Lecture 3: Emerging Markets and Elements of Country Risk Analysis.

World Trading System: Four Phases  : Development Strategies;  : Transition and Reorientation;  : Macro Adjustment, Trade Reform and shift in Development Strategies;  : New Globalisation Wave and WTO.

Development Strategies  Industrialisation in LDC:  Import substitution industrialisation (ISI).  Ideology: socialist versus capitalist development  Role of Government and private sector;  Role of Planning.  Early shift to Export Led Growth (ELG) on mfg:  Asian miracle: Korea, Taiwan, HK and Singapore;  Role of Global Markets;  Role of Government.

World Trade  Developing Countries dependent on OECD markets:  Export of primary commodities;  Import industrial goods.  Trade Blocks:  North-South trade;  Little South-South trade.

Transition  Emergence of East and South East Asia Trade Block;  Growth of Trade in mfg in developing countries:  Success in ELG development strategy (also during oil crises ).  Failure of socialist development model:  Increase role of markets: capitalist model;  Concern with price distortions.

1980s Adjustment and Development  Financial and Macro Crises:  Inflation;  Financial capital flows and shocks;  Continued global trade liberalisation;  Spread of ELG development strategy.

Lessons (1)  Failure of socialist development model  No productivity growth;  Enormous distortions, rent seeking, and misallocation of resources.  Failure of ISI development strategy  Bias against agriculture;  Autarchy and ISI failed to insulate domestic economy: Macro shock: Protection and rent seeking: high cost.

Lessons (2)  ELG Strategy:  Comparative Advantage: labour-intensive mfg exports;  Better performance for poverty alleviation and income distribution;  Importance of mfg trade in ELG  Value added chains;  Declining importance of primary commodities  Terms of Trade Problem  Reforms as a reaction to a crisis:  First VS second generation reforms;  It’s not a good strategy for development.

New Globalisation Wave  Expanded role of International Governance:  Entry of Developing Countries in WTO;  Expanded role of trade:  Trade in services;  Fragmentation of Production Value chains; Productivity gains;  Continued Evolution of Global Trade Blocks:  LAC, Africa, East and South East Asia;  Asian Drivers: China and India.  Trade Policy and reforms slow down.

Emerging Markets?!?!?  Countries:  Asia (China! India! Indonesia!);  Latin America (Brazil!);  Africa (South Africa!);  East Europe and Russia. = BRIICS  Strengths and Opportunities;  Weaknesses and Threats.

Strengths and Opportunities

Strengths and Opportunities: Economic Growth and Income Convergence

Strengths and Opportunities: Share in World Output

Strengths and Opportunities: Industrial Production

Strengths and Opportunities: Export Share

Export and Import Growth

Share of Industrial Countries in world export

Share of Developing Countries in world export

GDP, Export and Imports

Weaknesses and Threats: volatility of per capital income growth rates

Weaknesses and Threats: Exchange Rate Instability

Weaknesses and Threats: Default and Crisis

Weaknesses and Threats: not only economic aspects  NOT only economy features but also Socio-Political Elements!  Weak Infrastructure;  Lack of specialised intermediaries;  Weak regulatory system;  Weak contract-enforcing mechanisms;  Instable political system

Invest or not Invest?  YES!  Growing economies;  Increasing investment opportunities;  High revenues.  NO!  Default risk;  Volatility and Instability.

Further Reforms could decrease risk?  YES: Second Generation Wave of Reforms: Complex domestic regulation; service regulation; technical standards; IPR, administration and competition rules; Improve the business-climate!  Link between trade policy and domestic economic policy and institutional reforms;  Less dependent on trade negotiation and international organisation foreign-policy agenda;  More transparent!

Developing Countries and The Financial Crisis (1)  Financial sector Decrease in the capital inflow; Risk of capital outflow; Increase in the risk ratio of these countries; Devaluation of exchange rate;  Negative feed-backs on real investment!  Real Economy: Decrease in the demand for export; Decrease in FDI inflows; Lower commodity prices (+ and -)

Developing Countries and The Financial Crisis (2)  Central and Eastern Europe are being the most adversely affected Large current account (fiscal and external) deficit;  Latin America: tight financial condition and weaker external demand; Brazil and Mexico more hurtled from the world crisis;  Emerging Asia: Reliance on manufacturing exports; BUT domestic demand and strong policy stimulate the economy!  Africa and Middle East: Lower GDP decrease than other regions Commodity exporters; Lower remittances; FDI and aid flows reduction.

Russia Federation and Brazil

China and India

References  Razeen Sally (2009): “Globalisation and the Political Economy of Trade Liberalisationin the BRIICS”, chapter 4 in Lattimore and Safadi (2009): Globalisation and Emerging Economies”, OECD.  IMF (2009): ”Global Economic Policies and Prospects”, G20, London March  Bergsten, C.F. (1999): “The Global Trading System and the Developing Countries in 2000”, WP 99-6, Institute for International Economics.  Balassa (1990): “Trade Between Developed and developing countries: a decade ahead”  Will, M. (2001): “Trade policy, developing Countries and Globalisation”, World Bank, Development Research Group.