Commentary by William Pesek
Jan. 30 (Bloomberg) -- The subprime crisis is containable. Asia has decoupled from the West. Europe’s banks are sound. Japan is a haven from turmoil. The worst is over.
To the list of faulty bits of conventional wisdom, add that the BRICs will save the world.
Actually, far from being immune from the world’s troubles, the BRICs -- Brazil, Russia, India and China -- are, to differing degrees, feeling the pain.
There’s still ample speculation about the four holding their own. It’s worth questioning the theory as the World Economic Forum holds its annual meeting in Davos, Switzerland. “Davos Man,” that composite of corporate chieftains, politicians and celebrities who gather in the snow each year, had a lot to do with hyping the BRICs.
These fast-growing nations have vast potential, and the Davos set isn’t wrong to expect great things. Ten years from now, the BRICs may comprise the core of the world economy. Lost in the excitement over these rising superstars is that they need growth from the external sector to get there. We can kiss that phenomenon goodbye for a while.
That increasing realization helps explain why equities in the BRICs fell 58 percent last year, exceeding the 42 percent drop in the MSCI World Index. A key reason is concern about their ability to stand alone as the world swoons.
Growth Trajectory
Jim O’Neill, the Goldman Sachs Group Inc. chief economist who coined the BRICs acronym, says the group will cushion the developed world’s recession. The Montreal-based Center for Research on Globalization says the contribution of the BRICs to world growth may reach 70 percent in 2009.
The trouble is, the trajectory of global growth will make it difficult for any economy, rich or poor, to maintain healthy growth. No economy, no matter the promise, can escape this crisis.
A year ago, many thought China’s 10 percent growth was sacrosanct. Now officials in Beijing are working up Keynesian- style stimulus packages the likes of which the developing world has never seen. The specter of a Chinese recession is very real.
Plunging oil prices are denting Russia’s designs on regaining the world status lost during the tumultuous 1990s. The average 7 percent growth over the last decade has given way to recession. Russia, the largest oil exporter after Saudi Arabia, expects its economy to shrink 0.2 percent this year.
Limited Room
It’s not without irony that Russian Prime Minister Vladimir Putin was asked to open the Davos confab. Putin probably envisioned a very different 2009 back in June, when his Davos invite came. At the end of June, a barrel of crude oil went for $100 more than it does now. Talk about reining in your ambitions.
Indian exporters have shed as many as 1 million jobs, more than 15 times a December estimate, amid the most protracted decline in overseas sales in a decade, says the Commerce Ministry. Bond investors are getting antsy about India’s fiscal outlook.
“India has very limited room to use fiscal policy given its huge and persistent budget deficits, and so we think the bulk of the stimulus will have to be provided by monetary policy,” says Win Thin, senior foreign-exchange strategist at Brown Brothers Harriman & Co. in New York.
In this credit crisis, one has to wonder if lower interest rates will be enough.
The economy has held its ground reasonably well. The Mumbai attacks in November that killed 164 people in hotels, a railway station, a Jewish center and a hospital capped a year of violence across the second-most-populous nation. Its economic costs are still being counted. The same is true of the fraud inquiry at software-services provider Satyam Computer Services Ltd.
Brazilian Growth
Brazil also has held up well. Yet the global slump will reduce consumption, and growth will slow to 2 percent this year from 5.6 percent in 2008, according to the median estimate in a central bank survey of about 100 economists on Jan. 23.
Even if one, two or three of the four BRICs avoid a formal recession, that’s hardly a boon for global growth. The odds favor BRIC economies having a tougher 2009 than today’s conventional wisdom suggests.
Many economists are writing off 2009. Even if stimulus efforts in the U.S., Europe and Japan are sufficient, they will take considerable time to kick in. Job and market losses will mount in the meantime.
The state of the world economy won’t make Davos Man happy. Public discourse has firmly shifted from the wonders of free markets and globalization to whether Europe’s social-welfare systems are a better way to go.
Never mind the risks of Brazil, Russia, India or China shunning free markets. The battle for the soul of capitalism is being waged in the U.S. and U.K., of all places. Out is Milton Friedman’s brand of laissez-faire capitalism, in is a serious discussion about nationalizing banks and companies.
It’s enough to make Davos Man feel like he has been hit by a brick. In this case, make that BRICs.
(William Pesek is a Bloomberg News columnist. The opinions expressed are his own.)
To contact the writer of this column: William Pesek in Tokyo at wpesek@bloomberg.net
Posts
No comments:
Post a Comment