Abstract
We welcome you to the first issue of the Global Journal of Emerging Market Economies in 2012.
The past year, 2011, has once again been ‘extraordinary’, but maybe the more appropriate adjective to use in the context of a tumultuous global economy is ‘frightening’. The aftermath of the global financial crisis that erupted in late 2008 is threatening to lead the global economy into yet another recession. The human and financial costs of the ongoing economic crisis are already enormous. They are being felt everywhere, particularly in many developed countries: unemployment is unacceptably high, institutions and markets are fraying, and national deficits threaten to become unmanageable. The sovereign debt levels combined with high fiscal deficits in some euro-zone countries seem unsustainable, and many wonder whether the euro even has a future or whether it is doomed to wither away—if the underlying imbalances cannot (or will not) be addressed in a truly meaningful manner.
Against this backdrop, two powerful and countervailing mindsets are at work. On the one hand, with the global economy poised at another economic and financial crisis, the impulse is for countries to turn inwards and institute increasingly protectionist policies. With the fear of economic and financial con-tagion, this impulse to withdraw from the global economy is understandable. However, the fragmentation that would ensue would, as Michel Camdessus articulates it, “lead to an unraveling of the —system, where national and regional policies are mutually inconsistent…and any progress towards open, competitive markets runs the risk of stalling, possibly even reverting.”
On the other hand, it is becoming increasingly apparent that more and more meaningful global integration will be necessary for the long-term sustainable growth of the global economy. It is becoming clear that the developing countries, cannot simply hope for increased exports to sustain their high growth. Key to their future growth prospects is higher consumption from emerging market economies and global integration. Central to increased, more meaningful global integration will be the political rise—not just the economic rise—of the emerging market economies as a group. Already, the fast-growing emerging economies in the world account for a large and growing share of the global economy; now their rising economic power must be accompanied with increased political involvement in global forums such as the G-20.
Emerging economies will have to make a profound “mental switch.” On the economic front, most emerging market countries have already benefited from increased globalization, mainly as exporters to developed countries and as recipients of large capital flows. Given their much higher growth rates and the sharp rise in their share of the global economy, they are now expected to contribute to the global good by becoming markets/importers for developed countries. Such an economic transition will have an equally profound political dimension. Emerging economies will need to become more active players in the global arena, by participating in the formulation and execution of strategies and policy decisions that contribute to the global common good. “With increasing size and influence comes greater responsibility,” as US Federal Reserve Chairman Ben Bernanke said in a speech in late September 2011.
I see three important areas where they will need to further contribute to the global good by: (i) sus-taining their high economic growth with a solid foundation that is based on their increased competitiveness and sound macro-economic balances, (ii) enhancing their contribution to international trade and international capital flows, and (iii) building solid, agile public and private institutions that are the cornerstones of any growing economy. Institution building is an especially complex and long-term task, where the benefits are not immediately visible and may only accrue obliquely.
The articles in this issue should be seen against the backdrop of this overarching global economic environment. We start with two articles that address issues related to inflationary pressures that have recently emerged as a particular concern in emerging market economies that weathered the Great Recession relatively well. The third article addresses another important question relatively new to emerging market economies: how did private companies respond to the global financial turmoil? The fourth article takes on the controversial issue of capital account convertibility.
The first article by Professor Noha Emara at Columbia University is titled “Welfare Implications of Inflation Volatility and Institutions: Implications for Emerging Market Economies.” She quantifies the welfare implications under two scenarios: a reduction in inflation volatility versus an improvement in institutions. The model is calibrated on data from 1989 to 2006 from Mexico—a country that suffers from a relatively small financial system and moderately high inflation volatility. An important insight from the model is that improving institutions has a larger impact on welfare than do efforts to improve inflation volatility. The policy implication is that the country is likely to get a bigger bang for its buck from focusing on institutional reforms.
The second article, “Inflation Volatility, Institutions and Economic Growth,” also by Professor Emara, is a logical extension of the first. Here, she shows that it is important to differentiate between levels of inflation and levels of inflation volatility, plus the interaction effects of financial and legal institutions. One striking result is that the positive effect of good institutions outweighs the negative impact of inflation volatility. Another way to interpret this result is that macroeconomic policy cannot somehow be viewed as a proxy for institutions. Improving institutions, be they legal or financial, has a positive significant impact on the channel through which inflation volatility affects growth. A high degree of corruption, weak enforcement of laws, high levels of bureaucracy, lack of protection of creditors’ or shareholders’ rights, and a lack of respect for the law all prevent reducing the negative impact of inflation volatility on growth.
The third article is by Professor Robert Grosse at George Mason University, entitled “Latin American Company Strategies in the Financial Crisis.” His analytical framework is at the level of the firm, and the article provides interesting insights from this level of analysis. He uses a management framework which focuses on a firm’s costs, revenues and risks (CRR), and applies it empirically to six companies in Mexico. In the sample of Mexican firms, the two most significant strategies were (i) sectoral diversification and (ii) cross-country diversification. These strategies significantly explained a firm’s relative performance during a crisis. Fundamentally, the crisis forced firms to look for new country markets for opportunities for expansion and new products or industry sectors to build further business. Grosse’s analysis makes it clear that diversification improved performance for the firms. Both the entry into add-itional foreign countries and the entry into additional industry sectors were correlated with better company performance.
In the last article of this issue (“Capital Account Convertibility—Myth and Reality”), Professor T. Satyanarayana Chary and his co-authors ask the central question “Is India ready to take the plunge towards full capital account convertibility”—a question rendered more poignant in the face of the global recession and the dangers and fears associated with global economic and financial contagion. We include this article because it will spark a heated—but certainly familiar debate, pitting opposing views in stark contrast. The authors espouse gradualism—a view that some readers will undoubtedly find difficult to accept. Professor Chary and his co-authors believe that the move to full capital account convertibility (CAC) should only occur if the economy is based on strong fundamentals. This, they argue, better ensures that the economy can modulate the pace at which it institutes full CAC. In contrast and as international experience shows, the authors argue that countries with weak initial conditions are forced to adopt drastic and potentially destabilizing (at least in the short run) macroeconomic policies to facilitate the move to CAC.
In conclusion, I want to reiterate my belief that there is no real conflict for emerging economies as they move forward. Emerging economies should be able to exploit the synergies that derive from acting in their national interest, while shouldering more economic and political power.
I hope you will enjoy this issue, and I invite you to send in your comments at