Growth slowdown in the BRICS and it implications

The BRICS (Brazil, Russia, India, China, South Africa) were collectively seen as drivers of global economic growth and its saviour following the global recession that afflicted the international community in 2008-2009. This optimism was justified as the BRICS rebounded vigorously from the global recession by 2010. Since then growth, with some exceptions, has faltered in the BRICS. As Table 1 shows, Russia and South Africa are in recession that is likely to persist until 2017. Growth in China has dipped below the near double-digit growth that it experienced in the 1998 to 2007 period and this is expected to prevail over the medium-term. South Africa’s growth has moderated in the last three to four years. Projections suggest that this sombre outcome is likely to persist. Only India is growing in excess of 7 per cent, based on estimates of the revised national accounts system. Medium-term projections suggest that this salutary performance is likely to continue.

 Table 1: BRICS, GDP growth rates, 1998 to 2017

Recent evaluations suggest external factors have largely been responsible for the synchronous growth slowdown in the BRICS.  Weak global trade, which is about 20 per cent below trend growth, have had a negative impact on the BRICS. Tumbling commodity prices have hit commodity exporters like Brazil, Russia and South Africa. In the case of Russia, the adverse consequences flowing from the imposition of sanctions and the conflict with Ukraine cannot be discounted. Tightened financial conditions and the volatility of short-term capital flows have exacerbated the inhospitable external conditions facing the BRICS community. There is also evidence of a reduced pace of total factor productivity growth juxtaposed with substantially reduced investment growth. These might be attributed to domestic policy uncertainty as governments in the BRICS seek to navigate their way through a turbulent external economic environment after the boom of 1998 to 2007.[2]

Concerns have been expressed about the negative spillover effects of the growth slowdown in the BRICS on emerging economies and the global economy. Some estimates suggest that the reduced pace of growth in the BRICS is likely to shave off 0.8 per cent from GDP growth for emerging economies as a whole and about half that for global growth.[3]

Under normal circumstances, governments in the BRICS would have reacted with vigorous counter-cyclical fiscal and monetary policies to respond to recession and slow growth as they did during the last global downturn. Now, there are continuing concerns about lack of fiscal space, at least in some of the BRICS. For example, in South Africa public debt to GDP ratio has increased 19 percentage points since the last global recession. In other commodity exporting BRICS, there are also concerns about debt to GDP ratio being in excess of OECD guidelines which suggests that emerging economies should aim for a debt to GDP debt target of 30 to 50 per cent.[4] While there is no robust evidence that there will be an imminent growth collapse if these guidelines are breached,[5] governments are wary of perceived financial market pressures in the wake of evidence of lax fiscal policies.

In the case of monetary policy, there is also evidence of cautious manoeuvres. Inflation targeting central banks in BRICS are hesitant to reduce rates as long as the prevailing and projected inflation rate is above the target rate as is the case in Brazil and South Africa. Russia has only very recently decided to reduce the policy rate by 50 basis points even though the prevailing inflation rate is significantly above the target rate. India and China have been more forthcoming in reducing policy rates.[6]

It is also possible that the growth slowdown is part of a secular phenomenon. This stems from studies which claim that ‘regression to the mean’ is a strong empirical regularity. In other words, an economy might grow rapidly for some time, but eventually growth regresses to the historical mean of 2 to 4 per cent. Estimates suggest that even if partial regression to the mean takes place, China’s and India’s growth in the 21^st century are unlikely to exceed 4 per cent.[7] Closely linked to the phenomenon of ‘regression to the mean’ are studies that claim a secular decline in the pace of ‘catch up growth’ and hence the ability of emerging economies to converge to living standards of the rich nations within a reasonable period of time.[8]

What are the implications of these studies? One important observation that one can make is that the boom of the 1998-2007 period that preceded the global recession of 2009 was probably exceptional. They were driven at least partially by a global commodity price boom and plentiful supply of cheap credit. These conditions that can enable a boom are unlikely to be replicated for prolonged periods. Hence, the emphasis should be on the quality and inclusiveness of growth rather than its quantitative dimensions. Certainly, a growing economy is necessary for enhancing labour and social indicators, but as endogenous growth theory suggests, improvements in labour and social indicators are important because they signal positive changes in human capabilities that promote growth.

[1] All estimates are derived from IMF (2016) World Economic Outlook, April. 2016 and 2017 are projections.

[2] World Bank (2016), ‘Sources of the growth slowdown in the BRICS’, January 11, available at http://blogs.worldbank.org/prospects/global-weekly-sources-growth-slowdown-brics

[3] Huidrom, R, Kose, M.A, and Ohnsorg, F (2016) ‘Painful spillovers from slowing BRICS growth’, February 17, available at http://voxeu.org/article/painful-spillovers-slowing-brics-growth

[4] OECD (2015) ‘Achieving prudent debt targets using fiscal rules’, Economics Department Policy Note No.28, July, www.oecd.org/eco/Achieving-prudent-debt-targets-using-fiscal-rules-OECD-policy-note-28.pdf

[5] Islam, R and Islam, I (2015) Employment and inclusive development, London and New York: Routledge, https://www.amazon.com/Employment-Inclusive-Development-Routledge-Economics/dp/0415825989

[6] The latest monetary policy developments can be downloaded from central bank websites of the BRICS available at https://www.bis.org/central_bank_hub_overview.htm

[7] Pritchett, L and Summers, L (2014) ‘Asiaphoria meets regression to the mean’, NBER Working Paper No.20573, http://www.nber.org/papers/w20573

[8] The Economist (2014) ‘Economic convergence: the headwinds return’, September 13, http://www.economist.com/news/briefing/21616891-ten-years-ago-developing-economies-were-catching-up-developed-ones-remarkably-quickly-itsummarizes the findings of a growth slowdown in the emerging economies as a whole and highlights the dramatic fact that, if one excludes China, convergence of emerging economies to rich country living standards at the current and projected pace will take place in 300 years!