Global slowdown hits developing countries

India’s economy is also slowing. GDP growth fell to 5.3 per cent in the first quarter of this year.

Developing countries are increasingly being adversely affected by the economic recession in Europe and the slowdown in the United States. The hope that major emerging economies like China, India and Brazil would continue to have robust growth, decoupling from western economies and becoming an alternative engine of global growth has been dashed by recent data showing that they are themselves weakening.

Just as during the 2008-2010 global crisis, a decline in exports caused by falling western demand is the main way in which the developing countries are being hit. The inflows of capital into developing countries have also slowed down, and a reversal to a new outflow situation may well take place. The lending conditions of banks in emerging economies have also deteriorated, according to a banking industry survey. Recent reports confirm the slowdown in many major developing economies.

In China, growth of the gross domestic product (GDP) fell to 7.6 per cent in the second quarter of this year, denoting a continuous deceleration from 10.4 per cent in 2010. China’s export growth has been sinking rapidly. Exports in July were only 1 per cent higher than a year ago, far below the 11.3 per cent growth in June, indicating that China will not be able to rely on its export-led model for further growth in the near term.

India’s economy is also slowing. GDP growth fell to 5.3 per cent in the first quarter of this year. The International Monetary Fund (IMF) has lowered its growth projection to 6.1 per cent for 2012 overall.  This compares to 6.5 percent last year and 8.4 percent in the preceding two years. The country's external trade situation has also deteriorated. Exports fell 5.5 per cent in June, compared to the strong growth during much of last year.

Growth projection
In Brazil, the government on July 20 lowered its growth projection for 2012 to 3 per cent. The IMF's latest growth estimate is even lower at 2.5 per cent. Argentina had one of the fastest growing economies in the world. GDP growth was 8.9 per cent in 2011. But the economy contracted by 0.5 per cent in the 12 months to May.

A report by the London-based Overseas Development Institute has predicted that the fiscal austerity measures by European countries will affect African countries through export decline and declines in remittances, foreign investment and aid. It is said that Mozambique, Kenya, Niger, Cape Verde and Cameroon are among the most vulnerable African countries to the Eurozone crisis as they are highly dependent on trade with Eurozone countries, while some are also linked through aid, strong financial linkages or pegging of their currencies to the euro.

The prevalent view about the prospects of developing economies has almost suddenly changed from their being the emerging leaders of the global economy to their also being victims of the western slowdown. In July, World Bank president Jim Yong Kim warned that the debt crisis in Europe would hurt most regions in the world. If a major European crisis develops, the developing countries economic growth rate could be cut by 4 per cent or more, he predicted. Even if the Eurozone crisis is contained, it could still reduce growth in most of the world’s regions by as much as 1.5 per cent.

Also in July, the IMF in its latest world economic outlook gave a downbeat picture of how developing countries are now being adversely affected by the European and US economic situation. It warned that the ability of governments worldwide to respond to the new slowdown has become limited.

A paper by Yilmaz Akyuz, chief economist of the South Centre, shows that the theory of the ‘staggering rise of the South’ had vastly exaggerated the developing countries’ de-coupling from the economic fortunes or misfortunes of the developed countries.
The high consumption growth in the US was a main basis for the high growth of manufactured exports from China and other East Asian countries, and these together also underlay the boom in commodity prices that lifted growth in Africa and South America. The boom in capital flows into major developing countries also helped to fuel their growth and covered the current deficits of several of them.

The global crisis in 2008-2009 slowed down the developing countries’ export growth and reversed the capital flows, but the strong anti-recession actions in developed countries resulted in the resumption of export growth and capital inflows in the developing countries.

However, with the developed countries ending their reflationary policies and instead switching to austerity budgets and with their low interest rates having little effect, the recessionary conditions in Europe are now impacting adversely on developing countries. With the positive conditions that supported the South’s rise no longer in place and in fact turning negative, the developing countries’ prospects have dimmed, prompting the need for a change in development strategy. 

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