Run out of steam?

As the rest of the developed world crumbled in the 2008 financial Armageddon, the BRIC (Brazil, Russia, India, China) countries seemed to hold fast to their economic boom.

 A healthy combination of large populations and rapid economic growth meant the BRIC nations were on track to become some of the largest economies in the world, with China predicted to be the biggest of all. But recently, the BRICs, along with other emerging market economies, have begun to experience a severe slowdown, leaving many to question whether these countries may be victims of their own hype.

However, the situation is complex and sometimes contradictory.

The malaise and uncertainty created by October’s partial shutdown of the US administration over failure to agree a budget has led to fears of another financial crisis enveloping the country. This has led to warning of potential adverse effects for businesses and economies across the globe, particularly those in the BRIC bloc that are reliant on continuous US investor funding.

The US Federal Reserve is also due to end quantitative easing, although an exact timeframe is unclear, meaning bond yields are likely to rise, dragging interest rates with them and ultimately putting emerging markets investors off. Richmond Federal Reserve president Jeffrey Lacker told a media conference in early October that the Federal Reserve could still reduce the pace of its bond-buying stimulus despite the government shutdown. A stronger US economy means high-risk alternatives in emerging economies become less attractive, leaving the BRIC economies facing a dearth of investors and an unstable future.

According to International Monetary Fund forecasts, growth in China will almost halve to 7.6% in 2013, in India by 3.8%, in Brazil by 2.5%, and in Russia by 1.5% over the next year.

The reason for such a sharp drop in fortunes is because developing countries are tied far more closely to first-world economies than at first thought. American economist Nouriel Roubini believes a period of overheating in 2010– 2011 left the BRICs and other emerging economies with growth figures above potential and inflation. The economies then tightened monetary policies, with negative consequences for growth that have carried on in 2012–2013.

“The idea that emerging-market economies could fully decouple from economic weakness in advanced economies was far-fetched: recession in the eurozone, near-recession and slow economic growth elsewhere were always likely to affect emerging-market performance negatively,” said Roubini.

Economists also argue that emerging markets, in particular BRIC countries, have developed their economies into a form of state capitalism, whereby economic activities are undertaken and driven by the government. Ultimately, this has suffocated private sector investment and depressed potential growth.