In 1986 The Economist magazine famously created its Big Mac Index, a guide to the fair value of a currency based on the principle of purchasing-power parity, which states that exchange rates should adjust to bring prices of identical goods into line across national boundaries.
But Big Macs are not sold everywhere. Seeking a similar mechanism applicable to countries in Africa, we have created our Milk Index, based on the price of a gallon of milk. Read more
By Richard Dobbs, James Manyika, and Jonathan Woetzel, McKinsey
Even Western executives who are good at geography may have a hard time picking out Surat, Foshan and Porto Alegre on a map. Yet over the next decade, each of these cities will contribute more to global economic growth than Madrid, Milan or Zurich.
While China’s move to cut interest rates this month has sparked some concern about emerging-market growth, , we see no let-up in one of the most disruptive trends of our time: the shift of the world’s center of economic gravity from advanced economies to the developing world, and in particular, to rapidly growing cities in Asia, Latin American and Africa. Even at 6 to 7 per cent growth, China is adding the equivalent of a Canada to the global economy every two years.
We are currently living through the biggest mass migration from countryside to cities in human history. The global population of cities is growing by 65m people annually – that’s the equivalent of 7 Chicagos a year, every year. Between now and 2025, we calculate that 440 cities in developing countries will generate nearly half of global GDP growth. Read more
Obituaries have been written for the World Bank following the arrival of China’s Asian Infrastructure Investment Bank (AIIB), the implied question being whether the US remains willing and able to lead the global economic governance system. Yet the other Washington-based Bretton Woods institution, the International Monetary Fund, reveals a different story. It appears to be on the verge of a third epoch in which it is set to become indispensable, ushering in the global economic reforms now considered necessary in the ‘new mediocre’. Read more
Imagine you’re a policymaker from an emerging economy, and you’re comfortable with the idea that your exchange rate needs to weaken. Maybe that’s because you’re a commodity exporter, and prices have fallen; or because global trade growth isn’t what it used to be, and your exports are weak; or because the prospect of higher US interest rates could make external financing less plentiful. Now, the question is, what would you rather see: a quick-and-nasty currency collapse? Or a fall in your currency’s value that’s smooth and sedately spread over time?
That’s the difference between Brazil and Russia. In the 12 months following February 2014 the rouble fell 30 per cent in trade-weighted, inflation-adjusted terms. But it took Brazil almost four years to achieve that same 30 per cent gain in competitiveness. What works better? Read more
It seems to be getting harder and harder to find a news story about the Middle East and North Africa (MENA) that doesn’t fall within the narrow narrative of disorder and political violence. From state collapse in Libya and the tragic conflict in Syria to the geopolitical flashpoint in Yemen, the headlines from the broader region make for bleak reading indeed.
These challenges are real and they are significant, but there is another story about the region that remains under-reported. It is a story of dynamism and entrepreneurship, and it’s one of how private capital is playing a critical role in creating new realities for the region and its people. Read more
How worried should you be when the US Federal Reserve goes ahead with its first interest rate hike? After all, following years of close to zero policy rates and three rounds of quantitative easing, this will be a significant change in policy.
Financial markets do not appear too concerned. One could even say that they are being complacent. Nevertheless, the usual commentators are once again stating that Fed hikes will bring the end of the world and of emerging markets.
So who is right, the complacent markets or the doomsayers? We think neither. Read more
A lot has been made of the IMF’s recent warning that potential growth has fallen dramatically in emerging markets (EMs). Many have correctly pointed out that potential output is expected to fall from to a yearly average of 5.2 per cent in the 2015-20 period while developed markets (DMs) are expected to see potential growth increase to 1.6 per cent. This has, in turn, caused renewed cries of concern about emerging economies. It is, however, possible to draw a dramatically different conclusion using the same data set. The IMF predicts that the growth differential between EMs and DMs will be higher in the 2015-20 period than it was in 2001-07, a period when EMs were very much in favour. Read more
With a decision due next year, the process of choosing the next United Nations Secretary General is already under way against a background of tectonic international change. The incumbent, Ban Ki-moon, was appointed in 2006 when the world was still very much in the midst of a “unipolar moment”. The US may have been bogged down in Iraq, but the desire and capacity of the Bush administration to project power on a global scale was beyond doubt. The context in which Ban’s successor takes office will be very different. It will be one still grappling to come to terms with the aftermath of a global economic crisis and a reordering of world power that has accelerated the rise of China and other developing nations, weakened the eurozone, forced the US to retrench and encouraged Russian to challenge the post-Cold War settlement with force. Read more
As finance ministers gather this week in Washington DC they cannot but agree and commit to fighting extreme poverty. All of us must rejoice in the fact that over the past 15 years, the world has reportedly already “halved the number of poor people living on the planet”.
But none of us really knows it for sure. It could be less, it could be more. In fact, for every crucial issue related to human development, whether it is poverty, inequality, employment, environment or urbanization, there is a seminal crisis at the heart of global decision making – the crisis of poor data. Read more
Geo-economics was defined by its intellectual godfather, Edward Luttwak, as a contest defined by the grammar of commerce but the logic of war. Today, one of the most pernicious tools in this global contest is the evolving role of government in a market economy. It was one thing to fight the battle of communism v. capitalism. It is quite another to fail to recognize today’s competition is increasingly over the rules, norms and tools of state involvement in capitalism itself.
For decades, the US led global economic order largely advocated the position that the economic role of government should be limited. Ideally, governments should set the ground rules for investment and commerce via just laws and regulations and enforce them fairly both domestically and internationally. Beyond that, let the free market rule. Read more
Whatever the result of Argentina’s presidential election later this year, the country will be in a different place a year from now with a new and more pragmatic government running the country. All the main contenders for president in the next government have similar ‘four pronged’ approach to address Argentina’s economic problems. Investors should look through this election ‘noise’ and towards the new government’s coming macro-economic reforms which we believe will usher in a new Argentina.
The era of Cristina Fernández de Kirchner, president, is set to be remembered as a strange epoch that began with default and ended with default. The Kirchners oversaw the restoration of order in Argentina after the chaos that accompanied the 2001 default, but then became bogged down by unnecessary confrontations and economic mismanagement. Read more
Over the weekend of 28-29 March 2015, a Chinese government “special leading group” was set up to oversee progress on the “Silk Road Economic Belt” and the “21st-Century Maritime Silk Road”, and an action plan was released.
China’s top leadership started talking about a “new silk road” almost as soon as it came into office. President Xi Jinping gave back-to-back speeches on the subject in Kazakhstan and Indonesia in September and October 2013. The Indonesia speech was also the occasion for Xi’s announcement of plans for an Asia Infrastructure Investment Bank (AIIB) with a capital of US$100bn to leverage into the scheme. Xi has also announced that China will provide further financial backing through a US$40bn Silk Road Fund.
Grandiose political rhetoric is nothing new. But economic developments are catching up with – or are already ahead of – the financial diplomacy. Read more
The rush by African sovereigns to issue in the Eurobond market is creating problems. When interest rates in the US eventually rise, the burden of servicing new Eurobond interest payments will also rise. Any new issuance will also likely be priced higher. Adding to the burden of higher debt servicing costs, the low oil and commodity price environment is reducing export revenues – the very revenues that sovereigns need to service debt.
Some sovereigns (and possibly some corporates) could struggle to meet private creditor debt service payments, which would increase roll-over risk, ushering in a new era of debt relief. Read more
Global gabfests on international development are an easy target for ridicule, given that some of them contribute little more than wordy declarations with minimal relevance for the world’s poor. This year, however, promises something different. Two crucial summits — at the United Nations in September and in Paris in December — will result in a set of global development goals for 2015 to 2030 and a new treaty on climate change, respectively.
In reality, the success of both summits will hinge on whether the world can first solve the trickier issue of how to finance such efforts. This will be the subject of a less high-profile but arguably more important summit in July in Addis Ababa, Ethiopia. Successfully bridging the growing divisions between developed and developing countries over their respective funding obligations can smooth the path for the other two events. Failure to come to agreement on financing will likely doom them. Read more
Only five months after being narrowly reelected, Dilma Rousseff, Brazil’s president, faces a growing array of problems, including a major bribery scandal and myriad economic challenges. Hundreds of thousands of Brazilians have taken part in recent protests against her, with many calling for her impeachment. And it wasn’t the first time demonstrations have rocked the country during Rousseff’s tenure –millions also took to the streets in the run-up to the 2014 World Cup.
But Rousseff is hardly the only leader of an emerging market to face public anger in recent years. Protest movements have erupted in the Middle East, eastern Europe, Asia, and Latin America. Emerging markets have benefited in many ways from globalisation, but rising incomes have also led to rising expectations. Newly empowered citizens in the emerging world are demanding more accountability from their leaders, and as a result we are likely to see more protests and upheaval. Read more
Holidaying in Bali is often synonymous with bottled Bintang Beer, Indonesia’s biggest selling brew, popularly enjoyed by the beach or the poolside while basking in the sun.
But access to Bintang and all other beers could soon get much tougher. Next month, the government, partly at the behest of conservative Islamic groups, is expected to introduce a regulation prohibiting the sale of beer at convenience stores and small corner shops, restricting its sale to supermarkets and hypermarkets (as is the case with wine and spirits) and in restaurants and bars at marked-up prices. Read more
Mexico, like many emerging markets, is going through a period of exchange rate depreciation that has the peso close to its lowest levels in history. Emerging markets typically tighten their monetary and fiscal policies to fight large depreciations, to avoid high inflation and financial instability. Mexico tightened its fiscal policy a few weeks ago by cutting public expenditures and it will probably cut expenditures again in 2016. And the Mexican central bank has sent the message that it will most likely increase its overnight rate target in the coming months. Is Mexico tightening its fiscal and monetary policies out of fear of floating?
Not at all. Read more
By Giancarlo Bruno and Michael Drexler of the World Economic Forum
Are emerging countries facing a corporate bond market bubble? That was the central question in a recent article in the FT, which cautioned that foreign investors are pouring too much money too quickly into emerging corporate bond markets.
Indeed, emerging market activity appears higher than ever before: hard currency emerging market bond issuance reached a record $480m last year, driven by global investors’ search for yield. Yet despite this influx of capital, companies in emerging countries often still have difficulty raising bond proceeds. Read more
The decision of several European countries to join the China-inspired Asian Infrastructure Investment Bank has created a widely believed narrative as follows. Beijing, frustrated by its exclusion from the centres of power in existing international economic institutions, creates its own. The accession of the UK to the bank, followed by (to date) five other European countries, is a powerful testament to China’s role as a rising hegemon.
This narrative is not wrong, but is far from the whole story. First, China’s decision to bypass multilateral institutions and go it alone with development lending was hardly forced on it. Second, Beijing’s willingness to allow western nations to join the AIIB is also an admission that its bilateral efforts have often not worked well. Read more