After a decade of infatuation, investors have suddenly turned their backs on emerging markets. In the BRIC countries—Brazil, Russia, India and China—growth rates have quickly fallen and current-account balances have deteriorated. The surprise is not that the romance is over but that it could have lasted for so long.
From 2000 to 2008 the world went through one of the greatest commodity and credit booms of all times. Goldman Sachs preached that the BRICs were unstoppable (e.g. Wilson and Purushothaman, 2003).
However, Genesis warns that after seven years of plenty, “seven years of famine will come and the famine will ravage the land”. Genesis appears to have described the combined commodity and credit cycle, from which the Brazil, Russia, India and China have benefited more than their due.
Claudio Borio explained the nature of the financial cycle. Late Russian prime minister Yegor Gaidar showed how the commodity cycle impacted the Soviet leadership. During the oil boom in the 1970s, it was caught by hubris and neglected economic reforms. When the declining commodity prices hit in the 1980s, the Soviet leaders were incompetent, uninformed and unprepared, because they had faced too few problems for too long.
The boom was prolonged for half a decade by quantitative easing in mature economies, flooding them with cheap financing. During their years of plenty, the BRICs did not have to make hard choices. Today, their entrenched elites seem neither inclined to nor able to do so. Their lives have been too good.
Now all these booms are over: Brazil and Russia have been hit by the levelling out of commodity prices, which are widely expected to decline for several years; those two countries may also be caught in the ‘middle-income’ trap, that Barry Eichengreen, Donghyun Park, and Kwanho Shin warned of in a seminal paper. They found that countries tend to experience a sharp growth slowdown when gross domestic product per capita reaches about $17,000, which is the current level of Russia and Brazil.
Brazil, Russia, India and China have accumulated large foreign reserves, but they are not likely to help them. Russia is a case in point. In 1998, it ran out of reserves and had to cut enterprises subsidies sharply, which levelled the playing field and was a major factor behind the fast Russian economic recovery. In 2008-09, by contrast, the Central Bank of Russia spent $200 billion of its ample reserves. Essentially these funds went to inefficient