Monday, October 11, 2010

Why Are Brazil, China and India Weathering the Recession Better than the US and Europe?

David Wessel in the Wall Street Journal reports on a speech given by Michael Spence:

Why did China, India and Brazil all emerge so much more rapidly from the global financial crisis than advanced economies did? In a presentation in Denver to the National Association for Business Economics, Nobel Prize-winning economist Michael Spence, now of New York University, offered several reasons:

These economies learned bitter lessons in the 1997-98 crisis that afflicted them more than advanced economies.

They were in “a good initial position” with relatively low leverage, and thus didn’t get hit with the severe “balance sheet recession” that hit the U.S.

They hadn’t any complex securitized financial instruments.

They had built up large foreign-exchange reserves.

Their central banks responded, much as advanced countries’ central banks did, with speed and agility to the credit tightening.

Their economic managers displayed “a high degree of competence.”

“Is this sustainable? Will they keep growing? I think the answer is a qualified yes,” he said. “I wouldn’t have said that 10 years ago.”

Rapidly growing economies aren’t generating the ideas and technology to propel growth; rather, they’re using ideas and technology from advanced countries to catch up.

“There is no reason to believe that will stop,” he said, unless emerging markets make the major mistake of walling them off from the rest of the world, as Brazil did around 1975.

I think this is largely right, though the fact that they might not have created derivatives does not mean they were not exposed to exotic derivatives through international markets.

Adding to the sustainability of growth in emerging markets are two other factors, he said: One, they are increasingly trading with each other and thus are less dependent on now slow-growing advanced economies; two, they have become rich enough for their consumers to buy the goods they produce. Spence said that emerging markets can sustain rapid growth even if the advanced economies, including the U.S, grow slowly – but not if the U.S. succumbs to recession.

“There is partial decoupling, but by no means complete decoupling,” he said.


Continued rapid growth in emerging markets will be a plus for the U.S., but not a big enough plus to pull up U.S. growth, he said. “We can’t compete for that demand right now,” he said, “not for most of it.”

U.S. companies don’t make – at least not in the U.S. – many of the goods that emerging markets are increasingly demanding.

Which is a sobering note, but not quite right I think. I am bullish on China being a help to Oregon's economy, but I recognize the fact that we don't manufacutre a lot of the consumer goods that will be increasingly demanded by the country. But we do a lot of the designing of the products, a lot of the engineering and a lot of the making of the critical components.  In other words we do a lot of the value-added activities.

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