John B. Hurford Memorial Lecture: Lessons from Emerging Markets

Panelists:
Joyce Chang Global Head of Fixed Income Research, J.P.Morgan
Richard H. Clarida C. Lowell Harriss Professor of Economics and International Affairs, Columbia University
Peter B. Henry Dean, Leonard N. Stern School of Business, New York University; Author, Turnaround: Third World Lessons for First World Growth
Presider:
Tim Ferguson Editor, Forbes Asia
Description

Join Joyce Chang, Richard Clarida, and Peter Henry for a discussion of how emerging markets have responded to the global recession of 2008-2009 and potential lessons for developed countries.

Inaugurated in 2002 in memory of Council member John B. Hurford, this annual lecture features individuals who represent critical new thinking in foreign policy and international affairs.

Audio
Transcript

TIM FERGUSON: Welcome, everyone, to this evening's Council on Foreign Relations John B. Hurford Memorial Lecture, which tonight is focused on "Lessons from Emerging Markets." I have with my Joyce Chang, Peter Henry and Richard Clarida. This annual lecture, inaugurated in 2002 in memory of council member John B. Hurford, is -- features individuals who represent critical new thinking in foreign policy and international affairs.

And I would like to recognize members of the Hurford family and the Hurford Foundation who are with us today. We have Helga and Jennifer Hurford and Jayne Kurzman of the foundation. Welcome, and very much appreciate your support.

Emerging markets is a rather encompassing term. It could mean, to some people, everything short of the G-7 industrialized countries, or for others it means those emerging or developing markets that are part of the growth story around the world. I'll defer to my speakers today as to how they care to define it, but the term is a bit challenging as a -- as a starting point.

Let me suggest this as a sort of economic mini-history -- a mini-narrative of the last few years as a -- perhaps a way to get the discussion going. And all of you can either take issue with this or use it as a jumping-off point.

In the wake of the economic crisis, 2008 and '9, what are commonly called the emerging markets were seen to be in a particularly fortuitous situation. Because of lessons painfully learned over the previous 25 years, many of these economies were at that point low on leverage compared to the Western industrialized countries -- both household debt, corporate debt, public debt -- and therefore in a position for -- to expand, to build, to grow in a way that the Western countries were not.

That was the situation until perhaps -- and perhaps may still be true in some of these markets. But in the recent period, with the advent of very loose money in the industrialized world, several of these markets have to now contend with the downside of rapid growth, the prospects of inflation, asset bubbles, hot currencies as investors seek to put their money into these markets. So they've had to, perhaps, face the conditions of growth that they perhaps did not anticipate in 2008 and '9.

Now, looking forward in the immediate future, they're faced with the prospect of having to cool down their economies. The stock market, the equity markets for emerging markets are beginning to reflect this a bit. And now they are in a position where they need to contain the inflation, they need to contain the current account deficits, not buy too many imports and to watch those public deficits. So it's not a completely rosy picture, but it's a better situation to be in than a lot of the industrialized countries that are still flat and barely above -- on a growth incline.

Peter Henry, you have released a book, lessons -- Third World lessons, that very much coincides with the title of our discussion today. Why don't you take a first stab at addressing the matter of: Are these emerging markets in the catbird seat at this point, and why?

PETER HENRY: Thanks, I'll be happy to. So I think it's very helpful to actually take your point about leverage and the position these countries are in right now as a result of decisions that they made cumulatively over the past couple of decades.

So the reason why, you know, I call the book "Turnaround: Third World Lessons for First World Growth" is because if we take kind of a unifying message across -- if we look at the last three decades, going back to roughly the late 1970s until now, how is it that countries that were formerly called Third World countries, in fact they were called Third World countries, became emerging markets?

And I think the central point to take away is they did that through what I would call discipline. But discipline doesn't mean fiscal austerity. What discipline means, in the context of fiscal policy for instance, is the willingness to save for a rainy day. It's no more complicated than what we call in the textbook running countercyclical fiscal policy.

So to your point, between 2002 and 2007, when the world economy was booming -- growing at 4.9 percent per year -- emerging markets were running fiscal surpluses of about 1 percent of GDP on average. The advanced nations of the world were running deficits, which is exactly counter what you're -- what the textbook tells you you ought to do. And consequently, as a result of that, debts were falling in the emerging markets, they were rising in the advanced countries.

And just to give a very -- I -- two very specific examples of what I would call sort of First World grasshoppers and Third World ants -- (chuckles) -- is the example of Chile. So Chile -- in 2008 the finance minister of Chile at the time, Andrews Velasco, was burned in effigy in the streets of Chile because he refused to give back the large fiscal surpluses that Chile was experiencing as a result, largely, of the copper boom during that boom period. He refused to do so. He said, this is money for a rainy day. And when the global downturn hit, Chile was able to institute a $4 billion tax cut package to keep growth going.

On the other hand, I think the United States is a good example of going the other direction. And in 2000 we had a record budget surplus and again in 2001 turned a $36 billion surplus. We decided not to save that surplus. And we certainly had other shocks after that, but I think you can make the case that had we saved that surplus, we would have been in a better position to deal with those shocks. And just to make clear that I'm not making a partisan point here about the United States, I mean, you can argue that had we had a Gore presidency, that surplus would have disappeared in the form of higher spending instead of tax cuts.

So the point is really about running countercyclical fiscal policy, saving for a rainy day to -- discipline means sustained commitment to the long term, not fiscal austerity. And because of the discipline that emerging markets have shown or third-world countries have shown, they've now become emerging markets.

FERGUSON: They did show discipline in many cases. They also -- as you suggest with Chile, they were the beneficiaries of great commodity boom, in copper primarily, in the case of Chile. That in turn -- the (worm ?) may have turned a bit on the commodities story.

Joyce, do you -- do you see this emerging markets bonanza the last five to 10 years as a commodity-driven story, or is it much more than that?

JOYCE CHANG: It's much more than a commodity-driven story. But commodities are a big part of this. About two-thirds of the emerging markets countries are commodity exporters, either agricultural commodities, metals or energy. But what changed over the last five years?

If you take a look at the way that we have to think about emerging markets versus developed markets, the average developed country, since 2007, before the financial crisis, has added about 36 1/2 percentage points of GDP to its debt burden. So the average developed country now has a debt burden that is about 119 percent of GDP, over a hundred percent of GDP, and well over that in a number of countries. Emerging markets are at a debt burden of 35 percent of GDP. The average developed country had an increase in their fiscal deficit of about 5 percent of GDP.

Now, emerging markets countries were able to use fiscal policy, countercyclical policies, because they had a surplus, but the average emerging markets country now has a fiscal deficit around 2 percent of GDP. It's still 5 or 6 percent of GDP, on average, for developed countries. So this has a huge impact on the growth implications going forward. I mean, looking at emerging markets today, they account for -- China accounts for about half of the contribution -- the contribution to global GDP growth, and emerging markets, in aggregate, about 70 percent. And emerging markets are growing at about 5 percent this year, developed markets at a little over 1 percent. So it's not just commodity prices; it's that after the Asia and the Russia financial crises, you had a whole series of reforms.

And what is the checklist of reforms that emerging markets countries put into place? They abandoned the fixed exchange rate. Many countries had used their foreign exchange reserves to defend an exchange rate. They adopted inflation targeting. They saved the oil windfall. So if you look at global foreign exchange reserves today, about 80 percent of them are in emerging markets countries. Two-thirds of emerging markets are now net external creditors. So it's not just commodity prices; it's also the result of responsible policies, you know, basically saving the windfall that they had, adopting greater transparency around that and attracting greater private capital flows. In the '90s emerging markets attracted about 5 percent of the capital flows, and that has, you know, quadrupled over the last two decades.

FERGUSON: A lot of it is chasing yield, the better growth rates, better return rates in several of these emerging markets -- (inaudible) --

CHANG: I think that was the story, but you're now at a point where the asset class is maturing. If you actually look at the credit ratings and the sovereign spreads for emerging markets countries, they're actually well below many European countries.

So let me give you an example. A country like Bulgaria, which before they did their Brady Plan, had 160 percent of GDP as their debt burden -- they now have the same credit rating as Italy, they have a rating that's higher than Ireland and Spain, and they've brought down their debt burden tremendously, and they trade at a much narrower spread than Italy as well. So it hasn't just been seeking yield, although that was a large part of the story in the aftermath of the global financial crisis. It's also been now the growth prospects going forward compared to developed markets because of the size of the debt overhang and the fiscal overhang.

FERGUSON: Richard, you've done a lot of work with the G-7 countries in the various aspects of your career. Is the lesson that they are likely to take from this experience one of discipline and being countercyclical in policy, or will they take any lessons at all? Is it too late to take lessons?

RICHARD CLARIDA: Well, honestly -- honesty compels me to say I would hope so, but I don't think that is in -- is likely, at least for a while. I think in the -- in the case of the U.S. in particular, the U.S. benefits from what's been called the exorbitant privilege of providing the global reserve currency. There were those five or six years ago who said, well, the U.S. will lose that status to the euro, but obviously the turmoil in Europe has delayed that day, probably for decades.

And so as a result, in the U.S., we get a subsidy for providing that currency, that privilege, which is -- which is borrowing costs which are quite low and which creates a demand for our assets that delays that market discipline. So I think in the case of the U.S., it's not at all -- not at all imminent.

Again, Europe right now is facing an existential threat, so probably a lot of European officials will admit that during the prior decade, the first decade of the euro, they were so focused on hitting that inflation target of 2 percent that a lot of the necessary institution-building in terms of a fiscal policy, they should have done before the crisis. Now in fact, I was just at a conference at the New York Fed today in which they admitted, you know, we're doing this on the -- on the fly.

So again -- and then if you look at Japan and the G-7, you know, Japan is now trying to avoid a third decade -- a lost decade of deflation and disappointing growth. And they are embarking on a very, very, you know, sizable, some would say ambitious, quantitative easing program. And ultimately, the day of reckoning on Japan's debt will have to be faced, but certainly, that is not imminent either.

So I think the remarkable point to remember -- just to reinforce what both of the other panelists said -- is that if we had had this session just 10 years ago, it would have been unthinkable to be -- to be saying what we're doing, that these emerging -- or I like to say, emerged economies not only say that they're targeting inflation, they're hitting those targets, they have very, very variable debt ratios, it's been mentioned. And the market is acknowledging that with the interest rates that they pay.

So although I think there are a number of lessons to be learned, I think for the reasons that I cited that it will be a long time before the G-7 fully internalizes that.

FERGUSON: Peter, much as there are lessons to be taught by the experience of the emerging-market countries, there are still lessons that they themselves must be learning. The BRICS countries, for example, are each in turn facing challenges at the moment. What are the lessons that the Third World or emerging-market countries indeed are still learning?

HENRY: That's a great question. I think the critical point is that there is no easy road to prosperity. They're all -- all sustainable paths to prosperity are long. And emerging markets have to continue down that road. And to -- how do we -- how do we know this is the right -- the right lesson to take away? Well, I think it's helpful to give a little historical context.

So go back to 1985, when we were mired in at that time what was called the Third World debt crisis. So we just had the World Bank IMF meetings this past weekend in Washington. In October 1985, the World Bank IMF meetings were held in Seoul, South Korea. And then-Secretary of the Treasury James A. Baker III goes to Seoul, South Korea, in the -- in the midst of the debt crisis and basically unveils a speech called "The Program for Sustained Growth", quote, unquote, that was essentially the U.S. Treasury's view of what these countries needed to do in order to start growing, so fiscal discipline, privatizing (state-owned ?) enterprises, reducing inflation, opening of trade, a laundry list of things.

And as you might imagine, this speech, which -- the -- almost all of that speech, which came to be known as the Washington Consensus, effectively, was not particularly well-received by the developing countries.

But over time -- and this is not my view, this is the view of, frankly, you know, 30 years of historical data -- if you look at how -- it's not that the countries that succeeded did all the 10 -- list of 10 things that Baker listed in his speech. Countries that adopted the reforms that were appropriate for their specific circumstances and stuck with them, over time, found that their economies turned around.

How do we -- how do we know that? Well, there are two things to notice: One, if you look at how frankly, coming into Joyce's world, how equity markets in these countries actually responded at the time, when these governments instituted big policy changes -- they responded very favorably. So they're basically saying we anticipate that these policy changes are going to drive value.

And then subsequently, if you actually look at what happened, were the -- were the markets right after the fact? Yes, in fact, they were. So just to give a very casual example: In 1985, if you looked at the price earnings ratios in Latin America on average across the region, was about 3 1/2, right, meaning that yields were at 27 percent.

By the mid 1990s, after inflation stabilization programs are firmly in place and these countries have demonstrated the clarity that they're moving in this direction of the long road, price earnings ratios are at 14. They're are huge valuation gains that take place as a result of this. So we know, coming back to answer your question very specifically, that market-friendly policies, implemented in a smart, strategic way that's appropriate to the country-specific circumstances work. And emerging markets need to continue to do that. There's still a lot of work to do in places like Brazil. Interest rates are still quite high locally in Brazil. Mexico needs to reform its labor markets, needs to deal with monopolies in the telecom sector -- lots of changes, so then you have -- (inaudible) -- to continue moving up foreign direct investment. So there's lots of work that's left to be done.

But I think the -- one of the -- one of the key points, though, is that in order for that work to happen in the emerging markets, the First World has a big role to play in basically saying, you know, we're willing to begin making some of these changes ourselves so that the emerging market governments that are trying to continue down this -- our road can show their local populaces that in fact the First World is actually willing to play ball.

FERGUSON: Joyce, do you think that markets are, in a sense, overriding the political world here, that is to say, the investment flows of the world have made a decision, that is to say, that these emerging markets are on a higher stature par than the political world is willing to acknowledge?

CHANG: Well, I think there's a couple different ways to look at that question. I mean, one of the biggest concerns about emerging markets have been the high level of government intervention, but then the global financial crisis changed that. I mean, you know, U.S. policy had to be very interventionist for our crisis, and the same is true for the eurozone. And I think intervention is still an issue in emerging markets. I mean, you still have many countries that have capital controls. It's now called financial fragmentation or macro credential supervision instead, but they're capital controls. So I do think that part of the thinking has shifted. So what do you consider political risk? Is it government intervention? And I think one thing that is actually very interesting is that since the global financial crisis, we've seen a deterioration in both emerging markets and developed markets, and the corruption and the transparency indicators. But it's gone down much more in the developed markets than it has in emerging markets.

FERGUSON: Elaborate on that a bit.

CHANG: Well, I think that part of it was that when the eurozone was looked at as risk-free, you didn't really scrutinize the numbers because it was risk-free. So as you started to have to do the due diligence at the regional level for a lot of countries, the data wasn't readily available.

But remember the origins of the Mexico crisis. They had only released the reserves three times per year. And nobody knew what their foreign exchange reserves were. And, you know, then they had to go under an IMF program, which requires you to report everything daily. So a lot of these countries took the changes in the 1990s. And I don't know how much of it was deliberate, but emerging markets really didn't have a choice. They didn't have access to the kinds of bailout packages that you -- had put into place for some of the developed countries. So if you had a bad exchange rate, you had to let it go. You had to devalue.

Some of it was that the options were not so much deliberately planned but that each crisis actually got rid of the source of a crisis because reforms were forced, and they were forced relatively quickly, which led to the V-shaped nature and the boom-bust nature of what we saw in emerging markets through the 1990s.

FERGUSON: Richard Joyce mentioned the International Monetary Fund, which is three dirty words in a lot of these countries for many of the last 25 years. Did the -- is the IMF in fact a credit for the institution of virtue, if you will, in some of these emerging markets, or is that misreading the story?

CLARIDA: Well, I think there are cases on either side. I think on balance, though, I think it has been a positive. I think that oftentimes the -- as would be the case in a rich country, the decisions that need to be made to have structural improvements in the economy have some short-term pains, some winners and losers, and it's difficult or impossible to get that without the focus and urgency of a crisis and without the role of the -- of the IMF. So, no, I think that that's certainly -- I think that that's certainly relevant here.

And I think we see this actually playing out in real time in Europe. You know, one would have thought -- well, first of all, very few people predicted the contours of the euro crisis that we saw. And what was remarkable was how the Europeans felt that it was important to have the IMF very, very engaged in the technical aspects of sustainability, analysis and conditionally and the like. So again, without, you know, refighting past battles and particular episodes, I think -- on balance, I think the IMF has been a positive in these issues.

I think broadly speaking, though, the lessons in the emerging world were searing enough. Certainly, I think, both of my colleagues here could speak about Asia, but certainly when you visit Asia and -- as I do now a couple times a year -- and I now meet with people who 15 or 20 years ago were just starting out in these organizations and they're now running the sovereign banks -- sovereign wealth funds or central banks. And, you know, what, to a person -- and they're not coordinating this across different languages and different institutions across these countries -- to a person, what they always say to me is, you know, we went through '97, '98, and never again; it was a searing experience.

And that's led to the reserve accumulation. It led to, quite frankly, an attitude -- and this one area where many of these countries pushed back on the IMF, which is in the issue of what some would capital controls, other would call prudential regulation of the banking system. But in many of these countries, they felt that one of the problems with the crises of '97, '98 was a very toxic mix of capital inflows and imperfectly regulated financial system. And so they've always been less receptive to the idea. And of course, now we actually see the IMF itself being influenced by the experience in these countries to at least have a more open mind on that. So I guess that would be my take on it.

FERGUSON: You've raised this issue of capital controls, related to some degree with flexible exchange rates and such, the idea that money essentially should move freely around the world and correct for particular national situations. Any of the three of you, is the view changing in that in a -- in a substantial way? Is there a sort of emerging market lesson that has been taught with regard to capital flows? The famous example out of the '90s crisis was in Malaysia, where Dr. Mahathir imposed capital controls in the face of the IMF telling him to free up his economy, including his capital system -- now widely seen as a -- as a successful move by him. Is there a lessons with regard to freedom of capital here?

HENRY: I think the big lesson on capital flows that we've learned -- and frankly, I think it hasn't been pushed enough, certainly not by the IMF -- is we need to make -- there's a key distinction one needs to make between debt and equity. So if you go -- if you go back over the last 40 years, every major financial crisis that the world has started in some debt-related market, whether it'd be short-term dollar-denominated debt, the Asian crisis, bank debt, sovereign debt -- doesn't start with the equity markets. Equity markets, of course, respond to downturns.

And so I think the key lessons for -- one of the key lessons for emerging markets is that when countries have liberalized capital flows in the form of certainly foreign direct investment, but also, very importantly, portfolio equity investment -- which, by the way, facilitated a great deal of FDI, particularly in Latin America during the privatization period -- equity market liberalizations have led to lower cost of capital, higher growth, higher wages, higher investment in emerging markets.

And so there was this rush to judgment during the Asia crisis in particular to -- by people like Joe Stiglitz and others who said, oh -- or -- and my friend Jagdish Bhagwati -- who said, look, liberalization causes crisis. But, in fact, the key lesson is, liberalization of debt flows, in particular short-term dollar-denominated debt flows, is really what gets countries in trouble. And we need to have a shift more towards equity and less -- and away from debt and emerging markets.

And there are a number of things where the international financial system is actually biased -- capital flows, suppliers of capital provide debt capital or equity capital versus the fact that you can take a Third World or emerging market government to court in the First World, but there's no such recourse for equity. So that's just one example of the bias just towards debt over equity.

FERGUSON: Joyce, so Wall Street is said to prefer a world in which it -- money flows freely and seeks out its highest return. Has Wall Street's view on capital controls and hot money changed at all as a result of the lessons of the last few years?

CHANG: I think that Wall Street is pragmatic. I think capital controls and emerging markets are here for a while because they have fairly small domestic capital markets still. There's a need still deep in the financial markets. So many of these countries are getting much more money than the size of their markets can absorb. So the capital controls, it's not like the capital controls of the 1990s; it's been to prevent short-term excessive capital flows. And that's where the IMF has said, maybe we need to have some rules of the game because this is a state of affairs that's going to be in place for a while.

And I think what the IMF, when people ask me, you know, where I actually go to look for good-quality data, the first place I turned to was the IMF. I think the IMF has had a very important technical role in making sure that there is integrity to the data. Whether it's emerging markets or developed markets is less the issue. I mean, I think they have done a very good job of making that -- you know, making that a standard-bearer that, you know, any sovereign really needs to have out there if they're going to be in the markets.

So I think Wall Street isn't so ideological about it. It's just that pragmatically, they are going to be with us for a while. If this is the case, then perhaps there should be some best practices about sequencing, about when capital controls are used, how they're used. Money's going to be flowing into emerging markets, given the growth differential, and there still is an interest rate differential with zero interest rate policy, which is quite attractive.

FERGUSON: We'll turn to the members in a moment. Before I -- before we do, we've almost by definition been focused on economics here, but there is a broader lesson you could argue coming from the emerging markets or being learned by the emerging markets having to do with lots of what you might call the softer side of this, including rule of law, trust, transparency and the like. A couple of you made reference to this. Is this an important broader context for some of these economic figures we've been discussing? Any of you have thoughts on that?

HENRY: Well, I'd love to build on a point that -- I think an important point that Richard made earlier, actually. You mentioned trust. If you go back to some of these lessons that Richard talked about in Asia in the late 1990s and this response to these -- as Richard described, these searing episodes with the IMF, I think we're at a point right now where there is a real trust deficit, frankly, between a lot of emerging-market governments and certainly the IMF, but emerging-market governments and advanced-country governments more generally.

And so just to tie that to your earlier question, emerging markets need to do a number of things to continue to grow, raise their growth rates or potential output even more. But in order for those changes to happen, I think it's going to be critical that they begin to see that, A, you know, the IMF is willing to push the difficult medicine in Europe, so to really push for structural reform, labor-market reform in Europe, for instance, and do a better job of communicating, for instance, the point that -- you know, in the late 1990s in Asia, the IMF actually imposed fiscal austerity.

When -- during the crisis in 2008, the IMF actually said that -- went to the large countries and said, no, we need fiscal stimulus. Now, there are good reasons for doing that, but you need to communicate why it is that you're doing that, so that countries don't get the sense that, oh, there's one set of rules for the guys in Europe and another set of rules for emerging economies.

So I think filling that trust deficit, which is sort of a softer, more speculative issue, I think is really critical to get emerging markets to continue down that long road that we need them to go down so they can continue growing even more rapidly to help pull us along.

CHANG: And I think that -- I don't know if I would call it just political stability or social stability, because I think that the more that incomes improve, education levels improve, with that becomes, you know, more political accountability, greater transparency. So I think when I talk to emerging-markets policymakers, that their number-one objective typically is social stability. It is taking more people out of poverty. It is increasing the size of the middle class. It's making sure that services, you know, are available. And that is a way that you actually address the political issues, and probably the most important way in which you can address the political issues.

FERGUSON: All right.

Well, we can address other economic or non-economic questions, as the members prefer. We are on the record today, so please, if you do have a question, wait for the microphone and identify yourself and your affiliation, if you would.

Pending such question, I will raise the aspect of indeed this sort of social capital that you were alluding to just there. Has the social capital surplus, if you will, grown with the economic surplus in these countries? Is that another lesson of these last 20 years? And does it have anything to teach the Western democracies, which are seemingly increasingly fractious?

CHANG: Well, I mean, I think the China story -- you can still say that political reforms need to occur in China, but they have taken more people out of poverty in the last 30 years than the rest of the world combined. And I think that the social stability is what is key; that, you know, that's their objective. So I don't know how much I would actually separate the issues.

FERGUSON: Peter, you mentioned the "A" word, "austerity."

HENRY: Yes.

FERGUSON: The new dirty word in the economic debate. Are these virtues that we've been talking about here -- are they -- is "discipline" another word for austerity?

HENRY: No, I don't think it is, actually. So in turn -- I define discipline the following. Discipline means a commitment to a pragmatic growth strategy that is both vigilant and flexible and that values what's good for the country as a whole over what's good for any individual, interest group or person running for political office. The reason why I think that's a useful definition is, if you think about it in the fiscal context, you immediately see it doesn't mean austerity, it means -- discipline in the context of fiscal policy, yeah, it's countercyclical fiscal policy, but it also means recognizing that -- the objective is growth, which means that -- which doesn't mean that you don't need to deal with -- reduce the deficit, but it means you can be flexible about the speed of adjustment, for instance.

In the context of trade policy, you know, it's very tempting to fall into the point of view that, you know -- it's sort of almost mercantilist, that exports are good and imports are bad. But again, the history of a country like South Korea tells us that's not right. South Korea had an export-led growth strategy, but between 1965 and 2001, when South Korea was growing 7 percent per year, they were running trade deficits most of that period.

And so discipline really means sustained commitment into the future. And trade is good for countries not because it allows you to export a lot and import a little bit, but because it allows you to exploit the world markets and drive up productivity.

So "discipline" does not mean "austerity" and -- it's not a code word for "austerity." It's a code word for "sustained commitment to prosperity."

FERGUSON: We have a question in the back row there.

QUESTIONER: Thank you very much. Ahmed Fathi, Economics Channel, Saudi Arabian TV. My question is, since most of emerging markets, as you have indicated, depends -- and its resources -- on natural resources, whether commodities, natural resources, et cetera -- how can these markets sustain the high level of growth over the years, since most of it is not a renewable source? Thank you.

CHANG: Well, I think that we have seen a shift in commodity consumption patterns. So you now have the -- you know, China is the number two, you know, consumer of oil, and emerging markets -- this is the first year where the emerging markets' consumption is actually matching the consumption of developed markets. So when I look at the demand piece of it, emerging markets is a large part of the demand story --

MR. : Yeah.

CHANG: -- which has supported prices. But I still think that in many of emerging markets' countries, particularly in Africa, you have a lot of untapped potential. And you have untapped in the U.S., which one could talk about as well. But I think that -- you know, I still think that there is more that can be done in the commodities sector to, you know, further production and also tap into some of the countries where it has not been as accessible.

So you know, I don't know if I think that it's only a commodity story. However, I mean, I think the fact that the countries are net external creditors; that they're building domestic demand engines; that the size of the middle class is growing as, you know, equally as important as the commodities story.

But I also don't think that the commodities story has necessarily completely played out at this stage, given the stage of development that, you know, Africa is still at and that it's very commodity resource-rich.

FERGUSON: Richard, is there a danger that in their newfound prosperity the resource usage in the emerging markets, as they wish live as we do, presents some macroeconomic problems or environmental problems that the entire world, including the developed countries, are going to have to deal with?

CLARIDA: Well, certainly, and I think one thing to keep in mind is how humble we all need to be in making these long-range forecasts. I recall back in '03, when I was at the Treasury Department, the secretary asked me to look at the impact of $40 oil on the global economy, and then oil was around $11 or $12 a barrel. So -- and so no one was even thinking -- I think there was one study that said $60 oil. So here we are, and the global economy, you know, has operated at -- with oil at much higher levels.

And in fact, as I think I've mentioned in other contexts, I think that from the point of view of the global economy, we are in something -- we have been in some of a sweet spot now where commodity prices have been high enough to generate prosperity in those who export but are not so high so as to kill the global economy. And if anything, I think the recent data suggests that we may be in this zone for a long period time. As the handoff goes from the rich countries to the emerging countries on demand, that would tend to push up price, but on the other hand, you've got this supply that is triggered.

And so I think the key lesson I take away, as more of a macro person than a development expert, is that because the bulk of the economies that are benefiting from the commodities story have been running sensible macropolicies -- I mean, Peter gave the example of Chile, but there are others -- that, you know, this is actually, I think, a self-reinforcing positive cycle for some time to come.

But I think there is a range in that, and I think the story that becomes to be a risk for the global outlook is if the demand becomes so voracious that it pushes up commodity prices to a level that it really kills growth in the other countries. Certainly when we got up -- I don't think it was helpful to the global economy in '08 when oil got up to $150 a barrel. Of course a lot of other things happened in 2008 as well, but I think there is a range. But we have been in that range now, really, for three years, and I think the outlook is that we could well be in that range for some time.

FERGUSON: Perhaps a virtuous cycle.

We have a question here in the third row.

CLARIDA: Yeah.

QUESTIONER: Thank you. I'm Bruce Scherer (sp) with the Nature Conservancy. I'd like to press you a little harder on this question of the rule of law, human rights. One of the enabling factors -- there are many economies around the world that are not emerging markets, that are really disasters, economically. What -- you're offering us your ideas of what can be learned from the successful emerging economies. Certainly it's more than social stability, I would hope. In the Chinese case, there are real questions about the rule of law and about human rights. Can we learn any lessons across the board about the importance of these other factors, those so-called soft factors?

HENRY: I would just offer that I think it's really critical, as you think about some of these other cases that you referred to -- that it's really important to understand that, you know, there are limitations to what economic growth can do. And no one -- no economist -- (off mic) -- will make the argument that economic growth is, in and of itself -- you know, leads to happier outcomes for societies necessarily. Economic growth is all about increasing efficiency and increasing the resources you have to deal with a whole range of potential problems.

And Arthur Lewis, in his -- in his -- in his famous book on economic growth in 1956, warns us of this in the -- in the -- in the appendix, where he (has a lesson called ?), is economic growth desirable? And he says, no, not in and of itself. It just increases the range of options we have, frankly, to deal with a whole range of societal problems. So I would just say that there are a whole range of important social issues -- everything from increasing human freedom and human rights, democracy for its own sake -- these are all very good things. And the process of economic growth and thinking about how to -- how to operate an economy more efficiently can help with these problems, but it's not necessarily a solution to any of these -- any of these issues.

CHANG: And I still think that as global integration just proceeds, that accountability increases -- the whole way that information is transmitted has changed so much through social media that, you know, increased accountability is just a reality for the emerging markets policymakers now. I mean, they need to be held accountable where that if they are going to, you know, increase their trade, continue to have, you know, educational opportunities in all parts of the world and the kind of integration that they hoped for. So I still -- I do think that the economics, you know, is connected to it as far as improving the standard of living and access to opportunities.

FERGUSON: Has -- I wonder if the nature of some of these changes -- technological and communication and such indeed has brought what Michael Spence calls -- is convergence of the developed and emerging worlds. Whether that would have occurred even if economic lessons had not been learned or transmitted -- any thoughts about whether we're seeing just in a -- in a sense, a natural drawing together, hopefully involving human rights and other sort of elements as well? Anyone have any thoughts on that or whether this is, in fact, an economic story?

HENRY: For the record, I do think that there are raised expectations. I mean, if you -- if we're talking about a convergence of expectations, I think technology has played a big role in that, right, in the sense that access to cell phones, digital communication -- the range of people in the world who are unaware of how the top 1 percent or 10 percent are living is getting smaller and smaller. And so I do think there's been a convergence of expectations. And, you know, at the margin, that can be -- that can be a good thing for hastening social change.

FERGUSON: We have a question here, here and there. So at least three.

Second, row please.

QUESTIONER: Thanks a lot. I'm -- (name inaudible) -- from Citigroup. The traditional relation between G7 emerging markets were, G7 were doing the consumption part, emerging markets were doing a production part by commodities like, Brazil manufactures goods, like China and IT services like India.

But now, there are more and more interactions within emerging markets. BRICS just signed several currency swaps. So all these transactions used to be happening in U.S. dollars. Right now, they're happening Chinese yuan, or, you know, some other currencies. And the momentum is keep going. So what are your thoughts on this change? Thanks.

FERGUSON (?): Richard, do they still need us?

CLARIDA: Well -- no -- certainly, I think it's important to note that even though we've given examples of Chile and Brazil and Malaysia that have thrived under appropriately-designed capital controls, that the fundamental forces in the market are toward more open capital markets. China is doing that along a number of dimensions and liberalizing.

So I think that is -- that is the broad trend, but we may get there more slowly than people would have thought several years ago. And I think increasingly, and not just for marketing purposes, but really for substantive purposes -- and this is where my Columbia colleague, I think, Joe Stiglitz had it fundamentally right -- it's the interaction between capital flows and a banking system, especially in foreign currency, when that banking system has a "too big to fail" element.

And many countries, including the U.S., obviously have, you know, those elements as well. So I think that -- but I think the trend is towards -- is towards more opening of those markets. And I would -- I think the other thing we need to get on the table -- and it's related to this point -- and, you know, as all of us look ahead, the natural tendency in human nature is to extrapolate the past.

But I think in the -- in the case of a number of the key economies that show up in this category -- I would certainly put China and Brazil in this category -- I think -- I think it will -- the best forecast of the next 10 years will not merely extrapolate the last 10 years, both in terms of performance but also more broadly in terms of what those economies need to do to build on that success.

In the case of China, there are rising wages. You know, China will have to move away from a development strategy that focuses on an export model towards one in which there's more domestic demand, and I think in the case of Brazil and other countries, things in terms of efficiency and ease of doing business and sort of the microworkings of the economy will be relevant too.

So I think even though we've painted, I think, a positive picture, because there is a very positive picture, to continue on with the advances of the last 10 years is going to require, in many key countries, a different and, in some ways, more difficult approach.

CHANG: I think intraregional flows are going to be increasingly important, and I think in particular for infrastructure financing. I think for 20 years now I keep on hearing, where's all the infrastructure financing going to come from; how can we entice developed countries to go to emerging markets and do the infrastructure? Frankly, I think that's going to be handled intraregionally, you know, as we go forward, and in different currencies. But I think the whole definition of developed versus emerging has changed. And one thing to look at is in 1990, of the top 500 multinational corporations, only 19 of them were in emerging markets. Now it's about 120 of the top corporations, and what will that look like in a decade?

So I think intraregional flows and issuing in different currencies, you know, but also finding ways to make that more tradable and a more liquid market, which is still at a fairly early phase, you know, are the next stages of the financial market deepening going forward, rather than just thinking about it as just borrowing in the dollar market. This has been an opportunity for emerging markets to issue, you know, in different currencies, for China to also develop its local market as well.

FERGUSON: We had a question in the front row.

QUESTIONER: Bart Szewczyk, Columbia Law School. What are the overall attitudes within emerging markets towards the international investment regime through bilateral investment treaties and ICSID convention? So some -- a couple of South American countries have attempted to withdraw from certain treaties and sort of publicly denounced the ICSID convention. As you survey the landscape of emerging markets, is there a shift in attitude as to whether this regime still serves their interest, whether it actually promotes foreign investment in their countries? And has -- you know, has there just been a change in the perception as to the international investment regime?

FERGUSON: I think you're referring to the Venezuela group, basically? Yes? Are Venezuela and its allies in Latin America -- are they outliers, or is this representative of a larger movement?

CHANG: I don't think that Venezuela is that representative of Latin America. I mean, take a look at Mexico, which -- you know, North America Free Trade Agreement, WTO member, you know, and it's been growing, actually, at a faster pace than Brazil, which is surprising to a lot of people. But I think Venezuela has been more of an outlier in that way. And you can point to the outliers, but I think for a lot of the core major emerging markets countries, I mean, they very much, you know, want to be in the international trade flow. So I think Venezuela is more the exception in this case.

FERGUSON: Peter, you use that term "Third World" in your title of your book. Is there a Third World sensibility anymore?

HENRY: I think there really has been a sea change. And I intentionally used the phrase "Third World" because it had sort of this pejorative sense, when it was used back in the 1970s, to demonstrate just how radical the turnaround has been. And I think it underscores, you know, the point that Richard made earlier. I think the question that's really on the table is will advanced nations have the requisite humility to actually look beyond our shores and look at the turnaround that's happened in a range of countries over a range of issues and take some -- take some lessons to heart?

One example I'd like to just sort of come back to, the gentleman asked the question about these interregional kind of blocs, like, you know, the BRICS decision to begin their own monetary fund, for instance. And I would just -- I would -- I would just offer -- I would offer that up as a -- as a -- as a symptom of this issue -- this softer issue, the trust deficit that I referred to earlier. You can put the Chiang Mai Initiative coming out of East Asia along with that as well. When you -- in a world in which you have, you know, the 2010 IMF reforms still awaiting congressional approval, in which, you know, there's -- it's on the table to move two board seats to the developing countries, away from Europe, in a world in which you have the BRICS accounting for 21 percent of global GDP but only 11 1/2 percent of the votes of the IMF board, and Europe with 24 percent of GDP and 32 percent of the votes, it creates some trust issues.

And I think the danger is that we drift -- not radical, but slowly move to a world in which the countries that need to continue making hard reforms, and some of them are more on the microeconomic side that Richard alluded to, but reforms nonetheless that will require political consensus and political capital, that those things don't happen, to our -- to everyone's detriment, because we're not willing to reciprocate it.

FERGUSON: Question right on the -- (inaudible) -- there.

QUESTIONER: Thank you. Mr. Agwa (sp), Pace University. Would you please comment on the debt-growth conundrum, both private and public? As you know, recently there's been a controversy over the Reinhart-Rogoff findings and -- that's broadly speaking. And specifically, you look at an emerging market like Turkey, where private debt has increased considerably, is that good debt or bad debt? What does that mean for future growth? Thank you.

CLARIDA: Well, I'll just offer some quick thoughts on this. Obviously there've been a lot of ink and digital files exchanged on the issue of the famous result of Rogoff and Reinhart, that a debt-to-GDP ratio of 90 percent is associated with -- they were careful not to say caused -- but associated with a slowdown in growth. And if you review the critique of Rogoff and Reinhart, it doesn't overturn the point that on average countries with high debt loads grow more slowly than countries with lower debt loads, but the magnitude of the affect is attenuated if you adjust for some factors.

But I think the fundamental issue there is that economics is -- in general we don't do controlled experiments. Many people think that's a good thing. (Laughter.) And clearly here you've got two very -- you've got two variables that move together in very complex ways. And so I believe -- personally, I think the profession would accept that countries with high debt loads on average, other things equal, will grow more slowly, but the affect is not as dramatic as Rogoff and Reinhart found.

I would like to say, while I've got the platform here -- and I'll get it 30 seconds -- that we need to be careful in discussions about austerity because in the case of many countries, and I can give concrete examples, the choice has not been austerity versus no austerity, it's been the kind of austerity that they're going to be part of.

So for example, Greece did not have a choice. Greece was going to have austerity. It either gets it from having interest rates of 42 percent or it goes in an IMF program with austerity and then lower rates, you can make the case for other programs in Europe. I know, having visited the United Kingdom and spoken to senior officials there, that they believed in 2011 that they did not really have a choice. Their choice was either have austerity through fiscal policy or austerity through very, very high interest rates as they sort of got pulled into the euro crisis.

So I think it's important, as you all think about where you come down on the austerity debate to -- when you look at the specific cases, in many cases it's really not a choice between zero austerity and austerity, it's the form that the austerity takes in a post-crisis world.

CHANG: Yeah. And I don't know if there's a line in the sand on what debt level is the right debt level, but emerging markets now are at less than one-third the average developed country. So you've had this just growing differential between the two. But I wanted to just go to go to your point on the high-yield debt, because we see a dramatic pickup in emerging markets' high-yield corporate debt issuance.

And just to give you an example, I mean, since the beginning of the year, you've probably had 60 new corporates come to market who've never accessed the market. If you look at Asia, Asia high-yield has issued as much in the first quarter of the year as they issued all of last year -- about 25 billion. And we think it'll be 60 billion this year.

So a lot of people ask me, is this a bubble? You know, I -- it still is early days for emerging markets. I mean, this is a big growth year on year, but I mean, like the U.S. high-yield market is probably 25 to 30 percent, the size of U.S. GDP EM high yield is probably 2 to 3 percent the size of EM economy. So which one's a bubble?

You know, emerging market still has a lot of new markets, you know, coming on line right now. So -- but we have seen an increase in high-yield issuance. And with that, we've also seen a number of sovereigns able to come to market at spreads that would have been unthinkable a couple of years ago -- like Bolivia, you know, Paraguay, Zambia, tapping the market at 5 percent -- Bolivia at less than 5 percent for example.

You know, there's now in our frontier market's index -- our next generation emerging markets index -- you know, 27 borrowers. And this includes a whole range of countries in Central America, you know, Sri Lanka, Mongolia, as well as Africa.

FERGUSON: And if I can interject, Joyce, I would imagine that many of those deals are in local currency, right?

CHANG: NO, they're -- right now they've been U.S. deals that are under international law, but the local currency market is developing. And right now, like, for example, Nigeria is one that recently we put in our local currency index and it's one that was one of the top performers last year. So it's been both access to the international markets and developing the local markets. But these markets are still -- in liquidity terms still pretty shallow. I mean, you can get a pretty deep high-yield sell-off on a fairly small trading volume just because these are relatively new markets.

FERGUSON: I think we had a question right here.

QUESTIONER: Hi. Rachel Robbins, most recently with IFC. Joyce, you talked about Africa and the promise of Africa beyond commodities with a rising middle class and also the demographic phenomenon. Could you speculate over the next decade how you see the growth of Africa? And if anybody else has any comments.

CHANG: So I focus on bond markets, on fixed-income markets. So, you know, Africa, it's very interesting right now; because emerging markets countries are net external creditors, the incremental borrower is a frontier market country. So if you look at the 50-plus countries in the emerging market sovereign bond index, the EMBI, you know, 27 of them are these next generation countries. So you have to sort of follow them because even though they're relatively small, of the individual stories, it's more than half of the stories now because the other countries don't need to borrow. What they need to do is deepen their domestic markets, raise infrastructure financing. So, you know, we launched a frontier markets index for the bond markets December 2011. And if you look at new borrowing by emerging markets countries, like the frontier markets are about half of that of the net incremental new borrowing because the other countries just don't need to borrow. I mean, if Mexico's going to borrow, they're looking at a hundred-year bond because they can do that.

So I think that, you know, there is -- there is a lot of concern about Africa still on the governance and the transparency side, but there is also a lot of excitement about the growth potential, the commodities and the fact that they are able to come to market. And the process of coming to market and getting a credit rating, they have to make themselves transparent, they have to let foreign investors come in to ask questions about the economy, about the political system and about the social indicators. They have to get themselves ready for an investor road show. So I wouldn't really disconnect the social issues and the political issues and the human rights issues because when you get foreign investors in, you are held more accountable.

So I think this is a positive thing. I think some of the spreads, because of zero-interest rate policies -- I mean, they -- if somebody had asked me a year ago what I thought the spread levels would have been for some of these countries, they've come much lower than what I would have thought just because of a developed country quantitative easing policies.

FERGUSON: Any quick Africa observations? Peter?

HENRY: I would just say that it's really important to keep in mind that Africa is growing for the first time in decades. And while there is still a lot of challenges, I think it's really critical to understand that. There's a lot more stability in Africa than there's ever been. And stability is (really ?) the first rule of growth. Without stability, almost nothing else matters.

And so countries like Ghana, for instance, that are -- really seem to have turned the corner in very important ways -- the last two democratic transitions in Ghana have been very tightly fought elections but have held. And I wouldn't discount -- you know, South Africa is by no means a growth miracle, but the example that South Africa has set for sub-Saharan Africa sort of post-apartheid in managing the fiscal accounts and managing the demand for redistribution of income but not going overboard in the way that many countries did in the '70s -- you know, an example, that would be Jamaica going too far towards redistribution in the '70s -- is not to be discounted. And that model is slowly taking hold.

You know, I think -- you know, Richard alluded to something important, which is that we're seeing now more local currency bond issuance, which, back in the late 1990s, post-Asian crisis, a lot of -- people were talking about original sin; why can't emerging markets issue debt in their own currency? Well, the answer is they did -- they just need to show discipline for a while, and they can do it.

So countries -- African countries in particular are showing that they can get beyond aid. Still important questions as to whether it's, you know, better management or metal prices that's doing it, but I think at least part of the answer is better management.

FERGUSON: So we're at the witching hour here, and we're going to have to close, but I'm going to impose a lightning round on my panel here. (Laughter.)

CLARIDA: Double jeopardy.

FERGUSON: Quickly, quickly, the most surprising emerging market story of the next five years. Joyce?

CHANG: I still think it's China. I mean, again --

FERGUSON: No end of surprises there.

CHANG: (Chuckles.)

FERGUSON: Peter?

HENRY: I'm going to say Ghana.

FERGUSON: Ghana. Well, there's an African story.

CLARIDA: And I'll move to another continent. I'll say Central Europe.

FERGUSON: Central Europe.

CLARIDA: Yeah.

FERGUSON: The former Soviet countries?

CLARIDA: Broadly defined, yes.

FERGUSON: Well, it's an interesting story.

I want to thank my distinguished panelists and to invite you to join them at a reception beginning immediately. And could you also join me in thanking them for their contributions. (Applause.)

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THIS IS A RUSH TRANSCRIPT.

TIM FERGUSON: Welcome, everyone, to this evening's Council on Foreign Relations John B. Hurford Memorial Lecture, which tonight is focused on "Lessons from Emerging Markets." I have with my Joyce Chang, Peter Henry and Richard Clarida. This annual lecture, inaugurated in 2002 in memory of council member John B. Hurford, is -- features individuals who represent critical new thinking in foreign policy and international affairs.

And I would like to recognize members of the Hurford family and the Hurford Foundation who are with us today. We have Helga and Jennifer Hurford and Jayne Kurzman of the foundation. Welcome, and very much appreciate your support.

Emerging markets is a rather encompassing term. It could mean, to some people, everything short of the G-7 industrialized countries, or for others it means those emerging or developing markets that are part of the growth story around the world. I'll defer to my speakers today as to how they care to define it, but the term is a bit challenging as a -- as a starting point.

Let me suggest this as a sort of economic mini-history -- a mini-narrative of the last few years as a -- perhaps a way to get the discussion going. And all of you can either take issue with this or use it as a jumping-off point.

In the wake of the economic crisis, 2008 and '9, what are commonly called the emerging markets were seen to be in a particularly fortuitous situation. Because of lessons painfully learned over the previous 25 years, many of these economies were at that point low on leverage compared to the Western industrialized countries -- both household debt, corporate debt, public debt -- and therefore in a position for -- to expand, to build, to grow in a way that the Western countries were not.

That was the situation until perhaps -- and perhaps may still be true in some of these markets. But in the recent period, with the advent of very loose money in the industrialized world, several of these markets have to now contend with the downside of rapid growth, the prospects of inflation, asset bubbles, hot currencies as investors seek to put their money into these markets. So they've had to, perhaps, face the conditions of growth that they perhaps did not anticipate in 2008 and '9.

Now, looking forward in the immediate future, they're faced with the prospect of having to cool down their economies. The stock market, the equity markets for emerging markets are beginning to reflect this a bit. And now they are in a position where they need to contain the inflation, they need to contain the current account deficits, not buy too many imports and to watch those public deficits. So it's not a completely rosy picture, but it's a better situation to be in than a lot of the industrialized countries that are still flat and barely above -- on a growth incline.

Peter Henry, you have released a book, lessons -- Third World lessons, that very much coincides with the title of our discussion today. Why don't you take a first stab at addressing the matter of: Are these emerging markets in the catbird seat at this point, and why?

PETER HENRY: Thanks, I'll be happy to. So I think it's very helpful to actually take your point about leverage and the position these countries are in right now as a result of decisions that they made cumulatively over the past couple of decades.

So the reason why, you know, I call the book "Turnaround: Third World Lessons for First World Growth" is because if we take kind of a unifying message across -- if we look at the last three decades, going back to roughly the late 1970s until now, how is it that countries that were formerly called Third World countries, in fact they were called Third World countries, became emerging markets?

And I think the central point to take away is they did that through what I would call discipline. But discipline doesn't mean fiscal austerity. What discipline means, in the context of fiscal policy for instance, is the willingness to save for a rainy day. It's no more complicated than what we call in the textbook running countercyclical fiscal policy.

So to your point, between 2002 and 2007, when the world economy was booming -- growing at 4.9 percent per year -- emerging markets were running fiscal surpluses of about 1 percent of GDP on average. The advanced nations of the world were running deficits, which is exactly counter what you're -- what the textbook tells you you ought to do. And consequently, as a result of that, debts were falling in the emerging markets, they were rising in the advanced countries.

And just to give a very -- I -- two very specific examples of what I would call sort of First World grasshoppers and Third World ants -- (chuckles) -- is the example of Chile. So Chile -- in 2008 the finance minister of Chile at the time, Andrews Velasco, was burned in effigy in the streets of Chile because he refused to give back the large fiscal surpluses that Chile was experiencing as a result, largely, of the copper boom during that boom period. He refused to do so. He said, this is money for a rainy day. And when the global downturn hit, Chile was able to institute a $4 billion tax cut package to keep growth going.

On the other hand, I think the United States is a good example of going the other direction. And in 2000 we had a record budget surplus and again in 2001 turned a $36 billion surplus. We decided not to save that surplus. And we certainly had other shocks after that, but I think you can make the case that had we saved that surplus, we would have been in a better position to deal with those shocks. And just to make clear that I'm not making a partisan point here about the United States, I mean, you can argue that had we had a Gore presidency, that surplus would have disappeared in the form of higher spending instead of tax cuts.

So the point is really about running countercyclical fiscal policy, saving for a rainy day to -- discipline means sustained commitment to the long term, not fiscal austerity. And because of the discipline that emerging markets have shown or third-world countries have shown, they've now become emerging markets.

FERGUSON: They did show discipline in many cases. They also -- as you suggest with Chile, they were the beneficiaries of great commodity boom, in copper primarily, in the case of Chile. That in turn -- the (worm ?) may have turned a bit on the commodities story.

Joyce, do you -- do you see this emerging markets bonanza the last five to 10 years as a commodity-driven story, or is it much more than that?

JOYCE CHANG: It's much more than a commodity-driven story. But commodities are a big part of this. About two-thirds of the emerging markets countries are commodity exporters, either agricultural commodities, metals or energy. But what changed over the last five years?

If you take a look at the way that we have to think about emerging markets versus developed markets, the average developed country, since 2007, before the financial crisis, has added about 36 1/2 percentage points of GDP to its debt burden. So the average developed country now has a debt burden that is about 119 percent of GDP, over a hundred percent of GDP, and well over that in a number of countries. Emerging markets are at a debt burden of 35 percent of GDP. The average developed country had an increase in their fiscal deficit of about 5 percent of GDP.

Now, emerging markets countries were able to use fiscal policy, countercyclical policies, because they had a surplus, but the average emerging markets country now has a fiscal deficit around 2 percent of GDP. It's still 5 or 6 percent of GDP, on average, for developed countries. So this has a huge impact on the growth implications going forward. I mean, looking at emerging markets today, they account for -- China accounts for about half of the contribution -- the contribution to global GDP growth, and emerging markets, in aggregate, about 70 percent. And emerging markets are growing at about 5 percent this year, developed markets at a little over 1 percent. So it's not just commodity prices; it's that after the Asia and the Russia financial crises, you had a whole series of reforms.

And what is the checklist of reforms that emerging markets countries put into place? They abandoned the fixed exchange rate. Many countries had used their foreign exchange reserves to defend an exchange rate. They adopted inflation targeting. They saved the oil windfall. So if you look at global foreign exchange reserves today, about 80 percent of them are in emerging markets countries. Two-thirds of emerging markets are now net external creditors. So it's not just commodity prices; it's also the result of responsible policies, you know, basically saving the windfall that they had, adopting greater transparency around that and attracting greater private capital flows. In the '90s emerging markets attracted about 5 percent of the capital flows, and that has, you know, quadrupled over the last two decades.

FERGUSON: A lot of it is chasing yield, the better growth rates, better return rates in several of these emerging markets -- (inaudible) --

CHANG: I think that was the story, but you're now at a point where the asset class is maturing. If you actually look at the credit ratings and the sovereign spreads for emerging markets countries, they're actually well below many European countries.

So let me give you an example. A country like Bulgaria, which before they did their Brady Plan, had 160 percent of GDP as their debt burden -- they now have the same credit rating as Italy, they have a rating that's higher than Ireland and Spain, and they've brought down their debt burden tremendously, and they trade at a much narrower spread than Italy as well. So it hasn't just been seeking yield, although that was a large part of the story in the aftermath of the global financial crisis. It's also been now the growth prospects going forward compared to developed markets because of the size of the debt overhang and the fiscal overhang.

FERGUSON: Richard, you've done a lot of work with the G-7 countries in the various aspects of your career. Is the lesson that they are likely to take from this experience one of discipline and being countercyclical in policy, or will they take any lessons at all? Is it too late to take lessons?

RICHARD CLARIDA: Well, honestly -- honesty compels me to say I would hope so, but I don't think that is in -- is likely, at least for a while. I think in the -- in the case of the U.S. in particular, the U.S. benefits from what's been called the exorbitant privilege of providing the global reserve currency. There were those five or six years ago who said, well, the U.S. will lose that status to the euro, but obviously the turmoil in Europe has delayed that day, probably for decades.

And so as a result, in the U.S., we get a subsidy for providing that currency, that privilege, which is -- which is borrowing costs which are quite low and which creates a demand for our assets that delays that market discipline. So I think in the case of the U.S., it's not at all -- not at all imminent.

Again, Europe right now is facing an existential threat, so probably a lot of European officials will admit that during the prior decade, the first decade of the euro, they were so focused on hitting that inflation target of 2 percent that a lot of the necessary institution-building in terms of a fiscal policy, they should have done before the crisis. Now in fact, I was just at a conference at the New York Fed today in which they admitted, you know, we're doing this on the -- on the fly.

So again -- and then if you look at Japan and the G-7, you know, Japan is now trying to avoid a third decade -- a lost decade of deflation and disappointing growth. And they are embarking on a very, very, you know, sizable, some would say ambitious, quantitative easing program. And ultimately, the day of reckoning on Japan's debt will have to be faced, but certainly, that is not imminent either.

So I think the remarkable point to remember -- just to reinforce what both of the other panelists said -- is that if we had had this session just 10 years ago, it would have been unthinkable to be -- to be saying what we're doing, that these emerging -- or I like to say, emerged economies not only say that they're targeting inflation, they're hitting those targets, they have very, very variable debt ratios, it's been mentioned. And the market is acknowledging that with the interest rates that they pay.

So although I think there are a number of lessons to be learned, I think for the reasons that I cited that it will be a long time before the G-7 fully internalizes that.

FERGUSON: Peter, much as there are lessons to be taught by the experience of the emerging-market countries, there are still lessons that they themselves must be learning. The BRICS countries, for example, are each in turn facing challenges at the moment. What are the lessons that the Third World or emerging-market countries indeed are still learning?

HENRY: That's a great question. I think the critical point is that there is no easy road to prosperity. They're all -- all sustainable paths to prosperity are long. And emerging markets have to continue down that road. And to -- how do we -- how do we know this is the right -- the right lesson to take away? Well, I think it's helpful to give a little historical context.

So go back to 1985, when we were mired in at that time what was called the Third World debt crisis. So we just had the World Bank IMF meetings this past weekend in Washington. In October 1985, the World Bank IMF meetings were held in Seoul, South Korea. And then-Secretary of the Treasury James A. Baker III goes to Seoul, South Korea, in the -- in the midst of the debt crisis and basically unveils a speech called "The Program for Sustained Growth", quote, unquote, that was essentially the U.S. Treasury's view of what these countries needed to do in order to start growing, so fiscal discipline, privatizing (state-owned ?) enterprises, reducing inflation, opening of trade, a laundry list of things.

And as you might imagine, this speech, which -- the -- almost all of that speech, which came to be known as the Washington Consensus, effectively, was not particularly well-received by the developing countries.

But over time -- and this is not my view, this is the view of, frankly, you know, 30 years of historical data -- if you look at how -- it's not that the countries that succeeded did all the 10 -- list of 10 things that Baker listed in his speech. Countries that adopted the reforms that were appropriate for their specific circumstances and stuck with them, over time, found that their economies turned around.

How do we -- how do we know that? Well, there are two things to notice: One, if you look at how frankly, coming into Joyce's world, how equity markets in these countries actually responded at the time, when these governments instituted big policy changes -- they responded very favorably. So they're basically saying we anticipate that these policy changes are going to drive value.

And then subsequently, if you actually look at what happened, were the -- were the markets right after the fact? Yes, in fact, they were. So just to give a very casual example: In 1985, if you looked at the price earnings ratios in Latin America on average across the region, was about 3 1/2, right, meaning that yields were at 27 percent.

By the mid 1990s, after inflation stabilization programs are firmly in place and these countries have demonstrated the clarity that they're moving in this direction of the long road, price earnings ratios are at 14. They're are huge valuation gains that take place as a result of this. So we know, coming back to answer your question very specifically, that market-friendly policies, implemented in a smart, strategic way that's appropriate to the country-specific circumstances work. And emerging markets need to continue to do that. There's still a lot of work to do in places like Brazil. Interest rates are still quite high locally in Brazil. Mexico needs to reform its labor markets, needs to deal with monopolies in the telecom sector -- lots of changes, so then you have -- (inaudible) -- to continue moving up foreign direct investment. So there's lots of work that's left to be done.

But I think the -- one of the -- one of the key points, though, is that in order for that work to happen in the emerging markets, the First World has a big role to play in basically saying, you know, we're willing to begin making some of these changes ourselves so that the emerging market governments that are trying to continue down this -- our road can show their local populaces that in fact the First World is actually willing to play ball.

FERGUSON: Joyce, do you think that markets are, in a sense, overriding the political world here, that is to say, the investment flows of the world have made a decision, that is to say, that these emerging markets are on a higher stature par than the political world is willing to acknowledge?

CHANG: Well, I think there's a couple different ways to look at that question. I mean, one of the biggest concerns about emerging markets have been the high level of government intervention, but then the global financial crisis changed that. I mean, you know, U.S. policy had to be very interventionist for our crisis, and the same is true for the eurozone. And I think intervention is still an issue in emerging markets. I mean, you still have many countries that have capital controls. It's now called financial fragmentation or macro credential supervision instead, but they're capital controls. So I do think that part of the thinking has shifted. So what do you consider political risk? Is it government intervention? And I think one thing that is actually very interesting is that since the global financial crisis, we've seen a deterioration in both emerging markets and developed markets, and the corruption and the transparency indicators. But it's gone down much more in the developed markets than it has in emerging markets.

FERGUSON: Elaborate on that a bit.

CHANG: Well, I think that part of it was that when the eurozone was looked at as risk-free, you didn't really scrutinize the numbers because it was risk-free. So as you started to have to do the due diligence at the regional level for a lot of countries, the data wasn't readily available.

But remember the origins of the Mexico crisis. They had only released the reserves three times per year. And nobody knew what their foreign exchange reserves were. And, you know, then they had to go under an IMF program, which requires you to report everything daily. So a lot of these countries took the changes in the 1990s. And I don't know how much of it was deliberate, but emerging markets really didn't have a choice. They didn't have access to the kinds of bailout packages that you -- had put into place for some of the developed countries. So if you had a bad exchange rate, you had to let it go. You had to devalue.

Some of it was that the options were not so much deliberately planned but that each crisis actually got rid of the source of a crisis because reforms were forced, and they were forced relatively quickly, which led to the V-shaped nature and the boom-bust nature of what we saw in emerging markets through the 1990s.

FERGUSON: Richard Joyce mentioned the International Monetary Fund, which is three dirty words in a lot of these countries for many of the last 25 years. Did the -- is the IMF in fact a credit for the institution of virtue, if you will, in some of these emerging markets, or is that misreading the story?

CLARIDA: Well, I think there are cases on either side. I think on balance, though, I think it has been a positive. I think that oftentimes the -- as would be the case in a rich country, the decisions that need to be made to have structural improvements in the economy have some short-term pains, some winners and losers, and it's difficult or impossible to get that without the focus and urgency of a crisis and without the role of the -- of the IMF. So, no, I think that that's certainly -- I think that that's certainly relevant here.

And I think we see this actually playing out in real time in Europe. You know, one would have thought -- well, first of all, very few people predicted the contours of the euro crisis that we saw. And what was remarkable was how the Europeans felt that it was important to have the IMF very, very engaged in the technical aspects of sustainability, analysis and conditionally and the like. So again, without, you know, refighting past battles and particular episodes, I think -- on balance, I think the IMF has been a positive in these issues.

I think broadly speaking, though, the lessons in the emerging world were searing enough. Certainly, I think, both of my colleagues here could speak about Asia, but certainly when you visit Asia and -- as I do now a couple times a year -- and I now meet with people who 15 or 20 years ago were just starting out in these organizations and they're now running the sovereign banks -- sovereign wealth funds or central banks. And, you know, what, to a person -- and they're not coordinating this across different languages and different institutions across these countries -- to a person, what they always say to me is, you know, we went through '97, '98, and never again; it was a searing experience.

And that's led to the reserve accumulation. It led to, quite frankly, an attitude -- and this one area where many of these countries pushed back on the IMF, which is in the issue of what some would capital controls, other would call prudential regulation of the banking system. But in many of these countries, they felt that one of the problems with the crises of '97, '98 was a very toxic mix of capital inflows and imperfectly regulated financial system. And so they've always been less receptive to the idea. And of course, now we actually see the IMF itself being influenced by the experience in these countries to at least have a more open mind on that. So I guess that would be my take on it.

FERGUSON: You've raised this issue of capital controls, related to some degree with flexible exchange rates and such, the idea that money essentially should move freely around the world and correct for particular national situations. Any of the three of you, is the view changing in that in a -- in a substantial way? Is there a sort of emerging market lesson that has been taught with regard to capital flows? The famous example out of the '90s crisis was in Malaysia, where Dr. Mahathir imposed capital controls in the face of the IMF telling him to free up his economy, including his capital system -- now widely seen as a -- as a successful move by him. Is there a lessons with regard to freedom of capital here?

HENRY: I think the big lesson on capital flows that we've learned -- and frankly, I think it hasn't been pushed enough, certainly not by the IMF -- is we need to make -- there's a key distinction one needs to make between debt and equity. So if you go -- if you go back over the last 40 years, every major financial crisis that the world has started in some debt-related market, whether it'd be short-term dollar-denominated debt, the Asian crisis, bank debt, sovereign debt -- doesn't start with the equity markets. Equity markets, of course, respond to downturns.

And so I think the key lessons for -- one of the key lessons for emerging markets is that when countries have liberalized capital flows in the form of certainly foreign direct investment, but also, very importantly, portfolio equity investment -- which, by the way, facilitated a great deal of FDI, particularly in Latin America during the privatization period -- equity market liberalizations have led to lower cost of capital, higher growth, higher wages, higher investment in emerging markets.

And so there was this rush to judgment during the Asia crisis in particular to -- by people like Joe Stiglitz and others who said, oh -- or -- and my friend Jagdish Bhagwati -- who said, look, liberalization causes crisis. But, in fact, the key lesson is, liberalization of debt flows, in particular short-term dollar-denominated debt flows, is really what gets countries in trouble. And we need to have a shift more towards equity and less -- and away from debt and emerging markets.

And there are a number of things where the international financial system is actually biased -- capital flows, suppliers of capital provide debt capital or equity capital versus the fact that you can take a Third World or emerging market government to court in the First World, but there's no such recourse for equity. So that's just one example of the bias just towards debt over equity.

FERGUSON: Joyce, so Wall Street is said to prefer a world in which it -- money flows freely and seeks out its highest return. Has Wall Street's view on capital controls and hot money changed at all as a result of the lessons of the last few years?

CHANG: I think that Wall Street is pragmatic. I think capital controls and emerging markets are here for a while because they have fairly small domestic capital markets still. There's a need still deep in the financial markets. So many of these countries are getting much more money than the size of their markets can absorb. So the capital controls, it's not like the capital controls of the 1990s; it's been to prevent short-term excessive capital flows. And that's where the IMF has said, maybe we need to have some rules of the game because this is a state of affairs that's going to be in place for a while.

And I think what the IMF, when people ask me, you know, where I actually go to look for good-quality data, the first place I turned to was the IMF. I think the IMF has had a very important technical role in making sure that there is integrity to the data. Whether it's emerging markets or developed markets is less the issue. I mean, I think they have done a very good job of making that -- you know, making that a standard-bearer that, you know, any sovereign really needs to have out there if they're going to be in the markets.

So I think Wall Street isn't so ideological about it. It's just that pragmatically, they are going to be with us for a while. If this is the case, then perhaps there should be some best practices about sequencing, about when capital controls are used, how they're used. Money's going to be flowing into emerging markets, given the growth differential, and there still is an interest rate differential with zero interest rate policy, which is quite attractive.

FERGUSON: We'll turn to the members in a moment. Before I -- before we do, we've almost by definition been focused on economics here, but there is a broader lesson you could argue coming from the emerging markets or being learned by the emerging markets having to do with lots of what you might call the softer side of this, including rule of law, trust, transparency and the like. A couple of you made reference to this. Is this an important broader context for some of these economic figures we've been discussing? Any of you have thoughts on that?

HENRY: Well, I'd love to build on a point that -- I think an important point that Richard made earlier, actually. You mentioned trust. If you go back to some of these lessons that Richard talked about in Asia in the late 1990s and this response to these -- as Richard described, these searing episodes with the IMF, I think we're at a point right now where there is a real trust deficit, frankly, between a lot of emerging-market governments and certainly the IMF, but emerging-market governments and advanced-country governments more generally.

And so just to tie that to your earlier question, emerging markets need to do a number of things to continue to grow, raise their growth rates or potential output even more. But in order for those changes to happen, I think it's going to be critical that they begin to see that, A, you know, the IMF is willing to push the difficult medicine in Europe, so to really push for structural reform, labor-market reform in Europe, for instance, and do a better job of communicating, for instance, the point that -- you know, in the late 1990s in Asia, the IMF actually imposed fiscal austerity.

When -- during the crisis in 2008, the IMF actually said that -- went to the large countries and said, no, we need fiscal stimulus. Now, there are good reasons for doing that, but you need to communicate why it is that you're doing that, so that countries don't get the sense that, oh, there's one set of rules for the guys in Europe and another set of rules for emerging economies.

So I think filling that trust deficit, which is sort of a softer, more speculative issue, I think is really critical to get emerging markets to continue down that long road that we need them to go down so they can continue growing even more rapidly to help pull us along.

CHANG: And I think that -- I don't know if I would call it just political stability or social stability, because I think that the more that incomes improve, education levels improve, with that becomes, you know, more political accountability, greater transparency. So I think when I talk to emerging-markets policymakers, that their number-one objective typically is social stability. It is taking more people out of poverty. It is increasing the size of the middle class. It's making sure that services, you know, are available. And that is a way that you actually address the political issues, and probably the most important way in which you can address the political issues.

FERGUSON: All right.

Well, we can address other economic or non-economic questions, as the members prefer. We are on the record today, so please, if you do have a question, wait for the microphone and identify yourself and your affiliation, if you would.

Pending such question, I will raise the aspect of indeed this sort of social capital that you were alluding to just there. Has the social capital surplus, if you will, grown with the economic surplus in these countries? Is that another lesson of these last 20 years? And does it have anything to teach the Western democracies, which are seemingly increasingly fractious?

CHANG: Well, I mean, I think the China story -- you can still say that political reforms need to occur in China, but they have taken more people out of poverty in the last 30 years than the rest of the world combined. And I think that the social stability is what is key; that, you know, that's their objective. So I don't know how much I would actually separate the issues.

FERGUSON: Peter, you mentioned the "A" word, "austerity."

HENRY: Yes.

FERGUSON: The new dirty word in the economic debate. Are these virtues that we've been talking about here -- are they -- is "discipline" another word for austerity?

HENRY: No, I don't think it is, actually. So in turn -- I define discipline the following. Discipline means a commitment to a pragmatic growth strategy that is both vigilant and flexible and that values what's good for the country as a whole over what's good for any individual, interest group or person running for political office. The reason why I think that's a useful definition is, if you think about it in the fiscal context, you immediately see it doesn't mean austerity, it means -- discipline in the context of fiscal policy, yeah, it's countercyclical fiscal policy, but it also means recognizing that -- the objective is growth, which means that -- which doesn't mean that you don't need to deal with -- reduce the deficit, but it means you can be flexible about the speed of adjustment, for instance.

In the context of trade policy, you know, it's very tempting to fall into the point of view that, you know -- it's sort of almost mercantilist, that exports are good and imports are bad. But again, the history of a country like South Korea tells us that's not right. South Korea had an export-led growth strategy, but between 1965 and 2001, when South Korea was growing 7 percent per year, they were running trade deficits most of that period.

And so discipline really means sustained commitment into the future. And trade is good for countries not because it allows you to export a lot and import a little bit, but because it allows you to exploit the world markets and drive up productivity.

So "discipline" does not mean "austerity" and -- it's not a code word for "austerity." It's a code word for "sustained commitment to prosperity."

FERGUSON: We have a question in the back row there.

QUESTIONER: Thank you very much. Ahmed Fathi, Economics Channel, Saudi Arabian TV. My question is, since most of emerging markets, as you have indicated, depends -- and its resources -- on natural resources, whether commodities, natural resources, et cetera -- how can these markets sustain the high level of growth over the years, since most of it is not a renewable source? Thank you.

CHANG: Well, I think that we have seen a shift in commodity consumption patterns. So you now have the -- you know, China is the number two, you know, consumer of oil, and emerging markets -- this is the first year where the emerging markets' consumption is actually matching the consumption of developed markets. So when I look at the demand piece of it, emerging markets is a large part of the demand story --

MR. : Yeah.

CHANG: -- which has supported prices. But I still think that in many of emerging markets' countries, particularly in Africa, you have a lot of untapped potential. And you have untapped in the U.S., which one could talk about as well. But I think that -- you know, I still think that there is more that can be done in the commodities sector to, you know, further production and also tap into some of the countries where it has not been as accessible.

So you know, I don't know if I think that it's only a commodity story. However, I mean, I think the fact that the countries are net external creditors; that they're building domestic demand engines; that the size of the middle class is growing as, you know, equally as important as the commodities story.

But I also don't think that the commodities story has necessarily completely played out at this stage, given the stage of development that, you know, Africa is still at and that it's very commodity resource-rich.

FERGUSON: Richard, is there a danger that in their newfound prosperity the resource usage in the emerging markets, as they wish live as we do, presents some macroeconomic problems or environmental problems that the entire world, including the developed countries, are going to have to deal with?

CLARIDA: Well, certainly, and I think one thing to keep in mind is how humble we all need to be in making these long-range forecasts. I recall back in '03, when I was at the Treasury Department, the secretary asked me to look at the impact of $40 oil on the global economy, and then oil was around $11 or $12 a barrel. So -- and so no one was even thinking -- I think there was one study that said $60 oil. So here we are, and the global economy, you know, has operated at -- with oil at much higher levels.

And in fact, as I think I've mentioned in other contexts, I think that from the point of view of the global economy, we are in something -- we have been in some of a sweet spot now where commodity prices have been high enough to generate prosperity in those who export but are not so high so as to kill the global economy. And if anything, I think the recent data suggests that we may be in this zone for a long period time. As the handoff goes from the rich countries to the emerging countries on demand, that would tend to push up price, but on the other hand, you've got this supply that is triggered.

And so I think the key lesson I take away, as more of a macro person than a development expert, is that because the bulk of the economies that are benefiting from the commodities story have been running sensible macropolicies -- I mean, Peter gave the example of Chile, but there are others -- that, you know, this is actually, I think, a self-reinforcing positive cycle for some time to come.

But I think there is a range in that, and I think the story that becomes to be a risk for the global outlook is if the demand becomes so voracious that it pushes up commodity prices to a level that it really kills growth in the other countries. Certainly when we got up -- I don't think it was helpful to the global economy in '08 when oil got up to $150 a barrel. Of course a lot of other things happened in 2008 as well, but I think there is a range. But we have been in that range now, really, for three years, and I think the outlook is that we could well be in that range for some time.

FERGUSON: Perhaps a virtuous cycle.

We have a question here in the third row.

CLARIDA: Yeah.

QUESTIONER: Thank you. I'm Bruce Scherer (sp) with the Nature Conservancy. I'd like to press you a little harder on this question of the rule of law, human rights. One of the enabling factors -- there are many economies around the world that are not emerging markets, that are really disasters, economically. What -- you're offering us your ideas of what can be learned from the successful emerging economies. Certainly it's more than social stability, I would hope. In the Chinese case, there are real questions about the rule of law and about human rights. Can we learn any lessons across the board about the importance of these other factors, those so-called soft factors?

HENRY: I would just offer that I think it's really critical, as you think about some of these other cases that you referred to -- that it's really important to understand that, you know, there are limitations to what economic growth can do. And no one -- no economist -- (off mic) -- will make the argument that economic growth is, in and of itself -- you know, leads to happier outcomes for societies necessarily. Economic growth is all about increasing efficiency and increasing the resources you have to deal with a whole range of potential problems.

And Arthur Lewis, in his -- in his -- in his famous book on economic growth in 1956, warns us of this in the -- in the -- in the appendix, where he (has a lesson called ?), is economic growth desirable? And he says, no, not in and of itself. It just increases the range of options we have, frankly, to deal with a whole range of societal problems. So I would just say that there are a whole range of important social issues -- everything from increasing human freedom and human rights, democracy for its own sake -- these are all very good things. And the process of economic growth and thinking about how to -- how to operate an economy more efficiently can help with these problems, but it's not necessarily a solution to any of these -- any of these issues.

CHANG: And I still think that as global integration just proceeds, that accountability increases -- the whole way that information is transmitted has changed so much through social media that, you know, increased accountability is just a reality for the emerging markets policymakers now. I mean, they need to be held accountable where that if they are going to, you know, increase their trade, continue to have, you know, educational opportunities in all parts of the world and the kind of integration that they hoped for. So I still -- I do think that the economics, you know, is connected to it as far as improving the standard of living and access to opportunities.

FERGUSON: Has -- I wonder if the nature of some of these changes -- technological and communication and such indeed has brought what Michael Spence calls -- is convergence of the developed and emerging worlds. Whether that would have occurred even if economic lessons had not been learned or transmitted -- any thoughts about whether we're seeing just in a -- in a sense, a natural drawing together, hopefully involving human rights and other sort of elements as well? Anyone have any thoughts on that or whether this is, in fact, an economic story?

HENRY: For the record, I do think that there are raised expectations. I mean, if you -- if we're talking about a convergence of expectations, I think technology has played a big role in that, right, in the sense that access to cell phones, digital communication -- the range of people in the world who are unaware of how the top 1 percent or 10 percent are living is getting smaller and smaller. And so I do think there's been a convergence of expectations. And, you know, at the margin, that can be -- that can be a good thing for hastening social change.

FERGUSON: We have a question here, here and there. So at least three.

Second, row please.

QUESTIONER: Thanks a lot. I'm -- (name inaudible) -- from Citigroup. The traditional relation between G7 emerging markets were, G7 were doing the consumption part, emerging markets were doing a production part by commodities like, Brazil manufactures goods, like China and IT services like India.

But now, there are more and more interactions within emerging markets. BRICS just signed several currency swaps. So all these transactions used to be happening in U.S. dollars. Right now, they're happening Chinese yuan, or, you know, some other currencies. And the momentum is keep going. So what are your thoughts on this change? Thanks.

FERGUSON (?): Richard, do they still need us?

CLARIDA: Well -- no -- certainly, I think it's important to note that even though we've given examples of Chile and Brazil and Malaysia that have thrived under appropriately-designed capital controls, that the fundamental forces in the market are toward more open capital markets. China is doing that along a number of dimensions and liberalizing.

So I think that is -- that is the broad trend, but we may get there more slowly than people would have thought several years ago. And I think increasingly, and not just for marketing purposes, but really for substantive purposes -- and this is where my Columbia colleague, I think, Joe Stiglitz had it fundamentally right -- it's the interaction between capital flows and a banking system, especially in foreign currency, when that banking system has a "too big to fail" element.

And many countries, including the U.S., obviously have, you know, those elements as well. So I think that -- but I think the trend is towards -- is towards more opening of those markets. And I would -- I think the other thing we need to get on the table -- and it's related to this point -- and, you know, as all of us look ahead, the natural tendency in human nature is to extrapolate the past.

But I think in the -- in the case of a number of the key economies that show up in this category -- I would certainly put China and Brazil in this category -- I think -- I think it will -- the best forecast of the next 10 years will not merely extrapolate the last 10 years, both in terms of performance but also more broadly in terms of what those economies need to do to build on that success.

In the case of China, there are rising wages. You know, China will have to move away from a development strategy that focuses on an export model towards one in which there's more domestic demand, and I think in the case of Brazil and other countries, things in terms of efficiency and ease of doing business and sort of the microworkings of the economy will be relevant too.

So I think even though we've painted, I think, a positive picture, because there is a very positive picture, to continue on with the advances of the last 10 years is going to require, in many key countries, a different and, in some ways, more difficult approach.

CHANG: I think intraregional flows are going to be increasingly important, and I think in particular for infrastructure financing. I think for 20 years now I keep on hearing, where's all the infrastructure financing going to come from; how can we entice developed countries to go to emerging markets and do the infrastructure? Frankly, I think that's going to be handled intraregionally, you know, as we go forward, and in different currencies. But I think the whole definition of developed versus emerging has changed. And one thing to look at is in 1990, of the top 500 multinational corporations, only 19 of them were in emerging markets. Now it's about 120 of the top corporations, and what will that look like in a decade?

So I think intraregional flows and issuing in different currencies, you know, but also finding ways to make that more tradable and a more liquid market, which is still at a fairly early phase, you know, are the next stages of the financial market deepening going forward, rather than just thinking about it as just borrowing in the dollar market. This has been an opportunity for emerging markets to issue, you know, in different currencies, for China to also develop its local market as well.

FERGUSON: We had a question in the front row.

QUESTIONER: Bart Szewczyk, Columbia Law School. What are the overall attitudes within emerging markets towards the international investment regime through bilateral investment treaties and ICSID convention? So some -- a couple of South American countries have attempted to withdraw from certain treaties and sort of publicly denounced the ICSID convention. As you survey the landscape of emerging markets, is there a shift in attitude as to whether this regime still serves their interest, whether it actually promotes foreign investment in their countries? And has -- you know, has there just been a change in the perception as to the international investment regime?

FERGUSON: I think you're referring to the Venezuela group, basically? Yes? Are Venezuela and its allies in Latin America -- are they outliers, or is this representative of a larger movement?

CHANG: I don't think that Venezuela is that representative of Latin America. I mean, take a look at Mexico, which -- you know, North America Free Trade Agreement, WTO member, you know, and it's been growing, actually, at a faster pace than Brazil, which is surprising to a lot of people. But I think Venezuela has been more of an outlier in that way. And you can point to the outliers, but I think for a lot of the core major emerging markets countries, I mean, they very much, you know, want to be in the international trade flow. So I think Venezuela is more the exception in this case.

FERGUSON: Peter, you use that term "Third World" in your title of your book. Is there a Third World sensibility anymore?

HENRY: I think there really has been a sea change. And I intentionally used the phrase "Third World" because it had sort of this pejorative sense, when it was used back in the 1970s, to demonstrate just how radical the turnaround has been. And I think it underscores, you know, the point that Richard made earlier. I think the question that's really on the table is will advanced nations have the requisite humility to actually look beyond our shores and look at the turnaround that's happened in a range of countries over a range of issues and take some -- take some lessons to heart?

One example I'd like to just sort of come back to, the gentleman asked the question about these interregional kind of blocs, like, you know, the BRICS decision to begin their own monetary fund, for instance. And I would just -- I would -- I would just offer -- I would offer that up as a -- as a -- as a symptom of this issue -- this softer issue, the trust deficit that I referred to earlier. You can put the Chiang Mai Initiative coming out of East Asia along with that as well. When you -- in a world in which you have, you know, the 2010 IMF reforms still awaiting congressional approval, in which, you know, there's -- it's on the table to move two board seats to the developing countries, away from Europe, in a world in which you have the BRICS accounting for 21 percent of global GDP but only 11 1/2 percent of the votes of the IMF board, and Europe with 24 percent of GDP and 32 percent of the votes, it creates some trust issues.

And I think the danger is that we drift -- not radical, but slowly move to a world in which the countries that need to continue making hard reforms, and some of them are more on the microeconomic side that Richard alluded to, but reforms nonetheless that will require political consensus and political capital, that those things don't happen, to our -- to everyone's detriment, because we're not willing to reciprocate it.

FERGUSON: Question right on the -- (inaudible) -- there.

QUESTIONER: Thank you. Mr. Agwa (sp), Pace University. Would you please comment on the debt-growth conundrum, both private and public? As you know, recently there's been a controversy over the Reinhart-Rogoff findings and -- that's broadly speaking. And specifically, you look at an emerging market like Turkey, where private debt has increased considerably, is that good debt or bad debt? What does that mean for future growth? Thank you.

CLARIDA: Well, I'll just offer some quick thoughts on this. Obviously there've been a lot of ink and digital files exchanged on the issue of the famous result of Rogoff and Reinhart, that a debt-to-GDP ratio of 90 percent is associated with -- they were careful not to say caused -- but associated with a slowdown in growth. And if you review the critique of Rogoff and Reinhart, it doesn't overturn the point that on average countries with high debt loads grow more slowly than countries with lower debt loads, but the magnitude of the affect is attenuated if you adjust for some factors.

But I think the fundamental issue there is that economics is -- in general we don't do controlled experiments. Many people think that's a good thing. (Laughter.) And clearly here you've got two very -- you've got two variables that move together in very complex ways. And so I believe -- personally, I think the profession would accept that countries with high debt loads on average, other things equal, will grow more slowly, but the affect is not as dramatic as Rogoff and Reinhart found.

I would like to say, while I've got the platform here -- and I'll get it 30 seconds -- that we need to be careful in discussions about austerity because in the case of many countries, and I can give concrete examples, the choice has not been austerity versus no austerity, it's been the kind of austerity that they're going to be part of.

So for example, Greece did not have a choice. Greece was going to have austerity. It either gets it from having interest rates of 42 percent or it goes in an IMF program with austerity and then lower rates, you can make the case for other programs in Europe. I know, having visited the United Kingdom and spoken to senior officials there, that they believed in 2011 that they did not really have a choice. Their choice was either have austerity through fiscal policy or austerity through very, very high interest rates as they sort of got pulled into the euro crisis.

So I think it's important, as you all think about where you come down on the austerity debate to -- when you look at the specific cases, in many cases it's really not a choice between zero austerity and austerity, it's the form that the austerity takes in a post-crisis world.

CHANG: Yeah. And I don't know if there's a line in the sand on what debt level is the right debt level, but emerging markets now are at less than one-third the average developed country. So you've had this just growing differential between the two. But I wanted to just go to go to your point on the high-yield debt, because we see a dramatic pickup in emerging markets' high-yield corporate debt issuance.

And just to give you an example, I mean, since the beginning of the year, you've probably had 60 new corporates come to market who've never accessed the market. If you look at Asia, Asia high-yield has issued as much in the first quarter of the year as they issued all of last year -- about 25 billion. And we think it'll be 60 billion this year.

So a lot of people ask me, is this a bubble? You know, I -- it still is early days for emerging markets. I mean, this is a big growth year on year, but I mean, like the U.S. high-yield market is probably 25 to 30 percent, the size of U.S. GDP EM high yield is probably 2 to 3 percent the size of EM economy. So which one's a bubble?

You know, emerging market still has a lot of new markets, you know, coming on line right now. So -- but we have seen an increase in high-yield issuance. And with that, we've also seen a number of sovereigns able to come to market at spreads that would have been unthinkable a couple of years ago -- like Bolivia, you know, Paraguay, Zambia, tapping the market at 5 percent -- Bolivia at less than 5 percent for example.

You know, there's now in our frontier market's index -- our next generation emerging markets index -- you know, 27 borrowers. And this includes a whole range of countries in Central America, you know, Sri Lanka, Mongolia, as well as Africa.

FERGUSON: And if I can interject, Joyce, I would imagine that many of those deals are in local currency, right?

CHANG: NO, they're -- right now they've been U.S. deals that are under international law, but the local currency market is developing. And right now, like, for example, Nigeria is one that recently we put in our local currency index and it's one that was one of the top performers last year. So it's been both access to the international markets and developing the local markets. But these markets are still -- in liquidity terms still pretty shallow. I mean, you can get a pretty deep high-yield sell-off on a fairly small trading volume just because these are relatively new markets.

FERGUSON: I think we had a question right here.

QUESTIONER: Hi. Rachel Robbins, most recently with IFC. Joyce, you talked about Africa and the promise of Africa beyond commodities with a rising middle class and also the demographic phenomenon. Could you speculate over the next decade how you see the growth of Africa? And if anybody else has any comments.

CHANG: So I focus on bond markets, on fixed-income markets. So, you know, Africa, it's very interesting right now; because emerging markets countries are net external creditors, the incremental borrower is a frontier market country. So if you look at the 50-plus countries in the emerging market sovereign bond index, the EMBI, you know, 27 of them are these next generation countries. So you have to sort of follow them because even though they're relatively small, of the individual stories, it's more than half of the stories now because the other countries don't need to borrow. What they need to do is deepen their domestic markets, raise infrastructure financing. So, you know, we launched a frontier markets index for the bond markets December 2011. And if you look at new borrowing by emerging markets countries, like the frontier markets are about half of that of the net incremental new borrowing because the other countries just don't need to borrow. I mean, if Mexico's going to borrow, they're looking at a hundred-year bond because they can do that.

So I think that, you know, there is -- there is a lot of concern about Africa still on the governance and the transparency side, but there is also a lot of excitement about the growth potential, the commodities and the fact that they are able to come to market. And the process of coming to market and getting a credit rating, they have to make themselves transparent, they have to let foreign investors come in to ask questions about the economy, about the political system and about the social indicators. They have to get themselves ready for an investor road show. So I wouldn't really disconnect the social issues and the political issues and the human rights issues because when you get foreign investors in, you are held more accountable.

So I think this is a positive thing. I think some of the spreads, because of zero-interest rate policies -- I mean, they -- if somebody had asked me a year ago what I thought the spread levels would have been for some of these countries, they've come much lower than what I would have thought just because of a developed country quantitative easing policies.

FERGUSON: Any quick Africa observations? Peter?

HENRY: I would just say that it's really important to keep in mind that Africa is growing for the first time in decades. And while there is still a lot of challenges, I think it's really critical to understand that. There's a lot more stability in Africa than there's ever been. And stability is (really ?) the first rule of growth. Without stability, almost nothing else matters.

And so countries like Ghana, for instance, that are -- really seem to have turned the corner in very important ways -- the last two democratic transitions in Ghana have been very tightly fought elections but have held. And I wouldn't discount -- you know, South Africa is by no means a growth miracle, but the example that South Africa has set for sub-Saharan Africa sort of post-apartheid in managing the fiscal accounts and managing the demand for redistribution of income but not going overboard in the way that many countries did in the '70s -- you know, an example, that would be Jamaica going too far towards redistribution in the '70s -- is not to be discounted. And that model is slowly taking hold.

You know, I think -- you know, Richard alluded to something important, which is that we're seeing now more local currency bond issuance, which, back in the late 1990s, post-Asian crisis, a lot of -- people were talking about original sin; why can't emerging markets issue debt in their own currency? Well, the answer is they did -- they just need to show discipline for a while, and they can do it.

So countries -- African countries in particular are showing that they can get beyond aid. Still important questions as to whether it's, you know, better management or metal prices that's doing it, but I think at least part of the answer is better management.

FERGUSON: So we're at the witching hour here, and we're going to have to close, but I'm going to impose a lightning round on my panel here. (Laughter.)

CLARIDA: Double jeopardy.

FERGUSON: Quickly, quickly, the most surprising emerging market story of the next five years. Joyce?

CHANG: I still think it's China. I mean, again --

FERGUSON: No end of surprises there.

CHANG: (Chuckles.)

FERGUSON: Peter?

HENRY: I'm going to say Ghana.

FERGUSON: Ghana. Well, there's an African story.

CLARIDA: And I'll move to another continent. I'll say Central Europe.

FERGUSON: Central Europe.

CLARIDA: Yeah.

FERGUSON: The former Soviet countries?

CLARIDA: Broadly defined, yes.

FERGUSON: Well, it's an interesting story.

I want to thank my distinguished panelists and to invite you to join them at a reception beginning immediately. And could you also join me in thanking them for their contributions. (Applause.)

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