Slumping growth, if not outright contraction, in most of the world’s major emerging economies has been rightly attributed to China’s slowdown and plummeting commodity prices. But weak external conditions have also exposed profound governance failures – and not just in Brazil.
WASHINGTON, DC – Pity the world’s emerging markets: they are no longer flavor of the month, or indeed year, for international investors. You need only look at how investors have been fleeing Brazil amid rising economic uncertainty and political turmoil there. And Brazil is no outlier.
For most of this century – even after the shock of the global financial crisis in 2008 – emerging economies, led by China and India, grew at almost unprecedented rates. In the words of
Jim O’Neill, who in 2001 cleverly condensed Brazil, Russia, India, and China into the BRICs acronym (the “s” later became upper case to include South Africa), these markets were no longer emerging – they had emerged.
Such bullishness, however, has practically vanished. China, the great emerging-market growth engine, may still be expanding at an impressive 6.5%-7% rate, but that is markedly lower than in the country’s boom years. Growth in other emerging economies has slowed as well, often dramatically, or even gone into reverse, hit hard by plummeting prices for oil and other commodity exports.
Carmen Reinhart of Harvard’s Kennedy School of Government reckons the pain will continue.
Her Harvard colleague
Dani Rodrik goes further, arguing that there was never a “coherent growth story for most emerging markets” in the first place. “Scratch the surface,” he says, “and you found high growth rates driven not by productive transformation but by domestic demand, in turn fueled by temporary commodity booms and unsustainable levels of public or, more often, private borrowing.”
Continuing credit expansion after the global financial crisis helped to prolong rapid growth, but not for long – and at a very high cost. As NYU’s
Nouriel Roubini puts it: “Emerging markets are in serious trouble. They face global headwinds (China’s slowdown, the end of the commodity super cycle, the Fed’s exit from zero policy rates). Many are running…twin current-account and fiscal deficits, and confront rising inflation and slowing growth. Most have not implemented structural reforms to boost sagging potential growth. And currency weakness increases the real value of trillions of dollars of debt built up in the last decade."
My
own take is similar. Output in Brazil and Russia, for example, shrank by about 4% in 2015, and similar losses are likely this year. But, while the driving force of decline has been the collapse of commodity prices, the critical problem these countries (and other leading emerging markets) face is poor governance.
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