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The Submerging-Market Threat

The slump in emerging markets was predictable; the booms that led to their rise were not accompanied by the structural reforms needed to sustain growth when commodity prices fell. Faced with years or even decades of anemic global growth, Western leaders must start thinking about managing the destabilizing effects of stagnation.

WASHINGTON, DC – It is time to put the rise of the emerging economies in perspective. The rapid economic growth in much of the developing world since the beginning of the century was fueled by a commodity boom and an overextension of credit. But, because the emerging-market boom was not accompanied by sufficient structural reforms, it was not sustainable.

Today, most of the major emerging economies have experienced a severe reversal of fortune. Russia and Brazil have plunged into severe crises, with double-digit inflation accompanying a 4% contraction in GDP last year. South Africa is barely growing. China’s phenomenal rate of expansion has slowed to below 7%. Unsurprisingly, Goldman Sachs has closed its money-losing BRIC fund for investment in Brazil, Russia, India, and China.

Indeed, the future of the BRICS (including South Africa) – and that of other emerging markets – looks gloomy. Outside of Asia, most developing economies are principally commodity exporters, and thus are highly exposed to price shocks. Plunging oil prices have cut the value of the Russian ruble by more than half against the US dollar, and further declines appear likely – especially if the US Federal Reserve continues to hike interest rates.

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