Årets ekonomipris till Acemoglu, Johnson är ett klokt val. Har själv tillämpat deras forskningsresultat i min egen forskning och föreläsningsverksamhet sedan en längre tid tillbaka, speciellt för att understryka institutionernas betydelse för utveckling, välfärd och tillväxt. Intressant är också att Acemoglu på sistone också hänvisat till risker som är förknippade med AI-utvecklingen.
Acemoglu, Johnson and Robinson really deserve the “Nobel Prize” in economics with their institutional research. I use their research results a lot, particularly when it comes to my research on emerging markets. Interestingly, Acemoglu also has published conclusions about neglected AI risks.
Hubert Fromlet Affiliate Professor at the School of Business and Economics, Linnaeus University
Recently, I published an article in Swedish on African challenges as a reaction on some articles in the Swedish academic journal Ekonomisk Debatt in its April number from 2024 (https://www.nationalekonomi.se/artikel/afrikas-handel-utmaningar-och-mojligheter/). Several authors put then a strong emphasis on all the increasing commercial opportunities that may be derived from the relatively new free trade agreement African Continental Free Trade Area (AfCFTA).
Sure, everybody should be happy about a hopefully improving trade future for Africa. However, African progress cannot be based on improved trade conditions alone. Better working institutions are – more or less – needed in all African countries which in any emerging market uses to be a long journey. But, better starting now than waiting another five or ten years.
Unfortunately, the EU and the U.S. have neglected the important continent of Africa in many respects for too long time, more lately even in the fight against covid and other diseases – but also when it comes to fruitful and friendly cooperation in the strategic fields of commodities, infrastructure and education.
Instead, China and Russia have recognized this Western neglect and strengthened more lately their positions considerably in quite a number of Sub-Saharan countries.
Emerging markets are usually more sensitive to weak current account balances than advanced countries. A deficit in the balance on current account urges for a currency inflow since it implies a debt for imports vis-a-vis other countries that has to be paid. This inflow can be done in the three following ways:
¤ by receiving currency reserves via foreign direct investment (which often does not work as an available or sufficient financial source),
¤ by borrowing money in foreign currency (mostly in U.S. dollar, USD), or
¤ by selling stocks, bonds, etc to foreign investors (if such financial products exist in the emerging country and foreign demand for these papers is there).
Statistics show that emerging markets borrow the lion share of their foreign credits in USD which may be challenging in times when the American dollar is strong on global currency markets. This is actually the case. Serving existing debt in USD uses to be even much more challenging.
By the way: During a meeting the other day with American financial analysts, I heard the view that the USD historically tended to be strong when investments in research and development (R&D) in the U.S. were high. This is explained by an increasing demand for American technology stocks and also foreign action for FDI in the U.S., thus leading to a high demand for the dollar and therefore to the strengthening of the American currency. I am not quite sure about the general validity of this suggested correlation. But it can be observed that such conditions can be found these days.
Back to emerging markets. What we can see today is an increasing willingness of certain emerging markets to avoid or decrease new borrowing in USD. However, this is not easy to achieve since USD markets function by far as the biggest global supplier of new loans, also to emerging markets.
The ongoing situation with the strong dollar is, of course, particularly difficult for emerging countries with high indebtedness in USD. Such countries may be found in all continents – countries that are or have been reporting growing pressure on their currencies in 2024 such as the Nigerian Naira, the Egyptian Pound, the Turkish Lira, the Indonesian rupee, the Argentine peso or the Brazilian real (watch for this the following IMF table: https://stats.bis.org/statx/srs/table/e2?m=USD). Of course, some of these and other weak currencies of emerging markets have also been impacted by other negative factors than the strong dollar, for example domestic political ones.
At the same time, there are also countries trying to reduce their exposure to the dollar (which also can be seen in the IMF table quoted above). Indonesia is such an example. However, such a trend will not be easy to achieve – but Thailand actually managed it in the past few decades. Perhaps another option may gain momentum as it is currently the case in South East Asia, i.e. trying to expand borrowing within the region at the expense of the USD.
Conclusion: Analysts of emerging markets should watch the further development of the USD and its impact on indepted emerging markets.
Hubert Fromlet Affiliate Professor at the School of Business and Economics, Linnaeus University Editorial board
