India’s Slowdown May Be More Important than Europe’s Crisis

Never Mind Europe. Worry About India

NEW YORK TIMES  Tyler Cowen  May 6, 2012 

The economic slowdown in India is one of the world’s biggest economic stories, but it is commanding only a modicum of attention in the United States.

It may not even look like a slowdown because by developed standards, India’s growth — estimated by the International Monetary Fund at 6.9 percent for 2012 — is still strong. But a slowdown it is: the economy has decelerated from projected rates of more than 8 percent, and negative momentum may bring a further decline. The government reported year-over-year growth in the October-through-December quarter of only 6.1 percent.

What is disturbing is that much of the decline in the growth rate is distributed unevenly, with the greatest burden falling on the poor. If the slower rate continues or worsens, many millions of Indians, for another generation, will fail to rise above extreme penury and want. The problems of the euro zone are a pittance by comparison.

China commands more attention, but Scott B. Sumner, the Bentley College economist, has pointed out it is India that is likely to end up as the world’s largest economy by the next century. China’s population is likely to peak relatively soon while India’s will continue to grow, so under even modestly optimistic projections the Indian economy will be No. 1 in terms of total size.

India also is a potential force for energizing the economies of Bangladesh, Nepal and, perhaps someday, Pakistan and Myanmar. The losses from a poorer India go far beyond the country’s borders; furthermore, the wealthier India becomes, the stronger the allure of democracy in the region.

Why is India’s economic growth slowing? The causes are varied. They include a less than optimal attitude toward foreign business and investment: recall the Indian government’s reversal of its previous willingness to let Wal-Mart enter the retailing sector. The government also has been assessing retroactive taxation on foreign businesses years after incomes are earned and reported. Another problem is the country’s energy infrastructure, which has not geared up to meet industrial demand. Coal mining is dominated by an inefficient state-owned company and there are various price controls on both coal and natural gas. Over all, the country does not seem headed toward further liberalization and market-oriented reforms.

These problems can be solved. More troubling are the causes that have no easy fix.

Agriculture employs about half of India’s work force, for example, yet the agricultural revolution that flourished in the 1970s has slowed. Crop yields remain stubbornly low, transport and water infrastructure is poor, and the legal system is hostile to foreign investment in basic agriculture and to modern agribusiness. Note that the earlier general growth bursts of Japan, South Korea and Taiwan were all preceded by significant gains in agricultural productivity.

For all of India’s economic progress, it is hard to find comparable stirrings in Indian agriculture today. It is estimated that half of all Indian children under the age of 5 suffer from malnutrition.

Another worry is that India’s services-based growth spurt may have run much of its course. Call centers, for example, have succeeded by building their own infrastructure and they often function as self-contained, walled minicities. It’s impressive that those achievements have been possible, but these economically segregated islands of higher productivity suggest that success is achieved by separating oneself from the broader Indian economy, not by integrating with it.

India also has one of the world’s most unwieldy legal systems, and one that seems particularly hard to reform. On the World Bank’s Doing Business Index, the country ranks 132 out of 183 listed countries and regions, behind Honduras and the West Bank and Gaza, and just ahead of Nigeria and Syria. One undercurrent of talk is that the days of “the license Raj” have returned, referring to the country’s earlier subpar economic performance under a regime of heavy government regulation.

On the positive side of the ledger, the country retains a population with remarkable talent, energy and entrepreneurship. It has worldwide networks of trade and migration, and world-class achievements in entertainment and design, among numerous other strengths. Nonetheless, the previous pace of progress no longer seems guaranteed.

India may not be alone in this slowdown. There is a more general worry that the grouping of disparate giants known as the BRIC nations — Brazil, Russia, India and China — has, for some reason, lost much of its previous momentum. Last year Brazil grew at only a 2.7 percent rate, down from 7.5 percent, and Chinese and Russian G.D.P. growth are slowing too, to an unknown extent and duration. In the past, many countries engaged in catch-up growth have suddenly slowed and hit plateaus, although economists do not have firmly established theories as to when and why this happened. In any case it remains a real danger.

In the short run, we often focus on headlines, elections and fights between personalities and political parties. But the world is shaped by deeper structural forces, such as resources, technologies, demographics and economic growth rates.

We ignore India’s troubling trends at our peril.

 

 

China and Developing Countries Become Top Importers in 2012

David Griffith’s Note:  The economic shift of power from the developed world to the developing world is accelerating and the developing countries, including China, will surpass the developed world in the amount of imported goods in 2012.  This signals the emergence of the consumer and a growing middle class in the BRICs countries and other emerging economies.  China will surpass the US as the largest global importer in 2014.

By Stacy Curtin | Daily Ticker  December 5, 2011

More evidence emerged over the weekend that China is increasingly worried about slowing growth and the social unrest that could arise as a result. Always a concern, this is a particularly sensitive issues in a time of political transition as the top leaders of the Communist Party are set to change next fall.

“It is an urgent task for us to think how to establish a social management system with Chinese characteristics to suit our socialist market economy,” warned Zhou Yongkang, the Chinese leadership’s law-and-order czar. “Especially when facing the negative effects of the market economy, we still have not formed a complete mechanism for social management.”

These comments come on the heels of last week’s news that manufacturing in China fell to levels not seen since February 2009. As a result, many economists — including those at IHS Global Insights and J.P. Morgan — have lowered growth expectations for the rest of the year.

Gross domestic product averaged 9.7% in China from 2008 to 2010, but since the beginning of this year growth has been slowing. The country’s GDP slowed to 9.1% in the third quarter, from 9.5% in the second and 9.7% from the first.

Last week, the Chinese government also unexpectedly cut bank reserve requirements by 50 basis points, which will likely help banks increase lending in the months to come. “They are much more worried about the Chinese economy slowing very fast so they are putting their foot back down on the accelerator,” says Daniel Franklin, editor of The Economist’s The World in 2012, a publication focused on the trends and stories that will shape the year to come.

To his point, at the end of November, China announced another stimulus plan roughly two times the size of its initial program back in 2008, which did prevent a recession but has led to inflation and a country-wide debt crisis. The country is now set to spend $1.7 trillion on seven “strategic” or high-tech sectors.

But the question remains: Is this new spending program a short-term fix or means to restart sustained long-term growth?

The World in 2012: China

What is not in question these days is the fact that China, as well as other emerging markets, are not only producing much of the world’s goods, but are consuming more and more of the world’s goods too.

According to Franklin, a big shift is coming in 2012. Emerging economies are set to overtake the rest of the world as the biggest importers of goods.

“That is a dramatic change since 2000, when they imported barely half as much as rich countries did,”writes Pam Woodall in the magazine. “This rapid growth in developing countries’ buying power will boost the profits of companies in rich economies over the coming years.”

And by 2014, China alone will surpass the United States as the world’s biggest importer.

“Within ten-to-15 years emerging markets could produce half of the revenues of several big multinational firms,” writes Woodall. “This rapid growth in developing countries’ buying power will boost the profits of companies in rich economies over the coming years.”

 

Tenth Anniversary of the ‘BRICs’ – Is the Western World ‘Finished Financially’?

CNBC – November 30, 2011

The Western world has run out of ideas and is “finished financially” while emerging economies across the world will continue to grow, David Murrin, CIO at Emergent Asset Management told CNBC on the tenth anniversary of coining of the so-called BRIC nations of Brazil, Russia, India and China, by Goldman Sachs’ Jim O’Neill.

“I still subscribe and I’ve spoken about it regularly on this show that this is the moment when the Western world realizes it is finished financially and the implications are huge, whereas the emerging BRIC countries are at the beginning of their continuation cycle,” Murrin told CNBC.

Murrin added he believes the power shift from the West to emerging economies beyond Europe and the United States was “unstoppable” and he blamed a lack of ideas from Western leaders on how to stimulate growth together with contracted demographics and rising inflation as catalysts for Western decline.

“We suffer from no growth and we suffer from imported inflation… that means we have negative real growth and societies fracture when you have negative real growth and quite simply our society faces fractures for trying to stick Europe back together again is not going to work with that underlying paradigm, unless you can create five percent growth to overcome that imported inflation,” Murrin explained.

Murrin said that the East was depending less on the West and the rise of a consumer society was the first step in the expansion of an economic empire.

“If you look at the cycle of an empire system from regionalization to expansion to empire, the first phases of that catalyst are when you have a self fuelled consumer society and so actually that process of building your consumer base which is really what’s going on in China, day by day their consumer base increases and the dependence on the West decreases,” he said.

Containing China

Murrin added that while China is by far the biggest emerging economy and would be at the center of a new economic order, other emerging nations were set to join the BRIC countries and new political orders and alliances would come about as a result.

“This isn’t just a BRIC story, this is the end of the Christian Western Empire versus the rise of the whole emerging world led by China as the foremost and most powerful,” Murrin told CNBC.

“I think it’s going to be the whole world trying to contain China’s growth and there’s going to be completely new alliances that take place… between Australia, Japan and India and America and possibly Russia if the foreign policy is expansive enough, there’s going to be a ring of containment trying to hold this bulging entity which is like no other nation we’ve ever seen coherently challenge for control of world commodities and resources,” he added.

Intervention Not the Answer

Finally, Murrin stressed that Europe in particular was set to experience a rapid and deep decline and intervention by the European Union and its financial institutions was not a solution to stimulate growth.

“I think there’s a real reality amongst investors and just taxi drivers, that without growth, the system’s not sustainable, so intervention is just a drug and we all know that the more drugs you put into someone, the more the system becomes immune to their response and so I don’t see this as a solution,” he said.

Pointing to previous economic downturns, Murrin said the West was much less equipped than the emerging world to deal with its current decline.

“In all our examples of disastrous events, Argentina, Russia, the Asian crisis, they’re not good references for us in the West because they take place in countries with good demographics, good commodity stories and essentially underlying tides which lift them away from their problems,” he said.

“We in the West have none of those, we live in a world where resources are increasing in prices, where we’re a consumer society, we’re an old society, we’re not innovative, we’re not expansive, so we don’t have any of those natural lifting qualities to actually pick us out of the mire which is what decline is really about,” he added.

 

 

BRICS Challenge the Group of Seven

SANYA, China (Reuters) – The BRICS group of emerging-market powers kept up the pressure on Thursday for a revamped global monetary system that relies less on the dollar and for a louder voice in international financial institutions.

The leaders of Brazil, Russia, India, China and South Africa also called for stronger regulation of commodity derivatives to dampen excessive volatility in food and energy prices, which they said posed new risks for the recovery of the world economy.

Meeting on the southern Chinese island of Hainan, they said the recent financial crisis had exposed the inadequacies of the current monetary order, which has the dollar as its linchpin.

What was needed, they said in a statement, was “a broad-based international reserve currency system providing stability and certainty” — thinly veiled criticism of what the BRICS see as Washington’s neglect of its global monetary responsibilities.

The BRICS are worried that America’s large trade and budget deficits will eventually debase the dollar. They also begrudge the financial and political privileges that come with being the leading reserve currency.

“The world economy is undergoing profound and complex changes,” Chinese President Hu Jintao said. “The era demands that the BRICS countries strengthen dialogue and cooperation.”

In another dig at the dollar, the development banks of the five BRICS nations agreed to establish mutual credit lines denominated in their local currencies, not the U.S. currency.

The head of China Development Bank (CDB), Chen Yuan, said he was prepared to lend up to 10 billion yuan to fellow BRICS, and his Russian counterpart said he was looking to borrow the yuan equivalent of at least $500 million via CDB.

“We think this will undoubtedly broaden the opportunities for Russian companies to diversify their loans,” Vladimir Dmitriev, the chairman of VEB, Russia’s state development bank, told reporters.

ALL DOWN TO THE BRICS

The call by the BRICS for a new monetary order are not new.

But, coming hours before a meeting in Washington of finance ministers from the Group of Seven industrial nations, the traditional power brokers of the world economy, Thursday’s communique showed the growing confidence of emerging markets.

Burdened by heavy debt, the United States, the euro zone and Japan are struggling to shake off the lingering effects of the 2008 global financial crisis. Rich countries will grow 2.4 percent this year and 2.6 percent in 2012, the International Monetary fund forecast this week.

By contrast, less well-off countries have emerged relatively unscathed. The IMF is forecasting that emerging and developing countries will grow 6.5 percent both this year and next.

“The quality and the durability of the global economic recovery process depends to a great measure on how the BRICS economies perform,” Indian Prime Minister Manmohan Singh said.

The leaders reviewed the global role of the Special Drawing Right, the IMF’s accounting unit and reserve asset, which some experts believe could grow into a partial substitute for the dollar.

But they stepped around the issue of whether the yuan should join the SDR, saying only that they welcomed discussion of the composition of the SDR’s basket of currencies.

A member-country official said the group was split on whether China’s currency, which cannot be freely exchanged except for trade and investment purposes, met the criteria for being part of the SDR.

“There is a need for a broad-basing of the international monetary system. The SDR is an instrument to do that, but we still have no unanimity on the inclusion of the Chinese currency in the SDR as of now,” said the official, who declined to be identified.

The SDR now comprises the dollar, the euro, the Japanese yen and the British pound.

“India has said that the SDR is an accounting mechanism used by the IMF, and countries such as Brazil have also said that this (the yuan) should be convertible first,” he added.

Though keen on a more diverse global monetary order, Beijing has given no indication that it is ready to make the yuan freely tradable or to dismantle capital controls as the price for the prestige of being part of the SDR.

BROAD-BRUSH TREATMENT

Emerging economies have already won more say in the way the IMF is run, but the BRICS leaders said they were still under-represented.

“We … agreed on the need for the reform of international financial institutions in order to promote a just economic order,” South African President Jacob Zuma said.

On the hot topic of capital flows, the BRICS called “for more attention” to the risks posed by massive cross-border flows of money but went no further.

The group said the world economy, of which its members make up nearly a fifth, still faced headwinds.

“The developments in west Asia and north Africa, and the aftermath of the huge tragedy that befell Japan, have introduced fresh uncertainties in the global recovery process,” Singh said.

Swings in commodity prices are also a prime area of concern for the BRICS. China is the world’s biggest importer of many commodities; the other BRICS members are major exporters of natural resources.

China hopes the group will be able to agree on a common stance on commodity price fluctuations at the G20 summit in the French city of Cannes in November.

The main aim of the BRICS is to forge a common emerging-market negotiating stance on issues from climate change to world trade and to act as a counterweight to the West in settings such as the Group of 20 forum of advanced and developing economies.

The BRICS caucus is a work in progress. Thursday’s brief meeting, held under tight security at a beach-front hotel, was only its third summit and the first to include South Africa.

The group brings together five countries that, though frequently united in their disinclination to do the West’s bidding, are a political and economic mosaic.

“Our economic potential, political influence and our development prospects as an alliance are exceptional,” Russian President Dmitry Medvedev said.

(Additional reporting by Ben Blanchard, Zhou Xin and Ray Colitt in Sanya and Chris Buckley in Beijing; Writing by Alan Wheatley; Editing by Ken Wills and Dean Yates)