The Emerging market economies and the Great Recession

The Emerging market economies and the Great Recession Ahmad Seyf Regent’s University London 26 March 2015 University of Cambridge

- Introduction: - The economics and Politics of the Great Recession - Bubbles may look nice, but they are dangerous - Emerging economies and the Great Recession - Conclusion

INTRODUCTION: “…Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. . . ” (Keynes, 1936, p. 142)

Neoliberalism: - Perpetual international imbalance - Debt-led Consumption in Deficit countries - Export led growth model in Surplus economies.

- The economics and Politics of the Great Recession - Two phases - Feb 2007 with HSBC and others facing life difficult. - Sept. 2008, The Lehman Brothers - The first phase led to a “ financial crisis” but in post Lehman this become an economic crisis, i. e. the Great Recession.

- Conversion of ‘Private sector’ debt, into ‘ public sector’ debt. - Sovereign debt crisis - Globalisation of Austerity. - Little growth, more, recessionary pressure.

- This economic mismanagement has a longer history …. The 1970 s, the Great Stagflation - Three developments: - A return to pre-Keynesian economics - Globalisation encouraged - Financialisation - The Great Recession = failure of this model.

- The root of the problem goes to the 1970 s - The rate of profit falling, and over-capacity emerging - 1 - old and less productive capital stock should have been destroyed and replaced by new investment. - 2 - In the UK and USA, the first part done, but the second. - A process of deindustrialisation set in. - 3 Outsourcing and a restructuring of global manufacturing - 4 - Reorganisation of labour process

LP M C P C’ M’ MP M M’ - Bubbles may look nice, but they are dangerous - A Statistical recovery and a Human Recession

Figure 1: The Great Recession in Global GDP and Trade

Figure 2: Annual Average economic growth, 19952013 (GDP in constant prices)

Figure 3: Annual GDP growth in emerging economies, 2000 -2014

- Decoupling - Re-coupling: Post Lehman panic - Re- decoupling, differentiation among emerging market economies - Initial impact rather weak: why? - Balance sheet not exposed to toxic assets - Little use of derivatives - Little use of credit default swap The impact of the Great Recession is different

Capital inflows stopped International Credit seized up Those with big foreign debt or large deficits were very badly affected - Exports fell - Given the Recession, devaluation did not help to expand exports to get out. Income in foreign currencies declined. - Global GDP down by 6% - Output in Emerging markets down by 4% - This is the average, Europe fell more and Asiacontinued to have positive growth

There was a strong belief that BRICS could act as a new engine for global recovery and growth I do not share this view: These economies, in my view, are structurally weak and dependent, - Not enough was done to enhance domestic demand - Unequal income and wealth distribution like the rest of the world. - In the case of China, too much investment and for India, too much poverty

Table 1: Workers Remittances Table 2: Capital Flows, Export Financing and International Reserves

The overall policy of Bubble creation is being repeated in the emerging market economies China is the biggest and most dangerous example but it is not the only one, South Africa Thailand Turkey, just to name a few. Two reasons for the bubbles in the emerging markets Deeper Recession in the West Less demand for goods

- Hence little motive to invest in the real sector - A kind of ‘ Financial Outsourcing’ - Speculative capital can do nothing but speculate - Where? - Bonds markets - Share markets - Real Estates - Let me say a few words about China

China India South Korea Indonesia

Figure 4: Contribution to World GDP Growth

Figure 5: China’s debt, 2000 -2014

Figure 6: China’s Investment Rate

Figure 7: China’s Property Bubble

- Conclusion - Fundamental change of direction - Bubble, crisis, bubble - Glass-Steagall - Tobin Tax - Redistribution of Income and wealth