The emerging slowdown

Emerging economies survived the global shock in 2008 quite well. But now that the industrial countries have not fully recovered, the crisis in Europe continues, the uncertainty in world markets remains high and large emerging economies are seeing a rapid fall in GDP growth. Weak growth in emerging markets will, in turn, slow down the world economy. In the last decade, growth in the US and China contributed to a benign global environment, which made it possible for India to get away with more policy mistakes. Now, the government needs a bigger focus on building confidence in private investment.

The slowdown of GDP growth in emerging economies appears to be well entrenched now. In 2010, there seemed to have been a rebound in emerging economies, but it has not been sustained. The GDP growth in Brazil declined from 6.1 per cent in 2007 to 2.7 per cent in 2011. China has seen a dramatic fall in GDP growth from 14.2 per cent in 2007 to 9.1 percent in 2011. In 2012, emerging economies are expected to slow down further.

China was a big contributor to post-crisis world GDP growth. China's GDP growth will be roughly 7.5 per cent in 2012. Two factors are at work. There are deeper problems in China's growth model that are beginning to rein in growth. In recognition of these deeper problems, the government pushed towards policies that would yield sustainable growth. These policies inevitably entailed slower growth. Recent indicators suggest that the Chinese economy is slowing down to a greater extent than expected. With consumer prices falling in the last three months, indicating a possible deflation, the Chinese central bank announced two interest rate cuts. China also has significant scope for a fiscal stimulus at the central and local levels.

What was wrong with the old Chinese model of growth? In the pre-crisis years, Chinese families saved half their incomes, and American families consumed more than they earned. Low Chinese consumption was engineered through the exchange rate, monetary policy, financial repression, etc. The delicate balance between China and the US broke down in the crisis. Policymakers everywhere have talked about the need for a rebalanced world in which Chinese households save less and American families consume less. A rebalancing should lead to a lower current account surplus for China, reducing its build-up of reserves; less buying of US treasury bills by China; and lower liquidity and asset price bubbles in the US economy.

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