2008 crisis and unravelling of the Brics

Export demand from the precrisis boom was a big driver of economic growth for the Brics countries. However, slow growth in world trade and threat of trade wars have curbed these tailwinds in the postcrisis world

NEWDELHI: In September 2006, representatives of Brazil, India, Russia and China met in New York on the sidelines of the United Nations General Assembly meeting, and expressed their interest in extending multilateral cooperation. The initiative was of historical significance as it was the first closely knit grouping of emerging market economies. It was the first ministerial meeting of what came to be known as the Bric countries, which preceded a summit in 2009. Bric became Brics with South Africa’s inclusion in 2010.

If one were to look at the share of these five countries in global gross domestic product (GDP), Brics would seem like an extremely successful initiative today. This figure increased from 14.5% in 2006 to 21.4% in 2017. The increase looks even more impressive when compared with the share of the US – the world’s largest economy – in global GDP. In 2006, the difference between the share of the US and Brics in global GDP was 9.9 percentage points. This came down to 0.2 percentage points in 2017. Nothing can be a bigger proof of increasing economic multi-polarity in the world than this (see Chart 1).

However, another set of statistics punctures the optimism around the convergence in GDP shares of Brics economies and the US. The GDP growth rate of Brics nations was significantly higher, and widening its lead, than the world-average and the US GDP growth numbers in the years before the first Brics ministerial meeting in 2006. It was this trend which probably gave the confidence to these countries to create a club of their own. This, unfortunately, was going to change very soon. In 2008, the US confronted its worst financial crisis in decades. Given the weight of the US in the world economy and its linkages with other countries thanks to globalisation, this soon mutated into a worldwide recession.

The global headwinds to economic growth were particularly severe for the Brics countries. Their GDP growth rate fell sharply, and even a recovery in the years since has not been able to restore to the Brics the pre-crisis edge they had in terms of economic growth rates over the world and the US (see Chart 2).

Both the statistics described above capture equalisation of important economic variables in the global economy. But given the fact the per capita incomes in Brics countries are significantly lower than in developed countries such as the US, there is an element of perversity in the equality in terms of GDP growth of advanced countries and emerging market economies.

Had the crisis not erupted and were purchasing power to remain at pre-crisis levels in the world, especially in advanced countries, export demand would have continued to power the growth engines of developing countries, especially the Brics nations. Unit value of exports, a useful measure of export earnings, for Brics countries was growing sharply in the pre-crisis period, crashing after 2008. This trend is in concurrence with the GDP growth figures discussed above (see Chart 3).

While GDP growth rates have recovered somewhat, the initial recovery in unit value of exports has reversed once again. This statistic seems even more troubling when it is seen along with the changing relation between economic growth and trade in the world economy. We look at the ratio between percentage growth in the trade-GDP ratio and GDP growth for the global economy. The value can tell us about the trade-creation potential (or lack of it) of GDP growth. This figure has been negative for four consecutive years (latest data available is till 2016), a trend which has never been seen since the 1960s (see Chart 4 ).

This means that growth in world GDP has actually been leading to a reduction in world trade. This suggests that global trade has been in troubled waters for quite some time. Trade wars are bound to make this worse. The global crisis gave a tectonic shock to the global economy in 2008. Even after 10 years, it is difficult to say how exactly the fault lines will change.