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*Mr. T.S.Kumar, Asst professor in business Administration in Jawahar Science
College / Block – 14 / Neyveli.
** Mr. Vasanth, Sales Manager in India Cements Private limited at Kattumannar Koil


We analyze the transmission of global financial crisis to business cycles in China and
India. The pattern of business cycles in emerging Asian economies generally displays a
low degree of synchronization with the OECD countries, which is consistent with the
decoupling hypothesis. By contrast, however, the current financial crisis has had a
significant effect on economic developments in emerging Asian economies. Applying
dynamic correlations, we find wide differences for different frequencies of cyclical
development. More specifically, at business cycle frequencies, dynamic correlations are
typically low or negative, but they are also influenced most by the global financial crisis.
Finally, we find a significant link between trade ties and dynamic correlations of GDP
growth rates in emerging Asian countries and OECD countries.
Keywords: Financial crisis; Business cycles; Decoupling; Trade; Dynamic correlation.
Globalization has been perhaps the key event in the world economy in the past two
decades. During this gradual process, several emerging countries have gained in
economic importance and have begun to influence economic developments in other
countries (Akin and Kose, 2008). This development has been dominated especially by
the growing Chinese economy, supported by its export expansion into and investment
from developed countries. Within a just a few years, China has become an important
source of growth for the global economy. More recently, China has been followed by
India and possibly also by some other smaller emerging economies in Asia. Not

the Asian crisis can be traced to a set of interrelated problems” . which would speak against decoupling. We show that more intensive trade ties between the large Asian emerging economies and the OECD countries do increase business cycle correlations between them. First. The main results of our paper are as follows. They fall into two groups: developing countries in Asia. Finally. EMERGING ECONOMIES Emerging economies are low-income. In this introduction. Africa. This Special Research Forum on Emerging Economies examines strategy formulation and implementation by private and public enterprises in several different regional settings and from three primary theoretical perspectives: institutional theory. We discuss the special methodological as well as empirical challenges associated with doing research in emerging economies.surprisingly. transaction cost economics. we briefly summarize the individual contributions of the works included in our special research forum. rapid-growth countries using economic liberalization as their primary engine of growth. which favors the decoupling hypothesis. we analyze the relationship between trade and the degree of business cycle synchronization of emerging Asian economies with the industrial countries. Latin America. Finally. Private and public enterprises have had to develop unique strategies to cope with the broad scope and rapidity of economic and political change in emerging economies. and the resource-based view of the firm. we show that business cycles in China and India have been very different from those of OECD countries. growth in China has changed the distribution of economic activities across the world. the current global financial crisis has had largely similar effects on industrial countries and on emerging Asian economies. THE ASIAN FINANCIAL CRISIS “Like other financial crises of years past. Second. we show how different theoretical perspectives can provide useful insights into enterprise strategies in emerging economies. and the Middle East and transition economies in the former Soviet Union and China.

says 100% of the global growth forecast by the fund for 2009 was to have occurred in emerging markets. Loan classification and provisioning practices were too lax. These financial-sector problems could not have progressed so far were it not for longstanding weaknesses in banking and financialsector supervision. Consumer sentiment in Seoul." he says. . The IMF is now ladling out cash as fast as suddenly bankrupt economies line up for it. state-owned banks did not pay much attention to the creditworthiness of borrowers. Ship owners in Hong Kong say the rates for hiring the large container vessels that ship consumer electronics. problems in the external sector.In this case. Now that prop underneath the world's economy has buckled. there was too much "connected" and "policy-directed" lending. The financial crisis is now beginning to slow real economic activity — in some cases quite dramatically — all over the world. the capital of South Korea. The real economic pain in emerging markets matters immensely to the economic prospects of the U.000 has been trimmed to just $10. On top of this. his life savings of $50. and contagion running from Thailand to other economies. Indeed. and there were strong expectations of government bailouts should banks get into difficulties. toys and clothes to the West have fallen 40% in the past two months. amid a drastic slowdown in international trade. and other developed countries. has weakened sharply and stocks have plunged. has plunged to its lowest level in eight years. to the extent that that there was growth in the U. growth has slowed sharply. "we have to make sure that potential is protected. first deputy managing director at the IMF.S. And across what had been the booming economies of Eastern Europe. The fund has $200 billion on hand and access to about another $50 billion to manage the intensifying global emergency. it was buttressed by strong exports. economists say. the local currency. three factors predominated: financial-sector weaknesses cum easy global liquidity conditions. "Now. bank capital was often inadequate relative to the riskiness of banks' operating environment. the Korean stock market. and a lot more besides. Park Yung Tae is an office worker who was laid off earlier this year and invested his severance pay in the KOPSI." That's plainly going to be an expensive proposition. Big mistake.000. before this is over. Jonathan Lipsky. as the won. the quality of public disclosure and transparency was poor. Chances are it will need all of those funds.S. earlier this year.

Some argue that the crisis countries didn't need strong IMF medicine because they were merely victims of a (negative) shift of sentiment on the part of international investors. bank closure. This ignores the serious financial-sector weaknesses and external imbalance problems outlined above.OBJECTIVES: • Evaluate opportunities in specific countries in the context of your company's core capabilities • Realistically assess how the business environment in an emerging market creates revenue opportunities for your company • Design or modify product and service offerings for your target segments within the emerging market—from high-income to underserved low-income populations • Address emerging market characteristics in demand generation strategies • Recognize institutional gaps and economic roadblocks to your success. The market may have overshot once the crisis got started. saving and loan crisis).S. and then design effective strategies to overcome them • Create an organization willing and able to shift its mindset to better address the needs of a particular market • Compete against local and multinational players by building capabilities or creating new partnerships THE ROLE OF THE IMF The IMF has recently been subject to sharp criticism on many fronts. If there . and that allowing insolvent banks/thrifts to remain open encourages "gambling for resurrection" that can add significantly to the ultimate public-sector tab of banking problems (recall the U. The Fund has also been criticized for recommending higher interest rates. With the exception of the "moral hazard" argument. and tighter fiscal policy. but the "innocent bystander" hypothesis simply doesn't wash. most of this criticism is off the mark. But experience suggests that it is difficult to stabilize a rapidly declining currency without a temporary period of high interest rates (recall the case of the Mexican peso in early 1995).

Foreign trade is not the only factor affecting the degree of business cycle correlation. Kalemli-Ozcan et al. this channel may be less important for their business cycles. In a standard two-country model with perfect capital mobility. Since China and India seem to be specializing vertically in their foreign trade. leading to less similar business cycles. in many empirical studies the correlation between financial integration and similarity of business cycles has been positive. CRISIS IN EMERGING MARKET ECONOMIES . (2009) find that in a sample of twenty high income countries negative correlation does obtain when one controls for countrypair-specific factors as well as the global trend to greater integration. Nevertheless. which can cause business-cycle divergence between the emerging Asian giants and their trading partners. INTERNATIONAL TRANSMISSION OF BUSINESS CYCLES Economic development is determined both by domestic (e.g. more complete financial integration enables greater specialization. The Asian emerging economies with their strong export orientation could therefore be heavily exposed to foreign shocks. In many theoretical models. the country encountering a positive productivity shock also receives capital inflows from the other 5 country.g. However. In open economies. the increased flows of foreign direct investment would increase or decrease business cycle correlation. it was that the authorities did not close enough insolvent banks. as in Krugman (1998). a greater degree of financial integration leads to lower business cycle correlation.1 Moreover. it is not certain whether e. which leads to lower correlation of national business cycles. Given China’s relatively strict capital controls. the specialization forces discussed by Krugman (1993) can dominate. Actually.was a mistake in Indonesia. the latter are playing an increasingly important role and often 4 determine also domestic policies. which are aimed at insulating the economy from adverse external economic shocks. aggregate demand shocks and budgetary policy) and international factors (external demand and international prices of traded goods).

growth has rebounded sharply. especially in domestic financial and corporate systems. Within these programs. and ultimately human progress. has become increasingly out of tune with the rigorous demands of our globalized economy. • The third tier is to boost efficiency. and to recognize the sheer magnitude of the structural reforms that had to be initiated from the outset. In emerging economies. characterized by mechanisms that interfered with market allocation of resources. Conventional monetary policy has reached its limits and debt has risen to such high levels that it constrains the scope of fiscal policy. The approach of "managed development" underlying economic policy. by contrast. we can discern three tiers of recovery: • The first tier is to restore stability. Lost confidence." and more than that. the importance of the structural element is the hallmark of these programs. has to be restored through fundamental institutional changes.In a worlds that becomes more global every day. in a world where private business everyday plays an increasingly dominant role in innovation. • The second tier is to improve soundness. CHALLENGES OF BEING GLOBAL PLAYERS In the aftermath of the crisis. Among advanced economies. As usual. The policy programs to respond to crisis in Asian countries had to be speedily designed. which means they face rising inflation. due to the fact that questioning this approach was tantamount to challenging many vested interests. to put the proper emphasis on the immediacy of macroeconomic adjustment. will be essential. surges of capital inflows. immediate action is needed for countries faced with sudden acute pressure on their balance of payments. allowing market forces to operate more freely. This tier perhaps has been the more controversial due to many misunderstandings on what were at an earlier stage the parameters of the "Asian miracle. the major concern is weak growth and impending fiscal pressures. financing. investment. there is a striking dichotomy between advanced and emerging economies in the short-term risks and policy challenges that they face. Basic changes in the approach to policymaking. As a matter of fact. . and pressures of rapid currency appreciation.

Along with an increase in their economic heft. These projected demographic advantages do not guarantee that India will be able to achieve higher growth rates than China. IMPACT OF CHINA AND INDIA’S RISE ON INDUSTRIALIZED AND OTHER EMERGING ECONOMIES Irrespective of the current global economic crisis. through exploiting the potential of their huge populations to take their rightful place on the world stage. In terms of the demographic changes that are expected to take place by the year 2030. where emerging economies have a much larger say than before. India is forecasted to have a much younger working population in relation to China. emerging economies are becoming more important players in setting global priorities. China and India are clearly aiming to become global powers in the 21st century. Hungary and Slovakia who have recently gained accession to the EU are likely to suffer more than say. the adverse or positive affect of India and China as global players varies across countries. In sum. The same is true in international institutions such as the Financial Stability Board and the IMF. with 28% of the working population between the ages of 15-29 compared to 19% for China. 2004). their sheer overall size makes it important for them to consider the regional and global spillovers of their policy choices. political. remain relatively poor in per capita terms. commercial aeroplanes and household electrical components. such as China and India. More alarmingly is that 23% of China’s population is expected to be in the 50-64 year old group compared to only 9% for India (Financial Times. advantages of being younger will not amount to much. France Italy or Britain. that are producers of technologically advanced goods such as luxury cars. While emerging markets. both countries face different economic. Eastern European countries such as Poland. For example. Unless the primarily and secondary educational system is improved as well as made more accessible and malnutrition and poverty levels are brought under control. social and . The unofficial anointment of the G20 as the major body determining the global economic agenda has given emerging markets a prominent seat at the table. The global financial crisis presents a unique opportunity for emerging markets to mature in another dimension – taking on more responsibility for global economic and financial stability.

It is only through viewing the challenges faced by India and China in sustaining high economic growth to address poverty reduction. M. which have either been restricted to a country or to a specific region. Brookings Institution Press. Developed nations of the world will need to cooperate and work closely with economically powerful emerging economies such as China and India rather than to perceive their growing influence as somehow threatening to their own economic stability. Emerging Markets: Resilience and Growth Amid Global Turmoil.Prasad (2011). and Eswar S. Reference: Ayhan Kose. The dilemma of addressing global imbalances thus goes far beyond the responsibility of one or two countries such as China and the US. control environmental degradation and achieve sociopolitical progress as a collective problem that we can collectively find solutions that face 16 an ever globalized and integrated world economy. CONCLUSION The current global economic crisis is different from previous financial crises. or a specific region of the world. .environmental challenges in 13their ambition to become global leaders and to deal with sudden shocks as the current global economic crisis. This harsh realization. minimize inequality. fortunately for the welfare of humanity at least in the short term seems to be gaining steady ground over national interests.