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Sustainable Development – A need in emerging markets

Published in Investment Saturday, 27 September 2014 18:02

- Ananth Mishra-

One of the pressing issues that the economic and financial domain is experiencing is the internationalization phenomenon. There have been a few distinguishable countries that have entered the international economic market and have quickly outdone stronger competitors, yet their global performance invariably affects their domestic activity. China, India and Brazil are the most renowned countries to have risen in the international charts, but what seems worrying is how this reflects on their local markets. Engaging in transnational transactions, especially when one’s economy is on the rise and can be easily shaken, has its adjacent risks.

This is exactly why it is eminent to discuss this matter and assess whether the advantages of being well-placed within the international markets outweigh the dangers posed by the destabilization of domestic economy.
What we know
EMEs or Emerging Market Economies are characterized by fast economic growth, increased foreign investment, and increased international political clout. Fast growth is evidenced by strong economic data, such as rising gross domestic product (GDP), GDP per capita, trade volumes, and foreign reserves. Faster growth generally means higher profits for foreign investors, which encourages more foreign investment in a country, which, in turn, promotes economic growth.
Countries can attract foreign investors by pursuing sound macroeconomic policies and being open to international trade. EMEs are generally more open to international trade than other economies, including advanced economies. This openness is spurred initially by export-led growth models, but it functions to diversify the goods countries export. Some experts argue that diversification and general integration into the international economy help reduce the effects of sudden changes in global prices or other internal or external economic shocks, making the country more stable for investors.
Fast growth and high rates of investment often lead to increased influence on a regional and international scale. The level of international political clout varies from country to country, but EMEs generally are gaining power and influence internationally, especially compared to other developing countries. They are leaders in their respective regions, and are oftentimes responsible for representing the interests of that entire region in global economic affairs.
The term “emerging” suggests that EMEs have not achieved a level of development on par with advanced economies. Some most important factors that contribute to the status of an EME are policy failures, weak institutional structures, and inequality. Policy failures could come in forms of uncontrolled spending and protectionist trade regimes. Bad policy and weak institutional structures raise transaction costs for foreign and domestic investors. Inequality among a country’s population hinders overall economic potential causing many negative side effects that can affect an economy (e.g., more crime), the inefficiency it causes in investment by denying parts of the population the funds needed to start potentially lucrative businesses or otherwise invest in their communities is among the most important.
A particular case of EMEs is represented by the BRIC countries. The BRIC countries label refers to a select group of four large, developing countries (Brazil, Russia, India and China). The four BRIC countries are distinguished from a host of other promising emerging markets by their demographic and economic potential to rank among the world’s largest and most influential economies in the 21st century. Together, they comprise more than 2.8 billion people or 40% of the world’s population, cover more than a quarter of the world’s land area over three continents, and account for more than 25% of global GDP.
The first country that comes to mind when discussing EMEs is China. The socialist market economy of China is the world’s second largest economy by nominal GDP and by purchasing power parity after the United States. It is the world’s fastest-growing major economy, with growth rates averaging 10% over the past 30 years. China is also the largest exporter and second largest importer of goods in the world. China is the largest manufacturing economy in the world, outpacing its world rival in this category, the service-driven economy of the United States of America.
As the Chinese economy is internationalized, so does the standardized economic forecast officially launched in China by Purchasing Managers Index in 2005. Most economic growth of China is created from Special Economic Zones of the People’s Republic of China. China is leading the shift in the centre of economic gravity towards Asia, and the economic prospects of economies throughout the world have become increasingly dependent on sustained demand in the Asian giant.
China’s economic growth in the past four decades can be divided into two periods: the pre-reform era (before 1979) and the post-reform era (after 1979). The year 1979 represents a milestone in terms of economic performance, development strategy and the pattern and nature of growth. The Chinese economy in 1978 was generally pictured as “on the brink of disaster” due to its various imbalances as well as problems of low productivity growth and poor incentives. The major imbalances included an emphasis on capital construction and neglect of agriculture and light industry; emphasis on production and neglect of people’s livelihood; emphasis on production and neglect of distribution; and emphasis on high accumulation and neglect of efficiency and consumption. These imbalances caused high urban unemployment, widespread rural poverty and sluggish productivity growth.
Foreign trade and investment have played a crucial role in the growth of the Chinese economy. Its foreign trade currently ranks 11th in the world economy. China has also recently achieved foreign exchange reserves of about $90 billion, ranking second in the world after Japan. Production and employment structures have shifted in favour of industry and services, suggesting a continuation of the industrialization process.
With good subsequent economic growth during the pre-reform era, China’s human development in terms of life expectancy, infant mortality, income distribution, reduction of poverty, etc. had seen great improvement since the establishment of the PRC. However, its achievements were flawed by the serious absence of such essential human choices as political and economic freedom. The economic reform since 1979 has tremendously increased the Chinese people’s economic choices, but the development of other elements of human development such as basic education and health care has stagnated. This mixed performance of human development can be explained by the change from highly centralized institutions to decentralized institutions, unbalanced effects of reform policies, and governance with increased corruption and reduced state commitment towards improving the well-being of the poor. In the decentralized institutions, the central government is unable to provide enough basic health-care and primary education due to its own weak capability to mobilize resources, while local governments are likely to ignore issues of education and health due to lack of commitment and incapability. Market institutions adversely affect these social issues while social institutions are still too weak to play an important role in the provision of basic education and health services. In this regard, although the decentralized institutions have brought great opportunities to the Chinese people for higher economic growth, their undeveloped aspects seriously impede translation of growth to human development. The reform policies have unbalanced impacts. Rural industrialization, that was designed with the intent to generate employment, making China able to absorb a large amount of the surplus labour, has had few negative impacts on human progress except for its the effect on the environment. By contrast, fiscal policy that places a smaller share of central government expenditure on the social sectors has had a destructive impact on education and health care. In areas where the market fails, the state fails to resume the leadership; as a result, social progress has slowed down. The quality of governance of China has been negatively affected by the lack of accountability and transparency and by reduced state commitment towards improving the well-being of the poor. As a result of the lack of accountability, corruption is significantly increasing with negative impact on income distribution and social welfare. The lack of transparency makes Chinese people unable to have freedom of speech, press and assembly, and unable to develop stable means of political participation. With increased economic growth, the Chinese people’s economic choices have been greatly increased. However, the undeveloped parts of institutions, negative effects of reform policies and governance with increased corruption and reduced commitment towards improved well-being of the poor that impede the complete translation from economic growth to human development should not be ignored. The failure of basic education and the reduced success of primary health services suggest that the central government should not retreat from the basic administrative and financial supports of basic education and a rural health-care system. It should consistently endorse education-for-all and health-for-all policy, and collect enough resources to guarantee the funds for basic education and health care for all people, especially for the poor.
Another country which fits the profile of EMEs is India. India is the world’s 12th largest economy. India’s economic development strategy immediately after Independence was based primarily on the Mahalanobis model, which gave preference to the investment goods industries sector, with secondary importance accorded to the services and household goods sector (Nayar, 2001). Any increase in planned investments in India required a higher level of savings than existed in the country. Because of the low average incomes in India, the needed higher levels of savings had to be generated mainly by restrictions on the growth of consumption expenditures.
Therefore, the Indian government implemented a progressive tax system not only to generate the higher levels of savings, but also to restrict increases in income and wealth inequalities. In addition, the Indian economy was sheltered from foreign competition through use of both the “infant industry argument” and a binding foreign exchange constraint. Imports were limited to goods considered essential either to the development of the economy (such as raw materials and machines) or to the maintenance of minimal living standards (such as crude oil and food items). It was further decided that exports should play a limited role in economic development, thereby minimizing the need to compete in the global market place. As a result, India became a relatively closed economy, permitting only limited economic transactions with other countries.
Over time, India created a large number of government institutions to meet the objective of growth with equity. In the late1950s and 1960s, the government established public sector enterprises in such areas as production and distribution of electricity, petroleum products, steel, coal, and engineering goods. In the late 1960s, it nationalized the banking and insurance sectors. To alleviate the shortages of food and other agricultural outputs, it provided modern agricultural inputs to farmers at highly subsidized prices (World Economic Indicators, 2001). In 1970, to increase foreign exchange earnings, it designated exports as a priority sector for active government help and established, among other things, a duty drawback system, programmes of assistance for market development, and 100% export-oriented entities to help producers export (Government of India, 1984). Finally, from the late 1970s through the mid-1980s, India liberalized imports such that those not subject to licensing as a proportion to total imports grew from 5% in 1980-1981 to about 30% in1987-1988 (Pursell, 1992). However, this partial removal of quantitative restrictions was accompanied by a steep rise in tariff rates. This active and dominant participation by the government in economic activities resulted in the creation of a protected, highly-regulated, public sector-dominated economic environment.
India’s environment of regulated economic development led to the formulation of policies that were concerned with both macroeconomic and microeconomic aspects. The policy of price ceilings, along with the quantitative restrictions on production and consumption, led to an economic environment ripe for corruption. Also, the lure of higher profits led producers and sellers to have little concern for quality such that many deliberately produced and sold inferior quality products, and to resort to the creation of artificial shortages by not releasing to the market all of the products that were available for selling. Another example of a harmful policy was the control of ownership of private capital by Indian nationals in India and also by foreign nationals doing business in India. Such policies, coupled with high individual and corporate income tax rates and high customs and excise duties, led to outcomes similar to those resulting from price ceilings namely, increased corruption and higher transaction costs. One of the more recent microeconomic approaches to economic growth in India is the promotion of entrepreneurial activities which have helped generate a wide range of economic benefits, including new businesses, new jobs, innovative products and services, and increased wealth for future community investment.
The Indian economy provides a revealing contrast between how individuals react under a government- controlled environment and how they respond to a market-based environment. The evidence presented here suggests that recent market reforms encouraging individual enterprise have led to higher economic growth in that country. Specifically, reliance upon a free market, with its emphasis upon individual self- interest in survival and wealth accumulation, can yield a wide range of economic benefits. In India those benefits have included, among other things, increased economic growth, reduced inflation, a smaller fiscal deficit, and higher inflows of the foreign capital needed for investment.
When one travels today in India, the most overwhelming impression one sees is the immense inequality. In India, the contrast between luxury hotels, modern office-towers and congested super-highways filled with men and women in the latest western fashions and the immediately surrounding fetid slums, crumbling side-streets, and traditionally-clothed barefoot or sandaled families thronging the streets and byways is stunning. It is clear that growth is being halted by the inadequacy of infrastructure and the vast waste of human potential in the hundreds of millions of poorly educated underemployed men and women not sharing in globalization-led growth. A study by Baldev Raj finds that, whatever the consequences of globalization elsewhere in the developing world, the case of the critics has little merit when examined in relation to the Indian experience. The Indian case does not bear out the predictions of the critics.
1. Instead of economic stagnation, India has seen acceleration in its average annual rate of economic growth, from 3.4 percent in the pre-globalization period to about 6 percent. That figure may soon reach 7 percent.
2. Instead of deindustrialization, there has been industrial growth and, indeed, acceleration in the industrial growth rate.
3. Instead of denationalization, business in India is now more competitive and is venturing forth into the global market. Increased imports and the entry of foreign multinationals have not swamped it.
4. Instead of economic destabilization, the globalization of India’s economy has led to fewer economic crises.
5. Instead of impoverishment, India has seen a long and unprecedented period of welfare enhancement. The period before globalization featured high levels of poverty.
A study shows that India has been a significant beneficiary of the globalization process. The policy conclusion that flows from the experience is that India should, in general, be more open to globalization in the interest of sustaining the acceleration in growth and, therefore, the welfare of its people. The agenda for reform to this end is well-established in the reform community. What is required is more energetic action to implement it, but there are, of course, constraints in doing so that are built into the larger political system.
Lastly, we are referring to the case of Brazil. Brazil’s economic freedom score is 57.7, making its economy the 100th freest in the 2013 Index. The foundations for long-term economic development remain fragile in Brazil due to the absence of an efficiently functioning legal and regulatory framework. The state maintains an extensive presence in many sectors, and the legacy of decades of central planning is a substantial tolerance for state meddling in economic activity, even where it has demonstrably failed. Despite some progress, corruption continues to be pervasive.
Progress with market-oriented reforms has been uneven. The burdensome regulatory environment discourages private- sector growth and hampers realization of the economy’s full potential. Increasing inflationary pressure poses a risk to overall macroeconomic stability. Business confidence has floundered, with foreign investments declining about 40% in the first half of 2012 .
Brazil is the world’s fifth-largest country in terms of land mass and population, and its almost 200 million people are heavily concentrated on the Atlantic coast. Its democratic constitution, adopted in 1988, ushered in an era of economic reform and more responsible monetary policy that broke the back of chronic hyperinflation.
In 1989, the president adopted a liberal international trade regime (i.e., lower barriers to imports) and privatized many state-owned businesses. They introduced comprehensive plan which introduced a new currency (the real), de-indexed the economy (prices were no longer pegged to the rate of inflation), tightened monetary policy, introduced a managed floating exchange rate regime, and increased taxes. The launch of the Real Plan was the first time Brazil showed the economic discipline necessary to attract the foreign capital and investment that has propelled Brazil’s growth. It was also successful in raising the standard of living throughout the country by lowering inflation from 45% in 1994 to less than 1% in two years. Lower inflation has the practical effect of raising real wages by reducing prices, and therefore increasing the buying power of wage earners.
During financial crises
Brazil raised interest rates, which makes currency speculation less profitable. As a side effect of raising interest rates, industrial production fell as domestic consumption faltered due to higher borrowing costs. Lower industrial production meant Brazil’s exports decreased, and therefore its ability to pay for imports without borrowing declined as well. To pay for necessary imports, Brazil had to borrow and increase its debt even further .The crisis did not cause a long-lasting disruption of the flow of foreign capital into Brazil. Cardoso’s macroeconomic policies had proven successful—public sector revenues were rising, which gave Brazil more money to pay its debts, privatization reduced the losses borne by the state, and increased agricultural production helped keep food prices stable—all of which helped blunt the effect of the crisis.
Brazil’s strong performance through the global financial crisis is partially attributable to the fact that its banks were and still are less exposed to the U.S. mortgage-backed securities market where the crisis started. Brazil also benefited from a low unemployment rate and less dependence on trade with the developed world. Having a diversified profile of customers made Brazil less dependent on demand from the developed world, meaning the demand for Brazilian goods stayed high even as developed world demand dropped precipitously.
Four policies have played, and continue to play, an important role in pushing Brazil forward:
1. Its emphasis on building the infrastructure necessary to support a diverse and fully developed economy
2. A commitment to reducing poverty and inequality to ensure the maximum number of citizens can contribute to economic growth,
3. An increasing openness to the world
4. Its movement to reform domestic institutions to foster efficiency.
As is the case with explaining growth, there is no one thing that explains why Brazil is not “there” yet. The most commonly mentioned problems Brazil faces are:
Policy failures that inhibit economic activity,
A cumbersome regulatory and legal framework that limits efficiency
Excessive inequality that prevents full and equal economic participation for all Brazilians
External factors that inhibit Brazilian economic interests.
Brazil has come a long way since its days as home to the Western Hemisphere’s lowest GDP per capital. Brazil is perhaps best positioned to pursue domestic growth, as its ethanol-fuelled economy and still-abundant land offer opportunities for its own population to improve their status.
In spite of its recent success, Brazil’s goal of becoming an advanced economy has not yet been met. It must continue to diversify its economy, reduce regulatory and legal inhibitors to efficiency, and fight poverty through social spending and education. They must also find a way to balance the country’s budget without slowing sustainable growth. In spite of all these issues, Brazil is still capable of becoming an advanced economy, and certainly deserves its position among the BRIC countries.
Current Day Situation
As it can already be inferred from the background information, China, Brazil and India have emerged despite their predicted shortcomings and have had a better outcome than most economists foretold. Although they followed different paths in their ascension, individually and as BRIC countries, they integrated well into the global market economy. However, while successful EMEs so far, they are still susceptible to downfalls. Their financial rise on an international scale did not leave their domestic economy unscathed. China put many of its local activities on hold in order to be able to westernize its economy, which can only prove that its domestic political policy conflicts with its global economic outreach. India rose beautifully against all odds, but its people are the subjects of crucial discrepancies: international well-being, domestic poverty. Contrasts are more than visible internally, where Indian luxurious resorts coexist alongside with impoverished establishments. Brazil is not far behind either: the internationalization of its economy comes at the cost of a swift in political ruling. Accusations of corruption and of a proper legal framework for sustainable development are frequent and threaten to hinder its success. The present situation is tricky and everything can tip the balance downwards, which is why China, Brazil and India have to create strong and efficient policies.

Last modified on Monday, 29 September 2014 19:04
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