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Emerging markets will have their day

Friday 24 September 2010 - by Nicolas Veron

 Bruegel senior fellow Nicolas Veron says emerging economies are creeping up the financial league tables after the fall-out of the financial crisis.

The rise of emerging economies has long been recognised as a defining feature of our times when it comes to trade, manufacturing, and an increasing range of services businesses.

Until recently, however, there was a widespread sentiment that international finance was somehow escaping the trend.

A dominant share of financial assets, financial companies, financial centres and financial regulatory power remained concentrated in the North Atlantic.

Even as the world’s economic centre of gravity was moving away, the financial one seemed firmly anchored in the West. But this feeling was an illusion that is rapidly dissipating.

In this shift the crisis has had a powerful accelerating effect, even though cracks in the West’s financial dominance had appeared before its start.

Since early 2009, financial institutions from emerging countries consistently weigh more than those from either the US or Europe among the global top 100 by market capitalisation, and Chinese banks have dominated global rankings since late 2007.


Their relative position has strengthened while that of Western peers was undermined by market turmoil and deleveraging.

Non-Western financial centres such as Hong Kong and Singapore are similarly climbing up the league tables.

Sovereign wealth funds make their impact felt on global markets. Increasingly, emerging economies produce not only huge savings but also investable financial assets.

It is not just the numbers. At a more intangible level, the crisis has hit the pre-eminence of Western models.

Not only have icons such as Merrill Lynch or Citi bitten the dust; the world’s most influential financial bodies, such as the US Federal Reserve and Securities and Exchange Commission and the UK Financial Services Authority, have had to acknowledge major misjudgments.

By contrast, the Chinese, Indian or Brazilian supervisors, long derided as under-developed, have successfully prevented domestic financial turbulence and even applied “macroprudential” instruments (such as limits to loan-to-value ratios) that were ignored in the West.

Emerging economies feel no responsibility for the crisis, even as they suffered from it. The West’s moral authority is at a correspondingly low point.


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