Still like your dal-bhat? Well, it is getting expensive thanks to the falling world markets. Traditionally, commodities have always driven a spike between industrialised economies and developing ones. This has been a normal trend as raw material prices have been soft and yielded adverse terms of trade vis-?-vis value-added industrialised exports. Add price volatility to that; it is yet another unwelcome dimension for commodity exporters. Even then, it was during the commodity boom that the christening occurred of Brazil, Russia, India and China. They became Bric in 2003 under the aegis of Jim O?Neill of Goldman Sachs. The year was also marked by the ongoing commodity boom that took-off in 2001. Commodities suddenly started to matter then, driving the Commodity Research Bureau (CRB) index to 132%.
Crude was up, as were copper, gold, accompanied by foodgrains, metals and energy. All of them hit fresh highs thanks to growing Asian demand?from China and India in particular. Amongst the other contributory factors were bigger emerging economy disposable incomes, plus (relatively) stronger OECD growth.
That momentum lasted until the July of this year, meaning that raw material producers never had it so good for almost eight full years. Exporters like Chile, Peru, Brazil, Kazakhstan and Russia saw the waxing of their hard-currency reserves, accompanied by currency appreciation. Some?like Brazil?even went ahead to retire international debt.
But there is a difference now. Not only has the current price slump marshaled together traditional commodity exporters like Australia, Brazil, Russia and South Africa. It has also pitted their interests against those of such net commodity importers as China, Japan, the US and the 27 European Union economies.
And it is not just stray chance that the trigger has been the US sub-prime crisis. The demand, and stock-market, slump that the crisis has engendered hits at the very roots of the US? proclivity for dollar seignorage and excess consumption?two factors that fuelled the worldwide growth in economic activity, overseen by an accommodative federal reserve.
Clearly, the party could not last, and matters started unravelling by July-end. Currently, there is every sign that prices must fall further before they can even begin to recover. Meanwhile, IMF estimates suggest that developing countries have accounted for 75% of world GDP growth (PPP-measure) in recent years.
Bric countries continue to motivate about 40% of global growth and the IMF says that the intensity of the current downturn in developed economies is such that the role of emerging markets might actually increase in 2009.
As for the Bric economies, they did their best in this environment by super-specialising?in services (India), manufacturing (China), minerals (Russia) and a combination of manufactures, minerals and agro-produce (Brazil).
The only downside to such specialisation is that it has left both Brazil and Russia dangerously exposed to the commodity price slump. But while Brazil?s is a diversified economy (it is the world?s fourth largest manufacturer of automobiles, an industrialised power and a topper in mass agriculture), Russia?s economy is far less so. It depends largely on mineral wealth and has been especially badly hit by the downturn in commodities.
Brazil?s situation was ably delineated on October 12 by Anoop Singh, director of the IMF?s western hemisphere department. He congratulated the country on its low inflation and debt retirement record. (In 2005, Brazil?s non-financial public sector primary surplus reached a record high, 4.8% of its GDP?well above the target of 4.25%).
Yet, Singh expected no serious relief for the region from US policies. Any such help, he said, would have to await the second half of 2009?and, even then, not much might be forthcoming since the Americans would have their hands full in the job of adjusting asset prices.
Russia, though, has been hardest hit by the commodity fallout. The most obvious instance of that is that the Russian economy is having to bear the export of crude at about $80 billion?almost $70 below the price, which had been attained (albeit fleetingly).
It is also suffering a lowered off-take and shorter order-books for metal exports, while there are (domestic) issues of taxation, pension-reform and the low efficiency of public-sector undertakings.
Finally, it is clear that Bric?s internecine differences have been coming clearly through from tussles over commodity prices and asset or investment adjustment. For example, commodity export prices continue to be a major factor for Brazil, but they (as well as Australia) have been running into serious dissonance with China, which wants to pay less as it is lowering steel production in line with the fall in world demand for manufactures.