Future of the Developing Countries

The economic crisis will continue to wreak havoc and untold hardship on all facets of the global economy for the foreseeable future. However, given historic economic precedents, it's conceivable this upheaval will lead to a restructuring of the global financial system that will set the stage for a new era of economic growth and prosperity.  We need to reflect on how we got to this point in order to learn from our mistakes. Investors and regulators clearly did not see or heed the signals indicating a major economic downturn was in the making: wealth inequality increased; returns to labor fell but returns to capital increased; both public and private debt was built up; and there were severe commodity price shocks. Although the sub-prime crisis originated in the I.S. from excess credit extended against insufficient security to people who were least capable of repaying loans, the crisis engulfed first the financial industry and then entire economies. Broad segments of global financial markets stopped working and structures and institutions that had been the bedrock of the system for decades disappeared almost overnight. In response, central banks and governments put in place counter-measures on an unprecedented scale. Alan Greenspan says the inability of even our greatest intellectuals to see this crisis coming is a conundrum.  Some try to attribute the blame on capitalism, but that's incorrect.  Rather, it is a failure of financial capitalism.  2009 will reshape the global financial system.  Banks will need to restore their capital base and clients' trust and they'll also have to reconsider their business models and products.  Authorities will need to continue doing what's necessary to maintain the functioning of the financial system and redesign regulatory and supervisory system addresses the new world order of global, interdependent financial markets.  We are witnessing the establishment of a new economic order where great economic powers such as the U.S. continue to wield considerable influence but where new economies such as China will have ever-growing influence.  Today there is a substantial difference in the rate of growth between the developed world and the emerging markets. The growth-rate gap will see the BRICs (Brazil, Russia, India, China) and others begin to catch up with the G8 countries, even if the wealth gaps within and between nations are high and likely remain so.  The process of economic globalization has been under way for some time.  It has brought great benefits to millions in the developing world, but the increasing wealth of developing nations has yet to bring them close to the standard of living of advanced economies.  However, the economic power of developing countries is now such that to some extent they can grow independently of the developed world and have their own momentum, bringing a process of industrialization that includes more than 1.5 billion people.  As consumers in advanced economies retrench from unsustainable levels, shoppers in the BRICs will take up the slack. There are also concerns as to what extent these countires will excercise the new economic power. Continued economic coordination is essential or we risk relapsing into a system of seperate national markets and uncoordinated actions that will only create more uncertainty.  More calls for tighter regulation will be heard in 2009.  We need to regin in the unfettered financial capitalism that contributed to the crisis and implement more sensible checks and balances.  The financial industry must bear much of the responsibility for the past mistaes in both macroeconomic and regulatory policies.  But it must not result in weaking financial-market intergration and hindering financial innovation.  The market-based financial system has made a big contribution to global growth.  Reverting to fragmented, nation-based and over-regulated banking markets is not the answer.  What we need is stronger market infrastructure and multinational structures for the regulation and supervision of the global financial system.  I'm an optimisit and i believe, as the world's economy become more interdependent, we'll see better collaboration.  Developed economies will hopefully become more generous with their intellectual property and financial resources; and, in return, emerging economies will supply raw materials and cheap labor along with their human vitality and inventiveness.  Furthermore, if we can implement a system of checks and balances to stop Wall Street's excesses, the economy will correct itself and rebounded quicker than many expect.  One of the great strengths of free-market capitalism is its ability to drive innovation and its capacity to evolve quickly.  2009 will no doubt bring continued economic trauma, but should also set the stage for a long term recovery.  My personal outlook for the economy is to invest in emerging markets in 2009 and those success will reciprocate back to the U.S. in 2010.