Brics miracle over as world faces decade-long slump

US Conference Board fears Brics miracle over as world faces decade-long slump

The catch-up boom in China, India, Brazil is largely over and will be followed by a drastic slowdown over the next decade, according to a grim report by America’s top forecasting body.

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China’s double-digit expansion rates will soon face, fallng to 3.7pc from 2019-2025 as the aging crisis hits. 

By Ambrose Evans-Pritchard

7:37PM GMT 13 Nov 2012

377 Comments

Europe's prognosis is even worse, with France trapped in depression with near zero growth as far as 2025 and Britain struggling to raise its speed limit to 1pc over the next three Parliaments.

The US Conference Board’s global economic outlook calls into question the "BRICs" miracle (Brazil, Russia, India, China), arguing that the low-hanging fruit from cheap labour and imported technology has already been picked.

China’s double-digit expansion rates will soon be a romantic memory. Growth will fall to 6.9pc next year, then to 5.5pc from 2014-2018, and 3.7pc from 2019-2025 as the aging crisis hits and investment returns go into "rapid decline".

Growth in India - where the reform agenda has been "largely derailed" - will fall to 4.7pc to 2018, and then to 3.9pc. Brazil will slip to 3pc and then 2.7pc. Such growth rates will leave these countries stuck in the "middle income trap", dashing hopes for a quick jump into the affluent league.

"As China, India, Brazil, and others mature from rapid, investment-intensive ‘catch-up’ growth, the structural ‘speed limits’ of their economies are likely to decline," said the Board. 

The fizzling emerging market story is a key reason why the West has relapsed this year. The world is now facing a synchronized downturn all fronts, with little scope for fiscal and monetary stimulus.

^{France slumps to bottom of the class, with Britain close behind}

"Mature economies are still healing the scars of the 2008-2009 crisis. But unlike in 2010 and 2011, emerging markets did not pick up the slack in 2012, and won’t do so in 2013," it said.

The Conference Board says Europe’s demographic crunch and poor productivity has reduced trend growth to near 1pc, though it could be worse if the region makes a hash of monetary policy and follows Japan into a "structural deflation trap". Large numbers of people may be shut out of the jobs market forever.

Germany will outperform Italy and France massively over the next five years, implying a bitter conflict within EMU over control of the policy levers. While the report does not analyze debt-dynamics, it is hard to see how the Club Med bloc could keep its head above water in such a grim scenario or stop political revolt coming to the boil.

Bert Colijn, the Board’s Europe economist, said France’s woes stem from low investment, as well as delayed austerity and reform. The reckoning will now come.

He thinks Spain will fare better since it has already taken its bitter medicine. It is expected to grow at 1.8pc for the next decade as "Schumpeterian" creative destruction clears away dead wood and unleashes fresh energy - a contentious point since labour economists argue that unemployment of 25.6pc is doing permanent damage to parts of the workforce, and therefore to economic potential.

America has a younger age profile and should eke out 2.5pc to 3pc growth until 2018, and 2pc thereafter. It has a big "output gap" of 6pc of GDP to close before it hits any speed limit, so part of this is just the effect of elastic snapping back.

^{Emerging markets deflate}

The Board said lack of demand lies behind the current global malaise, but the fading technology cycle may prove a greater threat over the long-term.

The thesis is based on work by professor Robert Gordon from Northwestern University, who argues that the great innovation burst of the last 250 years is a "unique episode in human history" and may be fading. His claims challenge the work of Nobel laureate Robert Solow - orthodoxy since the 1950s - that economic growth is a perpetual process once the right legal and market framework is in place.

The Conference Board’s forecast is starkly at odds with a report by the OECD last week predicting that China would keep growing at 6.6pc until 2030, and India at 6.7pc -- propelling the two rising powers to global dominance.

Apostles of the BRICS revolution are certain to dispute the claims. Yet there could be no clearer sign that the emerging market euphoria of the last decade has fully deflated.

Global finance has dysfunction at its heart

Sound fiscal policy alone won't solve this debt crisis. We need structural reform of the entire financial system

• 
• • Ha-Joon Chang
  • guardian.co.uk, Monday 8 August 2011 18.08 BST 

The world economy is in turmoil again. We have seen two weeks of near-universal falls in major stock markets, prompted by the spread of the eurozone crisis to Spain and Italy, the phony fiscal crisis in the US manufactured by the Republicans, and the economic slowdown around the world. The first ever downgrading of the US debt by Standard & Poor's last weekend has certainly added to the drama of the unfolding events.

The debate focuses on how budget deficits should be controlled, with the dominant view saying that they need to be cut quickly and mainly through reduction in welfare spending, while its critics argue for further short-term fiscal stimuli and longer-term deficit reduction relying more on tax increases.

While this debate is crucial, it should not distract us from the urgent need to reform our financial system, whose dysfunctionality lies at the heart of this crisis. Nowhere is this more obvious than in the case of the rating agencies, whose incompetence and cynicism have become evident following the 2008 crisis, if not before. Despite this, we have done nothing about them, and as a result we are facing absurdities today – European periphery countries have to radically rewrite social contracts at the dictates of these agencies, rather than through democratic debates, while the downgrading of US treasuries has increased the demands for them as "safe haven" products.

Was this inevitable? Hardly. We could have created a public rating agency (a UN agency funded by member states?) that does not charge for its service and thus can be more objective, thereby providing an effective competition to the current oligopoly of Standard & Poor's, Moody's, and Fitch. If the regulators had decided to become less reliant on their ratings in assessing the soundness of financial institutions, we would have weakened their undue influence. For the prevention of future financial crises we should have demanded greater transparency from the rating agencies – while changing their fee structure, in which they are paid by those firms that want to have their financial products rated. But these options weren't seriously contemplated.

Another example of financial reforms whose neglect comes back to haunt us is the introduction of internationally agreed rules on sovereign bankruptcy. In resolving the European sovereign debt crises, one of the greatest obstacles has been the refusal by bondholders to bear any burden of adjustments, talking as if such a proposal goes against the basic rules of capitalism. However, the principle that the creditor, as well as the debtor, pays for the consequences of an unsuccessful loan is already in full operation at another level in all capitalist economies.

When companies go bankrupt, creditors also have to take a hit – by providing debt standstill, writing off some debts, extending their maturities, or reducing the interest rates charged. The proposal to introduce the same principle to deal with sovereign bankruptcy has been around at least since the days of the 1997 Asian financial crisis. However, this issue was tossed aside because the rich country governments, under the influence of their financial lobbies, would not have it.

There are other financial reforms whose absence has not yet come back to haunt us in a major way but will do so in the future. The most important of these is the regulation of complex financial products. Despite the widespread agreement that these are what have made the current crisis so large and intractable, we have done practically nothing to regulate them. The usual refrain is that these products are too complicated to regulate. But then why not simply ban products whose safety cannot be convincingly demonstrated, as we do with drugs?

Nothing has been done to regulate tax havens, which not only depriven governments of tax revenues but also make financial regulations more difficult. Once again, we could have eliminated or significantly weakened tax havens by simply declaring that all transactions with companies registered in countries/territories that do not meet the minimum regulatory standards are illegal.

And what have we done to change the perverse incentive structure in the financial industry, which has encouraged excessive risk-taking? Practically nothing, except for a feeble bonus tax in the UK.
A correct fiscal policy by itself cannot tackle the structural problems that have brought about the current crisis. It can only create the space in which we make the real reforms, especially financial reform. Without such a reform we will not overcome this crisis satisfactorily nor avoid similar, and possibly even bigger, crises in the future.