The myth of decoupling: emerging economies hit a wall

When the current crisis began, there were some who painted it as simply a Western crisis; a crisis that was unique to Europe – due to problems caused by its common currency – and America – due to its sub-prime mortgage scandal and ensuing credit crunch.

The theory of a “decoupled” world economy was put forward: on the one side there was the senile, crisis-ridden West with its reliance on credit and finance, its ageing population, and its excessive welfare state; on the other side there was the dynamic “emerging” economies – including the “BRICs” of Brazil, Russia, India, and China, as well as a whole host of other developing countries, such as Indonesia, Thailand, Turkey, and South Africa – with their consistently strong economic growth.

But now this theory of decoupling is being seen for the myth that it always was. Not only do Europe and the USA continue to stubble along, but now growth in the BRICs is slowing and other emerging economies are facing a stormy period ahead also. Far from having a decoupled world economy, we are now seeing the results of an intricately and intrinsically linked global economic system. In this respect, the current economic troubles facing emerging economies are not an accident due to this or that policy, but are a necessary new phase of the world crisis of capitalism.

China’s boom and slowdown

The strength of the Chinese economy has played an important role in forging the myth of decoupling. As we have explained elsewhere, the Chinese economy has made a long march to capitalism over the past few decades, under the control of the state, beginning with the “reforms” by Deng Xiaoping, opening up to foreign investment and developing giant state-owned enterprises, joint ventures, and private Chinese companies that can compete on the world market.

Low-wages, helped by a steady flow of freshly exploitable workers from the countryside and into the cities, became – along with an expansion of credit-fuelled consumption in the USA and Europe – the basis for an export-led model of growth in China. The implementation of the latest technological and industrial methods, imported via joint ventures and foreign direct investment, completed this model.

The enormous economic growth seen in China over the past decade – with growth rates consistently exceeding 10% - became, in turn, the basis for growth in many other countries, both in Asia and in the rest of the world. Countries such as Brazil, Indonesia, South Africa, and even Australia, saw their own economies boom on the back of Chinese growth, with its demand for energy and raw materials, and many emerging economies became reliant on exporting to China.

But as we have reported elsewhere, as the crisis hit in the West, the Chinese export model – reliant on this credit-fuelled consumption in the USA and Europe that no longer existed – collapsed, and in response the Chinese government stepped in with a huge investment programme to maintain growth. This Keynesian style investment was similarly credit-fuelled, leading to a built up of household, corporate, and government debt that is now equivalent to around 200% of GDP by some estimates.

The result of this investment surge has been an enormous build up of contradictions in the economy in China: a glut of building construction has led to empty ghost towns alongside overcrowded cities; the expansion of industry has vastly exacerbated excess capacity in key sectors, leading to oversupply of certain commodities and a collapse in prices; and the build up of debt and a slowdown in the economy has resulted in defaults and thus a freeze on future loans. As a recent article in the New York Times reports:

“As the Chinese economy boomed, few cities soared faster or higher than Shenmu, a community of nearly 500,000 in northwestern China...

“...But a painful credit crisis is now spreading across Shenmu and cities nearby, as thousands of businesses have closed, fleets of BMWs and Audis have been repossessed and street protests have erupted...

“...‘It’s an economic crisis just like the United States has had; just like it,’ said Wang Ting, an operator of an illegal casino in Fugu, near Shenmu. ‘There’s no cash, everyone stays home without a job, there’s no way the economy can recover’...

“...Across China, growth has slowed. With the slowdown have come rising defaults on loans made outside the conventional banking system, chronic overcapacity in many industries like coal mining and steel production and, in particularly troubled cities like Shenmu, a sharp decline in previously debt-fueled prices for real estate and other assets...

“...The cracks are showing in many sizable cities like coastal Wenzhou, where informal lending, a big part of so-called shadow banking, has dominated for a quarter-century. Cities with economies linked to commodities with falling prices have also been affected, as more people have defaulted on loans...

“...As some borrowers began defaulting early this year, worried lenders in the informal sector raised interest rates for small and medium-size businesses, previously 25 to 40 percent a year, to as much as 125 percent a year. The increase set off a much broader wave of defaults in recent weeks, as owners found themselves unable to repay billions of dollars in bad debts, many of them handwritten and hard to enforce in court...

“...At the same time, overinvestment led to overcapacity. Dozens of new mines opened around Shenmu in the last decade and older mines expanded. But demand has grown much more slowly than expected for electricity and steel, the two main users of coal...

“...The popping of the real estate bubble has been the most serious blow to the local economy. Real estate prices had soared in cities across China...

“...Public discontent is fuelling street protests. Several thousand residents turned out in mid-July for a demonstration in the expensively paved square across the street from city hall, demanding that municipal officials revive the stalled economy. More recently, a smaller group of migrant workers protested, demanding that the local government pay their back wages after construction was halted on a row of high-rise apartment buildings.”

The contradictions in the Chinese economy – of excess capacity, i.e. overproduction – have in turn created contradictions, imbalances, and tensions on a world scale, as we reported recently.

The Chinese boom, having been a source of growth for the other BRICs and emerging economies, has now turned into its opposite and become a source of trouble for these same countries. As The Economist reported in its article entitled “The Great Deceleration”:

“When a champion sprinter falls short of his best speeds, it takes a while to determine whether he is temporarily on poor form or has permanently lost his edge. The same is true with emerging markets, the world economy’s 21st-century sprinters. After a decade of surging growth, in which they led a global boom and then helped pull the world economy forwards in the face of the financial crisis, the emerging giants have slowed sharply.

“China will be lucky if it manages to hit its official target of 7.5% growth in 2013, a far cry from the double-digit rates that the country had come to expect in the 2000s. Growth in India (around 5%), Brazil and Russia (around 2.5%) is barely half what it was at the height of the boom. Collectively, emerging markets may (just) match last year’s pace of 5%. That sounds fast compared with the sluggish rich world, but it is the slowest emerging-economy expansion in a decade, barring 2009 when the rich world slumped.” (The Economist, 27th July 2013)

Cheap money and contagion

The fears relating to collapsing exports, credit-fuelled growth, and a built up of debt are not unique to the example of China. Elsewhere across Asia there are concerns that cheap money has led to an unsustainable situation, as the Financial Times commented in a recent piece with the headline “Spectre of 1990s crisis looms large as debt grows”:

“When China unleashed the largest stimulus package in its history in response to the 2008 crisis and slowing export markets in the west, it came at price. Today China is grappling with a bill that some economists say has driven total debt to gross domestic product past 200 per cent.

“While China offers the most extreme example of using debt to fund growth, it is a pattern that has been repeated across Asia. Without exports, central banks turned on the taps, leading to a jump in household and corporate borrowing...

“...Echoes of the Asian financial crisis are easy enough to hear. Credit growth since 2008 has been rapid, leading to an increase in house prices, high growth rates and corporate mega-deals...
“...But as the tide of cheap money from overseas rolls back from emerging economies across the region, analysts warn that Asia could be at the start of a series of currency and credit crises, not unlike the experience of the 1990s...

“...the risks of contagion across the region are beginning to rise, say economists, made worse by the slowdown in China, Asia’s biggest source of growth.” (Financial Times, 21st August 2013)

In particular, much of this credit has been speculatively used to buy up property, rather than being invested into real production, as the above article notes in quoting Jimmy Koh, head of economic-treasury research at United Overseas Bank in Singapore: “A lot of this new credit is going into housing and property across the region. That area is not the most productive; it doesn’t bring new value into the system.”

The cause of such speculation is clear: with overproduction already existing on such a large scale across China, Asia, and the rest of the whole world, why would anyone invest in new production? With vast excess capacity at a global level and an abundance of commodities piling up that already cannot be sold, why would any businesses – in Asia or elsewhere – could to invest in new industry? Instead, therefore, we see firms either hoarding money – i.e. simply sitting on stockpiles of idle cash – or choosing to invest their money in speculative activity.

Much of this cheap money in recent times has come from the “quantitative easing” (QE) programmes enacted in the West – particular that of the US Federal Reserve. Over several rounds of QE, the Fed bought has bought up nearly $2.9 trillion in assets, e.g. debts, bonds, and securities, all by effectively printing money. Large amounts of these QE funds have found their way over to Asian economies, causing a bubble of cheap money, as the same Financial Times article comments:

“‘All this QE money has led to a massive credit inflation bubble in Asia,’ said Kevin Lai, chief regional economist at Daiwa Securities. ‘The crime has been committed, we just have to deal with the aftermath. During that process there will be a lot damage...It’s like a margin call. Household will need to sell their assets. There will be a lot of wealth destruction.’”

The credit taps turn off

Many important emerging economies have, in effect, become reliant on this cheap money to keep going. Now, with the US Federal Reservce announcing that it is planning to “taper” the QE programme – i.e. gradually reduce the size of its purchases – these emerging economies, from Thailand to Turkey, are facing a crisis.

In particular trouble are those countries that have used foreign credit to plug the gap in their current accounts – a measure of the inflow and outflow of money and commodities across a country’s borders. For many years, emerging economies ran current account surpluses, with exports to China or the West, along with foreign direct investment (FDI) from abroad, keeping these countries above the water. But as exports – both to China and to the West – and FDI collapsed, current account surpluses turned into deficits, and money was needed from somewhere to fill the hole.

As the Financial Times reports:

“In Thailand, which slipped into technical recession in the second quarter, household debt to GDP has risen from 55 per cent in 2009 to almost 80 per cent today. Total debt to GDP now stands at 180 per cent, according to data compiled by HSBC.

“Oil-rich Malaysia has seen a similar increase in debt levels, helping to power consumption and housing booms. But poor trade figures have raised the prospect of it slipping into deficit this year, after a decade of running surpluses. And last week Indonesia reported a sharp widening of its current account deficit, its worst since 1996, thanks mainly to a fall in the value of its commodity exports.”

And as The Economist explains:

“Cheap financing allowed emerging economies to temporarily live beyond their means, borrowing the difference from abroad: capital flows into such countries enabled them to import more than they exported...

“...This is creating headaches for some of those emerging economies, and especially those that had been running big current-account gaps. Borrowing costs are rising; firms and households needing to roll over short-term debt will have to do so on less advantageous terms than they received a year or two ago. (Any firms unwise enough to have borrowed in a foreign currency will be in big trouble.) Import prices will rise. Exporters could benefit, though important inputs (fuel especially) could grow damagingly expensive. There is some cause to worry that an orderly exit becomes a rush and then a panic, as knock-on effects from depreciation spark a broader loss in confidence.

“The bigger concern, however, may be the threat of big policy errors in response to these dynamics. Recklessly imposed capital controls could fuel panic and impair long-run growth. Worse still, central banks may strangle their economies with high rates in an attempt to protect their currencies' values. The end of QE risks squeezing demand around the world.” (The Economist online, 20th August 2013)

In this way we see how interlinked the world economy is: the QE programme in the USA – a response to the crisis there and in Europe – has created contradictions in the emerging world, and these contradictions, in turn, risk rebounding back to America and the rest of the world.

Political and social consequences

The country that has most notably hit the headlines in relation to the US Fed’s QE tapering is India, with its particularly senile and corrupt capitalism. As The Economist comments:

“The rupee has tumbled by 13% in three months. The stockmarket is down by a quarter in dollar terms. Borrowing rates are at levels last seen after Lehman Brothers’ demise. Bank shares have sunk.

“On August 14th jumpy officials tightened capital controls in an attempt to stop locals taking money out of the country. That scared foreign investors, who worry that India may freeze their funds too. The risk now is of a credit crunch and a self-fulfilling panic that pushes the rupee down much further, fuelling inflation. Policymakers recognise that the country is in its tightest spot since the balance-of-payments crisis of 1991...

“...Private companies have slashed investment. Growth has slowed to 4-5%, half the rate during the boom. Inflation, at 10%, is worse than in any other big economy. Tycoons who used to cheer India’s rise as a superpower now warn of civil unrest.” (The Economist, 24th August 2013)

The solution that The Economist – a reliable mouthpiece of the capitalist class – proposes, for India and for other countries in a similar situation, is simple: cut the deficit and liberalise the economy. The concrete realities of such a “solution”, however, would be devastating for ordinary people in India, Indonesia, Brazil, and elsewhere: cuts to fuel subsidies, which the poorest in society are reliant on for cooking and transport; inflation, with rising prices of staple goods; and privatisation, leading to job losses across the board.

Such a programme would be a finished recipe for class struggle. Everything the capitalists can do to restore economy stability simply leads to social and political instability, and vice-versa. But the ruling class in every country – whether it is Europe or Asia, America or Africa – has no option but austerity. Either they cut living standards in order to “increase competiveness” in a global race to the bottom, or they continue relying on credit-fuelled growth, letting the bubble get bigger and bigger until it pops even more violently.

Far from having “decoupled”, the economies of China, India, Brazil, and elsewhere are now more interwoven with those of the USA and Europe then ever more. We can now see clearly that when America – the largest economy in the world – sneezes, the emerging economies catch a cold, and this in turn mutates, spreads, and develops back across the globe.

The process of capitalist crisis is not a smooth, linear one in which all national economies decline in tandem in an even manner. Rather, it is a dialectical process of combined and uneven development (or lack of development), in which the crisis reaches different stages in different places at different times. Various process and factors – economic, social, and political – cross paths, feedback, interact. The crisis in some countries will be delayed; periods of stabilisation in one part of the world will be seen alongside periods of trouble in others; certain countries can even see a temporary spurt of growth against this general backdrop of recession and stagnation.

But despite this unevenness, the combined process – in its totality – is one of decay and decline; of a world economy that is no longer able to take society forward; of a system that is dying on its feet, stumbling from one crisis to after another, waiting to be dealt its death blow. It is the task of the world socialist revolution to deliver this final fatal strike and put an end to capitalism once and for all.

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