Today, investors, policymakers, and businesses have several reasons to devote much more attention to these transitions. For starters, with a GDP that is as large as the combined total of the other BRICS countries (Brazil, Russia, India, and South Africa) plus Indonesia and Mexico, China has raised the stakes considerably. Sustained Chinese growth, or its absence, will have a significant effect on all other developing countries – and on the advanced economies as well.
Second, the developed economies are out of balance and growing well below potential, with varying but limited prospects for faster growth on a five-year time horizon. By contrast, emerging economies, with their higher growth potential, increasingly represent large potential markets to tap.
Third, a majority of the large emerging economies (Indonesia, Brazil, Russia, Turkey, and Argentina, but not China) unwisely relied on large inflows of abnormally cheap foreign capital, rather than domestic savings, to finance growth-sustaining investments. As a result, their current-account balances deteriorated in the post-crisis period.
Now, with the onset of monetary tightening in the advanced economies, the imported capital is leaving, in a slightly panicky mode, creating downward pressure on exchange rates and upward pressure on domestic prices. The adjustment now underway requires launching real reforms and replacing low-cost external capital with domestically financed investment.