Are emerging markets altering the world economy?

• Author: Ina Kota
• Position: IMF External Relations Department
• Pages: 48

Page 48

The recent buoyancy of emerging market economies is almost unprecedented in its duration. Is this extraordinary period of growth, low inflation, and absence of balance of payments crises a secular transformation of the global economy, a "structural break" with the past?

And, if so, what are the potential ramifications for the IMF?

At an IMF Institute seminar, Mohamed A. El-Erian (formerly managing director, Pacific Investment Management Company, and now president and chief executive officer of the Harvard Management Company, where he manages Harvard University's endowment fund) tackled these topics in a review of recent developments in international capital markets.

A break with the past?

Emerging market countries now account for almost one-half of world GDP. El-Erian focused on Brazil, Russia, India, and China, whose growth prospects remain good, whose global trade linkages continue to deepen, and whose exports are moving up the value-added ladder. These countries now have better policies, stronger financial system balance sheets, and improved data dissemination. According to El-Erian, on the basis of this structural break with the past, they have seen barriers to market entry collapse and have been able to wield new influence in the global economy.

The number of upgrades that rating agencies have given to these emerging market countries has accelerated, El-Erian said, and this would point to a tremendous change in the quality of growth. All would seem to indicate, he said, that we are experiencing "a significant, loud revolution."Volatility used to be a more serious issue for emerging market countries, but recently, every spike in their interest rate spreads has been externally induced.

This suggests that investors perceive that economic and financial fundamentals in these countries are getting stronger. But it is still too early to know, he said, if what we are seeing is a new reality or an old-fashioned overshoot on the part of investors based on excessively optimistic expectations.

Interestingly, consumers in emerging market countries are...