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FEATURES/Boardroom | Jun 4, 2012 | 38674 views

BRIC Countries Hit A Wall

The economies of Brazil, Russia, India and China grew at a furious pace for much of the past decade and looked like they would beat even the most optimistic of forecasts. But recent missteps and increased competition from other nations have slowed the momentum
BRIC Countries Hit A Wall
Image: Corbis

J

im O’Neill’s epiphany came on September 11, 2001. Chief economist at Goldman Sachs then, he had grown up in a working class neighbourhood, south of Manchester in England “getting drunk and playing soccer”.

Three thousand people died that day when 19 terrorists’ owing allegiance to Al-Qaeda, a terrorist group, hijacked four passenger jets. Of these, two were used to bring down New York’s iconic twin towers at the World Trade Center; another one was rammed into the Pentagon, America’s defence headquarters; and one crash landed into a field in Pennsylvania after passengers onboard the plane overpowered the hijackers and a scuffle ensued. An outraged America responded with grief, fury and acts of retribution.

Unlike most people who believed this was a clash of civilisations, the economist in O’Neill argued it was an act of lopsided globalisation. In fact, in January 2010, he’d told the London-based Financial Times that all things global are exemplified by all things American. And that it didn’t feel right to him. “...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,” he argued. September 11 was his evidence.

He called in his team of number geeks, including Roopa Purushothaman and Dominic Wilson, to interpret the world from this lens. It culminated in a report: Global Economics Paper No: 66. People in business and economics know of it as the BRIC report, with BRIC being an acronym for Brazil, Russia, India and China.

The hypothesis it contained was this: “Over the next 10 years, the weight of the BRICs and especially China in world gross domestic product (GDP) will grow”. GDP measures the total market value of all final goods and services produced in a country in a given year, minus the value of what it imports. “...in line with these prospects, world policymaking forums should be re-organised,” the report said. Therefore, it argued, investors across the world would do well to pay more attention to this block of nations.

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Investors across the world took notice and bet their monies on the idea. The numbers prove it.

• In 2000, all the emerging markets put together got $200 billion in private capital investments.

• By 2010, this number had gone up eight times to one trillion dollars. Of this, almost 40 percent found their way into BRIC. In absolute terms, the number continues to grow even though the pace at which capital is coming in has declined since 2007.

All ought to be well, therefore, in Brazil, Russia, India and China, and O’Neill ought to be guzzling the beer down in an English pub. But all isn’t well and O’Neill isn’t guzzling beer. Instead, his hypothesis is under intense scrutiny and O’Neill is busy defending it. It is, therefore, important to closely scrutinise yet another series of numbers.

• If you went to the market to buy something using the Brazilian real, the Indian rupee or the Russian rouble, you’d get much less of whatever you want to buy than you could in the recent past. Over the last four months, for instance, the value of the rupee has declined 11 percent. Each American dollar, the currency against which the value of all other currencies are measured by, is now worth Rs 54.4—in economic jargon, the lowest the rupee has gone to. This, in spite of the fact that the American economy stands at a precarious point. By all yardsticks, each American dollar ought not to be able to buy so many Indian rupees. But it can. Add to this the fact that output from India’s factories shrunk 3.5 percent in March this year. That brings India close to the economic crisis it faced in 2008-09.

• It’s much the same thing with Brazil’s real. Since the beginning of this year, it is down 15 percent against the dollar. The country’s economy is shrinking in spite of the Brazilian government’s attempts to give it a fillip by cutting taxes and putting more money into the hands of its people.

• China’s GDP, which was growing at an incredible 10 percent, has slowed down to 8.9. While 8.9 is as good a number as any, it’s a slowdown nevertheless. That is because when GDP slows down, jobs are among the first casualties, and the workforce begins to get restless. In part, this is because the Chinese are cutting down on constructing new highways and railroads. If they slow down any more, demand for resources such as steel, copper and oil will taper and fall into a slump.

•  The ripple effects are being felt in Brazil and Russia, both of which are exporters of resources to China. Like we articulated above, the real has already lost a significant amount of its value. And in Russia, industrial production grew just 1.3 percent last month, the slowest in two-and-a-half years.

So, what happens now to investors who’ve poured their money into BRIC? More importantly, what happens to 40 percent of the world’s population that live in these four countries?

This article appeared in the Forbes India magazine issue of 08 June, 2012
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Comments (3)
Dr.a.jagadeesh Oct 27, 2013
Great article on BRICS.
Projections on the future power of the BRIC economies vary widely. Some sources suggest that they might overtake the G7 economies by 2027. More modestly, Goldman Sachs has argued that, although the four BRIC countries are developing rapidly, it was only by 2050 that their combined economies could eclipse the combined economies of the current richest countries of the world.
In 2010, however, while the four BRIC countries accounted for over a quarter of the world's land area and more than 40% of the world's population, they accounted for only one quarter of the world gross national income. A criticism is that the BRIC projections are based on the assumptions that resources are limitless and endlessly available when needed. In reality, many important resources currently necessary to sustain economic growth, such as oil, natural gas, coal, other fossil fuels, and uranium might soon experience a peak in production before enough renewable energy can be developed and commercialized, which might result in slower economic growth than anticipated, thus throwing off the projections and their dates. The economic emergence of the BRICs will have unpredictable consequences for the global environment. Indeed, proponents of a set carrying capacity for the Earth may argue that, given current technology, there is a finite limit to how much the BRICs can develop before exceeding the ability of the global economy to supply.
Dr.A.Jagadeesh Nellore(AP),India
Naveen Lukose Jun 7, 2012
this article reads like a synopsis of the "breakout nations" by ruchir sharma
Ashok Pai Jun 4, 2012
The most important thing is that the BRIC countries produced and the developed nations bought. Now, the developed nations slowed down on buying and the BRIC nations are left searching whom to sell the goods and services!
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