Download Aniket Bhushan

The Emerging Economy
Challenge: an Optimistic View
Reforming the Bretton Woods Institutions
Danish Institute for International Studies (DIIS), Danish Ministry of
Foreign Affairs
Copenhagen, Denmark
September 2009
Aniket Bhushan
Finance for Growth
The North South Institute
Outline
• What went wrong this time?
• How do we situate ‘Emerging Economies’
(EE)? Where do they stand in relation to
advanced?
• Their crisis experience: take-away(s),
lessons?
• Preconditions for policy change?
• Three loci of change: monetary system (&
IMF role); conditionality; broad policy mix
What went wrong this time?
Relationship between Imbalances
1400
(USD,billions)
1200
1000
800
600
400
200
0
1995 1996 1997 1998 1998 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Change in EE Reserves
US Current Account Deficit
• Nothing
• Chronicling continuation (long-trend: income polarization,
middle class wage stagnation &debt dependence)
• Economy on steroids (2000-07, cumulative household debt
increase by $7tln, mortgage $5tln)
What went wrong this time?
Sharp growth in financial
sector profitability
– Curious in context of high
competition
– Profitability implies = “lads
must be doing something
right”
– Dancing till the music plays
Explosive growth in
derivatives markets
– Leverage, high opacity,
breeding unknown
unknowns, unforeseen
correlations
– Insurance v. gambling
What went wrong this time: EE lens
(not much new)
• Urgency of reform, already made apparent by
Asian (1997)
• Inadequacy of BWI framework
• Workaround strategies
% increase in reserves (1997-2000 average vs. 2007)
3500
3314
3000
2500
2000
1500
907
1000
773
437
500
420
310
254
182
150
125
88
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C
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R
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Situating Emerging Economies
• Decoupling?
(private consumption,$ billions)
Size of the Wallet
12,000
10,000
8,000
6,000
4,000
2,000
0
US
EU
Japan
China
Brazil
Russia
India
(real GDP growth,%)
7
4.5
4
3.5
3
2.5
2
1.5
1
0.5
0
6
5
4
3
2
1
0
1980s avrg
1990s avrg
Advanced
2000s avrg
Emerging (broad)
2010-14 (projected)
Difference
Adv Emerg difference
Structural Decoupling
Situating Emerging Economies
Catching Up: Share of World GDP (PPP)
(% of world GDP)
35
30
25
20
15
10
5
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
20
08
20
10
20
12
20
14
0
EU
United States
China
India
• Over 35yrs, 20-26% gap down to 4-10%
Situating Emerging Economies
G20 Emerging Economies
European Union
United States
• Emerging G20 catch-up and crisis experience
• Still ways to go on DFD
2014
2012
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
35
30
25
20
15
10
5
0
1980
GDP (PPP), Share of World
Emerging G20's Share of Global GDP
Situating Emerging Economies:
Sharp rise, hard fall
BRIC Market Capitalization as % of World Market
Capitalization
700
600
500
400
300
200
100
0
-100
-200
-300
617.49 (2007)
180.102
109.263
73.536
-6.46
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
-190.31 (2009)
(percent)
(US$, Billions)
Net Private Capital Flows to Emerging and Developing Economies
18
16
14
12
10
8
6
4
2
0
16.9 (2007)
9.39 (2006)
4.26 (2004)
3.08 (2000)
2000
2001
2002
2003
2004
2005
2006
2007
Key EE take-away (s)
• Workaround worked, but cannot count on
steroids
• Carpe diem: opportunity to play pro-active role
• Managing “going out”: stake in external financial
sys increasing rapidly
Stock of Outward FDI
($,billions)
300
255.2
200
100
129.8
51.9
95.8
20.1
1.8
29.4
27.7
0
Brazil
Russia
2000
India
2007
China
Take-away, lessons?
Well if EE were better prepared, are there
any lessons
• Calibrated liberalization, gradual
• Strong ownership of process
• Cap a/c lib not same as trade
• Asian crisis, cause for pause
• State as “absorber” v. “multiplier” of shock
• Informal sub-grouping (BRIC Summit)
BWI Implication
• Bottom-line:
– Addressing precautionary r. accumulation (insurance)
– Longer-term diversification of global demand (drivers
and composition)
Household Consumption Expenditure
70.00
(%GDP)
60.00
50.00
40.00
30.00
20.00
10.00
0.00
YR2000
YR2001
YR2002
Brazil
YR2003
China
YR2004
India
YR2005
YR2006
Russian Federation
YR2007
Current IMF Vote-share relative to projected Population & Share of GDP(2014)
(% of Total Votes,
2009)
US
(projected % share of global
population, 2014)
(projected % share global
GDP,2014)
16.77
4.53
18.34
Japan
6.02
1.77
5.48
Germany
5.88
1.14
3.5
UK
4.85
0.92
2.88
France
4.58
0.9
2.73
Italy
3.19
0.86
2.14
Canada
2.88
0.48
1.74
44.17
10.6
36.81
Netherlands
2.34
0.23
0.85
Belgium
2.09
0.15
0.5
Australia
1.47
0.32
1.09
Spain
1.39
0.66
1.74
Sweden
1.09
0.13
0.47
52.55
12.09
41.46
China
3.66
20.2
15.52
Russia
2.69
1.95
3.44
India
1.89
18.13
5.74
Brazil
1.38
2.9
2.83
Total (BRIC)
9.62
43.18
27.53
Total (G7)
Total (leading econ, 12)
Conditions for policy change
• Structural shifts (and amplifiers)
– Economic, Geopolitical
• Political capital
– Will, momentum, anti-incumbency, palatable-ness
• Perceived alternatives
– i.e. doesn’t have to be “new”; but new mix of old/new
• Windows of opportunities
– i.e. vacuum can be window; or crisis can be too short
Potential loci of Change
• Monetary system and role of IMF
• Conditionality
• Broad policy-mix (countercyclical,
industrial)