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China and Other BRICs Can’t Save the Slowing Economy, Tett Says

Daily Ticker

The world is looking for a bit of magic to save the slowing global economy. One potential solution tossed around by many observers lately has been growing demand from China and other emerging markets.

"Many experienced very rapid growth over the past decade, and most have recovered quickly from the 2008-2009 crisis," writes Dani Rodrik, professor of international political economy at Harvard's Kennedy School of Government, in today's Financial Times. He goes on to cite two optimistic assessments:

1) Citigroup predicts real gross domestic product will grow more than 9 per cent a year in Nigeria and India, and more than 7 per cent in Bangladesh, Indonesia and Egypt over the next two decades.

2) In a new Peterson Institute for International Economics study, Arvind Subramanian projects that aggregate output of developing and emerging economies will expand at an annual rate of 5.6 per cent over the same horizon.

But the thrust of Rodik's commentary is just as the title suggests: Don't expect China et al to save the world.

Gillian Tett, U.S. managing editor for the Financial Times, joined The Daily Ticker's Aaron Task to discuss the article and the role of the BRICs in today's slow-growth economy.

"The good news is that certainly the growth of the emerging markets has been a great support for the global economy over the last year or two," says Tett, pointing to the fact that in the same time 80% of global growth has come from the emerging markets. "The bad news is that these are still relatively small economies on the global stage [and] they are not enough, in themselves, to power a really strong global economic recovery, and they are certainly not enough to dig the West out of its hole."

But this is not only an issue of bolstering global demand. Emerging markets have also helped to fill the growing capital void in the Western world (i.e. the United State and European debt crisis). China, for example, owns more than $1 billion in U.S. Treasury bonds and is the largest foreign holder of U.S. debt.

That's the good news. But it won't likely last, says Tett. "Going forward, these emerging market countries are going to need quite a lot of capital themselves to actually finance their own growth."

To top that off, the U.S. dollar is not all that attractive of an investment these days. In recent months, there have been murmurs that China would find another safe have and dump most of its Treasury holdings due the U.S. debt crisis.

Tett isn't worried on that front for two reasons. First, China is also sitting on a vast pile of U.S. dollars and cannot afford to see them depreciate, which pulling out of the U.S. bond market would do. Second, for the time being, there is no better alternative to the U.S. dollar.

Tell us what you think! Can emerging markets save the slowing global economy?