Stiglitz: Emerging markets face economic instability

Economist Joseph Stiglitz. (AFP)

Economist Joseph Stiglitz. (AFP)

Emerging markets will have to pursue more exchange rate interventions, to manage risks stemming from ongoing economic strife in the developed world, according to renowned economist Joseph Stiglitz.

Speaking in Cape Town earlier on Monday, Stiglitz painted a bleak picture for developed nations going forward, particularly the fate of the European Union, which is reeling under the weight of its continuing sovereign debt crisis.

Emerging markets evidenced good deal of resilience and still presented opportunities for growth beyond 2012, Renohe said. But they faced a great deal of instability as developed nations worked to cope with the current economic crisis.

Major risks included the threat of further capital inflows into their economies, which has helped to drive up emerging market currency values, making them less competitive.

“For emerging markets one of the problems they are going to have to face is a lot of economic instability — change in market sentiment, moving to safe havens, away from safe havens, liquidity running to the emerging markets. And that means emerging markets are going to have to manage their policies very carefully,” said Stiglitz.

“That means they are going to have to manage their exchange rates.” Stiglitz’s comments followed Reserve Bank governor Gill Marcus’s warnings last week that smaller emerging markets are caught in the cross fire, as developed nations endeavour to address the turmoil.

Significant flows of money
The rand, along with other currencies, saw significant flows of money into the local market, as increased global liquidity sent investors looking for better interest rates and more lucrative yields.

There were a number of policy instruments that developing nations could look to he argued that have already been utilised in countries such Brazil, Turkey and China.

Options included building up foreign currency reserves or controls on capital inflows.

Stiglitz argued that while these policy options are “not costless”, in the case of South Africa with hefty unemployment levels, on balance a more competitive exchange rate was critical to boosting economic growth and stimulating job creation.

The Reserve Bank in a bid to address the problem has been steadily accumulating reserves in a bid to curb rand strengthening.

Local economists have warned, however, that attempts to curb capital inflows could have negative impacts on our current account deficit, which is financed through the flow of foreign investment into the country.

Similarly, they argue such efforts to weaken the rand could ultimately result in inflation.

Inflexible labour market

Many private sector economists have argued that increasing efficiency and productivity in the economy as well as addressing an inflexible labour market will do more to stimulate growth.

Stiglitz argued, however, that a rapid rise in a currency’s value was very difficult to match with a similar increase in productivity.
There was a confusion he said between viewing a strong currency as indicative of a country’s strength, versus seeing it as an indicator of “the price” of a country.

“Get the price right,” he said.

The move by the Brics nations to explore establishing a Brics bank, along with the impetus to move away from using the dollar as the global reserve currency was part of a rebalancing of the global economy. It ended “a 200-year anomaly” where Asia’s share of global GDP dropped from 50% to 10%.

“That is being changed in a very dramatic way, with growth in the emerging markets twice that in the Organisation for Economic Cooperation and Development,” he said.

“We are heading into a difficult period as the new economic realities get translated into geo-political realities.”

A single reserve currency based on the dollar was an “anachronism” he argued. But he warned that a multi-currency system did run the risk of more instability.

“You need a single global reserve currency that is not based on one currency,” he said.

Despite the risks of contagion from the crisis in the developed world Stiglitz believed that emerging economies exhibited a number of strengths that could aid it in weathering the story.

These included large amounts of reserves, particularly in countries such as China, along with increasingly diversified export bases.

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