The Role of Emerging Markets in a New Global Partnership for Growth by IMF Managing Director Christine Lagarde
IMF News, February 4, 2016
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- Authors: Christine Lagarde
- Published: February 4, 2016
Importance of emerging markets: scale and everyday links
- Emerging and developing economies are home to 85 percent of the world’s population—6 billion people.
- As a group, emerging and developing economies now account for almost 60 percent of global GDP, up from just under half only a decade ago.
- They contributed more than 80 percent of global growth since the 2008 financial crisis.
- China alone has lifted more than 600 million people out of poverty over the past three decades.
- World Bank estimates: in 2012, 12.7 percent of the world’s population lived at or below $1.90 a day; that is down from 37 percent in 1990 and 44 percent in 1981.
A new partnership for growth: rationale and goals
- Current reality: emerging markets’ growth rates are down, capital flows have reversed, and medium-term prospects have deteriorated sharply.
- Last year, emerging markets saw an estimated $531 billion in net capital outflows, compared with $48 billion in net inflows in 2014.
- On current IMF forecasts, emerging and developing economies will converge to advanced economy income levels at less than two-thirds the pace predicted a decade ago.
- Risks of slower convergence: rising inequality, protectionism, and populism.
- Objective: forge a “new partnership for growth” in which both emerging and advanced economies act to promote faster and more sustainable convergence.
Key challenges facing emerging markets and spillovers
- Definition and diversity:
- Emerging markets: a group of about 30-50 countries in transition—not too rich, not too poor, and not too closed to foreign capital.
- These countries are diverse; examples: Brazil and Russia in recession, India and Mexico enjoying robust growth.
- Main challenges:
- China’s growth transition: rebalancing from industry to services, exports to domestic demand, and investment to consumption; short-term slower growth with trade, commodity, and financial spillovers.
- Declining commodity prices: oil and metals prices have fallen by around two-thirds from their most recent peaks; many commodity-exporting emerging economies under severe stress with large currency depreciations.
- Asynchronous monetary policies: Federal Reserve rate normalization has contributed to a rise of the U.S. dollar, straining emerging market firms with US dollar-denominated debt.
- Financial vulnerabilities: the corporate debt of nonfinancial firms across major emerging markets quadrupled to more than $18 trillion between 2004 and 2014 (October 2015 GFSR).
- Geopolitical and environmental risks: Syrian refugee crisis affecting Turkey, Lebanon, Jordan; climate change impacts—by 2030 it is expected that more than 98 percent of deaths related to climate change will occur in developing countries.
- Spillovers and spillbacks:
- Financial spillovers: Chinese exchange rate changes and stock market plunges can trigger global market reactions.
- Trade spillovers: global trade slowdown partly due to China; trade between emerging and advanced economies now exceeds trade among advanced economies.
- Economic spillovers: IMF estimates a slowdown of one percent in the emerging world would reduce growth in advanced countries by about 0.2 percentage points.
- Environmental spillovers: over the next 15 years, there may be up to $90 trillion in global infrastructure investment, mostly in emerging and developing economies—risk of locking in carbon-intensive systems.
Mutual responsibilities: what emerging and advanced economies should do
- Actions for commodity-exporting emerging economies:
- Upgrade spending efficiency, strengthen fiscal institutions, and increase non-commodity revenues to make fiscal adjustment less painful.
- Allow greater exchange rate flexibility to absorb adverse external shocks.
- Use macroprudential tools to limit financial sector risks, including monitoring foreign currency debt and limiting fallout from large credit expansions.
- Actions for advanced economies:
- Continue accommodative monetary policies to support demand, but adopt a more balanced policy mix that includes fiscal policy where room exists (for example, funding infrastructure).
- The United States should normalize monetary policy prudently and with clear communication to limit global spillovers and spillbacks.
- Joint priorities for both groups:
- Foster more and better innovation by removing barriers to competition, cutting red tape, enhancing labor mobility, and investing more in education and research.
- Facilitate greater sharing of technology between advanced and emerging economies, including rethinking aspects of patent protection and intellectual property balance.
- Promote foreign direct investment: FDI into emerging and developing economies, as a share of GDP, is now well below what it was in 2000-06; global forecasts predict it will fall even further by the end of the decade.
- Promote trade reforms and integration: global trade growth has slowed relative to pre-2008 trends; increased trade liberalization is needed.
- Complete and implement the global regulatory reform agenda to create a more resilient global financial system.
Global measures and the IMF’s role
- International monetary system challenges:
- The system governs exchange rates, international capital movements, reserves, and official liquidity arrangements (the global financial safety net).
- The system has become more fragmented and asymmetric; many emerging economies lack access to advanced-country swap lines, prompting large foreign-exchange reserve accumulation.
- Safer capital flows:
- Capital flows rose sharply over recent decades: between 1980 and 2007 global capital flows increased more than 25-fold, compared with an eight-fold expansion in global trade.
- Policy ideas: shift toward more long-term, equity-based capital flows; adjust supervisory frameworks in source countries to ensure prudent capital behind short-term debt-creating flows; strengthen macroprudential policies in recipient countries; reconsider tax policies that bias toward debt (interest deductibility).
- Stronger global financial safety net:
- Components: countries’ foreign-exchange reserves, swap lines, regional financial arrangements, and the IMF.
- Strengthening options: broaden and strengthen precautionary financing instruments, increase size and coverage of the safety net to reduce the need for self-insurance and free capital for investment in infrastructure, health, and education.
- IMF actions: membership-approved Quota and Governance Reforms came into effect last week, doubling the IMF’s permanent resources and enhancing representation of dynamic emerging and developing economies.
- Institutional role: the IMF monitors economic and financial stability of its 188 members, provides financial support in times of distress, and offers technical assistance and training.
- Result: for the first time, emerging market countries like Brazil, China, India, and Russia are now among the 10 largest shareholders of the Fund.
Conclusion: implications for policy and future leaders
- A new economic reality: the rising role of emerging and developing economies is a defining feature of the 21st century and affects advanced economies as well.
- Policy imperative: both emerging and advanced economies must act multilaterally to promote growth, manage spillovers, and support sustainable convergence.
- Call to action for future leaders: promote climate change awareness, combat excessive inequality, and insist on the highest standards of ethical behavior to help forge a “new multilateralism” and a new partnership for growth.
Speech by Christine Lagarde, Managing Director, International Monetary Fund, University of Maryland, February 4, 2016.