Section 3G: Emerging Markets Roundup
A Bigger, Faster World
June 28, 1993
I am still trying to understand all the implications of the International Monetary Fund's new weightings of developing economies by purchasing power parity instead of market exchange rates. It seems to me that this revision really is a big deal, because it says that we have all been viewing the world incorrectly. Among the implications are that the world economy is bigger and growing faster, that developing countries' currencies are by and large undervalued, that the developing countries are not as poor as they are assumed to be, and that China, India, Brazil, Mexico, and Indonesia are much bigger markets than generally realized.
To briefly review the argument for PPP as the medium of conversion, the IMF's World Economic Outlook for 1993 points out that market FX rates may be distorted by speculative bubbles, central bank intervention, asymmetric speed of adjustment in goods and asset markets, or macroeconomic shocks. The result is that FX rates in both the short run and the long term can be biased away from PPP and thus can point to misleading conclusions.
There are many examples of the distortions that result from using market FX rates. From 1985 to 1990, Asia was the fastest-growing area of the world, but its share of world output seemed to fall from 7.9 percent to 7.2 percent. The new data show Asia now ...