Baltic Business Research

Speech at the annual conference
“Baltic Sea Region and China Day”
at Linnaeus University’s School of Business and Economics
October 17, 2011

Summary

1. Two major financial and economic crises in the Western hemisphere within four years must be considered as tough and unusual events. During the first crisis from 2007 to 2009 – the so-called American subprime crisis with its global contagion on the real economy  – emerging markets succeeded quite well to counteract the big challenges on economic growth – in China, for example, by substantial growth packages and stable exchange rates instead of a slightly appreciating currency. There were visible downturns of GDP growth in a number of emerging economies – but these downturns  were quite short-lived.

2.  Now, the world is confronted with crises in some European countries and significant problems for the euro. Again, challenges are considerable for the financial sector, and – possibly or probably – for the real economy (investment and consumption) in most European countries – with concrete global contagion risks as well.

3.  Looking at important signals from emerging economies so far – for instance at the indices for the development on stock exchanges – they have  been moving considerably downward (MSCI – 18% in the first three quarters of 2011). This is more or less in line with the average downturn of European stock exchanges. Brazil, China, India, Taiwan, Argentina and Chile belong to the main losers in the emerging market area, whereas Russia, Indonesia, Malaysia, Korea and Mexico performed relatively well in this harsh financial climate. Consequently, we can note that emerging markets do not always show homogenous developments during the ongoing European and global nervousness.

4.  What makes the difference between the above-mentioned positive groups of emerging countries and the more negatively reacting ones?  In my eyes, this split – at least when watching the stock exchanges – into the two categories of emerging countries is not really transparent. Could it be that Russia, Indonesia, Malaysia and Mexico are all oil-producing countries (but not Korea!)? This causality seems to be weak. Obviously, more analysis is needed, also when regarding the poor performances of the stock exchanges in China, India and Brazil – as much in three out of five BRICS countries. In some cases, previous rapid upturns may have led to some kind of normalizing downturns.

5.  In general terms, however,  it is obvious that emerging countries with strong macroeconomic fundamentals (low inflation, good performances of the balances of current account and governmental budgets, etc.) tend to be less negatively affected by speculators and to be preferred – using the term of former Nobel Prize winner James Tobin – by the increasing number of risk averters.

6.  I have been writing it many times before – but would like to repeat it: financial and economic stability begins at home, in emerging economies as well. So does the resilience of emerging economies to Western/global exogenous financial and economic shocks. Furthermore, resilience is also a function of the distribution of exports and domestic demand. Strongly export-intensive emerging countries are, of course, more sensitive to economic shocks from Western economies than developing economies that have more concentration on domestic consumption and investments.

7.  There is no doubt:  foreign investors try to find the most solid markets when risk aversion is the melody of the financial investors’ community. Thus, more risky emerging markets suffer from this kind of re-consideration of investment strategies. At least in the case of China, the mood of financial investors has become somewhat more cautious during the course of 2011 – due to persisting high inflation, overheating and banking fears. India suffers – as usual – from the twin deficits in the current account and the public deficits. Brazil, on the other hand does not. Finding more causality in the economic  and financial behavior and reactions of emerging countries to financial and economic shocks from advanced countries could actually become an interesting research topic.

8.  Another interesting issue: To what extent are (foreign) investors influenced by major commodity resources in an emerging country, both when it comes to their FDI and more short-sighted portfolio investment? Still, it seems to be difficult to see some major decoupling from Western industrial trends in mainly commodity-producing countries. At the same time,  we should not forget that strongly commodity-producing emerging countries also can have an impact on the economy of many other emerging countries that have no mentionable commodity production potential.

9.  Summary:  emerging markets are not always homogenous in their development of GDP changes as a reaction on major financial and economic turmoil in Western countries. All emerging countries have economic conditions on their own. For this reason, (foreign) investors and analysts should work with each and every emerging market separately – and not treat them as homogenous groups of countries, even if economic short-trends sometimes may look homogenous.

10. Different economic conditions in emerging markets in a political and macroeconomic sense also mean varying economic resilience to Western economic shocks. Automatic economic growth cannot be achieved by any country in the globalized economic competition of today. Or as professor Dani Rodrick recently put in a widely observed speech in Jackson Hole on August 25-27 this year when regarding more long-term  growth perspectives:   “As the empirical literature on growth has documented, convergence (of growth between advanced countries and emerging countries; own comment) is anything but automatic. It is conditional on specific policies and institutional arrangements…”.