The emerging economies which were sitting pretty in the immediate aftermath of the global financial crisis, forcing commentators to speak of ‘decoupling’, are now in their worst situation ever, with many of the EME currencies crashing with capital outflows. Would G20 Ministerial at Buenos Aires be able to address these growing concerns?
In the run-up to the 10th G20 Ministerial at Buenos Aires, the world looks forward to the global leadership towards addressing the growing clouds of uncertainty over the growth prospects of the emerging market economies. With yields of long term US Treasury notes on the rise, and the price of oil on the boil, the emerging economies have never had it so bad in the last decade.
When global financial crisis broke out in 2008, and the rates of growth of emerging economies were not declining by as much, and some amidst them like China and India grew at reasonably good rates of growth, it was thought that they have decoupled from the rest of the world. Through the expansionary fiscal policies then, both United States and China tried to make up for the demand shortfall in the world economy, but those were too limited in nature.
Moreover, taking a cue from the lessons offered by economic history, swift action compelled the monetary authorities to inject in the much needed liquidity, lest many banks would have gone under water like in the time of the Depression. Not only did the monetary authorities intervene to save the banks, but given the interconnectedness in the system, in an unprecedented manner, they resorted to long term asset purchases in a big way. Windows of liquidity support were kept open by United States for Europe, but all those were pure ad hoc arrangements.
Even as all these unconventional monetary policies saved the ship of the world economy from wrecking, the near to zero interest rates, negative in some cases, resulted in large scale carry trade happening from the advanced economies to the emerging economies. Few can forget the umbrage taken by the Brazilian Finance Minister against the huge inundation of capital inflows into his country then.
In 2013, during the Bernanke-Subbarao period in the world economy, we had had a taste of the after effects of the reversal of monetary policies in the advanced economies, when the former had suggested the possibility of the United States thinking in terms of tapering the process of bond purchases resorted to.
Crisis Spreading Wings
The crisis which receded from the US shores since 2010 has been making its entry into different other regions. The interconnectedness of banks of US and Europe not just took the sheen from the European banks, but also from the euro, which was expected to pose a challenge to the dollar. Forced to inject in funds to the banks,many countries in the continent were pushed into a sovereign debt crisis. For the first time ever, an advanced economy, Greece was forced to approach the IMF for support.
The reversal of low interest regime is coming at such an inopportune time for emerging economies, when the oil prices are on a boil, and the current account surpluses of the emerging economies have drastically got reduced, with most them incurring deficits. Given the growing share of the emerging economies in the world trade, it could very well have spillback effects on the advanced economies too.
Reports say that just in the course of the last two weeks there has been sales of Rs 25,000 crore worth of bonds by the foreign institutional investors from India, resulting in the sharp depreciation of the Indian rupee. In fact, despite the growing share of the emerging economies in the world output and trade, the international monetary and financial system have not taken serious consideration of the same.
In the recently held IMF meeting on the 15th General Review of Quotas in Bali, there has been a demand that the IMF quotas should be reflective of the relative strength of economies in the world economy. Indeed, Europe, which in mid-nineties was comparable to the US in terms of its output, has now dwindled in its relative share, and at $12 trillion is similar in size to China. In fact, the growth of China in the post 2000 period has been marvellous. Though the relative share of United States has decreased from 30% in 2000 to 25% in 2017, there is no other country posing any serious challenge to its supremacy.
It is to be seen as to whether President Trump would give up his “my country” approach and reach out to the emerging economies, not just on restructuring international institutions, but also in addressing the serious planetary concerns on climate change. Let us hope that Buenos Aires would have something for the world, for it cannot afford another crisis, that too, so soon.
Krishnakumar S teaches economics at Sri Venkateswara College, University of Delhi