Not too long ago, Brazil, Russia, India, and China were looked upon with envy by the international arena. Predictions of decoupling—a theory in which emerging economies have strengthened so much that they no longer depend on the United States for economic growth—were seen as a foregone conclusion for the BRIC nations. To the surprise of many, what was once a mere formality is now a distant reality.
Lately, BRIC nations have encountered different degrees of turbulence with engineering economic growth. The European economic crisis, coupled with sluggish U.S. growth, has hindered the BRIC’s economic growth when analyzed as a single bloc—discarding the decoupling phenomenon and proving the opposite is still the norm, to the chagrin of BRIC leaders. In addition, corruption continues to be an endemic problem for all BRIC members, dampening not only their political systems, but also investor confidence. High taxes and heavy regulation are thorny matters that never appear to cease, stalling future productivity, investment and growth, especially in Brazil and India. In short, not all is rosy in BRIC land.
However, to undervalue these emerging economies now would be a mistake, or living in a state of denial. Most importantly, the state of the global economy should not be perceived as a G7 vs. BRICs battle for economic supremacy. Instead, the BRIC nations should be viewed as a market for exports not only for the United States, but also for the European Union and emerging Latin American and Asian nations—another vehicle fueling the engines of economic growth.
If we were to include South Africa in the BRIC bloc, as is increasingly common, the five nations would represent 40 percent of the world’s population and approximately 25 percent of the world’s GDP. South Africa has participated in the last two BRIC summits and will host the next summit in March 2013. I say the more the merrier, as long as the goal for BRIC nations is to integrate more profoundly with the world economy, instead of designing a model of ‘us’ against ‘them’.
The problems for BRIC nations are threefold. First, the BRIC economies are not performing at a rate that was forecasted by domestic and foreign economists. Second, although all BRIC nations appear to stutter simultaneously, the notion that they are similar cannot be further from the truth. Each country has a unique economic model that is not duplicated by other BRIC members; in fact, the only two commonalities are that they are both emerging economies and they happen to be lumped together in a catchy acronym. Third, no one can really answer who is leading the BRIC group, whereas the G7 and Western nations look to Washington, D.C. for leadership, The BRIC nations seem to jockeying for the leadership role, or at times shying away from it (i.e. China).
If there were to be a leader of the BRIC nations, the obvious candidate would be China. However, China is dealing with its own set of woes. In 2012, for the first time this century, China grew at a rate below 8 percent. Although a figure near 8 percent would be a miracle for crisis-laden EU countries and the United States, for China it is seen as average or less. Why the drop? China’s labor force is no longer growing as fast as before, the so-called labor dividend (a surplus of a cheap labor pool) has been exhausted; moreover, wages in China are increasing, especially in factory labor, which causes a severe dent in China’s competitiveness. This has opened a new space for Mexico to reignite their exports for the United States, placing China in a position where it now has to compete against other nations based on strategy, efficiency, and optimal productivity instead of relying on dirt-cheap labor. A portion of the slowdown can be also attributed to Chinese leaders, who made a bold decision earlier this year to increase interest rates in order to tame inflation and cool the county’s real estate crazeand avoid property bubbles similar to episodes in Japan during the 90s and the United States in 2008.
China is still the second largest economy in the world, and out of all the BRIC members, it is still the fasting growing economy. The country is projected to bounce back in 2013, avoiding a hard landing, and targeting the ever-important 8 percent growth rate for 2013. However, according to Ruchir Sharma, author of Breakout Nations, if China’s growth were to fall to a GDP rate of 6 to 7 percent, recession would occur, but it would not be on the same scale as the Euro crisis or the United States’ Great Recession. The bad news is that a decelerated China will hurt other growing nations, including BRIC partners India, South Africa, and Brazil.
The darling of the Americas, Brazil, is no longer feeling the confidence it exuberated when they were awarded the 2014 World Cup and 2016 Rio Olympics. The nation’s 2012 GDP is expected to come in below 1 percent—a very disappointing figure, especially compared to its 2010 growth rate of 7.5 percent. Brazil was once the hot spot for international investors and businesses, but lately the samba country has lost some of its mojo, muddled with an overvalued currency against the U.S. dollar, high taxes, poor infrastructure, constant government intervention, and self-placed barriers holding back entrepreneurial growth. The slowdown in China has hurt Brazil, which now sees itself as a quasi-prisoner to China’s economic growth, transferring their dependency from the U.S. to the Middle Kingdom. To counteract the economic bottleneck and galvanize economic activity, Brazil is lowering interest rates and easing credit. It may work. However, what we have learned as of late is that Brazil is miles away from decoupling from anybody.
India too is struggling with below average growth rates. A few years ago, India was touted as the second coming of China-esque growth, projected to grow from 2010 and onward at a rate of 8 to 10 percent. But not so fast. The last two years have been meager for India. At the beginning of 2012, India was scheduled to hit a GDP of 6.5 percent, but unfortunately economists project that the country will not deliver that number, aligning India to a lower growth rate of roughly 5 percent. For investors in Indian stocks, the last five years have delivered a negative yearly return of 8.3 percent, a microcosm of India’s underperformance. The Indian government has initiated new reforms to jump-start the economy—d such as opening retail sectors to foreign investors and raising prices for subsidized fuels; although they are welcomed, pervasive corruption and horrid regulations need to be addressed in order for India to become an authentic emerging market player. No more than two years ago India was riding a wave of enormous confidence; it now needs to fix their internal problems before they can once again look outward.
Russia is no exception to the BRIC’s latest snags. Putin’s quasi-authoritarian style of governing has put a wet blanket on investment confidence, as the current governance style appears to hinge on whether Vladimir Putin favors a certain domestic or international company. Russia faces other challenges such as a heavy dependency on natural resources and a shrinking and aging population, akin to Japan. If the price of oil continues to drop, Russia will be adversely affected, as oil and gas are their largest exports. The EU and its crippling recession has not done Russia any favors lately either; Europe is Russia’s main trading partner and the largest purchaser of Russia’s natural resources, yet demand has dropped significantly, affecting Russia’s GDP growth. Corruption also cripples economic growth in Russia—an overlapping characteristic that all BRIC members share.
The luster of the BRICs is slowly losing its shine. The advancements of the BRIC nations and other emerging markets in the last 12 to 15 years have been nothing short of amazing, but to sustain incredible growth without encountering periods of slow growth is virtually impossible. The lesson here is to move away from categorizing emerging markets in lazy groups dressed in acronyms. Each country has unique characteristics and comparative advantages, and while some emerging markets are in near crisis mode, others like Colombia, Nigeria, Chile, Indonesia, and Turkey are in an expansionary phase. The BRIC nations have had their run, and maybe they have one or two more hurrahs left in them. However, the notion that Brazil, Russia, India, and China were on the road to create an alternative to the United States and the G7 was—and still is—a distant desire.
Oscar Montealegre is a Los Angeles-based Diplomatic Courier Contributor specializing in Latin American markets, finance, economics, and geopolitics. He holds an MA in International Relations, a BA in Journalism, and a Certificate in International Trade and Commerce.
This article was originally published in the special annual G8 Summit 2013 edition and The Official ICC G20 Advisory Group Publication. Published with permission.
Photo: Government of South Africa (cc).
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Breaking Apart: The End of 'BRIC'
June 27, 2013
Not too long ago, Brazil, Russia, India, and China were looked upon with envy by the international arena. Predictions of decoupling—a theory in which emerging economies have strengthened so much that they no longer depend on the United States for economic growth—were seen as a foregone conclusion for the BRIC nations. To the surprise of many, what was once a mere formality is now a distant reality.
Lately, BRIC nations have encountered different degrees of turbulence with engineering economic growth. The European economic crisis, coupled with sluggish U.S. growth, has hindered the BRIC’s economic growth when analyzed as a single bloc—discarding the decoupling phenomenon and proving the opposite is still the norm, to the chagrin of BRIC leaders. In addition, corruption continues to be an endemic problem for all BRIC members, dampening not only their political systems, but also investor confidence. High taxes and heavy regulation are thorny matters that never appear to cease, stalling future productivity, investment and growth, especially in Brazil and India. In short, not all is rosy in BRIC land.
However, to undervalue these emerging economies now would be a mistake, or living in a state of denial. Most importantly, the state of the global economy should not be perceived as a G7 vs. BRICs battle for economic supremacy. Instead, the BRIC nations should be viewed as a market for exports not only for the United States, but also for the European Union and emerging Latin American and Asian nations—another vehicle fueling the engines of economic growth.
If we were to include South Africa in the BRIC bloc, as is increasingly common, the five nations would represent 40 percent of the world’s population and approximately 25 percent of the world’s GDP. South Africa has participated in the last two BRIC summits and will host the next summit in March 2013. I say the more the merrier, as long as the goal for BRIC nations is to integrate more profoundly with the world economy, instead of designing a model of ‘us’ against ‘them’.
The problems for BRIC nations are threefold. First, the BRIC economies are not performing at a rate that was forecasted by domestic and foreign economists. Second, although all BRIC nations appear to stutter simultaneously, the notion that they are similar cannot be further from the truth. Each country has a unique economic model that is not duplicated by other BRIC members; in fact, the only two commonalities are that they are both emerging economies and they happen to be lumped together in a catchy acronym. Third, no one can really answer who is leading the BRIC group, whereas the G7 and Western nations look to Washington, D.C. for leadership, The BRIC nations seem to jockeying for the leadership role, or at times shying away from it (i.e. China).
If there were to be a leader of the BRIC nations, the obvious candidate would be China. However, China is dealing with its own set of woes. In 2012, for the first time this century, China grew at a rate below 8 percent. Although a figure near 8 percent would be a miracle for crisis-laden EU countries and the United States, for China it is seen as average or less. Why the drop? China’s labor force is no longer growing as fast as before, the so-called labor dividend (a surplus of a cheap labor pool) has been exhausted; moreover, wages in China are increasing, especially in factory labor, which causes a severe dent in China’s competitiveness. This has opened a new space for Mexico to reignite their exports for the United States, placing China in a position where it now has to compete against other nations based on strategy, efficiency, and optimal productivity instead of relying on dirt-cheap labor. A portion of the slowdown can be also attributed to Chinese leaders, who made a bold decision earlier this year to increase interest rates in order to tame inflation and cool the county’s real estate crazeand avoid property bubbles similar to episodes in Japan during the 90s and the United States in 2008.
China is still the second largest economy in the world, and out of all the BRIC members, it is still the fasting growing economy. The country is projected to bounce back in 2013, avoiding a hard landing, and targeting the ever-important 8 percent growth rate for 2013. However, according to Ruchir Sharma, author of Breakout Nations, if China’s growth were to fall to a GDP rate of 6 to 7 percent, recession would occur, but it would not be on the same scale as the Euro crisis or the United States’ Great Recession. The bad news is that a decelerated China will hurt other growing nations, including BRIC partners India, South Africa, and Brazil.
The darling of the Americas, Brazil, is no longer feeling the confidence it exuberated when they were awarded the 2014 World Cup and 2016 Rio Olympics. The nation’s 2012 GDP is expected to come in below 1 percent—a very disappointing figure, especially compared to its 2010 growth rate of 7.5 percent. Brazil was once the hot spot for international investors and businesses, but lately the samba country has lost some of its mojo, muddled with an overvalued currency against the U.S. dollar, high taxes, poor infrastructure, constant government intervention, and self-placed barriers holding back entrepreneurial growth. The slowdown in China has hurt Brazil, which now sees itself as a quasi-prisoner to China’s economic growth, transferring their dependency from the U.S. to the Middle Kingdom. To counteract the economic bottleneck and galvanize economic activity, Brazil is lowering interest rates and easing credit. It may work. However, what we have learned as of late is that Brazil is miles away from decoupling from anybody.
India too is struggling with below average growth rates. A few years ago, India was touted as the second coming of China-esque growth, projected to grow from 2010 and onward at a rate of 8 to 10 percent. But not so fast. The last two years have been meager for India. At the beginning of 2012, India was scheduled to hit a GDP of 6.5 percent, but unfortunately economists project that the country will not deliver that number, aligning India to a lower growth rate of roughly 5 percent. For investors in Indian stocks, the last five years have delivered a negative yearly return of 8.3 percent, a microcosm of India’s underperformance. The Indian government has initiated new reforms to jump-start the economy—d such as opening retail sectors to foreign investors and raising prices for subsidized fuels; although they are welcomed, pervasive corruption and horrid regulations need to be addressed in order for India to become an authentic emerging market player. No more than two years ago India was riding a wave of enormous confidence; it now needs to fix their internal problems before they can once again look outward.
Russia is no exception to the BRIC’s latest snags. Putin’s quasi-authoritarian style of governing has put a wet blanket on investment confidence, as the current governance style appears to hinge on whether Vladimir Putin favors a certain domestic or international company. Russia faces other challenges such as a heavy dependency on natural resources and a shrinking and aging population, akin to Japan. If the price of oil continues to drop, Russia will be adversely affected, as oil and gas are their largest exports. The EU and its crippling recession has not done Russia any favors lately either; Europe is Russia’s main trading partner and the largest purchaser of Russia’s natural resources, yet demand has dropped significantly, affecting Russia’s GDP growth. Corruption also cripples economic growth in Russia—an overlapping characteristic that all BRIC members share.
The luster of the BRICs is slowly losing its shine. The advancements of the BRIC nations and other emerging markets in the last 12 to 15 years have been nothing short of amazing, but to sustain incredible growth without encountering periods of slow growth is virtually impossible. The lesson here is to move away from categorizing emerging markets in lazy groups dressed in acronyms. Each country has unique characteristics and comparative advantages, and while some emerging markets are in near crisis mode, others like Colombia, Nigeria, Chile, Indonesia, and Turkey are in an expansionary phase. The BRIC nations have had their run, and maybe they have one or two more hurrahs left in them. However, the notion that Brazil, Russia, India, and China were on the road to create an alternative to the United States and the G7 was—and still is—a distant desire.
Oscar Montealegre is a Los Angeles-based Diplomatic Courier Contributor specializing in Latin American markets, finance, economics, and geopolitics. He holds an MA in International Relations, a BA in Journalism, and a Certificate in International Trade and Commerce.
This article was originally published in the special annual G8 Summit 2013 edition and The Official ICC G20 Advisory Group Publication. Published with permission.
Photo: Government of South Africa (cc).
