Disregard what you may have heard about how consumers living in the big four emerging market countries—Brazil, Russia, India and China—will rescue the world’s developed nations from recession. That won’t happen. What’s more, their programmes to spur domestic consumption are useless and may backfire.
The so-called Bric group of nations has made great strides over the last decade. Still, contrary to what their political leaders and some economists are saying, the purchasing power of consumers in these countries remains too limited to counter the current global economic decline.
Jim O’Neill, the London-based Goldman Sachs Group Inc. chief economist who coined the Bric acronym, recently said: The Bric consumer is going to rescue the world. The remark reminded me of other experts who predicted that emerging market economies would decouple from the troubled economies of developed nations and maintain their fast growth.
Bonding:(L to R) A 9 July photo of Indian Prime Minister Manmohan Singh, Russian President Dmitry Medvedev, Chinese President Hu Jintao and Brazilian President Luiz Inacio Lula da Silva in Japan. PIB
While the US, the EU and Japan are responsible for 66% of the global gross domestic product, Brazil, Russia, India and China account for only 12%, according to 2007 data by the United Nations.
In other words, if the three most advanced economies contracted by, say, 2% next year and all other non-Bric countries had zero growth, then the four Bric nations would have to grow an unrealistic 11% in 2009 to avert a global recession.
The idea of Bric consumers saving the world seems even more far-fetched given that households in Bric countries represent only 10% of world consumption, while those in the US, Europe and Japan account for 68%.
In November, the International Monetary Fund (IMF) lowered its 2009 global growth forecast to 2.2%. Advanced economies will contract by 0.3%, the first annual contraction during the post-war period, according to the organization.
Growth in emerging economies may fall to 5.1% in 2009, down from almost 7% in 2008, IMF said. In January, the group will release its quarterly World Economic Outlook and another lowered revision in global growth forecasts is likely.
Dominique Strauss-Kahn, managing director of IMF, recently said China will probably grow at 5% or 6%, down from the organization’s official forecast of 8.5%.
If Bric consumers can’t rescue the world from a recession and if their economies can’t decouple from a global recession, does it make sense for those nations to increase government spending today only to face greater fiscal constraints tomorrow?
After Lehman Brothers Holdings Inc. collapsed in September and world financial markets tumbled, leaders in the emerging world criticized those in more advanced economies for spending the last decade meddling in other countries’ affairs instead of regulating their own markets to prevent such a chaotic bursting of the real estate bubble.
Now, three months later, the world’s four biggest emerging economies are, once again, eagerly following the advice of the same leaders and organizations they had criticized.
Lured by the idea that their consumers can save the world—and oblivious to the possibility that people who say it, might be wrong—Bric leaders have decided to increase government spending to ignite faster growth. Unfortunately, not all of them can afford this measure.
Hiking government spending isn’t as good an economic recipe for emerging economies as it is for advanced economies for two main reasons.
First, investors become more risk-averse during economic crises, preferring the government bonds of the most developed markets over similar securities issued by emerging nations. This flight to quality leads the Bric countries to pay higher interest rates on their existing debt, as well as on the future debt they will have to issue to finance increased spending.
Second, emerging economies rely on foreign money to finance their growth. When investors are nervous, they covet dollars, euros and yen, not reais and yuan. Whenever that happens, emerging currencies tend to weaken, fuelling inflation and increasing the amount of foreign debt owed by the emerging world.
The bottom line is that although the worst economic crisis since 1929 was born in the US, investors continue to prefer the US treasury and dollars, making it easier for the US than for any Bric nation to finance government spending to spur growth. Oblivious to this, Brics nations are dutifully following IMF’s advice: The most urgent need is a big foot on the accelerator of fiscal expenditure.
Last month China unveiled a massive 4 trillion yuan ($586 billion) plan to spur domestic consumption. Russia followed suit with a $20 billion economic stimulus package. India promised to spend an extra Rs20,000 crore to support the economy. Brazil joined the fiscal stimulus club last week with a tax cut worth 8.4 billion reais ($3.6 billion).
This time around, when Bric leaders realize their increased spending didn’t avert a global recession but only made debt obligations harder to pay, they won’t have anyone to blame but themselves.
Alexandre Marinis is political economist and founding partner of Mosaico Economia Politica.