Is the BRICS rise over?

The BRICS name is cer­tainly here to stay, and in terms of global gov­er­nance, their in­flu­ence is likely to rise as a group be­cause of the agree­ment to set up a joint devel­op­ment bank, says the man who coined the term ‘BRICS’

Financial Mirror (Cyprus) - - FRONT PAGE -

On one level, this seems like a rather odd time to be ask­ing such a ques­tion, es­pe­cially when the BRICS po­lit­i­cal lead­ers have just agreed to set up a joint devel­op­ment bank to be head­quar­tered in Shang­hai. So the BRICS name is cer­tainly here to stay, and in terms of global gov­er­nance, their in­flu­ence is likely to rise as a group be­cause of this devel­op­ment. Pre­vi­ously, the BRICS po­lit­i­cal lead­ers meet­ings had failed to agree any­thing spe­cific and even once the cre­ation of such a bank was first mooted, for the past two years, they ap­peared to have dif­fi­cul­ties in agree­ing where it might be lo­cated and how it should be cap­i­talised. At this Fon­taleza meet­ing in Brazil, they have con­founded scep­tics by agree­ing not only both these key things, but also to have the first head of the Bank to be an In­dian. What the Bank will pri­ori­tise in terms of lend­ing and projects, we will have to wait and see, but one can think of many good ideas in­clud­ing shared road and rail in­fra­struc­ture chal­lenges, es­pe­cially those with some com­mon bor­ders, projects for en­ergy ef­fi­ciency, al­ter­na­tive en­er­gies, clean and safe wa­ter, and of great im­por­tance to them­selves, to fo­cus on the grow­ing re­sis­tance to an­tibi­otics, a chal­lenge that if a so­lu­tion can­not be found will be very harm­ful for their fu­tures.

But if the BRICS lead­ers hadn’t made this break­through, I am sure the siren ris­ing about the end of the BRIC eco­nomic phe­nom­ena would be even louder and it is im­por­tant to try and ob­jec­tively deal with this, separately from this an­nounce­ment, im­por­tant as that is.

So, let’s deal with the case as to why the BRIC story might be past its prime. Some ob­servers be­lieved that the whole no­tion of a group­ing of Brazil, Rus­sia, In­dia and China never made any sound sense be­cause be­yond hav­ing a lot of peo­ple, they didn’t share any­thing else in com­mon. In par­tic­u­lar, two are democ­ra­cies, and two are not, ob­vi­ously, China and Rus­sia. Sim­i­larly, two are ma­jor com­mod­ity pro­duc­ers, Brazil and Rus­sia, the other two, not. And their lev­els of wealth are quite dif­fer­ent, with Brazil and Rus­sia well above $10,000, China around $ 7-8 k, and In­dia less than $ 2k per head. And the scep­tic would fol­low all of this by say­ing, the only rea­son why Brazil and Rus­sia grew so well in the past decade was sim­ply due to a per­sis­tent boom in com­mod­ity prices, and once that fin­ished, as ap­pears to be the case now, then their economies would lose their shine, as in­deed ap­pears to be the case. Throw in that China would in­evitably be caught by its own sig­nif­i­cant chal­lenges at some point, which the doubters would say, is now, then all is left is In­dia, and if it weren’t for the elec­tion of Modi re­cently, there has not been a lot to jus­tify struc­tural op­ti­mism about that coun­try re­cently.

It is fac­tu­ally the case that all four BRIC coun­tries have seen their GDP growth rates slow sharply in this decade. From 2011-13, China has grown by 8.2pct com­pared to 10.5 pct the last decade, In­dia has slowed to 4.6pct , down from 7.6, Brazil has grown by 2pct, down from 3.6, and Rus­sia , some 3pct, com­pared to 4.6pct. So all four have grown less, and in all cases, there are plenty of is­sues to worry about.

But, let’s now start to get se­ri­ous. Be­cause of China’s huge im­por­tance, the weighted av­er­age per­for­mance of the BRIC growth rate since 2011 is 6.5pct. Now this is down from 7.9pct the last decade, but higher than the pre­vi­ous two decades. China to­day is one and a half times the size of the other three put to­gether, so its in­flu­ence on their com­bined growth rate is more im­por­tant. Re­lated to this, the BRIC coun­tries com­bined GDP is nearly as large as the US, and by end 2015, it will be the same size in cur­rent US$. (In PPP terms, it is al­ready sub­stan­tially larger than the US). So even with slower growth, the BRIC coun­try’s eco­nomic in­flu­ence is on the rise. In US$ terms, they are con­tribut­ing decade to date more than 3 times to the world econ­omy that of the US, and ob­vi­ously in PPP terms, even more.

So, the idea that the im­por­tance of the BRICs is over is re­ally not a cred­i­ble ob­jec­tive eco­nomic is­sue. (note I don’t make any in­clu­sion of South Africa as that econ­omy is so small, it is not jus­ti­fied to be re­garded in the same eco­nomic sphere. It is ac­tu­ally not even the largest econ­omy in sub-Sa­hara Africa any­more, Nige­ria is to­day. And there at least 8 other so called emerg­ing economies are much big­ger than South Africa, some of them at least 3 times)

What is un­doubt­edly true is that the RATE of BRIC growth has slowed, but while this might be a sur­prise to the ca­sual observer, it cer­tainly isn’t to most who fol­low them closely. In fact, the 6.5pct decade to date is just 0.1pt less than I had as­sumed in 2010 that they would grow by 6.6pct. China, cru­cially is ac­tu­ally grow­ing by more than I as­sumed, so far by 8.2pct, ac­tu­ally more than the 7.5pct I as­sumed. This is com­pen­sat­ing for the weaker growth in the other three, which in­deed has dis­ap­pointed my ex­pec­ta­tions, es­pe­cially Brazil and Rus­sia, and to some de­gree In­dia. So it might be truer that the BRIC story decade to date has been purely sup­ported by China, and with­out that, then the dis­ap­point­ment might be much more jus­ti­fied. And it would fol­low that if China is about to slow a lot fur­ther, which many scep­tics think, then the BRIC eco­nomic story would be­come marginally less.

The prob­lem with this line of think­ing is that while there are con­sid­er­able chal­lenges for China, in many cases, there is ev­i­dence that the pol­i­cy­mak­ers are ris­ing to those chal­lenges and try­ing to deal with them, which I might point out is quite dif­fer­ent from many other coun­tries that of­ten ig­nore them un­til they cause mas­sive crises. For ex­am­ple, how many read­ers can re­call any coun­try de­lib­er­ately try­ing to stop house prices ris­ing as China has- pos­si­bly­suc­cess­fully-done? A cou­ple of years ago, peo­ple wor­ried about hous­ing bub­bles in Bei­jing and Shang­hai, they don’t talk about that any­more. Why? Be­cause the prob­lem has eased due to pol­icy. To­day the scep­tics fear bub­bles in so-called sec­ond and third tier cities, but I think there is a rea­son­able chance that the pol­i­cy­mak­ers will deal with them es­pe­cially with so many mi­grants still to mi­grate and, now, to re­ceive proper full blown ur­ban cit­i­zen rights in­clud­ing house own­er­ship. And more im­por­tantly still, is the data it­self. Af­ter months of clear slow­ing, much of it, in­clud­ing the re­cent PMI’s and June’s raft of eco­nomic data has all im­proved fur­ther, and from what I can see, 7.5pct looks to be in the bag for 2014, if not a bit stronger.

I do be­lieve each of Brazil and Rus­sia have got some chal­lenges to face, that they are not yet con­fronting, which at the core is to re­duce their de­pen­dency to the com­mod­ity cy­cle, and while there are many dif­fer­ences be­tween them, they do both need to be­come more com­pet­i­tive and en­tre­pre­neur­ial out­side of com­modi­ties and to boost pri­vate sec­tor in­vest­ment. Which leaves In­dia, about who I have to say, fol­low­ing the re­ally pow­er­ful elec­tion vic­tory of Modi, I think there are clear rea­sons to ex­pect big pol­icy im­prove­ments, and I now don’t en­tirely rule out that this coun­try could still match my 7.5pct ex­pec­ta­tion for the decade. It will be re­ally dif­fi­cult, but what is quite likely is that they may grow more than 7.5pct in the sec­ond half of the decade, and pos­si­bly faster than China.

So the BRIC eco­nomic story over? I think not, even with­out their his­tor­i­cally im­por­tant de­ci­sion to cre­ate a shared devel­op­ment bank, the con­se­quences of which we are set to learn about.

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