A case against the Rise of the Rest

From NextBigFuture.com

Foreign Affairs Magazine – The Broken BRICS by Ruchir Sharma. Ruchir is head of Emerging Markets and Global Macro at Morgan Stanley Investment Management and the author of Breakout Nations: In Pursuit of the Next Economic Miracles.

I think that Ruchir is overly pessimistic about China. I do agree that many other nations have to demonstrate the ability to grow for decades. Indonesia appears back on track to grow at 6% fairly consistently for a number of years. India has slowed down to 5-6% growth and needs a lot of reforms to get on track. India has serious challenges to educate and lift up its poorest people (making up over half of its population.)

The Economist forecasts China will have 9.3 trillion GDP in 2013. (next year). This is more than Japan (3rd biggest economy) and Germany (4th biggest economy) combined. This is without including Hong Kong and Macau which are part of China. It also does not include the hidden economy. Michael Pettis is a China pessimist and talks about subtracting environmental damage from China’s GDP. This is not done for any other GDP and basically is a different measurement than GDP.

Including Hong Kong and Macau China should be at 9.8 trillion GDP at the end of next year and with the hidden economy China would be at 13 trillion GDP. There is also general agreement that China’s currency is undervalued. So China catching up on an overall GDP basis a done deal. However the catchup on a per capita basis is a more open issue. I think several cities like Shanghai and Beijing will catchup on a per capita basis by 2020. Overall per capita catchup will take into the 2030s and a lot can happen to delay and slow that. What could speed it up is if China allowed its currency to strengthen a lot.

Over the past several years, the most talked-about trend in the global economy has been the so-called rise of the rest, which saw the economies of many developing countries swiftly converging with those of their more developed peers. The primary engines behind this phenomenon were the four major emerging-market countries, known as the BRICs: Brazil, Russia, India, and China. The world was witnessing a once-in-a-lifetime shift, the argument went, in which the major players in the developing world were catching up to or even surpassing their counterparts in the developed world.

These forecasts typically took the developing world’s high growth rates from the middle of the last decade and extended them straight into the future, juxtaposing them against predicted sluggish growth in the United States and other advanced industrial countries.

With the world economy heading for its worst year since 2009, Chinese growth is slowing sharply, from double digits down to seven percent or even less. And the rest of the BRICs are tumbling, too: since 2008, Brazil’s annual growth has dropped from 4.5 percent to two percent; Russia’s, from seven percent to 3.5 percent; and India’s, from nine percent to six percent.

None of this should be surprising, because it is hard to sustain rapid growth for more than a decade. The unusual circumstances of the last decade made it look easy: coming off the crisis-ridden 1990s and fueled by a global flood of easy money, the emerging markets took off in a mass upward swing that made virtually every economy a winner. By 2007, when only three countries in the world suffered negative growth, recessions had all but disappeared from the international scene. But now, there is a lot less foreign money flowing into emerging markets. The global economy is returning to its normal state of churn, with many laggards and just a few winners rising in unexpected places. The implications of this shift are striking, because economic momentum is power, and thus the flow of money to rising stars will reshape the global balance of power.

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