Economists examined the challenges and opportunities facing three key emerging economies — India, Brazil and China — in papers being prepared for a panel discussion at the Brookings Papers on Economic Activity (BPEA) conference on March 30.
India at 75: Full of contradictions, full of opportunities, full of challenges
New York University’s Viral Acharya writes that India could potentially become “the next game in town” as international manufacturers adopt a “China Plus One” strategy to diversify their operations beyond China. But to do that, it must focus on developing and maintaining sound policies, he writes.
India has enjoyed a K-shaped recovery since the start of the COVID-19 pandemic three years ago: Urban India has recovered but rural India is lagging behind, Acharya writes. He notes that India’s gross domestic product remains 6% lower than the pre-pandemic trend suggests, despite a booming stock market.
“The stakes are high, for India and for the world.”
However, India’s advantages include a strong interest in entrepreneurship among top university students, a healthy banking system and what is considered the best “digital installation” in the world, he writes. To reap its benefits, Acharya recommends India focus on reforms in five areas:
- Increase its share of global trade in goods by reducing its “far too high and protectionist” tariffs, perhaps through a calibrated three-year plan.
- Breaking up its anti-competitive industrial conglomerates by betraying trust, or at least reducing their market power through legal and regulatory changes that make it economically unattractive for them to stay big.
- Ensure that India’s bankruptcy law can handle insolvencies of large conglomerates by requiring them to draw up “living wills” to plan their resolution and independently reduce the 18-24 months it takes to resolve defaulting companies .
- Restore macroeconomic balance by recommitting to reducing budget deficits and further raising interest rates to bring inflation down to the Central Bank of India’s 4% target.
- Addressing skills and education gaps, for example by establishing public charter schools to provide quality STEM (Science, Technology, Engineering and Mathematics) education and by providing incentives for companies to bring more women into the workforce.
“Much is at stake for India and the world,” writes Acharya. “It would be nice if India could get it right in the coming decade.”
Challenges of Disinflation: The Brazilian Experience
Carlos Carvalho of Kapitalo Investimentos and PUC-Rio and Fernanda Nechio of the Federal Reserve Bank of San Francisco write that two previous bouts of above-target inflation in Brazil suggest it could be economically costly for the country to keep its postal Induce COVID-19 inflation up to central bank target.
The Central Bank of Brazil adopted an inflation target in 1999 and faced inflation well above target in 2002-05 and again in 2015-16. In both cases, fiscal concerns were high and expectations for future inflation were off target, the authors write. The central bank has had to hike interest rates significantly to bring down inflation and restore credibility – but both times at the expense of a recession, they write.
In response to the shutdowns and economic hardships caused by the pandemic, Brazil, like many other countries, has cut interest rates and rapidly expanded government programs to support households and businesses, the authors note. But like many other countries, fiscal and monetary stimulus, among other factors, have contributed to a sharp rise in Brazilian inflation since 2021. Expectations for future inflation dissipated around September 2021 and, according to the authors, have continued to fall since the October 2022 presidential election and promises of significant fiscal expansion.
“Brazil is all too familiar with the combination of fiscal concerns and unanchored expectations in a high-inflation environment,” the authors write. “The similarities between the previous two episodes suggest that unless policy changes direction, the road to disinflation will be extremely difficult.”
They note that Brazil’s experience could offer lessons for other countries, perhaps even advanced economies like the United States and the United Kingdom, also experiencing above-target inflation. They note that even for these economies, political credibility can be questioned.
Has China’s Growth Turned From Miracle To Disease?
Eswar Prasad of Cornell University and The Brookings Institution writes that China could continue to defy long-standing predictions of economic collapse if its leaders manage to reform its institutional framework, improve productivity and strengthen its financial system.
China’s growth over the past three decades has been remarkable, writes Prasad. Its gross domestic product in 2022 was 73% of the United States’ gross domestic product, more than 10 times the 7% rate in 1990. He discusses the sources of China’s growth and its vulnerabilities. He then highlights areas where reforms are needed to allow China to continue growing, albeit more moderately than previously in its long expansion.
“The fundamentals of China’s growth appear fragile.”
According to Prasad, China’s vulnerabilities include a weak financial and institutional framework, a bloated public sector and an authoritarian government. Still, the government has maneuvered the economy around various “plausible doomsday scenarios” over the years, he writes.
In order to sustain economic progress, China should better allocate the resources of its economy to the most dynamic parts (the service sector and small and medium-sized enterprises), Prasad writes. This requires repairing China’s banking system and financial markets, and tightening regulation. China’s banks must remove non-performing loans to state-owned companies from their balance sheets. And better corporate governance and accounting standards are needed to provide stock and bond investors with information about Chinese companies.
“The foundations of China’s growth seem fragile,” writes Prasad. “…Things that must end often end suddenly and in unpredictable ways. But if the government plays its cards right, one might as well envision a brighter future for the Chinese economy.”
CITATION
Acharya, viral. 2023. “India at 75: Full of Contradictions, Full of Opportunities, Saddled with Challenges.” BPEA Conference Draft, Spring.
Carvalho, Carlos and Fernanda Nechio. 2023. “Challenges of Disinflation: The Brazilian Experience.” BPEA Conference Draft, Spring.
Prasad, Eswar. 2023. “Has China’s Growth Turned From Miracle To Disease?” BPEA Conference Draft, Spring.
disclosure
Acharya served as Deputy Governor of the Reserve Bank of India from January 2017 to July 2019. Nechio served as deputy governor of the Central Bank of Brazil between July 2019 and May 2021. Carvalho was Deputy Governor of the Central Bank of Brazil between July 2016 and September 2019. The authors have not received financial endorsement from any company or person for this article, or from any company or person with a financial or political interest in this article. The authors are not currently an officer, director, or board member of any organization with a financial or political interest in this article.
