labels: economy - general
New financial market players, new instruments raise risks for emerging economies: Y V Reddynews
06 June 2007

Mumbai: New financial market players and instruments as well as greater market integration have increased the risks to emerging economies, the Reserve Bank of India (RBI) governor told a conference in Argentina.

The rise of emerging market economies has made globalisation a two-way process where these economies are changing from passive recipient to being part of active participants in the global economy, Reddy said in the speech published on the RBI web site.

While growth in emerging market economies was strong due to structural reforms and sound macro policies, they were concerned about the sustainability of factors like abundant global liquidity, he said.

"The exposure of emerging markets to risky financial assets of the mature markets has increased, and therefore the overall global financial risks have increased," Reddy said.

Emerging market economies had diverse characteristics, like size of country, financial markets and foreign exchange reserves, and investors appeared to differentiate between them.

"The advantage of such diversity is that the possibility of any synchronised behaviour or a potential for contagion amongst the EMEs is to some extent moderated," he said.

But there were new financial market players, new financial instruments and new dispersed risks.

"Hence the risk of contagion to the emerging market economies through the financial markets, which appear to be even more integrated now, seems to have heightened, and the real sector in these emerging markets might not remain immune to its consequences," he said, noting investors may be assigning insufficient weight to downside risks.

Reddy noted high economic growth and demand for food in populous countries like India and China, and diversion of corn and oilseeds to biofuel, could increase demand for foods like edible oil.

"The recent rise in agriculture prices could potentially represent the beginning of a structural increase in prices," he said.

A nine per cent economic growth has not helped to reduce income disparities with about 10 million people currently engaged in agriculture hard put to find remunerative non-agricultural employment in India, Reddy said.

"An overall growth of nine per cent will further increase income disparity between agriculture and non-agriculture households, unless around 10 million people currently employed in agriculture find remunerative non-agricultural employment," he said.

While there was a need to strike parity between dependence on agriculture and the number of people employed by the sector, he said, the planning commission''s focus on increasing agriculture growth rate to four per cent should improve rural job conditions by reducing real wages and under-employment.

More than 60 per cent of the population depended on agriculture while it contributes only 20 per cent to the GDP.

Reddy underlined the need of improving quality of delivery of essential public services such as education and health and the need to remove infrastructure bottlenecks.

 


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New financial market players, new instruments raise risks for emerging economies: Y V Reddy