Are BRICs Really that Powerful?

BRIC Business News

During the current economic crisis has provided fresh fuel to the debate over the decline of the West and emergence of the East. The so-called BRICs – Brazil, Russia, India, and China – are often looke upon as the inevitable economic winners. A glance behind the numbers, though, suggests proclaiming these countries victors may be a little too early. Some like Russia may not be included at all if major changes aren't made soon.

The numbers aren’t that great. The World Bank’s dark forecasts see global GDP plunging a record 2.9 percent in 2009, along with deteriorating current account balances, increased debt, soaring unemployment, chaotic stock markets and declining business confidence. Yes, there may be a few positives concerning recovery. China’s stimulus efforts – a rapid expansion of fixed investment and credit to the state sector fueled by massive foreign reserves – seem to have had a predictable positive, if probably short-term, effect. Although there is the possibility of a broader, but still mild, recoveries in 2010 and 2011 .

But the path to full recovery is not clear in any way. The global economy is at some kind of tipping or inflection point, a moment of paradigm shift. If the Anglo-American model of finance capital is yet another god that failed, so too the alternatives: Japanese networked capitalism, Euro-dirigisme, or various strains of state capitalism have not been widely accepted.

Before the depth of the coming economic storm was clear, the BRICs were the sweethearts of the investment community. They were first lumped together in an influential Goldman Sachs research report in 2001. Goldman projected that their continuing GDP growth could be faster than the rest of the world, with the GDPs of China and India surpassing those of the major Western economic powers before the middle of the 21st century. To be sure, these “emerging markets” were not seen as without risk, but with their scale – large populations and records of substantial economic growth – they looked very attractive.

But there’s more to economic prowess than GDP statistics and stock market indices. This is not to gainsay the BRICs’ – especially China and India’s – economic momentum and remarkable development. Visitors to China cannot be but wowed by what metropolitan giants Beijing and Shanghai have become. India’s IT prowess dominates. But long term growth and economic leadership will ultimately have to be based on business environment basics. International metrics that go beyond GDP suggest the BRICs have a long way to go, and they're right.

For example, corruption, the acid that eats away at business confidence, rule of law and fair dealing. None of the BRICs rank very high in the 180-country survey published by Transparency International. Brazil and India come in at 80th and 85th place, roughly comparable to Burkina Faso, Saudi Arabia and Panama. Russia, unsurprisingly, is almost at the bottom, ranking 147th – Kenya and Syria being near them. China does best, at 72nd place – right down there with Mexico. And if the current murky scandal involving China’s steel industry which has ensnared executives from Australia’s Rio Tinto shows anything, it’s that corruption and the opacity of China’s legal system can rust business confidence away.

If there’s corruption, then it’s not so easy to do business there, as there is no way of doing business in a predictable manner. The World Bank studies “the ease of doing business” in 181 countries. Brazil, Russia and India stand between 120 to 125 in those tables. China comes in somewhat better, in 83rd place – a little higher than Belarus, a little lower than Kenya. The most difficult issues? Dealing with the local authorities in Russia and China; enforcing contracts in India’s clogged legal system, and, interestingly enough, taxes in Brazil.

And if social stability is a metric, then the fires that have fueled tragic communal violence in India and, more recently, China (which also suffers from tens of thousands “mass incidents” of citizens protesting corruption) have to be a concern. You don’t push too hard against entrenched interests in Russia, where arbitrary arrest and even murder can be the outcome.

Should we really be surprised? From these points of view, the BRICs don’t look that strong. These countries are all, in one way or another, still developing. Brazil, India and China have large problems of income distribution (more unequal than even the US), issues exacerbated by large but low productivity agricultural sectors and urban squalor. Brazil and Russia rank at midpoint in the 179 country United Nations’ Human Development Index; China is just slightly below and India, alas, is almost at the bottom. And Russia and China face demographic challenges. China is aging. Russia has even more severe population problems – it’s disappearing.

Having said that, we do have to remember the days of America and the wild west where very similar situations were part of the mix. The only difference was the strong Christian influence which helped temper much of this. The BRICs, in general, don't have that as part of the matrix, with the excpetion - to a small degree - of Brazil.

But could they be considered a bloc? Their economic, social and political systems differ considerably: Brazil’s economy is based on agriculture; India’s on services; Russia’s on price-sensitive energy resources, and China on manufactures for export. China and Russia have had problematic political relations; the disputed borders between China and India are still hot (and let’s not forget New Delhi’s concerns about the cozy relationship between Beijing and Islamabad). What do they share? Growth potential. And a desire to take the Yankee dollar down a peg. Is that sufficient to suggest that the answer to the world’s woes be found with the BRICs?

BRIC officials seem to think so. In the run up to the April 2009 G-20 meeting in London they pushed their own agenda, calling for new international finance rules, reform of the IMF and the World Bank, and resurrection of the Doha round. Overall, they are pushing for a multi-polar economic order, one less dominated by the US.

The Russians called for a new international currency backed by IMF SDRs (Special Drawing Rights) – an idea also picked up by Brazil and China. Indian Prime Minister Manmohan Singh said that the eyes of the world were on India in the “hope that India would be an engine of growth for the world economy.” Chinese officials touted their own “stimulus package” and quick action, noting the superiority of China’s command system “when it comes to making vital policy decisions.”

But at a “BRIC Summit” held in Yekaterinburg in July, there was less fire – a BRIC agenda did not surface. Still, the idea of a new international reserve currency hasn’t gone away. The problem there are the consequences of being a world reserve currency, which these countries probably aren't ready to, or willing to take on.

We raise these matters not to criticize the BRICs individually but rather to put a little realism into the crucial discussion of world economic recovery. First, they can hardly be considered a cohesive group. Second, sustainable leadership requires a sound business environment. On that score, the BRICs have a way to go.

To be sure, their equity markets seem to be doing well enough. But there’s more to an economy than GDP projections and speculative bets about the future of a few leading companies.

While some think the BRICs are overly hyped, I don't think that's the case in the long term; with the possible exception of Russia. They will play a huge role the economics of the world, and if nothing else, the populations of China and India, along with their growing middle classes guarantee that.

BRIC Business News