Emerging market economies, which had become the main drivers of global growth in the aftermath of the financial crisis, are now leading the world economy into a slump. Growth has fallen, business and consumer confidence are eroding, and financial markets have taken a beating in these economies. Most economic indicators point to a loss of growth momentum in China, with high-frequency indicators such as electricity consumption and freight volumes pointing to an even sharper manufacturing slowdown. While policymakers in China still have some room to boost growth closer to the seven percent target, the inability of monetary policy measures to gain traction in raising growth has elevated risks to the financial system and shaken confidence in the economic management skills of the leadership. These concerns have been exacerbated by recent missteps in managing stock market volatility and the shift to a more market-determined exchange rate, both of which have been marred by an unclear strategy and weak communication. Among the major emerging markets, India alone continues to maintain strong GDP growth, although industrial production and other indicators of economic activity suggest that the economy is in less robust shape. Disinflationary pressures remain a feature of many emerging markets as well. In China, CPI (consumer price index) inflation is around two percent but PPI (producer price index) deflation has intensified to nearly six percent. In India, CPI inflation has fallen below 4 percent, a sharp fall from about 10 percent just a couple of years ago. There is a different set of emerging markets experiencing a complex set of problems—stalled growth, high inflation, and falling currencies—stemming from macroeconomic mismanagement and political instability. Brazil’s economy is shrinking, inflation is close to 10 percent, and the value of Brazil’s currency has fallen by more than 30 percent against the dollar this year. Countries such as Russia, South Africa, and Turkey have all taken sharp hits to growth and currency values, often in tandem with high inflation. Monetary policy remains the go-to policy tool in most countries, with cheap money and weak currencies becoming the main hallmarks of aggressive countercyclical policies. However, the impotence of monetary policy in boosting growth and staving off deflationary pressures has become painfully apparent. The policy prescriptions for most economies remain much the same as in years past—a more balanced set of macroeconomic policies, accompanied by deep-rooted structural reforms. But few lessons seem to have been learned and absorbed by national leaders, who continue to rely largely on the convenient but wobbly crutch of monetary policy. Eswar Prasad is a Professor in the Dyson School at Cornell University and a Senior Fellow at the Brookings Institution. Karin Foda is a research associate at Brookings.

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