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Roubini: Risk Abounds in Emerging Markets, But Things Might Turn Out Well

By    |   Monday, 03 March 2014 09:44 AM

Recent events point out the risks present in emerging markets, but there is hope that many will make economic progress, says New York University economist Nouriel Roubini.

"One definition of an emerging-market economy is that its political risks are higher, and its policy credibility lower, than in advanced economies," he writes in an article for Project Syndicate.

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"After the financial crisis, when emerging-market economies continued to grow robustly, that definition seemed obsolete. Now, with the recent turbulence in emerging economies driven in part by weaker economic-policy credibility and growing political uncertainty, it seems as relevant as ever."

For example, the Fragile Five — India, Indonesia, Turkey, Brazil, and South Africa — face budget and current account deficits, and presidential or parliamentary elections this year, Roubini explains.

Other emerging-market countries, such as Ukraine and Venezuela, endure political unrest.

Emerging-market enthusiasts said the rise of urbanization and a middle-class consumer society would help boost stability. "But in many countries recently wracked by political unrest . . . it is the urban middle classes that have been manning the barricades," he argues.

"This is not a complete surprise. In many countries, working classes and rural farmers have benefited from per capita income increases and a broadening social safety net, while the middle classes feel the pinch from rising inflation, poor public services, corruption and intrusive government."

However, the political unrest has an upside. "A lot of it may lead to better governance and greater commitment to growth-oriented economic policies," Roubini notes.

"In most cases, there is reason to hope that electoral change and political upheaval will give rise to moderate governments whose commitment to market-oriented policies will steadily move their economies in the right direction."

But it's still a risky situation. "Emerging economies today are more fragile and volatile than in the recent past. Structural reforms imply the need to pay short-term costs for longer-term benefits," he adds.

"Rising income and wealth inequality in many emerging markets may eventually lead to a social and political backlash against liberalization and globalization."

That makes cohesive economic growth and reduction of inequality crucial in emerging markets, Roubini says.

"Government has a key role to play in providing a social safety net for the poor; maintaining high-quality public services; investing in education, training, healthcare, infrastructure and innovation; . . . and ensuring genuine equality of opportunity for all."

Meanwhile, investors are growing cautious on emerging markets. U.S.-based exchange-traded funds that invest in emerging-market stocks and bonds have seen an outflow of $11.3 billion this year, already topping the $8.8 billion of withdrawals for all of 2013, according to Bloomberg.

"What you see is the transition of funds from emerging to developed markets," Scott Rodes, a money manager at Bahl & Gaynor, tells Bloomberg.

"The fundamentals are going to be challenging for the emerging markets for at least six months."

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Recent events point out the risks present in emerging markets, but there is hope that many will make economic progress, says New York University economist Nouriel Roubini.
Monday, 03 March 2014 09:44 AM
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