Valdai Club

It is crucial for BRICS countries to realize that the main stimulus for the demand must come from the domestic market.

Amid falling commodity prices and other negative macroeconomic factors, some of the emerging markets have been hit hard, while others fare better. Valdaiclub.com asked Radhika Desai, Professor at the Department of Political Studies, University of Manitoba, what the BRICS countries could expect in the year 2016.

India and China will not suffer to the same degree as Russia, Brazil and South Africa, which are commodity-dependent, the Canadian scholar said. In particular, “India is projected to grow relatively well this year and has a fairly robust capital account management,” she stressed.

While the slowdown in China is creating some anxiety, these worries are highly exaggerated, Professor Desai believes. “Still, China faces a number of problems: one of them is the stock market turbulence and the other is the decline of renminbi,” she said. “There are specific causes related to both. The stock market turbulence can be really put aside, because the stock market is not structurally significant in China. And while it may be true that the Chinese authorities are not really clear about what to do with this, even if it crashes a lot, it is not going to affect the Chinese economy that much.”

An important part of the economic discourse in China is the debate about whether to liberalize capital control or to liberalize capital account. “I would say that for countries like China and, indeed, all emerging economies capital account management should be retained,” Desai pointed out. “If capital account is liberalized, it should be done extremely cautiously and in a very measured way. What has happened in China is that liberalization of capital account has gone farther than it should and what happened as a consequence is an enormous capital flight from China,” she added.

But the scholar believes the Chinese authorities are taking note and come to understand that the only way is to go back to a very cautious capital account management.

Desai singled out the US dollar overvaluation as one of the reasons behind the commodity prices freefall. “I think that the US dollar is going absurdly high,” she said. “There is no justification for it doing either on the basis of the real US economy performance or from the point of view of market. There is a great possibility that there will be another set of financial unraveling which is already happening in the stock market, so that there will be a lot of financial losses as well.”

However, the scholar believes that what she called the unreasonable rise of the US dollar will eventually come down. “The main lesson for the emerging economies which are doing badly is that they really must diversify their economy,” she concluded.

While discussing the possible factors of growth, Desai ruled out that it could be spurred by the US demand. “The US economy is not doing well. It has never recovered from the Great Recession. While some point to good employment figures, the reality is that this employment figures do not take into account the discouraged workers who do not even figure in unemployment statistics. The investment situation in the United States is not good either. The United States cannot be relied upon to provide any stimulus,” she said.

It is crucial for countries to realize that the main stimulus for the demand must come from the domestic market, Desai said. “For example, according to the more sophisticated analysts of the Chinese economy, it is becoming internally focused. It can have its internal problems, but nevertheless the driver of China’s economy is no longer the external demand. In fact, it never was: the role of external demand in China’s economy was always slightly exaggerated,” she elaborated.

“This is the lesson for all emerging economies: they must base their growth on domestic investment and domestic consumption. And for that, a higher degree of capital account management will be necessary,” Desai concluded.