THE GLOBAL ECONOMIC ENVIRONMENT FOR EMERGING MARKET ECONOMIES APPENDICES JEFFREY FRANKEL ANNUAL SYMPOSIUM ON CAPITAL MARKETS MEDELLIN, COLOMBIA, MAY 3, 2012

APPENDIX 1: OVERHEATING IN EMERGING MARKETS By 2011, two years of strong growth had returned some EM economies to a state of probable overheating. The Question for 2012: Is the current easing of growth a soft landing? Or will it turn to a hard landing?

CREDIT GROWTH HAS AGAIN BEEN HIGH IN TURKEY AND SOME OTHER EMS (INCL. COLOMBIA) World Economic Outlook, IMF, April 2012

OUTPUT IN EMS IS NOW ABOVE POTENTIAL (EXCL. EASTERN EUROPE). ADVANCED ECONOMIES ARE STILL FAR BELOW POTENTIAL OUTPUT. World Economic Outlook, IMF, April 2012

Inflation in many EMs rose in , but appears to be easing in World Economic Outlook, IMF, April 2012

APPENDIX 2: DEALING WITH COMMODITY PRICE VOLATILITY The Natural Resource Curse The Dutch Disease

Many countries that are rich endowed with oil, minerals or fertile land have failed to grow more rapidly than those without. Examples: Oil producers in Africa & the Middle East have relatively little to show for their resources. Meanwhile, East Asian economies achieved western-level standards of living despite being rocky islands (or peninsulas) with virtually no exportable natural resources. Japan, Singapore, Hong Kong Korea & Taiwan, followed by China.

9 Some developing countries have avoided the pitfalls of commodity wealth. Some developing countries have avoided the pitfalls of commodity wealth. E.g., Chile (copper) E.g., Chile (copper) Botswana (diamonds) Botswana (diamonds) Some of their features are worth emulating. Some of their features are worth emulating. The last section of my survey paper explores policies & institutional innovations that might help avoid the natural resource curse and achieve natural resource blessings instead. The last section of my survey paper explores policies & institutional innovations that might help avoid the natural resource curse and achieve natural resource blessings instead.

10 GROWTH FALLS WITH FUEL & MINERAL EXPORTS

11 ARE NATURAL RESOURCES NECESSARILY BAD? Commodity wealth need not necessarily lead to inferior economic or political development. Commodity wealth need not necessarily lead to inferior economic or political development. Rather, it is a double-edged sword, with both benefits and dangers. Rather, it is a double-edged sword, with both benefits and dangers. It can be used for ill as easily as for good. It can be used for ill as easily as for good. The priority for any country should be on identifying ways to sidestep the pitfalls that have afflicted other mineral producers in the past, to find the path of success. The priority for any country should be on identifying ways to sidestep the pitfalls that have afflicted other mineral producers in the past, to find the path of success. No, of course not.

12 ONE CHANNEL OF THE NRC: DUTCH DISEASE 5 SIDE-EFFECTS OF A COMMODITY BOOM 1) A real appreciation in the currency 1) A real appreciation in the currency 2) A rise in government spending 2) A rise in government spending 3) A rise in nontraded goods prices 3) A rise in nontraded goods prices 4) A resultant shift of resources out of non-export-commodity traded goods 4) A resultant shift of resources out of non-export-commodity traded goods 5) Sometimes a current account deficit. 5) Sometimes a current account deficit.

13 THE DUTCH DISEASE: THE 5 EFFECTS ELABORATED 1) A real appreciation in the currency 1) A real appreciation in the currency taking the form of nominal currency appreciation if the exchange rate floats taking the form of nominal currency appreciation if the exchange rate floats e.g., floating-rate oil exporters, Kazakhstan, Mexico, & Russia. e.g., floating-rate oil exporters, Kazakhstan, Mexico, & Russia. or the form of money inflows & inflation if the exchange rate is fixed ; or the form of money inflows & inflation if the exchange rate is fixed ; e.g. fixed-rate oil-exporters, UAE & Saudi Arabia. e.g. fixed-rate oil-exporters, UAE & Saudi Arabia. 2) A rise in government spending 2) A rise in government spending in response to increased availability of tax receipts or royalties. in response to increased availability of tax receipts or royalties.

14 THE DUTCH DISEASE: 5 SIDE-EFFECTS OF A COMMODITY BOOM 3) An increase in nontraded goods prices (goods & services such as housing that are not internationally traded), 3) An increase in nontraded goods prices (goods & services such as housing that are not internationally traded), relative to internationally traded goods, esp. manufactures. relative to internationally traded goods, esp. manufactures. 4) A resultant shift of resources out of non-export-commodity traded goods 4) A resultant shift of resources out of non-export-commodity traded goods pulled by the more attractive returns in the export commodity and in non-traded goods. pulled by the more attractive returns in the export commodity and in non-traded goods. 5) A current account deficit 5) A current account deficit thereby incurring international debt that is hard to service when the boom ends. thereby incurring international debt that is hard to service when the boom ends. E.g. the end of the 1970s commodity boom. E.g. the end of the 1970s commodity boom.

APPENDIX 3 More graphs from IMF WEO, April Recent macro policies of major EM countries. More on commodity prices.

SOME EMS, SUCH AS CHILE & CHINA, RAN BUDGET SURPLUSES BEFORE 2008, ALLOWING FISCAL EASE IN RESPONSE TO THE GLOBAL RECESSION World Economic Outlook, IMF, April 2012

INTEREST RATES HAVE COME DOWN SINCE 2008 World Economic Outlook, IMF, April 2012

EMS CONTINUE TO BUILD UP RESERVES, EXCEPT THAT CHINA, THE BIGGEST RESERVE HOLDER OF ALL, HAS RECENTLY STOPPED. World Economic Outlook, IMF, April 2012

GLOBAL IMBALANCES HAVE NARROWED ESPECIALLY CHINA’S SURPLUS World Economic Outlook, IMF, April 2012

FLIGHT FROM RISK DENTED EM CAPITAL FLOWS, FIRST DUE TO THE GFC, AND THEN THE EURO CRISIS World Economic Outlook, IMF, April 2012

22 MORE ON COMMODITIES

OIL & AGRIC. PRICES ROSE SHARPLY IN 2011 World Economic Outlook, IMF, April 2012

WHEN INVENTORIES ARE UNUSUALLY LOW, THE COMMODITY PRICE IS UNUSUALLY HIGH World Economic Outlook, IMF, April 2012

7. Manage Commodity Funds transparently & professionally, like Botswana’s Pula Fund -- not subject to politics like Norway’s Pension Fund. like Botswana’s Pula Fund -- not subject to politics like Norway’s Pension Fund. 8. Invest in education, health, & roads. 9. Buyers: Publish What You Pay. Recommendations for commodity producers, concluded GOOD GOVERNANCE INSTITUTIONS