THEME: EMERGING ECONOMICS, ECONOMIC CRISIS AND WAY FORWARD

*Mr. T.S.Kumar, Asst professor in business Administration in Jawahar Science

College / Block 14 / Neyveli.
** Mr. Vasanth, Sales Manager in India Cements Private limited at Kattumannar Koil
Belt.
TITLE:

EMERGING ECONOMIES AND THE GLOBAL FINANCIAL CRISIS

ABSTRACT
We analyze the transmission of global financial crisis to business cycles in China and
India. The pattern of business cycles in emerging Asian economies generally displays a
low degree of synchronization with the OECD countries, which is consistent with the
decoupling hypothesis. By contrast, however, the current financial crisis has had a
significant effect on economic developments in emerging Asian economies. Applying
dynamic correlations, we find wide differences for different frequencies of cyclical
development. More specifically, at business cycle frequencies, dynamic correlations are
typically low or negative, but they are also influenced most by the global financial crisis.
Finally, we find a significant link between trade ties and dynamic correlations of GDP
growth rates in emerging Asian countries and OECD countries.
Keywords: Financial crisis; Business cycles; Decoupling; Trade; Dynamic correlation.
INTRODUCTION
Globalization has been perhaps the key event in the world economy in the past two
decades. During this gradual process, several emerging countries have gained in
economic importance and have begun to influence economic developments in other
countries (Akin and Kose, 2008). This development has been dominated especially by
the growing Chinese economy, supported by its export expansion into and investment
from developed countries. Within a just a few years, China has become an important
source of growth for the global economy. More recently, China has been followed by
India and possibly also by some other smaller emerging economies in Asia. Not

surprisingly, growth in China has changed the distribution of economic activities across
the world.
The main results of our paper are as follows. First, we show that business cycles in
China and India have been very different from those of OECD countries, which favors
the decoupling hypothesis. Second, the current global financial crisis has had largely
similar effects on industrial countries and on emerging Asian economies, which would
speak against decoupling. Finally, we analyze the relationship between trade and the
degree of business cycle synchronization of emerging Asian economies with the
industrial countries. We show that more intensive trade ties between the large Asian
emerging economies and the OECD countries do increase business cycle correlations
between them.
EMERGING ECONOMIES
Emerging economies are low-income, rapid-growth countries using economic
liberalization as their primary engine of growth. They fall into two groups: developing
countries in Asia, Latin America, Africa, and the Middle East and transition economies
in the former Soviet Union and China. Private and public enterprises have had to
develop unique strategies to cope with the broad scope and rapidity of economic and
political change in emerging economies. This Special Research Forum on Emerging
Economies examines strategy formulation and implementation by private and public
enterprises in several different regional settings and from three primary theoretical
perspectives: institutional theory, transaction cost economics, and the resource-based
view of the firm. In this introduction, we show how different theoretical perspectives
can provide useful insights into enterprise strategies in emerging economies. We discuss
the special methodological as well as empirical challenges associated with doing
research in emerging economies. Finally, we briefly summarize the individual
contributions of the works included in our special research forum.
THE ASIAN FINANCIAL CRISIS
Like other financial crises of years past, the Asian crisis can be traced to a set of
interrelated problems

In this case, three factors predominated: financial-sector weaknesses cum easy global
liquidity conditions, problems in the external sector, and contagion running from
Thailand to other economies.

These financial-sector problems could not have

progressed so far were it not for longstanding weaknesses in banking and financialsector supervision. Loan classification and provisioning practices were too lax; there
was too much "connected" and "policy-directed" lending; state-owned banks did not
pay much attention to the creditworthiness of borrowers; bank capital was often
inadequate relative to the riskiness of banks' operating environment; and there were
strong expectations of government bailouts should banks get into difficulties. On top of
this, the quality of public disclosure and transparency was poor.
The financial crisis is now beginning to slow real economic activity in some cases
quite dramatically all over the world. Consumer sentiment in Seoul, the capital of
South Korea, has plunged to its lowest level in eight years, as the won, the local
currency, has weakened sharply and stocks have plunged. Park Yung Tae is an office
worker who was laid off earlier this year and invested his severance pay in the KOPSI,
the Korean stock market. Big mistake, his life savings of $50,000 has been trimmed to
just $10,000. Ship owners in Hong Kong say the rates for hiring the large container
vessels that ship consumer electronics, toys and clothes to the West have fallen 40% in
the past two months, amid a drastic slowdown in international trade. And across what
had been the booming economies of Eastern Europe, growth has slowed sharply,
economists say.
The real economic pain in emerging markets matters immensely to the economic
prospects of the U.S. and other developed countries. Indeed, to the extent that that there
was growth in the U.S. earlier this year, it was buttressed by strong exports. Now that
prop underneath the world's economy has buckled. Jonathan Lipsky, first deputy
managing director at the IMF, says 100% of the global growth forecast by the fund for
2009 was to have occurred in emerging markets. "Now," he says, "we have to make
sure that potential is protected." That's plainly going to be an expensive proposition.
The IMF is now ladling out cash as fast as suddenly bankrupt economies line up for it.
The fund has $200 billion on hand and access to about another $50 billion to manage
the intensifying global emergency. Chances are it will need all of those funds, and a lot
more besides, before this is over.

OBJECTIVES:

Evaluate opportunities in specific countries in the context of your company's

core capabilities

Realistically assess how the business environment in an emerging market creates

revenue opportunities for your company

Design or modify product and service offerings for your target segments within
the emerging marketfrom high-income to underserved low-income populations

Address emerging market characteristics in demand generation strategies

Recognize institutional gaps and economic roadblocks to your success, and then
design effective strategies to overcome them

Create an organization willing and able to shift its mindset to better address the
needs of a particular market

Compete against local and multinational players by building capabilities or

creating new partnerships

THE ROLE OF THE IMF

The IMF has recently been subject to sharp criticism on many fronts.

With the

exception of the "moral hazard" argument, most of this criticism is off the mark. Some
argue that the crisis countries didn't need strong IMF medicine because they were
merely victims of a (negative) shift of sentiment on the part of international investors.
This ignores the serious financial-sector weaknesses and external imbalance problems
outlined above. The market may have overshot once the crisis got started, but the
"innocent bystander" hypothesis simply doesn't wash.
The Fund has also been criticized for recommending higher interest rates, bank closure,
and tighter fiscal policy. But experience suggests that it is difficult to stabilize a rapidly
declining currency without a temporary period of high interest rates (recall the case of
the Mexican peso in early 1995), and that allowing insolvent banks/thrifts to remain
open encourages "gambling for resurrection" that can add significantly to the ultimate
public-sector tab of banking problems (recall the U.S. saving and loan crisis). If there

was a mistake in Indonesia, it was that the authorities did not close enough insolvent
banks.
INTERNATIONAL TRANSMISSION OF BUSINESS CYCLES
Economic development is determined both by domestic (e.g. aggregate
demand shocks and budgetary policy) and international factors (external demand and
international prices of traded goods). In open economies, the latter are playing an
increasingly important role and often 4 determine also domestic policies, which are
aimed at insulating the economy from adverse external economic shocks. The Asian
emerging economies with their strong export orientation could therefore be heavily
exposed to foreign shocks.
Foreign trade is not the only factor affecting the degree of business cycle
correlation. In many theoretical models, a greater degree of financial integration leads
to lower business cycle correlation. In a standard two-country model with perfect
capital mobility, the country encountering a positive productivity shock also receives
capital inflows from the other 5 country, leading to less similar business cycles.1
Moreover, more complete financial integration enables greater specialization, which
leads to lower correlation of national business cycles, as in Krugman (1998). However,
in many empirical studies the correlation between financial integration and similarity of
business cycles has been positive.
Nevertheless, Kalemli-Ozcan et al. (2009) find that in a sample of twenty
high income countries negative correlation does obtain when one controls for countrypair-specific factors as well as the global trend to greater integration. Given Chinas
relatively strict capital controls, it is not certain whether e.g. the increased flows of
foreign direct investment would increase or decrease business cycle correlation. Since
China and India seem to be specializing vertically in their foreign trade, this channel
may be less important for their business cycles. Actually, the specialization forces
discussed by Krugman (1993) can dominate, which can cause business-cycle divergence
between the emerging Asian giants and their trading partners.
CRISIS IN EMERGING MARKET ECONOMIES

In a worlds that becomes more global every day, in a world where private business
everyday plays an increasingly dominant role in innovation, investment, financing, and
ultimately human progress.
The policy programs to respond to crisis in Asian countries had to be speedily designed,
to put the proper emphasis on the immediacy of macroeconomic adjustment, and to
recognize the sheer magnitude of the structural reforms that had to be initiated from
the outset. As a matter of fact, the importance of the structural element is the hallmark
of these programs. Within these programs, we can discern three tiers of recovery:

The first tier is to restore stability. As usual, immediate action is needed for
countries faced with sudden acute pressure on their balance of payments;

The second tier is to improve soundness. Lost confidence, especially in domestic

financial and corporate systems, has to be restored through fundamental institutional
changes;

The third tier is to boost efficiency. The approach of "managed development"

underlying economic policy, characterized by mechanisms that interfered with
market allocation of resources, has become increasingly out of tune with the rigorous
demands of our globalized economy. Basic changes in the approach to policymaking,
allowing market forces to operate more freely, will be essential. This tier perhaps has
been the more controversial due to many misunderstandings on what were at an
earlier stage the parameters of the "Asian miracle," and more than that, due to the
fact that questioning this approach was tantamount to challenging many vested
interests.
CHALLENGES OF BEING GLOBAL PLAYERS
In the aftermath of the crisis, there is a striking dichotomy between advanced and
emerging economies in the short-term risks and policy challenges that they face. Among
advanced economies, the major concern is weak growth and impending fiscal pressures.
Conventional monetary policy has reached its limits and debt has risen to such high
levels that it constrains the scope of fiscal policy. In emerging economies, by contrast,
growth has rebounded sharply, which means they face rising inflation, surges of capital
inflows, and pressures of rapid currency appreciation.

Along with an increase in their economic heft, emerging economies are becoming more
important players in setting global priorities. The unofficial anointment of the G20 as
the major body determining the global economic agenda has given emerging markets a
prominent seat at the table. The same is true in international institutions such as the
Financial Stability Board and the IMF, where emerging economies have a much larger
say than before.
The global financial crisis presents a unique opportunity for emerging markets to
mature in another dimension taking on more responsibility for global economic and
financial stability. While emerging markets, such as China and India, remain relatively
poor in per capita terms, their sheer overall size makes it important for them to
consider the regional and global spillovers of their policy choices.

IMPACT OF CHINA AND INDIAS RISE ON INDUSTRIALIZED AND OTHER

EMERGING ECONOMIES
Irrespective of the current global economic crisis, the adverse or positive affect of India
and China as global players varies across countries. For example, Eastern European
countries such as Poland, Hungary and Slovakia who have recently gained accession to
the EU are likely to suffer more than say, France Italy or Britain, that are producers of
technologically advanced goods such as luxury cars, commercial aeroplanes and
household electrical components.
China and India are clearly aiming to become global powers in the 21st century,
through exploiting the potential of their huge populations to take their rightful place on
the world stage. In terms of the demographic changes that are expected to take place by
the year 2030, India is forecasted to have a much younger working population in
relation to China, with 28% of the working population between the ages of 15-29
compared to 19% for China. More alarmingly is that 23% of Chinas population is
expected to be in the 50-64 year old group compared to only 9% for India (Financial
Times, 2004). These projected demographic advantages do not guarantee that India will
be able to achieve higher growth rates than China. Unless the primarily and secondary
educational system is improved as well as made more accessible and malnutrition and
poverty levels are brought under control, advantages of being younger will not amount
to much.

In sum, both countries face different economic, political, social and

environmental challenges in 13their ambition to become global leaders and to deal with
sudden shocks as the current global economic crisis.

CONCLUSION
The current global economic crisis is different from previous financial crises, which
have either been restricted to a country or to a specific region. The dilemma of
addressing global imbalances thus goes far beyond the responsibility of one or two
countries such as China and the US, or a specific region of the world. Developed nations
of the world will need to cooperate and work closely with economically powerful
emerging economies such as China and India rather than to perceive their growing
influence as somehow threatening to their own economic stability. It is only through
viewing the challenges faced by India and China in sustaining high economic growth to
address poverty reduction, minimize inequality, control environmental degradation and
achieve sociopolitical progress as a collective problem that we can collectively find
solutions that face 16 an ever globalized and integrated world economy. This harsh
realization, fortunately for the welfare of humanity at least in the short term seems to be
gaining steady ground over national interests.
Reference:
Ayhan Kose, M. and Eswar S.Prasad (2011). Emerging Markets: Resilience and Growth
Amid Global Turmoil, Brookings Institution Press.