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Developing Countries and Deflation - Essay Example

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Developing Countries and Deflation

A year after Roach's controversial report, Goldman and Sachs published a Global Economics paper entitled "Dreaming with BRICs: The Path to 2050". In this report, the authors surmised that given the 'right' growth conditions and a lot of luck, four of the biggest developing countries namely Brazil, Russia, India and China (thus forming the BRIC acronym) could become the largest economic force in the world in 50 years possibly even surpassing the G6 economies (US, Japan, UK, France, Italy and Germany). Like China, the economies of Brazil, Russia and India have influenced the decline of consumer prices in the world. If there is any empirical basis on the notion of China's alleged spread of deflation, would it not be reasonable to suggest that the rest of the BRICs could have the same effect on the world's economy This paper aims to examine if such generalization regarding deflation shifting could indeed be applied to all of the BRICs as the world's largest developing countries. ...
ntinuously as determined by aggregate measures such as the Consumer Price Index (CPI) or the Gross Domestic Product (GDP) deflator (Kumar et al, 2003). In such a case, economic activity and consumer spending are significantly reduced, which in turn cause a decline in prices, profits, trade, employment and productivity in general (Guardian Unlimited, 2006). The decline in price levels could either be due to a demand shock (a significant fall in the demand of goods and services) or a supply shock (significant increase in outputs while demands remain constant). In case of the former, a vicious cycle of declining asset prices, rigid financial policies and reduced nominal interest rates are likely to result. The situation could become more problematic if the expectation for even lower prices prompt consumers to postpone their spending. An extreme effect of this would be companies going out of business or severely cutting down on labor and production due severe inability to sell their goods or services, realize revenues and/or pay off outstanding loans. This perpetuates an even lower demand for goods and further decline in prices. Supply shocks, on the other hand, can result from more 'positive' events such as technological advancements, trade liberalization gains, productivity growth and strengthened confidence in the long-term effects of perceived political and economic stability. Under such circumstances, deflation could not be as costly as that in the demand shock effect since the price decline could only be a manifestation of temporary adjustment to a new equilibrium brought about by external, productivity-enhancing changes, e.g., IT revolution and deregulation, (Kumar et al, 2003).
Deflation in history

There are two periods in history when deflation occurred in ...Show more

Summary

In October of 2002, one of Morgan Stanley's chief economists, Stephen Roach, wrote and published "The Factor of China", a report documenting China's alleged transfer of deflation to the world through the export of its commodities. The report argued that coinciding with China's rapid growth was a significant decrease in local consumption causing deflation but with its continuous export of cheap commodities to the world's markets, it has rendered the countries producing the same commodities weaker in their production capacity…
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