With the world's largest financial system more or less eviscerated amid a scarcity of liquidity and a war-depleted Treasury Department limited in its ability to respond, circumstances would seem to favor the emergence of more multipolar economic world. Certainly, a waning of U.S. economic predominance was increasingly expected to be accompanied (and in part caused by) an ascendant China and India and, to a more limited extent, Brazil and Russia. Instead, the American-originated crisis that has gone global has spurred an investors' flight to quality and bolstered U.S. government debt. For all the weaknesses that the current economic crisis has demonstrated in the U.S. financial system and economy, it also appears to be dispelling the probability of an economically multipolar world taking form in the foreseeable future.
The crisis has highlighted India's economic vulnerabilities and the limits of its economic potential. China still appears, with its vast liquidity, to be the best positioned to withstand investors' recoil, reconfirming the advantage of producing actual goods that the rest of the world buys-or has been buying. But Beijing could face its own financial shock, should loans to government-backed companies become as risky and pervasive as the U.S. subprime loans have proven to be. China's financial system is so opaque, though, that its economic health remains unknown. Russia, with its reliance on commodity exports, is in economic distress. Some Russian officials may be residing well outside the "reality-based community" by downplaying, in signature Bushesque fashion, the scale of Russia's problems. Brazil, meanwhile, has seen its equities and currency dive and sovereign debt shunned.
The BRIC countries could, under more stable circumstances and on a gradual and more sustained basis, rise in economic prominence-relative to the United States. But the current financial morass is demonstrating that, for all of America's problems, the BRIC countries are facing troubles related to policy and industrial immaturity-problems that for a host of reasons will probably not be remedied quickly, especially during times of economic pain.
The equity markets of all BRIC countries have fallen in value and the currencies of Brazil, Russia and India are under pressure. The investors that are venturing back into the market are radiating towards China, while Russia is being largely sidelined.
Economists polled by Reuters expect that India's growth will be about 6.8 percent in the financial year ending March 2009, despite official Indian forecasts of more than 7 percent growth for the same period. India had grown at or above 9 percent for the past three fiscal years. The global crisis has hurt India's balance of payments, with gross international reserves falling by over $60 billion since April and the rupee depreciating 20 percent against the dollar, despite action by India's central bank to support the currency. India's factory output fell for the first time in more than thirteen years in October. Indian stocks are down 51 percent down on the year, despite a recent rally. Foreign investors bought $400 million of Indian shares in December, but remain net sellers of $13.3 billion this year.
The government has instituted a $4 billion stimulus package and has cut interest rates, with further cutting expected. It has also instituted market reforms to attract investment and stimulate growth, allowing domestic companies to borrow more abroad and introducing a special facility to help refiners raise foreign currency to pay for crude oil imports. It has also allowed banks to pay higher interest rates on foreign-currency deposits.
Still, analysts say the government needs to deepen reforms, such as allowing greater foreign ownership of domestic debt and removing the remaining restrictions on foreign direct investment. These policy changes can be difficult to institute during a recession, with economic pain generating greater protectionism and insularity.
The Brazilian real, meanwhile, has lost roughly a third of its value since its August levels, due to capital flight and the drop in commodity prices. The Brazilian government's reserves have been buoyed slightly by gains in the value of the U.S. Treasuries it holds. The Brazilian stock market is down more than 38 percent so far this year despite a recent rally.
The official version of Russian economic conditions depends on who is doing the talking. Russia's chief macroeconomic planner has said Russia might already be in recession, having seen 6 percent growth in 2008. That diagnosis was quickly disputed by Prime Minister Vladimir Putin and Finance Minister Alexei Kudrin, who is forecasting growth of as much as 3 percent next year. Barclays Capital reported on December 10 that the economy will sink into recession next year, after eight years of heady growth averaging above 7 percent. Russian industrial production has contracted most sharply since the economic crisis of 1998, due largely to a drop in global demand for steel, pipes and fertilizers.
Ratings agency Standard & Poor's has given Russia its first sovereign rate cut in a decade. Russia's central nank has spent roughly a quarter of its reserves attempting to support the rouble but has decided in the past five weeks to allow six mini devaluations of the currency. The Russian equity market is down 69 percent this year, despite repeated market suspensions-which may have further alienated investors.
The Chinese story is more mixed. The IMF has signaled it may cut its forecast for Chinese 2009 growth to around 5 percent, a precipitous drop from earlier double-digit surges and even the IMF's November forecast of 8.5 percent growth. In another sign of a drop in activity, China's demand for oil fell in November for the first time in nearly three years. Shanghai shares are down 62 percent this year.
Still, several Western brokerages have raised their rating on Chinese equities in the hopes of a rally. And China has announced an almost $600 billion stimulus package and cut interest rates in an attempt to keep growth above 8 percent. Given its vast reserves, it could inject even more liquidity should it choose to do so. Unlike many other emerging economies, China has not spent reserves to hold up its currency and one official said it still expected them to top $2 trillion by the end of the year.
Meanwhile, foreign and domestic investors have been buying up low-interest U.S. Treasury securities. Although U.S. equities have taken a dive since the subprime crisis erupted, U.S. government debt remains in high demand, pushing down yields to record levels. Last week, the yield on ten-year Treasuries hit a five and a half year low and the yield on thirty-year bonds dropped to 3.5 percent, its lowest level since it has been regularly issued, starting in 1977.
The global crisis will continue to profoundly impact the American. and global economy, but the demand for Treasuries will give the U.S. government broader options in dealing with the troubles, even if those options hinge on borrowed liquidity. Some countries, such as India, have proven to be more economically dependent on U.S.-fueled growth than widely presumed. China's financial standing, meanwhile, remains largely unknown, given its opaque accounting.
It seems increasingly probable, therefore, that while the U.S. economy will suffer in absolute terms, it may not fall behind much in relative terms. The sudden brake on America's brisk growth may just prompt global economic pain, rather than lead to a change in the global economic pecking order.
Ximena Ortiz is a senior editor at The National Interest.