Economics Developing World

Economics The condition of global financial stability implies that the world's financial institutions are healthy, that macroeconomic risks are within normal bounds and that the risk environment including appetite for risk is at normal levels (IMF, 2014). There are differences between the ways that the macroeconomic environment affects the developed and developing worlds, and this paper is going to focus on the latter.

The economic structure and vulnerability levels of the developing world, as well as their often-reduced participation in the global economic system create different reactions to the condition of global financial stability. Global financial stability as a condition is fostered by the economic health and stability of the world's largest and most interconnected economies. The European Union, United States, Japan and other modern nations contribute to the prevailing conditions in the global macroeconomic environment. These economies tend to be highly interconnected. For example, when issues emerged in U.S.

credit markets in 2008, much of the Western world was dragged into recession along with the U.S., except those nations with strict capital controls in their banking system, but even they saw slowdown. The developing world was affected in different ways. Some developing world nations are highly connected to the major Western economies -- for example 78% of Mexican exports go to the United States -- and therefore their economic performance is more correlated with global financial stability.

Other nations have strength of their own, and trade networks that go beyond mere dependence on the West. China saw a slight slump in 2009 but almost immediately began a recovery. Still other nations in the developing world were barely affected at all -- many African nations were not really affected because they are not part of the global economic system. Other nations have reference countries that are not part of the West or were less affected.

Many Pacific islands are dependent, but on Australia or New Zealand, which were not as strongly affected by the slowdown. Other nations use Russia or China or South Africa as their reference countries, nations that are already less affected by global financial instability. With all of these different characteristics, there are several outcomes for the developing world of a given level of global economic stability. Trade Global financial stability fosters trade, because of stable interest rates, healthy credit markets, and health aggregate demand.

When the global financial system is unstable, interest rates might drop as a point of monetary policy, but a flight to quality could raise rates in the developing world. Credit markets could dry up, and aggregate demand is likely to fall. As noted, how much the latter matters depends on the level of dependence of the emerging market in question. But credit markets matter because they facilitate trade -- if buyers cannot finance their purchases, the seller suffers.

Mexico, being highly dependent on the U.S., saw its GDP collapse in 2010 as the result of global financial instability (Trading Economics, 2014). Malawi, far removed from the global financial system, saw no such decline relating to the Great Recession (Ibid).

So for countries with close ties to the global economic system -- many are dependent on North American and European trade -- their exports and trade are expected to fall during times of global financial instability and rise during times of global financial stability; countries far removed from the financial system are unlikely to see these effects.

Foreign Direct Investment Whatever the net effect on their economy might accrue from the level of global financial instability, foreign direct investment should fall during times of instability, and generally rise during times of stability. Again, access to credit is a critical factor here, because credit in home markets tends to be a key driver, along with market opportunity, of FDI. Global financial stability allows companies to finance major deals, which can be a key driver of FDI figures.

An example would be the A-B InBev purchase of Grupo Modelo, which was the driver of record FDI in Mexico in 2013 (Reuters, 2014). The country had seen FDI slump badly in 2009 due to constricted credit markets in the U.S. (Lange, 2010). This effect should be less pronounced in countries less dependent on the global financial system. Another issue with FDI is that some developing world countries can gain FDI during periods of global financial instability. This seems counterintuitive, but during such times, returns in Western markets can be terrible.

This forces capital to seek out returns in the developing world. Mongolia saw FDI spike during the Great Recession as Australian and Canadian companies invested heavily in its mining sector in anticipation of rapid recovery in Asia (Els, 2014). The country's FDI has fallen now, during a stable environment, illustrating this trend towards countercyclicality in FDI in some emerging markets. Similarly, inflows to Nigeria peaked in 2008-2009 at the depths of the crisis, with investors chasing returns in the developing world (Vanguard, 2011).

Social Outcomes The economic outcomes are easy to track, but it is less easy to track social outcomes such as average incomes and expansion of social services. There is little doubt that when FDI and GDP expand, governments should in theory have more money and there should be more jobs in the economy, both of which should be positively correlated with quality of life measures. There is a certain stickiness with social measures, however. Wages are sticky, and will not fluctuate with corporate profits or FDI.

Social measures often reflect factors like education and health, in addition to the distribution of wealth within the society. Thus, the latest global financial instability's effects will not fully be known at this time. Less diversified nations like Mongolia can attract FDI, but not necessarily create the conditions for positive social outcomes if the country's wealth mainly leaves the country, or concentrates only in the capital. Nigeria is a better case study, because a lot of the recent FDI gains have come outside of the oil and gas sectors.

Thus, there is real opportunity for social gains, even in such a large country it will take time. But it is worth noting that GDP and FDI figures seem volatile in the developing world, so when.