The industrialized North pushes the developing South down

Protest in Barcelona. (Photo:
Davidlohr Bueso/Flickr/CC)

Emerging countries are being affected adversely by the European and US economic situations, according to Martin Khor, executive director of South Centre, in his most recent column for The Star, one of the leading Malaysian newspapers.

Rich countries’ demand is falling, as poor countries’ exports. Inflows of capital into developing nations have also slowed down, and a reversal to a new outflow situation may well take place. The lending conditions of banks in emerging economies have also deteriorated, explains Khor.

Economic growth is slowing down in countries such as Argentina, Brazil, China, India, Indonesia, Malaysia, Singapore and South Africa.

Khor columna reads as follows.

Slowdown in developing nations
By Martin Khor

Developing countries are increasingly being affected adversely by the economic recession in Europe and the slowdown in the United States.

The hope that major emerging economies like China, India and Brazil would continue to have robust growth, decoupling from Western economies and becoming an alternative engine of global growth, has been dashed by recent data showing that they are themselves weakening.

Just as during the 2008-2010 global crisis, a decline in exports caused by falling Western demand is the main way in which the developing countries are being hit.

Inflows of capital into developing countries have also slowed down, and a reversal to a new outflow situation may well take place. The lending conditions of banks in emerging economies have also deteriorated, according to a banking industry survey.

Recent reports confirm the slowdown in many major developing economies.

In China, growth of the gross domestic product fell to 7.6% in the second quarter of this year, denoting a continuous deceleration from 10.4% in 2010, 9.2% in 2011 and 8.1% in first-quarter 2012.

The IMF has lowered its growth projection for India to 6.1% for this year. This compares to 6.5% last year and 8.4% in the previous two years.

The Singapore economy contracted 1.1% in the second quarter over the previous quarter at an annualised rate, mainly due to manufacturing output falling by 6%.

For Malaysia, the growth rate for this year is projected to be 4.2% by the Malaysian Institute of Economic Research. This is lower than last year’s 5.1%, which had also slowed to 4.7% in the first quarter.

In Indonesia, the Central Bank said growth was slowing and projected this year’s rate to be 6.2%, compared with 6.5% last year (and 6.3% in the first quarter).

In South America, two of the largest economies are also facing decelerating growth prospects.

For Brazil, the government has lowered its growth projection for this year to 3% (from 4.5% earlier), but the IMF’s latest growth estimate is even lower at 2.5%. Growth last year was 2.7%; industrial production declined by 4.3% in the 12 months to May.

Argentina had one of the fastest growing economies in the world. Growth was 8.9% in 2011, and the average annual growth was 7.6% in 2003-2010.

But the economy contracted by 0.5% in the 12 months to May. Industrial production in June fell 4.4% on the year due mainly to a 31% decline in the auto sector.

In South Africa, growth in the first quarter was 2.7% over the previous quarter, which was down from the 3.2% growth of fourth-quarter 2011.

Last Friday, new World Bank President Jim Yong Kim warned that the debt crisis in Europe would hurt most regions in the world. He predicted that if a major European crisis developed, growth in developing countries could be cut by 4% or more.

Even if the eurozone crisis is contained, it could still reduce growth in most of the world’s regions by as much as 1.5%.

Also last week, the International Monetary Fund in its latest world economic outlook gave a downbeat picture of how developing countries were being affected adversely by the European and US economic situations.

It warned that the ability of governments worldwide to respond to the new slowdown had become limited. And while the withdrawal of capital from developing countries was not at critical levels, there could be problems for some if conditions deteriorated.

The prevailing view of prospects for developing economies has almost suddenly changed from their being emerging leaders of the global economy to being victims of the Western slowdown.

A paper by Yilmaz Akyuz, chief economist of the South Centre, shows that the theory of the “staggering rise of the South” had vastly exaggerated the developing countries’ decoupling from the economic fortunes or misfortunes of the developed countries.

Much of the high growth in developing countries in the past decade had been due to the favourable external conditions generated by Western countries.

High consumption growth in the US was a main basis for the high growth of manufactured exports from China and other East Asian countries, and these together enabled the boom in commodity prices that lifted growth in Africa and South America.

The boom in capital flows into major developing countries also helped to fuel their growth and covered the current deficits of several of them.

The 2008-09 global crisis slowed down developing countries’ export growth and reversed capital flows, but the strong anti-recession actions (fiscal stimulus, low interest rates and expansion of liquidity) in developed countries resulted in the resumption of export growth and capital inflows in developing countries.

However, with the developed countries ending their reflationary policies and switching to austerity budgets, with their low interest rates having little effect, recessionary conditions in Europe are now impacting adversely on developing countries.

With the positive conditions that supported the South’s rise no longer in place but instead turning negative, developing countries’ prospects have dimmed, prompting the need for a change in development strategy.

Meanwhile the Wall Street Journal of July 19 reported that lending conditions in emerging economies deteriorated in recent months due to the eurozone crisis.

According to a report of the Institute of International Finance, credit standards grew tighter in emerging-market banks around the world, while bad loans increased in the second quarter.

The results suggest trouble ahead for emerging economies, with banks in Asia and Latin America showing deeper caution, which can lead to weaker lending.

The Star: