A recent editorial in The Economist magazine (July 27th 2013) calls attention to what it described as “The Great Deceleration.” The essence of the deceleration encompasses three interrelated set of events.
First, there is the slowing down in the growth rates of emerging economies. Next, there is increasing interdependence between events in the emerging and developed economies. Lastly, there is the continued stagnation of the developed economies and their inability to carry their own weight in economic recovery. What makes it most disturbing, however, is that in the midst of this deceleration there is the absence of a corresponding set of interpretative tools to help digest and perhaps guide policy going forward.
Much of what goes for economic analysis these days is the tired old muddle of warmed-over Keynesian stew that passes for economic analysis and is providing little in the way of analysis or prescription. A more sophistication appreciation of the dynamics of the new global economy is called for.
Ever since the financial crisis of 2009, developed economies have had a hard time rebounding. Meanwhile, the BRICS (Brazil, Russia, India, and China) and the other emerging economies have shown markedly impressive growth rates for the last decade.
Today, mainstream economists are increasingly alarmed by a sharp slow down in growth in the world’s emerging economies. The double-digit growth rates that carried much of the world economy after the 2009 financial crisis have abated. India’s growth rate at around 5 %, both Brazil and Russia at around 2.5%, and China’s targeted 7.5% is a considerable decline compared to the height of the boom and is generating concerns for the period ahead. The leading emerging economies are, by all accounts, decelerating their rates of growth.
The reality, however, is that China drove much of the surge in output through its high levels of investment, its robust export model and its voracious appetite for commodities. If the BRICS were driving the world economy, it is doubtless that China provided the spark plug, the motor and the fuel, and subsequently helped avert a worldwide depression.
In what passes for economic analysis, the good Keynesian economist gets a gold star and moves to the head of the class if she addresses the new open secret that China is now engaged in making a decided shift from investment-led growth to a consumption-based model, in part due to an excess of under performing investment and bad debt. But this thinking ignores the fundamental insight that all investment is ultimately intended for consumption, and that production and consumption are not two separate and distinct categories. Moreover there is a time dimension to production; investment is deferred present consumption intended to increase our ability to consume more in the future. The dualistic bromide of “investment-led” and “consumer-based” misses the point of human economic activity creating a false and distortionary view of an economy, as if China will now stop producing and trading in order to consume.
Emerging and submerging economies
Similarly, the mainstream economic thinking tends to separate emerging and developed markets building another dualistic wall, unhelpful at best for establishing causation and correlation. There is an international division of labor that all countries, except perhaps North Korea, are a part of and policies in one country tend to affect what occurs elsewhere.
For instance, in the last few years Brazil has experienced both a commodities’ and a domestic credit boom. This should bring excitement even to the dullest central banker. However, while the boom in commodities can most assuredly be traced to China’s demand for petroleum, iron ore, soybeans and numerous other goods, what are we to make of Brazil’s slowing growth and its stubborn inflation with its attendant recent political consequences?
For one thing, Brazil’s domestic consumer credit boom owes much to the U.S. Federal Reserve’s quantitative easing policy. None other than the IMF’s Christine Legarde, the world’s Keynesian-in-chief, warned several months back that US dollars were behind a Brazilian domestic credit bubble that would bode ill.
At the center of this is the $85 billion a month bond buying policy by the Fed helping lower interest rates in the U.S., making stocks more attractive to investors, but also causing a bubble in countries like Brazil, with dollars seeking better returns in emerging markets. The rush to Brazil has pushed the real up in value, raising wages and making manufacturing exports more expensive. For instance, despite China’s heavy purchases of Brazilian iron ore, Chinese steel manufacturing is considerably cheaper than the more costly Brazilian output.
Over time, Brazilian manufacturing has been shrinking as a percentage of GDP, to about half of 1980s levels. Currently, some 65% of Brazil’s economy is in services, with four times as many employees in the service sector as in manufacturing. Add to this Brazil’s government pushing up consumption, through expanded subsidized credit, and the availability of cheap dollars and in the long run, higher consumption without a corresponding increase in production is a classic definition for inflation.
Consequently the “stimulus” policy for keeping the developed economies limping along is as corrosive of their own markets as it is detrimental to growth in emerging economies. This would seem obvious considering that despite a plethora of stimulus instruments, the U.S. and Europe are registering anemic growth and continue to lag in creating robust employment.
Time for a new perspective
Finally, the developed world must step up if there is to be any hope of sustained global economic recovery. Unfortunately, none of the policy prescriptions in the mainstream bag of tricks is geared for anything other than a combination of more debt, spending and inflationary money-creation.
It is highly likely the economic future will depend on developing large-scale trading relationship with China and the other key emerging markets. Some are beginning to appreciate the new dynamic. Germany, offers good insights, as it has targeted its manufacturing exports to China, especially capital goods, consumer products and luxury cars focused on expanding domestic markets. Gradually re-orienting itself to the developing world has helped Germany extract itself from the financial crisis of 2009-2011. Complementary to hitching one’s wagon to the drivers of global economic growth is the need for fresh economic thinking beyond the conventional truisms of the past 70-plus years.
Fernando Menéndez is an economist and principal of Cordoba Group International LLC, a strategic consulting firm providing economic and political analysis to clients.