Tags: Roubini | BRICS | growth | economy

Roubini: BRICS Are in a Mid-Life Crisis

Tuesday, 28 Jan 2014 09:21 AM

By Dan Weil

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The BRICS nations — Brazil, Russia, India, China and South Africa — are suffering serious growing pains, says New York University economist Nouriel Roubini.

Their economic growth figures are sagging, he writes in a World Economic Forum blog.

So what are their problems?

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"First of all, while most of them implemented first-generation reforms, they failed to implement second-generation structural reforms that are more micro-based and boost productivity growth," Roubini argues. "As a result, their potential growth rate has fallen."

Second, in addition to eschewing market-oriented reforms, these countries have oriented themselves toward state capitalism, he says. That means "an excessive role of the public sector and state-owned enterprises in the economy," he explains.

"State capitalism may have worked at earlier stages of development and during the global financial crisis, which had prompted a fall in private spending, but it is now distorting economic activity and leading to a fall in potential growth, as investment becomes less efficient."

Third, the commodity super cycle has probably run its course, hurting commodity exporters such as Russia, Brazil and South Africa, Roubini states.

Fourth, the countries' macroeconomic policies were too loose in the boom years, "leading to overheating: excessive credit growth in part driven by excessive capital inflows; growing currency appreciation, which led to a loss of competitiveness and in some cases external deficit; and looser monetary and fiscal policy, given cheap external financing," he notes.

Fifth, in China and Russia, the population is aging.

Sixth, many BRICS will have trouble rising from a middle-income economy to a truly developed one, Roubini predicts. "World Bank studies suggest that only a small number of emerging market economies have escaped the middle-income trap, and as more emerging markets navigate from low to middle income, avoiding the trap becomes harder," he writes.

"Making the transition means moving from resource mobilization (of labor and capital) to sustained increases in total factor productivity growth, and requires innovation, investment in new technologies and the digital economy, an opening up of the economy and fostering of private-sector development."

But don't write off the BRICS. "In spite of the delays in the last decade, most may eventually shed a model of state capitalism and implement structural reforms that increase potential growth," he maintains.

"The macro weaknesses that some of them faced are solvable; none of them face the past risks of severe currency, sovereign or external debt crises." And the BRICS still have urbanization, industrialization, the rise of a stable middle class and development of a consumer-oriented society going for them, Roubini explains.

As for last week's emerging market turmoil, University of Pennsylvania finance professor Jeremy Siegel doesn't think it will turn into something as bad as the Asian currency crisis of 1997, which depressed currencies and financial markets in the region through the next year.

"I think what happened last week, for those of us with some gray hair, remember the Asian [currency] crisis of '97, people are beginning to say, oh, my God, is this the beginning of something that looked like that? That really shocked the market," he tells CNBC.

"I don't think Argentina and Turkey are anything like Korea, Thailand, Indonesia back 15 years ago."

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