Financial Development, Economic Crises and Emerging Market Economies

During the late 1970s and early 1980s, many African countries experienced a profound slowdown in economic growth. The growth rate of real per capita GDP fell from 0.4% per year during the 1973-80 period to 1.2% per year during the 1980-89 period.' The causes-internal and external-of Africa's economic decline and the strategies for restoring economic growth are much debated. Nevertheless, broad consensus has emerged on the importance of (i) increasing total investment and (ii) promoting private-sector development and increasing its share of total investment for long-term growth.2 It is widely recognized that gross domestic investment fell substantially in Africa during the 1980s and remains severely depressed across the region. The proportion of total domestic investment in GDP fell from 20.8% per year during 1973-80 to 16.1% per year during 1980-89. In some countries, investment has fallen to less than 10% of GDP-a level that is insufficient even to replace depreciated capital. In Africa, the minimum investment needed to replace depreciated capital is estimated at 13% of GDP.3 In recent years, there has also been a growing recognition among many African leaders, faced with new realism and pragmatism, that the private sector could play a significant role in economic development. The focus in the longer term of structural adjustment programs and sectoral reforms adopted by these countries is on creating more appropriate incentives and a framework for private-sector development as the basis for achieving sustainable economic growth. In addition, multilateral and bilateral institutions have developed new initiatives with priorities for private-sector development. In 1989, the International Finance Corporation, an affiliate of the World Bank, es-

The issue of decoupling of emerging market economies (EMEs) (especially in the Asian region) from the developments in advanced economies has become a subject of lively debate in recent years. Basically, decoupling seems to comprise three sub-hypotheses: (i) growth spillovers from advanced countries to EMEs decreasing progressively in importance, (ii) business cycles in EMEs becoming less synchronized with those of the advanced world and (iii) strengthening of growth spillovers and cyclical synchronization among the EMEs as a group. The received literature fails to distinguish adequately between the trend and cyclical aspects of the decoupling relationship. We resort to two frequency domain methods (nonstationary spectral causality testing and wavelet correlations), which seem to offer a neat separation of trend and cyclical decoupling. Based on a sample of seven EMEs from the Asian region (including the two large EMEs – China and India), we uncover strong evidence favouring both trend and cyclical decoupling.

Quantitative Aspects of the Economic Growth of Nations: VIII. Distribution of Income by Size

PurposeAfter the adoption of unconventional monetary policies (UMPs) in advanced economies (AEs) there were many studies of monetary spillovers to asset prices in emerging market economies (EMEs) but the extent of contribution of EMEs and AEs, respectively, in real exchange rate (RER) misalignments has not been addressed. This paper addresses the gap in a cross-country panel set-up with country specific controls.Design/methodology/approachFixed effects, pooled mean group (Pesaran et al., 1999) and common correlated effects (Pesaran, 2006) estimations are used to examine the relationship. Multiway clustering is taken into account to ensure robust statistical inferences.FindingsRobust evidence is found for significant monetary spillovers over 1998–2017 in the form of RER overvaluation of EMEs against AEs, especially through the portfolio rebalancing channel. EME RER against the US saw significantly more overvaluation in UMP years indicating greater role of the US in monetary spillovers. However, in the long-run monetary neutrality holds. EMEs did pursue mercantilist and precautionary policies that undervalued their RERs. Precautionary undervaluation is more evident with bilateral EME US RER.Research limitations/implicationsIt may be useful for large EMEs to monitor the impact of foreign portfolio flows on short-run deviations in RER. Export diversification reduces EME mercantilist motives against the US. That AE monetary policy significantly appreciates EME RER has implications for future policy cooperation between EMEs and AEs.Originality/valueTo the best of the author's knowledge such a comparative analysis between AE and EME policy variables on RER misalignment has not been done previously.

Fiscal multipliers in Emerging Market Economies: Can we learn something from Advanced Economies?

Behavioural​ equilibrium real exchange rates and misalignments: Evidence from large emerging markets

Given its versatility, energy security's importance to economic growth cannot be overstated. Existing empirical research has not, however, taken into account the significance of energy security in achieving sustainable economic and financial development. The objective of this study is to provide an empirical response to the question, “How can we exploit energy potentials without compromising the sustainable development agenda?”. Our research indicates that energy security enhances economic and financial sustainability. However, the influence varies between quantiles. Initially, energy security inhibited sustainable economic development; this may have been due to excessive reliance on fossil fuel as a source of energy generation; however, the energy transition to renewable energy mitigated this negative impact, thereby fostering sustainable economic development. Likewise, energy security promotes long‐term sustainable financial development. Energy security is the heart of sustainable economic and financial development hence, the need for diversification of energy sources by promoting the adoption of renewable energy technologies became necessary. Encourage investments in solar, wind, hydro, geothermal, and other renewable sources to reduce dependence on fossil fuels and mitigate environmental impacts.

The failure of uncovered interest rate parity (UIP) is a well-known phenomenon of the last thirty years. UIP failure is more prominent in advanced economies than in emerging market economies. Typically, UIP estimation for an advanced economy generates a negative coefficient, meaning that a higher interest rate in advanced economy A will result in the appreciation of economy A's exchange rate. For emerging market economies, higher interest rates usually correspond to future depreciation, although this depreciation is not sufficient for UIP to hold. This paper shows that UIP holds in Russia better than in other emerging market economies when the UIP equation accounts for a constant risk premium. Consequently, there is no forward premium puzzle for Russian data for 2001–2014. To determine the results for Russia and to compare them with the results for other countries, we estimate UIP first for Russia and then for advanced and emerging market economies using seemingly unrelated regressions and panel data analysis. By comparing the profitability of static and dynamic carry trade strategies, we also confirm that in emerging market economies, risk premiums are often constant, whereas in advanced economies, risk premiums are almost always volatile. This may explain why UIP holds better in emerging market economies. It also enables us to formulate a hypothesis that macroeconomic policies of emerging market economies (e.g., the accumulation of large foreign exchange reserves) stabilize risk premiums.

Publisher Summary This chapter discusses the financial development and economic growth in underdeveloped countries. An observed characteristic of the process of economic development over time, in a market-oriented economy using the price mechanism to allocate resources, is an increase in the number and variety of financial institutions and a substantial rise in the proportion not only of money but also of the total of all financial assets relative to GNP and to tangible wealth. Typical statements indicate that the financial system somehow accommodates—or, to the extent that it malfunctions, it restricts—growth of real per capita output. Such an approach places emphasis on the demand side for financial services; as the economy grows it generates additional and new demands for these services, which bring about a supply response in the growth of the financial system. In this view, the lack of financial institutions in underdeveloped countries is simply an indication of the lack of demand for their services.

Financial and economic development are strongly supported by national policies. New productivity is driving rapid growth in the financial and economic sectors. Furthermore, the government is promoting industrial upgrading through consumer services, intelligent industrial transformation, and green technological upgrades, thereby driving economic development. As a key factor supporting economic growth and driving industrial upgrading, the efficient and stable development of finance is crucial for regional coordination. Zhejiang Province, as a frontier region in China's financial and economic development, boasts a typical and exemplary financial and economic development model. This study examines the comprehensive development level of Zhejiang's financial and economic system and explores the interactive and coordinated relationships within it, providing theoretical support for regional financial and economic coordinated development. Therefore, this study employs an "entropy-coupling" model to empirically examine Zhejiang's financial and economic development. Based on the diverse nature of financial and economic development, this study constructs data covering dimensions such as social financing scale, money circulation volume, and risk control, and summarizes them into a comprehensive evaluation index system encompassing both economic and financial development. The entropy method is used to objectively assign weights to measure the comprehensive development level of Zhejiang's financial economy from 2019 to 2023. Furthermore, to explore the degree of coupling and coordination within the financial and economic system, the study further employs a coupling coordination degree model. The "entropy-coupling" model reveals that Zhejiang Province's comprehensive financial and economic score has been rising annually, with a compound annual growth rate of approximately 69% from 2020 to 2023. An analysis of subsystem development reveals that the comprehensive scores of the financial development subsystem and the economic development subsystem have also been rising annually, with compound annual growth rates of 54.98% and 85.73% from 2020 to 2023, respectively. Furthermore, based on the coupled model analysis, financial and economic development were in a phase of disharmony in 2019 and entered a phase of coordination from 2020 to 2023. In summary, given Zhejiang Province's specific economic context and in alignment with national economic and financial policies, the province should maintain a prudent monetary policy and adopt a cautious approach to fiscal investment. Priority should be placed on supporting green finance, technological innovation, and the digital economy. Strengthening financial and economic resilience to risks, optimizing resource allocation, and enhancing the efficiency of policy implementation will collectively contribute to more sustainable and high-quality economic development.

We present a comprehensive analysis of the shock absorption role of external positions using the currency exposures dataset by Bénétrix et al. (2020). While the literature has frequently studied how the net international investment position and its currency composition determine the direction and scale of valuation effects, we focus on their amplitude. This is of central importance for global financial stability given the large and increasing scale of external balance sheets. To that end, we propose an indicator showing the extent to which external positions absorb or amplify exchange rate shocks. Analysing a set of 50 countries over the period 1990-2017, we find the external shock absorption role to be present for advanced economies, while this was initially not the case for emerging markets economies (EMEs). In recent years, however, EMEs’ external positions increasingly showed a shock absorption capacity. Our regression-based analysis reveals that the level of economic and financial development is associated with a greater capacity to absorb exchange rate shocks.

Several studies have examined the relationship between environmental performance and economic development. However, most of them did not take sustainable development and financial development into account. The study argues that sustainable financial and economic development contributes to reducing greenhouse gas emissions. We use the panel data regression model to capture the relationship between greenhouse gas emission and sustainable economic and financial development. The panel data refers to the period of 2007–2017. The EU 25 countries were analysed. The results show that the relationship between sustainable financial development and environmental degradation is more relevant for converging economies than developed countries. We found that the variable “energy productivity” has the strongest impact on greenhouse gas emissions for both country groups (converging and developed); however, it increases for developed countries and it decreases the greenhouse gas emissions for converging economies. We also found that environmental taxes are an efficient instrument that mitigates greenhouse gas emissions, especially in developed countries group.

Since the mid-2000s, the platforms of major political parties in both advanced and emerging-market economies have increasingly emphasized policies that stress national sovereignty, reject multilateralism, and seek to advance national interests through measures that come at the expense of foreign interests. This paper documents this shift by evaluating the policy platforms of the largest political parties (about 55 in total) in the Group of Twenty (G-20) countries with regard to trade policy, foreign direct investment (FDI), immigration, and multilateral organizations. Preference shifts with respect to industrial policy, competition policy, and macroeconomic populism are also examined. In advanced economies, the biggest shifts were toward restrictions on immigration and trade and toward macroeconomic populism. In emerging-market economies, the largest preference shifts were toward industrial policies favoring specific sectors, macroeconomic populism, and industrial concentration. Trade protectionism and skepticism toward multilateral organizations and agreements have increased in both advanced and emerging-market economies. As of 2018, economic policy preferences in emerging-market economies were more nationalist and less liberal than in advanced countries, but the gap has narrowed. Right-wing parties tend to be more nationalist than left-wing parties in the areas of immigration restrictions, FDI restrictions, and antimultilateralism, but there is no significant difference with respect to trade protectionism.

Jing Zhang of University of Michigan reviews “Emerging Markets: Resilience and Growth amid Global Turmoil” by M. Ayhan Kose and Eswar S. Prasad. The EconLit abstract of the reviewed work begins, “Examines changes in the nature of cyclical linkages between advanced economies and emerging market economies in order to analyze the resilience of the latter group to global economic and financial developments. Discusses changes in the world economic order--a roadmap; rising global linkages and international business cycles--what we know; setting the stage; shifting dynamics of global gross domestic product and growth; global trade linkages; global financial linkages; business cycle volatility; comovement of business cycles and financial markets; exploring the sources of business cycle comovement; macroeconomics of recessions and financial crises; emerging markets during the global financial crisis; the good and the ugly--emerging Asia and emerging Europe; and what explains the resilience of emerging markets. Kose is Assistant to the Director in the International Monetary Fund's Research Department. Prasad is Tolani Senior Professor of Trade Policy at Cornell University and New Century Chair in International Economics at the Brookings Institution. Index.”

Macroprudential policy involves using mainly prudential but sometimes also monetary and fiscal tools to reduce systemic risk and achieve financial stability. It is motivated by externalities associated with the buildup of systemic risk over time due to strategic complementarities, fire sales and credit crunches related to a generalized sell-off of assets, and strong cross-institutional interconnectedness. Macroprudential tools apply to both banks and nonbank financial institutions and to different classes of borrowers to the extent that they come with systemic risks. Both advanced economies (AEs) and emerging market economies (EMEs) have steadily increased their use of macroprudential measures since the mid-1990s. Empirical evidence suggests that tighter macroprudential policy has improved banking system resilience and that tools such as lower caps on loan-to-value or debt service ratios have helped reduce housing credit and price growth. Evidence shows that while tightening macroprudential policy is generally effective, relaxing it is less so. By moderating fluctuations in general bank credit, housing/household credit, or house prices, macroprudential policy tends to reduce the severity and likelihood of future crises as well as the volatility of growth, but recent studies also show that it slows output growth. As financial globalization progresses, macroprudential policy may become less effective due to regulatory arbitrage and cross-border leakages, especially in financially more open AEs and EMEs, also given the limited scope for international coordination and the lack of an internationally agreed-upon macroprudential framework. To deal with the associated externally driven risks, many EMEs use foreign exchange (FX)-related macroprudential tools, e.g., FX liability-based reserve requirements, limits on currency mismatch or FX positions, and FX liquidity requirements. In EMEs, FX intervention can also play a macroprudential role. In contrast, AEs rarely use such instruments but use macroprudential capital buffers more actively than EMEs. Recent evidence suggests both positive and negative international spillover effects of these and other macroprudential policies. These and other findings point to the need to build formal models that have a macro-financial stability framework (MFSF) at their core. The framework incorporates the relevant policy tools, their individual effects, and interactions, and captures the channels of financial risk-taking and their implications for global and domestic financial conditions. Such an MFSF includes monetary policy to ensure macroeconomic stability and assist with financial stability, fiscal policy to guarantee fiscal sustainability and limit cyclical economic fluctuations, and macroprudential policy to complement monetary and fiscal policies by strengthening the resilience of the financial system and limiting the buildup of financial imbalances. Research is underway to develop such models, but considerable scope for further work in this area exists.