Brics dream always came with warnings

ON a grey winter’s day in London, my university’s economics society held a conference at what was then Credit Suisse First Boston, in Canary Wharf.

Jim O’Neill, chief economist of Goldman Sachs, spoke about the Bric countries — Brazil, Russia, India and China.

The title of his talk was “Dreaming with Bric: The path to 2050”— the same title as a Goldman Sachs study on Brazil, Russia, India and China. According to O’Neill, growth by Bric countries was likely to make the group a much more powerful force in the world economy over the next 50 years.

Using demographic projections and a model of capital accumulation and productivity growth, O’Neill and his team mapped out GDP growth, income per capita and currency movements until 2050 and concluded that, in less than 40 years, the Bric countries together were likely to be larger than the G6 (the US, the UK, Germany, France, Italy and Japan) in dollar terms.

India’s economy was tipped to be larger than Japan’s by 2030 and China’s larger than that of the US by 2041.

Encouraged by the growth prospects of the Bric countries, Goldman Sachs launched a Bric fund in 2007. However, nine years later, having lost 88% of its assets from its peak in 2010, the fund was closed and merged with the Goldman Sachs emerging markets equity fund.

At that conference in 2003 — surrounded by Chinese and Indian friends, who looked rather pleased by the projections for their countries — I asked O’Neill: “What about South Africa?”

South Africa was expected to grow about 3.5% over the next 50 years, much lower than the average GDP growth of the Bric countries. With the right policies in place, South Africa could achieve 5% growth over the next decade.

Ironically, the National Development Plan contained the same growth projections.

In the decade following the creation of the Bric moniker, the Bric countries surged as economic powerhouses, amassing 40% of the world’s foreign reserves. The four countries still account for more than a fifth of the global economy, but their growth prospects are waning. Brazil and Russia are in recession, and China’s economy is sluggish. Only India seems to be closer to the Bric growth assumptions.

In 2010, Bric became a counterweight to the G8 and G20, which were dominated by wealthy developed economies. South Africa was added as a representative of Africa that year.

Many have criticised the Bric study for getting it wrong, but it did contain conditions to growth that formed the basis on which it was conducted. For instance, it noted that institutional capacity is required to implement stable macroeconomic policies, and an unstable macroeconomic environment could hamper

❛ Ironically, the NDP contained the same projections

growth by distorting prices and incentives. And it warned that inflation hinders growth by discouraging saving and investment.

The study noted that institutions affect the efficiency of an economy in much the same way technology does. More efficient institutions allow an economy to produce the same output with fewer inputs. Bad institutions lower incentives to invest, work and save.

Openness to trade and foreign direct investment were also listed as crucial. And so was education.

The Brics countries face significant challenges in keeping development on track. Perhaps Robert Barro’s work on the determinants of growth ought to be revisited.

Leoka is an economist at Argon Asset Management