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25.01.08
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A New Role For Emerging Economies
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By Felix Goryunov
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U.S. Downturn Opens the Door for New Players
It is a rare occasion when the world’s 2,500 most influential people get together to admit there is little they can do to avert a global economic meltdown. It still remains to be seen whether the Black Monday of Jan. 21, 2008, will be remembered in economic history as part of the group of Black Mondays that includes Oct. 28, 1929 or in Oct. 19, 1987. However, this unpleasant prelude already affected the mood at this year’s World Economic Forum in Davos, Switzerland.
To be sure, nobody could expect several hundreds of the world’s top politicians, bankers, heads of international organizations, scholars and CEOs of major multi-nationals to devise a plan to avoid a slump. Such international high society events are meant for an exchange of opinions and mindsets. But of course it stands to reason that among all the planned themes, the recent instability in the global economy became the top item on the agenda.
The danger now spreading from the world’s largest economy, the United States, makes the guesswork going on at Davos ever more intriguing. So far, opinions on where the downturn in America is leading the world are very diverse, and it will take at least a month to conclude that the U.S. is actually in a full-fledged recession. The last – and very mild – one happened six years ago, and now analysts fear that a deep slump is required to complete a full business cycle. A serious contraction in the U.S. economy has been due for a while, but it was artificially postponed by the Federal Reserve’s low interest rate policies and high housing prices. If a slump is inevitable, President George W. Bush’s recent decision to stimulate growth with another dose of monetarism will be just another attempt to fool the market, which is eventually doomed to fail.
There are chances that the gloom encroaching on the U.S. economy will not be as long as the 16 month recession of 1981-1982, and will be more likely to repeat the shorter downturns that occurred after the collapse of the dot-com bubble and after Sept. 11. After all, the United States is more than the sum of its housing and credit markets, those currently contracting. The country’s manufacturing industries – or at least the parts of them that have not yet been fully outsourced to China – are alive and kicking very competitively. There is a robust and generously funded defense sector, as well as the world’s best information technology and other high-tech engineering and services sectors. And they may keep the U.S. GDP growth rates from diving below zero. So it was not just wishful thinking when U.S. Secretary of State Condoleeza Rice spoke in Davos about the resilience of the American economy.
More threatening is the contracting U.S. consumer demand. American household consumption constitutes more than 70 percent of GDP, a sizable part of total U.S. imports, which account for about 20 percent of world exports. Considering that Japan and the European Union are also facing a downturn, it should be no surprise that the developed world’s top economic brass are turning to their colleagues from the emerging market countries. Economists believe that the decoupling of the world economy from dependence on the United States happened last year when about half of global GDP was produced in emerging economies – not only in the BRIC countries (Brazil, Russia, India, China) but also Argentina, Indonesia, Malaysia, Pakistan and Egypt.
The World Bank believes that continued expansion in developing countries will help offset a slowdown in the developed world. Collectively the same size as the U.S. market, the emerging economies are growing three times as fast and, consequently, their contribution to world demand is three times as important as that of the United States. As if they wanted to cheer up the Davos participants, Bloomberg reported Jan. 24 that China’s economy expanded more than 11 percent for the fourth straight quarter of 2007, thus supporting global growth. A very slight (0.1 percent) appreciation of the yuan to the dollar, reported this week, also seemed an encouraging sign from Beijing.
However, the Chinese delegates to Davos have not shared the enthusiasm about their country’s role as a global savior. According to China’s economic policymakers, their main concern now is to curb inflation even at the expense of slowing growth. Delhi is also cautious. India’s Trade Minister Kamal Nath said in Davos: “no economy can decouple itself from the United States,” adding that the impact of a U.S. recession on his country would be limited. Thus, among the BRIC delegates in Davos, the Russians became the only helpful cheerleaders of such a decoupling.
On the opening day of the forum, Deputy Prime Minister Alexei Kudrin said that, as a country with substantial reserves, Russia can help in cushioning the impact of the world crisis. He also said that Russia is now an island of economic stability that has not been damaged by the downturn in world markets. Talks with a few international investors convinced Kudrin that they consider Russia a good bet for investing. Andrei Kostin, CEO of state-owned bank VTB, reiterated that the recession in the United States will be compensated by the emerging markets, headed by China, India and Russia.
It remains to be seen how the emerging economies will now “couple” with the world economy to compensate for the contraction in U.S. demand. From the point of view of macroeconomic statistics, the decoupling may sound promising, but nobody knows how it will work and whether or not the international business community will buy the idea.
Every nation has specific structures of domestic demand and exports that are adapted to local and external suppliers or investors. These existing international trade flows cannot be reshuffled overnight, to say nothing of the marketing, logistics and distribution systems and channels that are targeted to serve business relationships now in operation. Whereas for, example, China and Russia would be happy to import more Brazilian beef because of reduced demand in the United States, they would think twice before opting for imports of Brazilian aircraft or cars. A relatively rapid shift in trade flows is viable only in commodities that are already in high demand among emerging economies.
Thus, the presumably good idea of decoupling from the United States can hardly be of great help even in international trade and is still more questionable as regards global financial flows. Every emerging market can consume only so much foreign direct or portfolio investment safely.
Russia’s experience with foreign money in 2007 is an example. Capital inflows into lucrative sectors of real economy were well received by the Russian market, but it became overheated when, after the global credit crunch, hot foreign money created inflationary pressures and volatility which remain.
The vulnerability of national economies and of the world financial system in the face of uncontrolled financial flows became the most urgent point of discussion in Davos. Forum participants agreed that the main villains of international financial volatility are the multinational hedge, wealth and private equity funds that have accumulated some $2.5 trillion, now used for speculative operations. Applying sophisticated financial instruments, they can create havoc in sectors of the economy they see fit for making fast money. This is what happened with the subprime mortgage loans, whose collapse instigated the global credit crisis and the eventual downturn in the U.S. economy.
Naming the villains at Davos was an achievement in itself, since many of the mighty banking and investment institutions represented at the forum, belong to the crowd. Nevertheless, this recognition was only a half-truth because the core of the problem is a world financial system based on the money supremacy of a single international player. According to the George Soros, the dollar has exhausted its role as a reserve currency. The IMF recently estimated that the greenback now accounts for less than 64 percent of all world currency reserves.
But still more important is the rarely popularized fact that this financial supremacy made it possible for the United States to create a debt economy of astronomical proportions. The U.S. current account deficit requires about $2 billion a day in foreign investment flows unless its exchange rate falls still further. And the country’s total debt is over $44 trillion - only $4 trillion less than the total world GDP.
It is high time to admit that contemporary capitalism has new dynamic business players.
Felix Goryunov is a Russian journalist who has been observing the world economy for over 30 years. He is the editor of an English language website www.rusbizconf.com covering Russia’s economy and investment opportunities. |
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