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World economy hitting a BRIC wall? | American Enterprise Institute

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Much has been written about the risks China that poses to
the global economy. This is hardly surprising considering that China has the
world’s second largest economy.

What is surprising, however, is that relatively little attention has been paid to the apparent running out of steam of the Brazilian and Indian economies. This is particularly the case considering that the so-called BRICS (Brazil, China, India, Russia and South Africa) now constitute around one third of the global economy and until recently have been the main engine of global economic growth. As such, those countries’ economic prospects have a key bearing on the world economic outlook.

Brazilian President Jair Bolsonaro prepares to deliver a speech during a Dialogue with BRICS Business Council & New Development Bank at the BRICS summit in Brasilia, Brazil November 14, 2019. REUTERS/Adriano Machado

Concerns about the Chinese long-run economic outlook would
appear to be well-founded. The Chinese economy is already slowing down markedly
as a result of the US-China trade war as well as of the prospect that the Hong
Kong political crisis could lead to an escalation of that trade war.

More ominously yet, China could very well soon experience a
lost economic decade as Japan did before it. This could happen as the result of
the prospective bursting of its epic credit bubble and of the highly unbalanced
state of its economy. Over the past decade, credit to the Chinese non-state
sector has exceeded 100 percent of GDP, which exceeds the size of Japan’s
credit bubble in the 1970s. Meanwhile China’s investment to GDP ratio has
averaged a highly unsustainable 45 percent or approximately double the
corresponding ratio in the United States.  

Troubling economic signs are also coming out of India,
another of the BRICS heavyweights, which could portend that India might be
headed for a lower long run economic growth path. Over the past year, India’s
pace of economic expansion has approximately halved from over 8 percent in 2018
to barely 4.5 percent in the latest quarter. This economic slowing is bound to
deepen the crisis in India’s shadow banking system, which has been a principal
cause of the country’s economic slowdown. It is also bound to aggravate the
country’s shaky public finances, which could prove to be a major headwind to
any future Indian economic upswing.

Compounding the bad news coming out of China and India are
increasing signs that the Brazilian economy is likely to remain stuck in the
relative stagnation that has characterized its economy over the past few years.
These include the Bolsonaro government’s decision to put its much needed
economic reform program on hold for fear of exposing Brazil to the political
and social unrest now sweeping through much of South America. Further
undermining investor confidence in the Brazilian economy are the country’s
large budget deficit, its high short-term external financing needs, and
President Trump’s recent decision to re-impose import tariffs on Brazilian
aluminum and steel products.

Sadly, the apparent stalling of the BRICS economic engine is occurring at an inopportune time for the global economy. According to the IMF, around 90 percent of the world’s economies are currently experiencing economic slowdowns. One would think that if ever there was a time for responsible economic policies and for decisive economic leadership from the United States, it has to be today.

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Thanks !

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