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Emerging Financial Markets

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Emerging Financial Markets 1. Growth and Prosperity Prof. J.P. Mei R – PowerPoint PPT presentation

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Title: Emerging Financial Markets


1
Emerging Financial Markets
1. Growth and Prosperity
Prof. J.P. Mei
R
2
  • V-Violence
  • AL- Incorrect Politically
  • AC-Adults only, Very Challenging

2
3
Economic Growth A Millennial Perspective
  • 0-1000 Almost no growth, 0.01
  • 1000-1500 Almost no growth, sign of life 0.15
  • 1500-1820 Doubling the growth rate 0.32
  • 1820-1870 Tripling the growth rate 0.93
  • 1870-1913 Golden age 2.11
  • 1913-1950 Set back 1.85
  • 1950-1973 Recovery boom 4.91
  • 1973-1998 Another Golden age 3.01

4
Three Key Drivers
  • Conquest or settlement of relatively empty areas
    of fertile land, new resources, transfer of
    population, crops and livestock
  • International trade and capital movement
  • Technology and institutional innovation

5
Historical Roulette
  • 3000 BC, Kingdom of Egypt
  • 2500 BC, The Greek Civilization
  • 2000 BC, Shang Dynasty in China
  • 500 BC, The Roman Empire
  • Middle Ages China, Aztec in Mexico and
    the Incas of Peru
  • 1500 AD, Spanish Adventurers
  • 1600-1800, The Netherlands
  • 1700-1900 AD, British Empire
  • 1900 AD - ?, The United States of America

6
3000 BC, Kingdom of Egypt
7
500 BC, The Roman Empire
8
Key Questions
  • Why the small Netherlands once dominated the
    world?
  • Why New York won the world series of Capitalism?
  • What is the key ingredient of economic growth?

9
Tulip Mania The First Speculative Bubble in the
World
10
Tulip Mania The First Speculative Bubble in the
World
  • The Flow of foreign capital
  • The first stock exchange in the world
  • Development of options, futures, and banking
    institutions
  • International lending

11
Why New York?
  • In 1770, Foreign import
  • Philadelphia 47,000 tons Boston 38,000 tons
  • Charleston 27,000 tons New York 25,000 tons
  • But, New York had a unique history
  • Money driven, not religion
  • It was a trading post, speaking 18 different
    languages even with 1000 population
  • Became a financial center after independence
  • The development of Erie canel
  • Center for trading railroad stocks

12
The Man Who Made it Happen
  • What to do with Junk continentals? 2.5 cents?
  • Federal tax system
  • Refund national debt, both foreign and domestic
  • Central bank
  • The fight with Jefferson
  • Establish Bank of New York
  • Introduced securities for federal, state, bank,
    insurance companies
  • A windfall for Wall Street

13
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14
Free Market Monopoly
  • Buttonwood Agreement on 4/21/1792 outside 68 Wall
    Street
  • Self Governing and regulating gt set its own
    rules and devise its own procedures gt most free
    market in the world. But not always in public
    interests.

15
The Definition Of Emerging Markets
  • The IFC Definition Income less than 9,000
  • 21 GDP, 85 Population, 76 Area, And 11 Market
    Capitalization in the World (1995)
  • Higher growth rates high mean returns in many
    countries
  • Time Taken to Double Per capita Output (10 years
    but unstable)

3
16
The Emerging Markets
17
Annual Real GDP Growth1987-1996
18
Annual Real GDP Growth1997-2001
19
Average Annual Returns for the Twelve Years Ended
December 1998 Source International Finance
Corporation. Returns include capital gains and
dividends.
20
Average Annual Dollar Returns 1999-2002 Source
International Finance Corporation. Returns
include capital gains and dividends.
21
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22
The Lucas Growth Model The Puzzles of Economics
Growth
  • Why growths differ across countries? (India vs.
    China)
  • Why growths do not always translate to stock
    (investment) returns? (Korea)
  • Why capital flow is so small?

23
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24
Privatization and Incentives
  • Studies have shown a high correlation between
    economic freedom and growth.
  • Privatization of SOEs leads to great improvement
    in efficiency and profits.
  • Low Tax Rates provide more incentives for
    entrepreneurs.
  • Free trade and market opening allows
    multinationals to leverage their strength,
    outsourcing production, and expand their markets.

4
25
Effective Corporate Tax Rates Data Source
Goldman Sachs
26
An Educated And Low Cost Labor Pool
  • Low Literacy Rates Make Training Less Costly.
  • Young and Energetic
  • Cost Of Labor Is Low
  • Technology Leap-frog Allows for Dramatic
    Improvement in Efficiency.

5
27
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28
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29
Domestic Savings And Foreign Capital Flow (FDI)
  • People are thrifty (high saving rates) in many
    markets. But high domestic savings can not fully
    cushion the flow of foreign capital.
  • FDI flows have increased rapidly.
  • Equity flows are rising but not steady.
  • The composition of capital flows are more healthy
    (more private than public flows) but there is a
    problem of duration mismatch.

6
30
6
31
Economic Impact On Developed Countries
  • Raising demand of baby boomers in EM vs. falling
    demand in many western countries
  • Rising demand for western technology
  • Badly needed infrastructure projects create huge
    demand for capital and expertise.

7
32
Comparison of Population Growth Data Source
United Nations Over the last five years, Japans
population grew only at a miniscule 0.2 a year.
In comparison, the population of other Asian
grew at much higher rates, with some growing at
over 2 a year.
33
Annual GDP Growth Projection 2000-2025 Data
Source Asias Bright Future (Steven Radlelet
and Jeffrey Sachs ), United Nations, and
Financial Times
34
What can go wrong
  • Paul Krugman Little TFP increase.
  • Past Success has little persistence (Brazil
    Korea).
  • Excessive public and private borrowing increase
    the risk of financial crisis.
  • Currency instability resulted from week financial
    system.
  • Overbuilding of production capacity leads to low
    returns. (Real estate speculation)
  • Strong special interest groups can block badly
    needed reform.

8
35
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36
Will Asia Follow Japans Fate?
  • Population growth create demand
  • Still in catch-up mood
  • Low taxes create strong incentive
  • Valuation reasonable before the crash (The bubble
    was small)
  • Weak currency boost competitiveness
  • Good fiscal and monetary condition
  • Weak legal institutions
  • New development strategy
  • Market panic
  • US market crash

9
37
Dramatic Improvement in Current Account
  • Population growth create demand
  • Still in catch-up mood
  • Low taxes create strong incentive
  • Small family business (except Korea)
  • Valuation reasonable before the crash (The bubble
    was small)
  • Weak currency boost competitiveness
  • Good fiscal and monetary condition

38
Lessons from History
  • Speculation helps accumulate capital and
    encourages risk taking and capital flow
  • Diversity is key to emergence
  • Democracy helps trickling down
  • TFP is key to long-term success (not growth, not
    investment)
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