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The BRIC - States: World Economy on a Silk Thread
by Jorg Goldberg
Thursday Apr 11th, 2013 5:35 AM
The year 2013 has a good chance of making economic history. For the first time since the beginning of European industrialization, the production volumes of the so-called threshold- and developing countries will surpass the volumes of the triad, North America, Western Europe and Japan... The phenomenon of sinking real investments is true for all `developed' countries... Hardly anything happens in the real economy while the central banks flooded the financial industry with money free of charge.
THE BRIC-STATES: WORLD ECONOMY ON A SILK THREAD


by Jorg Goldberg


[This article published in April 2013 is translated from the German on the Internet. In a 2004 article “The Cure is the Sickness,” the German economist Jorg Goldberg decried the Washington Consensus of deregulation, privatization and liberalized markets. According to neoliberals, the invisible hand of the market changes private vices into public virtues. When the “medicine” fails, neoliberals only cry for more “medicine.” As an example, Grover Norquist got over 240 republican representatives to sign a No Tax pledge and now insists removing tax deductions for corporations is a new tax!]


The year 2013 has a good chance of making economic history. For the first time since the beginning of European industrialization at the outset of the 19th century, the production volumes of the so-called threshold- and developing countries will surpass the volumes of the “triad,” North America, Western Europe and Japan. According to the calculations of the International Monetary Fund (IMF), the share of 35 “developed” countries including the four Asian “tiger states” in the worldwide gross output will only be 49 percent. [1]


The economic crisis triggered in 2008 accelerated the catch-up process of the former “periphery” that was visible since the 1990s. Threshold- and “developing countries” have also felt the effects of the crisis to a lesser extent. Their economies are recovering more dynamically.


The economic slump since 2008 is described as a “great crisis” [2] that promotes structural changes of the world economy, a great distinction to the past great crises of the 20th century around 1929 and 1973 is striking. In those times, the consequences in the colonies or countries economically dependent on the colonial powers were deeper and more lasting than in the “mother countries.”


In contrast, the strong and seemingly self-sustaining economic dynamic of the global South today is expected to keep “developed” countries from enormous breakdowns. “Developing countries are still the most important drivers of global growth,” the World Bank said in its January economic forecast. [3] Jim O'Neill, that Goldman-Sachs investment banker who invented terms like “BRIC” and “MIST” [4], declared in August 2012: “The BRIC-states still have the potential of averting a worldwide recession.” [5]


THE RISE OF THE PERIPHERY


A glance at the development of world trade confirms this conclusion. The imports of t6he so-called threshold- and developing countries grew twice as fast in the last years as world trade altogether and three times the imports of industrial countries.

The current crisis (along with other transformations like the political strengthening of the financial markets) encourages the rise of countries of the former “periphery” [6]. The effects of this power shift that can hardly be ignored on worldwide economic perspectives are still inconsistent. The connection between the crisis dynamic in industrial countries on one side and the rise of threshold countries on the other side is more complex than the debate over an alleged “uncoupling” of the global South assumes.


Firstly, the assumed unity of this ascent process should be questioned. The division of threshold countries in groups like “BRIC” or “MIST” - which reflect the interests of financial investors in high profits more than real economic processes – masks the fragility and varying pattern of the developments in the individual countries. While China owes its rise to a catch-up industrialization – the country is the largest producer of industrial goods today -, most of the other threshold- and “developing countries” profit from the raw material boom which is strongly determined by Chinese need.


Many countries of the global South are still suffering under dependence on their one-sided economic structure specializing in raw materials. This is true for most Latin American states, for the countries of the former Soviet Union and obviously for vast parts of the African continent. On the other hand, India is only tied to the world economy in some areas and apart from that is strongly oriented in its domestic market.


Therefore the attention of economic observers concentrates on the situation in China. The central question today is whether the country can solve the inner contradictions of its economic development without stronger growth breakdowns and no longer to what extent China is affected by the crisis of industrial countries. The economic prognoses that are analyzed most closely are those for China.


CHINA: “WORKBENCH OF THE WORLD”


The Chinese foreign trade balance which has increasingly normalized in the last years is no longer central. Rather the high and increasing investments in the “workbench of the world” worry analysts. While the investment rate, the share of investments in the gross domestic product, falls in the “developed” countries and lies under 20 percent, it rises seemingly inexorably in China.


Two-thirds of Chinese growth now refers back to investments. This over-investment can be ended by tightening monetary policy (perhaps to combat inflation). Therefore the anxious question is: can Chinese economic policy successfully redesign investment-driven growth into a model oriented more intensely in private consumption, more just income distribution and improvement of social security without great production breakdowns?


The “principle hope” is important here. In the case of China, the economists of the World Bank who usually plead for a “sleek state” set their hope on Chinese institutions: “China's economic history suggests that China, possibly more than any other country, has the instruments to bring about such a transformation.” ]7]


If China does not succeed in reorganization and an abrupt collapse of Chinese investments occurs (triggered for example by a stricter monetary policy, export declines and/or over-indebtedness of private or public investors), those threshold countries would be first impacted that profit from rising prices and rising demand in the raw material market. This would doubtlessly ignite a new global economic crisis that would be more momentous than the collapse of 2008/2009.


INDUSTRIAL COUNTRIES: BOOMING FINANCIAL MARKETS AND FALLING INVESTMENTS


Even if attention is now mainly directed at the stability of the Chinese growth model, this is not the only world economic risk factor. Another danger is the opposition between the very slowly growing or partly shriveling real economies of rich countries on one side and the booming financial market5s on the other side. More than five years after the eruption of the economic crisis, the production level in industrial countries hardly exceeds the pre-crisis level of 2007. The decline could only be overtaken in the US. In the EU and in Japan, fewer goods and services are produced than before the crisis. A further decline of economic output is expected in the Euro zone in 2013.


The production breakdowns in the countries of the European periphery are very dramatic. In that periphery, the Troika of the European Central Bank, the IMF and the EU has ordered a strict austerity policy. However the economies of Great Britain, Netherlands and several smaller countries shrivel. They all have a very weak investment activity. Investments fall even in Germany that maintains its special role very well.


Referring to the whole EU, the 2012 and 2013 investment rate is at the low crisis level of 2009. The phenomenon of sinking real investments is true for all “developed” countries. It points to an insidious or (as in Greece, Great Britain and the US) quickly advancing de-industrialization process.


A deceptive peace and quiet now prevails on the financial markets whichh seduced the EU council president Hermann Van Rompuy to declare in January: “The worst is behind us.” Hardly anything happens in the real economy while the central banks flooded the financial industry with money free of charge. Then there was the news that 265 of the corporations on the European stock exchange have 360 billion euro in cash – three times as much as in 2002. Real estate prices are beginning to rise in an alarming way in some countries that like Germany have relatively stable housing markets. The state debts also grow despite – or on account of – the austerity policy...


Another consequence of the expanding financial markets are increasing financial streams in the threshold- and “developing” countries that reached the record 2008 level after a sharp collapse in the middle of 2012. These streams are by no means stable. Quite the contrary, the slightest shock can make them quickly dry up again.


Such a shock can be triggered by seemingly insignificant events given the unsolved indebtedness problems and the stagnating real economies of industrial countries. Tactless statements by central bankers, election results not approved by the “markets,” individual bank breakdowns and gloomy economic prospects in individual countries – all this can ignite a new financial panic that will strike back again on the real economy, even on the economies of China and other threshold countries.


The economic decision-makers of “developed” countries have fallen in a trap they created themselves. On one hand, they signal that the austerity policy “has no alternatives” (Merkel) to the financial markets. On the other hand, this kind of austerity policy obviously inhibits investment activity – both public and private – and undermines that process indispensable for a lasting reduction of the debt burden.


As a result, the world economy faces a new dangerous crisis constellation. Growth in the threshold- and “developing countries” that long supported the global economic development depends substantially on the Asian, above all Chinese process of catch-up industrialization. This process is helped along by the influx of money capital from the “developed” countries. The banks of these countries lend at low interests and attractive conditions that promote inflation tendencies there and thus put pressure on the monetary policy of receiver-countries. A long-lasting we4akeningof the productive capacities of industrial countries intensified by the austerity policy corresponds to that.


A policy stimulating expansive productive investments in both the public and private spheres would be necessary to stop and reverse this process. However governments like the Obama administration that see this necessity no longer have the fiscal possibilities needed for that. The “National Export Initiative” started in 2010 that should double American exports by 2015 is far from its goals. The US initiative for a free trade zone with the EU will only help both economic zones to a little more growth - if at all 0 in the very long term.


While the possibilities for an expansive growth-stimulating policy with indebtedness rates near or – as in the case of Japan – clearly above 100 percent of the gross domestic product are largely exhausted, monetary policy has lost any positive relation to the productive economy.


Like the rabbit staring at the snake, central bankers stare at the financial markets and are entirely aware of their fragility and overstretching. But their hands – and the hands of fiscal decision-makers – are ultimately tied. If the trust of investors is shaken again, that will inevitably strike back on the unstable economies in industrial countries, interrupt the money streams in threshold- and “developing countries” and plunge the world into a new global recession. Unlike 2008/2009, the governments – with record low interests and record high debt rates – can hardly counter such a development.


RELATED LINK:


Goldberg, Jorg, “The Cure is the Sickness,” 2004
http://portland.indymedia.org/en/2004/05/288843.shtml