Emerging markets, generally

Covid-19 – in many emerging countries primarily an institutional problem

Monday, August 24th, 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?

Tuesday, August 11th, 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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China abandons ambition to be acknowledged as market economy

Tuesday, July 14th, 2020

International recognition has been given high priority in the past few decades by China’s political leaders. Being welcomed by the WTO as a new member in 2001 was celebrated as a brilliant success in Beijing and the whole country. I could see it with my own eyes during a simultaneous visit in Beijing. An enormous new potential was opened for Chinese exporters but also for globally oriented foreign companies in this largely promising country. Without doubt, one may conclude that China turned to be the winner of globalization in the past twenty years, meaning also quite some opening up during this time.

But what about this spirit of opening up in the future? First signals of giving domestic objectives even more priority are obvious. Interventions in Hong Kong, increasing surveillance, declining transparency (covid-19), less calming diplomacy vis-à-vis the United States and relatively easily accepted abolition of the market-economy objective point indeed at stronger prioritization of domestic issues and (somewhat) lesser international harmony considerations. However, it should be kept in mind that China still maintains a neutral and even collaborative voice in its contacts with the EU.

No chance to be recognized as a market economy

Five years ago, there was a lot of pressure on the EU to finally give China the status of a market economy. Such an improved classification would have meant for China a milder treatment by the WTO with dumping conflicts. However, the EU never wanted to give such a mandate to the WTO. China has now canceled these ambitions and has therefore to accept possible anti-dumping accusations also in the future. Obviously, this formerly important international goal had become less relevant after many years of waiting and not really worth-while to go on fighting for.

Also when analyzing more deeply the whole question, it was impossible to find neutral arguments for a Chinese upgrading to market economy (see also my comments on this from 2016, https://blogg.lnu.se/china-research/?p=2164). China still has by far too much government in the economy and by far too weak institutions. No doubt about this!

However, all this has not necessarily to lead to negative consequences for global trade. I do not rule out completely that China will try to keep down future dumping charges as much as possible. Time will tell us.

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

 

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