Emerging markets and developing countries
For de past five years they drove the recovery and kept the global economy afloat—accounting for three-quarters of total growth.
They are now in much better shape, with the exception of India and Malaysia, than in the crisis of the 80's and 90's, they have flexible exchange rates,higher International Reserves, and lower debts with respect of their GDP's.
Over the past five years, capital flooded into emerging markets—partly due to loose monetary policy in the advanced economies. Bond inflows alone rose by over $1 trillion—more than 2 percentage points of GDP a year for the recipient countries. Now, with markets getting jittery over the perceived end of easy money, this financial tide is starting to recede.
These countries are in another transition:
By IMF estimates, the turbulence in train since last May could reduce GDP by ½ to 1 percent in major emerging markets. Of course, some countries are more vulnerable than others.
As it happens with advanced economies, different groups of emerging economies, face different
problems.
For some,the priority is to ride out the turbulence as smoothly as possible. Currencies should be allowed to depreciate. Liquidity provision can help deal with dysfunctional market behavior.
There is less room to maneuver,in countries with inflation pressures—such as Brazil, India, Indonesia, and Russia. Likewise, there is not much space left across many emerging markets for using fiscal policy, given high debt and deficits.
Some countries also need to knock down lingering barriers to long-term growth—pushing ahead with infrastructure investment in places like India and Brazil, deepening financial markets, and opening up local markets,ending non-tariffs proteccionist measures.
China needs to keep moving to a growth path based less on credit—which hit 180 percent of GDP this year—and more on higher productivity, higher incomes, and higher consumption. This means liberalizing interest rates, ramping up financial sector oversight, opening up protected sectors to private initiative, and further strengthening the social safety net.
This emerging market transition will not be fast or easy. These countries will likely spend the rest of the decade adjusting to the new reality.
Again, international collaboration is the only way forward.
Low income countries
These too are in the process of profound transition. In many cases, the developing countries of yesterday are poised to become to the frontier economies of tomorrow.
Sub-Saharan Africa is now the second most dynamic region in the world after developing Asia, and is getting ever closer to the beating heart of the global economy. Growth rates over the past several years have been around 5 percent.
So these countries need to take action, by having enough foreign and fiscal reserves to deploy when necessary, including by mobilizing more revenue. Beyond that, they need to make growth more inclusive—including by boosting public investment and making sure that all have access to decent healthcare, education, and finance.
Transition in the Financial Sector
There is a second fundamental transition taking place in the global financial sector, in parallel with the economic.
Under the old model, the financial sector took on outsized risk in pursuit of outsized rewards, causing outsized ruin—and precipitating the crisis we have been experiencing for the last five years.
How is this transition doing? In the IMF’s assessment, it remains a case of “mission not yet accomplished”.
Yes, we have seen progress. The tougher capital standards, agreed under Basel III, are being implemented. We have agreement on new liquidity standards, and plans for a leverage ratio to keep excess risk in check.
There is also an issue for the reform in the deratives market.At the end of last year, total outstanding derivatives amounted to $633 trillion, of which only $24 trillion were traded on organized exchanges. Adequate supervision of the remaining part requires countries and markets to speedily implement the agreed derivatives reforms.
Another danger zone is shadow banking, which is attracting a lot of riskier activity. In the United States, the nonbanking sector is now twice the size of the banking sector. In China too, about half of the new credit extended so far this year has come through the shadow banking system.
Putting this all together in a globalized world is a headache. And yet, it must be done—nothing less than global financial stability depends on it.
Building a new financial sector is not the job of policymakers alone. It is also the responsibility of the financial industry.
Managing the New Transitions in the Global Economy
an Address by Christine Lagarde
Managing Director, International Monetary Fund
Managing Director, International Monetary Fund
