Sep 3rd 2013

Are Emerging Markets Submerging?

by Kenneth Rogoff

Kenneth Rogoff is Professor of Economics and Public Policy at Harvard University, and was formerly chief economist at the IMF.

CAMBRIDGE – With economic growth slowing significantly in many major middle-income countries and asset prices falling sharply across the board, is the inevitable “echo crisis” in emerging markets already upon us? After years of solid – and sometimes strong – output gains since the 2008 financial crisis, the combined effect of decelerating long-term growth in China and a potential end to ultra-easy monetary policies in advanced countries is exposing significant fragilities.

The fact that relatively moderate shocks have caused such profound trauma in emerging markets makes one wonder what problems a more dramatic shift would trigger. Do emerging countries have the capacity to react, and what kind of policies would a new round of lending by the International Monetary Fund bring? Has the eurozone crisis finally taught the IMF that public and private debt overhangs are significant impediments to growth, and that it should place much greater emphasis on debt write-downs and restructuring than it has in the past? 

The market has been particularly brutal to countries that need to finance significant ongoing current-account deficits, such as Brazil, India, South Africa, and Indonesia. Fortunately, a combination of flexible exchange rates, strong international reserves, better monetary regimes, and a shift away from foreign-currency debt provides some measure of protection.

Nonetheless, years of political paralysis and postponed structural reforms have created vulnerabilities. Of course, countries like Argentina and Venezuela were extreme in their dependence on favorable commodity prices and easy international financial conditions to generate growth. But the good times obscured weaknesses in many other countries as well. 

The growth slowdown is a much greater concern than the recent asset-price volatility, even if the latter grabs more headlines. Equity and bond markets in the developing world remain relatively illiquid, even after the long boom. Thus, even modest portfolio shifts can still lead to big price swings, perhaps even more so when traders are off on their August vacations.

Until recently, international investors believed that expanding their portfolios in emerging markets was a no-brainer. The developing world was growing nicely, while the advanced countries were virtually stagnant. Businesses began to see a growing middle class that could potentially underpin not only economic growth but also political stability. Even countries ranked toward the bottom of global corruption indices – for example, Russia and Nigeria – boasted soaring middle-class populations and rising consumer demand. 

This basic storyline has not changed. But a narrowing of growth differentials has made emerging markets a bit less of a no-brainer for investors, and this is naturally producing sizable effects on these countries’ asset prices.

A step toward normalization of interest-rate spreads – which quantitative easing has made exaggeratedly low – should not be cause for panic. The fallback in bond prices does not yet portend a repeat of the Latin American debt crisis of the 1980’s or the Asian financial crisis of the late 1990’s. Indeed, some emerging markets – for example, Colombia – had been issuing public debt at record-low interest-rate spreads over US treasuries. Their finance ministers, while euphoric at their countries’ record-low borrowing costs, must have understood that it might not last. 

Yes, there is ample reason for concern. For one thing, it is folly to think that more local-currency debt eliminates the possibility of a financial crisis. The fact that countries can resort to double-digit inflation rates and print their way out of a debt crisis is hardly reassuring. Decades of financial-market deepening would be undone, banks would fail, the poor would suffer disproportionately, and growth would falter.

Alternatively, countries could impose stricter capital controls and financial-market regulations to lock in savers, as the advanced countries did after World War II. But financial repression is hardly painless and almost certainly reduces the allocative efficiency of credit markets, thereby impacting long-term growth.

If the emerging-market slowdown were to turn into something worse, now or in a few years, is the world prepared? Here, too, there is serious cause for concern. 

The global banking system is still weak in general, and particularly so in Europe. There is considerable uncertainty about how the IMF would approach an emerging-market crisis after its experience in Europe, where it has had to balance policies aimed at promoting badly needed structural change in the eurozone and those aimed at short-run economic preservation. That is a topic for another day, but the European experience has raised tough questions about whether the IMF has a double standard for European countries (even those, like Greece, that are really emerging markets).

It is to be hoped, of course, that things will not come to that. It seems unlikely that international investors will give up on emerging markets just yet, not when their long-term prospects still look much better than those of the advanced economies. 

Besides, the current sentiment that the eurozone has gotten past the worst seems exceedingly optimistic. There has been only very modest structural reform in countries like Italy and France. Fundamental questions, including how to operate a banking union in Europe, remain contentious. Spain’s huge risk premium has almost disappeared, but its debt problems have not.

Meanwhile, across the Atlantic, the political polarization in Washington is distressing, with another debt ceiling debacle looming. Today’s retreat to advanced-country asset markets could quickly revert to retreat from them.

The emerging-market slowdown ought to be a warning shot that something much worse could happen. One can only hope that if that day should ever arrive, the world will be better prepared than it is right now.

Copyright: Project Syndicate, 2013.
www.project-syndicate.org

 

 


This article is brought to you by Project Syndicate that is a not for profit organization.

Project Syndicate brings original, engaging, and thought-provoking commentaries by esteemed leaders and thinkers from around the world to readers everywhere. By offering incisive perspectives on our changing world from those who are shaping its economics, politics, science, and culture, Project Syndicate has created an unrivalled venue for informed public debate. Please see: www.project-syndicate.org.

Should you want to support Project Syndicate you can do it by using the PayPal icon below. Your donation is paid to Project Syndicate in full after PayPal has deducted its transaction fee. Facts & Arts neither receives information about your donation nor a commission.

 

 

Browse articles by author

More Current Affairs

Jan 14th 2023
EXTRACT: "On balance, then, the events in and around Soledar over the past week illustrate that no matter the outcome of the current fighting, this is not a turning point. It’s another strong indication that the war is likely going to be long and costly."
Jan 14th 2023
EXTRACTS: "Russian President Vladimir Putin has long regarded the collapse of the Soviet Union as a “geopolitical catastrophe.” The invasion of Ukraine, now approaching its one-year anniversary, could be seen as the culmination of his years-long quest to restore the Soviet empire. ..... "With Russia’s economy straining under Western sanctions, some of the country’s leading economists and mathematicians are advocating a return to the days of five-year plans and quantitative production targets." .... "The logical endpoint of a planned economy today is the same as it was then: mass expropriation. Stalin’s collectivization of Soviet agriculture in the late 1920s and early 1930s led to millions of deaths, and the post-communist 'shock therapy' of privatization resulted in the proliferation of 'raiders' and the creation of a new class of oligarchs. Now, enthralled by imperial nostalgia, Russia may be about to embark on a new violent wave of expropriation and redistribution."
Jan 11th 2023
EXTRACT: "These developments suggest that Indian economist Amartya Sen was correct when he famously argued in 1983 that famines are caused not only by a shortage of food but also by a lack of information and political accountability. For example, the Bengal famine of 1943, India’s worst, happened under imperial British rule. After India gained independence, the country’s free press and democratic government, while flawed, prevented similar catastrophes. Sen’s thesis has since been hailed as a ringing endorsement of democracy. While some critics have noted that elected governments can also cause considerable harm, including widespread hunger, Sen points out that no famine has 'ever taken place in a functioning democracy.' --- China’s system of one-party, and increasingly one-man, rule is couched in Communist or nationalist jargon, but is rooted in fascist theory. The German jurist Carl Schmitt, who justified Adolf Hitler’s right to wield total power, coined the term “decisionism” to describe a system in which the validity of policies and laws is not determined by their content but by an omnipotent leader’s will. In other words, Hitler’s will was the law."
Dec 29th 2022
EXTRACTS: "On August 1, 1991, a little more than three weeks before Ukraine declared independence from the Soviet Union, US President George H.W. Bush arrived in Kyiv to discourage Ukrainians from doing it. In his notorious 'Chicken Kiev' speech in the Ukrainian parliament, Bush lectured the stunned MPs that independence was a recipe for 'suicidal nationalism', 'ethnic hatred', and 'Local despotism.' ----- ....the West’s reluctance to respect Ukraine’s desire for sovereignty was a bad omen, revealing a mindset among US and European leaders that paved the way to Russia’s full-scale invasion in February. ----- .... Western observers, ranging from Noam Chomsky to Henry Kissinger, blame the West for Russian President Vladimir Putin’s decision to invade, or have urged Western leaders to provide Putin a diplomatic off-ramp by compelling Ukraine to give up territory. Policymakers, too, seem to view Ukraine’s self-defense as a bigger problem than Russia’s genocidal aggression. ----- ..... despite the massive material and military support the West has provided to Ukraine, the fateful logic of appeasement lingers, because many Western leaders fear the consequences of Russia’s defeat more than the prospect of a defeated Ukraine. ----- This war is about the survival of Ukraine and the Ukrainian people. In the words of the Israeli leader Golda Meir, born in Kyiv, 'They say we must be dead. And we say we want to be alive. Between life and death, I don’t know of a compromise.' "
Dec 29th 2022
EXTRACT: "China’s flexible, blended, increasingly dynamic private sector could do all that and more. ----- Then came Xi Jinping. "
Dec 29th 2022
EXTRACTS: "For a few years in the late 2010s, it seemed to be only a matter of time before China would replace the US as the world’s largest economy and overwhelmingly dominant technological superpower. Then came the COVID-19 outbreak in Wuhan in late 2019. " ---- "How could China’s seemingly all-powerful autocrat understand so little about the social contract on which his power rests? For all its difficulties, liberal democracy – with its transparency and self-imposed limits – has once again proved more efficient and resilient than autocracy. Accountability to the people and the rule of law is not a weakness; it is a decisive source of strength. Where Xi sees a cacophony of clashing opinions and subversive free expression, the West sees a flexible and self-correcting form of collective intelligence. The results speak for themselves."
Dec 12th 2022
EXTRACTS: "Next time you’re in Ukraine’s capital, Kyiv, don’t bother looking for Dostoevsky Street. It’s been renamed: it’s now Andy Warhol Street. ..... because many Ukrainians regard Andy as Ukrainian. Was he? The evidence is mixed." ---- "Warhol remained a committed Greek Catholic all his life. He regularly prayed, both at home and in church, and frequently attended Sunday Mass. His bedside table contained a crucifix, a Christ statuette, and a prayer book. After he died on February 22, 1987, he was buried in St. John the Divine Byzantine Catholic Cemetery, some twenty miles south of Pittsburgh, in a simple grave next to his parents." ---- "When it comes to objective cultural affiliation or subjective ethnic identification, the United States—with its diverse Slavic heritages—has the greatest claim on Warhol and his art."
Dec 12th 2022
EXTRACT: "Cellular agriculture provides an alternative, and could be one of this century’s most promising technological advancements. Sometimes called “lab-grown food”, the process involves growing animal products from real animal cells, rather than growing actual animals. If growing meat or milk from animal cells sounds strange or icky to you, let’s put this into perspective. Imagine a brewery or cheese factory: a sterile facility filled with metal vats, producing large volumes of beer or cheese, and using a variety of technologies to mix, ferment, clean and monitor the process. Swap the barley or milk for animal cells and this same facility becomes a sustainable and efficient producer of dairy or meat products."
Dec 5th 2022
EXTRACT: "After a decade of unconstrained growth – when it seemed that a new billionaire was minted every day – the tech industry has finally hit a rough patch. Elon Musk’s erratic behavior following his takeover of Twitter has left the financially leveraged platform in a precarious state. The crypto exchange FTX’s sudden implosion has vaporized a business that was recently valued at $32 billion, taking many other crypto firms with it. Meta (Facebook) is laying off 11,000 people, 13% of its workforce, and Amazon is shedding 10,000. What are we supposed to make of these setbacks? Are they isolated incidents, or signs of structural change?"
Dec 3rd 2022
EXTRACT: "Just looking at explicit debts, the figures are staggering. Globally, total private- and public-sector debt as a share of GDP rose from 200% in 1999 to 350% in 2021. The ratio is now 420% across advanced economies, and 330% in China. In the United States, it is 420%, which is higher than during the Great Depression and after World War II."
Dec 3rd 2022
EXTRACT: "The Conservative leadership must stand up to the party’s extremists, and it must do so sooner rather than later. If moderates cannot defeat the hardliners by the next election, and the outcome turns out to be as bad for the Tories as recent polls suggest, they will find they have the same fight on their hands in opposition. --- Conservatives must never underestimate the importance of their moderate supporters. If the Party continues to disregard centrists whenever the Brexiteer right stamps its feet, it may find itself out of power for a long time to come."
Nov 24th 2022
EXTRACT: "....young voters did reach the polls they voted overwhelmingly for Democrat candidates across the country. According to reports, 63% of 18- to 29- year olds voted Democrat and 35% voted Republican in the House of Representatives elections. Voters between 30 and 44 split their vote between the two parties, while older voters tended to vote Republican."
Nov 24th 2022
Nouriel Roubini: "Central banks are in both a stagflation trap and a debt trap. Amid negative aggregate supply shocks that reduce growth and increase inflation, they are damned if they do and damned if they don’t. If they increase interest rates enough to bring inflation down to 2%, they will cause a severe economic hard landing. And if they don’t – attempting instead to protect growth and jobs – they will be left increasingly far behind the curve, leading to a de-anchoring of inflation expectations and a wage-price spiral. Very high debt ratios (both private and public) complicate the dilemma further. Raising interest rates enough to crush inflation causes not only an economic crash, but also a financial crash, with highly leveraged private and public debtors facing severe distress. The resulting financial turmoil that intensifies the recession, creating a vicious cycle of deepening recession and escalating financial pain and debt distress. In these circumstances, central banks will blink. They will wimp out in the fight against inflation, in an effort to avoid an economic and financial crash. But that will lead to a higher permanent inflation rate, while only postponing the arrival of stagflation and debt crises. In other words, central banks in the United States, Europe, and other advanced economies have only bad options."
Nov 13th 2022
EXTRACTS: "Today’s autocrats wear staid business suits and pretend to be democrats, and that has been sufficient to grant them access to high-level meetings in Davos or at the G20, where they actively recruit former Western politicians, lawyers, public-relations consultants, and think tanks to make their case in the West." ---- "....whatever the weaknesses of Western democracies, they still command a degree of soft power that their autocratic competitors could only dream of. Democracy remains popular around the world – among citizens of both democratic and nondemocratic countries. That is why modern dictators pretend to be democrats." ---- "....there is no shortage of criticism about how the US and Europe function. But that itself is a product of the press freedom and political opposition that one can find only in democracies. But actions speak louder than words: Immigrants from around the world are eager to come to Europe or America, whereas few are trying to get into Russia or China."
Nov 9th 2022
EXTRACT: "In conventional macroeconomics, an economy’s longer-term growth potential is determined by the sum of labor-force and productivity growth. If one of those factors slows, the other must accelerate. Otherwise, long-term growth suffers.  China is in serious trouble on both fronts. An unsustainable one-child family-planning policy –subsequently changed to a two- and now three-child policy – means that the working-age population is declining, and Xi’s speech at the 20th Party Congress suggested that already-strong productivity headwinds are likely to intensify. "
Nov 1st 2022
EXTRACTS: "First and most obvious – it has happened before. And in an historical sense, it has happened relatively recently, with the collapse of the USSR in 1991 rightly considered a seismic event in world politics. The rub is that nobody predicted the end of the USSR either. In fact, it was confidently assumed in the West that Mikhail Gorbachev would go on ruling the Soviet Union, until the hard-line coup that failed to topple him (but left him mortally wounded in a political sense) made that view obviously redundant." ---- "So is it speculative to talk about a future Russian collapse? Yes. Is there evidence it is imminent? No. But in many ways that’s the problem: when authoritarian regimes implode, they tend to do so very quickly, and with little warning."
Oct 25th 2022
EXTRACT: " But in celebrating the CPC centennial, he [XI left little doubt of what those challenges might portend: “Having the courage to fight and the fortitude to win is what has made our party invincible.” A modernized and expanded military puts teeth into that threat and underscores the risks posed by Xi’s conflict-prone China."
Oct 8th 2022
EXTRACTS: "Recent inflation news from the eurozone’s largest member, Germany, is particularly alarming. In August, producer prices – which measure what is happening at the preliminary stages of industrial production – were a whopping 46% higher than in the same month last year. Given the long-term correlation between the growth rate of producer and consumer prices, this suggests that the latter could soar to 14% in November. Price stability – which is supposed to be the ECB’s uncompromising goal, per the Maastricht Treaty – is no longer perceptible" ----- "Since the 2008 global economic crisis, the ECB has allowed the central-bank money supply to increase twice as fast, relative to economic output, as the US Federal Reserve has. Of that growth, 83% was the result of the ECB’s purchases of government bonds from eurozone countries. With those purchases – which totaled an estimated €4.4 trillion – the ECB pushed interest rates on government bonds to around zero. This spurred countries to disregard European debt rules and accumulate debt at a breakneck pace."
Oct 7th 2022
EXTRACTS: "While some Russians have opposed the attack on Ukraine from the outset and publicly protested against the mobilisation that has just been declared, others, on the far right, feel that Russia is holding back too much and are increasingly calling for total mobilisation, the carpet-bombing of Ukrainian cities, and even the use of nuclear weapons." ----- "Will the Kremlin be able to channel the growing warmongering zeal? In view of the intensity of the rhetoric of the various wings of the Russian far right, backed recently by several Putin allies including the Chechen leader Ramzan Kadyrov, it is doubtful: whatever the outcome of the war in Ukraine, nationalist pressure is likely to become a serious and lasting threat to Russia’s internal stability."
Oct 3rd 2022
EXTRACT: "But US and global equities have not yet fully priced in even a mild and short hard landing. Equities will fall by about 30% in a mild recession, and by 40% or more in the severe stagflationary debt crisis that I have predicted for the global economy. Signs of strain in debt markets are mounting: sovereign spreads and long-term bond rates are rising, and high-yield spreads are increasing sharply; leveraged-loan and collateralized-loan-obligation markets are shutting down; highly indebted firms, shadow banks, households, governments, and countries are entering debt distress. The crisis is here."