The financial crisis and emerging economies

The role of globalisation after the 2008–2009 financial crises has fundamentally altered the economic landscape around the world.

Excessive dependence on exports to the United States and the European Union has long been identified as a problem for developing countries. Product and market diversification should be part of any trade or development strategy.

The fall in demand in the US and the EU triggered by the crisis made this problem even more acute, and made rapid adjustment a requirement. In an effort to lessen their dependence on traditional export markets, many multinational companies have paid more attention to emerging markets during the crisis.

For large emerging economies, this has translated into a greater focus on domestic markets. For smaller economies, it has meant a focus on exporting regionally. For the poorest countries, the shift in demand has resulted in the arrival of new brands and new investors from emerging countries.

The shift in markets to the south has been facilitated by two distinct components. These include the growth of south-south trade, including a greater focus on domestic markets in large emerging economies and the increased interest of exporters in the north in emerging markets in the south.

Local producers in emerging economies, particularly in Brazil, China, India, and South Africa, have tried and increasingly succeeded in competing with foreign producers.

An example of this trend can be seen in the cellphone sector where the lack of variety in low-end product lines, higher prices, incompatible standards and restrictive regulatory requirements all contributed to the shift in demand from foreign to local handsets in China.

The 2008–2009 crises also accelerated these trends.

The crisis in advanced country markets has inspired export strategies to other developing countries. The fallout of the subsequent crisis has boosted south-south trade, which can be seen in the case of intermediate goods where south-south trade jumped to 50% of world intermediate goods trade in 2009 compared to about 25% in 2000.

The shift in the centre of gravity of global demand and the increasing share of south-south trade has major implications for global value chains (GVCs). Although GVC-centred economic growth has largely been a story of rising supplier capabilities, there has been a growing recognition of the key role that final markets play in this process.

While market size and growth are part of the story, the nature of final markets and the role of buyers in guiding the direction of supplier capabilities have been crucial.

The shift of end markets to the south presents several major challenges for firms in developing countries.

First, consumer preferences in emerging countries are different from those in industrialised economies. While both emerging market firms and consumers are moving up-market, price remains an overwhelming consideration in developing countries. As a result, product differentiation based on variety and quality matters less. Exporters to these markets, therefore, need to “commodify” or standardise established products by dramatically reducing costs without sacrificing quality.

A tangible example of this trend can be found in the automotive and electronics sectors, respectively, with the growing importance of products like the $3 000 car and the $300 notebook computers.

Secondly, the importance of product and process standards can be significantly lower when the demand comes from developing countries — for both final and intermediate goods in GVCs. This could have significant consequences for developing countries that invest in complying with higher standards set by developed countries.

Also, it has a potentially important impact on the negative externalities of global production on social and environment compliance and other public goods.

Third, emerging economies like China have a preference for relatively unprocessed products. This trend could affect less-developed countries trying to improve their position in value chains. Localisation of value-added, such as processing at the source, has been an important strategy for developing countries trying to move up the value chain and it has often been the first step in industrial upgrading.

But there is no guarantee of a win-win division of labour among emerging countries at different stages of development.

By restricting imports to unprocessed products, a lead firm can confine its suppliers to the low end of the value chain and limit their upgrading path: in other words, the buyer has the power to either create a path to upgrading or kick away the development ladder.