Developing World: Importance steadily moving up

Dr B K Mukhopadhyay

W hither the developing world? The question of undermining has been steadily going down – immense potentials, least exploration – the future lies here indeed!

DRC [Democratic Republic of Congo] is one of the richest countries in the world in terms of tural and mineral resources. The land is so fertile, it could be one of the world’s largest exporters of fruit and vegetables (at the moment it is one of the largest importers). People say that you can almost just throw seeds on the ground and they will grow, yet some somewhere between 50-70% of the population doesn’t have enough food to eat and is malnourished. In terms of mineral wealth, in some parts of the country the story goes that you can pick up a handful of earth and almost sift diamonds and precious metals through your fingers. It has water in abundance; you can sink a well almost anywhere, yet the majority of the population has no access to safe, clean drinking water.

Current trends indicate that the global economic recovery continues, albeit unevenly, in as much as while growth is a bit rapid in many emerging economies (BRICS), it still remains fragile in most advanced economies. In fact the global economy continues to improve amidst ongoing policy support and improving fincial market conditions. As the latest trends indicate, world trade continues to pick up gradually, and in many developing regions the trade volume has almost returned to the pre-crisis levels owing to the robust growth in some large developing economies, mainly India and Chi, and the restocking of inventories.

BRICS, coined by US investment bank Goldman Sachs to describe the five key emerging economic powers, has been predicted to account for an increasingly greater share of the world economy, which accounts for around 22 per cent of the global economy, compared to 16 per cent a decade back. Though Russia (the world’s largest gas and oil producer) fell into its worst recession in the very recent past, yet the economy is expected to grow in 2012, mainly by a rebound of oil prices. While dollar-denomited assets were held heavily by Chi with the US Treasury, Brazil, with the ability to become a major player tomorrow in the world economy after locating huge deep sea oil reserves, and which slipped into recession a couple of years back, rebounded and grew thereafter. India, beset with high food prices-driven inflation that even exceeded double digit in May 2010, is expected to grow by 8 per cent this year backed by consumer and government spending.

So, it is not an exaggeration to say that the developing economies hold the fort under the stated facts and circumstances. The recent trends in Sri Lanka may be seen in details. Fitch Ratings has affirmed Sri Lanka’s Foreign and Local-Currency IDRs at ‘BB’, denoting outlook for both ratings is stable. The Country Ceiling has also been affirmed at ‘BB’, and the Short-Term Foreign Currency IDR at ‘B’. The ratings reflect Fitch’s view that the authorities have taken the appropriate action to correct recent pressure on the balance of payments and place it on a more sustaible trajectory. Given the state of Sri Lanka’s exterl finces as well as a heavy exterl debt refincing schedule through to 2013, the authorities’ ability to persist with policies that address existing macroeconomic imbalances and improving exterl liquidity is crucial. Accordingly, “…although Sri Lanka was able to record real GDP growth over 8% for the second consecutive year in 2011, such economic performance, coupled with policy missteps, resulted in the current account deficit rapidly widening to 7.8% of GDP from 2.2% in 2010. This, in conjunction with deterioration in the exterl economic environment and limited currency flexibility, led to balance of payment pressures and in turn a sharp depletion of foreign exchange (FX) reserves to USD 5.8bn (3.4 months of imports) in January 2012 from USD 8.1bn (equivalent to 5.7 months of imports) in July 2011”.

It has rightly noted that successful implementation and persistent application of policies aimed at improving exterl liquidity, including further monetary tightening if required, would support the ratings. Concerted efforts to persist with fiscal consolidation, by both enhancing the tax revenue base and ratiolizing expenditure, in tandem with lowering public debt, would be supportive of Sri Lanka’s ratings. It has been a fact that in the near-term, certain policy measures have resulted in adverse risks to both growth and inflation that have the potential to impact policy consistency. Due to the authorities’ pro-growth bias and the fragile balance of payments, Fitch believes developments in the coming months warrant close monitoring. The overall position cannot be said to be highly satisfactory, but silver lining must not be lost sight of. The fiscal deficit (including grants) rrowed to 6.9% of GDP in 2011 from 8% in 2010, and public debt declined to 78.5% of GDP from 81.9%. Further simplification of the tax system could bolster measures announced in previous budgets and aid in the attraction of greater foreign direct investment inflows. Measures implemented by the Central Bank of Sri Lanka and the government since February 2012 have tightened monetary conditions and could help Sri Lanka to return to a more sustaible GDP growth trajectory over the long-term.

Economies like Bangladesh, Vietm, among others, are also steadily coming up.

The latest trend has been that new fincial plumbing are in the making. London and New York are not about to lose their spots as the world’s leading centres, and they are being increasingly challenged by emerging market upstarts in a potentially lucrative area – magement of fund being cut well away from the traditiol centres. If the recent trends are any indication, spur of growth of fincial centres in the fastest-growing economies would be there in view of prominent factors like rising trade between emerging economies, cross-border mergers, and acquisition by Indian and Chinese companies as well as move by developing world businesses to raise capital in each other’s markets.

Capital is much more efficiently deployed in comparatively less risky emerging markets where the returns are higher.

The intra-emerging markets movements of funds are quite evident – flows between Africa and India, India and Chi, and India and Korea have been on the rise. The ongoing fact remains that with developed economies, minnows have been struggling to keep their heads above water, and with emerging markets thriving, more and more fincial deals are being cut away from the traditiol centres. Singapore is challenging Switzerland for the world’s wealth magement business, while Hong Kong, which led the world in IPOs last year, has been an upcoming centre as an equity hub for Asia’s growing resources companies and Shanghai is coorditing the fincial resources driving Chi’s private sector.

At the global level, these are being considered as seeds of a new model, being the one in which the savings of emerging markets flow to the areas showing highest growth rates and not to the US and Europe. Chinese investment is surging in Africa and SE Asia, while Russian and Central Asian resources companies are making a beeline to get listed shares in Hong Kong.

In fact, the foundations for a worldwide recovery are not solid as the sovereign-debt crisis would deepen. Euro zone remains shaky because of weak Greece, Spain, Hungary and Portugal. No wonder, the global economy risks are sliding back to contraction. Most central banks know that they will at some point have to exit from the accommodative monetary policy. Though a lot is said about this, action has been rare in view of the fragile global recovery. Any major change in interest rate is not discernible till stable recovery.

(The writer, a noted Magement Economist, an Intertiol Commentator on Business and Economic Affairs and Principal, Eminent College of Magement and Technology, Kolkata,  can be reached at m.bibhas@gmail.com)