THE GLOBAL ECONOMIC ENVIRONMENT FOR EMERGING

MARKET ECONOMIESAPPENDICES

JEFFREY FRANKEL

ANNUAL SYMPOSIUM ON CAPITAL MARKETSMEDELLIN, COLOMBIA, MAY 3, 2012

APPENDIX 1: OVERHEATING IN EMERGING MARKETS

• By 2011, two years of strong growth had returned some EM economies to a state of probable overheating.

• The Question for 2012: • Is the current easing of growth a soft

landing?• Or will it turn to a hard landing?

CREDIT GROWTH HAS AGAIN BEEN HIGH IN TURKEY AND SOME OTHER EMS (INCL. COLOMBIA)

World Economic Outlook, IMF, April 2012

OUTPUT IN EMS IS NOW ABOVE POTENTIAL

(EXCL. EASTERN EUROPE).ADVANCED ECONOMIES ARE STILL FAR BELOW

POTENTIAL OUTPUT.

World Economic Outlook, IMF, April 2012

Inflation in many EMs rose in 2010-11,

but appears to be easing in 2012.

World Economic Outlook, IMF, April 2012

World Economic Outlook, IMF, April 2012

APPENDIX 2: DEALING WITH COMMODITY PRICE VOLATILITY

• The Natural Resource Curse

• The Dutch Disease

• Many countries that are rich endowed with oil, minerals or fertile land have failed to grow more rapidly than those without.

• Examples:

• Oil producers in Africa & the Middle East have relatively little to show for their resources.

• Meanwhile, East Asian economies achieved western-level standards of living despite being rocky islands (or peninsulas) with virtually no exportable natural resources.• Japan, Singapore, Hong Kong Korea & Taiwan, • followed by China.

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• Some developing countries have avoided the Some developing countries have avoided the pitfalls of commodity wealth.pitfalls of commodity wealth.

• E.g., Chile (copper)E.g., Chile (copper)• Botswana (diamonds)Botswana (diamonds)

• Some of their features are worth Some of their features are worth emulating.emulating.

• The last section of my survey paper The last section of my survey paper explores policies & institutional explores policies & institutional innovations that might help avoid the innovations that might help avoid the natural resource curse and achieve natural resource curse and achieve natural resource blessings instead. natural resource blessings instead.

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GROWTH FALLS WITH FUELGROWTH FALLS WITH FUEL &&

MINERAL EXPORTSMINERAL EXPORTS

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ARE NATURAL RESOURCES ARE NATURAL RESOURCES NECESSARILYNECESSARILY BAD? BAD?

• Commodity wealth needCommodity wealth need not necessarily lead to not necessarily lead to inferior economic or political development. inferior economic or political development.

• Rather, it is a double-edged sword, Rather, it is a double-edged sword, with both benefits and dangers. with both benefits and dangers. • It can be used for ill as easily as for good.It can be used for ill as easily as for good.

• The priority for any country should be on identifying The priority for any country should be on identifying ways to sidestep the pitfalls ways to sidestep the pitfalls that have afflicted other mineral producers that have afflicted other mineral producers in the past, to find the path of success. in the past, to find the path of success.

No, of course not.No, of course not.

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ONE CHANNEL OF THE NRC: ONE CHANNEL OF THE NRC: DUTCH DISEASE DUTCH DISEASE 5 SIDE-EFFECTS OF 5 SIDE-EFFECTS OF A COMMODITY BOOMA COMMODITY BOOM

• 1) A real appreciation in the currency 1) A real appreciation in the currency

• 2) A rise in government spending 2) A rise in government spending

• 3) A rise in nontraded goods prices 3) A rise in nontraded goods prices

• 4) A resultant shift of resources out of 4) A resultant shift of resources out of

non-export-commodity traded goods non-export-commodity traded goods

• 5) Sometimes a current account deficit.5) Sometimes a current account deficit.

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THE DUTCH DISEASE: THE 5 EFFECTS ELABORATEDTHE DUTCH DISEASE: THE 5 EFFECTS ELABORATED

•1) A real appreciation in the 1) A real appreciation in the currencycurrency • taking the form of nominal currency appreciation taking the form of nominal currency appreciation

if the exchange rate floatsif the exchange rate floats• e.g., floating-rate oil exporters, Kazakhstan, Mexico, & e.g., floating-rate oil exporters, Kazakhstan, Mexico, &

Russia. Russia. • or the form of money inflows & inflation or the form of money inflows & inflation

if the exchange rate is fixed ;if the exchange rate is fixed ;• e.g. fixed-rate oil-exporters, UAE & Saudi Arabiae.g. fixed-rate oil-exporters, UAE & Saudi Arabia. .

•2) A rise in government 2) A rise in government spending spending • in response to increased availability in response to increased availability

of tax receipts or royalties.of tax receipts or royalties.

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THE DUTCH DISEASE: 5 SIDE-EFFECTS OF A THE DUTCH DISEASE: 5 SIDE-EFFECTS OF A COMMODITY BOOMCOMMODITY BOOM

• 3) An increase in nontraded goods prices 3) An increase in nontraded goods prices (goods & services such as housing that are not internationally (goods & services such as housing that are not internationally traded),traded), • relative to internationally traded goods,relative to internationally traded goods, esp. esp.

manufactures.manufactures.

• 4) A resultant shift of resources out of 4) A resultant shift of resources out of non-export-commodity traded goodsnon-export-commodity traded goods • pulled by the more attractive returns pulled by the more attractive returns

in the export commodity in the export commodity and in non-traded goods.and in non-traded goods.

•5) A current account deficit5) A current account deficit • thereby incurring international debt thereby incurring international debt

that is hard to service when the boom ends.that is hard to service when the boom ends.• E.g. the end of the 1970s commodity boomE.g. the end of the 1970s commodity boom..

APPENDIX 3

More graphs from IMF WEO, April 2012.

• Recent macro policies of major EM countries.• More on commodity prices.

SOME EMS, SUCH AS CHILE & CHINA, RAN BUDGET SURPLUSES BEFORE 2008, ALLOWING FISCAL EASE

IN RESPONSE TO THE GLOBAL RECESSION

World Economic Outlook, IMF, April 2012

INTEREST RATES HAVE COME DOWN SINCE 2008

World Economic Outlook, IMF, April 2012

EMS CONTINUE TO BUILD UP RESERVES,EXCEPT THAT CHINA, THE BIGGEST RESERVE HOLDER OF ALL, HAS RECENTLY STOPPED.

World Economic Outlook, IMF, April 2012

GLOBAL IMBALANCES HAVE NARROWEDESPECIALLY CHINA’S SURPLUS

World Economic Outlook, IMF, April 2012

FLIGHT FROM RISK DENTED EM CAPITAL FLOWS,FIRST DUE TO THE GFC, AND THEN THE EURO CRISIS

World Economic Outlook, IMF, April 2012

World Economic Outlook, IMF, April 2012

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MORE ON COMMODITIES

OIL & AGRIC. PRICES ROSE SHARPLY IN 2011

World Economic Outlook, IMF, April 2012

WHEN INVENTORIES ARE UNUSUALLY LOW,THE COMMODITY PRICE IS UNUSUALLY HIGH

World Economic Outlook, IMF, April 2012

7. Manage Commodity Funds 7. Manage Commodity Funds transparently & professionally, transparently & professionally,

like Botswana’s Pula Fundlike Botswana’s Pula Fund -- -- notnot subject to politics subject to politics like Norway’s Pension Fund.like Norway’s Pension Fund.

8. Invest in education, health, & roads.8. Invest in education, health, & roads.

9. Buyers: Publish What You Pay. 9. Buyers: Publish What You Pay.

Recommendations for commodity producers, concluded

GOOD GOVERNANCE GOOD GOVERNANCE INSTITUTIONSINSTITUTIONS