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The role of emerging and developing countries in the global economy

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If you thought for one moment that the matters of the emerging and developing economies are not your business then think again. A domino effect exists in almost every circumstance of our lives and believe it or not, Guyana’s monetary system, its capacity to grow and offset external shocks cannot be done if attention is not paid to what is really happening in the global market.

And so today, the role of emerging and developing countries in the global economy will be placed in the spotlight.

It is worth remembering that these countries are home to 85 percent of the world’s population. And it is not surprising that—slowly but steadily—these 85 percent have become a major engine of global activity.

At the moment, emerging and developing economies account for almost 60 percent of global GDP, up from just under half only a decade ago. They propped up the global economy as advanced countries grappled with the after effects of the financial crisis. Together they contributed more than 80 percent of global growth since the crisis so clearly, the 85 percent matter for the global economy.

According to Managing Director of the International Monetary Fund (IMF), Christina Lagarde, China, has of course, emerged as an economic superpower. It has also recently become a member of the Special Drawings Right (SDR) currency basket—a decision based on a technical assessment that was wholeheartedly endorsed by the IMF Executive Board.

 

After years of success, however, Lagarde noted that emerging and developing countries are now confronted with a new reality.

She stated that growth rates are down and cyclical and structural forces have undermined the traditional growth paradigm. The IMF Managing Director noted that on current forecasts, the emerging world will converge to advanced economy income levels at less than two-thirds the pace we had predicted just a decade ago. Lagarde noted that this is cause for concern.

She asserted that China itself has embarked on an ambitious multi-year rebalancing of its economy, toward slower and more sustainable growth. The IMF Director expressed that this is a positive endeavor that, in the long run, will benefit everybody. In the short run, however, this transformation generates spillover effects – through trade and lower demand for commodities, and through financial channels as well.

 

 

Lagarde said that not only have oil and metals prices fallen by around two-thirds from their most recent peak, but supply and demand side factors suggest that they are likely to stay low for a sustained period.

She said that many commodity exporting emerging and developing economies are under severe stress, and some currencies have already experienced very large depreciations.

“We have all seen it in Latin America, and I have seen it first-hand last week in Nigeria and Cameroon – two countries that are hit hard by lower oil prices and domestic fragilities. So where does this leave economic policy? And what can the other 15 percent of the global population do for global growth, and to help emerging and developing countries adjust to the new global environment?

Certainly any solution must involve individual countries – advanced and emerging –tackling their own vulnerabilities and policy constraints,” noted the Managing Director of the IMF.

More generally, she stated that in advanced economies, monetary policy can no longer be the only game in town. Lagarde said that it needs the support of fiscal policy and structural reforms to support aggregate demand and raise growth potential. And emerging economies need to redirect their economies toward new sources of growth.

The IMF Director expressed that in the Euro Area and Japan, weak growth and low inflation call for continued monetary accommodation. In the United States, she said that firming activity laid the ground for monetary normalization by the Federal Reserve. She stated that lift-off has gone smoothly. Lagarde intimated that it was clearly communicated and priced in by financial markets.

The key issue going forward Lagarde said is the pace of normalization.

 

Lagarde explained, “Clearly, emerging market are benefiting from the fact that many central banks in many advanced economies still have a very easy policy stance. And yet, if financial tightening by the U.S. were to coincide with further easing in the euro area and Japan, there could be further dollar appreciation vis-à-vis the euro and the yen.”

 

“For emerging economies, this could raise vulnerabilities in sectors with dollar exposures, especially corporates. Foreign exchange exposures by corporates have grown sharply over the last five years, in part because of the search for yield in a low interest rate environment.”

 

Beyond dollar appreciation, the IMF Boss said that there is also the potential for increased exchange rate volatility. She said that this volatility could be induced not only by the divergence in monetary policies in major advanced economies, but also by uncertainty about their overall prospects and policy action.

Putting it all together, she said that the key issue for emerging economies is that heightened volatility is manifesting at a time when many of them are already under stress. Lagarde said that another bout of global risk aversion could lead to further commodity price declines, widening spreads, and depreciating exchange rates.

The IMF Boss said that this of course, this matters a lot for advanced economies too.

“It matters because of the current environment of elevated uncertainty and financial market volatility. In such an environment, events and policy decisions that in “normal” times may have limited cross-border effects can now trigger much larger financial reactions,” she explained.

Lagarde said, too, that an equally compelling reason why advanced economies should heed what is happening in the emerging world is the impact on growth. According to the IMF’s estimates, there are strong indications of a slowdown of one percent in the emerging world which would lower growth in advanced countries by at least about 0.2 percentage points.

She said that this is substantial given anemic growth rates, lack of employment, and increasing social tension in large parts of the advanced world. She stressed that for the aforementioned reasons, there is a need for a global policy upgrade, a stronger global financial safety net, and a framework for safer capital flows.

The IMF Boss stressed that in a nutshell, a global policy upgrade is not only desirable for improved global health, it is essential.

 

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