Jan 08, 2013 07:13 PM

2013: The Year Stagnation Continued


Historic buildings along the western bank of the Huangpu River lit up in a countdown to 2013

Between 2009 and 2011, the emerging economies, especially the BRICs, kept growing following a brief crash in 2008. Many pundits interpreted it as a sign of decoupling. Emerging economies, due to their low base, tend to grow faster than the developed ones. The issue is by how much. During the 2009-11 period, they experienced high inflation, debt growing faster than income, and asset bubbles, not signs of sustainability. The growth spurt was due to a hot money bubble rather than a natural state of affairs. This bubble isn't blowing up like in 1997 because the big central banks are still loosening monetary policy. Hence, this bubble could deflate gradually.

A bubble deflates when it can't expand, even if there is no trigger to deflate it. The weight itself can bring it down. Even though the Fed, European Central Bank and Bank of Japan continue to expand money supplies, the incremental changes are smaller than before. On the other hand, the asset bubbles in emerging economies have become big and demand acceleration of hot money to continue. The contradiction is causing the emerging economies to cool.

The statistics in emerging economies are not accurate. The GDP data in China and India, for example, do not reflect their 2012 slowdown. My estimate is that the growth rate in emerging economies declined by half in 2012 from 2011. It could be seen in trade stagnation and weak commodity demand.

China and India

When an emerging economy has a low stock of capital and surplus labor, like India, inflation tends to be associated with supply bottlenecks and commodity inflation. China was like that a decade ago and India still is today. China was able to invest massively to de-bottleneck and join the World Trade Organization to create demand. The policy combination led to a decade of rapid growth. Now China has exhausted growth potential from surplus labor, infrastructure formation and rising export penetration. For the next wave of growth, it needs to shift to labor productivity through improving quality and technology on the supply side, and consumption on the demand side. Even if the transition is successful, the growth rate would be much lower than in the past, possibly only half as high.

India faces terrible trouble in expanding supply. The constraint is problems in investment implementation, not capital. The global cost of capital has declined sharply with slowing growth everywhere. If India can show ability to form capital like China, global capital would pour in for the upside. Even though the global financial community has been hyping the India story, trying to drum up more business, the multinational corporations (MNCs) have not been able to invest much. Those that have have had a pretty bad experience. Even though India has potential, it will remain so for years to come. Hence, it is not going to take from China to become a growth engine. This is important for commodities. As China's demand cools, suppliers are pinning their hopes on India. They will likely be disappointed. Industrial commodities will likely continue to decline in 2013.

The China-India story is vital for the global growth outlook. If they can't deliver more, the global economy will remain stuck. The Organization for Economic Cooperation and Development (OECD) economies are not capable of good growth under the best circumstances. Aging and declining competitiveness hold them close to zero growth in per capita income. The debt problem is an added headwind. The relatively low growth rates in China and India will last for years to come, I believe.

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