2010.03.24 17:07:36

Sharky

2009 saw markets being flooded with liquidity to boost the economies worldwide as an incentive to resume lending by the banks. Governments around the world launched massive stimulus packages to keep their economies going, and the markets that fared well were mostly emerging markets, why?

As Joseph Stiglitz points out, during the good times, governments from emerging markets were putting money aside for potential rainy days. Basically, they learned from their past mistakes, such as the Asian crisis, the Brazilian crisis and the Argentinean crisis (among others, such as the Tequila crisis in Mexico) and they were more prepared than developed countries.

Once the rainy days arrived, they were prepared to do what was necessary to keep their economies going. They invested heavily in economic stimuli, launched infrastructure projects, etc. The surplus money these countries had saved during the boom years has now been put at work and the emerging markets are resisting the downturn.

This is especially true for China. Its stimulus package was worth US$585 billion, which is 65% of the American package for an economy that is five times smaller. No wonder the Chinese economy is performing well, pulling its neighbors with it.

For emerging countries in general, on top of the stimuli, they saw massive flows of foreign investments since they were better prepared to counter the recession and achieve growth, and these investments fueled growth even more. Indeed, investments drive growth, and foreign investments make the currency appreciate, making it even more attractive to foreign investors. However, careful with the opposite effect, once foreign investments reverse, much can go wrong very fast. Globalization has accelerated the speed of foreign investments, with huge masses of money flowing in and out rapidly following greed and fear. 

The growth in the world is therefore driven by emerging markets, and it will be as long as their reserves allow them to do so. With a little luck, their reserves will last longer than the recession.

economy | growth | Stiglitz | emerging markets