by Firas Al-Atraqchi
by Firas Al-Atraqchi
Both countries were economic stalwarts, were nuclear-ready (India’s programme has already been weaponized), and had been major contributors to the UN both financially, and in men and materiel for peacekeeping operations.
By the mid-1990s, the world’s economic focal point had already started shifting.
Terms and phrases such as Asian Tiger, Asian Powerhouse or Asian Dragons signaled that global industrialists were starting to see the waning of the Atlantic as a lucrative investment region while markets began to emerge in the Pacific.
The shift would last well into the new century and beyond.
In 2001, Goldman Sachs Asset Management Chairman Jim O’Neill realised that the emerging markets around the world were beginning to pull focus and energy from the dominant G7 countries.
In his 2001 paper, Building Better Global Economic BRICs, which focused on this trend, O’Neill coined the acronym used in the title to shed light on the growing economic might of Brazil, Russia, India and China as emerging markets.
Given their growth and market purchasing power, O’Neill was able to project that within a decade, their combined GDP would “raise important issues about the global economic impact of fiscal and monetary policy in the BRICs”.
As such, BRICs would become the stalwart players in a global economy, O’Neill forecast, adding that the four countries would be among the world’s most powerful economies.
“World policymaking forums should be re-organised and in particular, the G7 should be adjusted to incorporate BRIC representatives,” he advised.
O’Neill believed that for “globalisation to advance, it had to be accepted by more people … but not by imposing the dominant American social and philosophical beliefs and structures.”
In BRICs he saw how geographically disconnected non-Western economies shared common denominators of large populations with rapidly-growing markets, industrialization, modernization and an ambition to become at least regional players.
In a world where Western economies were the paradigm, O’Neill’s theories of emerging markets were met with disdain.
Many analysts were perhaps unprepared to accept that post-colonial nations, which less than a 100 years ago where occupied by Western powers, could now be on the verge of introducing new paradigms to global economic theory.
Nevertheless, the past decade has seen the rise and plateau and rise again of BRICs nations.
According to the Financial Times’ Gillian Tett (January 15, 2010), “in the past decade, Bric has become a near ubiquitous financial term, shaping how a generation of investors, financiers and policymakers view the emerging markets: companies ranging from Nissan to media group WPP have developed BRICs business strategies; several dozen financial institutions now run Brics funds; business schools have launched Brics courses; and this April Phillips de Pury will be holding a Brics-themed auction.”
According to data from the World Bank, IMF and the United Nations Development Programme’s Human Development Report compiled by Global Sherpa, BRIC’s combined share of total world economic output increased from 16 to 22 per cent between 2000 and 2008.
Between 2004 and 2007, Brazil averaged nearly 5 per cent in GDP growth, Russia 5.8 per cent, India 8.9 per cent and China 10.25 per cent.
Such growth invariably fuels the growth of the middle class and urbanization.
In 2004, Goldman Sachs issued a report on the status of BRIC countries. The report predicted that the number of people with a $3000+ income would dramatically increase in BRIC by 2014 thereby expanding the middle class.
The report also said that urbanization would become a major concern for China, Brazil and India in the next decades.
“India has 10 of the 30 fastest-growing urban areas in the world and, based on current trends, we estimate a massive 700 million people will move to cities by 2050. This will have significant implications for demand for urban infrastructure, real estate, and services,” the report said.
The growth of emerging markets, specifically BRIC, came to a sudden halt in 2008 when the global economic crisis hit and led to recession, sometimes severe, from the US to Europe to Asia.
In 2008, GDP growth fell to just above-zero levels – Russia actually registered negative growth – while inflation rates increased.
BRIC slowly began to recover in 2011 and are expected to jump back in 2013. China, and, to a lesser degree, India appear to have weathered the worst of the recession, although inflation rates were still higher than the golden period a decade ago.
But the data gathered by Global Sherpa also projected between 2011 and 2014 average growth rates in GDP of 4.2 per cent for Brazil, 4.5 per cent for Russia, 8.1 per cent for India and 9.5 per cent for China.
In 2009, BRIC went through a major development, which even O’Neill could not have predicted – the four countries met at a summit in Yekaterinburg, Russia and formalized their relationships into an economic block with a political outlook.
In a joint statement from the summit, the group stressed UN Security Council reform, with emphasis on Brazil and India’s aforementioned efforts to expand the body. The summit also said that BRIC nations sought “greater voice and representation in international financial institutions, and their heads and senior leadership should be appointed through an open, transparent and merit-based selection process.”
In 2010, Africa’s largest economy, South Africa, became the fifth member of BRICS. There have been four summits since 2009, with this year’s meeting scheduled for the end of March in Durban, South Africa.
The Durban Summit will discuss BRICS expansion into Africa, seen by many analysts as one of the most lucrative markets to emerge in recent years, and the creation of a joint development bank with the accumulated foreign reserve of over $200 billion.
More importantly, and perhaps learning from the European experience with Greece and Spain since the recession, the new bank will include a bailout fund.
According to the Russia and India Report, the fund will establish a BRICS-specific system of mutual lending allowing nations to bypass the IMF and World Bank.
BRICS – The Fluke?
Since the global economic crisis in 2008, criticism – some of it harsh – of BRICS has intensified with many saying that O’Neill overstated the role emerging markets would have in dominating world trade.
Among the most vehement of critics has been Ruchir Sharma, a Managing Director and the head of the Emerging Markets Equity team at Morgan Stanley Investment Management.
Sharma has said that the international economic convergence brought upon by BRICS is a myth and that the powerful performance of these nations in the past decade was more of a fluke.
“With the world economy heading for its worst year since 2009, Chinese growth is slowing sharply, from double digits down to seven per cent or even less. And the rest of the BRICs are tumbling, too: since 2008, Brazil’s annual growth has dropped from 4.5 per cent to two per cent; Russia’s, from seven per cent to 3.5 per cent; and India’s, from nine per cent to six per cent,” Sharma wrote in December’s issue of Foreign Affairs.
Sharma was alluding to news from Brazil late in 2012 that its central bank corrected its economic growth forecast from 2.5 to 1.6 per cent.
It also corrected inflation rates from 4.7 to 5.2 per cent.
India was also struggling in the wake of the global recession.
In 2011, India forecast double-digit growth in 2012, but it soon slashed this to just less than 7 per cent.
A Christian Science Monitor article last September said: “High inflation, high interest rates, and a poor monsoon season, coupled with a political crisis that has brought the government to a standstill, have caused business, consumer, and investor confidence to plunge [in India].”
The corrected forecasts of slower than expected growth in BRICS has led to speculation that the group will drag global economies into yet another recession around the corner.
In December, Danske Bank appeared to blame much of the economic crises in Europe on the downturn in BRICS performance.
“In fact, lower growth in BRIC countries is behind around 80 per cent of the decline we have seen in global growth this year,” Danske Bank reported.
Sharma appears to be on the same page. In his Foreign Affairs article, Sharms says: “No idea has done more to muddle thinking about the global economy than that of the BRICs.”
He echoes what many critics have said about the group – that they are physically disparate, have political issues challenging a full transition to democracy, generate growth in different, often contrary, ways, and have little in common when it comes to foreign policy.
“A problem with thinking in acronyms is that once one catches on, it tends to lock analysts into a worldview that may soon be outdated. In recent years, Russia’s economy and stock market have been among the weakest of the emerging markets, dominated by an oil-rich class of billionaires whose assets equal 20 per cent of GDP, by far the largest share held by the superrich in any major economy. Although deeply out of balance, Russia remains a member of the BRICs, if only because the term sounds better with an R,” Sharma says.
Other critics have pointed to internal divisions within BRICS, with some saying regional rivalry often dominates.
“The hope that the Brics countries would help one another through increased trade, investment and political support hasn’t panned out,” said Bob Davis in a January 2 Wall Street Journal article.
Davis goes on to say that while BRICS see their grouping as an alternative to the G7, both groups’ economies are intertwined, for better or for worse.
“When the US financial crisis spread to Europe, it didn’t stop there. The Brics nations weakened because they lost big export markets and sources of financing and investment,” he writes.
Challenging the order
But while criticism of BRICS institutions and power continues, there are two sides to the story.
While the Guardian’s Simon Tisdall admits that some critics accuse BRICS of having achieved little as a group since their first summit in 2009, he goes on to say that there may also be a feeling that no one wants “the established world order as defined by the US-dominated UN security council, the IMF and the World Bank” to be challenged.
But Oliver Stuenkel, Professor of International Relations at the Getulio Vargas Foundation in São Paulo, Brazil, downplays this challenging position and says BRICS is not interested in becoming a mirror of NATO or the EU. Instead, he says, BRICS is moving toward creating economic models that are “less rigid” than the G7, for example.
In an article published on e-International Relations, Stuenkel admits that one of BRICS greatest obstacles is establishing a unified vision.
“Without the ability to find a common denominator, there is little reason to organize yearly summits to debate global issues. From the very beginning, critics of the BRICS outfit have argued that such a vision was an impossible dream,” he says.
But he goes on to point that many of BRICS’ critics have paid little attention to the growth of ties between the member states from one summit to the other.
“Furthermore, the upcoming summit’s agenda indicates the BRICS members are slowly beginning to institutionalize their ties. Aside from a BRICS development bank, a common stock exchange, the elimination of investment barriers and cooperation on maritime security, the BRICS members will seek to build a common regulatory framework to boost intra-BRICS trade,” Stuenkel concludes.
Some analysts have also ignored BRICS’ ability to carry the rest of the world as it weathered or, in some instances, faltered in the face of the continuing global crisis.
While their numbers were down, emerging markets in BRICS enjoyed growth in 2012, compared to the stalled performance of developed markets, mainly in Europe.
“China and India are so large that their catch-up growth was able to raise the entire worldwide rate of economic growth. That’s why the world economy kept growing through the 2008-09 financial calamity,” says Slate’s Matthew Yglesias.
However, he says this paints a dismal picture as lower GDP figures from BRICS means that they may be unable to again give global economies a boost in the face of a possible recurring recession.
Better than Europe?
Last November, the European Central Bank warned that the Euro zone crisis was growing direr as the member states appeared to be slipping into a double-dip recession.
But the story is far more grim writes Vistula University’s Krzysztof Rybinski in the Financial Times “A critical sign is that public debt levels and unemployment rates are rising fast in the troubled southern European countries of Greece, Italy, Spain and Portugal. For example Greek debt is expected to hit 200 per cent of GDP, and in Spain public debt is growing from below 40 per cent in 2007, to a likely 100 per cent of GDP in 2014,” he says.
Meanwhile, the MSCI BRIC Index of the largest emerging markets shot up 22 per cent from last year’s low. According to the Economic Times, Reuters global stock market polls indicate that a BRICS rebirth is imminent. The newspaper predicts that investors will lean toward BRICS markets in 2013.
Zhang Jianping, a research fellow at China’s Institute for International Economics Research under the National Development and Reform Commission, believes such forecasts are palatable. In remarks made to the China News Service, Jianping examines BRICS statistics and says their economies will begin to rebound in 2013, outperforming European counterparts. HSBC analysts have predicted a Brazilian rebound later in the year.
While some have blamed BRICS for Europe’s economic woes and forecast its demise, others have come to the group’s defense.
Writing for Forbes, Ken Rapoza says eulogies for BRICS are premature. He says the fact that the IMF lowered global growth forecasts is “not because of China. Not because of the emerging world running around like chickens with their heads cut off.”
He indicates that while BRICS growth has slowed compared to the ‘golden period’ of the mid-noughties, it is still growing faster than Western economies. He points to the austerity measures many in the Euro Zone have to face.
“No one should be counting the BRICs and emerging markets out either,” he says.
Investment banking and online stock market forecasting expert Paul Ebeling agrees.
He believes that data indicates that BRICS economies are expected to begin to rebound in 2013, “and grow at a much faster rate than most developed economies, forming a sharp contrast to the developed economies standing now on the brink of recession”.
In late 2011, O’Neill wrote a piece for the UAE’s National paper in which he examined the viability of the economic ‘revolution’ he introduced into the global lexicon.
Not only did he reiterate his decade-old forecasts but said that BRICS had performed beyond his expectations. Although, in earlier articles he admitted he was surprised that South Africa had been so quickly admitted into the group, his outlook remained positive.
“I remain optimistic that as the four emerging giants, and some others, continue to grow in size and wealth, their prosperity will not only bolster their role in the world, but also give the more challenged economies a chance for a better future,” he wrote.
In an interview with Fortune magazine, O’Neill rejected any notions made by critics that China’s growth would falter and crumble.
He did, however, warn that India needed to overcome its reluctance to change policies and allow greater foreign investment.
He also believes that Brazil’s main sticking point is that it is dealing with an overvalued currency.
“That added to their second problem, that the non-commodity sector of their economy is not very competitive. Unless they can do something to boost their non-commodity industries, Brazil might continue to struggle. But I add that they’ve done things to reduce the strength of their currency this year that are risky but quite impressive,” he says.
Whether analysts pan or praise BRICS, the group is likely to grow in influence. It is likely to call for greater political roles, perhaps succeeding in expanding Security Council membership, and creating a new world bank.
What started off as a mere acronym a decade ago has steadily progressed into a trading alliance of two permanent Security Council members and three nuclear-ready countries that could be well-positioned to attempt a new economic order.
Postscript: In a travel and airline segment on CBS’ This Morning on January 8, 2013, Peter Greenberg, CBS News Travel Editor, predicted 2013 travel trends and said that foreign travelers will dominate the tourism industry.
“It’s not us anymore – it’s the Chinese, the Russians, the Indians and the Brazilians.”
This article was first published in the BRICS POST on 9 January 2013