Washington made it clear in the run up to the Pittsburgh G20 meeting that it wanted emerging economies to become engines of growth in an effort to rebalance the global economy away from US consumption and Chinese production.
Dominique Strauss-Khan, head of the International Monetary Fund, recently told the FT that a rebalancing of growth and increase in consumption in emerging markets was needed. What policy challenges lay ahead for emerging markets as the G20 proposes more balanced growth and a new international governance structure?
Ousmène Mandeng is head of public sector investment advisory at Ashmore Investment Management. He was also a deputy division chief at the International Monetary Fund.
Ousmène’s answers to a selection of the best questions were published here from 2pm on Monday, September 28.
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Demographic discrepancies between mature and emerging markets are striking. A wave of young, eager and skilled workforce is shaping a new global labour order. Plus it supports a new pattern of domestic demand potential across the globe. Do you think that this trend is subject to any risks?
George P, Geneva
Ousmène Mandeng: Differences in demographic trends between advanced economies and emerging markets are mixed.
Korea, for example, has the fastest aging population among the nations of the Organization for Economic Cooperation and Development. Nine of the 10 fastest aging populations in the world, based on current trends, are estimated to be in emerging markets.
While in emerging markets, less than 10 percent of the population is aged over 60 compared with 20 percent in advanced economies, by 2050, the proportion is expected to more than double. The 60-plus age group is estimated to comprise 20 per cent of India’s population and 30 per cent of China’s by 2050. While demographic trends are deferred in emerging markets they pose an equally important challenge.
Today, the lower proportion of under 60s in emerging markets is expected to give rise differential consumption and investment behaviour compared with advanced economies. This aggregate demand difference could indeed imply that advanced economies, where output is geared more towards an older population, may find it increasingly difficult to produce products that are representative in tastes and features for the global economy leading to market segmentation and slower globalisation.
This argument also supports the notion that emerging markets have an interest to promote integration between emerging markets.
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If the US wants emerging economies to borrow more and to spend more in order to be consumers, how are they going to pay back the debt they have accumulated over the years if they are net consumers rather than producers?
Yerdelen Kemal, Istanbul
OM: Most emerging markets exhibit only moderate debt levels and many are net external creditors.
The objective to rebalance the international economy is of course not one of creating new imbalances.
The idea should therefore not be to create highly levered consumption in emerging markets to help the U.S. to restore external balance. Some emerging markets had been running policies that led to unsustainable debt burdens and to the debt crisis of the 1980s and to some extent to the Asian crisis. Savings rates in some emerging markets have been very high and there is a case for reducing them.
This must not mean that emerging markets need to incur debt but merely that they will save less of current income and spend more. Most emerging markets exhibit debt levels that significantly lower than advanced economies and many of the large emerging markets are net creditors.
The burden of adjustment today rests mostly on the debtor.
This is part of the fundamental adjustment mechanism that goes back to the post World War II Bretton Woods system when the US insisted on the burden of external adjustments to rest above all with the debtor. Several decades later, and since the collapse of Bretton Woods, this still holds.
This so-called asymmetry of adjustment puts the onus on the US The large US current account deficit can be attributed largely to a decline in US savings in 2001-04 exacerbated by an adverse terms of trade shock.
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Will lower global growth mean that non-financial, or Environmental, Social and Governance [ESG] performance will become more embedded into emerging markets and will demonstrate regional traits? For example, will companies operating in Brazil need to demonstrate greater attention to ESG housekeeping as well as long term commitments to issues such as Amazon conservation?
Jimmy Greer, London
OM: Emerging markets have an upmost interest in upholding environmental, social and governance criteria.
Peer pressure through regional affiliations could exert regional trends in strict ESG adoption. The risk is as well, though, that ESG will be used in a slower growing international economy as a form of non-tariff protectionism or administrative barrier of entry.
In our view, this must be avoided.
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Given the US is more a services than a manufacturing economy, how is it going to increase exports to the level that’s needed to rebalance? Chinese consumers can buy more as GDP per capita grows, but this will be mainly domestic production. How is this going to benefit the rest of the world?
Javier Cabrerizo, Madrid
OM: The US will likely need to adopt a combination of restrained consumption and increased net exports.
The latter will depend on the propensity of the international economy to absorb US goods and services. The US has among the highest levels of productivity and there is no reason why the US should not be able to compete successfully in international markets. However, the main adjustment will probably have to come from reduced consumption. A shift towards net exports is also likely to require a depreciation of the dollar.
China’s consumption pattern will in part converge with advanced economies consumption upon achieving higher per capita income corrected for possible demographic differences. This will imply more demand for advanced economies goods and in particular services. Near convergence of consumption patterns would then help the international economy.
Global imbalances are of course not only about the US and China. Large current account deficits have also been incurred by some Southern European countries, the UK and some eastern European countries. Substantial surpluses had also been incurred by Germany, Japan and oil-exporting countries.
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US protectionism is surely a threat to any notion of economic rebalancing, when it is trying to tilt the scales in its favour?
Norman Fosset, London
OM: Many advanced economies still maintain very high barriers of entry in agriculture which has long been to the detriment of farmers in emerging markets. Protectionism appears a powerful policy option if the protectionist country can credibly sustain it.
The importance of emerging markets in the global economy today has significantly reduced the bargaining power of advanced economies including the US. Hence, this will help reduce protectionism in agriculture. Advanced economies alone can no longer determine the pace of globalisation and the risk of loosing global market share may be too great to implement protectionist policies.
It is fair to say that so far an increase of traditional trade protectionism has not been very prevalent and this is a major achievement during this crisis. However, protectionism comes in many disguises. The massive support given to banks in the US and UK or the European car industry is a form of protectionism.
The significant exchange rate movements resulting from the crisis are also equivalent to the imposition of tariffs by the countries of the depreciated currencies. Capital controls are another form of protectionism that needs to be resisted.
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Won’t global rebalancing evolve naturally as developing economies emerge from the financial crisis keen to pick up from where they left off? Decoupling may now seem like an ancient precept, but might it yet be talking point?
Sam Mullins, Nottingham
OM: The prospect for a resumption of global imbalances during 2001-07 looks indeed more benign. There is concern of course that prevailing adjustments (the US current account deficit declined to an estimated 3 per cent of GDP in 2009 from a peak of 6 percent in 2006) are merely cyclical and that imbalances will revert to a higher level once trend or near-trend growth is restored.
However, some of the drivers that have fuelled the build-up of the imbalances are no longer as prevalent in particular the availability of finance. The reduction in global imbalances is therefore likely to be permanent to an important extent. However, the international economy also needs to undertake important policy adjustments to ensure that the process of rebalancing will not be disorderly.
Decoupling rests on the notion that the international economy has a core, namely the advanced economies, and a periphery made-up of emerging markets. This is no longer representative of the international economy amid important feed-back loops between these groups.
Emerging markets have grown faster than advanced economies since 1999 leading to an increase of the share of emerging markets in world gross domestic product [GDP] from 23 per cent to 34 per cent today and are expected to continue growing faster over the medium-term with the share of emerging markets in global output expected to reach more than 50 per cent of world GDP within the next 10-12 years. This is a structural divergence in output growth performance.
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What do you think about the emerging markets, for example the BRIC [Brazil, Russia India China] markets, as an engine of global economy growth? And how will global rebalancing influence the consumption trends in emerging markets in the near term?
Viktor O. Ledenyov, Ukraine
OM: Emerging markets have been the engine of global growth by contributing more than half of GDP growth in the years leading to the global crisis. Emerging markets continue to exhibit, on aggregate even excluding China, stronger growth than advanced economies and set to contribute the bulk of world growth going forward. The IMF projects that Brazil, China, India and Russia will be among the top 10 largest economies by 2014 (April 2009 WEO and due for revision shortly). Those economies already play a leading role in the international economy.
The effect of a rebalancing of the global economy on consumption pattern is ambiguous.
A significant realignment of exchange rates, consequence of global rebalancing, and related terms of trade changes would shift the propensity of consumption. However, the high savings rates in many emerging markets are in large part precautionary and unlikely to change in the short term unless the incentives can be altered significantly.
Rising GDP per capita will certainly lead to a higher propensity to consume but this will be a slow process to have a significant aggregate impact. Notwithstanding, anecdotal evidence of vehicle sales in China, up 23 percent in the 7 months year-to-date compared with the same period of last year, suggest that consumption patterns are evolving rapidly.
Yet, the risk is that the international economy will have to consume less overall and consequently grow slower.
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What proportion of global GDP do emerging markets represent and which countries in particular do you regard as having the best growth prospects?
Michael Perman, London
OM: Emerging markets represent today 34 per cent of world GDP at market prices and 51 per cent in international prices (purchasing power parity). Given recent trends, emerging markets will represent more than half of world GDP at market prices within the next 10-12 years.
The G20 commitment to give a greater say to emerging markets and make the G20 the main economic policy forum represent a major shift in the international governance structure.
This shift is far more important than pending governance reform at the IMF and is expected to see the G20 to fully substitute the G7.
The emerging markets members of the G20 now stand to benefit from simultaneous economic, political and monetary proliferation. This will give these countries substantial institutional support to promote their prominence. The countries with the strongest growth prospects will be those that exhibit strong institutions and strong policy formulation capacity, supportive domestic demand and political continuity.
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Dominique Strauss-Kahn, the head of the IMF, has said leaders need reliable machinery which provides better policy notes and forecasts, and helps them follow up on decisions that have been taken at summits. Would it ever be possible to achieve, given that the crisis took so many by surprise?
Murat Basboga, Istanbul
OM: The extent of the crisis took most by surprise indeed.
The administrative and analytical infrastructure will need to be improved as a consequence of that.
The IMF itself of course dedicates considerable resources to the analysis of the international economy but it will also need to improve the delivery of its findings and be more assertive in its policy recommendations. However, there will always be a substantial degree of uncertainty in economic analysis and no system will be fail-prove. The build-up of sufficient margins and flexibility to address unforeseen shocks may require further thought.
The debate about whether monetary policy needs to take into account asset prices rather than merely looking at consumer prices for the assessment of the adequacy of its policy stance represents a good point in case. We should see significant changes in the formulation of economic policies following this crisis.
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I think we all know that the emerging economies already are the engines of growth. The question is how does the US justify this desire for emerging markets to drive growth and balance out the asymmetric trade balances -- particularly of Chinese production and US consumption -- yet maintain the dollar-based reserve system as opposed to a multi-currency system?
Ryan Dembinsky, New York, NY
OM: The international economy has indeed not yet addressed the monetary implications of the crisis.
The G20 commitment to balanced growth, while being merely a reaffirmation of existing rules guiding membership in the IMF, will need to be complemented by an international monetary response conducive to support its aim.
The current framework based in essence on the dominance of the US dollar has demonstrated that it is no longer consistent with the notion of balanced growth. A rebalancing of the real international economy will therefore require a rebalancing of the international monetary system to establish policy consistency. This remains essential to provide adequate incentives and adjustment mechanism for balanced growth.
Adoption of a multi-currency international monetary system seems the most feasible option. This would allow greater currency competition and impose more external financing constraints on individual currencies (reduce the “exorbitant privilege”) that is essential to provide adequate incentives for balanced growth. While reliance on national currencies is a fundamental dilemma of the current system, as national currencies are subject to domestic policy objectives, a multi-currency system would also allow reducing dependence on individual national policies. This seems particularly relevant as US. monetary policy may have become significantly less representative of the needs of the international economy.
The most promising candidates for a multi-currency system to complement the prevailing main currencies are the so-called BISMARCK (Brazil, India, South Africa, Mexico, Saudi Arabia, Russia, China, Korea) currencies. The BISMARCK currencies provide a representative cross section of high grade countries members of the G20 by geography and resources basis that are set to play a more prominent role on the international stage.
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If world leaders encourage a shift of consumption and production towards emerging countries, does this result in higher equity values for those markets?
van Moerbeke, Belgium
OM: Emerging markets are set to outperform advanced economies significantly over the medium-to long term. This will affect risk perception and valuations. Above all, it is expected to exert appreciating pressure on emerging markets currencies as a consequence of rebalanced growth.
Such currency appreciation will be supportive of equities valuations. However, emerging markets equities are expected to remain more highly correlated with advanced economies equities compared with other emerging markets asset classes. Sharp adverse shocks to advanced economies equities are therefore also expected to exert downward pressure on emerging markets equities.
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Do you see an increased role for the WTO (World Trade Organisation) as an arbitrator of the world’s markets since any re-balancing could lead to increased protectionism and/or subsidies for domestic markets?
Jim Pattullo, London
OM: The WTO is set to play a crucial role to ensure that a rebalancing will not be unduly cushioned by protectionist measures.
However, as effective tariffs are broadly set significantly below allowed tariffs, countries can adjust tariffs in some instances by considerable margin without being in non-compliance with WTO rules and yet would be as damaging.
The WTO dispute settlement mechanism is also relatively slow and if the WTO were to see a substantial increase in trade disputes, settlement is likely to suffer. The aim therefore has to be that countries avoid legal battles through the WTO.
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With heavy debt to be burdened with and the inability to improve competitiveness by devaluing its currencies (e.g., accession countries in Eastern Europe), I would think select emerging economies with fixed exchange rate regimes are bound to face speculative pressure. How can should countries best handle or avoid such a possibility? Dmitri Repnikov, VT, USA
OM: Many emerging markets show only moderate debt levels. Exchange rate regimes have shown some remarkable flexibility amid significant exchange rate depreciations following the intensification of the global crisis.
This should deter speculative attacks. Select cases of fixed exchange rates regimes will continue to be under pressure if they force a disproportionately large adjustment onto the domestic economy. Policy consistency remains the most important policy principle. Where exchange rate regimes are or are perceived to be no longer consistent with underlying economic conditions, countries need to consider an exit strategy. Deferring an exit, risks leading to a bigger problem only later on.
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