Archive for October, 2013

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what can industrialized world learn from emerging markets?

Thursday 10 October, 2013

The other night I attended this event Research Meets Practice – Turnaround: Third World Lessons for First World Growth with Peter Blair Henry presented by the Social Enterprise program @ Columbia business school. Ironically, Henry is the dean of the Stern business school @ NYU. As an economist, he uses the stock market as the barometer of success & applies how the markets react to policy changes to decide whether or not the policies are successful. His premise is the industrialized world can learn from emerging markets in this context. Most recently, the economic policy question has been “When should the Fed taper interest rates?” Rising American interest rates led to volatility in emerging markets. But then the narrative changed with the publication of a study which revealed that 75% of economic growth will come from emerging markets by 2025. Paul Krugman’s setting of diminished expectations has led to a 0-sum mentality, but growth is not a 0-sum game.

Henry offers 3 lessons from emerging economies to industrialized nations.

  1. Impose discipline, not as a means of fiscal austerity, rather as a structured commitment to a pragmatic growth strategy which values a whole nation over the interests of any particular set of individuals. In 1965, during a meeting in Seoul to solve the debt crisis of that time, a program for sustained growth was proposed which became known as the Washington Consensus, which consisted of 10 policy prescriptions countries should follow to lead them out of economic crises. These were not well-received by 3rd world countries @ the time, as they resented being told what to do by 1st world countries. Joseph Stiglitz called this a massive failure, but there are differing points of view. Taking a closer look @ how stock markets define discipline & show what creates value, in recent economic history there have been 81 instances when fiscal austerity was imposed to bring down high inflation. The stock market went up 60% when high inflation was brought under control, but if inflation was moderate or lower, the stock market went down 30% when austerity measures took hold. So if inflation is 2-3% now, does imposing fiscal austerity make sense? Chile offers a good example of counter intuitively saving during a surplus . They saved when they had a budget surplus from earnings on copper exports, while in the US we returned our late 1990’s surpluses to taxpayers with the early Y2K tax cuts.
  2. Leaders must exhibit a clear commitment to a change in direction. Barbados in 1992 offers the best example here. Their currency was fixed to the US$. There was a financial crisis & the IMF suggested de-linking from the US$ & devaluing the currency to bring down inflation. The government proposed a 9% across the board wage cut would accomplish the same thing with better consequences, i.e. cut their costs to make their exports more competitive. In negotiations, the unions ultimately agreed, but then 30K of the 250K population protested, & the country was coming apart @ the seams. The unions then agreed to link wage increases to increases in productivity & keep the wage cuts. The stock market recovered nicely. Leadership was kicked out of office, but agreed that was a small price to pay for the recovery.
  3. Work to rebuild the trust deficit. Emerging markets had to gain the trust of the developed world. Now the leading economies need to earn back the trust of the growth economies. The BRICS countries generate 21% of world GDP, but only get 11% of the votes of the World Bank(WB). The WB agreed to shift 2 votes to emerging markets, but this still hasn’t happened yet as a result of 0-sum thinking, which leads to a lack of trust. The proposal of the creation of a BRICS development bank is symptomatic of the lack of trust between emerging & industrialized leaders.

By using discipline, clarity, & building trust as fast-growing economies have offers good lessons for the rest of the world to learn from.

Q&A

  • Making good on IMF & World Bank reforms would do a lot to ameliorate the trust deficit. Symbolism matters & sends strong signals.
  • It’s much easier for small economies to change quickly. India is another matter. Brazil is an alternative. Brazil suffered from hyperinflation in 1994. Who would have thought they’d come this far in the last 20 years. The difference is leadership.
  • More customized solutions than the Washington consensus are required for growth. Shades of gray are OK.
  • Take a long view. Short cuts draw blood. Don’t advocate policies that are good for companies, but bad for society as a whole-that’s not sustainable. Business moves @ the speed of trust.
  • The EU has deepened their recession by implementing fiscal austerity policies. The IMF has said this is the wrong approach.
  • Abundant natural resources cover a lot of ills in places like Russia. Re: debt relief in Africa, how much of their success is due to management vs. the medicine that was imposed? Henry’s suggestions apply in these cases as well to maximize long term sustainability.