Why emerging markets should look within

That is the title of my latest New York Times column, here is one excerpt:

In recent weeks, Argentina, Turkey, Ukraine and Thailand have endured plunging currencies, capital flight and political disruptions in varying combinations. While they have all been affected by global economic tides, these nations are facing crises because of problems in their national governance. And if we look elsewhere around the world, we find that governance has been re-emerging as a major factor behind success or failure in many emerging nations.

It’s not that macroeconomic quandaries have gone away in all of those countries. There are still many such issues: how to deal with current account deficits, for example, or how to face the consequences of tighter monetary policy in the United States. But these concerns were foreseeable, and some countries have been meeting them, if imperfectly, while others are letting these problems push them over the precipice. In this context, good governance means directing political energies at strengthening the economy rather than trying to cement power and keep down the opposition.

This new world contrasts with two earlier waves of change. The first started in the 1990s, when a rising China bought and invested in raw materials at an unheard-of pace. That flow of purchasing power was so strong that it brought better times to other emerging nations, including many in South America and Africa, regardless of whether the individual countries had good governance in place.

The second major wave was the recent global recession, which damaged the commercial prospects of many nations. For instance, in the first quarter of 2009, the gross domestic product of Singapore fell at an annualized rate of 8.9 percent. That wasn’t because Singapore had bad economic policy, but because exports were hit by a global downturn beyond the country’s control.

The two waves have had such noticeable effects that we’ve become unaccustomed to evaluating political fundamentals in individual nations. But these waves, though not quite over, have slowed.

Some of the likely losers are Argentina, Thailand, Turkey, and Ukraine.  Chile, Malaysia, and Mexico are likely to come out of the turmoil in OK shape, to cite some examples on the other side.  As for China…?

Do read the whole thing.


Emerging Markets Are At A Crossroads, Says Economist.

'And in conclusion, the world is full of contrasts.'

This could be fun - who else can come up with an unerringly inane conclusion?

You missed the part of the likely losers and survivors at the end? It seems like a falsifiable claim later in 2014. It would be great to bet on it ;)

'And in conclusion, the world is full of losers and survivors.'

It isn't a hard game to play.

'And in conclusion, time will tell.'


"Some of the likely losers are Argentina, Thailand, Turkey, and Ukraine. Chile, Malaysia, and Mexico are likely to come out of the turmoil in OK shape, to cite some examples on the other side. As for China…?" (snip)

Cowen once again scurries about practicing mosquito circumcision- whilst ignoring the elephant in the bedroom

Who cares about all these middling emerging countries

Hint to unfocused headline seekers: its all about CHI (hint: remember Nihon 1989)

Well, the focus was not what impact the success or failure of the smaller countries would have on the world. Of course a China crash would cause a lot of collateral damage, but of course there are a dozen articles about that every month. Hint: not every article is about your pet issue.

Re-reading myself "The Cash Nexus" by Niall Furguson and D. Landis' tome, both excellent. The next powerhouse however will be India, whenever they get their act together. Dumb growth like China, but with more young people.

Isn't Tyler attacking a strawman? Is there significant opinion insisting that the problems of Turkey, China, Argentina etc. are merely external? Are we correcting a misconception that doesn't exist?

I don't know if that counts as significant opinion, because that comes from places quite ignorant in economics, but I have heard many times recently the meme that those country's problem were the fault of Barnanke and the Fed.

It is the dawning of realization that the stagnation in the US are not macroeconomic problems that will disappear when Yellen prints more money.

One of the more sobering data points considered during the time when Canada was coming to terms with its fiscal stupidity was a comparison to Argentina. In many ways a southern hemisphere mirror of Canada; abundant natural resources, populated with a similar mix of European immigrants with abilities and customs. The difference was governance.

How is Obama different from Peron?

Uglier wife.

I normally find your comments witty. That comment was not worthy of you.

he is doing what famous-to-the-common man economists are supposed to do, getting his name published with a piece full of generally acceptable platitudes. If he didnt have his tenured for life job he'd probably be writing the exact same stuff anonymously for the Economist or the McKinsey Institute.

I was a bit surprised when Prof Cowen recently distributed the Economist's recent Russia survey with some supportive comments. This survey was shallow and some of the facts were simply wrong. I hope he has more reliable sources and a better understanding of the other markets that are covered in the op-ed above.

Easy money corrupts. Countries run on a continuum between good and bad governance in part based on how their culture reacts to bad times: do they overreact and quickly move towards revolution? The usual uspects keep making repeat appearances. When the credit bubble bursts, the nations with bad governance have more malinvestment, more political intrigue and have a tougher time cleaning up the mess. The already banana republics are more likely to go banana again; well run nations are likely to avoid revolutionary fervor.

I would put Thailand in the good column: they have a very wild political history and manage to come out okay thanks to the monarchy.

Thailand and Turkey overall seem to be relatively good bets in the long-run. Many "newly" democratic states have occasional protesting difficulties. Over-interpreting this to imagine every emerging market is a new Argentina, which seems to be a special kind of "messed up," seems to be a pessimistic attitude to take.
On the other hand, I think Brazil's internal governance in no way matches up to its current economic stability and at some point I imagine some leftist is going to screw up and over-extend the nation, Chavez-style.

Very good choices. Both Thailand and Turkey have a long history of maintaining substantial power and relative stability when much more powerful powers entered the region looking for a piece of the action. I support George Friedman's hypothesis that Turkey and Mexico will ascend to become powerhouses by the late 21st century.

@Mexico: They have a chance if they can continue to export their low IQ peasant class to America. That's increasingly looking like a bad bet. When William Kristol is swinging around to Pat Buchanan's side of the debate, there's a change afoot in the ruling class. Charles Murray is looking to have right.

@Turkey: They have two problems. One is the Kurdish population is breeding like rabbits. The other is their smart fraction is not breeding and heading to Europe. The future belongs to those who show up and the Turks appear to be throwing in the towel on that goal.

Even if Mexico exported 300,000 of its "low IQ peasant class" to the US every year that's hardly going to make a dent in the economy of a country of 120 million people.

How do you know they're exporting the low IQ ones, is this just another baseless assertion from Z? I believe so

Brazil is looking less stable by the day, but a Chaves style takeover is almost out of the deck. We are going in the direction of a popular take-over more on the lines of Egypt, or a military one like we had at the 60's.

Of course the end of QE just happening to coincide with this is all coincidence.

When people stop lending money for you, you get in a bad situation. But you are in it because YOU spent too much, not because other people stopped lending you money.

You make a very good point. To blame the creditor in this situation would be paternalistic, but I'd like to know how much of that inflow of capital didn't go to government bonds and went to other things out of these governments' control.

China has been operating like a failing retail chain for years. They finance their customers under increasingly reckless terms. You can only pull forward profits for so long. At some point, you run out of forward to pull forward. That said, betting on the economic prospects of a country is really just betting on tis culture. If the choice is between being a world player or maintaining the iron rice bow, the latter wins every time. China will get old and isolationist in the coming decades.

Chile is a real good bet, but Mexico looks like a loser to me. When your economic plan is based on shipping your problems to the Gringo, you're just praying the Gringo does not wise up. There are increasing signs that the ruling Gringos are changing their mind on open borders.

A friend who has done (legit; small) business in Mexico for years recently said to me: "politicians in Mexico are either corrupt or dead." An exaggeration to be sure but the problem of finding non-corrupt people to serve/lead is a serious one.

Even the crooks are crooked in Mexico. In my wilder days I had business dealings with a guy who was in the import/export business there. He was the single most dishonest human being I have ever known and I worked for a Congressman once.

Isn't Argentina a case study of Modern Monetary Theory, the idea that a sovereign state that prints its own money can always pay its bills?

Why is it necessarily bad that "significant political forces want to suspend democracy" in Thailand? Does political democracy (whatever that might be) automatically mean economic progress or stability? If there can be an effective central direction of a national economy, why would "significant political forces" be any worse at it than a democracy?

"Chile, Mexico and Malaysia ...They have persistent problems...." Doesn't everyone? Is there some as-yet undiscovered economic policy that would eliminate the persistent problems in these countries? Is there a country that doesn't have problems?

"Drug-related violence is worsening in Michoacán" seems to be a problem related to the country's geographic location. Since they are unable to tow the country further out into the Pacific Ocean, the solution is related to policies in which Mexico has a limited influence but also a financial interest.

(China) "For all of its economic progress, there are still many signs of dysfunction in political institutions, like corruption among the party elite." A statement that could be true of practically any nation/state.

Running a economy while ensuring your underprivileged have a reasonable lifestyle is a very difficult job, especially if majority of your charge are underprivileged in a third world country, society lacks of capital and a ineffective and unjust legal system.. If the people choose to add costs by rule by edict, corruption, mismanagement, crime, and reduce resource through lack of initiative to the problems, that makes the government's job so much more difficult. And if they care to add political instability into the equation, it makes running this economy impossible.

"ARGENTINA Not long ago, Keynesian economists were heralding Argentina’s economic policy as an example of successful economic stimulus. But the government continued to inflate the currency excessively, legally suppressed accurate economic statistics to cover up this inflation and confiscated pensions to pay the government’s bills. The results have been a currency crisis and a hemorrhaging of reserves."

According the IMF, at least as far back as 1995, Argentina has never run a general government fiscal surplus:


True, the IMF estimates that Argentina’s general government deficit was less than 0.9% of GDP in calendar year 2008, but it is forecast to reach nearly 4.1% of GDP this year.

Argentina has been virtually shut out of the global credit markets since its 2001 default. How does a country succeed in running fiscal deficits without borrowing money you might ask? Well, one way is to simply print it. In March 2012 the Argentine Senate approved a “reform” of the central bank charter, effectively allowing the Argentine Treasury unlimited direct financing by the Central Bank of the Argentine Republic (BCRA).

There are numerous sources, but here’s a working paper by Alex Fuste, the Chief Economist of Andbank. Page 4:

“1. Government spending has been financed by printing pesos.
2. Since changes in BCRA charter (March 2012), the scope for
the central bank to print money and lend it to the Treasury
has been dramatically expanded (see the chart)
3. In reality the IOUs (non-negotiable debt instrument)
issued by the Argentine Treasury in exchange of newlyprinted
pesos tend to be rolled over indefinitely.
4. This policy probably put further pressure on inflation and
Fx in the past, but if policy is relaxed even more (in a
desperate attempt to pump the economy) then, inflation
could run wild above the 30% and we could witness a
disastrous impact on the currency.
5. Incredibly, low quality, illiquid government securities
(including non-transferable bills and temporary IOUs) now
account for 60% of BCRA assets. And the pensions agency
ANSeS have already been drained of a significant amount
of its liquid assets. Any other movement in the same
direction, could be critical.”


The graph shows the amount of “temporal advances” dating back to 2002.

Where is Andbank getting its data? From the BCRA. See pages BAL-BCR-1-2 and BAL-BCR-2-2:


On the first page you’ll find the transitory advances under the column labeled “adelantos transit.”. The monetary base is on the following page under the column labeled “base monetaria”.

Transitory advances totaled 20.9 billion pesos in 2011, 60.6 billion pesos in 2012 and 54.9 billion pesos in 2013. According to the IMF Argentina’s nominal GDP was 1,839.9 billion pesos in 2011, 2,163.0 billion pesos in 2012 and 2,666.0 billion pesos in 2013:


Thus transitory advances totaled 1.1% of GDP in 2011, 2.8% of GDP in 2012 and 2.1% of GDP in 2013. According to the IMF the fiscal deficits were 3.5%, 4.5% and 3.6% of GDP in 2011-13 respectively. Thus transitory advances accounted for about 31%, 62% and 59% of the deficits in 2011-13 respectively.

Argentina’s monetary base more than tripled from 124.5 billion pesos at the end of 2010 to 377.2 billion pesos at the end of 2013. Transitory advances accounted for 54.0% of the increase in the monetary base during that period.

I'm not sure why the link to the paper by Alex Fuste is not working. Here's another link:


Click on Working Paper 57.

How is this all that different from 1998, which had much to do with corrupt governance in places like Russia and Indonesia, and 2008 which had much to do with bad governance in America (e.g., Bush's promotion of lowering mortgage credit standards in the name of Diversity) and Europe (the Euro)?

The analyses of economy crashes & recessions has become something of a Rorschach test.

Ahhhhhhh, 1998: 3 years ago Bill Clinton requested Congress a 20 billion lifeline to Mexico to avoid a default. Mexico's economic crisis produces in the following years the largest immigration wave to the US.....from mexicans.

2014: NAFTA is 20 years old and estimates of net immigration from Mexico are zero. I tought Sailer would be happy about the 0 immigration rate, I was wrong.

(e.g., Bush’s promotion of lowering mortgage credit standards in the name of Diversity) and Europe (the Euro)? - See more at: http://marginalrevolution.com/marginalrevolution/2014/02/why-emerging-markets-should-look-within.html#comments

Gregory Mankiw and John McCain made an attempt at legislation to improve accounting standards at the GSE's. Blocked due to the efforts of Barney Frank.

You get the impression that all Argentine politicians have the same guardian angel: Sam Kinison.

Being an EM guy this is way too surface overview to speak to me. For me most of it is too vague and slippery.

I think the story is that as EMs have grown into world trade heavyweights they have become more dependent on each other and somewhat less dependent on US/Europe/Japan. We're likely seeing an EM cycle turn now and that's potentially far more important than US/Europe/Japan-focused global macro analysts realize. Within that mix certain countries are facing political crises or meltdowns. China is the 800 pound gorilla, about equal in weight to the US and Europe for overall world trade and far more important for raw materials industries.

I don't think any of the individual country stories are critical. Thailand has been a slow grower for a while already. Turkey has always been volatile. Argentina and Venezuela have been wretchedly mismanaging their natural wealth for decades. Ukraine has been so depressed and politically hopeless for so long this crisis is actually hopeful for the small chance of positive regime change it offers.

You might laugh but the main thing that caught my attention in this piece is that you like Malaysia. Huh? Why? Have you seen how fast private foreign borrowing has been growing? How the big old current account surplus has disappeared? How growth is being driven by credit, government and construction? What's going to bring the sun out, re-accelerating Chinese growth? Recovering Japanese and European imports? A big US acceleration?

Uncharacteristically, Tyler's piece was disappointing. There were no deep insights and everyone knows internal strife and incompetent and corrupt politicians and officials harm these nations. I an unknown person wrote this essay would it have ben published?

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