Emerging Economies in Trouble

  7 min 31 sec to read

World Focus
 
--By Sanjeev Sharma
 
In 2001 when Jim o’ Neill, the Chairman of Goldman Sachs bank’s Asset management unit coined the term ‘BRIC’ (an acronym for Brazil, Russia, China and India where South Africa later joined and the BRICS group was formed) , the global and domestic economic prospects of emerging economies were looking bright. The policies regarding economic liberalization and open market which they have adopted in 90’s helped their economy to grow in rapid pace. In 90’s and 2000’s the emerging nations became the outsourcing hub for most kind of western industries. The mammoth inflow of foreign investments led to the staggering growth of manufacturing and service sector in these countries. The economic growth data of 2007 clearly showed this. That year, China’s economy expanded by staggering 14.2 per cent whereas India managed 10.1 per cent, Russia reported 8.5 per cent, Brazil achieved 6.1 per cent and South Africa 6 per cent. In 2009 the global financial crisis caused a 2 percent drop in world GDP, but the BRICS expanded by 4.3 per cent which was led by China and India. In 2010 the BRICS GDP surged by 8.8 percent outpacing United States and European Union (EU). In that year, the crisis marred US reported GDP growth of 2.4 per cent followed by the EU at 2 per cent. The strong economic performance lured many analysts who in many occasions opined that the group to become the powerhouse of global economy in the near future. 
 
However, the recent economic and monetary troubles in emerging nations give clear hint that the ‘powerhouse’ is losing its steam. With the economic sluggishness in the developed nations, BRICS along with other emerging economies seem to have lost the momentum. In 2011 the group’s GDP slowed to 6.5 per cent and further declined to just over 4 per cent in 2012.  According to the International Monetary Fund (IMF) estimate in July, growth in emerging markets and developing economies is expected to be an average of 5 per cent this year. “This embodies weaker prospects across all regions,” said the IMF report. Similarly, the World Bank also slashed its economic growth projection for developing countries to 5.1 per cent, less than the 5.5 per cent it estimated in January. The bank cut China’s growth forecast to 7.7 percent from 8.4 percent, Brazil’s economic growth to 2.9 percent from 3.4 percent and India’s growth outlook to 5.7 percent from 6.1 percent which are less than the estimates of January. 
 
So, what has happened to the emerging bloc that was supposed to overtake the US and Europe becoming the ‘powerhouse’ of global economy? 
 
“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,” writes Prof Nouriel Roubini, in his article entitled ‘Trouble in Emerging- Market Paradise.’ The renowned economist who accurately predicted the financial crisis of 2008/09 further adds, “ The idea that emerging-market economies could fully decouple from economic weakness in advanced economies was far-fetched: recession in the euro zone, 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 euro zone downturn has hurt Turkey and emerging-market economies in Central and Eastern Europe, owing to trade links.” 
 
The fall in export is seen as the major contributor of economic problems in export-oriented emerging nations. The lack luster economic recovery in US and Europe has led to the slump of demand of goods and services of emerging. This is causing a slowdown in manufacturing activities of these nations. 
 
The economic woes of emerging bloc further escalated due to the sharp depreciation of their currencies against US dollar. Except the Chinese Yuan (which looked relatively stable), Indian Rupee, South African Rand, Russian Ruble and Brazilian Real have sharply depreciated against the US Dollar in recent months. Indonesian Rupiah, Turkish Lira and Thai Baht are also among the currencies of emerging markets which are hard hit in the wake of US central bank’s notion of tapering the quantitative easing (QE). Indian Rupee is the biggest sufferer among the BRIC bloc’s currencies. Since January 2013, the rupee has lost more than 20 percent of its value, the biggest loser among the Asian currencies. The government’s inability to tame the capital outflow and twin deficits - current account and fiscal deficits - are blamed as the main cause of sharp devaluation of Indian Rupee.  The foreign investors are particularly concerned over India’s widening current account deficit (CAD) which surged to a record high of USD 88.2 billion (4.8 percent of GDP) in 2012-13. Over the past several months, India’s exports have considerably slowed down due to weak demand from the US and Europe. While high imports of gold and crude oil have pushed country’s trade and current account deficits wider. Despite the Indian central bank’s repeated interventions and a slew of measures to rescue the currency, Rupee is still trapped in the vicious cycle of the depreciation. All these factors contributed to the weakening of Indian economy. India’s GDP growth rate fell to 5 percent in the fiscal year 2012-13, lowest in a decade. 
 
Meanwhile, China also experienced similar economic difficulties. China’s economic expansion slowed to 7.8 percent year on year in 2012, slowest in 13 years. The growth rate decelerated from 9.3 percent in 2011 and 10.4 percent in 2010. It was the slowest rate recorded since 1999, when the country’s GDP expanded by 7.6 percent year-on-year. International organisations such as IMF and The World Bank are predicting the Chinese GDP for this year to be in between 7.5 - 7.7 percent. The slowing of demand from US and Europe, and sluggish domestic consumption resulted in the decline of factory activities in China. Furthermore, a credit crunch (occurred in the month of July) indicates the internal vulnerabilities brewing in China’s economy. This cash crunch or “SHIBOR shock” (SHIBOR stands for Shanghai Interbank Offered Rate, a benchmark interest rate) raised immediate fears of bank defaults. It also highlighted broader concerns about financial excesses in China, where the supply of credit has been growing faster than the economy. 
 
The slowdown in China and India along with developed western nations is adding difficulties for Russia, Brazil and South Africa. These three countries are the exporter of various commodities and China and India were considered as the major buyers. As the slowdown in these two giants continues, economists are wary of the further sluggishness of commodities demand. Looking at this precarious outlook, Prof Roubini writes, “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 slowdown in emerging markets is ringing alarm bell in the global economy. Economists are giving various suggestions along with warnings on this. “The emerging-market slowdown ought to be a warning shot that something much worse could happen. One can only hope that if that day should ever arrive, the world will be better prepared, than it is right now,” noted Kenneth Rogoff, former Chief Economist of the IMF in his article ‘Are Emerging Markets Submerging?.’ Similarly, Jim O’ Neill urged the emerging economies to stop blaming US Federal Reserve for the currencies crash.
 
“I don’t really think it’s right for them to just constantly blame the Fed, it’s up to them to grow the role of their own currencies, and to take more responsibility within the G20 rather than just moaning about the Fed all the time,” says Jim O’Neill. O’Neill suggested the BRICS to collaborate more effectively in order to take control of their currencies, economies and monetary policies. “If they want to have some kind of influence, they need to start doing sensible things together,” he adds. “They can actually agree to coordinate their own monetary and exchange rate policies when they need to. I think it’s a smart thing to do.” 
 

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