What Happens If the BRICs Sink Like One?
Nouriel Roubini points out that after a decade of torrid growth, the BRIC economies (Brazil, Russia, India, China) are slowing down.
" Brazil's gross domestic product grew by only 1 percent last year, and may not grow by more than 2 percent this year, with its potential barely above 3 percent. Russia's economy may grow by barely 2 percent this year, with potential growth also at around 3 percent, despite oil prices being around $100 a barrel. India had a couple of years of strong growth recently (11.2 percent in 2010 and 7.7 percent in 2011) but slowed to 4 percent in 2012. China's economy grew by 10 percent per year for the last three decades, but slowed to 7.8 percent last year and risks a hard landing. ...
"Many other previously fast-growing emerging-market economies—for example, Turkey, Argentina, Poland, Hungary, and many in Central and Eastern Europe—are experiencing a similar slowdown. So, what is ailing the BRICS and other emerging markets?"
Roubini offers a diagnosis -- those economies were overheating in 2010 and 2011, so a slowdown should have been expected, especially given continued weakness in rich-world economies, the slowing commodities boom and their own institutional problems. To all that, you have to add the fact that the U.S. Fed may finally be slacking off of quantitative easing, which means that investors will no longer be forced into emerging markets to find higher yields.
The analysis seems accurate to me. So what does it mean for BRICs -- and the world economy?
In the case of India and Brazil, I think the answer is "sad, with regional implications." Growth in those countries has pulled millions of people out of dire poverty, but many remain. And solid economic growth in any large country has regional spillover effects through migration and trade.
But these are still economies where agriculture plays an outsized role. Brazil's growth has been driven by agricultural exports such as soy and beef, while India's GDP is still measurably affected by the monsoon, which drives crop yields. A growth slowdown in an agricultural economy may play havoc with individual commodity prices, but it doesn't have, say, the enormous impact on global manufacturing networks that a Chinese slowdown would have.
Russia and China are a different story. Russia is a major player on global energy markets, which have knock-on effects all over the world. China, of course, seems to manufacture half the stuff at Walmart. And both pose serious security threats if things get too bad.
China is obviously the more interesting problem; Russia's natural gas supply may be critical to Western Europe, but at the end of the day, that supply can be replaced (at great expense, perhaps). But China? China is unique. The mass migration of Chinese industrial workers into factories has been one of the greatest poverty-reduction measures in history. It has also driven a massive reduction in the cost of manufactured goods in the developed world.
The Chinese government is sponsoring building projects all over the developing world, trying to secure resources for its future. And if a rising China hasn't quite singlehandedly driven the commodity boom of the last decade, it's certainly accounted for the majority of it ... which means that China is not only responsible for cheap kitchen gadgets and flat-panel televisions at Target, but also for Brazil's booming agricultural operations, and much of the oil wealth that Venezuela has been diverting into social spending.
All of which is to say, China's impact is far-reaching. The impact of a serious slowdown would be as well.
If China can no longer provide such a steady flood of cheap manufacturing workers, connected to Western ports by huge government investment in transportation infrastructure, those cheap goods in Walmart will stop being so cheap. Unskilled workers straight off the farm are willing to work for very low wages, and the government has helped keep costs low by diverting an amazing share of GDP into investment, rather than consumption goods that would compete for workers and spur demand for higher wages. But China's wages are rising anyway, meaning that they're no longer necessarily the cheapest game in town.
Regionally, this means that nearby countries which have had difficulty competing with China's economies of scale may be able to pick off some manufacturing at the lowest end of the skill curve -- simple assembly and garment work. Globally, it means that the days of absurdly cheap manufactured goods may slowly come to a close. And workers in developed countries may face a little less competition from Chinese factories ... though with the competition from robots heating up, this may be small comfort.
But inside China, this may mean disaster. There are still a lot of poor people in the countryside, and the people in the cities aren't living any too well either. They will get restive if growth doesn't continue at quite high rates, because China has cut a deal with its citizens: Don't demand too much political freedom, and we'll give you economic growth. If the growth slows down, China will have roughly a billion very unhappy people.
Economic growth is a great palliative. You can get away with a lot during periods of rapid growth: shoddy accounting, weak institutions, insane demographic policy. The problem -- as Enron and Japan alike discovered -- is that when the growth slows down, all of your problems become pressing at once, and at just the time when you're least able to deal with them.
Of course, China's not looking at a recession right now. They're not even looking at our own tepid growth rates -- they're debating what happens if growth falls to 4 percent to 6 percent instead of the torrid 10 percent they enjoyed in 2010.
But how low is too low? At what point do the institutional cracks -- in China's banking system, its legal system, its government -- start showing? I don't think we know. But a restive and angry Chinese populace is probably not good for anyone.
This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.
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Megan McArdle at firstname.lastname@example.org