Thursday, August 11, 2011

where will growth come from?

NYTimes | Never has the world economy depended so much on the success of developing nations. A misguided focus on budget cutting has plunged the European Union and the United States down paths that will prolong their economic stagnation and perhaps tip them into another recession. The International Monetary Fund was forecasting 2 percent growth in the euro zone before the financial crisis spread to Italy. The Japanese economy is shrinking. Some top economists put the odds of a double-dip recession in the United States at 1 in 2.

These dire prospects, along with the realization that economic policy is blocked by political gridlock in the United States and complacency in Europe, have sent spasms through financial markets, which could further sap growth. Fortunately, developing countries, which account for almost half the globe’s economic output, are growing faster than the industrialized world: in June the I.M.F. forecast that they would grow some 6.5 percent this year and next. Their growth spares the world utter economic stagnation.

Yet developing countries are not robust enough to keep the global economy from sinking in a morass for long. Their economies remain vulnerable to financial turbulence and economic weakness in wealthy nations.

Even a flood of money moving to developing nations, as investors react to the lack of growth in the industrial world, would create new challenges. It would stoke inflation and asset bubbles in developing economies: annual inflation in Brazil is running at 6.85 percent. And it would push up the value of their currencies, hindering exports.

China, the biggest developing economy, is still more a caboose than a growth engine, dependent on rich countries to buy more than 40 percent of its exports. In 2009, China led efforts to help the global recovery, investing heavily in infrastructure and boosting consumer spending, but today it is taking the opposite tack and trying to combat inflation, which is running at 6.4 percent.