What's called a 'global' recession is in fact shrinking economies mainly in the West, not the East.
by Rana ForooharMarch 21, 2009
As Chinese Premier Wen Jiabao informed the world recently, he's a "little bit worried." Not about
, mind you, but about the China . "We have loaned huge amounts of money to the United States , so of course we have to be concerned," said Wen earlier this month, warning U.S. to "honor its word" and "ensure the safety of Chinese assets." Translation: Those guys on Wall Street really screwed up. We think the dollar might tank and erase the value of our $2 trillion in T-bills. Get your act together. America
It's a stunning turnabout from even a year ago, when such warnings were almost always issued by rich nations, like the
, to poorer ones. But a lot has changed in recent years and recent days. Emerging giants like U.S. are stronger, more economically competent and vastly richer. Their confidence has only increased amid a calamity that is widely described as the worst "global" recession in 70 years, but is in fact not truly global. It is shrinking the richest economies, but only slowing the emerging giants. This year GDP is expected to contract by 3 percent in the China and U.S. Europe, and by close to 6 percent in , while continuing to expand in Japan and China by 7 and 5 percent, respectively. India
That growth gap is destined to reshape the economic future of the world. Goldman Sachs chief economist Jim O'Neill now predicts that the major emerging markets—
, Brazil , Russia and India , a.k.a. the BRICs—could overtake the combined GDP of the G7 nations by 2027, nearly a decade sooner than the forecast in a landmark study a few years back. The ascent of the formerly poor giants is accelerating, and their confidence is evident not only in the utterances of Wen Jiabao. Manmohan Singh of China has blamed the "massive failure" on authorities in "developed societies," but his peers all name India by name. Vladimir Putin of America scorns "the irresponsibility of the system that claims leadership." Luiz Inácio Lula da Silva of Russia , in an interview with NEWSWEEK (following story), says the Brazil bears the brunt of responsibility for the crisis, and for fixing it at the upcoming G20 summit in U.S. . London
Power is not only shifting toward the BRICs, but among them as well. For all their outspokenness,
and Brazil have been hit much harder by the crisis than Russia and India . Dependent on sales of commodities that are shrinking rapidly in price, China 's economy has fallen off a cliff, and could shrink 3 percent this year. Russia will likely stagnate. Their recoveries could be slow and painful, too. Goldman Sachs projections for the period from 2011 to 2050 show Brazil growing at just 2.8 percent, Russia at 4.3 percent, Brazil at 5.2 and China at 6.3. If those figures turn out to be correct, three of the top four economies in the world— India , the China , U.S. and India , in that order—would be Asian within the next two decades. The Asian Century is almost here. Japan
The markets seem to know it. While the S&P 500, down about 45 percent last year, has plummeted another 15 percent since the start of 2009, the Shanghai Composite Index is up by 20 percent, continuing a rally that began in November.
The grim consumer outlook, unemployment paranoia and general siege mentality that's taken hold in the West is also largely absent in
Asia. In and China , sales of cars, white goods and many other types of consumer products are still rising, in large part because of the strong and swift stimulus measures taken by these nations, which have clearly learned a lot about macroeconomic policymaking since the 1990s. Capital goods and machinery are showing double-digit growth in India , and cement sales in India have suddenly risen, now that it's getting warm enough to build. China once again is the outlier: consumer spending there is still down sharply. Russia
Americans are ceding the role of world's most resilient shoppers to the Chinese and Indians. Chinese bank lending this past December was up 1,000 percent over the same period last year, as the government lowered interest rates, reigniting the real-estate market. "That's opening up a whole new, broader base of local people in China who can now afford apartments—and believe me, the demand is there," says Michael Klibaner, head of China research for the real-estate marketresearch firm Jones Lang LaSalle.
The big question for
has been whether it can forge an economy that depends not on exports to the West, but on consumption. Klibaner says it's happening, because the strongest real-estate growth now is not in big cities that cater to exporters but in smaller ones geared toward the domestic market. That follows the trend in China , where the middle class is the largest segment of the population, and also in Brazil . "Consumer spending is 60 percent of GDP in India ," says Global Insight chief economist Nariman Behravesh. "That's a key reason why the economy hasn't been hit harder in this downturn." India
None of this means that BRIC consumers will save a world in financial crisis. Their purchasing power is still far too weak compared with rich nations like the
and U.S. . Yet as their economies grow, so will the power of their wallets. Sooner rather than later, consumers in the BRIC nations will dictate the R&D investments of major corporations, the travel routes of airlines and the marketing campaigns of multinationals. Japan
The BRICs are better positioned to recover than their richer peers. Broadly speaking, better control of inflation, lower deficits, increasing productivity, richer social programs and greater political stability have given the emerging giants greater room for error at a time when the macro-economic environment in rich countries has been deteriorating. Even
and hard-hit Brazil have used raw-materials windfalls (oil and gas for Russia , soybeans and iron ore for Russia ) to build a buffer for the downturn— Brazil has spent more than $300 billion defending the ruble, and still has that much in reserve. Russia 's $208 billion reserve remains almost untouched. Brazil
What's more, the BRICs have learned from our follies. Strong regulatory oversight allowed the Indian and Chinese financial sectors to emerge relatively unscathed from the credit crisis. Through the first half of 2008 (the most recent available data), Chinese banks were acquiring foreign rivals and increasing their share of global financial markets. If that continues, a Deutsche Bank report released last week predicts, China will become one of the dominant financial markets in the world by 2018, alongside the U.S. and the EU, with a 13 percent share in global bond markets, 40 percent of equity markets and 18 percent of global banking.
Sooner than that, the Chinese will likely see an uptick in exports. Purchasing-order surveys in China have been up for three months now, notes CLSA economist Andy Rothman, as factory owners in places like the Yangtze River Delta struggle to fill rush jobs for Western clothing chains that panicked and reduced orders too much. Rothman calls it the "Wal-Mart effect", and expects the interest of increasingly thrifty Western consumers in all things cheap to help Chinese exporters rebound. Many others say the "cheap is cool" phenomenon will ultimately buoy all kinds of emerging-market products and services, from Mexican cement makers to Indian telecom providers, that still tend to offer the best prices. When consumers around the world do start buying again, it seems they'll be doing it in the BRIC countries.