Over a decade ago, economist Jim O’Neill coined the term BRIC. The acronym was used to identify four fast growing economies that by 2050 would be bigger than the current richest economies in the world.
China has been living up to those expectations. But many have questioned whether Russia, Brazil, and India deserve to be part of the group. In the recent past, experts argued that Russia and India should be replaced by Indonesia.
And in a Wall Street Journal column in August, O’Neill argued that China is the only BRIC nation worthy of that title. And it would appear he is bang on the money.
Grant Thornton’s 2013 Global Dynamism Index (GDI) — which assesses the world’s 60 largest economies ranked on 22 indicators including business operating environment, science & technology, labour & human capital, financing environment, economics & growth — saw China jump 17 places from 2012 to take the third spot.
China is not without its problems, but of the four emerging nations that were expected to become the next big nations, China is the only one to stand true to that prediction.
In terms of economic growth, China had been growing at an unsustainable breakneck speed and is expected to slow to 7.5% in 2013. But a hard economic landing — four straight quarters of below 6% growth — hasn’t emerged.
Some economists still predict a “bumpy landing,” but China is making an effort to rebalance its economy and move towards growth supported by domestic demand.
So, what went so wrong in the other three BRICs?
Brazil’s Dutch Disease & Credit Woes
By comparison, Brazil has flustered and flailed. Brazil’s economic growth plunged from 7.5% in 2010, to 0.9% in 2012.
Some blame the Dutch disease. China’s investment-led growth helped boost commodity prices subjecting Brazil (and Russia, but more on that later) to the Dutch disease, where “an overemphasis on commodity-led growth,” strengthens the currency and boosts wages, “twin forces” that are a blow to the country’s manufacturing sector, according to Morgan Stanley’s Joachim Fels. Of course this isn’t Brazil’s only problem.
Using monetary policy easing (a cyclical tool) to fix economies suffering from the Dutch Disease (a structural problem) creates “unintended consequences.”
Rate cuts by Brazil’s central bank eased borrowing conditions for everyone (not just the sectors that needed help) boosting lending for everyone. This in turn boosted “bank lending to consumers and inflation expectations, precisely the two things that Brazil’s economy did not need.” In fact, inflation is a deep rooted problem for the country and one that the government needs to tackle.
Growth has continued to slow despite the money being spent on infrastructure leading up to the World Cup and the Olympics.
Russia Too Dependent on Oil and Gas
The World Bank expects the Russian economy to grow a mere 1.8% this year.
Like Brazil, Russia suffers from the Dutch Disease, and experts have long argued that the country is too dependent on its oil and gas sector.
This in turn has impacted its manufacturing sector. In fact, Russia has had three-straight months of sub-50 HSBC PMI readings, showing that its manufacturing sector has been contracting.
The state’s role in the economy is another problem plaguing this BRIC nation. “In Russia, the corporate sector is dominated by state-run companies. The efficiency and flexibility that the private sector tends to provide, is thus missing in Russia Inc,” writes Fels.
Russia continues to face structural challenges to its economy and external demand issues, and it needs to get serious about cracking down on corruption.
India’s “Vicious Loop”
In India, a mix of global headwinds and disastrous domestic policies have sent growth to a 10-year low. Fels thinks India’s biggest problems are its “deep cyclical issues:”
“Policy action in 2009/10 created unintended consequences… Aggressive fiscal easing supported consumption and economic growth during the Great Recession. However, the lack of support for investment meant that productive activities did not benefit from the government’s initiative. The result? A widening of the fiscal and current account deficits along with a deterioration of what our colleague Chetan Ahya calls the ‘productive dynamic’. This poor productive dynamic helped to produce an inflation problem that appears to be ebbing only now.”
India’s high gold and oil imports haven’t helped narrow its troublingly wide current account deficit. This in turn has been crushing the Indian rupee, boosts inflation, and external debt.
“In the absence of a credible policy response, currency weakness and volatility may create a vicious loop,” wrote Lombard Street Research’s Shweta Sing in an August note.
India’s labor laws and corruption also continue to hold it back. O’Neill thinks India has been the most disappointing of the BRICs.
What Has China Done Right?
While the economy is slowing, it has long been argued that the ongoing slowdown was inevitable as officials began to rebalance the economy towards domestic demand. Premier Li Keqiang promised a growth floor of 7.5% in 2013. The Chinese leadership’s promise to double per capita income by 2020 is in line with their efforts to boost domestic demand.
Moreover, policymakers seem aware of problems in the economy. Wary of a property bubble, they acted aggressively to deflate it, forcing China bears like Jim Chanos to admit the country might have got a handle on the property sector.
In an effort to boost land reform and achieve growth, officials are trying to speed up urbanization.
Yes, China has a burgeoning shadow banking system and will have to worry about its “Minsky moment.” Yes its state-run banks can’t guarantee bad debts forever. Yes the nation has a long way to go in liberalizing its capital account, and yes the government is right to be wary of social unrest.
But for now, it’s easy to see China has been the star BRIC nation.