Economics Developing World Term Paper

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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.

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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.....

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