The Emerging Markets’ Problem (Among Others): State Capitalism

Nouriel Roubini, writing in Trouble in Emerging-Market Paradise lists reasons that the BRICS (Brazil, Russia, India, China, and South Africa) are in slowing down.

Reason No. 3 points to a systemic mistake, the adoption (or continued embrace, really) of state capitalism:

Third, most BRICS and a few other emerging markets have moved toward a variant of state capitalism. This implies a slowdown in reforms that increase the private sector’s productivity and economic share, together with a greater economic role for state-owned enterprises (and for state-owned banks in the allocation of credit and savings), as well as resource nationalism, trade protectionism, import-substitution industrialization policies, and imposition of capital controls.

This approach may have worked at earlier stages of development and when the global financial crisis caused private spending to fall; but it is now distorting economic activity and depressing potential growth. Indeed, China’s slowdown reflects an economic model that is, as former Premier Wen Jiabao put it, “unstable, unbalanced, uncoordinated, and unsustainable,” and that now is adversely affecting growth in emerging Asia and in commodity-exporting emerging markets from Asia to Latin America and Africa.

So much that’s been reported about China has been wrong, and the correction – in perception and, of course, inevitably in policy – will prove jarring to many.

Via Trouble in Emerging-Market Paradise.

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