The BRICs Have Hit a Wall

Major emerging markets are suffering — and frankly that's not very surprising

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Prakash Singh / AFP / Getty Images

Indian Prime Minister Manmohan Singh delivers a speech during the inauguration of the 3rd BRICs International Competition Conference in New Delhi on Nov. 21, 2013

Only a short time ago, the world’s emerging markets, especially the BRICs — Brazil, Russia, India and China — were supposed to be the saviors of the global economy. As the West sank into a recession in the wake of the 2008 financial crisis, China, India and many other developing economies continued to post strong growth, helping to prevent the world economy from tumbling into an even deeper and more painful downturn. As the U.S. and Europe struggled to recover, talk that the giants of the developing world were destined to take their place at the top of global economic and political affairs accelerated.

Now, however, with the opening of 2014, many emerging markets look like they’re the ones that need saving. Investors are fleeing markets from Latin America to Asia, tanking currencies, stocks and sentiment. The good money is now betting on the once battered advanced nations. While stock markets in the U.S. and Japan have soared, those in the developing world have slipped.

What’s gone wrong? Some of the turmoil has been inadvertently brought on by the U.S. Federal Reserve. After flooding the world with billions of dollars through unorthodox bond-buying programs to boost the U.S. economy, the Fed is beginning to scale back — or “taper” — those efforts, and jitters over the impact of that unprecedented unwinding is scaring investors from assets perceived as high risk. Especially vulnerable are emerging economies that have become dependent on cheap and easy foreign funds to finance current-account deficits, like Turkey and Indonesia. Turkey’s currency, the lira, hit a record low in recent days, while Indonesia’s rupiah has sunk to levels not seen since the Asian financial crisis of the late 1990s.

(MORE: Viewpoint: How Elections Could Impact Five Emerging Economies)

However, there are more fundamental reasons why investors have soured on emerging economies. Their prospects just aren’t what they used to be. China, the granddaddy of them all, is in the middle of its most severe slowdown since the late 1990s. Fears are rising that India could be trapped in stagflation — that nasty combination of slow growth and high inflation. Once high-flying Brazil is expected to grow no faster than the U.S. in 2014. Research firm Capital Economics forecasts growth in emerging markets overall to be around 4.5% in 2014 — well below the average of 6.0% since 2000.

Of course, no economy, no matter how bright its prospects, can expect to expand quickly forever. But the problems facing emerging markets are not just cyclical. The fact is that complacency has torpedoed the emerging world. Politicians in developing nations, made overconfident by their economies’ stellar performances and talk of their inevitable dominance in a “post-American world,” failed to press forward with the reforms necessary to sustain their growth miracles.

In New Delhi, political bickering tanked efforts to further the liberalization that had set the economy free and sparked rapid development. China’s new leaders are facing a long, difficult process of reshaping the country’s tapped-out growth model and contending with rising debt levels that threaten the nation’s financial stability. New President Xi Jinping has only just embarked on long-stalled free-market reforms that could lay the foundation for further success. In Brazil, overbearing taxes, red tape and poor infrastructure have hampered competitiveness. Though some emerging markets continue to excel — such as the Philippines and Nigeria — many are being held back by similar political hurdles and foot-dragging.

None of these problems can be solved easily. Xi will have to take on China’s entrenched interests — state-owned enterprises, a powerful bureaucracy — to implement the bold reforms outlined in an important party plenum in November. India and Indonesia are facing critical elections this year that could determine their outlook for some time to come. All emerging nations are in the process of learning a difficult lesson: even those economies with the brightest prospects and biggest advantages can’t continue to grow without timely reform and bold political action. While the giants of the emerging world deal with the fallout, the post-American world will have to wait.

3 comments
Sibir_Russia
Sibir_Russia

Michael Snyder. USA

"During 2013, America continued to steadily march down a self-destructive path toward oblivion.  As a society, our debt levels are completely and totally out of control.  Our financial system has been transformed into the largest casino on the entire planet and our big banks are behaving even more recklessly than they did just before the last financial crisis.  We continue to see thousands of businesses and millions of jobs get shipped out of the United States, and the middle class is being absolutely eviscerated.  Due to the lack of decent jobs, poverty is absolutely exploding.  Government dependence is at an all-time high and crime is rising.  Evidence of social and moral decay is seemingly everywhere, and our government appears to be going insane.  If we are going to have any hope of solving these problems, the American people need to take a long, hard look in the mirror and finally admit how bad things have actually become.  If we all just blindly have faith that "everything is going to be okay", the consequences of decades of incredibly foolish decisions are going to absolutely blindside us and we will be absolutely devastated by the great crisis that is rapidly approaching.  The United States is in a massive amount of trouble, and it is time that we all started facing the truth."

The following are 83 numbers from 2013 that are almost too crazy to believe...

KonstantinUsjukovs
KonstantinUsjukovs

@Sibir_Russia 

The United States is in a massive amount of trouble - they have to stop printing money and manipulate gold.

This is the one and the only reason. STOP printing those worthless dollars. Experts are not blind, they see what Fed is doing.