emerging-market countries
Even if it appears to be doing so too cautiously and too reluctantly for some of its critics, however, China seems to be moving toward aiding global rebalancing. Its new five-year plan, which it announced earlier this year, calls for the country to bolster welfare programs, develop domestic demand in order to drive growth, and raise internal consumption and investment. Perhaps the strongest sign of change came from the governor of the People’s Bank of China, Zhou Xiaochuan, who announced in April that China’s reserves “exceed [the country’s] reasonable requirements.” That same month, Chinese Premier Wen Jiabao declared that he would “strengthen the flexibility” of the yuan’s exchange rate to control inflation. Should Beijing pursue this path, other, smaller emerging-market nations might more easily follow the same route: they could allow their currencies to strengthen without the fear of damaging their competitiveness with China since China has already made the first move in the rebalancing game.
The Imbalance Distraction
Beyond the Great Recession and the recovery, long-term trends support the idea that a rebalancing is under way. A broad range of economic figures suggest that emerging markets are catching up to developed markets. As the Great Recession fades, this trend is likely to continue. The emerging-market history of low growth and high volatility is fading, while developed markets are experiencing more instability and financial impairments. Emerging markets have decreased their debt-to-GDP ratios, even as developed markets, including the United States and some in Europe, are letting theirs rise in a sign of convergence. Between emerging and developed markets, health and schooling levels in emerging-market countries are now comparable to those seen in developed markets around 1975, with the gap continuing to narrow. And average levels of political and economic freedom in emerging markets have also dramatically improved in the last two decades. Although emerging markets have not yet achieved parity with developed markets — income inequality has deepened in emerging markets even more rapidly than in developed ones in recent years, and emerging markets must still improve their political and economic freedoms — they now appear more stable and better positioned to enjoy sustained growth than they did a generation ago.
If policymakers can reinforce these trends, enhancing the emerging world’s growth prospects, they will round out the decade or two of adjustments set in motion by the once-in-history opening of emerging markets to economic and financial globalization. The imbalances of the recent era of globalization represented a specific response to a peculiar set of historical circumstances, as emerging markets learned to navigate a fragile financial landscape. These imbalances have begun and will continue to even out through patience and gradual shifts in market mechanisms and policy.
