Tag Archives: Emerging Economies

Human Development Report – 2018 – gaps reflect unequal opportunity

The Human Development Index (HDI) is a composite index focusing on three basic dimensions of human development:

  • the ability to lead a long and healthy life, measured by life expectancy at birth;
  • the ability to acquire knowledge, measured by mean years of schooling and expected years of schooling; and
  • the ability to achieve a decent standard of living, measured by gross national income per capita.

To measure human development more comprehensively, the Human Development Report presents four other composite indices.

  • The Inequality-adjusted HDI discounts the HDI according to the extent of inequality.
  • The Gender Development Index compares female and male HDI values.
  • The Gender Inequality Index highlights women’s empowerment.
  • And the Multidimensional Poverty Index measures non income dimensions of poverty.

The 2018 Update presents HDI values for 189 countries and territories with the most recent data for 2017. The main points are:

59 are in the very high human development group,
53 in the high,
39 in the medium
38 in the low.

In 2010, 49 countries were in the low human development group.

The top five countries in the global HDI ranking are:

Norway (0.953),
Switzerland (0.944),
Australia (0.939),
Ireland (0.938) and
Germany (0.936)

New Zealand comes in at 16 with 0.917

The bottom five are:
Burundi (0.417),
Chad (0.404),
South Sudan (0.388),
the Central African Republic (0.367)
Niger (0.354).

The largest increases in HDI rank between 2012 and 2017 were for Ireland, which moved up 13 places, and for Botswana, the Dominican Republic and Turkey, which each moved up 8. The largest declines were for the Syrian Arab Republic (down 27), Libya (26) and Yemen (20) .

Why is Inequality a problem for development?
A recent Oxfam International report showed that:

“8 men own the same wealth as the 3.6 billion people who make up the poorest half of humanity”
“82 percent of all global wealth in the last year went to the top 1 percent, while the bottom half of humanity saw no increase at all”

Deep imbalances in people’s opportunities and choices stem from inequalities in:
income  – education – health  – voice – access to technology – exposure to shocks.

Human development gaps reflect unequal opportunity in access to education, health, employment, credit and natural resources due to gender, group identity, income disparities and location. Inequality is not only normatively wrong; it is also dangerous as:

  • It can fuel extremism and undermine support for inclusive and sustainable development.
  • It can lead to adverse consequences for social cohesion and the quality of institutions and policies, which in turn can slow human development progress.

The global level inequality in income contributes the most to overall inequality, followed by education and life expectancy. Countries in the very high human development group lose less from inequality than countries in lower groups

Source: Human Development Indices and Indicators 2018 – Statistical Update

Emerging Markets take hit as Fed starts the tapering process

Recent volatility in the major financial markets has had ripple effects on the emerging economies especially the fragile five – Turkey, India, Brazil, South Africa, and Indonesia.

The emerging markets are currently facing 4 major concerns:

1. The Chinese economy’s growth rates are slowing – China is a very important trading partner for many emerging markets.

2. There is the prospect of monetary tightening in the US which could increase interest rates. This then leaves investors a dilemma. Do they continue to invest in emerging markets with volatile growth prospects or take the now safer option by investing in U.S. Treasury bills which are perceived to have no default risk.

3. All these economies have significant current a/c deficits which means that they rely on overseas funding to pay for domestic consumption and investment.

4. Politically they are unstable which makes the implementation of reforms near impossible.

It is important to remember that before the tapering of QE purchases liquidity in developed countries has gravitated towards higher returns in emerging markets and the carry trade. Since the start of the tapering process the volume of money into emerging markets has fallen which means that they will have to tighten up their own budget policies or reduce investment and domestic consumption.

Individual Concerns:

Turkey – political problems – current account deficit – exchange rate depreciation.

Argentina – political problems – high Inflation – exchange rate depreciation (Peso has fallen 14% since 22nd January).

India – very high inflation = higher interest rates = reduced domestic consumption

Brazil – similar to India – very high inflation = higher interest rates = reduced domestic consumption

Indonesia – current account deficit – slow growth – budget problems with US tapering.

Below is a graph from The Economist showing emerging market currencies depreciating over the last 9 months as investors move their money elsewhere.
Emerging Markets v US$

Emerging Economies – Overheating Index

The Economist last week introduced a new index for measuring emerging economies according to their risk of overheating. These economies make up more than 50% of the world’s GDP and over the last five years have produced more than 4/5ths of global real GDP growth.

The chart below tracks 27 countries according to their risk of overheating. The Economist take 6 different indicators and the scores for these are then added to form an index – 100 means that the economy is red-hot on all 6 measures.

The 6 indicators

1. Inflation – This has an average rate of 6.7% in the developed world. In the emerging markets inflation to vary – 1.7% Taiwan, 20% or more in Argentina, Vietnam and Venezuela. In China core inflatin is at 2.4% whilst Brazil has 5.5% and India is over 8%. When growth is bumping up against capacity constraints and labour markets are tight, food inflation may impact into wages and prices.

2. GDP – a country’s average GDP growth rate since 2007 compared with its growth rate between 1996 and 2006. Growth in Argentina, Brazil, India, and Indonesia has exceeded its long-term trend which assumes little spare capacity. However there appears to be plenty of spare capacity for other countrys – Hungary, Czech Republic and Russia.

3. Unemployment – a lot of emerging markets have been experiencing tight labour markets which are indicative of low unemployment levels – most have levels below their 10 year average. Brazil’s unemployment rate is at record low levels and this has led to wage pressure.

4. Credit Expansion – the best measure is to measure the different between the growth rate in bank credit and nominal GDP. In an emerging economy as the financial sector develops it is normal for the levels of GDP to be less than that of bank lending. However in countries like Argentina, Brazil and Turkey lending to the private sector has increased 20% more than nominal GDP. Though in China bank lending has halved over the past year and is in line with GDP growth.

5. Real Rate of Interest
– (Interest rate – inflation rate) this is negative in over half the emerging economies. In rapidly growing economies, as many emerging are, negative real interest fuel faster credit growth and inflation. China’s rate is positive but this understates the level of its recent contractionary monetary policy.

6. Change in Current-Account Balance – economies that run increasing current-account deficits generally means that they are overheating as domestic demand outstrip domestic supply. Turkey, Brazil, and India seem to be experiencing huge demand relative to supply.

When the scores from the six variables we can see that there are 7 countries where the index is over 80. Argentina is the only country where all six are red and Brazil and China are close by.