Global Markets in a Slump

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Alex Chadwick speaks with Kristin Forbes, an economist at the Massachusetts Institute of Technology, about the recent downturn in global markets.


This is DAY TO DAY. I'm Alex Chadwick.


And I'm Madeleine Brand. If you're invested in international stocks or mutual funds, you may be feeling a bit grim these days. Most Asian markets plunged today. Japan's NIKKEI was down 392 points.

CHADWICK: Yesterday, the Dow Jones Industrial Average in this country dropped 184 points as investors face new worries about inflation. Economist Kristin Forbes teaches at MIT's Sloan School of Management. She served in the Bush administration as a member of the White House Council of Economic Advisors. Ms. Forbes, welcome to the program.

Professor KRISTIN FORBES (Economist, Sloan School of Management at Massachusetts Institute of Technology): Good to be on.

CHADWICK: Let's start with these emerging markets - at least they're still called emerging markets. Investors have been putting money into places like Mexico and India and China and developing countries. And they've seen rapid growth there, but maybe those days are over.

Prof. FORBES: Yes. If you look at the amount of money flowing into emerging markets over the past few years, it set record after record. The World Bank just released a report yesterday that reported that private investors invested almost $500 billion into emerging markets in 2005, and this set a new record. And very inauspiciously, the last peak of emerging markets was in 1996. This is right before there was an emerging market crisis that started in Asia, and then spread around the world. So a number of investors are worried that once again, maybe there was too much money flowing into emerging markets, and now there will be a retrenchment.

CHADWICK: Well, is that the problem now? Over the last couple of months, things seem a little more tenuous with these emerging markets, and the news -especially today - not very good.

Prof. FORBES: I think there's a mix of two things going on. One is there has been a fundamental improvement in a number of emerging markets which justified initially the investment going into emerging markets. For example, a number of emerging markets have cut down on their budget deficits, have moved to floating exchange rates, have reduced their trade deficit, and are less reliant on foreign borrowing. But somewhere along the line, I think investors became too optimistic, and they focused only on the positives and forgot many of the risks that still exist in many of these economies.

CHADWICK: Is the risk basically that these - as we call them, emerging markets - are still in countries that while they are better market economies, they're still not as clear and - transparent is the word, as markets that we're used to in this country? That is, exactly what governs the market in China? What governs the market in Thailand? Do we know?

Prof. FORBES: No. There is a big variance across emerging markets. So it is difficult to generalize. But in some countries such as China, for example, there are still large question marks on what the accounting data actually means, and how accurate any of the information on the companies actually is. So there are real risks in investing in these companies, as often that you don't know what you're buying.

CHADWICK: Well, so at this point, an investor listening to this conversation, what are they to do?

Prof. FORBES: Well, I think the best approach is not to panic. I think that this is not the start of a major meltdown such as we saw in 1997 or 1998. If anything, this is more of a market correction, where prices in many emerging markets got out of line, became too optimistic, and now prices are coming back to standard level. But since the fundamentals of the global economy are still quite strong, emerging markets should still continue to do quite well for the next year or so. When I worry more is in a year or so if growth in the U.S. slows, and growth in China slows - then I'd worry more about emerging markets. But at least for the next few months, fundamentals still look quite sound.

CHADWICK: Economist Kristin Forbes at MIT's School of Management. Kristin, thank you.

Prof. FORBES: Thank you.

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