Paper on Emerging Economies by Abhishek Pande


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Financial reforms in emerging economies

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Paper on Emerging Economies by Abhishek Pande

  1. 1. FINANCIAL REFORMS IN EMERGING ECONOMIES WITH REFERENCE TO ASIAN COUNTRIES Author : Abhishek Pande Institute : Orange School of business,NagpurABSTRACTDeveloping countries also known as the emerging markets are fast becomingthe driver of global growth.To cash in where the growth is today, and for theforeseeable future,emerging economies are expected to grow two to threetimes faster than developed nations like the United States of America. 1International Monetary Fund estimates emerging markets or emergingeconomies are nations with social or business activity looking for thecontinuous process of rapid growth and industrialization.The diversificationthat emerging markets provide is they tend to perform differently thandeveloped markets and have been successful at decoupling from the greaterlonger term woes of the mature economies.KEYWORDS – emerging economies,fiscal consolidation,sustainablegrowth.1 International Monetary Fund is an organization of 188 countries, working tofoster global monetary cooperation and secure financial stability.
  2. 2. INTRODUCTIONAfter a subdued economic performance in emerging Asia in 2012, growth inthe region is set to pick up gradually in 2013 helped by external demand andaccommodative monetary policy.At about 5½ percent, Asia’s growth in 2012is estimated to have been about ½ percentage point below 2011, although theregion still expanded about 2 percentage points faster than the global average.Weaker external demand was the main factor, but China’s efforts to engineer asoft landing and supply constraints in India also weighed on Asian economies.However, recent activity indicators suggest economic momentum isstabilizing. A modest growth pickup to about 6 percent in 2013 would resultmostly from strengthening external demand, with accommodative monetarystances across the region also playing a role. In fact, many economies inemerging Asia have now reached a development stage that in principleexposes them to the risk of falling into a ―middle-income trap.‖ Historically,the odds of a sustained growth slowdown have been 1/7 for a fast-growingmiddle-income country versus 1/11 for frontier, that is low-income, economiesin the region.SAMPLE DESIGNMorgan stanleys Emerging Markets Index consists ofChina,India,Indonesia,Lebanon,Malaysia,Pakistan,Philippines,Thailand,Vietnam.The ASEAN2–China Free Trade Area, launched on January 1, 2010, is thelargest regional emerging market in the world.2 The Association of Southeast Asian Nations is a geo-political and economicorganization of ten countries located in Southeast Asia.
  3. 3. RESEARCH OBJECTIVESTo sustain economic growth over the medium term and make growth moreinclusive, a diverse policy agenda will be required in different parts of Asia,ranging from economic rebalancing to strengthening the sources of privatesector–led investment to reforms in goods,labor markets.The existingopportunities and challenges from rapid demographic change have alsocontributed to the growth factor of Asian economies.Following are some important objectives of this research paper :1. The policy agenda for advanced economies—and the implications forAsian economies.2. The virtues and benefits of further economic cooperation within Asianeconomies.3.Importance of fiscal consolidation and sustaining growth in Asianeconomies. CONTINENT COUNTRIES China India Indonesia Lebanon ASIA Malaysia Pakistan Philippines Thailand Vietnam
  4. 4. 1.POLICY AGENDA IN ADVANCED ECONOMIES ANDIMPLICATIONS FOR ASIAN COUNTRIESIn the the global economy, where momentum continues to slow,the expectedglobal growth of 3.3 percent in 2012 and 3.6 percent in 2013 is expected toslowdown,it is also spreading to regions that have previously performed well.This year, growth in emerging Asia fell to its lowest level since 2008—partlyfrom domestic slowdowns in China and India, but also because of stronggusts from storms in the west.These financial links are very strong,demand from Europe and the UnitedStates each account for about a third of emerging Asia’s net exports. Foreignparticipation in local sovereign debt markets has nearly doubled over the pastfive years. So from all sides, Asia is exposed to sudden shifts insentiments.Going forward, we believe that growth will pick up again, and thatAsia will retain its position as a growth leader—expanding 2 percentagepoints faster than the world average next year.But none of this can be takenfor granted,it depends on the actions of global policymakers, especially in theUnited States and Europe.In short, Asia’s economic foundations became safer, sounder, and moreresilient—but still open to the world and open for business. This hasimportant lessons for the advanced economies currently facing severechallenges.The main concern is the policymakers must avoid the so-called ―fiscal cliff‖at all costs. If expiring tax provisions and spending cuts were indeed to comeinto play, growth in the developed nations would fall to zero or below—andthe rest of the world will not be immune. This policy uncertainty must be
  5. 5. resolved.The Eurozone, which is still facing crisis, must also deliver on itspolicy commitments at the national and regional level—fiscal, financial,structural. And again, all players must play their part.Europe must forge ahead with greater economic cooperation—especiallythrough deeper fiscal and financial integration. A major priority for theEurozone is a true banking union to complement its monetary union. As afirst step, this means a single supervisory framework and ultimately there alsoneeds to be a pan-European deposit guarantee scheme 3and a bank resolutionmechanism with common backstops.2. INCREASED ECONOMIC COOPERATION WITHINASIAN COUNTRIESThe virtues of further economic cooperation within Asian countries can beimproved by economic cooperation in two areas in particular—trade andfinance.Trade integrationIn terms of trade integration, Asia has already made great strides. Over thepast decade, trade within Asia tripled, and regional trade among emergingAsia grew even faster.With Asian trade, many tributaries flow together as asingle great river. A typical pattern is that Asian economies send intermediategoods to China, which assembles them into final goods for exports. In fact,intermediate goods now account for over 70 percent of all Asian exports.3 Pan European Deposit Guarantee Schemes reimburse a limited amount ofdeposits to depositors whose bank has failed.
  6. 6. Malaysia is part of this flow—especially through exporting valuableelectronic goods up the chain. Malaysia’s intermediate exports to China haveincreased fourfolds.ASEAN countries themselves, of course, will also need to support domesticconsumption. After all, the shift toward high-income status can only comethrough a strong middle class. And again, further regional integration can helpwith this, by offering new avenues for mutual gain.Looking ahead, the formation of the ASEAN Economic Community in 2015offers the vast possibilities of a common market. The Trans-PacificPartnership 4can also deliver great benefits, especially by emphasizing servicemarkets—a sector that has been too protected for too long.Financial integrationMore than 90 percent of ASEAN cross-border portfolio investment flows arewith advanced economies outside Asia.Certainly, we do see FDI flows withinthe region. Malaysia, for instance, is a big direct investor in Cambodia,Indonesia, Thailand, and Vietnam.Greater regional financial integration could open up a host of new benefits. Itcan boost domestic demand—partly by making it easier for small businessesin countries to gain access to credit. It can make economies safer, by allowingmore insurance against volatility and adverse developments. And one otherimportant benefit is greater access to financial services by the poor can reduce4 The Trans-Pacific Partnership Agreement (TPP) is a viable pathway forrealising the vision of a free trade area of the Asia-Pacific.
  7. 7. inequality.On a practical level, financial integration is eased by making localbanking systems more open and competitive. The integration of ASEANstock markets would help, as would a larger regional bond market, asenvisaged by the Asian Bond Market Initiative.With Economic Transformation Program, emerging asian countries can leadthe way in boosting productivity and growth to become a vibrant, high-percapita income generating nations by 2020.Malaysia already has a history of innovative finance. It has become a worldleader in sukuk, or shari’ah-compliant bonds—accounting for two-thirds ofthe sukuk market.Further economic cooperation—despite the very differentspan of countries, cultures, and systems across Asia.Making integration workMore financially-integrated economies are more exposed to storms. Inparticular, while capital flows can bring great benefits, they can alsooverwhelm countries with damaging cycles of crescendos and crashes.At thesame time, deeper financial market development allows an economy to putdown strong roots and weather storms well.Economic management is the key for success. If the flows are coming throughthe banking system, then macroprudential tools make sense—such astightening conditions for housing loans or having banks hold more capital. Inother circumstances, temporary capital controls might prove useful makingthe most of financial integration.Despite the tremendous fall in poverty overthe past few decades, income inequality is on the rise.Even emerging marketswhich made great strides in reducing inequality in the 1970s and 1980s, hasnot seen further reductions.
  8. 8. 3.IMPORTANCE OF FISCAL CONSOLIDATION ANDSUSTAINING GROWTH IN ASIAN ECONOMIESCountry circumstances will also determine the appropriate pace of fiscalconsolidation. Higher structural deficits imply the need to rebuild fiscal spacein many asian economies.Strengthening fiscal policy frameworks can also playan important role in reprioritizing spending and mobilizing adequate revenuein support of new sources and more inclusive growth.Coordinated andcollective action by asian policymakers will also help in particular, bypursuing ongoing initiatives to maintain and deeper strong regional tradeintegration.Automatic stabilizers––that is, automatic tax revenue declines and spendingincreases that dampen the impact of the shock––should be the first line ofdefense. However, in reflecting a narrow tax base and lack of social safetynets, automatic stabilizers are small in many regional economies, which wouldprevent them from cushioning the blow of a sharp downturn. This calls forcontingency plans for discretionary spending, especially in countries withmore fiscal space.Calibrating the appropriate near-term support for growthwithout fanning inflationary and financial stability risks is the key near-termchallenge for policymakers.But the need and scope for monetary policy actiondiffers substantially across economies, mainly reflecting different exposures togrowth and inflation risks, and risks to financial stability from past stimulus.Inaddition, macroprudential measures will have to play an important role wherecredit growth remains too rapid and could pose problems for financialstability, especially if accompanied by persistently strong capital inflows.
  9. 9. DIRECTIONS FOR POLICY FRAMINGMaking growth more inclusive means moving on many fronts: There is room to spend more on healthcare and education, which are at relatively low levels in Asia. There is room to cover more people under pension and unemployment insurance schemes—only 20 percent of the working-age population is covered in emerging Asia, as opposed to 60 percent in the OECD5. There is room to raise minimum wages for the poor, which are relatively low in Asia.Introduction of minimum wage policy should be made compulsory for all emerging nations in Asia. And there is room to improve access to financial markets—right now, nearly 60 percent of the people in East Asia are excluded from the formal financial system.CONCLUSIONThe financial stability makes it imperative to refine rather than retreat from theobjectives and avenues of financial development. Mobilizing savings andeffectively channeling them into productive investment remains a keychallenge for financial systems in emerging markets. In economies like Chinaand India that have high private saving rates, effective financial intermediationis a key not just for promoting growth but also for improving the welfare5 Organisation for Economic Cooperation and Development Internationalorganisation helping governments tackle the economic, social and governancechallenges of a globalised economy.
  10. 10. impact of that growth.The financial reforms is likely to shift the emphasis ofthe financial development agenda toward the basics of strengthening systems,developing financial markets and working towards sustainable growth in theregion. There is an increasing impetus in different economies to establish aninstitutional framework to coordinate the work of different regulatory agencies and toprovide oversight of the future.This papers attempts to recommends setting up a financial sector oversightagency in emerging asian economies to redefine the objectives and avenues offinancial development in light of recent events in major Asian emergingeconomies.REFERENCES[1] Bhide, Amar, (1994). The Hidden Cost of Stock Market Liquidity, Journalof Financial Economics[2] Fama, E. (1970). Efficient capital markets: A review of theory andempirical work.Journal of Finance.[3] Keynes, J. M. (1936). The General Theory of Money, Interest andEmployment.Macmillan, London.[4] Muhammad Yunus(2004).Creating a world without poverty:Socialbusiness and the future of capitalism.[5] Ruchir Sharma, (2010). Breakout Nations: In Pursuit of the Next EconomicMiracles.
  11. 11. [6] Shleifer, A (2000). Inefficient Markets: An Introduction to Behaviouralfinance,Oxford University Press, Oxford.[7] Singh, A (1998).Liberalisation, The Stock Market and the Market forCorporate Control: A Bridge Too Far for the Indian Economy,OxfordUniversity Press.[8] Standard and Poor (2010). Global Stock Market Factbook 2010.[9] Stiglitz, J (1994).The Role of the State in Financial Markets. Proceedingsof the World Bank Annual Conference on Development Economics.[10] Tarun Khanna, Krishna G Palepu(2008).Winning in Emerging Markets:A Road Map for Strategy and Execution.[11] World Bank (2010). World Development Report, World Bank, OxfordUniversity Press. New York.