Building the Financial Infrastructure for Middle Class Emerging Economies

Overview

The export-led growth model for emerging economies is driven by their need to service external debt and build foreign exchange reserves. It has foundered in the aftermath of financial crises characterized by collapsing currency and asset values, widespread bankruptcies in real and financial sectors, rising unemployment, and negative growth rates. In many developing countries, a higher volume of exports is needed to earn the same income that previously sufficed to meet external obligations. As a result, profits and wages have fallen, lowering earlier gains in per capita income and threatening past improvements in income distribution, education, and life expectancy. The sustainability of the export-led growth model is also threatened by dramatic increases in the current account deficits, external debt, and domestic debt ratios of the major global importer/consumer.

As U.S. ability to maintain its role becomes less certain, fewer countries appear to be willing or able to absorb more imports or to accept current account deficits. Continued slow growth in Japan, the second-largest national economy in the global system, would hamper its ability to assume some of the burden carried by the United States, even if its own adherence to an export-led growth model were not in itself a major inhibiting factor. Continued restructuring, high levels of unemployment, and constrained monetary and fiscal policies within the European Community also do not suggest robust increases in demand for imports of goods and services in the near future. Diminishing returns to the export-led growth strategies that emerging economies have followed (and have been encouraged to follow) during the last two decades will require the development of new strategies to promote growth.

Both developing and developed countries will need to reintroduce domestic demand-driven growth as a policy objective. However, emerging economies will require more than a shift in the direction of macroeconomic policy to stimulate demand. Also required will be the development of domestic capital markets and financial systems like those in industrialized countries, which are capable of mobilizing and channeling domestic savings to expand internal economic activity.That, in turn, will require changes in global capital markets and financial infrastructure to support and encourage reinstatement of a role for domestic demand-driven growth in the global economy and particularly in emerging economies.