Emerging Markets

ECON 2024
 Definition
• Defined as countries engaged in restructuring
their economies along market lines
• Largest emerging markets:
• China, India, Indonesia, Brazil, Russia
 Characteristics
• Large population
• Large resource base
• Large markets
• Economic reform – to transition to market
economies
• High rates of economic growth
 Impact on world economy
• Increasing participation in management of
international economic system
• Increased trade and investment with
developing countries
• Increased investment in developed countries
(shift from dependence to interdependence)
• Helping to drive growth in other countries-
e.g. China major consumer of commodities
 China
• China began economic reform in 1978
• Leader- Deng Xiaoping
• China had to “choose between distributing
poverty under the old system and distributing
wealth under a new system”
• “To be rich is glorious”
 Chinese reforms
• Farmers allowed to own land
• Farmers allowed to sell their output in markets
• Gradual removal of price controls and export
subsidies
• Creation of special economic zones to attract FDI.
• Creation of high technology development zones
• Applied for WTO membership 1986, approved in 2001
 China and the global economy
• China’s low cost production of manufactured
consumer goods makes it difficult for
manufacturers in U.S and some developing
countries to compete
• Demand conditions in China affect international
commodity prices
• China’s large foreign exchange reserves invested
in developing and developed countries (and
financing of U.S budget deficit)
 China cont’d
• Large producer of pollutants – carbon dioxide-
implications for global warming
• Large domestic market provides
opportunities for foreign firms.
 India
• Reforms began in 1980s
• Response to lack of prosperity
• Permit system reformed to improve efficiency
• State owned enterprises privatized
• Trade liberalization
• Reduction in restrictions on FDI inflows
 India and the world economy
• India has comparative advantage in services
• Outsourcing of services to India has resulted in
job losses in some countries
• Opening of India to trade and investment –
opportunity for TNCs to enter market
• Indian firms increasing investments overseas.
 Russia
• Economic reforms implemented rapidly beginning in
1991
• Introduced market mechanisms for prices of goods and
services
• Creation of pensions systems
• Creation of legal infrastructure for contract enforcement
an dispute settlement
• Establishment of regulatory framework for financial
markets
• Privatization of state owned companies
 Russia cont’d
• Sharp reduction in budget deficit
• Introduction of new taxes (VAT)
• Results:
• Russian economy declined by 36 percent
between 1990 and 1996
• Privatization led to concentration of wealth in
the hands of a few cronies
 Russia vs China
• Economic reforms reduced economic growth
in Russia but not in China
• Reforms introduced gradually in China, Russia
used shock treatment
 Brazil
• Debt crisis in 1987 led to introduction of
reforms in early nineties:
• Trade liberalization
• Privatization
• Deregulation
• Promotion of foreign investment
• Abolition of state monopolies
 Brazil cont’d
• Real Plan introduced in 1994 to reduce
inflation- currency replaced by new currency-
Real
• Macroeconomic policies aimed at reducing
inflation
• Regulation of financial sector strengthened
• January 1999- floating exchange rate
introduced
 Brazil cont’d

• January 2003 President Lula da Silva gained power

• Economic reforms in Brazil accompanied by
measures to reduce poverty
• Share of population living in poverty declined
from 21 percent in 2003 to 11 percent in 2009
• Growth acceleration plan introduced in 2007 to
increase investment in infrastructure and promote
faster growth
 Brazil in world economy
• Economic power has facilitated stronger voice
in international affairs:
• Strong influence in Latin America-member
MERCOSUR
• South- South cooperation
• Promoting development of biofuel industries
in developing countries