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NS4053 Winter Term 2014 Overview: Economic Development and Emerging Economies. Critical Questions I. The class will address a number of key questions involving the emerging economies: What is the meaning of economic development and economic growth – how do these two concepts differ?
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NS4053Winter Term 2014Overview: Economic Development and Emerging Economies
Critical Questions I The class will address a number of key questions involving the emerging economies: • What is the meaning of economic development and economic growth – how do these two concepts differ? • How have emerging economies and developing countries performed economically since the min-twentieth century? • What are economic institutions, and how do they shape problems of underdevelopment and prospects for successful development? • What are the sources of national economic growth? Who benefits from such growth and why? Why do some countries make rapid progress toward development while many others remain poor? • What are the most influential theories of development, and are they compatible? Is underdevelopment an internally (domestically) or externally (internationally) induced phenomenon?
Critical Questions II • What constraints most hold back accelerated growth? • What are the causes of extreme poverty, and • What policies have been most effective for improving: • The lives of the poorest of the poor? • The least effective in this regard? • Is rapid population growth • Threatening the economic progress of developing nations? Or • Is it stimulating growth through providing a “demographic dividend” • Why is there so much unemployment and underemployment in the developing world • especially in the cities, and • why do people continue to migrate to the cities from rural areas even when their chances of finding a conventional job are very slim?
Critical Questions III • Do educational systems in developing countries really promote economic development? If not, how might they be improved • As more than half the people in developing countries still reside in rural areas: • how can agriculture and rural development best be promoted? • Bottom up rural development? • Top down governmental infrastructure programs? • Encouragement of foreign agro-businesses? • Higher agricultural prices together with adequate credit programs? • What is meant by “environmentally sustainable development”? Are there serious costs of pursuing sustainable development as opposed to simple output growth?
Critical Questions IV • Are free markets and economic privatization the answer to development problems, or do governments in developing countries still have major roles to play in their economies? • Is expanded international trade desirable from the point of view of the development of poor nations? • Who gains from trade, and how are the advantages distributed among nations? • What has been the impact of International Monetary Fund (IMF) “stabilization programs” and • World Bank “structural adjustment” lending on the balance of payments and growth prospects of heavily indebted less developed countries?
Critical Questions V • What is the impact of foreign economic aid from rich countries? • Should developing countries continue to seek such aid? • If so under what conditions and for what purposes? • Should developed countries continue to offer such aid, and if so, under what conditions and for what purposes? • For the emerging economies, are there any clear combinations of factors that seem to assure economic success for countries on the verge of rapid growth?
Critical Questions VI • Suggested topics: Jeremy Fischer • Economic aspects of US Foreign Policy towards the developing world (last 30-40 years and currently) • Effects of US-backed neoliberal economic reforms on the developing world from an economic perspective • Contemporary debates among historians, economists, political scientists, and sociologists over the consequences and merits of neoliberal reforms in the developing world • Role of international institutions in implementing US-backed reforms over the last few decades • Relationship between economic and value frameworks, and their role in conditional monetary aid
Current Global Situation I • Six years after the 2008-09 crisis, economic performance still disappoints, failing to regain pre-crisis vitality • Emerging economies far from the dynamic miracles they once seemed • Rich countries still grappling with problems exposed by the crisis • Return to days of buoyant growth seems far away • Level of dissatisfaction summed up at September 2014 G-20 meeting – their summary statement: • “Growth in the global economy is uneven and remains below the pace required to adequately generate much needed jobs.” • Worse -- they saw new threats in financial markets and deteriorating geopolitics • Little unity among the member countries who account for 85% of world output
Current Global Situation IV • Although the global picture is disappointing there are signs of optimism along with underperformance: • The growth surge in the in the UK along side economic weakness in France • Recent optimism in India together with the disappointing performance of Russia and Brazil exposing their weaknesses. • Across the world recovery can not be easily characterized as V-shaped or L-shaped • Instead OECD feels there is a “growing degree of divergence between the major economies” • U.S. economy appears to be expanding at a moderate pace with unemployment falling • U.K and Canada are also growing above their normal rates of expansion
Current Global Situation V • Most of the current concern is with the Eurozone. • With inflation falling close to zero, demand in the region • Appears insufficient to bring down an 11.5% unemployment rate • May not prevent bloc from sliding into deflation • The loss in economic momentum may • Dampen private investment and • Heightened geopolitical risks – populist governments that have a further negative impact on business and consumer confidence. • In Japan early optimism over Abenomics – economic policies of the prime-minister is now • Tempered with the fear that rising taxes are a major drag on growth • Facing the need for major, but politically unpopular structural reforms – resulting in questions over whether Japan would continue on its path
Current Global Situation VI • In today’s global economy • No longer the advanced world that is most important for global trends • Fully 30 percent of global growth in 2014 will occur in China – about twice the share of the U.S. • Clearly the success of China’s economy is now vital for the rest of the world. However there are problems. • For the medium-term, there is not much evidence that the Chinese economy has made much progress in its critical rebalancing efforts • In the short-term, are fears of a housing crash and bank failures • Housing prices have dropped 9.3% over the last year with • Sales registering the deepest contraction since 2008 • Moody’s estimates that a 10% fall in both property transactions and prices would reduce growth by 1.5% to 2% bringing it to 5 or 6%
Current Global Situation VII • At October 2014 Conference, even the IMF showing increased pessimism • The IMF feels there are many emerging concerns: • Geopolitical tensions from the Middle East and Russia could • “trigger large spillovers of activity in other parts of the world through a renewed bout of increased risk aversion in global financial markets.” • The Fund has just downgraded many of their forecasts • Big question is why countries are struggling to sustain decent rates of growth • Much has to do with remaining hangover from the financial crisis.
Current Global Situation VIII • Factors continuing to limit the return to growth and job creation • High levels of public and private debt act as constraints on • Government fiscal policy and • Consumer spending • Work to suppress aggregate demand below levels needed for steady growth • Increased income inequality also tends to reduce consumer spending • Policy uncertainty in many countries has resulted in falling investment rates • Slowing world economy makes export-led growth more difficult • Situation made worse by signs that productivity growth is slowing, limiting the potential for sustainable growth revival
Current Global Situation IX • In the emerging economies • Growth has slowed from 7% per year before the crisis • To a forecast of 5% between 2014 and 2018 • Moreover the decline is not just due to the slowdown in China and India • Growth rates are now lower than pre-crisis average in 70% of emerging economies. • The slowdown in emerging economies is due to: • The prolonged weakness of high income economies, • Failure to sustain economic reforms and • The exhaustion of policy induced post-crisis boosts to domestic demand.
Current Global Situation X • Policy makers are in a bind in many countries • In the Eurozone and Japan they are still trying to find ways to stimulate demand • In the U.S. and U.K interest rates are about to increase, but there is widespread concern that any movement back to normal might trigger financial turmoil • However leaving monetary policy loose will encourage excessive borrowing which may create bubbles and another financial crash • In emerging markets the need is to push forward on structural reforms to labor and product markets as well as education and social security to enable more secure and rapid growth • Not easy and mistakes are certain to happen. • The economic environment in many parts of the world is thus quite fragile with forecasts increasingly pessimistic.
October 2014 Markets Sending Bad Signals: VII Adding it up: • Markets aren’t anticipating on a catastrophe yet • If they were stock prices would be down more • They are betting that central banks and other policy makers aren’t going to be able to control global deflationary forces • Means world economy could be in for a slow grind in which both global growth and inflation both stay below normal levels • Situation much better than fall of 2008, but much worse that it should be six years after a crisis.
Implications for the Future • The slowdown will mean • Weaker growth in world trade • Lower commodity prices and • The possibility of unexpected losses in the financial sector • Increasing burdens on debtors • With growth in high income economies constrained by inadequate domestic demand, a risk of feedback effects exist • The channels go from • slowing emerging economies to • high income economies especially the more export dependent ones and • back again
Risks and Concerns • IMF October 2014 Message • Risks have increased: • Uneven Fragile growth • Risks from protracted low inflation • Financial sector excesses • Simmering geopolitical tensions • Emerging markets slowing • Surprises in monetary policy normalization
Assessment of Key Risks • The current consensus forecasts and scenarios are sensitive to a series of possible shocks/adverse developments. • Adverse developments in one or more areas might result in increased instability and/or negative linkages leading to lower growth rates: • Emerging Economies Slowdown • Eurozone Crisis -Stagnation • China Hard Landing • Backlash Against Globalization • Asian Tensions • Declining Defense Expenditures in the West
Key Risk I: EM Slowdown I • Range of factors will confront the emerging economies • Weak financing, currency overvaluation or policy missteps will likely have major negative impacts on many • Considerable differentiation in the emerging world. For some: • A policy-induced slowdown after some overheating: Many Ems tightened monetary policy in 2011 • A lack of full decoupling from hobbled DMs (EZ) • State capitalism is now distorting economic activity and leading to a fall in potential growth • A fallout from the Chinese slowdown: China is negatively affecting growth across Ems (especially in Southeast Asia, Latin America, metals exporters • The end of the commodities supercycle.
Key Risk I: EM Slowdown II • The end of QE and easy money: Will slow, in for reverse, trillions in EM capital flows • Increasing frequency of large current account deficits: many financed in ever-riskier ways • Rising political risk in many EMs: Busy electoral cycle in 2014 including Brazil, Turkey and South Africa • Macro and financial fragilities in some EMs: A handful of EMs have high and unsustainable debt ratios that will require coercive debt restructurings, particularly if a sudden stop occurs • The risk of a middle income trap: Many running out of easy sources of growth • In the case of Asia, exports have failed to maintain sustained growth as they did after previous economic crises.
