The Global Crisis and Emerging Nations

Striking staff workers at the University of Witwatersrand in the Republic of South Africa. The workers are demanding a 9 percent pay hike., a photo by Pan-African News Wire File Photos on Flickr.

Global crisis and emerging nations

Friday, 12 October 2012 07:26
Nhlanhla Nene
Reprinted From the Zimbabwe Herald

The global financial crisis and the recession that followed it signalled the beginning of a new global era. The global economy has been thrown into turmoil and each economy faces a unique set of challenges.

As early as January 2011 the update to the IMF’s World Economic Outlook, noted that while economic conditions were improving across the globe, the return to growth was then and continues to be, uneven, taking the form of a two-speed recovery.

There is subdued economic growth and high unem­ployment in advanced economies such as the United States, United Kingdom, France and Japan, in contrast to buoyant economic growth in emerging economies such as China, India and Brazil, which face the risks of over­heating and rising inflation.

Many developed economies are unable to achieve meaningful growth; several are struggling to reign in their national budgets and contain sovereign debt and many are still seeking to constrain private financial sec­tor activity. In many countries, financial sector’s activity grew too fast relative to the underlying real economy.

In contrast, one of the greatest challenges facing economies in Africa for example, is how to increase financial intermediation in order to finance infrastruc­ture backlogs. A 2008 report by the African Infrastruc­ture Country Diagnostic (AICD), which is a World Bank project, concluded that for the foreseeable future Africa would only be marginally above the level of investment required to maintain and operate its existing infrastructure.

The African Development Bank estimates that a shortage of roads, housing, water, sanitation and partic­ularly electricity, already reduces sub-Saharan Africa’s output by some 40 percent.

Given the nature of a majority of these infrastructure investments, they will rely heavily on public funding. Government expenditure is, however, limited by how much tax revenue can be collected without hurting eco­nomic growth and by how much debt can be borrowed.

Across the globe, governments’ revenue collection and ability to borrow are constrained by weak economic conditions, and given the size of the infrastructure deficit in many developing countries these sources would likely prove inadequate in any event. There is thus limited capacity for governments to pay for everything that is needed.

This creates significant opportunities for the private sector, particularly the financial sector, to play a crucial part in the realisation of these infrastructure projects. The financial sector is indispensable to the development of these countries because government cannot meet all infrastructure needs.

Governments cannot meet all infrastructure funding needs, therefore there is a role for the financial sector to play in channelling private funds appropriately. In con­trast to the developed world, Africa and other develop­ing regions are in dire need of increased, not decreased, financial intermediation.

Furthermore, not only do developed and developing countries have differing views on the stability/growth trade-off, they have different policy objectives alto­gether. The challenge then for developing countries is to put in place regulations that can achieve an appropriate level of stability, without compromising the financial sector’s ability to meet their unique needs. In contrast the priority for many developed economies is largely to restore stability to their financial systems.

While none truly escaped the recession that followed the 2008 financial meltdown, many developing coun­tries did not experience a financial crisis. In Africa the main transmission mechanism for the crisis was the col­lapse of export revenues following the decline of world demand for mineral and fossil resources.

The conditions that led to the crisis in the developed countries were not as prevalent in many developing countries. It is hard to see how subjecting the financial systems of the developing countries to arduous con­straints that are intended to rectify problems that exist in the developed world could be of any significant benefit.

We should be wary of imposing unnecessary addi­tional regulations on countries that came through the crisis relatively unscathed. In particular we should be aware that regulations that are sensible in the developed country context may not be applicable in the developing world.

Even though debt markets in developing markets have expanded in size and breadth in recent years, their depth is substantially below that of advanced economies. As a result liquidity in those markets is more vulnerable to economic and financial sector developments, includ­ing those arising from internationally agreed regulatory reforms.

Many of the multilateral initiatives and reforms are already being scrutinised and heavily criticised for their failure to adequately incorporate the emerging market perspective.

International efforts at financial sector reform have rightly been aimed primarily at the developed world — which is, after all, where the global financial crisis origi­nated.

However, against this background, it is necessary to ask whether these reforms have adequately taken into account the perspectives of emerging markets and developing economies.

At their most basic, banks and financial markets man­age risk, channelling funds from those with excess capi­tal to those with investment opportunities. As a result there will always be a trade-off between stability on the one hand and growth on the other.

Nhlanhla Nene is South Africa’s deputy minister of finance.