The BRICS name is certainly here to stay, and in terms of global governance, their influence is likely to rise as a group because of the agreement to set up a joint development bank, says the man who coined the term ‘BRICS’
By Jim O’Neill
On one level, this seems like a rather odd time to be asking such a question, especially when the BRICS political leaders have just agreed to set up a joint development bank to be headquartered in Shanghai. So the BRICS name is certainly here to stay, and in terms of global governance, their influence is likely to rise as a group because of this development. Previously, the BRICS political leaders meetings had failed to agree anything specific and even once the creation of such a bank was first mooted, for the past two years, they appeared to have difficulties in agreeing where it might be located and how it should be capitalised. At this Fontaleza meeting in Brazil, they have confounded sceptics by agreeing not only both these key things, but also to have the first head of the Bank to be an Indian. What the Bank will prioritise in terms of lending and projects, we will have to wait and see, but one can think of many good ideas including shared road and rail infrastructure challenges, especially those with some common borders, projects for energy efficiency, alternative energies, clean and safe water, and of great importance to themselves, to focus on the growing resistance to antibiotics, a challenge that if a solution cannot be found will be very harmful for their futures.
But if the BRICS leaders hadn’t made this breakthrough, I am sure the siren rising about the end of the BRIC economic phenomena would be even louder and it is important to try and objectively deal with this, separately from this announcement, important as that is.
So, let’s deal with the case as to why the BRIC story might be past its prime. Some observers believed that the whole notion of a grouping of Brazil, Russia, India and China never made any sound sense because beyond having a lot of people, they didn’t share anything else in common. In particular, two are democracies, and two are not, obviously, China and Russia. Similarly, two are major commodity producers, Brazil and Russia, the other two, not. And their levels of wealth are quite different, with Brazil and Russia well above $10,000, China around $7-8,000, and India less than $2,000 per head. And the sceptic would follow all of this by saying, the only reason why Brazil and Russia grew so well in the past decade was simply due to a persistent boom in commodity prices, and once that finished, as appears to be the case now, then their economies would lose their shine, as indeed appears to be the case. Throw in that China would inevitably be caught by its own significant challenges at some point, which the doubters would say, is now, then all is left is India, and if it weren’t for the election of Modi recently, there has not been a lot to justify structural optimism about that country recently.
It is factually the case that all four BRIC countries have seen their GDP growth rates slow sharply in this decade. From 2011-13, China has grown by 8.2% compared to 10.5% the last decade, India has slowed to 4.6%, down from 7.6, Brazil has grown by 2%, down from 3.6, and Russia, some 3%, compared to 4.6%. So all four have grown less, and in all cases, there are plenty of issues to worry about.
But, let’s now start to get serious. Because of China’s huge importance, the weighted average performance of the BRIC growth rate since 2011 is 6.5%. Now this is down from 7.9% the last decade, but higher than the previous two decades. China today is one and a half times the size of the other three put together, so its influence on their combined growth rate is more important. Related to this, the BRIC countries combined GDP is nearly as large as the US, and by end 2015, it will be the same size in current US$. (In PPP terms, it is already substantially larger than the US). So even with slower growth, the BRIC country’s economic influence is on the rise. In US$ terms, they are contributing decade to date more than 3 times to the world economy that of the US, and obviously in PPP terms, even more.
So, the idea that the importance of the BRICs is over is really not a credible objective economic issue. (note I don’t make any inclusion of South Africa as that economy is so small, it is not justified to be regarded in the same economic sphere. It is actually not even the largest economy in sub-Sahara Africa anymore, Nigeria is today. And there at least 8 other so called emerging economies are much bigger than South Africa, some of them at least 3 times)
What is undoubtedly true is that the RATE of BRIC growth has slowed, but while this might be a surprise to the casual observer, it certainly isn’t to most who follow them closely. In fact, the 6.5% decade to date is just 0.1pt less than I had assumed in 2010 that they would grow by 6.6%. China, crucially is actually growing by more than I assumed, so far by 8.2%, actually more than the 7.5% I assumed. This is compensating for the weaker growth in the other three, which indeed has disappointed my expectations, especially Brazil and Russia, and to some degree India. So it might be truer that the BRIC story decade to date has been purely supported by China, and without that, then the disappointment might be much more justified. And it would follow that if China is about to slow a lot further, which many sceptics think, then the BRIC economic story would become marginally less.
The problem with this line of thinking is that while there are considerable challenges for China, in many cases, there is evidence that the policymakers are rising to those challenges and trying to deal with them, which I might point out is quite different from many other countries that often ignore them until they cause massive crises. For example, how many readers can recall any country deliberately trying to stop house prices rising as China has- possibly-successfully-done? A couple of years ago, people worried about housing bubbles in Beijing and Shanghai, they don’t talk about that anymore. Why? Because the problem has eased due to policy. Today the sceptics fear bubbles in so-called second and third tier cities, but I think there is a reasonable chance that the policymakers will deal with them especially with so many migrants still to migrate and, now, to receive proper full blown urban citizen rights including house ownership. And more importantly still, is the data itself. After months of clear slowing, much of it, including the recent PMI’s and June’s raft of economic data has all improved further, and from what I can see, 7.5% looks to be in the bag for 2014, if not a bit stronger.
I do believe each of Brazil and Russia have got some challenges to face, that they are not yet confronting, which at the core is to reduce their dependency to the commodity cycle, and while there are many differences between them, they do both need to become more competitive and entrepreneurial outside of commodities and to boost private sector investment. Which leaves India, about who I have to say, following the really powerful election victory of Modi, I think there are clear reasons to expect big policy improvements, and I now don’t entirely rule out that this country could still match my 7.5% expectation for the decade. It will be really difficult, but what is quite likely is that they may grow more than 7.5% in the second half of the decade, and possibly faster than China.
So the BRIC economic story over? I think not, even without their historically important decision to create a shared development bank, the consequences of which we are set to learn about.
After being on its board since inception, Jim O’Neill became a Visiting Research Fellow to the think tank, Bruegel, in September 2013
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