What’s at stake: We've been talking about the problems in the eurozone for a while, but the BRIC economies have recently shown worrying decelerating signs. The economies of Brazil, Russia, India and China grew at a furious pace for much of the past decade and have assumed the role of growth engines for the world economy since the beginning of the crisis. But weak economic data in the BRIC nations have had pundits wondered about the impact that a BRIC slowdown could have on an already weak world economy.
A smaller contribution to World GDP growth
The Graphic detail blog of The Economist points to the worrying fall in the contribution to world GDP of the BRIC countries, which have been widely considered the driving force behind global growth. Mattew Iglesias writes in Slate that the world economy enjoyed amazing growth from 2002-08, took a small dip in 2009, and then went back to growing. China and India are so large that their catch-up growth was able to raise the entire worldwide rate of economic growth. That’s why the world economy kept growing through the 2008-09 financial calamity. Sadly the good news seems to be coming to an end in Brazil, China, and India.
The Economist points to the recent change as to how these economies have been portrayed. Not long ago, the BRICs were lionized as fast-growing superpowers-in-waiting. These days Russia is portrayed as a corrupt petrostate. India is ensnared in red tape, unable to muster the political will to break free. The mighty Chinese economy has slowed in recent weeks. Even South Africa, which considers itself to be the “S” in BRICs, seems sluggish and hidebound next to the gazelles to its north. Critics have also taken to complaining about Brazil’s expensive welfare state and dependence on commodity exports.
On GDP and other advanced indicators
In one of his recent Viewpoint notes, Jim O’Neill – the Goldman Sachs economist who invented the BRIC acronym – writes that overall, it is undoubtedly the case, with the exception of Russia, that Q1data in the BRIC economies has been disappointing. Ongoing economic releases furthermore add to the sense that things are not going as well as the optimists hoped. But fears of a China hard landing are misplaced and that the Chinese economy is more likely to see a “softer” landing.
At The Atlantic, Matthew O'Brien marshals 5 data points in favor of the Chinese hard landing hypothesis. O’Brien argues that the country’s GDP are not trustworthy and that as revealed by Le Keqiang in a 2007 cable made public by Wikileaks, it is more useful to look at the following three statistics – (1) Bank lending, (2) Electricity consumption, and (3) Rail cargo volume – to gauge the health of the Chinese economy. According to these measures, China's economy is clearly screeching to a halt.
The rebalancing challenge
Jean Joseph Boillot argues that, following the euphoria world of 2003-2007, these economies need to move from a growth based primarily on external drivers, to a growth based on domestic drivers. And there, things are more difficult.
Mattew Iglesias writes that most of China’s growth takeoff in the aughts was powered by exports to rich countries. When advanced economies stumbled into recession, China needed to change. And change it has. China’s total trade surplus is now modest enough that it runs deficits in some months. But rather than rebalancing to a more conventional consumer-focused economy, the Chinese government weathered the recession by engineering an unprecedented boom in domestic real estate and infrastructure investment. Investment is a good thing, but there was simply no way for the country to sustain double-digit growth in investment. Inevitably, the real estate market has started to unravel.
Menzie Chinn points, however, that with price pressures declining, China has, however, some flexibility in terms of policy response. Monetary policy is easing already, by way of decreased reserve requirements and a recent cut in interest-rates. More likely fiscal policy will be stressed, as China has more fiscal space than countries that engaged in reckless tax cuts at the beginning of the last decade.
Are these economies facing structural bottlenecks?
Mark Thoma argues that the chance that the slowdown will be persistent or perhaps even permanent must be taken seriously, not only because of its direct impact on these economies, but also because it would undermine hopes that increasing exports to developing countries can shorten the recovery from the recession in the US.
Tyler Cowen argues that India’s services-based growth spurt may have run much of its course. Call centers, for example, have succeeded by building their own infrastructure and they often function as self-contained, walled minicities. It’s impressive that those achievements have been possible, but these economically segregated islands of higher productivity suggest that success is achieved by separating oneself from the broader Indian economy, not by integrating with it.
The impact of a Chindown on commodity exporters
David Pilling writes that it’s time to fret about ‘Chindown’ and the impact that a softening of Chinese demand, particularly for raw materials, could have on parts of the global economy. Given the weight of China’s economy and its importance to some commodity exporters, perhaps rather more thought should be given to the topic. After all, unlike a Grexit, which no one wants, Beijing has actually announced its intention to engineer a Chindown. China’s five-year plan, which runs to 2015, talks specifically of weaning the economy off investment-led, commodity-hungry growth and easing the annual rate of growth down to 8 per cent from the double digits of recent years. One country that stands to lose is Brazil.
Antoinette Sayeh of the IMF points that although sub-Saharan Africa has usually been badly affected in previous global downturns, it was not the case this time around. Sub-Saharan Africa has been partially insulated from the adverse cyclical effects of the Great Recession because of a number of key factors. Commodity prices for African natural resources have remained relatively high to date, sustained by the continued strong growth of major emerging market economies, most notably China. African banking systems have not experienced the severe financial stresses recorded in the advance economies, in good part because they are not heavily dependent on external funding, relying instead on strong domestic deposit bases.