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It may be time for emerging market investors to acknowledge the truth: the problem is not just cyclical, it is structural.
One of the puzzles of recent months is the underperformance of emerging markets compared to the rather more sclerotic and central-bank dependent developed world. Thus far this year emerging market stocks are down about 6.5 percent and trail developed market indices by a full 11 percentage points.
Given that growth in emerging markets seems to have bottomed late last year, you would normally expect the reverse, accompanied by strong commodity markets prices and supportive central bank policy.
Instead performance is poor and central banks in China and Brazil have actually tightened.
"The primary emerging market problem is a structural one: of allocation of capital to a strategy whose time has passed," Patryk Drozdzik and Manof Pradhan of Morgan Stanley write in a note to clients.
"As a result, cyclical tools have been used in the past (and continue to be used even now in many places) to treat a structural malaise."
The structural problems vary, from an underdeveloped consumer economy in China to over-reliance on state industry in Russia, but in all cases the use of fiscal and monetary measures to goose growth in 2009 and 2010 may not have been the best medicine.
In fact, without structural reform, fiscal stimulus and easy monetary policy have only had the effect of worsening existing imbalances, leaving many of these economies less able to face their challenges as time goes on. That is precisely why Brazil and China have been forced to tighten at this point in the cycle, when normally you'd expect them to be able to allow the economy a bit of room to run.
China's challenge is fairly straightforward - it is massively dependent on investment and has little consumption in its economy to provide a counter-balance.
A very thin social safety net and a poor choice of savings vehicles mean Chinese households save more than they otherwise would, money which the banking system seems unable to allocate well. As a result, the banking system poses a risk and low-quality investments continue to enjoy a subsidy. Yet the obvious solution - liberalizing financial markets - carries with it its own risks, namely of a fast and bruising transition away from investment.
The upshot may be a long period of transition from investment to consumption, the Morgan Stanley authors argue, something that implies high risks.
RUSSIA AND BRAZIL'S DUTCH DILEMMA
Russia and Brazil's issues are in some ways a product of China's hugely high rate of investment, in that both economies have concentrated on the production of the natural resources which China consumes. That has left manufacturing lagging, and makes investing in both countries a bit of a gamble on commodities, and on China.
You could make a case that both economies are flirting with what economists call "Dutch Disease," after what Holland suffered in the wake of its discovery of large gas fields in 1959. That drove wages and the exchange rate up, helping consumer spending but hobbling manufacturing.
Both Brazil and Russia show signs of this, but both have unique problems. Russia's economy is dominated by sometimes sclerotic state-run companies, while subsidized lending in Brazil also leads to misallocation of capital.
That makes the fall in commodity prices an opportunity for both countries, but one that can only be fully realized if they pursue painful and politically difficult reform.
Of the BRICs, India has the fewest structural issues and the most market-determined interest and exchange rates. Still it faces a lack of labor flexibility and a political system that is famously opaque and lacking cohesion.
The main issue is that emerging markets, having perhaps wasted their chances at deep reform in the past five years, now may face a difficult choice. If indeed growth is faltering in the rest of the world, not to mention China, what exactly will be the official policy reaction among the BRICs?
Would China loosen monetary policy and give another large fiscal boost? If so, its reliance on poor-quality, low-yielding investments will only grow, implying a yet greater reckoning somewhere down the line.
The hard work of structural reform will also be that much more difficult to do amid a downturn, even a mild one. If a downturn comes, emerging markets might continue to underperform developed ones.
If we muddle through and growth returns in coming months then a bet on the emerging markets, especially China, is a bet on structural reforms.