Troubles in the South

The global economic crisis is now hitting many developing countries, in some ways worse than during the Great Recession of 2008-09.

The economic growth rates of the so-called emerging economies like China, India, Brazil and Argentina have gone down.

They face a terrible combination of high current account deficit, reversal of capital flows, declining currency and the prospect of higher interest rates.

Suddenly, the Western media story is no longer about the great rise of the South and the BRICS.

The hype has turned almost full circle to the decline of the emerging economies.

Since the outbreak of the global financial crisis in 2008, emerging economies, especially the BRICS nations—Brazil, Russia, India, China and South Africa—have become the major engine of global economic growth. It's no more.

Some BRICS economies including India, Brazil and South Africa are now mired in worsening financial turmoil, with their economic growth rates falling sharply. These developing economies are facing an uphill battle in the ongoing pursuit of structural reform.

In recent years, the current accounts of India, Brazil and South Africa have been on a path of constant deterioration. These countries are increasingly relying on short-term foreign capital to make their current account deficits look less dismal. With growing expectation of a US liquidity contraction, the direction of global capital flow has reversed. The three countries' currencies are depreciating on a large scale. Since May, the Indian rupee's exchange rate against the dollar hit a series of record lows, exhibiting a trend of currency crises with the depreciation soaring to over 20 percent.

The trend of decline among BRICS economies is self-evident In the second quarter of 2013, Russia's economy grew just 1.2 percent more compared to the same period in 2012—its worst performance since 2009. Russia has lowered growth expectations twice in the past four months, from the original 3.6 percent to 1.8 percent. According to statistics released by the Indian Government in early September, 2013 growth in the second quarter slid to 4.4 percent—the worst quarterly performance since 2009—due to the country's shrinking mining and processing industries.

Caught up in unprecedented prosperity brought on by rapid economic expansion, BRICS countries had little incentive to conduct economic and social reforms during the past 10 years. They neglected or failed to adequately address problems related to economic development which has slowed the momentum of economic growth.

Statistics from HSBC show that China, India and Brazil all received fewer processing orders in July, 2013. In addition, BRICS countries' domestic demand is not sufficient. In 2012, domestic consumption contributed 51.8 percent to China's GDP growth, and about 55 to 65 percent in India and Russia, which were far below the global average of 70 percent. The average rate in developed countries is actually as high as almost 80 percent.

Nevertheless, the world economic crisis has finally come to ground in the developing world.
A recent paper by the South Centre by its chief economist Yilmaz Akyuz argues that the present "recovery" phase in the developed countries is actually more problematic for developing countries than when the former fell into recession in 2008-09.

This is because the United States, Europe and China countered that recession through expanded government spending, and this gave a boost to exports and growth in developing countries.

But there has since been a reversal of policies as Western governments turned to austerity and budget cuts. Instead, they have relied excessively on easy-money policy.

Akyuz's paper highlights the negative spill-overs of these policies to developing countries. [contributed]

Vol. 46, No. 28, Jan 19 - 25, 2014

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