Well now that the theory of ‘decoupling’ has been assigned to the history bin as a fanciful assessment of the global economy, we need to analyze the impact of the global financial crisis on the Rising BRICSAM. It appears to be - not good.
Most analysts have commented on the efforts most BRIC countries have undertaken to defend themselves against financial instability. The BRIC countries have all built large surpluses of foreign reserves. Examine the figures on foreign exchange reserves below.
- China $USD 1.9 trillion (September 2008) +33% change in year 2007
- Russia $USD 485 billion (November 6, 2008)
- India $USD 253 billion (October 2008) +65%
- Brazil $USD 205 billion (August 31, 2008) +106%
These figures, by the way, come from a presentation by Prashant Pathak the managing partner of ReichmannHauer Capital Partners here in Toronto. This week Prashant gave a marvelous presentation to our (Jim de Wilde, Jonathan Hausmann and myself) undergraduate commerce course from the Rotman School of Management entitled, ‘Globalization, Global capital markets and the Structure of the International Political Economy’ (more on that in the future).
The point here is that each of the BRIC countries had taken steps to defend their economies. Bitter lessons of past appear to have been learned. Nevertheless the financial meltdown of Wall Street has lapped up against the BRICs. As Harvard’s Dani Rodrik (the navigation bar identifies his blog) recently wrote in an op-ed in Canada’s Globe and Mail, entitled, “Why Must We Save Emerging Markets from Wall Street’s Follies? To Keep Us All Afloat,” “Instead, emerging markets are suffering financial convulsions of possibly historic proportions. The fear is no longer that they will be unable to insulate themselves - it’s that their economies could be dragged down into much deeper crises than those at the epicentre of the subprime debacle.”
At least in financial markets the global financial meltdown has made little distinction between these financially defended economies and others in Central Europe or Asia that failed to take precautions. Thus Brazil that had suffrered through serious currency and financial crises in the near past but had undertaken serous efforts to imrpove fiscal health, reduce inflation, float their currency, build surpluses nevertheless has been hammered. The Brazilian real has lost a quarter of its value and the stock market has tumbled some 40%. The impact on the real economy, growth, jobs etc. is yet to be fully felt. Their is growing evidence of a sharper than expected slowdown in the Chinese economy. And the Russian defense of the ruble is fading.
The Washington G20 meeting is redolent with domestically focused rhetoric - a new Bretton Woods or Bretton Woods II. But real progress remains for the moment fixed on liquidity.
If the G20 meeting is to be viewed as as successful in the short term then coordinated effort needs to be announced. There are signs of collective effort. The US Federal Reserve and the IMF have both both created a swap facility for a number of countries including Brazil and Mexico providing each $30 billion.The IMF has announced a new quick dispersing short term facility for countries with ‘good policies.’
The G7/8 will need to step up to the plate and will need to include large surplus generating countries - most notably China. As Dani Rodrik suggests the need right now is to, “save the emerging markets from the consequences of Wall Street’s financial follies.”