Monday, November 24, 2014

Trouble in Emerging-Market Paradise

NEW YORK – During the last few years, a lot of hype has been heaped on the BRICS (Brazil, Russia, India, China, and South Africa). With their large populations and rapid growth, these countries, so the argument goes, will soon become some of the largest economies in the world – and, in the case of China, the largest of all by as early as 2020. But the BRICS, as well as many other emerging-market economies – have recently experienced a sharp economic slowdown. So, is the honeymoon over?

Brazil’s GDP grew by only 1% last year, and may not grow by more than 2% this year, with its potential growth barely above 3%. Russia’s economy may grow by barely 2% this year, with potential growth also at around 3%, despite oil prices being around $100 a barrel. India had a couple of years of strong growth recently (11.2% in 2010 and 7.7% in 2011) but slowed to 4% in 2012. China’s economy grew by 10% per year for the last three decades, but slowed to 7.8% last year and risks a hard landing. And South Africa grew by only 2.5% last year and may not grow faster than 2% this year.

Many other previously fast-growing emerging-market economies – for example, Turkey, Argentina, Poland, Hungary, and many in Central and Eastern Europe – are experiencing a similar slowdown. So, what is ailing the BRICS and other emerging markets?

First, most emerging-market economies were overheating in 2010-2011, with growth above potential and inflation rising and exceeding targets. Many of them thus tightened monetary policy in 2011, with consequences for growth in 2012 that have carried over into this year.

Second, the idea that emerging-market economies could fully decouple from economic weakness in advanced economies was far-fetched: recession in the eurozone, near-recession in the United Kingdom and Japan in 2011-2012, and slow economic growth in the United States were always likely to affect emerging-market performance negatively – via trade, financial links, and investor confidence. For example, the ongoing eurozone downturn has hurt Turkey and emerging-market economies in Central and Eastern Europe, owing to trade links.

Third, most BRICS and a few other emerging markets have moved toward a variant of state capitalism. This implies a slowdown in reforms that increase the private sector’s productivity and economic share, together with a greater economic role for state-owned enterprises (and for state-owned banks in the allocation of credit and savings), as well as resource nationalism, trade protectionism, import-substitution industrialization policies, and imposition of capital controls.

This approach may have worked at earlier stages of development and when the global financial crisis caused private spending to fall; but it is now distorting economic activity and depressing potential growth. Indeed, China’s slowdown reflects an economic model that is, as former Premier Wen Jiabao put it, “unstable, unbalanced, uncoordinated, and unsustainable,” and that now is adversely affecting growth in emerging Asia and in commodity-exporting emerging markets from Asia to Latin America and Africa. The risk that China will experience a hard landing in the next two years may further hurt many emerging economies.

Fourth, the commodity super-cycle that helped Brazil, Russia, South Africa, and many other commodity-exporting emerging markets may be over. Indeed, a boom would be difficult to sustain, given China’s slowdown, higher investment in energy-saving technologies, less emphasis on capital- and resource-oriented growth models around the world, and the delayed increase in supply that high prices induced.

The fifth, and most recent, factor is the US Federal Reserve’s signals that it might end its policy of quantitative easing earlier than expected, and its hints of an eventual exit from zero interest rates, both of which have caused turbulence in emerging economies’ financial markets. Even before the Fed’s signals, emerging-market equities and commodities had underperformed this year, owing to China’s slowdown. Since then, emerging-market currencies and fixed-income securities (government and corporate bonds) have taken a hit. The era of cheap or zero-interest money that led to a wall of liquidity chasing high yields and assets – equities, bonds, currencies, and commodities – in emerging markets is drawing to a close.

Finally, while many emerging-market economies tend to run current-account surpluses, a growing number of them – including Turkey, South Africa, Brazil, and India – are running deficits. And these deficits are now being financed in riskier ways: more debt than equity; more short-term debt than long-term debt; more foreign-currency debt than local-currency debt; and more financing from fickle cross-border interbank flows.

These countries share other weaknesses as well: excessive fiscal deficits, above-target inflation, and stability risk (reflected not only in the recent political turmoil in Brazil and Turkey, but also in South Africa’s labor strife and India’s political and electoral uncertainties). The need to finance the external deficit and to avoid excessive depreciation (and even higher inflation) calls for raising policy rates or keeping them on hold at high levels. But monetary tightening would weaken already-slow growth. Thus, emerging economies with large twin deficits and other macroeconomic fragilities may experience further downward pressure on their financial markets and growth rates.

These factors explain why growth in most BRICS and many other emerging markets has slowed sharply. Some factors are cyclical, but others – state capitalism, the risk of a hard landing in China, the end of the commodity super-cycle – are more structural. Thus, many emerging markets’ growth rates in the next decade may be lower than in the last – as may the outsize returns that investors realized from these economies’ financial assets (currencies, equities, bonds, and commodities).

Of course, some of the better-managed emerging-market economies will continue to experience rapid growth and asset outperformance. But many of the BRICS, along with some other emerging economies, may hit a thick wall, with growth and financial markets taking a serious beating.

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    1. Commenteddonna jorgo

      your statisice is bad for ALL .
      CHINA is slow 7.6% to 8% chine have inflation ..(high) this is bad ..corruption ..problem ( needed liberation)
      but i think is good for the economy in china to have this slow'//// (manifactura ) be come very strong and will help very good the CHINESE economy (not only ) even a round in world .
      needed to have transparence for good investiment ....Russia is very good in economy with a little problem with gas (gasprom ) is not good this timing because USA trying to play role in EU ..they trying to dominated with GER ..price gas .with carbohydrated they take from USA very cheap ..''check up ''...
      Brasil is real in trouble ..why ? America doesn't like to have from south partner with Russia ..they are allways contrary ..So they bit with others ways ..(needed help)
      LISTEN if you wanted my opinion about the social -capitalism (this countries ARE ) they needed very good corporation btw ..and very good study about the grow manifacture -infrastuchture and export gas natural with deal ..(deal prices.. ) DON'T LET USA to dominated when the biger exporter in gas is RUSSIA ..
      they are smarter is good to be faster ...

      WTO move very small .will be most slowly 2014-15 ..this is real trouble
      Michigan is example ..(they have much more )pension's for pay than workers ) ..
      nothing invest ..nothing budget nothing corporation btw others state insight the sate USA ..
      thank you nice article

    2. CommentedEnrique Woll Battistini

      Some thinking-out-of-the-box emergency criteria that might help prevent the Chinese economy from stalling in the mid or long term are: 1- Abandonment of the Command economy typical of totalitarian communism and adoption of an aggresive market-driven socially-focused inclusive economy. 2- Application of the bulk of the excess Chinese reserves to the acquisition of U.S. industrial equipment & technology and U.S. scientific, technological and administrative masters and doctoral education for a significant fraction their current and coming leaders. 3- Establishment of a private-public Partnership for Development between OECD member countries and developing countries in the Asia-Oceania North-South axis, operating through Development Consortia in each target country, controlled by the private sector, under Japanese leadership, and aimed at funding environmentally friendly direct investments, with both national and foreign capital, for profit, and bringing together the top Japanese broker dealer and other financial companies with their counterparts in the target countries, as well as target country government entities pertinent to holistic development with their multilateral counterparts to ensure the political support required for success. Of course, if one cannot see the Chinese ever accepting Japanese business leadership, or if one does not recognize an emerging long term international economic crisis, then more subttle or ingenious interventions, if any at all were deemed required by one, might suffice.

    3. Portrait of Pingfan Hong

      CommentedPingfan Hong

      "But many of the BRICS, along with some other emerging economies, may hit a thick wall, with growth and financial markets taking a serious beating":there are only five countries in BRICS, how "many" of them will hit a thick wall? Contrarian investmentors may take a cue from this article: it is probably right time to buy emerging economies.

    4. CommentedProcyon Mukherjee

      There is nothing common in the ensemble coined 'Emerging market paradise', and each one is 'unhappy in its own way'. India for example, with all its potential in demographic 'dividends', is now trapped in a situation of high-inflation and current account deficit where most of the States are entrenched in a fiscally irresponsible quagmire, while the polity is engaged in a bickering where no policy can be actually implemented on the ground from land acquisition to mining or starting of new projects where approvals and clearances are needed from scores of government offices. The common man is reduced to a residual claimant of state subsidies and the diminished dignity of crossing the Poverty Line is lauded as an achievement where the 'line' itself is deplorable, such is the rigor of a morally demanding subsistence level of consumption in the country.

    5. CommentedEdward Ponderer

      It behooves me once again to point out that the world is round and globalizing rapidly. Interdependence leads toward deterministic chaos and the greater and greater deviation from top-down first-order economic models and their relatively simple dynamics.

      The only "economist" that will eventually be able to "say" anything reasonably meaningful at any realistic detail will be Global humanity itself if it can establish the correct human mutually responsible relationships to obtain a homeostatic mapping across the globe.

      It would prove a sensory, reactive intelligence beyond our comprehension -- exactly what we need to handle complexity beyond our individual human ability to model it.

    6. Commentedsrinivasan gopalan

      As is his wont, Prof. Roubini has drawn a morose picture in the BRICs topography, drawing graphically the structural vulnerabilties they are plagued with. In an inter-dependent world ever since Washngton Consensus was foisted on the rest of the world, the fragilities of individual economy--be it a developed, developing or emerging or the least developed ones-- are too glaring to be brushed aside. State capitalism has become fashionable even in advanced countries such as in the US and now in Europe where governments must perforce bail out crumbling financial institutions on the pretext of "too big to fail". One wonders whether any simple nostrum most of the nations enjoyed before world economic liberalisation could now be the panacea for all the ills plaguing the planet! Economists the world over including doomsday prophets of Prof.Roubini genre revel in diagnosis of maladies than plumping for remedies to bring a whiff of comfort to millions of people trying to eke out a measly existence in the face of the severest economic challenges confronting them! Troubles and negative tidings always make a dismal reading but they are no substitute for substantive and ground-level action by governments the world over which is unfortunately found wanting in terms of coordinated strategy to pep up sentiments and revive growth impulses from langushing or getting extingusihed! G. Srinivasan, Journalist, New Delh, India

    7. CommentedPaul A. Myers

      Excellent tour de horizon. What seems to be a worldwide phenomenon is that the slopes of all the economic growth potential curves have decreased or flattened out. The US is not experiencing a robust recovery from recession as it often has in the past. Europe has an even flatter growth function. And now many emerging market countries seem to be experiencing decreased growth for a variety of structural reasons.

      But the reasons for the growth slowdown seem to be different from country to country, or region to region.

      But almost everywhere it would seem that governments need to adjust the policy mix to aim towards higher potential growth by removing constraints, many of which are baked in politically. Tough work!

      It's like the entire world is caught in the "middle income trap."

    8. CommentedVidyabhushan Upadhye

      India's slowest GDP growth was registered in 2012-13 at 5%. Wonder where this 4% figure comes from? It may be due calculation of GDP after conversion to USD.

        CommentedZach Peterson

        The 4% figure comes from the IMF's World Economic Outlook Database, found here: - thank you for reading.

    9. CommentedFrank O'Callaghan

      Many good points as far as it goes.

      There is another set of structural issues. Chief among them are the twin issues of inequality and the specter of unemployment/underemployment. Growth needs a market that can spend. The huge concentration of wealth in the hands pf a few and debt forced on the many prevents this. The death spiral towards default is inevitable. Far better to redistribute the meaningless wealth of the minority to protect the stability of the system.

      The unemployment situation is a consequence of high productivity. We can produce more with fewer people every year. Innovation will not stop. We need to share the work by lowering the working week, year or lifetime.

      A serious structural crisis can be used to create a stable and sustainable world economy. It should be a more just one and a more equal one.

    10. Commenteddouglas ungredda

      As FDI inflows become pervasive in emerging economies, any move to curb credit expansion will exacerbate real exchange appreciation, making domestic prices ever more expensive , affecting employment and growth. This much like Sir David Hume s Price Specie Flow Mechanism on the Dollar, Euro or Yen standard. Foreign Reserves are to an economy what glucose or sodium does to a human body. In the right dosage they nurture growth but too little or too much of it could prove deleterious and even deadly.

    11. CommentedCarlos Relano

      The growth of Emerging countries is taking a beating because they are currently affected by the current recession experienced by Western countries and United States. Though United States economy is recovering, the recovery is not even enough to help the middle class recover from the pre-recession status.
      Remember that the middle class of United States and Europe is still the key and badly needed for the rest of the world to survive, recover and grow in a sustainable outcome. However, the middle class are not spending. That's because they are not making income. Because of that, China is trying to start a consumer-driven economy and add an additional 250 million population to sustain its growth. However, it is still not enough. That's because the other BRICS and other emerging economies is not doing the same.
      The best solution for this global recession is to stimulate the middle class. That means the distribute of wealth must be a priority. The distribution of wealth must be sustainable. That's because we can't have 1% control the the 40% of the wealth. We can't have the 1% control the big pie. We can't have the 1% get all the riches and leave the middle class and the low class into obscurity, hardship and in ruins.