Important questions about China’s future

8 September, 2020

China has advanced to an increasingly important player on world (financial) markets. This special position increases China’s responsibility to avoid future economic and financial imbalances – partly because of the well-known cross-border contagion risks.

Some big questions in a financial deregulation context are for China in the next five to ten years (also part of ongoing discussions with students at Linnaeus University):

¤  Generally: Will China’s GDP growth be big enough for being able to introduce initially hurting reforms?  How will China handle the restructuring of its state-owned companies and the shift to competitive modern technology and products? We know from the Swedish financial deregulation that such a new policy stance should happen from a position of strength.

¤  Can China achieve surpluses in the current account balance in the longer run – also when regarding the possibility of renewed harsh American protectionism?

¤  How rapidly will China deregulate its capital account – and open for speculative capital flows?

¤  Can China handle its global power and strong international influence in an appropriate way and develop into an appreciated global partner politically, financially and economically? What will happen in Hong Kong?

¤  Will China’s version of the market economy be reversed at some point – or rather be improved in a longer perspective?

¤  How will China come out of the post covid-19 challenges in the medium run and what about the impact on unemployment also from this factor?

Altogether, there is a lot of room for further optimization of Chinese economic policy and of financial markets. Such improvements would be good for China’s own economic growth and stability but also in a global perspective – particularly when applying a long-term view.

Why not trying to reflect on these issues a little bit on your own?

Hubert Fromlet
Affiliate Professor at the School of Business and Economics, Linnaeus University
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Covid-19 – in many emerging countries primarily an institutional problem

24 August, 2020

To avoid any misunderstanding: covid-19 is a global disease and not only spread in emerging market countries. Advanced OECD countries were also badly hit by corona, such as the United States, Spain, Italy and the UK. Sweden could not either escape from covid-19 without pain. Not even Germany made it really well since the eruption of the crisis (though better than most other European countries). Norway and Denmark, however, succeeded pretty well so far – Finland even better.

Unfortunately, it can be recognized that emerging (developing) countries altogether are most heavily hit by corona infections, both in absolute and real terms. Why is that? In my view, there exist clear institutional shortcomings in the most heavily affected emerging countries, being mainly responsible for the bad outcome. But this kind of underlying weakness can also be watched in advanced countries with heavily burdening corona infections.

Quality and effectiveness of institutions play a decisive role

Nobel Prize winner Douglass North – the “father” of New Institutional Economics – probably remains the most strongly convincing economist about the decisive importance of institutions for growth and wellbeing of a country. (“Institutions form the incentive structure of a society, and the political and economic institutions, in consequence, are the underlying determinants of economic growth”). Insufficient health care – also when it comes to covid-19 – must certainly be regarded as an institutional failure.

However, if this described relationship is so logical and correct – which actually should be the case also in my own view – why are so many emerging countries incapable of managing  necessary institutional improvements? A possible (partial) answer is given by Olivier Blanchard (MIT, in his textbook “Macroeconomics”) who comes to the conclusion that low (high) institutional protection is associated with a low (high) GDP per capita. This means in other words that many emerging or developing countries suffer from insufficient financial resources.

Ten of the twelve most corona-affected countries belong to the emerging world  https://www.worldometers.info/coronavirus/ (August 21- 24, 2020)

Conclusions

¤ There is no doubt that the corona epidemic in emerging countries to a high extent can be referred to institutional shortcomings – institutional shortcomings that often can be explained by too limited financial resources for improvements. This factor should be considered more seriously by international organizations.

¤ It should not be neglected that many emerging market countries also face a large number of hidden corona cases since statistical quality still must be regarded as poor in many lagging countries. The real number of corona infections may be strongly underestimated (for example in Indian and probably also in Chinese statistics). Foreign support to developing and emerging countries could be very useful in this institutional context. International organizations should develop mechanisms that encourage and reward specific kinds of institutional progress, measured by, for example, “Doing Business” of the World Bank and the rankings of Transparency International.

¤  The EU, single EU-member countries and the UK could act more ambitiously to support improving institutions in lagging emerging countries, particularly in Africa. People in Africa need hope, driven by improved political, institutional and social improvements – including health and education with their strong institutional nexus. Hopefully, such a policy change could also give sustainable relief to the European migration problem in a somewhat longer perspective, originated by sizable institutional progress. Remember what Douglass North has been saying and writing about the decisive contribution of institutions to economic growth! There is no alternative.

¤  However, Latin America (and quite a number of emerging countries elsewhere) should not be neglected either – needing urgently a substantially improved institutional environment. “Urgently” should be stressed strongly. Institutional improvements do not come overnight.

Finally, the following question may be allowed: Could Joe Biden as a potential president give new and (relatively) unselfish incentives for institutional improvements in South/Latin America – or is that just wishful thinking?

Hubert Fromlet
Affiliate Professor at the School of Business and Economics, Linnaeus University
Editorial board

 

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Which factors favor the recovery of corona-affected emerging markets?

11 August, 2020

In my blog from June 12, I stressed the importance of renewed satisfactory or good economic growth in OECD countries for the future recovery in emerging market countries. Another important source for single emerging markets can be increasing price trends for their most important commodities, for example oil, copper, tin and many agricultural products and – interrelated – particularly the development of the U.S. dollar and U.S. rates.

In this article, a somewhat closer look is also taken on the domestic conditions for a visible recovery of a single emerging country. Below, some of these growth-favoring conditions are listed up. The impact of these different factors can, of course, differ substantially from country to country.

Some structural relationships are well-known, such as the links between institutions and economic growth, education and growth, infrastructure and growth, entrepreneurship and growth, the environment and growth, political efficiency and growth, macroeconomic stability and growth, to mention a few.

Most emerging countries have some shortcomings in the above-mentioned respects, with Brazil and its strongly underperforming political leadership probably at the very end of the globalized emerging markets. International sources for comprehensive country information can be, for example, picked from international organizations like the IMF, the World Bank (“Doing Business”), Transparency International, continental development banks like the ADB in Asia or the AfDB in Africa. Embassies and companies from the own country may hint at changes of the business sentiment in the emerging world, sometimes with a certain bias for their geographical and professional location. Good country reports by specialized analysts may also help.

Altogether, the analysis of emerging countries will be even more complex in the forthcoming quarters than normally. This enormous complexity also includes, of course, the fight against the corona virus.

But how much do the affected emerging countries know themselves about their own corona contagion – and how much are they able or want to publish?

Hubert Fromlet
Affiliate Professor at the School of Business and Economics, Linnaeus University
Editorial board

 

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