The Emerging Economy Challenge: an Optimistic View

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The Emerging Economy Challenge an Optimistic View

• Reforming the Bretton Woods Institutions
• Danish Institute for International Studies
  (DIIS), Danish Ministry of Foreign Affairs
• Copenhagen, Denmark
• September 2009
• Aniket Bhushan
• Finance for Growth
• The North South Institute

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Outline

• What went wrong this time?
• How do we situate Emerging Economies (EE)?
  Where do they stand in relation to advanced?
• Their crisis experience take-away(s), lessons?
• Preconditions for policy change?
• Three loci of change monetary system ( IMF
  role) conditionality broad policy mix

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What went wrong this time?

• Nothing
• Chronicling continuation (long-trend income
  polarization, middle class wage stagnation debt
  dependence)
• Economy on steroids (2000-07, cumulative
  household debt increase by 7tln, mortgage 5tln)

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What went wrong this time?

• Sharp growth in financial sector profitability
• Curious in context of high competition
• Profitability implies lads must be doing
  something right
• Dancing till the music plays
• Explosive growth in derivatives markets
• Leverage, high opacity, breeding unknown
  unknowns, unforeseen correlations
• Insurance v. gambling

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What went wrong this time EE lens(not much new)

• Urgency of reform, already made apparent by Asian
  (1997)
• Inadequacy of BWI framework
• Workaround strategies

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Situating Emerging Economies

• Decoupling?

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Situating Emerging Economies

• Over 35yrs, 20-26 gap down to 4-10

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Situating Emerging Economies

• Emerging G20 catch-up and crisis experience
• Still ways to go on DFD

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Situating Emerging Economies Sharp rise, hard
fall
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Key EE take-away (s)

• Workaround worked, but cannot count on steroids
• Carpe diem opportunity to play pro-active role
• Managing going out stake in external financial
  sys increasing rapidly

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Take-away, lessons?

• Well if EE were better prepared, are there any
  lessons
• Calibrated liberalization, gradual
• Strong ownership of process
• Cap a/c lib not same as trade
• Asian crisis, cause for pause
• State as absorber v. multiplier of shock
• Informal sub-grouping (BRIC Summit)

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BWI Implication

• Bottom-line
• Addressing precautionary r. accumulation
  (insurance)
• Longer-term diversification of global demand
  (drivers and composition)

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Conditions for policy change

• Structural shifts (and amplifiers)
• Economic, Geopolitical
• Political capital
• Will, momentum, anti-incumbency, palatable-ness
• Perceived alternatives
• i.e. doesnt have to be new but new mix of
  old/new
• Windows of opportunities
• i.e. vacuum can be window or crisis can be too
  short

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Potential loci of Change

• Monetary system and role of IMF
• Conditionality
• Broad policy-mix (countercyclical, industrial)