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World Economy - A wing and a prayer

By
Real Estate Broker/Owner with James Pycha (R) - REMAX KAUAI

FROM THE ECONOMIST:

wing

This credit crunch will be grim, but most emerging markets can avoid catastrophe. The biggest ones are in relatively good shape. The more vulnerable ones can (and should) be helped.

Among the giants, China is in a league of its own, with a $2 trillion arsenal of reserves, a current-account surplus, little connection to foreign banks and a budget surplus that offers lots of room to boost spending. Since the country's leaders have made clear that they will do whatever it takes to cushion growth, China's economy is likely to slow-perhaps to 8%-but not collapse. Although that is not enough to save the world economy, such growth in China would put a floor under commodity prices and help other countries in the emerging world.

The other large economies will be harder hit, but should be able to weather the storm. India has a big budget deficit and many Brazilian firms have a large foreign-currency exposure. But Brazil's economy is diversified and both countries have plenty of reserves to smooth the shift to slower growth. With $550 billion of reserves, Russia ought to be able to stop a run on the rouble. In the short-term at least, the most vulnerable countries are all smaller ones.

There will be pain as tighter credit forces adjustments. But sensible, speedy international assistance would make a big difference. Several emerging countries have asked America's Federal Reserve for liquidity support; some hope that China will bail them out. A better route is surely the IMF, which has huge expertise and some $250 billion to lend. Sadly, borrowing from the fund carries a stigma. That needs to change. The IMF should develop quicker, more flexible financial instruments and minimise the conditions it attaches to loans. Over the past month deft policymaking saw off calamity in the rich world. Now it is time for something similar in the emerging world.

Comments (2)

James G. Pycha
James Pycha (R) - REMAX KAUAI - Princeville, HI
(R), REMAX Kauai Broker

Good Stuff Jim

Nov 02, 2008 12:53 PM
Jim Crawford
Long & Foster - Fredericksburg, VA
Jim Crawford Broker Associate Fredericksburg VA

Very good information here.  Thanks for taking the time to share.

Nov 02, 2008 12:59 PM