Sound governance in emerging markets

Useful article on comparative fiscal management by Desmond Lachman in The American. The argument is well illustrated by two charts. The first was produced by Bill Gross, head of Pacific Investment Management Co., the world’s largest bond fund, to illustrate that while the public finances of Japan, Greece and Italy are far down the unsustainable path, France, USA, Britain, Ireland and Spain are all heading the same way:

For the "Ring of Fire" economies, lackluster growth is likely in the years ahead because high budget deficit levels will bring higher interest rates, as governments compete with their private sectors for financing. Private sector confidence will be further undermined by the prospect of higher taxes to pay for a public sector that will fiercely resist any change to the status quo. Obviously these considerations are of particular relevance to Britain, which has the highest state sector deficit as a percentage of GDP.

The second chart contrasts the public debt levels of the "Ring of Fire" countries with those of the emerging market economies, which, with the notable exception of India, range between 40 to 50 percent of GDP. Given their relatively small budget deficits, it is likely their public debt levels will remain at healthy levels.

In the years immediately ahead, the article concludes, emerging markets will retain many of the advantages that have favored their rapid growth in the recent past, amplified by their sounder public finances. There is every reason to expect that, as they become even more significant in the global economy, they will become increasingly vocal in pressing their case for their representation in international economic organizations like the International Monetary Fund to reflect their rapidly rising relative importance.