Emerging Markets And Developing Economies Research Articles

Reprint of “Unveiling the dance of commodity prices and the global financial cycle”

We examine the impact of commodity price changes on the business cycles and capital flows in emerging markets and developing economies (EMDEs), distinguishing between their role as a source of shock and as a channel of transmission of global shocks. Our findings reveal that surges in export prices, triggered by commodity price shocks, boost domestic GDP, an effect further amplified by the endogenous decline of country spreads. However, the effects on capital flows appear muted. Shifts in U.S. monetary policy and global risk appetite drive the global financial cycle in EMDEs. Eased global credit conditions, attributed to looser U.S. monetary policy or lower global risk appetite, lead to a rise in export prices, higher output, a decrease in government borrowing costs, and stimulate greater capital flows. The endogenous response of export prices amplifies the output effects of a more accommodative U.S. monetary policy while country spreads magnify the impact of shifts in global risk appetite.

Inefficient shocks and optimal monetary policy

Real disturbances that lead to trade-offs between inflation and output gap stabilization have not been studied much in the context of monetary policy settings in emerging markets and developing economies (EMDEs). We identify market price support present in the agriculture sectors of the EMDEs as inefficient shocks that lead to such trade-offs. Using a three-sector new Keynesian dynamic stochastic general equilibrium model, we show trade-offs between core-inflation and output gap stabilization under discretionary and commitment policies. This result departs from the popular viewpoint, stating that the strict core-inflation targeting is an optimal monetary policy for EMDEs susceptible to relative price changes.

Unveiling the dance of commodity prices and the global financial cycle

We examine the impact of commodity price changes on the business cycles and capital flows in emerging markets and developing economies (EMDEs), distinguishing between their role as a source of shock and as a channel of transmission of global shocks. Our findings reveal that surges in export prices, triggered by commodity price shocks, boost domestic GDP, an effect further amplified by the endogenous decline of country spreads. However, the effects on capital flows appear muted. Shifts in U.S. monetary policy and global risk appetite drive the global financial cycle in EMDEs. Eased global credit conditions, attributed to looser U.S. monetary policy or lower global risk appetite, lead to a rise in export prices, higher output, a decrease in government borrowing costs, and stimulate greater capital flows. The endogenous response of export prices amplifies the output effects of a more accommodative U.S. monetary policy while country spreads magnify the impact of shifts in global risk appetite.

Networking Increases the Probability of Women’s Start-Ups in EMDEs

In emerging markets and developing economies (EMDEs), entrepreneurship and self-employment, particularly among women, play a pivotal role as a means of livelihood. Unfortunately, the share of women participating in these activities is significantly lower compared to men, which has a negative effect on both the development of these countries and gender equality. Usual programs that support women’s entrepreneurship are costly. We aim to explore the role of social networks for the entrepreneurial entry of women in EMDEs, as women can ‘help themselves’ through their development and activation. Our results, using GEM data for 53 low- and middle-income countries for the period 2011–2018, revealed that an entrepreneur on the women’s social network increases the probability of their entrepreneurial entry by 3.3 percentage points. Our results also suggest that social networks represent an important source of information that enhances the determination of women to take advantage of good business opportunities, increases the positive effect of self-assessed start-up skills on entrepreneurial entry, and raises awareness of business risks. Based on these results (confirmed by robustness and causality checks), we can recommend supporting networking between entrepreneurs and women by targeted policy measures.

Do climate risks influence foreign direct investment inflows to emerging and developing economies?

ABSTRACT Foreign direct investment (FDI) inflows are considered to be an important source of private financing for several emerging markets and developing economies (EMDEs). However, the high susceptibility of these countries to climate change impacts vis-à-vis their developed counterparts may reduce their attractiveness as a favourable destination for FDI inflows. EMDEs with significant exposure to physical climate risks present a higher incidence of financial risks for foreign investors, which may in turn discourage them from locating themselves in such jurisdictions where their profitability and operations could be jeopardized by climate disasters. Given this context, we empirically investigate how physical climate risks influence FDI inflows to 68 EMDEs using data from over two decades, from 1995 to 2017. We contribute to an emerging body of literature that assesses the impact of climate risks on macro-financial variables by focusing specifically on FDI inflows. Although we abstain from making strong causal claims in our paper, we account for endogeneity concerns extensively and our empirical results show that higher climate risks adversely impact FDI inflows to EMDEs. However, we find these negative effects can be mitigated to a significant degree by strengthening financial sector development in the host country, as it increases their capacity to absorb some of these climate risks more effectively. Key policy insights Emerging markets and developing economies (EMDEs) that are more vulnerable and exposed to physical climate risks tend to be less attractive destinations for FDI inflows. Negative effects of physical climate risks on FDI inflows tend to be mitigated in EMDEs with a high degree of financial development. Well-developed, deep, and inclusive financial markets give EMDEs the capacity to absorb and manage various financial risks including those arising from climate change impacts.

Gender bias in access to trade credit: Firm-level evidence from emerging markets

How do small and medium-sized enterprises (SMEs) led by women fare with respect to obtaining trade credit? While both trade credit and bank credit have long been viewed as potentially important financing instruments for SMEs, there is considerable ambiguity in the existing literature as to whether they complement or substitute each other from the perspective of credit-seeking SMEs. This is even more important for Women-Led Businesses (WLBs) in emerging markets and developing economies (EMDEs) who tend to face higher severity of credit constraints relative to their male counterparts. Given this context, using firm-level data on 95 EMDEs over 2009–2020, we contribute to the literature on gender bias and credit access by examining three specific questions: First, is there a gender bias in obtaining inter-firm trade credit? Second, if there is one, can those WLBs with access to traditional bank finance use it as a signal to obtain trade credit? Third, how does this relationship hold for SMEs that are women-led? After tackling potential endogeneity bias, our empirical findings show that WLBs are less likely to obtain inter-firm trade credit relative to their male counterparts, although we observe that this bias tends to disappear when WLBs have received an institutional source of financing. We establish robustly that bank credit can act as a signaling device enabling the accessibility of inter-firm trade credit, suggesting a complementary relationship between trade credit and bank credit for WLBs.

The Effect of Financial Development and MFI’s Characteristics on the Efficiency and Sustainability of Micro Financial Institutions

The Micro Financial Institutions (MFIs) have been touted as development strategies for Emerging Markets and Developing Economies (EMDEs) which merits research into the effect of financial development on the efficiency and sustainability of the MFIs. The Efficient and sustainable MFIs significantly paved the way for the economic development of a country particularly in developing countries. Surprisingly there are very rare studies that examine the nexus of financial development, MFIs efficiency, and sustainability. Also, these studies are confined to the impact of financial development either on the efficiency or sustainability of MFIs. Addressing this gap, the study attempts to explore the country-specific and MFIs-specific factors which significantly affect the efficiency and sustainability of the MFIs. For this purpose, the study first determines whether financial development contributes to the efficiency and sustainability of MFI. Secondly, the effect of MFIs’ specific characteristics such as credit risk, market risk, liquidity risk, lending strategy, Development Financial Institutions (DFIs) funds management, financial outreach, and poverty alleviation on the efficiency and sustainability of MFIs. The study has been conducted for Bangladesh, India, and Pakistan consisting of a panel data set of 12 MFIs over a period spanning from 2008–2018 using Stochastic Frontier Analysis and Cobb Douglas production function regression analysis. Overall empirical analysis reveals that financial development has significantly affected the efficiency and sustainability of the MFIs. While specific characteristics such as poverty alleviation and DFIs funds management have been shown to improve MFIs efficiency whereas an increase in credit risk, lending strategy, and market risk decrease MFIs sustainability and liquidity risk along with an increase in financial outreach leads to a decrease in MFIs efficiency. The directions and magnitudes of the findings suggest the stakeholders for all three countries for the significant direction leads to the efficiency and sustainability of MFIs. Moreover, future research could strive to understand the aspects of financial development which negatively correlate with the MFIs’ efficiency and sustainability such as stringent tax policies, creditor rights protection, and implementation of rules and regulations.

Worse than you think: Public debt forecast errors in advanced and developing economies

AbstractWe compile a unique dataset of medium‐term public debt forecasts for an unbalanced panel of 174 countries, based on International Monetary Fund (IMF) (for the period 1995–2020) and Economist Intelligence Unit (2007–2020) projections. We find that, on average, (i) there is a positive forecast error (FE) in the debt‐to‐gross domestic product (GDP) projections—that is, realized debt ratios are larger than forecasts; (ii) the FE increases with the projection horizon and is statistically significant and large—about 10% of GDP at the 5‐year horizon; (iii) the magnitude is similar between advanced economies (AEs) and emerging markets and developing economies (EMDEs) and in EMDEs is present irrespective of recessions while for AEs is associated with surprise recessions in the forecast horizon; (iv) FEs are not statistically different between IMF program and non‐program cases; and (v) positive FEs are only partly attributable to optimism about growth or the fiscal balance. Looking at the correlates of FEs, we find that FEs are larger during periods of recession, elections, fiscal stress, and high uncertainty and in countries with more economic volatility and public debt.

Three Reasons Why Blockchain Adoption in Healthcare is a Success in Africa and LATAM

The session ellucidates the economic, regulatory and cultural reasons why decentralized health is so much more successful in EMDE (emerging markets and developing economies) when compared to the US and EU.

Government expenditure and economic growth: does the role of corruption control matter?

This study focuses on analyzing the role of corruption control in the impact of government expenditure on economic growth. The data were collected from 16 Emerging Markets and Developing Economies (EMDEs) in Asia over the period 2002–2019. Generalized method of moments (GMM) and threshold model were used to estimate research models. The estimation results show that government expenditure and corruption control have a negative impact on economic growth. Specifically, the interaction between government expenditure and corruption control can reduce the level of the negative impact of these two factors on economic growth, which is an interesting finding of this study. Moreover, unlike previous studies, the threshold model estimation results reveal that corruption control has two threshold values of -0.61 and 0.01, respectively. Accordingly, EMDEs in Asia can make the positive impact of government expenditure on economic growth if corruption control is above the threshold value of 0.01.

Decision making under uncertainty for deploying battery storage as a non-wire alternative in distribution networks

The growing demand for electricity in emerging markets and developing economies (EMDE) is causing loading and congestion problems on distribution networks, particularly in urban locations, that adversely impact sustainable development and economic growth. Electric utilities in these economies face unique constraints regarding raising capital required to upgrade their congested networks. Battery storage has emerged as a non-wire alternative (NWA) to feeder upgrades. This article presents a flexible valuation framework for battery storage use in distribution networks and its application in the context of EMDE distribution network planning. We evaluate the value of storage as an NWA using a multi-stage decision making process that combines system optimization with Markov-decision processes (MDP) to identify the least-cost network upgrade strategy under demand growth uncertainty. This approach was applied to distribution feeders in Delhi, India, and results highlight the cost-effectiveness of battery storage to manage load growth while deferring network investments. Across the low, medium and high battery storage capital cost projections for 2030, we estimate that 18 to 29 GWh of battery storage capacity could be deployed to defer 11,752 to 15,914 km of medium voltage distribution feeder lines that are loaded at 60% or more of their ampere capacity in 2030, resulting in 12 to 16% capital cost savings. Interestingly, lowering storage capital costs does not always lead to increased storage deployment, due to network capacity constraints limiting opportunities for off-peak storage charging.

Crash risk and ESG disclosure

This study examines whether ESG (environmental, social and governance) disclosure influences firm-specific crash risk. Our main research hypothesis postulates that further information disclosure about ESG activities and risks mitigates crash risk by virtue of lower opacity and information asymmetry between managers and outside investors (e.g., by facilitating the assessment of environmental and social risks and concerns faced by the firm). The analysis covers a global sample of firms and the period spanning 2007–2019. Overall, our findings confirm that ESG disclosure attenuates (future) firm-specific crash risk. The results are robust to different model specifications employed by previous research. The impact of ESG disclosure on crash risk is concentrated on firms from developed countries; benefits from ESG disclosure appear to be more limited in firms located in emerging markets and developing economies (EMDEs). Finally, the results from the decomposition of the ESG disclosure indicator suggest that all three dimensions (environmental, social and governance disclosure) weigh crash risk downwards.

How does financial inclusion influence tourism demand? Empirical evidence from emerging markets and developing economies

ABSTRACT The extant tourism literature has identified a range of economic, geographic, political, and social factors impacting tourism demand. However, existing research has ignored how financial inclusion influences tourism demand, especially in the context of emerging markets and developing economies (EMDEs). We make an empirical contribution in this paper by being the first to distinctly capture the impact of financial inclusion on tourism demand for 85 EMDEs across the world, spanning the time-period of 1995–2017. Using various measures of financial inclusion, we find robust evidence to support our conjecture that higher financial inclusion strongly augments higher tourism demand in an unambiguous manner. Our results also show that the impact of financial inclusivity is not non-linear, implying that financial inclusion in its entirety plays a crucial role in supporting countries to generate more tourism revenues regardless of their levels of financial inclusion, which has significant policy implications.

The impact of stock market development on economic growth: A GMM approach

This study investigated the impact of stock market development (SMD) on economic growth (EG) among emerging markets and developing economies (EMDEs) in Asia. The data sample includes eight Asian EMDEs (China, Indonesia, India, Sri Lanka, Malaysia, the Philippines, Thailand, and Vietnam) from 2008 to 2019. These countries share several similarities, so this ensures reliability of the results. Regarding the analysis, the generalized method of moments (GMM) is used for the estimation. The results show that SMD exerts a positive impact on EG. This finding confirms the importance of SMD in improving efficient capital accumulation and allocation, and also allows investors to reduce risks and increase liquidity, which will boost EG. Further, the significant influence of domestic credit (DC), control of corruption (CC), and inflation (INF) on EG is also highlighted. These findings are valuable empirical evidence that greatly contributes to reinforcing the suitability of classical economic growth theories, especially the theory of endogenous growth. They are also essential to EMDEs in Asia. Accordingly, the EMDEs should develop effective policies to improve the stock market’s scale, which contributes substantially to the development of EG. Moreover, these economies need to pursue many appropriate policies in sync, such as stimulating SMD, improving governance effectiveness and implementing effective macroeconomic policies. Acknowledgment This study was funded by the Industrial University of Ho Chi Minh City (IUH), Vietnam (grant number: 21/1TCNH01).

Unintended Consequences of U. S. Monetary Policy Shocks: Dutch Disease and Capital Flow Measures in Emerging Markets and Developing Economies

Dutch disease is often referred as a situation in which large and sustained foreign currency inflows lead to a contraction of the tradable sector by giving rise to a real appreciation of the home currency. This paper documents that this syndrome has been witnessed by many emerging markets and developing economies (EMDEs) as a result of surges in capital inflows driven by accommodative U. S. monetary policy. In a sample of 25 EMDEs from 2000-17, U. S. monetary policy shocks coincided with episodes of currency appreciation and a contraction in tradable output in these economies. The paper also shows empirically that the use of capital flow measures (CFMs) has been a common policy response in several EMDEs to U.S. monetary policy shocks. Against this background, the paper presents a two sector small open economy augmented with a learning-by-doing (LBD) mechanism in the tradable sector to rationalize these empirical findings. A welfare analysis provides a rationale for the use of CFMs as a second-best policy when agents do not internalize the LBD externality of costly resource misallocation as a result of greater capital inflows. However, the adequate calibration of CFMs and the quantification of the LBD externality represent important implementation challenges.

External debt vulnerability in emerging markets and developing economies during the COVID-19 shock

PurposeThis paper aims to assess to what extent the COVID-19 shock is expected to create a debt crisis in emerging markets and developing economies (EMDEs) through two main questions: what are the main determinants of EMDEs external vulnerability? How vulnerable are EMDEs to the current COVID-19 shock compared to the global financial crisis (GFC)?Design/methodology/approachIn addition to a descriptive analysis of the determinants of EMDEs external vulnerability, this paper designs two sub-indices of overindebtedness and financial fragility that capture EMDEs’ distinct characteristics. The two sub-indices together illustrate the overall external vulnerability to the current shock.FindingsEMDEs are more vulnerable compared to the GFC era. Current debt threats arise mainly from debt architecture and the domination of volatile debt forms – primarily foreign currency-denominated bonds. Excessive fear of debt-deflation spirals after the GFC prompted EMDEs to expand their growth trajectories through a pattern of cheap private lending, loose measures and unmonitored fiscal expansion.Research limitations/implicationsConclusive post-crisis data are still unavailable.Practical implicationsEMDEs need to balance between temporary accommodative measures and a post-shock policy mix that prevent a deflation spiral without worsening indebtedness and financial fragility. Moreover, financial prudence in face of growing credit demand is crucial, particularly in light of the monetary expansion and injected liquidity.Originality/valueThe indices offer a framework for examining external vulnerability in EMDEs based on theoretical and historical revisions, IMF benchmarks and EMDEs specific debt characteristics. The indices components can be offered for empirical examination in separate future research once conclusive data become available.

Global Opportunity Index 2021: Focus on Latin America

this report uses the 2021 Global Opportunity Index and its different categories to provide an overview of Latin America's attractiveness to foreign investors, especially when compared to other emerging markets and developing economies (EMDE). It also offers an in-depth look at Latin America's global capital inflows (emphasizing their composition and evolution over the past decade) and the regions' cross-border M&A activity.

The Effect of Financial Deepening on Economic Growth, Inequality, and Poverty: Evidence from 73 Countries

Abstract This study aims to analyze the effect of financial deepening on economic growth, income inequality, and poverty rates in 73 countries during the period 1991–2015. Panel data regression and the interaction of dummy variables are used to measure the effect. The results indicate that financial deepening has positive effects on economic growth, but negative effects on income inequality and poverty rates; has significant effect on economic growth in advanced economies (AEs) and significant effect on income equality and poverty rates in emerging markets and developing economies (EMDEs). These findings show that countries have to be selective in developing their financial sectors as it either can have positive or negative effect.

A Gathering of Storms: The Impact of COVID-19 Pandemic on the Balance of Payments of Emerging Markets and Developing Economies (EMDEs)

The aim of this article is to track the impact of the COVID-19 pandemic crisis on EMDEs focusing on the performance of their Balance of Payments (BOPs). EMDEs are facing simultaneous hits in their BOPs as they try to cope with the domestic impact of the COVID-19 pandemic. Those impacts call for a rethinking of some aspects of the Keynesian Approach to BOPs while strengthening the view of international financial markets as hierarchical and volatile institutions. The external impacts can be summarized in four channels: (i) The unprecedented capital flight which has led to depreciation, scarcity of hard currency, debt problems and rising spreads in domestic currency; (ii) the fall in commodity prices, a major component of the export basket in most EMDEs; (iii) the contraction in global aggregate demand and supply, which together with lower commodity prices lead to reduced export earnings; and (iv) the decrease in remittances, a major supply of hard currency in several EMDEs and Low-Income Countries (LICs). The concomitant impact of these “storms” has limited the capabilities and efficiency of governments to adopt fiscal and monetary stimulus packages and to respond to the sanitary requirements. Government reactions are also clogged by the large weight of the informal sector in EMDEs.

“Humanizing” investments in the extractive industries in Africa through the IFC’s sustainability policies

International financial institutions face enormous challenges in Emerging Markets and Developing Economies (EMDEs). They finance infrastructure projects, manage vast investment portfolios, offer advisory services, and contribute to economic development in EMDEs. In the process, they areexposed to huge risks and face reputational damage if they act recklessly or have little or no regard for their projects’ adverse impacts on thirdparties. In the context of natural resource exploitation in Africa, the weak governance of environmental and social risks often results in devastating consequences for communities proximate to investment projects. Promises of infrastructure and social services, job opportunities and economic boom have only often delivered land grabs, forced displacement, cultural infringements, environmental pollution, conflicts, health disasters, misery and sometimes deaths. As calls for greater corporate scrutiny increase, investment project facilitators in the extractive industries like the International Finance Corporation (IFC) must respond appropriately. To preserve its reputation and long-term market access, the IFC needs to apply a higher degree of due diligence and sustainable business conduct that proactively treat risks and limit its exposure. With the rising number of complaints against IFC policy compliance, including projects tainted by scandals and the debarment of companies from accessing international finance, this article demonstrates that merely promoting sustainable investment policies on paper is inadequate. Using a human rights-centred approach to development project financing, the article critically assesses the extent to which the implementation of the IFC’s sustainability framework can practicably protect resource-rich communities, safeguard human rights and ensure sustainable development outcomes in Africa.
 Keywords: Extractive Industries, Human rights, Project Financing, IFC, Compliance, Sustainable Development.