The medium-term macroeconomic and financial environment has become less supportive of capital flows to Emerging Markets. Tightening in global financial conditions in recent months has exposed a slowdown in emerging market economies. The receding liquidity and rising interest rates removed the key source of stimulus to growth which has been slowing in roughly three out of four emerging markets. Their average growth is now 1.5 percentage points lower than in 2010 and 2011.

Analysis attributes the slowdown in part to cyclical forces including weaker external demand. This has happened in spite of supportive domestic macroeconomic policies, favourable terms of trade, and easy financing conditions up until recently just began to compressed. Emerging Markets growth slowdown is not just cyclical, but also reflects underlying structural factors, including a lack of reform during years of impressive performance and a gradual exhaustion of the drivers of rapid growth.

In the early stages strong growth achieved by shifting labour from low productivity agriculture, from rapid accumulation of capital and from the rents from natural resource exports into labour intensive manufacturing. Analysis of the middle income trap has often concluded that the source of the problem is that countries need to adapt their growth model as development proceeds if they are to maintain a dynamic growth trajectory. However, sustaining growth requires more intensive patterns of growth, relying more on being able to shift resources across sectors in response to changing patterns of demand, and a capacity to innovate and apply more knowledge and skill intensive production techniques, particularly as the economy shifts to rely less on manufacturing and natural resources and more on services where capital deepening is less relevant as a source of growth.

Countries now need to develop new growth models to sustain growth strong enough to continue the convergence toward advanced economies' income levels. The policy priorities to achieve such new growth models differ considerably across countries, as do the structural hurdles holding back progress. The growth drivers was in effect behind economic booming period of emerging markets can be divided into three groups

1. The export-led growth model

China has pursued an export-led growth strategy which was driven on to consumer demand from abroad, and suppressing such demand at home. In other word the rest of the world's prosperity drove China's growth. China has mobilized a very high level of savings (45- 50% of GDP) to finance industrialization for manufacturing exports. This strategy has delivered strong growth over a long period of time, raising income and creating an emerging middle class - but at the cost of suppressing personal consumption, keeping it at the lowest share of GDP among Emerging Markets countries. Chinese consumption has been growing, but not nearly enough to tilt the balance. In fact, according to the IMF, consumption as a percentage of China's GDP has steadily declined.

On the other hand slower growth in many mature economies and erosion of competitiveness due to rising wages and real currency appreciation has slowed the pace of net exports. China needs to shift to a new growth model driven not by exports, but by domestic consumer demand. The imbalances implicit in this model posed little problem when China was a newly emerging market; but now that it has become the world's second-largest economy, China can no longer sustain its export-led growth.

Making adjustment however is much easier said than done. They've sustained high rates of GDP growth by engineering a large investment boom, fuelled by cheap money and easy credit. In turn, this strategy has fuelled asset bubbles and inflation - economic minefields that can just as easily drag down the global recovery as build it up. In the meantime, the investment-led "boom" produced by printing money has all but eliminated the motivation for the Chinese to tackle the kind of challenging reforms - to its banking system, its currency, its social safety net - needed to develop a strong consumer-based economy. A more balanced and sustainable growth model is therefore needed, to address the economic and financial imbalances that have accumulated.

2. Reliance on the export of commodities model

Many resources-based economies, both emerging and developed, have benefited from the upswing of the commodity super-cycle. In the run-up to the 2008 financial crisis, countries like Russia, Brazil and Indonesia have witnessed an unprecedented economic performance driven by massive terms of trade gains resulting from the commodity boom. However, the growing reliance on commodity exports has stalled structural reforms in these countries, and in some particular cases it has also led to build up of new impediments to growth. For example, because of the delayed supply side reforms, production capacity in Russia has reached its limits in recent years, resulting in higher unit labour costs together with large competitiveness losses. Now that the super-cycle appears to have peaked, many commodity-exporting countries are experiencing slower growth. Clearly, these countries need to diversify their economies and reduce reliance on commodity markets to produce more stable and sustainable growth, avoiding boom-bust cycles.

3. Credit expansion model

Growth has been stimulated by very strong credit creation and the favourable international capital flow environment driven by domestic developments. Significantly the total debt sum % of GDP has increased since 2000, with a particular acceleration in non-financial corporate liabilities. China has the largest non-financial corporate debt relative to GDP at around 145%. Brazil, Turkey and Poland have all seen brisk accumulation of debt in recent years. More leverage is not necessarily associated with higher economic activity. Credit expansion has contributed less and less to GDP growth such a diminishing "marginal contribution" of credit. The key challenge is how to maintain growth as many countries are now at high levels of indebtedness which would naturally act to constrain the accumulation of new debt, without which growth would be subdued.

The 3 growth models above highlight the challenges many countries face in dealing with the aftermath of a long period of rapid credit expansion. How can emerging markets get their glory days back? Emerging market countries will need to identify reform priorities to remove supply blocks, boost productivity and move their economies up in the value chain of economic activities. This means addressing lingering barriers to long-term growth - pushing ahead with infrastructure investment and improving the business climate, for example. Countercyclical demand management policies will no longer do the trick.

The required mix of reforms for growth will vary across countries, but in all cases will depend on how start to addressing to the real challenges posed to their economies listed below

1. Improving infrastructure (The Importance of PPP investment)

Weak transportation creates serious problems for exports and infrastructure including access to power, health services, education and sanitation. Given the pressures on public finances in many countries, a key task will be to provide an environment for successful private investment in infrastructure, including transportation and urbanization. The private sector can play an important role in infrastructure by nurturing long-term capital markets based on local institutional investors.

A bigger constraint to private investment in infrastructure in many countries relates to key institutions, including weaknesses in the government's capacity to prepare and authorize public-private partnerships (PPP), strengthening legal system to enforce contracts and a supportive political environment.

2. Control on monopoly

Building a competitive business environment requires a more difficult set of conditions, and it is harder to achieve than investment. For instance there is no competition in Transmission & Distribution in the energy sector because by their nature these are monopoly businesses. However, it is possible to encourage efficiency and improve performance through regulation and setting the right incentives. Such reforms would boost competition and improve opportunities for new investors, including foreign investors.

3. Developing strong domestic capital financial market

Building long term domestic capital markets and institutional investors to support infrastructure investment with long time horizons is one of the most important challenge that needs to be addressed. A particularly important measure that needs to be taken is mobilising domestic savings and to ensure that financial resources are allocated to the most productive sectors of the economy. Encouraging the development of local capital markets through such techniques as:

(i) the removal of subsidies and undue banking controls;

(ii) the establishment of pension funds; and

(iii) setting up provisional credit entities.

Also channelling venture capital to small businesses considering limited support of innovation within emerging market economies.

4. Improving the business environment

Improving the business environment will create an overall appealing climate for foreign investment: Emerging markets face a broad range of tasks to achieve this, including reducing red tape by establishing confidence in the legal system. Including clear commercial law, contract law and property law, and a court system that enforces contracts, strengthening legal protection of property - including intellectual property - and minimizes opportunities for corruption and market-distorting practices

5. Labour markets inflexibility

Strict labour market regulation discourages the development of the formal economy, obstructs the achievement of economies of scale, and makes it harder to redeploy workers across sectors. Labour market reforms enhance flexibility and reduce informality. Protection of jobs in the formal sector needs to be reduced to encourage greater willingness to hire, and capacity to shift labour resources between sectors. Reducing the reliance on informality also improves incentives for investment in human capital.

6. Education, Innovation, R&D

Increasing spending in further and wider level Education, supporting and financing innovation and R&D is a key factor behind productivity, growth and employment. Therefore there should be a higher priority in investing for a better trained and educated workforce (especially women in some of the emerging countries).

In Conclusion:

As investors will increasingly differentiate between emerging market countries according to their policy frameworks and health of their balance sheets, structural problems will be critical in the period ahead. Given the time it takes to implement structural measures and the natural lags with which the economy will respond, the emerging market rebound will not be fast or easy.

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