The most recent engines of the world economy - the BRIC countries - have turned into brakes and triggers of new crises. “What is going on is a great unravelling of the market conditions of the past 15 years”, one analyst commented in the Financial Times.
Before and after the G20 summit in Turkey, most prognoses of economic growth - global as well as country by country - are being scaled down. At the centre of increased concern is China as the biggest of the BRICS countries - Brazil, Russia, India, China and, more recently, South Africa. These five dominate the emerging markets (EM) and most of them are severely hit by huge outflows of capital and a collapse of commodity prices which make up a large part of their exports. This is linked to the policies of the US and other advanced capitalist countries.
The previous way out - currency devaluations - have had no effect in increasing exports. On the contrary, having weaker currencies has lead to decreased imports. The volume of world trade is now falling. Another effect of the many devaluations is to speed up outflow of capital from “unstable” countries and their stock markets.
For the last 15 years, the so-called emerging markets have recorded economic growth double the pace of the advanced capitalist countries. That was the case both before and after the immediate crisis in 2008-09. The EM group covers around 40 countries - the leading economies in Asia (except Japan), Africa, Latin America and Eastern Europe.
In this period, from 1997 to 2014, the EM countries’ economies grew to account for the majority of global GDP, going from 38 percent to 52 percent measured in purchasing power parity (or from 23 percent to 35 in nominal terms). One company in four on the Fortune’s Global 500 list is now based in EM countries.
This year, however, the growth rate in these countries has been estimated to be falling for the sixth year, to 3.6 percent. That prognosis is based on China growing by seven percent, a figure more and more in question.
Within the EM group, the BRICS themselves have seen a sharp downturn. The original four BRIC countries (a term invented by Goldman Sachs as late as 2001) stood for 23 percent of global economic growth between 2000 and 2014 with a combined GDP at 20 percent of global GDP.
Comparing the years 2006 and 2010 with 2015 shows the sharpness of the downturn. For Brazil, the numbers are 6 percent, 7.6 percent and -2.61 percent (for the second quarter of 2015). The crisis is still deepening. The export of iron ore from Brazil to China fell by 47 percent in the first quarter this year. The prognosis is for the economy to shrink by two percent or more this year. The currency, the ‘real’, has lost half of its value in just over two years. This former export champion now has a trade deficit.
For Russia, the drop is similar - from 8.5 percent growth in 2006 and 4.5 in 2010 to - 4.6 percent in the second quarter this year. India has gone from 10.1 percent to 7.5 and China from 10.7 to, at best, 7 percent. However, those are the official statistics. Others, pointing to the big drop in electricity consumption, transport of cargo and producer prices, estimate China is on a 4 percent growth rate or less. Exports have been falling, as has manufacturing production. The purchasing managers’ index - a measure of economic activity - is well below 50, showing the manufacturing sector is not moving ahead.
Since China uses half of the world’s steel and other minerals, and a third of global rice and cotton, the effects will be seen everywhere. Commodity prices have been collapsing - by 40 percent over the last three years. “The drops are stunning. Oil falling by more than half in the past year, iron ore plunging by a third, coal and copper by more than a quarter. Even prices for wheat and corn have fallen by more than half in two years,” the AP news agency reported. China’s trade with Africa, for example, is now half compared to its peak of a few years ago.
At a faster pace than their GDP growth, the emerging market countries increased their debts. Capital from quantitative easing in the US and elsewhere flowed into credit, shares, direct investments and bonds. (The EM bond market doubled in 2010-2014.)
Now the flow has turned. In 2015, up to August, 40 billion US dollars left the stock markets in EM countries. That is 40 percent of the inflow in the years 2009-2013. From 2007 to 2013, emerging market countries accounted for half of the increase in global debt.
The combined debt of households, non-financial companies and the state compared to the GDP of these countries has increased dramatically - for Malaysia from 49 percent to 222 percent and Thailand from 43 percent to 187 percent. In Taiwan it increased more than tenfold from 16 -178, South Korea from 45 to 231 and Brazil from 27 to 128 percent of GDP. (Figures from Financial Times, 2 April 2015). China’s debt as a share of GDP increased from 83 percent to 250 or even more according to some estimates.
The recent G20 meeting tried to put on a brave face, stating they “will refrain from competitive devaluations, and resist all forms of protectionism”. However, this is the total opposite of what is taking place.
A wave of devaluations has already taken place this year. Following China’s surprise devaluation in August, eight other countries devalued their currencies, among them Indonesia, Thailand, Vietnam (for the third time this year) and Kazakhstan.
A website specialising on currencies has reported that since 2014, the currencies of key emerging markets such as “Russia, Colombia, Brazil, Turkey, Mexico and Chile have fallen by 20-50% against” the US dollar.
However, the expected effect - to increase exports - has not taken place. Instead, weaker currencies have reduced imports and thereby reduced world trade. With increasing economic nationalism, exports are losing their role as a force for economic growth.
Will the Federal Reserve raise interest rates?
The most twisted financial policies ever – with, from 2008 onwards, quantitative easing, zero or negative interest rates and operations to save banks etc.– have probably meant the serious crisis ended in a Great Recession instead of a Depression as in the 1930s.
Two years ago the plans announced by the Federal Reserve to stop quantitative easing caused a first wave of negative impetus for the world economy. Now, the plans to raise US interest rates (the federal funds rate) is behind much of the present anxiety in EM countries.
The Fed has not raised interest rates since 2006 and has kept them at between 0 and 0.25 for the last seven years. The main argument for raising them is the fear of new, even larger, financial bubbles and the need to return to “normality”. But the recent turmoil, particularly the Chinese stock market fall and devaluation, has made it less likely they will go ahead with a rate rise planned for 16 September. Among those hesitating is William C. Dudley, president of the Federal Reserve Bank of New York.
Not only finance
The repercussions, however, will not be limited to financial markets. The downturn in China has already slowed trade. Chinese imports in August were down 14.3 percent year on year and exports fell 6.1 percent. This has already had its effects on industrial production, for example in the US and in Britain. Canada, Japan and France are other G7 countries that are struggling to have any growth at all.
For the US, the oil boom has helped create new jobs. Consumption is the main factor behind its growth. But the rise of the dollar against other currencies is now causing new problems, with exports going down and imports increasing. Maybe as many as a third of the new jobs in the US since 2009 are in exports. A rise of the interest rates would increase the upward pressure on the dollar.
The “unorthodox policies” have also twisted the political consequences of the crises, with waves of protest and revolts of a mass character in up to 90 countries over the past five years (Tunisia, Egypt, Turkey, Brazil etc.). Many workers and youth have seen through neo-liberalism and the market. The market policies adopted have not given way to any democratic opening; on the contrary, most regimes have increased repression to stay in power at the same time as corruption has also increased.
The “saving” of the world from a Depression has also created a new artificial self-confidence among the capitalists and politicians. They were able to survive.
Alongside the will of the masses to struggle, new forces and trends have emerged indicating the strong will to find a new alternative to the left in politics. Few of them, however, have offered a real alternative to capitalism or attempted to organise the working class.
Possible new turning points in the world economy will also have new political effects. A bigger layer than before will see capitalism as the reason for crises and understand the need for a socialist alternative.