Stretched budgets and sluggish growth are putting emerging-market governments on a collision course with rising pressures from recently empowered middle classes for more spending and better services.
From Jakarta to Brasilia, policy makers face the end to an era of abundant global liquidity that helped fuel the fastest expansion in three decades. In the eight weeks through July 17, investors pulled $40.3 billion from emerging-market bond and equity funds amid signs the Federal Reserve may begin reducing stimulus later this year. In 2012, $111 billion poured into these asset classes, according to EPFR Global in Cambridge, Massachusetts, which tracks money flows.
The Fed’s plans didn’t trigger the slump — after a decade of prosperity, the BRIC economies of Brazil, Russia, India and China (SHSZ300) have been slowing since 2010. Developing nations are punished more during downturns than their European counterparts because they depend on growth to mitigate social tensions, said Angel Gurria, secretary-general of the Organization for Economic Cooperation and Development.
“The needs are much more elementary and brutal,” said Gurria, a former Mexican finance secretary, in a July 19 interview in Moscow. Families live with “vermin because they don’t have cement on the floor, and when there’s a big wind it blows off the roof. This isn’t the problem the middle class in the Netherlands face.”