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The BRICs and the world economy: Which way now?

Rochester Business Journal
March 28, 2014

In the midst of World War II, in a memorable State of the Union address on Jan. 6, 1941, President Franklin D. Roosevelt declared that “in the future days … we look forward to a world founded on four essential freedoms,” including freedom from want. Since then, freedom from want has become one of the dominant themes of the postwar era, and all manner of official and non-governmental aid schemes are now in place to deal with the seemingly intractable problem of poverty alleviation.

While progress has been made on this front, the true realization of freedom from want in today’s world has been advanced substantially by the dramatic economic performance of the so-called BRIC nations: Brazil, Russia, India and China.

That acronym was coined by the former Goldman Sachs investment banker Jim O’Neill, who believed in 2001 that the best prospects for increasing the considerable assets of his clients lay not in the West but in the world’s emerging economies. The four emerging economies that interested O’Neill the most were the BRICs. On size alone, they were special. In purchasing-power, they were the only $1 trillion economies outside the rich-world group of 34 countries belonging to the Organization for Economic Co-operation and Development. In addition, their economic growth rates were impressive.

As noted by The Economist, the economic performance of the BRICs has been noteworthy because the BRIC era commenced at the end of a century when living standards in the world had diverged significantly. For instance, in 1890, the average American was about six times better off than his Chinese or Indian counterpart. By the early 1990s, this same individual was 25 times better off.

The work of Massachusetts Institute of Technology economist Daron Acemoglu and others tells us that the bigger the gap between a lagging nation’s per capita output and that of the growth leader, the greater are the possibilities for economic growth in the lagging region. A combination of this existing gap, the pursuit of market-friendly policies, declining transportation and communication costs, and greater economic integration enabled the BRICs to grow very rapidly.

That economic growth has indeed been astounding. From 2001 to 2013, the annual economic output of the four nations increased from about $3 trillion to $15 trillion. Between 1993 and 2007, the Chinese economy grew at a staggering rate of 10.5 percent a year. The Indian economy, although not as dynamic as the Chinese, still managed to grow at an impressive 6.5 percent a year. During this time, the Chinese and the Indian growth rates were more than double the U.S. growth rate.

The economies of Brazil and Russia are less diversified, but despite their dependence on commodities, these two nations also grew impressively. For instance, Nathaniel Popper noted in the New York Times that in 2011, Brazil grew at 7.6 percent.

These growth rates in the BRIC economies have had significant positive effects not only in the BRICs themselves but in the world economy. Millions of people in the BRIC countries have been lifted out of poverty, bringing us closer to President Roosevelt’s goal of freedom from want. In addition, a sizable middle class has now emerged in the BRICs, and this middle class is demanding a larger slice of the economic pie, higher wages and better living conditions.

Also, from New Delhi to Rio de Janeiro, people are demanding good governance. Even in China, one hears demands for democratic participation more frequently than before. Put differently, economic progress is proving to be a catalyst for political demands, and time will tell whether these demands will be met with reasonable compromise or with repression.

Burgeoning economic growth in the BRICs has had a strong positive impact on the world economy by contributing to employment. In addition, relatively low-cost workers in the BRICs have routinely produced electronics and other products that are much desired by consumers in the United States and elsewhere in the West. In the aftermath of financial crises, the BRICs have built up their financial reserves and have been able to manage their exchange rates to keep exports relatively cheap. Finally, strong economic performance has allowed the BRICs to provide new and growing markets for Western and in particular American products.

The father of English literature, Geoffrey Chaucer, noted in 1374 that all good things must come to an end. Recent events suggest that Chaucer’s sagacious observation applies to economic growth in the BRICs. China’s economic growth has dwindled from a high of 14 percent a year to about 8 percent in 2013. India’s impressive annual growth of 10 percent has declined to less than 5 percent. The story is similar in commodities-dependent Brazil and Russia. This state of affairs has significant implications for the world economy.

First, as Mark Twain might say, reports of the demise of the economies of the Western world in general and that of the United States in particular now appear to be greatly exaggerated. Therefore, when pondering the fate of the world economy, some rebalancing will be necessary. Even though the rich nations will not grow as quickly as the emerging economies, since they collectively account for 60 percent of the global economy, a slower pace of growth can still provide more economic activity than that provided by faster-growing emerging economies, including the BRICs.

Second, the BRICs will continue to grow in economic importance, but The Economist is surely right that the days of their quickest growth are behind them. And third, in the near term, American and Western producers reliant on BRIC markets will face difficulties, but with the above-mentioned rebalancing, the United States may well benefit. With regard to this rebalancing, O’Neill has said in the New York Times that he thinks the “U.S. is going to be one of the biggest winners.”

Other noteworthy implications are in the BRICs themselves. In “Awakening Giants, Feet of Clay,” the economist Pranab Bardhan has suggested that China’s economic model with its authoritarian, state-controlled capitalism is being pushed to its limit and there are questions about the resilience of this model. Corruption is rampant in India, and as noted by economists Jean Dreze and Amartya Sen in their recent book “An Uncertain Glory,” the country is in dire need of good governance. Brazil’s growth has depended significantly on an undiversified base of iron ore and soybean exports to China; with China slowing, the prospects for future growth are less than rosy.

The intense interest in the BRICs that we have witnessed has now subsided. In this regard, investors appear to have moved on to greener pastures. Just as O’Neill peddled the growth prospects of the BRICs to his clients in 2001, Goldman Sachs now touts a list of “Next 11” nations that includes countries like Bangladesh, Indonesia and Mexico. This touting notwithstanding, it is difficult to see how the “Next 11” will be able to replicate the dramatic economic success of the BRICs.

Amitrajeet A. Batabyal is the Arthur J. Gosnell professor of economics at Rochester Institute of Technology, but these views are his own.

3/28/14 (c) 2014 Rochester Business Journal. To obtain permission to reprint this article, call 585-546-8303 or email service@rbj.net.


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