Economic woes in the south
The global economic crisis is finally hitting major developing
countries, many of which face lower growth, current account deficits,
falling currencies and a reversal of capital flows.
by Martin Khor
The global economic crisis is now hitting many developing countries,
in some ways worse than during the Great Recession of 2008-9.
The economic growth rates of big countries such as India, Brazil and
Argentina have gone down. In recent weeks, the currencies of India,
Brazil and South Africa also declined.
In itself, this may not be bad as some of the currencies had been
over-valued and a depreciation is good for trade competitiveness.
However, this is also a sign of a slowdown in foreign inflow of funds.
And those countries having a deficit in their current account of the
balance of payments need inflows to cover it.
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. Just as the original headlines of rise were exaggerated, so
too is the anticipated collapse exaggerated.Nevertheless, the world
economic crisis has finally come to ground in the developing world.
Recovery
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 2008-9.
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.
The United States in particular injected massive liquidity into its
financial markets, with interest rates close to zero. The increased
liquidity instead of benefiting the real economy, went mainly as loans
to investors which placed the funds in stock markets and developing
countries, in their search for yield.
Akyuz's paper highlights the negative spill-overs of these policies
to developing countries. First, the austerity policies meant a slowing
down of exports of developing countries to advanced economies and
commodity prices have started to decline. Second, due to the
anticipation that the quantitative easing in the United States will
taper off, the flow of funds to emerging economies has slowed or
reversed. Third, the good effects of the developing countries' own
earlier counter-cyclical policies are fading and the space for more
expansionary policies is limited. Economic growth has thus fallen.
In 2012, Asia, growth was around five percentage points below the
rate achieved before the onset of the crisis; in Latin America it was
reduced to almost half. According to the paper, there is a lack of
demand in the world economy, and the major reason is low and declining
share of wages in national income in all major advanced economies. A
more equitable allocation of wealth is needed to allow rapid economic
expansion based on income-supported, as opposed to debt-driven,
household spending. But this is not happening. In the Unites States, the
ultra-easy monetary policy instead of achieving sustainable growth could
degenerate into new credit and asset bubbles and yet another boom-bust
cycle that is more damaging to the world than the present crisis.
If, on the other hand, the Unites States does not allow the new
bubbles to develop, the outcome could be sluggish growth, sharply
increased interest rates and a stronger dollar, a combination that often
breeds problems for developing countries, said Akyuz.
Meanwhile, the Eurozone appears to be mired in economic weakness for
an indefinite period.
It cannot generate growth for the rest of the world. And China,
facing an export slowdown and the need to shift to domestic
consumption-led growth, will likely have a lower growth path in the
medium term.
- Third World Network Features |
