INDIA/UNITED STATES - The advantages enjoyed by emerging economies when capital fled the recession- hit US market in search of higher returns are finally petering out.
With new stirrings of growth in America and hints by Federal Reserve chairman Ben Bernanke about paring down the stimulus, the outflow of capital back to the US has begun.
While such a turnaround could have been anticipated, the weak performance of emerging markets, especially China and India, was not.
China's failure to come to grips with its debt overhang, and India's preoccupation with populist economic policy could combine to drag the world economy down.
In its mid-year estimate, the International Monetary Fund pared its earlier projection of global growth.
"While old risks remain", the IMF warns, "new risks have emerged, including the possibility of a longer growth slowdown in emerging market economies" due to sustained capital flow reversals.
The old risks are lacklustre growth in the developed world, with continued recession in Europe creating weak demand for exports from emerging economies. Falling commodity prices add to these woes.
The IMF calls for policy action to reverse the trend. But judging from developments in two of the largest emerging market countries, China and India, concerns for regime stability and short-term political considerations, respectively, take priority over reforms.
Recent trade data from China (after the IMF forecast China's growth falling to 7.7 per cent) shows unmistakable signs of a slowdown.
With exports dropping by 3.1 per cent from last year and the government attempting to curb investment in property, the two principal drivers of Chinese growth are losing steam.
Meanwhile, low wages and high housing costs are acting as a drag on the private consumption that China hopes to harness to stimulate growth.
To revitalise the economy, Beijing needs to clamp down on shadow banking, which has created a huge overhang of hidden debt.
As the government jostles with these problems, Professor Michael Pettis of Peking University says China's long-term growth rate could average a decidedly humdrum 3-4 per cent.
India also stands on the precipice of squandered opportunities.
Despite successive years of good agricultural harvests, which have given India a cushion, the sinking rupee, rising inflation and woefully inadequate infrastructure, with corruption and policy paralysis, have dampened the nation's growth prospects.
Poor management of the public food distribution system has already caused substantial waste, which could be further aggravated by a fiscally irresponsible Right to Food programme.
While mass malnutrition in a country with surplus foodgrain is shameful, the government's populist programme could raise the total cost of subsidy to US$25 billion (S$32 billion), adding to a burgeoning current account deficit.
India's reserves now cover less than six months' worth of imports. Ever since Mr Bernanke hinted at a possible stimulus slowdown, paving the way for a rise in longterm interest rates, capital outflows from emerging countries have increased.
Already some US$7 billion has flowed out of India. The knowledge that over US$170 billion of the country's US$390 billion foreign debt is coming due this year could make it difficult to raise more loans.
The attempt to find a shortterm solution to the current account problem by allowing foreign investors to own 100 per cent of a telecoms company, up from 74 per cent, and raising the foreign direct investment (FDI) ceiling in defence-related companies to 49 per cent from 26 per cent may be a bit too late.
The regulatory environment remains unpredictable. A highpowered Cabinet committee set up to expedite launching of approved FDI projects has been able to clear only a tiny part.
For a long-term solution, India will have to first set its policy house in order. And that, in turn, may have to wait till the general election next year. Meanwhile, sputtering Asian economies can only add to the gloom about the global economy.
The author is editor-in-chief of YaleGlobal Online, published by the MacMillan Center, Yale University.
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