China, India face challenge of
home-made errors By Benjamin
Shobert
As 2012 begins, the world's eyes
will be watching emerging economies for signs of
whether they are losing momentum or finding
stability after small setbacks at the end of last
year.
Beyond purely asking whether these
countries are likely to go into recession, what
happens this year will test yet one more
confidently held truism about the most recent
incarnation of globalization: are emerging
economies decoupled from developed countries?
Already, the signs are not encouraging.
2011 ended with the stock indices of various
emerging economies in troubling condition.
Exchanges in the BRIC countries had a terrible
2011 - Brazil and Russia were down 18%, India 23%,
and China 21%.
For emerging economies with
political turmoil over the past year, the returns
were even more bad: Egypt's EGX30 was down almost
50%, Greece's Athex Composite was down even more
than that. Emerging economy currencies had a
similarly disastrous 2011.
In most cases,
these returns reflected significant softening in
the countries' respective gross domestic product
(GDP) growth rates. The best example of this
relationship was Brazil, which saw its GDP growth
shrink to a range of 0.7-0.8% over the course of
2011. GDP growth turned negative for several
countries troubled by the eurozone crisis,
including Greece, Ireland and Portugal. The twin
specters of economic and political turmoil spelled
trouble for emerging economies around the world in
the last quarter of 2011.
For developed
countries, 2011 ended on a mixed note: GDP growth
in the United States started off the year at a
paltry 0.4% and worked its way to a Q3 GDP of
1.8%, certainly an improvement, but noticeably
weaker than 2010's GDP growth rate range of
1.7-3.7%. The United Kingdom, largely due to the
impact of its much lauded austerity program, saw
its GDP growth slow to 0.50% in Q3, while Belgium,
France, the Netherlands, Luxembourg, Spain and
Italy all saw their GDP growth dip to less than 2%
as the year drew to a close.
The financial
crisis of 2008 has leveled one supposed truth
after another about how the new globalized economy
was supposed to work. Now, the established wisdom
that emerging and developed economies are
decoupled from one another appears to be the next
such assertion to be tested.
Decoupling
argues that the pent-up demand in emerging
economies like China and India is so great that
they can, if forced, continue to grow
significantly as they build additional
infrastructure and modernize their economies.
Advocates of de-coupling, such as Jim
O'Neill, the chairman of Goldman Sachs Asset
Management, who first coined the BRIC term, have
been able to point towards the amazing growth of
these countries since 2001 as well as the
continued strength of the Chinese economy since
the 2008 financial crisis as evidence that this
theory is accurate, at least in so far as it
characterizes China's economy.
In his new
book, The Growth Map: Economic Opportunity in
the BRICs and Beyond, O'Neill writes that "The
aggregate GDP of the BRIC countries has close to
quadrupled since 2001 ... The world economy has
doubled in size since 2001, and a third of that
growth has come from the BRICs ... Their combined
GDP increase was more than twice that of the
United States and it was equivalent to the
creation of another new Japan plus one Germany, or
five United Kingdoms, in the space of a single
decade."
Critics of de-coupling believe
that China's GDP growth in the period after 2008
owes much to a massive stimulus program Beijing
put through which was large and timely enough to
make up for softening export demand, but that this
was a one-time success which is not repeatable.
To this group, the weak Consumer Price
Index and Producer Price Index numbers in November
are beginning to suggest that China's economy is
heading for a slowdown. Equally troubling to these
critics are signs that the Chinese real estate
market, a critical factor in terms of economic
growth and job creation for the country, has begun
to implode.
If the events of 2008 to 2011
offer any insight into de-coupling it may be this:
while the BRIC nations had enough financial
horsepower to push through the 2008 financial
crisis, which began in developed economies with
minimal negative effect, other countries, what
O'Neill calls the "Next 11" (Bangladesh, Egypt,
Indonesia, Iran, South Korea, Mexico, Nigeria,
Pakistan, the Philippines, Turkey and Vietnam) as
well as precariously positioned European emerging
economies, do not quite yet have the same ability.
In fact, what the last several years
appear to show us is that the world has a whole
new set of economic interdependencies: yes, the
relationship between China's ability to export to
North America is critical to the former country's
ongoing growth, but the relationship between China
or India to the much smaller and more fragile
economies around is more important than has been
previously understood.
While advocates of
de-coupling might be able to argue that the
American and Chinese economies are growing
increasingly independent of one another, the same
healthy distance and de-coupling does not yet
exist between smaller regional economies and a
growing Chinese and Indian economy.
In
fact, recent studies show that emerging economies
export more to China than to the United States, a
finding echoed by research done by M Ayhan Kose,
an International Monetary Fund researcher who
found that emerging markets' trade with other
emerging markets increased by some fourfold from
1960 to 2005.
For the most part, the trade
between emerging economies falls into the
categories of commodities, raw materials, and
basic manufacturing. What this means, of course,
is that instead of the traditional argument that
if the United States "sneezed, the rest of the
world would catch a cold", it is China or India's
sneeze that might induce a cold for developing
nations.
This makes the recent signs of
distress in China and India's respective economies
that much more troubling. In many ways, the
performance of these two countries remains one of
the only positive points that American and
European multinationals can point towards when
looking at where they can generate revenue growth
and profitability from over the next 12-18 months.
After all, it was the ongoing strength and
relative stability of China's economy in
particular that allowed many multinationals in the
fast-moving consumer goods, luxury products, and
pharmaceutical industries to rise above a major
economic contraction in the United States and
Europe after the disaster of 2008.
Facing
an American economy still struggling with what is
likely to be a decade-long debt-deleveraging
process that will soon find new teeth as the
United States government pursues additional
austerity programs at the same time the eurozone's
future remains very much in question, the role of
emerging economies in securing and stabilizing the
future of multinationals is critical.
For
companies selling into these markets, a major
setback in China or India could severely damage
their financial performance, leading to further
job cuts not only in their overseas businesses but
in their domestic operations as well.
Such
a setback would also quell much of the euphoria
surrounding emerging markets and their ability to
act as an offset to instability and recessions in
the developed world. De-coupling hinted at the
great promise that could come from emerging
economies bringing their nations forward into the
modern-age; but like many ideas, de-coupling might
be right in one way (a coherent de-coupling from
China and the United States), but terribly wrong
in another (the coupling between China and other
regional developing economies).
As 2012
moves forward, business leaders, policy makers and
politicians are all watching for signs of whether
the emerging economies of China and India in
particular will continue to grow or begin to show
signs of slowdown and perhaps even recession.
Writing in a recent Morgan Stanley note
titled, "Why India is Riskier than China", Stephen
Roach says "Seduced by the political economy of
false prosperity, the West has squandered its
strength. Driven by strategy and stability, Asia
has built on its newfound strength. But now it
must reinvent itself ... Downside pressures
currently squeezing China and India underscore
that challenge. Asia's defining moment could be
[at] hand."
Both countries have been able
to prove they can stand on their own two feet
against economic contractions in the developed
West; now, however, they must equally prove that
they can navigate a period of instability caused
by policy decisions of their own making, not those
economic realities imposed on them by their
largest export markets.
If they cannot,
2012 is likely to mark a year where the American
and European recessions align with similar
setbacks in China and India, the results of which
would have profound economic and - perhaps most
importantly - political repercussions for years to
come in developed and emerging economies alike.
Benjamin A Shobert is the managing director of Rubicon Strategy Group, a consulting firm specialized in strategy analysis for companies looking to enter emerging economies. He is the author of the upcoming book Blame China and can be followed at www.CrossTheRubiconBlog.com.
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