Global Trends by Martin Khor
Monday 26 August 2013
Economic trouble in the South
The global economic crisis is finally hitting major developing countries, many of which face lower growth, current account deficits, falling currencies and a reversal of capital flows.
The global economic crisis is now hitting many developing countries, in some ways worse than during the Great Recession of 2008-9.
The economic growth rates of big countries like China, India, Brazil and Argentina have gone down.
In recent weeks, the currencies of India, Brazil and South Africa also declined. In itself this may not be bad as some of the currencies had been over-valued and a depreciation is good for trade competitiveness.
However, this is also a sign of a slowdown in foreign inflow of funds. And those countries having a deficit in their current account of the balance of payments need inflows to cover it.
They face a terrible combination of high current account deficit, reversal of capital flows, declining currency and the prospect of higher interest rates.
Suddenly the Western media story is no longer about the great rise of the South and the BRICS. The hype has turned almost full circle to the decline of the emerging economies.
Just as the original headlines of rise were exaggerated, so too is the anticipated collapse exaggerated.
Nevertheless, the world economic crisis has finally come to ground in the developing world.
A recent paper by the South Centre by its chief economist Yilmaz Akyuz argues that the present “recovery” phase in the developed countries is actually more problematic for developing countries than when the former fell into recession in 2008-9.
This is because
the US, Europe and China countered that recession through expanded
government spending, and this gave a boost to exports and growth in
they have relied excessively on easy-money policy. The US in particular
injected massive liquidity into its financial markets, with interest
rates close to zero.
good effects of the developing countries’ own earlier countercyclical
policies are fading and the space for more expansionary policies is
“Developing countries need to improve their own growth fundamentals, rebalance domestic and external sources of growth and reduce dependence on foreign markets and capital,” concludes Akyuz.
Note: The research paper, “Waving or Drowning: Developing Countries after the Financial Crisis” can be accessed in the South Centre website (http:/www.southcentre.org).