The crash of 2016?

You cannot understand the vulnerable state of the U.S. and global economies — and nervous stock markets — without coming to grips with the crash of “emerging-market” countries. Led by China, these are middle-income countries that, along with the poorest countries, account for 85 percent of the world’s population and 60 percent of the global economy, according to Christine Lagarde, head of the International Monetary Fund.

In many ways, their voyage into the global marketplace is a triumph. Rapid economic growth, driven in part by trade and international investment, has catapulted hundreds of millions of people out of deep poverty. By World Bank estimates, about 13 percent of the world’s population lives on incomes of $1.90 a day or less, but that’s down from 37 percent in 1990 and 44 percent in 1981.

Robert J. Samuelson writes a weekly column on economics. View Archive
Unfortunately, emerging-market countries are now disappointing in ways that damage the world economy. After the 2008-09 financial crisis, a widespread expectation was that the rapid growth of emerging-market countries would create a safety net for the mature economies of the United States, Japan and the European Union. For a while, that happened. Since 2008, emerging-market countries have provided more than 80 percent of global growth, Lagarde said in a speech at the University of Maryland.

Compared with these heightened expectations, many emerging-market economies have crashed. China is at the epicenter of the problem. Its annual growth, once 10 percent, appears headed toward 6 percent. This, in turn, has led to a collapse in prices for raw materials (oil, metals, foodstuffs), because China’s demand has been weaker than expected. Commodity prices are down about two-thirds from recent peaks, Lagarde said.

The ripple effects have spread. Commodity-producing countries — Brazil, South Africa, Australia, Canada — have suffered setbacks. Companies that borrowed heavily to add capacity are now straining to repay debts. With prices depressed, some banks and bond investors may be stiffed. A Morgan Stanley analysis finds that most U.S. banks have ample reserves against likely defaults. This may be less true of banks in Europe and emerging-market nations. Facing large losses, emerging-market banks have already tightened credit, reports the Institute of International Finance (IIF), an industry group.

All this has revealed weaknesses in emerging-market economies that were camouflaged by the commodities boom. Brazil is struggling with high inflation, big budget deficits and a corruption scandal involving Petrobras, the national oil company. China is striving to “rebalance” its economy — shifting “from industry to services, from exports to domestic markets, and from investment to consumption,” as Lagarde put it. These problems are not superficial or easy to solve; they take time.


As a result, international trade and investment — engines of the world economy — are languishing. For many years, international trade grew faster than the world economy. From 1997 to 2006, trade expanded 6.8 percent annually compared with 4 percent growth for the world economy. The gap reflected greater globalization: more cross-border supply chains and more specialization. Now this is no longer true. In 2015, both trade and the world economy grew at about 3 percent.

The same thing has happened to foreign direct investment (FDI): factories and businesses in emerging-market countries owned by outsiders. In 2015, FDI in 30 emerging-market countries totaled $488 billion, down from a peak of $606 billion in 2011, says the IIF.

The United States cannot isolate itself from these realities. The weakening global economy would be less important if the U.S. domestic economy were booming. It isn’t. Americans spend cautiously because they’re still spooked by the shock of the 2008-09 financial crisis and Great Recession. Consumers try to protect themselves against a recurrence by raising their saving and reducing their debt. Businesses do likewise by skimping on investment projects.

The pessimism is often self-fulfilling. Consumers and companies act cautiously, producing a shaky prosperity that breeds more caution. To escape this trap, the U.S. economy needs a shove from abroad. The assumption once was that the boost would come from the emerging-market countries. This increasingly seems wishful thinking. It is hard to find large pockets of strong, confident growth anywhere in the world. This is the markets’ somber message: There is only a thin margin for error between continued recovery and dreaded recession.

Published in Washington Post at Feb 10, 2016