Slowdown in developing nations

by Martin Khor

Developing countries are increasingly being affected adversely by the economic recession in Europe and the slowdown in the United States.

The hope that major emerging economies such as China, India and Brazil would continue to have robust growth, decoupling from Western economies and becoming an alternative engine of global growth, has been dashed by recent data showing that they are themselves weakening.

Just as during the 2008-2010 global crisis, a decline in exports caused by falling Western demand is the main way in which the developing countries are being hit.

Inflows of capital into developing countries have also slowed down, and a reversal to a new outflow situation may well take place. The lending conditions of banks in emerging economies have also deteriorated, according to a banking industry survey.

Recent reports confirm the slowdown in many major developing economies. In China, growth of the gross domestic product fell to 7.6% in the second quarter of this year, denoting a continuous deceleration from 10.4 p.c. In 2010, 9.2 p.c. in 2011 and 8.1 p.c. in first-quarter 2012.The IMF (International Monetary Fund) has lowered its growth projection for India to 6.1 p.c. for this year. This compares to 6.5 p.c. last year and 8.4 p.c. in the previous two years.

The Singapore economy contracted 1.1 p.c. in the second quarter over the previous quarter at an annualised rate, mainly due to manufacturing output falling by 6 p.c.

Slowing

For Malaysia, the growth rate for this year is projected to be 4.2 p.c. By the Malaysian Institute of Economic Research, lower than last year's 5.1 p.c. and also lower than 4.7 p.c. in the first quarter. In Indonesia, the Central Bank said growth was slowing and projected this year's rate to be 6.2 p.c. compared with 6.5 p.c. last year (and 6.3 p.c. in the first quarter).

In South America, two of the largest economies are also facing decelerating growth prospects. For Brazil, the government has lowered its growth projection for this year to 3 p.c. (from 4.5 p.c. earlier), but the IMF's latest growth estimate is even lower at 2.5 percent.

Growth last year was 2.7 p.c.; industrial production declined by 4.3 p.c. In the 12 months to May. Argentina had one of the fastest growing economies in the world. Growth was 8.9 p.c. in 2011, and the average annual growth was 7.6 p.c. In 2003-2010.

But the economy contracted by 0.5 p.c. in the 12 months to May while industrial production in June fell 4.4 p.c. on the year due mainly to a 31 p.c. decline in the auto sector.

In South Africa, growth in the first quarter was 2.7 p.c. over the previous quarter, which was down from the 3.2 p.c. growth of fourth-quarter 2011.

On July 20, new World Bank President Jim Yong Kim warned that the debt crisis in Europe would hurt most regions in the world.

He predicted that if a major European crisis developed, growth in developing countries could be cut by 4 p.c. Or more.

Even if the eurozone crisis is contained, it could still reduce growth in most of the world's regions by as much as 1.5 percent. The IMF in its latest world economic outlook also gave a downbeat picture of how developing countries were being affected adversely by the European and US economic situations.

It warned that the ability of governments worldwide to respond to the new slowdown had become limited. And while the withdrawal of capital from developing countries was not at critical levels, there could be problems for some if conditions deteriorated.

Prospects

The prevailing view of prospects for developing economies has almost suddenly changed from their being emerging leaders of the global economy to being victims of the Western slowdown.

A paper by Yilmaz Akyuz, chief economist of the South Centre, shows that the theory of the "staggering rise of the South" had vastly exaggerated the developing countries' decoupling from the economic fortunes or misfortunes of the developed countries.

Much of the high growth in developing countries in the past decade had been due to the favourable external conditions generated by Western countries. High consumption growth in the US was a main basis for the high growth of manufactured exports from China and other East Asian countries, and these together enabled the boom in commodity prices that lifted growth in Africa and South America.

- Third World Network Features