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.
The Third Plenum of the Chinese Communist Party’s Central Committee uses to be an important event. In the past, Third Plenums have taken place in fall following a Party Congress – with focus on the political leadership’s future economic and reform agenda.
The first – in my view – really memorable Third Plenum goes back to its number 11 in 1978 when China’s groundbreaking visionary leader Deng Xiaoping started up China’s famous process of economic reforms and opening-up, and, consequently, its modernization – with agriculture, industry, defense, science and technology as the main areas for the future.
This time, the Third Plenum happened in July, sending again quite a number of messages to the Chinese people and the rest of the world. But what do the messages tell us this time – or not?
Disappointments after the 18th Third Plenum
The credibility and outcome of this year’s Third Plenum still has characteristics of a conundrum. However, I do remember very well the plans and visions of the Third Plenum from 2013. Initially, I then had a feeling that China really might be on the way to a promising economic policy. Quite a number of modern guidelines and objectives could even having been picked from famous Western economic research and textbooks.
However, when checking all the details from the Third Plenum in 2013, one can now recognize that many envisaged or promised objectives from this policy convention have not been met and partly rather developed into the negative opposite during the following years. A deepening look into the quoted summary above – by the way prepared by the law firm Clifford Chance – should indicate or confirm that many officially strived policy improvements did not come true or did so only partly. In my eyes, the failure of giving the market economy a “decisive” role looks particularly disappointing. Rather the opposite could be noted during the past decade.
The question marks after the 20th Third Plenum
The 20th Third Plenum was concluded this summer on July 18. The official communique confirms also this time the long-term visions and supremacy of the Communist Party (http://en.cppcc.gov.cn/2024-07/19/c_1006186.htm).
When reading this communist party document, “everything“ seems to have developed well in the past years and been put on the right track for the foreseeable future.
Thus, the poor or at least insufficient current economic development is not discussed in the communique. Self-criticism seems to be more or less absent apart from a few general statements like “complex developments at home and abroad”; instead, formulations such as “we have achieved economic recovery and growth and have made firm strides in building a modern socialist country in all respects” look more representative for the pitch of the communique from this year’s Third Plenum.
Nonetheless, it should be worthwhile to quote the following conclusion from the communique, i.e. that “ the Central Committee made systematic plans for further deepening reform comprehensively with the emphasis on building a high-standard socialist market economy, promoting high-quality economic , supporting all-around innovation, improving macroeconomic governance, promoting integrated urban-rural development, pursuing high-standard opening up, advancing whole-process people’s democracy, promoting socialist rule of law with Chinese characteristics, deepening reform in the cultural sector, ensuring and improving the people’s wellbeing, deepening reform in ecological conservation, modernizing China’s national security system and capacity, deepening national defense and military reform, and improving the Party’s leadership in further deepening reform comprehensively to advance Chinese modernization…”
—> whatever all this could mean for the future.
Altogether, we can be quite safe about drawing the following six conclusions from this year’s Third Plenum:
China will keep its political top-down governance of the economy;
science and advanced technology play a growing role in the future;
there is no recognizable strategy for the different future challenges;
macroeconomic analysis and future policy approaches are still absent;
the environment continues to play an important role;
there is no clarifying strategy for China’s complicated overcapacity issue, the demographic challenge and the fight against (youth) unemployment.
Hubert Fromlet Affiliate Professor at the School of Business and Economics, Linnaeus University Editorial board
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
