Despite their slower growth, emerging economies will remain the engines driving the global recovery and future development
Since the outbreak of the financial crisis in 2008, the pattern of the world economy has undergone great changes. According to the International Monetary Fund, the average global economic growth rate in 2011 was 4.2 percent. For developed countries it was only 2.2 percent, while the emerging economies reached up to 6.4 percent.
However, since the second half of 2011, signs have pointed to a global growth slowdown in many emerging economies. This trend has continued into 2012, with many people beginning to question the future ability of the BRICS countries - Brazil, Russia, India, China and South Africa - to be engines of global growth.
India's economy is currently slowing markedly. Its GDP growth has fallen to its lowest level in nearly three years, as a result of the reversal of international capital flows, diminishing demand in its export markets, and the volatility of the price of crude oil. India's economic downturn is also reflected in a higher fiscal deficit and higher current account deficit.
After more than a decade of adjustment and reform, Brazil's public finances have greatly improved, with the net national debt to gross domestic product ratio down from 60 percent in 2002 to 37 percent in 2011. The proportion of foreign currency debt in total public debt has also fallen from 40 percent to 4 percent. However, since the second half of 2011, due to the debt crisis in Europe, especially the woes of Spanish financial institutions, the growth rate of the Brazilian economy began to decline, and it has picked up only slightly this year.
Russia's growth was better than expected in the first half of 2012, mainly because its oil and gas export revenues increased substantially, due to higher prices in the international energy market in the first quarter. Russia offset a 20 percent increase in government spending during the election period, thus allowing the federal budget to remain balanced. But Russia has just joined the World Trade Organization, meaning Russian foreign trade and investment could undergo new structural changes.
South Africa, the last member to join the BRICS grouping, has a bigger exposure to European financial risks because of its close ties with European goods and services and is likely to experience a lower growth rate this year than in 2011.
China's growth has also been slower this year. Several factors have contributed to this slowdown: first, decreased exports, mainly to Europe because of the debt crisis in the eurozone; second, the withdrawal of government investment in public works and the slowdown in the housing market due to government intervention to reduce house prices to a more reasonable level; third, firms are de-stocking because of falling prices and shrinking demand; and fourth, consumption of housing and automobiles has declined.
In 2008, after the outbreak of the international financial crisis, emerging markets suffered from a massive flight of capital, credit crunches and a sharp contraction in world trade. As a result, the emerging economies such as China, India and Brazil implemented strong fiscal and monetary measures to fend off economic recession.
However, since the beginning of this year, economic growth in emerging economies has been affected by diminishing exports to Europe, where the outlook for the eurozone is worrying. In some emerging countries, the level of non-performing loans in banks is also on the rise. Inflationary pressures from rising oil and food prices are limiting the possibility of further relaxation of monetary policy. In addition, in Western countries, public opinion has been questioning the sustainability of the high investment rate in China and many other Asian countries.
Credit easing in 2008 caused a series of follow-up effects, including a high level of credit, real estate bubbles and an increase in non-performing loans. Therefore, many emerging countries have found the room for monetary and fiscal maneuvering narrowing. In addition, even if the governments of these emerging economies decide to expand credit again, the effects of the policies will be diminished, because unlike 2008 there are no more easy investment projects.
However, looking ahead, there are many factors that should make people feel optimistic about emerging economies:
First, the emerging economies still have room to maneuver using macroeconomic policy to stimulate the economy. The recent fall in commodity prices provides good conditions for emerging economies to further ease monetary policy. And the emerging economies still have leeway to adopt expansionary fiscal policy to stimulate the economy, as their public debt to GDP ratio is around 30 percent. In developed countries this ratio is about 100 percent.
Second, emerging economies such as India and China have a huge advantage given their market size. If the crisis forced the emerging economies into structural transition, they might be able to embark on a development path driven by mass consumption stimulated by accelerated industrialization. So China's huge domestic market may become a new driving force for economic growth, provided that China adjusts its income distribution problem. In other words, there is a great consumer potential to be tapped in emerging economies.
Third, emerging economies are increasing their cross-border investments with each other. This trend might become a new impetus for future world economic growth. Since the financial crisis, the financial institutions of developed economies have withdrawn their investment in developing economies, but firms from emerging economies have taken over and become the driving force of foreign investment in developing countries. As national leaders of the emerging economies are committed to developing trade and investment among themselves, this trend will lead to greater development in the future.
The author is deputy director of the World Development Research Institute at the Development Research Center of the State Council.
(China Daily 10/18/2012 page8)