Table of Contents
1. Introduction 2
2. Literature Review 5
3. The Economic Growth of BRICs over a Four Year Period (2008-2011) 7
Brazil: 7
Russia: 8
India: 9
China: 10
LINE GRAPH SHOWING COMPARATIVE GROWTH OF BRICs 11
4. Problems Faced By The BRIC Nations 12
Brazil: 12
Russia: 13
India: 13
China: 14
BRICs Development Indicators 15
5. Suggestions to Improve the State of Affairs 16
Brazil: 16
Russia: 16
India: 17
China: 17
6. Conclusion: A projection of the path ahead for the BRICs 19
7. Bibliography 23
1. Introduction
The term BRIC (Brazil, Russia, India and China) was coined by Jim O’Neill of Goldman Sachs in 2001 as part of an economic modelling exercise to predict economic trends over the next fifty years. It was considered to be a game changing paper as it stated that in 2001-2002 the GDP growth rates of the emerging markets will be more than that of the G7 countries.[1] It was also observed that at end-2000, GDP in US$ on a PPP basis in Brazil, Russia, India and China was about 23.3% of world GDP. It was also rightly predicted that the weight of China in the share of world GDP will grow in the next ten years. Therefore it was important to realise the significance of these emerging markets and the impact of their fiscal and monetary policy on the world economy. The paper suggested that the G7 should be adjusted in order to incorporate representatives of these countries. China’s economy on current GDP basis at that time was slightly bigger than Italy (a G7 country), therefore it was certain that any expansionary fiscal or monetary policy of China will have a greater impact than that of Italy. However many economists had doubts over whether the BRIC nations would actually want to join the G7.
After nine years, in 2010, Goldman Sachs’ baseline projections envisage the BRICs, as an aggregate will be overtaking the US by 2018. In terms of size, Brazil’s economy will be larger than Italy’s by 2020; India and Russia will individually be larger than Spain, Canada or Italy. The coming decade was considered to be the time for the rise of the new BRICs middle class. The number of people with incomes greater than $6,000 and less than $30,000 grew by hundreds of millions in the preceding decade, and this number was expected to rise even further in the next 10 years. The demand potential of the BRICs could be observed in the types of products the BRICs imported at the time—the import share of low value added goods was likely to fall and imports of high value added goods, such as cars, office equipment and technology, was expected to rise. In the years between 2001 and 2010, BRIC equity markets outperformed significantly because the strong growth of these economies surprised many and the BRICs themselves came into focus. At the same time, valuations were low relative to many major markets in 2000. But as the BRICs story came to be better known, expectations became higher and the valuation gap much smaller, the same degree of outperformance could not be expected anymore, even though the BRICs delivered solid returns.
In 2011 a report by Goldman Sachs said that there will be a shift in the age structure in the BRICs which will open a new window of opportunity.[2] An older, working age population in Brazil, India and China will boost economic growth as this segment of the population can provide labour as well as savings. However there were rising concerns about the lack of infrastructure in these emerging economies, it was far behind the developed country norms. Rising infrastructure growth rates were observed in China and India, Russia already had advanced infrastructure in place due to heavy investment in the Soviet era. Brazil on the other hand still has underdeveloped infrastructure and growth rates are slow.
The BRICs recovered from the global financial crisis much faster than the developed world in 2010.[3] However they failed to meet the expectations that most people had. The GDP growth rates for Brazil have declined sharply since the first quarter of 2010, from 9.3% to 0.5% (current). China’s GDP growth rate fell from around 12% per annum to 7.6%, similarly India’s growth fell from 9.4% in 2010 to 5.5% in 2012. Russia has however maintained a 4-5 % of growth ever since it recovered in 2010 from a year of negative growth.
The fear of decelerating GDP in China and India, which are also leading consumers of commodities, is a blow to the instability prevailing in global economy. The Indian Finance Ministry has pointed out that the poor performance in the manufacturing sector is the main cause of the great fall in the GDP. India's economic situation has also become precarious with INR falling to record lows against dollar since May 2012. Even though China's GDP expanded 1.80% in the Q1 of 2012 over the previous quarter, it was a record low in last three years. During the period from 2011 to 2012, China's GDP growth averaged 2.12% reaching an all time high of 2.4% in September 2011 and a record low of 1.8% in March of 2012. The total value of imports and exports in the first quarter of 2012 was 859.37 billion US dollars, a year-on-year growth of 7.3 percent. An economic slowdown in countries like India and China further affects the international commodity markets as they are the largest commodity consumers in emerging markets.
Brazil hit record low unemployment rate, at 4.7 percent in the beginning of 2012. Since 2002, out of 5.1 million jobs created, 493,000 or 9.7 percent were in industry while more than 1.6 million, or 32 percent, of the jobs were in business services and finance. This trend has been accelerating rapidly over the last few years and inthe last quarter of 2011 recent quarter, 90 percent of the new jobswere created in the business services/finance sector. This is harmful for the economy because expansion of the financial sector has led to an overvaluation of the currency. This policy in turn is harming the industrial and manufacturing sector by making imports artificially cheap, and increasing the price of Brazilian exports to other countries. The policy of the Central Bank of keeping high interest rates has contributed considerably to this problem. To reach its potential, Brazil will need an industrial and development strategy that moves the economy toward higher value-added areas of production. Russia’s economy, on the other hand could face a shift; analysts say that growing imports will gradually outpace exports of oil and gas. In such a situation where both a federal budget and current account deficit the country is likely in the future it should be attracting capital. Russia at the moment is doing the opposite: partly because of political uncertainty,capital outflowstotalled a net $84bn in 2011, equivalent to 5 per cent of GDP. That drain in funds was barely noticed because the country was running a big trade surplus at that time. However if the petrodollar income was to disappear, such outflows would cost Russia its reserves and could force a devaluation of the rouble. Russia, despite having problems regarding investments is very much a part of the ‘emerging markets’ having low debt levels. However some reform measures mainly including privatisation and pension reform needs to be undertaken soon, according to liberal economists.
2. Literature Review
The paper that published and coined term BRIC for the first time discussed the state of the world economy in the year 2001. The main focus is on the relationship between the G7 and some of the larger emerging market economies or the BRICs nations. The term ‘BRIC’ was coined first in this particular paper by O’Neill. Goldman Sachs forecasts for 2001 and 2002 suggested a healthier outlook in some of the larger emerging market economies compared to the G7. The forecast at that time was 1.7% world GDP growth in 2002 with Brazil, Russia, India and China (BRICs) each set to grow by more than the G7 (France, Germany, Italy, Japan,United Kingdom, United States andCanada). [4]Even though the 2001-02 outlook was not expected to be sustained in the same degree over the next decade, a healthier environment for the BRICs seemed likely to remain. The GDP share of the BRICs in the world economy was therefore expected to rise.
According to the paper, on a PPP basis, the aggregate size of the BRICs was about 23.3% of world GDP at the end of 2000, which is somewhat higher than both Euroland and Japan. On the other hand on a current GDP basis, the size of the BRICs was just under 8%, this was also predicted to rise. Some of these emerging markets at that time were already bigger than some individual G7economies; China, for example was at 3.6% of world GDP (using current US$ prices) and slightly bigger than Italy at the end of 2000, and notably larger than Canada.
There were four different possible scenarios (A,B,C,D) which were considered in the paper for the next decade based on various nominal GDP assumptions for 11 countries (the G7 and BRICs), after making different assumptions about exchange-rate conversion. The nominal GDP assumptions were made keeping under consideration the likely trend rate of real GDP growth and inflation.
In Scenario A, the future nominal GDP projections were converted at end-2000 exchange rates. In Scenario B, the GDP projections we converted using the Goldman Sachs GSDEER/GSDEEMER fair value exchange rate estimates. Scenario C again converted the projections at end-2000 exchange rates, but assumed that the 2001-02 nominal GDP paths will continue for the next 10 years. Scenario D converted projected GDP trends using PPP conversions rather than estimated end-2011 current US Dollars.
The four scenarios show that the relative weight of the BRICs is seen to rise from 8.0% at present (in current US$) to 14.2%, or from 23.3% to 27.0%, converting at PPP rates. In each of these scenarios, the increasing weight is led by China, although Russia, India and Brazil also grow relative to the G7 countries.
There were projections made for likely timing of future EU joiners and subsequent membership of EMU (Economic and Monetary Union). Jim O’Neill also suggested that there is a 50% or greater probability of another 13 countries becoming active members of EMU by the beginning of 2007, taking the total membership to 25 from 12 in 2001. In 2012 the number of member countries of the EMU is 27, which includes the 17 Euro-zone countries and 10 non-member countries.
The argument was made that with 25 members of EMU, it will be necessary to reform the ‘active’ membership of the European Central Bank Governing Council.
Moreover, it was said that, this development should be accompanied by a reduction in Euroland representation at the G7 from 3 countries to 1, and provide the basis for a significant reform of the G7.
The paper lastly mentioned that keeping in view the relative expected growth of the BRICs in the future, efforts should be made to incorporate either China and Brazil or India and Russia in the key body of global economic policy co-ordination. However O’Neill expressed doubts on whether these nations would be willing to join a possible G9.
In the current scenario India and China despite having large labour population are suffering from high inflation rates. Russia is struggling to diversify its fields of production and Brazil is characterised by a heavy spending middle class population. These factors have hampered growth of the economies.
3. The Economic Growth of BRICs over a Four Year Period (2008-2011)
Brazil:
In 2008 Brazil’s economy has an imbalance between demand and supply which causes the pressure on prices. It was required for the industrial sector to fulfil the needs of the demand side of the economy in order to prevent rising prices of commodities. The domestic demand side also needed to be made stronger to create an investor friendly environment as the economic growth was moderately decelerating.[5] The annual growth rate for the fiscal year of 2008 came to 5.2% (Table 3.1).
In 2009 the Brazilian government had already made efforts to protect the economy from the global economic crisis. However the general deceleration of the world economy had affected Brazil’s growth in a negative manner. The predicted growth rate for the fiscal year of 2009 was lowered for the country but its numbers were much better compared to other large economies of the continent. [6]At the end of the year the figures were disappointing, the economy shrank by 0.3% (Table 3.1).
In 2010 Brazil experienced rapid growth which was characterised by low unemployment and a class of consumers who were spending freely and giving the economy the much needed boost. The downside of this was that it made the inflation rates soar above 6 percent. Household consumption the main driver of growth in Brazil rose at 2.5 percent in the fourth quarter of the year. Even capital spending had grown at an enormous rate of 21.8% in the whole year.[7] At that time Brazil seemed to have gained the confidence of investors and businesses who believed in a bright future ahead of the economy. The fiscal year ended with a highly reasonable growth rate of 7.5% (Table 3.1)
The year 2011 saw a rather sharp decline in consumer spending and was responsible for contraction in the growth for that year. Therefore following the boom in 2010 Brazil could not maintain a high steady growth rate. [8]This proved that an economy highly dependent on only consumer spending for growth cannot sustain a very high rate of growth for long (Table 3.1).
2008 / 2009 / 2010 / 20115.2 / -0.3 / 7.5 / 2.7
Table 3.1 GDP Growth Rates Brazil (Source: World Bank)
Russia:
In 2008 experts predicted that Russia was leading towards an economic crisis. This was mainly due to the sharp fall in crude oil prices to under $50 a barrel. The energy sector has always been crucial to Russia’s economic growth therefore a fall in the value of oil was expected to lead to a possible devaluation of the rouble and in turn a downslide in the living standards of the Russian people. The annual economic growth rate of Russia in the fiscal year 2008 was 5.2% (Table 3.2).