Emerging Markets

Emerging Markets: Resilience and Growth amid Global Turmoil

M. Ayhan Kose
Eswar S. Prasad
Copyright Date: 2010
Pages: 210
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  • Book Info
    Emerging Markets
    Book Description:

    Emerging market economies (EMEs) have become the darlings of international investors and the focus of enormous attention in academic, media, and policy circles. M. Ayhan Kose and Eswar Prasad present the definitive account of the evolution of EMEs and use the lens of the global financial crisis to evaluate their strengths and weaknesses.

    Led by a set of large and dynamic countries -including Brazil, China, India, and Russia -EMEs have become a dominant presence in the world economy. They now account for a substantial share of world output and have been a major driver of global growth during the past decade. They are significant players in international trade and financial flows and are beginning to exert rising clout in global policy debates. However, the financial crisis of 2007-09 and the worldwide recession that followed cast a pall over the notion that EMEs had become self-reliant and "decoupled" from demand conditions in and financial flows from advanced countries.

    Kose and Prasad, prominent experts on emerging market economies and globalization, draw on their extensive research to assess the resilience of EMEs in the face of the global financial crisis. Their analysis shows that EMEs, as a group, weathered the crisis much better than the advanced countries, and most of these economies have bounced back rapidly from the global recession. The authors track down the reasons for this resilience and explain why some countries in this group have done better than others. Based on this analysis, they draw lessons for the durability and sustainability of these economies' long-term growth. This book is important reading for anyone trying to anticipate the future growth of emerging markets or contemplating business opportunities in these economies.

    eISBN: 978-0-8157-0565-9
    Subjects: Business, Political Science

Table of Contents

  1. Front Matter
    (pp. i-vi)
  2. Table of Contents
    (pp. vii-x)
  3. Acknowledgments
    (pp. xi-xii)
  4. Introduction
    (pp. xiii-xvi)

    Emerging market economies (EMEs) have become prominent on the world economic stage, accounting for a substantial fraction of global growth and rising in importance by virtually any economic criterion. EMEs now play an increasingly important role in international trade and financial flows, implying major shifts in the patterns of global linkages. These developments have wide-ranging implications for the global economic structure.

    Before the global financial crisis there was a growing sense among investors and policymakers that EMEs, with their newfound economic might, had become more resilient to shocks originating in advanced countries. Indeed, empirical evidence indicates that over the last...

  5. 1 Changes in the World Economic Order: A Roadmap
    (pp. 1-8)

    Over the last two decades, emerging market economies (EMEs) have become a dominant presence in the world economy. They now account for a substantial share of world output and, with their rapid growth rates, have become a major driver of global growth during the past decade. Trade and financial linkages between advanced economies and EMEs have also become much stronger, speeding up the process of global integration.

    The spectacular growth performance of EMEs in recent decades has attracted the most attention.¹ As a group the EMEs have experienced far greater cumulative growth since 1960 than other developing countries and the...

  6. 2 Rising Global Linkages and International Business Cycles: What Do We Know?
    (pp. 9-22)

    This chapter provides an overview of the literature about the implications of global trade and financial linkages for the properties of business cycles in advanced countries and EMEs. We first present a brief summary of theoretical arguments and empirical evidence about how greater trade and financial linkages could influence the volatility and synchronization of business cycles. We then turn our attention to empirical studies analyzing various aspects of cyclical linkages between advanced countries and EMEs.

    Theoretical models have different implications about how global integration should affect volatility of output and other macroeconomic aggregates. The same is true for comovement of...

  7. 3 Setting the Stage
    (pp. 23-28)

    Characterizing the evolution of global trade and financial linkages and their implications in terms of business cycle and growth spillovers calls for an extensive database. We have developed a comprehensive database covering macroeconomic and financial variables for a large number of countries over five decades. To provide a broad measure of business cycle transmission across countries, we study the extent of global business cycle comovement in a number of macroeconomic variables rather than solely focusing on output. Specifically, we focus on three key macroeconomic aggregates—output, consumption, and investment. Our use of multiple macroeconomic indicators rather than just GDP to...

  8. 4 Shifting Dynamics of Global GDP and Growth
    (pp. 29-40)

    In this chapter, we provide a detailed analysis of the size distribution of countries in the three groups—advanced economies, emerging market economies (EMEs), and other developing economies (ODEs)—and their growth dynamics. (For membership in these groups, see List of Country Groups in the appendix.) We analyze the evolution of the size distribution of countries and cross-country economic linkages in three distinct subperiods: 1960–72, 1973–1985, and 1986–2009. As noted before, these three periods correspond to the Bretton Woods period, the preglobalization period, and the period of globalization. We also study data for the years 2008–09...

  9. 5 Global Trade Linkages
    (pp. 41-52)

    There have been substantial changes in the volume and nature of international trade linkages during the globalization period. These changes are associated with the liberalization of trade policies around the world and rapid declines in the costs of transportation and communication. Figure 5-1 shows that the fraction of countries with a fully liberalized trade regime increased sharply during the globalization period (from 1986 on). The trade liberalization measure captures the restrictiveness of trade policies in each country, based on policy measures such as tariffs, quotas, and other restraints on cross-border trade.

    Figure 5-2 shows the evolution of de facto trade...

  10. 6 Global Financial Linkages
    (pp. 53-66)

    This chapter undertakes a detailed analysis of the evolution of the financial linkages between country groups and the world economy. The growth of international financial flows was much higher than the growth of trade flows in the globalization period. This unprecedented change was mainly associated with the rapid liberalization of capital account regimes after the mid-1980s. The fraction of countries with liberalized financial systems increased sharply in the globalization period (see figure 6-1). In addition, several pull and push factors changed the composition of financial linkages between the advanced economies and the emerging market economies (EMEs) and other developing economies...

  11. 7 Business Cycle Volatility
    (pp. 67-74)

    Now that we have characterized the integration of different groups of economies into the global economy through trade and financial flows, we proceed to examine the implications of rising integration for business cycle volatility. This provides a baseline for evaluating the impact of globalization on business cycle fluctuations and also for examining the resilience of emerging market economies (EMEs) during the recent global recession. We first present some stylized facts concerning the dynamics of output, consumption, and investment volatility across groups of countries and over time. Next we briefly discuss the implications of globalization for volatility.

    We measure volatility by...

  12. 8 Comovement of Business Cycles and Financial Markets
    (pp. 75-84)

    In this chapter we provide a detailed analysis of the extent of business cycle comovement between advanced economies and emerging market economies (EMEs) from a variety of angles. First, we examine the correlations of GDP growth and the sectoral components of GDP growth within and among different regions. Second, we examine correlations of industrial production indexes. Since these data are available at a monthly frequency and can be aggregated up to quarterly or annual data, we can analyze the effects of the time averaging of data on business cycle correlations. Third, we study the correlations of stock returns within and...

  13. 9 Exploring the Sources of Business Cycle Comovement
    (pp. 85-104)

    Before we analyze the global nature of the recent recession and its impact on different groups of economies, it is useful to examine the evolution of business cycle linkages among these groups. The most interesting distinction in terms of macroeconomic performance during and after the crisis has been between advanced and developing countries, with some important differences as well between emerging markets and others in the group of developing countries. Hence we now use a dynamic factor model to provide a comprehensive empirical characterization of business cycle linkages within and between three main groups of countries—advanced economies, emerging market...

  14. 10 Macroeconomics of Recessions and Financial Crises
    (pp. 105-118)

    Understanding the features of past recessions is important as background for a study of the resilience of emerging market economies (EMEs) during the recent crisis. In this chapter we provide an overview of business cycle dynamics around recessions in EMEs. We first analyze the main properties of recessions in EMEs during the period 1978–2007.¹ We combine the information presented here with a detailed study of the recessions following the global financial crisis in the next chapter and then, in the context of this cumulative evidence, assess the resilience of emerging markets during the global financial crisis of 2008–09....

  15. 11 Emerging Markets during the Global Financial Crisis
    (pp. 119-128)

    The earlier chapters of this book present various types of formal analysis indicating a structural divergence between the business cycles of advanced economies and EMEs. There is a potential connection between the divergence of business cycles across these two groups of countries and the resilience of EMEs to recessions in advanced economies. This divergence suggests that, despite their rising trade and financial openness, EMEs have gradually become less vulnerable to adverse shocks emanating from advanced economies. Even if fluctuations in financial markets have become more highly correlated across these two groups of economies, this has not translated into higher correlations...

  16. 12 The Good and the Ugly: Emerging Asia and Emerging Europe
    (pp. 129-160)

    In this chapter we drill down more deeply into the experiences of two sets of emerging markets between which there is a sharp contrast in terms of resilience regarding the global financial crisis. Before the crisis, average per capita GDP growth was highest in two groups of emerging markets, Asian and European. As discussed, there is a stark contrast between the way in which these two groups of emerging markets experienced and responded to the crisis. In 2009 Asian emerging markets posted the highest average rate of growth, while European emerging markets had the lowest. These sharp contrasts led us...

  17. 13 What Explains the Resilience of Emerging Markets?
    (pp. 161-166)

    Based on the comparative stylized analysis of the experiences of emerging Asian and European economies, as well as the analyses in the previous chapters, we now provide a catalogue of seven factors that appear to have underpinned the relative resilience of emerging market economies (EMEs) as a group during the global financial crisis. These factors could also help explain differences in resilience across different groups of EMEs. Our list includes a few factors that have not been covered in depth in our own extensive analysis but have come to be accepted in the existing literature (see the literature survey in...

  18. 14 Conclusions and Policy Implications
    (pp. 167-174)

    In this book we provide a detailed analysis of the implications of the rising prominence of emerging market economies. It is clear that, with their rapid growth, increasing size, and rising integration into global trade and finance, emerging market economies (EMEs) have attained a prominent role on the world economic stage. Their financial markets have become increasingly interconnected with financial markets in advanced economies, and fluctuations in stock markets, in particular, have become more synchronized across the major EMEs and advanced economies. Interestingly, however, business cycle fluctuations—as reflected in fluctuations in GDP and other macroeconomic aggregates—reveal a rather...

  19. Appendix: List of Countries and Country Groups
    (pp. 175-182)
  20. References
    (pp. 183-196)
  21. Index
    (pp. 197-206)
  22. Back Matter
    (pp. 207-208)