Tuesday, June 12, 2012

The end of BRIC?

Back in 2001, Jim O Neill of Goldman Sachs predicted that Brazil, Russia, India, and China would eventually form a bloc of developing nations that would reach an advanced economic state at the same time. BRIC as it was called was supposed to become a new global super power agglomerate.  In fact, BRIC became so internationally recognized (partly because people take Goldman Sachs seriously), that the 4 countries started forming BRIC summits.

The idea of BRIC suggested that the world's market for resources would be dominated by Russia and Brazil and similarly the world market for manufactured goods and services would be dominated by China and India.  Together these nations would cooperate and their economic output would supposedly be greater than all the other countries combined.  While there were some detractors who felt that the countries weren't that well linked and too starkly contrasting to control both the economic and political sphere, many experts believed in BRIC's potential.

Until the last year or so, the BRIC nations were growing rather smoothly.  But since the latter months of 2011 and into 2012, there are suggestions that BRIC might not be so stable

Starting with India: Growth is expected to slow down to 5.3% from the typical 8-9% they've experienced before.  That's not a bad rate, but what's worrying is that the problems they are facing which require quick fiscal action aren't being dealt with appropriately. The rupee has lost value, private investment has dried up as a result, but the government seems unwilling to react.  S&P has threatened to downgrade India's credit rating due to political deadlock and the rise of regional parties.  India has been a stable democracy and one of the fastest growing economies in the world, but there are some signs that they could be derailed.  Change doesn't seem likely.

Growth in China, similarly has slowed down and part of that is due to their reliance on Europe's consumer market.  Europe has been one of China's largest trading partners and their currency crisis has caused a deep drop in consumer confidence and hence China has been forced to cut back on imports.  China's attempts to gain a foothold in Africa have also gone through a bit of a rough patch with the increased political instability over the past two years.

Russia's political problems have resurfaced and Brazil's counter-inflationary policies have slowed growth in order to control their skyrocketing interest rates.

Overall things are looking pretty bleak for each of the BRIC nations, but is this a permanent problem or merely a setback?

My answer: For India, China, and Russia they have some work to do.  For Brazil, there isn't as much reason to worry.

India's government is struggling right now to develop a plan B when the economy slows down.  China's trading partners issues and their own internal problems with inflation, while temporary on the surface should not be ignored.  If China doesn't want their economic growth pattern to be scuppered, they should build from within.  Turn to their own consumer base while the rest of the world is mired in their own economic conflicts. For China it's a tough choice to make and they might want to wait out the Euro crisis and Africa's political issues.  But if events turn for the worse (Euro disbands, Differing African interests), China will have no choice but to reinvent it's economic model.  Russia has to deal with corruption and a declining population base and those are some serious long term issues to contend with.  

Brazil on the other hand is dealing with something fairly temporary.  Inflation and high interest rates can be solved easily and a year or two of slower growth isn't as big a deal.  Considering they have a higher per capita GDP than China or India, growth was always going to be a little lower due to the higher starting level of social privileges that Brazilians have had.  There are other differences in income inequality but Brazil has started to address more progressive issues.    

So to answer the ultimate question, in my opinion BRIC might diminish into BIC or become BICS (S=South Africa) depending on how well South Africa develops.  Russia's long term strategy doesn't seem viable and they could very well be unable to sustain its growth patterns long enough to have the same stranglehold on raw materials that Brazil could eventually reach.