Mohamed A. El Erian – is CEO and Co-Director of the Investments in the investment firm PIMCO, and author of “When the markets collide”.
In the book “When markets collide” are described emerging economies that will be called upon to play a greater role in multirate global economy, which is characterized by long-term rehabilitation of over-bloated balance sheets of industrial countries. By themselves they are ready to tackle this problem. But they do not have to work in a vacuum. Developing countries’ ability to provide help for growth, which facilitates the adaptation of industrial countries, is also an important function of the willingness to adapt to the recent tectonic shifts in the operation and management of the global economy. Let’s hope that these global issues will be the attention that they deserve.
High growth and financial stability in emerging economies will help ease the massive adjustments to be undertaken industrialized countries. However, this growth also has long-term consequences. If it is kept current model, the global economy will be permanently transformed. In particular, it takes no more than ten years to share in the market prices when world GDP of developing economies exceeds 50%.
It is therefore important to know how stable this phase of growth is. The answer is in two parts. One part depends on the ability of emerging market countries to manage their own success, while the other depends on the degree of adaptation in the global economy of this success. The first question is encouraging; answer to the second – not. There is still retaining the ability to use the catch-up growth opportunities, s developing countries need sustained, rapid and sometimes difficult structural changes, as well as in parallel to carry out reforms and institution building. In recent years, systemically important countries have shown an impressive example of a pragmatic and flexible adaptation. This process is likely to continue.
Along with the growth it is important to take into account distribution. New countries are still in need of better managing their growing internal tension, which reflects the increase in income inequality and unequal access to basic services. Failure on this front could derail the strengthening of their national and regional growth dynamics. This becomes clearer today, when the distribution aspects of the growth strategy are firmly fixed in the policy agendas of developing countries.
Emerging economies, while coping with the economic slowdown in industrialized countries, transfer mechanism in the financial sector that is even more complex. Today’s low interest rates cause financial flows to developing economies, increasing the risk of inflation and depreciation of assets. Problems in Western banks led to a violation of access to trade credit, and if they are reinforced, it could lead to the destabilization of local banks.
These risks are real. Fortunately, some emerging economies still retain the airbag and shock absorbers. Going into the crisis of 2008-2009, with healthy initial conditions (including the major international currency reserves, a budget surplus and balance of payments, and banks with high capitalization), they are still very far from exhausting its fiscal and financial flexibility – and therefore , its ability to respond to future shocks.
In general, emerging markets may well continue to successfully navigate in an uncertain world, undermining the crises in industrialized countries. But, again, the separation is not complete. Favorable outcome also requires the ability and willingness of industrialized countries to adapt the growing size and importance of emerging economies. Risks are significant, indicating a wide range of potential problems.
Leakage of knowledge, finance and technology, which undermines sustainable growth in developing countries, is closely connected with an open, rule-based, globalized economy. But this is a global device that is subjected to pressure in an environment in which industrial countries have high unemployment and a wave of financial instability. Growth in the global economy should be seen as a zero sum game, which leads to suboptimal responses.
As a result, the preservation of open markets of industrialized countries cannot be taken for granted. Political speeches are ever more focused on discussion of domestic problems, while it is more difficult to hear on the agenda of international issues and adherence to a common collective global interest. These problems will grow in coming years. And then there is the question of global governance and institutions.
Managing the growing and increasingly sophisticated set of transnational linkages is an even bigger problem in the multirate world that turned upside down. Such a world requires better global governance, as well as long-overdue institutional reforms that will enable developing economies to the proper voice and representation in international organizations. Without such changes, the global economy will go from one crisis to another without having a firm hand on the steering wheel to create a common direction. The result is what economists call the “Nash equilibrium”.