Emerging Economies bonanza ?

The following  tables, taken from the 10 October 2010 Research Note  of IIF, Institute of International  Finance,  show a strong upward  revision of the private investment flowing to Emerging Economies for 2010  and  of the forecasts  for 2011.

Emerging Market Economies: External financing-Private inflows

(billion dollars) 

The total figure of capital moving  into Emerging Economies in 2010 shows an increase  on  2009 of 243.6 billion dollars , a  very high level,  which will  be slightly increased in 2011. More than sixty per cent  of this figure is represented by Equity Investment , both  Direct and Portfolio. Direct Investments counted for 44.4% of the total in 2009 , and are  going  to  increase to  48.8%  in 2011.   

Emerging areas: external financing (billion dollars)* 

     *Small differences due to roundings

 The share of the various recipient areas  have been changing in time.  Asia, which counted for 58% in 2009 went down to 41.6%  in 2010 and is expected to  go down again  to 38% in 2011 . Latin America  and Africa have  kept  their  positions, while Emerging Europe  jumped from  about 10% in 2009  to 22% in  2010, and is expected to grow more, to  27% in 2011.

Such a high  increase  of the  investment  flowing into Emerging Economies is seen by IIF as due basically to the low  interest rate and the slow growth of the economy in “mature” countries; and the high  level  of both  in emerging ones, some of which, in particular the commodity exporting ones,  have shown improving terms of trade.  Surely, the low cost of labour  in those areas is still a strong attraction for manufacturing industries as well as for  raw material productions. However, that high level of capital flowing into emerging areas, seen up to now as a great bonus for those countries, in the recent  past starved of capital, risks now to become a nuisance.

The IIF  writes that “  the persistent strength  in private capital flows raises new headaches for emerging market policy makers...  with a number of them expressing concern   that upward pressures on their  exchange rates  vis-à-vis the dollar, the yen , the Euro and Sterling.” One possible remedy is, of course, capital controls.  Press news indicate that such controls have been adopted recently by South Korea  and  Brazil,  while, for example, Turkey seems to be  quite happy with  the over evaluation of the Lira, a matter of national pride.

The American press quoted Vikram Nehru, chief Economist of the World Bank  for  Asia and Pacific region: “Should inflow remain strong, especially against a background of weak global growth , the authorities will be faced with the  challenge of balancing the need for large capital inflows  - especially foreign direct investment – with ensuring competitiveness, financial sector stability   and low inflation. “ The problem is somewhat mitigated by an increasing counter flow of investment  abroad from the emerging countries . Its figure  was already above the 200 billions in  2008, goes to   three hundred billion in 2010, and it  is estimated  to rise  again  in 2011 by  almost 6%. One could conclude that the disorder of the international economy may tend to depress even the growth of  emerging countries, which  find themselves  swamped by a flow of capital which  will appreciate their currency and  reduce their advantage in international competition. The IIF note   presents the following data  on the import export balance of the various countries .

“Global Current Account Balance” (billion dollars) 

The table shows  the gradual  reduction of the  surplus of the emerging economies due to increasing imports , which   indicates  a development of their internal market, and , basically, the level of their development. The positive number for Euro area  is basically due to German industrial  exports.The research notes of IIF comments as follows :“For mature economies , facing a deflationary threat resulting from excess goods supply, a reduced supply of imports  and  the reorientation of domestic production to export  is helpful  in dampening  those deflationary worries.” The current American strategy does not seem to include such  increase in exports. In fact, this  overall strange situation is due to the inability of the large developed countries , the “mature ones” , to  come out of the doldrums  of their  stagnation,  and  inject back some vitality to their economy. Because of that, both areas will suffer a slow down of their economies.

Next year  will not see a pick up of the world economy. The IIF Research Note forecasts the GDP increase of  Matures Economies at   2.4% in  2010 and 1.7% in  2011 , whilst the development of Emerging Economies is estimated at  6.8 % and 6.0%. The United States will slow down from 2,8% in 2010 to  2.3% in 2011, while Europe  will slow from 1.7% to 1,4%, and  Japan  from 3.0% to 1.0 %. Among Emerging Economies , China is foreseen to  move from 10% in 2010  to 9,5%  while  India will maintain its rate around 8% . The new “stimulus” that  USA is  apparently ready to administer, will simply put some more money -as cheap  as it is possible- in the hands of speculators, whose activities will not  have a positive effect on demand -rich people save  and don’t buy - and above all on unemployment. The lesson of the New Deal is now explicitly considered as un-American , and refused on ideological ground.

Europe is not faring any better.  Basically, demand does not increase,  either  because  in the US the companies are working for profit and not for market share , and because the “austerity” prompted in Europe by the fear of financial collapse turned out  to be   a way to dismantle whatever public  services the European  Sates maintained  in order to reduce the inequality among citizens. This is being met , at least in some countries,  with strong protests , which are in turn not the best possible way to give a new strength to the economy. One can conclude that  capital is  increasingly moving outside the old rich countries . because they offer    diminishing   opportunities, due to demand stagnation. At the same time .  company profits  are increasing ,  but they  are not invested in new production capacity at home, but are sent abroad. Consequently, the rich mature countries  not only will keep registering   high unemployment : they also,  especially  in Europe,    , will quickly move  to an increasing  economic inequality among their citizens, which is exactly the opposite of what is need in order to revive their economy.