Factors Affecting the Emerging Economies Research Paper

Executive Summary

Economies around the world are going through turbulent times. We are facing the worst crisis what some refer to as the worst since the ‘Great Depression. Fiscal and trade deficits are high, stock markets crumbling despite interventions from the central banking and financial institutions. Organizations once deemed as ‘safest’ are now belligerent to reduce their operating costs by cutting jobs, increasing unemployment. This could pose a serious threat for new emerging economies as they are also feeling the shockwaves of the financial crises. Governments, central banks, and financial institutions have also intervened injecting huge sums to stimulate the economy, enhancing limits of credit and payment to businesses, encouraging external investors, however, this has caused very small progress in the stabilization of the world economy, faced by dangers of nuclear wars, energy, and imminent food crisis, unemployment and others.

This paper is aimed towards discussing the current economic outlook globally today and factors imminent in the decline of economies. A part of this discussion will also shed light on how these factors are slowly gaining part in affecting the emerging economies and how these may affect them in the future.

With breakthrough technological advancements, businesses have entered into new arenas, so have the economies. Although globalization has played a larger role in connecting us to the farthest parts of the world, it also has some downsides. This would also be briefly discussed in this paper.

We will also discuss the opportunities offered by the globalization of economies as well as the threats facing the economic outlook.

Current Economic Trends

Economies around the world are facing a major slowdown in terms of growth, productivity, competitiveness, and trade, etc. In light of the tremors of global recession, the world growth has slowed down to 3½ percent in 2008 (HM Treasury UK, 2008) approximately, in wake of crises contributing to economic, political, energy, and other factors, primarily in wake of the current US financial crisis, trade deficits, fragile international financial markets, and weakening stock markets that pose a real threat of affecting the emerging markets. Policies have failed to result in diminished confidence and demand, in wake of increased energy requirements. Emerging economies, in wake of this crisis, have become more protected about their accumulated surpluses, feeling at risk to invest in dwindling economies, to support their operations. Only a minor few are supporting weakened economies indirectly through investments by international financial institutions.

At the same time when this crisis is pressing down on major world powers, it has now started to affect emerging markets and economies, such as China, India, etc, projected to represent 50% of the world’s GDP within the next 30 years (Stewart, 2007).

Factors Impacting the Global Economy

There is a new face of the global economy that we see today. Technological advancements, innovation through new methods of doing business, acquisitions, and mergers across continents, and various other reasons have changed the methods we are used to doing business. Some of these significant contributors that impact the global economy are:

1. Integration of economies in the world market, due to the incorporation of technological breakthroughs, bringing markets closer than ever.
2. Dependency on energy and environmental management (Brookins, 2006).
3. Geopolitical scenarios surrounding the major players in the world, US, UK, etc.

Emerging Economies & Globalization

We are moving fast towards reaching a new business paradigm, through globalization. Globalization significantly increases multiple types of flows in the economy. This is due to two major reasons: international economic integration and innovation through technological advancements, providing new paradigms for doing business, achieving greater connectivity to other regions of the world as well as competing with global markets in a local fashion. Emerging markets now occupy 90% of the world’s consumer base (Zalewska, 2008). The Morgan Stanley Capital International (MSCI Barra, 2008) index rates 25 nations as major emerging markets: Argentina, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Israel, Jordan, Korea, Malaysia, Mexico, Morocco, Pakistan, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey.

Many emerging economies are feeling the effects of the global slowdown in growth (HM Treasury UK, 2008) and credit shocks. This is in part due to dependency on external financing, large current account deficits, negative balance of payments that make them highly vulnerable targets in stopping their growth as well as their integration with the world markets, largely because almost all external financing economies are presently engaged in injecting large amounts of capital to sustain the economy amidst shocks, to provide liquidity, as well as encourage borrowings for businesses to carry out operations.

Opportunities and Risks Facing Global Markets

While the opportunities to operate in a global, integrated market are paramount, there are a variety of risks involved for all economies, some of which are:

1. Exchange rate risks (Khan, 2002), by the abrupt decline in the value of the currency in that economy. As research suggests, this risk is imminent in all types of exchange rate regimes, floating and fixed, that eventually discourages investment, affecting growth and stability across the region.
2. Capital flight risks, owing to the possibility of the sellout of holdings by all owners, because of an imminent capital loss. This risk may owe its existence to the investments taken aback by investors in wake of degrading political and economic stability, causing a fall in the currency of an economy. We can safely say, that exchange rate risks initiate capital flight risks.
3. Risks of contagion, emanating from the integration of the economy with the rest of the world. This may be in part due to the false expectations derived from the crumbling economies of neighboring countries that result in an assumption of economic decline in the entire region.

These risks, in turn, create the overall risk of a financially weakened economy, depending on the condition of financial institutions, hence raising the possibility of a financial meltdown, requiring stimulus from central banks and other financial institutions.

These risks in turn affect businesses trying to seek advantage in newer regions, emerging markets in particular. Problems facing the businesses wishing to integrate these areas are ‘fear and protectionism’ (Brookins, 2006) that prevents the businesses from becoming globalized.

Sustaining Global Economy and Prosperity

Although economic prosperity is merely one facet of economic growth, other areas work in parallel and can have a significant impact on growth in the long run. Sustaining these factors is equally important to ensure global economic growth and prosperity:

1. Enhanced global growth, by reducing the poverty in regions across the world, as defined by the Millennium Development Goals.
2. Ensuring that international financial institutions have adequate resources to respond to the global economic crisis
3. Help emerging market economies requiring both policy adjustments and financial assistance to deal with the crisis.
4. Induce growth in low-income nations, especially investing in private sectors that form a large part of the economy. Investments in infrastructure, health, education, development, and standards of social living form a high part of creating a sustained economy.
5. Dealing with global warming and climate change, neglecting which can have surmounting effects on our overall global economy.
6. Create jobs in new domains, sustain the economy, and reducing overall poverty
7. Regulate and revise policies of financial governance of international financial institutions. This financial crisis has demonstrated the weaknesses and ill-administered policies of international financial institutions.
8. At the same time, it is also necessary that developing economies are willing to deal with changes, regulations or systems, in the structure of international financial institutions.
9. Manage the commodity price volatility by ensuring efficient levels of demand, effective supply chain, as well as enhancing capability to respond to price volatility and supply shocks, on re-emergence.

Recommendations for Managing Global Prosperity

Economists suggest that 2009 will be the year of many faces. Many major changes will be witnessed, that might have positive and negative consequences facing the world economy. Most however recommend the following actions that might help in reducing the current crisis and in managing global prosperity:

Let the recession pass

Maintaining an open economy and carrying out a trade to increase productivity, enhancing prosperity and growth. Significant problems in any economic crisis are acts of fear and protectionism (Brookins, 2006) by the businesses (to serve their interests) that stop them from integrating with other economies. Any economy cannot sustain itself without trade. Trade liberalization allows for an improvement in the living standards of the people, allowing for an increased flow of investment, competitiveness, and growth of all the economies involved.

Reduce supply-demand inefficiencies to sustain sudden flare-ups in commodity prices. Commodities in developing economies are inextricably linked to fuel and energy prices, resulting in subsequent increases across the entire supply chain. This, in turn, affects demand.

Change the global monetary system, diverging from the source of current economic crisis, resulting from the collapse of the Bretton Woods system, basing US Dollar as the sole pillar of the monetary system (Global Research Canada, 2008). Evidence suggests that if not removed, the failure and subsequent demise of this monetary system would create a variety of economic, social, political, and strategic instability for the entire planet, in part due to the following reasons:

• Weakened central players
• Violent backlashes
• Sped up destabilization processes of the past decade

Loosening the monetary policy, that would help to deal more effectively with the downturn, and assisting to restart the flow of credit in the economy.

Conclusion

Although the recession has had a significant effect on the world economy, slowing down world growth, there is still a substantial caliber of growth in the global economy, provided that although integrated, economies regularize their internal as well as external economic environments to be able to deal with abrupt shocks due to supply, fall in domestic currency, the crash of stock markets, loss of investor’s interest, badly administered financial institutions or too much dependence on external resource management and mobilization.

Trade liberalization and a free-market economy are the answers to the current financial crunch. All nations are part of this integrated economy. Emerging markets must lose their fear of loss of investment or alleviation of poverty, changing their focus to rather improvising the overall infrastructure and systematic elimination of the problem.

The challenges that currently present themselves with importance in the coming times are those of increased inflationary pressures, energy and fuel shortages, and climactic change. These have to be met in a manner most economically efficient with appropriate advantages for each sector involved.

Works Cited

Brookins, H. C. (2006). An Overview of the Global Economy: Markets, Competitiveness, and Trade Facilitation. (O. A. Oyewumi, Interviewer)

Global Research Canada. (2008). Breakdown of the Global Monetary System by Summer 2009. Web.

HM Treasury UK. (2008). Managing the global economy through turbulent times. Surrey: Crown Publishers.

Khan, H. A. (2002). Managing Global Risks and Creating Prosperity: The Role of the IMF and Regional Financial Architectures. Managing Development and Transition in a Globalizing World (pp. 6-7). Tokyo: University of Tokyo.

MSCI Barra. (2008). MSCI Emerging Markets. Web.

Stewart, V. (2007). Becoming Citizens of the World. Educational Leadership, 8-14.

Zalewska, A. (2008). Emerging markets – is today the best predictor of tomorrow? The Capco Institute Journal of Financial Transformation, 1-2.