BRICs too small to lift global growth

Remember "decoupling"? (And I am not referring to mating mammals.) It was that seductive theory which held that the developing world had achieved a high degree of autonomous economic momentum, such that it could sustain fast growth despite any slowdown in the industrial world.

Indeed, because of its independent locomotive power, the developing world might even rescue global economic progress from the follies of irresponsible industrial countries. It was particularly odd when some cheerleaders of globalization became exponents of decoupling.

How, one used to ask, could the developing world have reaped the benefits of expanding global trade and capital flows and yet be immune to slumps in these key transmission mechanisms of globalization? Well, we now have the answer.

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When two-thirds of the global economy plunges into a serious recession, world trade growth grinds to a halt and net capital inflows to developing countries slump, these nations get hurt badly. The only decoupling is that of romantic theory from hard facts.

Even the big boys among developing countries feel the pain. Look what's happening to the mighty BRICs, those much-touted masters of the future. Let's review them in the order of the acronym.

Brazil, the giant of Latin America, was powering along at a y-o-y growth rate of over 6 per cent right up to the third quarter of 2008, fuelled by strong capital inflows and booming exports, which were riding the massive, global commodity boom of the preceding year.

By September, the commodity boom was collapsing and the global financial market seizure wreaked havoc on net capital inflows and suddenly throttled domestic liquidity. As these shocks took their toll, Brazil's economy may have actually shrunk in the final quarter of 2008 according to some estimates.

The forecasts for economic growth in 2009 are subdued. Goldman Sachs projects it as low as 1.5 per cent (see table). Obviously, the outcome will depend hugely on developments in world trade and capital flows, both of which are clouded by enormous uncertainty. 

As the Financial Times' Lex noted last week (December 17), "Russia is redefining the idea of a hard landing. After annual growth averaging 7 per cent for 10 years, the signs are its economy could shrink this quarter and next-the first recession since 1998."

As recently as the first half of 2008, the Russian economy was growing at 8 per cent, fuelled by the surge in global prices for oil and other commodities. With the collapse of oil prices after July and global financial markets in September, Russia has been hard-hit.

Exports have collapsed, industrial production plummeted by nearly 9 per cent in November (y-o-y), the ongoing domestic financial crunch is severe, share prices are down 70 per cent since January, forex reserves have dropped by $150 billion since August despite significant currency depreciation, and refinancing of external borrowings has become very difficult.

Goldman Sachs and Barclays Capital project a big decline in investment and hardly any growth in 2009, though some others are a little more optimistic.

In India too, the damage from global recession is substantial. The growth of the Indian economy had already slowed to 7.7 per cent in the first half of FY 2008/9.

Following the global credit crunch of September economic activity decelerated sharply. Merchandise exports fell by 12 per cent in October (y-o-y) and a similar amount in November. Industrial growth turned negative in October for the first time in over 15 years.

Sales data across a broad spectrum of Indian industry and services suggest that November would be worse. The rupee has depreciated by 20 per cent in the past few months and forex reserves are down by over $60 billion since March.

Despite some recent recovery, stock prices are less than half their January peak in rupees and down by more than 60 per cent in dollars.

The World Bank, Goldman Sachs and Citi all expect economic growth in 2009 to be below 6 per cent.

What about the big daddy of the BRICs, the emerging superpower called China? This was the country which had been a major force behind the global growth spurt of 2003-07 and had largely propelled the massive commodity boom of 2006-08.

There were many who thought that China could be the world's saviour in this crisis. Alas, even the mighty Chinese economy is being severely buffeted by this global tempest. In November, Chinese export growth turned negative after many years. Industrial growth slumped to 5 per cent from the recent trend rates in the mid-teens.

Tens of thousands of factories producing toys, textiles, electronics and other labour-intensive exports closed across the eastern seaboard. The Shanghai stock index is down nearly 70 per cent since the beginning of the year (in dollars).

With world trade growth expected to be negligible or negative in 2009 and exports accounting for 40 per cent of China's GDP, the country's economic growth is bound to slow sharply in 2009.

Goldman Sachs expects China's growth to slump to 6 per cent, though some others still expect a better outcome.

In the last column of the table, I have outlined my own expectations for BRIC growth in 2009, based on the projections presented here as well as others.

As Alexandre Marinis has pointed out, if the US, Europe and Japan contract at 2 per cent in 2009, and other non-BRICs show no growth, the BRICs would have to grow by 11 per cent or so to keep world growth out of negative territory.

The simple truth is that BRICs are still too small to be global locomotors unless they sustain double digit growth, which they manifestly can't in the present environment. Of course, the fact that the Asian BRICs are still expected to enjoy moderate growth in 2009, is itself testimony to their resilience in the face of global recession. But decoupled they are not.

Where then are the engines to haul the world economy out of stagnation? It seems we may have to wait for a recovery of the usual suspects: the US, Europe and Japan. And that doesn't seem at all likely in 2009.

Let's just hope that a year from now the massive fiscal and monetary stimuli injected (and planned) in these big economies will have done the trick and we will be on the cusp of a global recovery. Or may be we can engineer a turnaround for ourselves?

Till then, a happy new year to all!

The author is Honorary Professor at ICRIER and former Chief Economic Adviser to the Government of India. Views expressed are personal.