Emerging markets in the global economy

The article today draws upon the latest findings from an International Monetary Fund (IMF) report, providing an analysis of the increasing significance of G20 emerging markets (EMs) in the global economy. The report highlights pivotal developments and trends that have shaped these economies and their integration into global markets.

Reshaping power structures

China's accession to the World Trade Organization in December 2001 marked a pivotal moment for the integration of G20 EMs into the global economy. This event catalyzed a substantial increase in the global trade share of these nations, growing almost two-thirds faster than trade among other countries, according to the recent IMF report. This rapid expansion has been instrumental in promoting not only global trade but also diversification across countries, reshaping international economic relationships and power structures.

Expanding influence and investment

The IMF report notes that over the two decades following China's WTO accession, there has been a significant increase in the role of G20 EMs in global commerce. The proportion of goods imported and exported by these countries in total global trade has doubled, underlining their growing influence and connectivity. Concurrently, Foreign Direct Investment (FDI) originating from G20 EMs rose from about 6 percent of the total FDI in 2005 to approximately 10 percent just before the pandemic. This increase in FDI underscores the growing financial clout of these economies on the world stage.

Shift in global trade dynamics

Since 2018, the dynamics of trade and investment flows have shown notable changes. While flows to advanced economies have generally declined relative to the global average, investment in emerging market and developing economies has surged. This shift partly reflects the strengthening of investment ties under initiatives such as China's Belt and Road Initiative. Additionally, this divergence in trade and investment flows has coincided with the onset of US-China trade tensions and has been further accentuated by rising geopolitical tensions. Major economies have increasingly realigned their trade and investment linkages through strategies like "friend-shoring" and near-shoring, aiming to create more resilient and politically secure supply chains, as detailed in the IMF report.

Increasing financial integration of G20 emerging markets

Bank and portfolio flows signal growing integration

The participation of G20 emerging markets (EMs) in global trade is closely mirrored by their increasing financial integration, which is primarily evidenced through rising bank flows and, to a lesser extent, portfolio flows. Although the overall scale of financial flows is smaller than that of trade, the integration into global finance is significant and growing.

According to recent data, lending from banks in the Group of Five (G5) major industrial economies—France, Germany, Japan, United Kingdom, and United States—to G20 EMs has nearly doubled since the early 2000s. It peaked at more than 2.5 percent of G5 economies' GDP in 2014 before experiencing a gradual decline. This increase in lending has predominantly been driven by China, followed by Brazil and India, underscoring the pivotal role these economies play in global financial dynamics.

Contrasting dynamics in cross-border lending

While G20-EM-headquartered banks have exhibited relatively limited cross-border lending to advanced economies, their engagement with other emerging market and developing economies is more pronounced.

Notably, it represents about 20 percent of total cross-border bank claims, with Chinese banks playing a leading role in this expansion. This trend indicates a growing influence of G20 EMs in the financial sectors of other developing regions, reflecting their rising stature and capability in the global banking sector.

Portfolio investment trends

In terms of portfolio flows, the liabilities of G20 EMs to the G5 economies increased from 2.9 percent to 5.3 percent of the sender countries’ total portfolio claims between 2001 and 2021, equivalent to 4.6 percent of G5 GDP in 2021. This growth in exposure is particularly notable in China, followed by India, Mexico, and Brazil, indicating significant financial ties and dependencies.

A closer look at the US cross-border securities portfolio reveals similar patterns, although actual portfolio flows from advanced economies to emerging markets, especially China, are likely higher once flows through low-tax jurisdictions are accounted for.

On the asset side, however, G20 EM portfolio flows to the rest of the world, while still limited, are on the rise, reaching just over 2.5 percent of total cross-border portfolio assets as of 2021.

Expanding role of G20 ems in global commodities and trade networks

Global commodities production

G20 emerging markets (EMs) have become pivotal players in the global production of a diverse array of commodities, reinforcing their stature in the global economy. Beyond China's extensive output across multiple sectors, Russia and Saudi Arabia are recognized as crucial suppliers of oil and energy, while Brazil is known for its substantial production of agricultural commodities and minerals. This vast production capacity not only meets domestic needs but also caters to global demand, influencing global market dynamics and commodity prices.

In recent years, the role of G20 EMs has expanded beyond traditional commodities to include minerals critical for the green transition, such as lithium from Argentina and nickel from Indonesia. These materials are essential for manufacturing batteries and other technologies that support sustainable energy solutions. As the global demand for these green commodities continues to escalate, the influence of G20 EMs on the supply chains and market volatility is expected to increase, particularly in a world where supply networks are becoming more fragmented.

Integration into global value Chains (GVCs)

The participation of G20 EMs in Global Value Chains (GVCs) has seen significant growth, both in supplying raw materials and manufacturing products downstream, as well as in providing inputs upstream to other economies. Data shows that the median G20 EM has doubled its contributions to global inputs since 2000, while the demand from these economies for outputs has more than doubled. This expanded participation reflects their evolving roles not just as commodity suppliers but as integral parts of the manufacturing and processing stages of GVCs.

Drivers of increased trade and integration

Several factors contribute to the enhanced trade and integration of G20 EMs into GVCs. Declining costs of transportation, advancements in information and communication technology, and reduced barriers to trade and capital flows have all played a crucial role. These developments have enabled G20 EMs to become more vertically integrated within global supply chains. The manufacturing and mining sectors, in particular, have seen substantial integration, with China leading in manufacturing output, heavily reliant on external demand. Meanwhile, countries like India and Russia have also solidified their roles, with India rapidly growing its manufacturing sector and Russia strengthening its linkages through the energy sector.

Evolution and global influence of G20 emerging markets

Diversification and integration into the global economy

Over recent decades, G20 emerging markets (EMs) have undergone significant transformation, becoming more diversified and tightly integrated into the global economy. This evolution has been supported by strengthened policy frameworks which have led to more stable macroeconomic environments within these nations. As a result, the volatility of GDP growth across G20 EMs has diminished, showing a convergence towards the stability levels typically seen in more advanced economies.

Reduced vulnerability to external shocks

The influence of external shocks on the GDP growth of G20 EMs has seen a noticeable decrease. Historically, these shocks accounted for about half of the variations in GDP growth up until the global financial crisis. In the years following, their impact has reduced to about one-third. This shift reflects the growing economic resilience within these markets, which can be attributed to more robust monetary and fiscal policies, as well as diversified economic activities that are less susceptible to external disturbances.

Impact of domestic shocks on global Markets

Despite these advancements, the ability of domestic shocks within G20 EMs to affect global economic variables remains a critical area of study. Utilizing the analytical framework of Fernández, Schmitt-Grohé, and Uribe (2017), this analysis applies a "small open economy test" to assess the potential global repercussions of domestic fluctuations in these economies. The findings indicate that cyclical movements within G20 EMs have increasingly affected global economic indicators such as commodity prices and financial variables (including the US short-term interest rate, the 10-year real rate, the broad dollar, and US investment-grade corporate spreads). Notably, while all G20 EMs have impacted at least one of these global variables since the global financial crisis, it is primarily domestic shocks in China that have had a pervasive influence across all surveyed global variables.

Conclusion

This examination underscores the complex and growing role of G20 EMs within the global economic landscape. As these nations continue to integrate and mature economically, their internal economic fluctuations are becoming more capable of influencing global economic conditions. This interdependency highlights the need for vigilant monitoring and responsive policy frameworks both within and beyond the borders of these emerging markets to manage and mitigate potential global impacts effectively.