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Perspectives on Emerging Economies Growth
Vincenzo D’Apice
Observatory on Emerging Economies, Luiss 22-Feb-2011
Observatory on Emerging Economies,
Luiss, 22 Febbraio 2011 Vincenzo D’Apice
1. A framework for Boom & Bust Cycles: The Minsky
Model
2. Perspectives on Emerging Market Economies Growth
Agenda
Starting Point:-Low inflation
-Low unemployment
Positive Shocks:-Deregulation
-Financial innovation-Capital inflows
Banking Sector:-Demand for credit rises-Risk underestimation-Supply of credit rises
Financial Markets:-Asset prices rise
(shares & real estate)-Wealth increases-Debt increases
Real Economy:-Consumption rises-Investment raises
-Lower savings-Rising current account deficit
Boom:-Economy overheats
-Real and/or financial imbalances grow-Financial structure becomes fragile
Politicians & economiststheorize the beginning
of a new Era(e.g. New Economy)
Balance sheet channelLending channel
Financial accelerator(Bernanke-Gertler,’95)
Animal spirits(Keynes 1937) Global Imbalances
(Bernanke ’07)
-Covered-Speculative
-Ponzi
The Great Moderation(Bernanke ’04)
The Minsky model Boom stage
Observatory on Emerging Economies,
Luiss, 22 Febbraio 2011 Vincenzo D’Apice
Starting Point:-Rising interest rates
-Sudden change in expectations
Negative Shocks:-Capital flows away from more
speculative investment
Banking Sector:-Pessimistic evaluation of risk
-Demand for credit falls-Supply of credit falls (crunch)
Financial Markets:-Asset prices fall
-Wealth falls-Debt deflation
-Real debt increases
Real Economy:-Consumption falls-Investment falls-Rising savings
-Lower current account deficit
Bust:-Banking crisis (bank runs)
-Recession
Debt Spiral a la Fisher 1933 Deflationary Spiral
-Central Bank-Government-Regulation
Default of Ponzi units
Minsky model Bust stage
Vincenzo D’ApiceObservatory on Emerging
Economies,Luiss, 22 Febbraio 2011
Observatory on Emerging Economies,
Luiss, 22 Febbraio 2011 Vincenzo D’Apice
• The outlook is:
• U-shaped recovery in advanced economies
• V-shaped recovery in emerging-market countries
Output Growth (%) 2010 2011 2012World 5.0 4.4 4.5Advanced Economies 3.0 2.5 2.5Emerging Economies 7.1 6.5 6.5
What is the Outlook for the Global Economy?
Observatory on Emerging Economies,
Luiss, 22 Febbraio 2011 Vincenzo D’Apice
•The role of EEs will be even stronger in the next decade (BRICs + N-11):
$37t
$27t
$10t
45%
30%30%
What Will Be the Role of Emerging Economies?
Observatory on Emerging Economies,
Luiss, 22 Febbraio 2011 Vincenzo D’Apice
•One of the more striking story will be the rise of the new BRICs middle
class:
Import of low value added goods
Import of high value added goods (car, technology)
2010 middle-class consumers purchasing power $7 trillion
2020 middle-class consumers
purchasing power $20 trillion*
What Will Be the Role of Emerging Economies?
Observatory on Emerging Economies,
Luiss, 22 Febbraio 2011 Vincenzo D’Apice
• The first risk is further financial contagion in Europe:
Spread over German 10y-bunds
Jan-2010 (A)
Jan-2011 (B)
Diff.(B-A)
Greece 2.1% 8.0% 5.9%Ireland 1.3% 6.0% 4.7%Portugal 0.8% 4.0% 3.2%Spain 0.8% 2.2% 1.4%Italy 0.8% 1.8% 1.0%
What Are the Downside Risks in This Scenario?
Observatory on Emerging Economies,
Luiss, 22 Febbraio 2011 Vincenzo D’Apice
• The second risk is the negative effects of Fed QE:
• FED QE* is subjecting the emerging economies to a flood of capital,
rising commodity prices, inflation, and (possibly) asset bubbles:
Aug-2007 Feb-20110.9 2.5 1.6 178%
Memo US GDP 14.6 trillion
Fed Total Assets (trillion)
Stock Growth
What Are the Downside Risks in This Scenario?
Observatory on Emerging Economies,
Luiss, 22 Febbraio 2011 Vincenzo D’Apice
• The third risk is that capital inflows to emerging markets will be
mismanaged, thus fueling credit and asset bubbles:
Capital Flows to Emerging Markets (% of world GDP)
Capital Flows to Emerging Markets
(% of world GDP)
2006 2008 2010
Net liabilities 6,5% 1% 4%
• Drivers:• Asset allocations• Carry trades
What Are the Downside Risks in This Scenario?
Observatory on Emerging Economies,
Luiss, 22 Febbraio 2011 Vincenzo D’Apice
• Flows into debt and equity mutual funds have been strong:
• Risk of asset price bubbles
• So, back to the twin crises of 90s? Yes & No
• Yes, b/c the bust of the bubble can trigger a banking crisis
• No, b/c the risk of currency crisis is low thanks to the accumulation of intl. reserves
Annual Retail Flows to Emerging Market Debt and Equity Mutual Funds
($ billion)
What Are the Downside Risks in This Scenario?
Observatory on Emerging Economies,
Luiss, 22 Febbraio 2011 Vincenzo D’Apice
•The fourth risk is inflation in emerging markets:
What Are the Downside Risks in This Scenario?
Observatory on Emerging Economies,
Luiss, 22 Febbraio 2011 Vincenzo D’Apice
•The fifth risk is currency tensions (currency war):
• Global imbalances will remain large
• Deficit countries need a currency depreciation
• But, surplus countries don’t want to accept a currency appreciation
Global Imbalances (% of world GDP)
• Deflation in deficit countries
• Higher risk of debt default (via Fisher spiral)
What Are the Downside Risks in This Scenario?
Observatory on Emerging Economies,
Luiss, 22 Febbraio 2011 Vincenzo D’Apice
•The sixth risk is geopolitical (Korea, Pakistan, Tunisia, Egypt, Libya).
• This risk is putting pressure on the price of commodities:
• This, in turn, will put further pressure on inflation
What Are the Downside Risks in This Scenario?
Observatory on Emerging Economies,
Luiss, 22 Febbraio 2011 Vincenzo D’Apice
• For example, the shadow banking system is still “shadow”:
$16t
$13t
By the Way, Don’t Forget the Causes of the Recent Crisis
Observatory on Emerging Economies,
Luiss, 22 Febbraio 2011 Vincenzo D’Apice
EEs Strong Growth
Rising Middle-Class
EU DebtCrisis
Fed QE
Capital Inflows
Inflation
Global Imbalances
Geo-Political
EmergingBanking System
Why Do We Need Monitoring the Emerging Banking Systems?
Observatory on Emerging Economies,
Luiss, 22 Febbraio 2011 Vincenzo D’Apice
Thank You
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Vincenzo D’Apice