Friday, December 03, 2004

El-Erian on emerging mkts

Mohamed El-Erian is PIMCO's resident guru on emerging market bonds. These comments are excerpted from a Financial Times editorial of today.

We should keep in mind that for most of history, with the exception only of the last few hundred years, world economic activity was concentrated in the near and far east, so any predominance of "emergent" economies would only be a reversion to the historical norm.

The strengthening of emerging economies is undeniable and has triggered talk of a "new paradigm". Instead of constituting a source of volatility for the global system, these economies are now seen as providing an element of stability. They are also reducing their historical vulnerability to disruptions from abroad. It comes at an opportune time for a world that has become overly dependent on debt-financed growth in the US. The current improvement in emerging economies differs from earlier advances that proved unsustainable, because it involves a set of self-reinforcing enhancements in economic, financial, policy and institutional factors.

...The history of emerging markets has rarely seen the present combination of current account surpluses, surging international reserves, declining public sector debt and improved domestic growth conditions... These economies now account for almost half of global economic activity in terms of purchasing power parity; they represent the most dynamic portion of international trade; their low cost structures have enabled the world to contain inflationary pressures emanating from the surge in oil prices; and, through their large purchases of dollar-denominated financial instruments, they have helped keep interest rates low for now. This comes at an appropriate time for the global economy. The US, which has carried the burden of being the global growth locomotive, has done so at the cost of high household indebtedness, a sharp deterioration in government finances and an unprecedented current account deficit.

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