Friday, July 24, 2015

What's up with emerging markets?

The WSJ reports on an interesting puzzle:  While emerging market currencies have fallen, ...

The Brazilian real has lost one-third of its value in the past 12 months, and is just above a 12-year low. Indonesia’s rupiah hit a fresh 17-year low against the dollar Thursday, while Thailand’s baht accelerated its recent slide, hitting its weakest in more than five years. Earlier this month, the Malaysian ringgit hit its lowest level since 1999; it is down 13.6% since the start of 2014.

...their exports have not picked up.  A weaker currency is supposed to make exports cheaper, and imports more expensive, so the "current account balance" (exports-imports) should improve, and stimulate the domestic economy.

The answer to the puzzle is declining demand in China:

These countries, especially those reliant on export-led growth models, “are being forced to adjust to weak external demand, low commodity prices and a rebalancing in China,” said Alex Wolf, an emerging-markets economist at Standard Life Investments.

Remember that causal statements in economics, like "a weaker currency implies an increase in exports," are sometimes masked by other causal forces. In this case a slowdown in China, a major trading partner, has led to a decline in demand for their exports, which has more than offset the increase in demand caused by a weakening currency.

When describing causality, economists sometimes use latin jargon (to make us sound more learned than we really are) "ceteris paribus," meaning "holding everything else constant." In other words, if China demand for emerging country exports had not declined, we would have seen emerging country exports increase.

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