Developed economies shift their governance deficits

On Aug 18, Turkiye's central bank decided to cut its benchmark repo rate by 100 basis points to 13.00 percent. The announcement was followed closely by markets around the world as it contradicted market expectations of it raising interest rates to curb inflation.

The reason is that the inflation rate in the country is already close to 80 percent, its highest level in 24 years. Turkiye's main interest rate has been stuck at 14 percent for nearly half a year. Given the basic rule that the real interest rate is equal to the nominal interest rate minus the inflation rate, the transmission channel for the effectiveness of monetary policy has been severely narrowed.

It is difficult for emerging economies to maintain monetary policy independence. If they rely on raising interest rates to curb inflation, it is bound to attract inflows of hot money and boost domestic currency appreciation, which is obviously against the macroeconomic objectives of the emerging market economies. That means the independence of monetary policy in emerging market economies is greatly compromised.

In emerging market economies, there are more constraints on policies to sustain economic growth, and the difficulty of coordinating policies between curbing inflation and sustaining economic growth is increasing.

It is also becoming increasingly difficult to coordinate the policy toolbox of maintaining economic growth, price stability, full employment and international balance of payments. How to balance different policies to form a synergy makes higher requirements of policymakers in the emerging market economies.

The beggar-thy-neighbor policies of developed economies will slow the recovery of emerging market countries and the global economy. There is a big gap between developed economies and emerging market countries in factor endowment, economic basis and rights to a say in the world market. The developed economies have more abundant toolboxes to boost economic recovery, so they naturally have more obvious advantages, which has led to an uneven global recovery.

The process of raising interest rates and shrinking balance sheets that major advanced economies have embarked on to ease their own inflation has clearly failed to take into account the consequential negative effects of doing so on emerging market economies. From Brazil to Mexico to Turkiye, these negative externalities are brewing, with emerging economies bearing the brunt of the developed world's economic governance deficit.

21ST CENTURY BUSINESS HERALD