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Chapter 1

What’s been happening in the BRIC countries?

It is nearly twelve years since I first coined the acronym BRIC to highlight the remarkable impact these rapidly growing countries were starting to have on the rest of the world, as well as the changes they were experiencing for themselves. The first decade of that period, as I have described elsewhere,1 turned out to be even more dramatic than I had anticipated, but as we move further into the second decade, there is evidence of slower economic growth in each of Brazil, Russia, India and China. Some observers are now suggesting that the tailing off of BRIC growth means that the whole phenomenon was overhyped2 and was never a great investment proposition anyway.3 It is true that the BRIC economies are currently growing by less than in the past decade, but it is not clear whether this is a structural slowdown or just a cyclical one. For reasons I outline below, it was highly unlikely that they would have continued to see GDP growth at the same rapid pace.

Moreover, while it is interesting to look at their collective economic performance, it is also clear that there are big differences between the four economies. China is of particular importance, as the next chapter will discuss in more detail.

Table 1.1 shows GDP growth for each of the BRIC countries by decade, going back to the 1980s, along with my 2010 forecast for the ten years to 2020, and actual growth rates in 2011 and 2012. The figures tell the story of a decade of unusually strong growth, followed by a return to a less astounding, but hardly disappointing, growth performance. It is clear that the decade 2001–10 was a particularly good one for the BRIC economies. In some ways, it may have been unusually fortunate, maybe even a ‘perfect storm’ for rapid growth. In particular, nothing went badly wrong in any of the four countries, which was spectacularly lucky given their diversity in terms of their economies, societies and vulnerabilities to external influences. This is one of the main reasons (as I explained in The Growth Map1) that real GDP growth during that decade far exceeded expectations.

Table 1.1. BRIC real GDP growth by decade.

	1981–90	1991–2000	2001–10	2011	2012	2011–20
China	9.3	10.5	10.5	9.3	7.8	7.5
India	5.6	5.6	7.5	6.3	3.9	7.5
Brazil	1.6	2.6	3.6	2.7	0.9	5.2
Russia	–	–2.1	4.9	4.3	3.6	5.4
BRICs	5.3	5.5	8.1	7.7	5.8	6.6

Source: IMF and Goldman Sachs Asset Management (GSAM).

Perhaps to the casual observer a further acceleration in growth after the 2000s might have seemed inevitable. To those of us with experience in these economies, and in studying long-term growth trajectories in general, it seemed highly likely that the growth of the BRIC economies would slow down. The Goldman Sachs (GS) forecast for this decade was 6.6% on average, which would seem to be a more sensible benchmark than the extremely rapid growth of the previous decade. Anything lower would count as disappointing. If growth now starts to slow either to less than this figure, or even to less than the previous thirty years together, the adjective ‘overhyped’ would be justifiable. (As it turns out, average BRIC real GDP growth for the three decades 1981–2010 was also exactly 6.6%.)

As can be seen, primarily because of China’s importance, BRIC growth in 2011–12 has been 6.7%. Although slightly higher than the past thirty-year average, it is, of course, well down from 2001–10. At the time of writing, consensus forecasts for 2013 and 2014 are 6.6% and 6.9%, respectively. So while the BRICs’ real GDP growth this decade might be disappointing compared with the surge of 2001–10, it has actually slightly surpassed my initial expectations.

The detail obscures an extremely important point. Even with slower GDP growth in the next ten years compared with the previous decade, the impact of the BRIC economies on the world is still increasing. Figure 1.1 makes this point, which is vastly underappreciated by so many people, powerfully.

Figure 1.1. (a) The size of key economies in 2011. (b) Change in USD GDP. Source: IMF.

By the end of 2011, the aggregate size of the BRIC economies stood at around $15 trillion, not far off the size of the US economy. Remarkably, in just one year (2011) the rise in the dollar value of their GDP was $2.3 trillion, equivalent to creating between seven and eight new Greek economies a year, or to adding another Italy to the global economy in a year. In the West, people think about the BRIC countries as economic powers of the future. The point is that this future is already upon us. They are the powers of the present.

The message of this book is that even though their growth rates may be slowing down, Western policymakers must take on board the lessons of the adaptive capitalism adopted in a wide range of economies, from China to Nigeria, and must al­low these Growth Markets their proper status in international institutions, for effective governance of the global economy.

The BRIC countries differ greatly from the other Growth Markets, but the common theme is that they have been pragmatic in adapting capitalism to their own situation and needs. This book describes some of the key similarities and differences between them. They need to become more Western in some of their own policies and practices, as described below. However, the West, post crisis, needs to adapt too.

I have spent much of the past eighteen months trying to explain to business people and investors around the world that, hard as it might be for them to believe, the European financial crisis is not the biggest issue facing the world economy. The biggest single issue is the continuing growth of the BRIC countries, and some other rapidly growing economies. As I will discuss in a geopolitical and policy context, they will soon outweigh the United States in terms of GDP, which, among other things, will mean that as a group their influence on the world is set to rise dramatically.

Labelling economies

In the past few years the label BRIC has, for political rather than economic reasons, become BRICS with the inclusion of South Africa. Economically this is a bit odd, as South Africa, with a total GDP of around $400 billion, is not much bigger than Greece. Its size is dwarfed by the four original BRIC countries, and, indeed, by the four other emerging economies4 that I refer to here as Growth Markets (Mexico, Indonesia, South Korea and Turkey). They are each two or three times the size of South Africa. While the BRICs and the Growth Markets are the main subject here, as I will show in Chapter 3, Africa as a whole is already showing promising signs of growth and its potential is certainly quite BRIC-like. What is more, the growth of trade and investment between Africa and the BRIC countries is an important aspect of the transition into a mainly non-Western world economy – a story that is currently underappreciated. Nigeria is the continent’s leading contender for growth economy status. Still, if South Africa can help to both represent Africa as a continent and use that platform to positively encourage the growth of infrastructure and trade between African countries, then its membership of the club is more justifiable.

Still driving global growth

Table 1.2 is probably the most important table in the book because it shows that, although BRIC growth is going to be slower this decade than last, global GDP growth this decade could accelerate compared with the past three decades, because the BRIC countries and other rapidly growing emerging world economies now have so much more weight in the global economy.

Table 1.2. Global growth: last three decades and next decade.

	1981–90	1991–2000	2001–10	2011–20(forecast)
US	3.3	3.4	1.6	2.5
UK	2.8	2.5	1.4	1.5
Euro area	2.4	2.3	1.2	1.5
Japan	4.6	1.2	0.7	1.0
China	9.3	10.5	10.5	7.5
India	5.6	5.6	7.5	7.5
Brazil	1.6	2.6	3.6	5.2
Russia	–	–2.1	4.9	5.4
BRICs	5.3	5.5	8.1	6.6
Growth Markets	5.1	5.2	6.9	6.2
World	3.3	3.3	3.5	4.2

Source: IMF and GSAM.

By 2015 the size of the BRIC economies in US dollar terms will surpass that of the United States. This means that if their growth rate exceeds that of the United States, their contribution (in current US dollar terms) to world GDP growth will be more than double that of the United States as can be seen in Figure 1.2. In purchasing power parity (PPP) terms, or, in other words, with GDP adjusted for the cost of living in different countries, the relative size of the BRIC countries is even larger. This is the basis on which global GDP growth rates are normally calculated and compared, but some people argue that PPP calculations distort the contribution of the BRIC countries. Even on the nominal US dollar basis, though, their 6.6% growth contribution is more than double that of the United States. Another way of thinking about it is to imagine what world GDP would look like if the United States grew by 6.6%. Seen in this light, one could even argue that it is a good thing that the BRICs’ real GDP growth will slow as their economies get bigger, as otherwise there would be even more dramatic changes in world trade.

Figure 1.2. Contribution to GDP (USD) 2011–20.Source: GS Global ECS Research.

As I discussed in The Growth Map,1 long-term growth is really driven by two variables: the number of people in a country’s workforce and how productive they are. Countries with large and rising numbers in the workforce, and with rising productivity, will see their real GDP growth rates accelerate, and countries with declining populations, and weak and declining productivity, will see their growth rates weaken. Table 1.3 sets out the conflicting pressures for each of the BRIC countries.

Table 1.3. Labour force participation.

	Size of working age population (millions)	Growth this decade of working age population
China	1,013	0%
India	822	16%
Euro area	219	–2%
US	213	4%
Brazil	137	11%
Russia	102	–8%
Japan	79	–9%
UK	41	1%

Source: UN and GSAM.

As things stand, none of the BRIC countries has the ‘ideal’ combination. India easily has the best demographic profile; its large, young population gives it a rapidly increasing labour force and the highest potential growth rate of all the BRIC economies. I frequently think that, for this reason alone, India has the highest potential to do better than expected in this decade and beyond. In contrast to this, India probably has the weakest productivity of the four BRIC countries. As explained elsewhere,1 I use an index produced by GS and based on a total of eighteen different variables, called a growth environment score (GES), to measure sustainable potential growth and productivity. India scores the lowest of the BRIC countries and has the most need – but also the most scope – to improve. If it did introduce the reforms needed to boost productivity, it surely has the greatest capacity to achieve unexpectedly strong growth. India could easily surprise us, despite its disappointing progress in the past two years.

In June 2013, I visited India to meet the probable candidate for the BJP (Bharatiya Janata Party) in the 2014 elections, Mr Modi, the chief minister of the state of Gujarat. If he were to become elected, despite considerable challenges, and if he could implement his mantra of ‘maximum governance and minimum government’, India could become an extremely exciting place. Poor governance, both centrally and in many regions, has hindered the effectiveness of many policies, economic ones included. Transformation of central governance and its links to the different states would be a huge, but very difficult, step forward for India.

Table 1.4. Trend growth in the BRIC countries (% change in real GDP).

	Realized			2050 projections by decade*
	1981–90	1991–2000	2001–10			2011–20	2021–30	2031–40	2041–50
Brazil	1.6	2.6	3.6			5.2	4.6	3.9	3.1
Russia	–	–2.1	4.9			5.4	3.8	2.7	1.8
India	5.6	5.6	7.5			6.5	6.0	5.6	5.1
China	9.3	10.5	10.5			7.1	5.2	3.4	2.9

Source: IMF and GS Global ECS Research.*From GS Global ECS projections model.

None of the other three countries has as favourable a demographic profile as India, and so, in order to boost real GDP growth significantly, they have to rely more on productivity-enhancing policies to exceed expectations. So it is difficult to believe that their growth will accelerate in the future. Brazil has reasonable demographics and, with much improved policies that could unleash private sector investment, it could also show stronger growth than over the last decade. I have assumed that Brazil will grow by more, and this currently looks somewhat optimistic.

Once economies become very big, of course, there is less scope for them to grow rapidly. So, by 2050, it is assumed that all four of the BRIC countries will have slowed down. The two with the most challenging demographics are China and Russia, which both have ageing populations. Yet in the decade 2040–50, the BRIC countries combined will have surpassed the G7 in size, having overtaken the United States some twenty years earlier. Their average growth rate of 3–4% over that period, while significantly slower than today’s 6–7%, would still be the envy of Europe and the United States.

While all four of the BRIC countries need to introduce policies to boost their productivity, there is a danger of being too pessimistic about their outlook. There is evidence that demographic trends in Russia and China will not be as bad as I have just assumed. In March 2012, I participated in the annual workshop of the Ambrosetti Forum and, in a session on the ‘emerging world’, the chief economist of Sberbank compared official Russian projections for population size in recent years and the latest estimates of the actual figures. It would seem that the population has increased slightly, and so, as yet, shows little evidence of the widely assumed decline. There continues to be growing evidence that, as Russians become wealthier and more knowledgeable, they are adopting behavioural attributes that are extending their life expectancy. This includes drinking less cheap alcohol, especially vodka. There are perhaps other factors at work as well, including some signs of increased immigration from some of the countries of the former Soviet Union.

Russia faces considerable challenges, but so far this decade its growth has been slower than previously, but not materially slower than I expected.

It is worth underlining once again the significant position the BRIC countries already hold in the world economy: if Russia grows, as assumed, by 5% on average this decade, its contribution to global GDP will be bigger in US dollar terms than that of the euro area.

What about China’s demography, the result of its all-too-successful one-child policy? Recently, the State Council announced the closure of a number of ministries, including the one responsible for overseeing this policy. Some people see this as another sign that the one-child policy is in the process of being relaxed. If so, and if China’s birth rate were to rise as a result, this would not affect China’s labour force until well after 2020, but by 2030 China’s population would not be shrinking to the degree currently assumed.

Turning from workforce size to productivity, each of Brazil, Russia and India need to introduce policies to boost their performance. Suppose that they decided to learn from the experience of South Korea. At the end of 2012 South Korea had the second highest GES of the 180 countries in the ranking, and it is also the only large populated emerging nation that has approached the living standards of the G7. Policymakers in each of the BRIC countries, and many of the so-called Next 11 (N11)6, might find it useful to study South Korea and see what they can learn for their own economies.

South Korea’s potential would be spectacular if it were as large as one of the BRIC countries, but its population of less than 50 million is tiny by comparison. However, if Korea were to ever unify so that the North harnessed the forces that have driven South Korea, the potential of the unified nation would be ultimately rather strong, despite the enormous adjustment challenges.

What could the other BRIC countries learn from South Korea’s productivity advances? The lessons fall into three different categories.

Firstly, South Korea scores well in terms of education. To varying degrees, each of the BRIC countries could follow suit, India especially. It could be argued that repeating South Korea’s success in education for populations the size of those of the BRIC countries is a much tougher challenge, but, according to the Organisation for Economic Co-operation and Development (OECD), Shanghai has probably the best secondary education standards in the world today.7 So it is not an impossible challenge.

Secondly, South Korea has achieved superb results in the introduction and adoption of modern technologies such as mobile telephones and computers and in its broadband Internet access and use. South Korea actually scores the best of any of the 180 countries in the rankings on this front. The remarkable progress of Samsung in global markets is a vivid example of this technological prowess: it is a leading-edge technology company. Technological know-how benefits all sectors of Korean society, in both visible and less visible ways. Each of the BRIC countries, to varying degrees, could benefit dramatically from the nationwide spread of modern technologies. India has the greatest need to change, and would get the greatest potential benefit from catching up.

The third area relates to the rule of law, especially with regard to business. South Korea is not up to the highest of those standards achieved by some developed economies, but it has improved considerably since the 1997–98 Asian crisis, and the vulnerabilities that revealed. The propriety of connections between business and government and a credibly enforced rule of law are vitally important for sustained growth. The alternative – cronyism, uncertainty about the regulatory and legal environment, and even the risk of expropriation of assets – means lower investment and slower growth.

All the BRIC countries, especially India, could benefit from better governance. Their growth performance will be inhibited if they do not address some important domestic governance shortcomings. Even with such changes, their growth will not be as spectacular as it has been in the recent past. But, for at least the rest of this decade, they will be driving world growth.

The long-predicted shift in global economic power has now happened; in the West, we have not yet made the necessary mental adjustment and continue to talk about this as a transition that still lies ahead. Yet the BRIC countries and other fast-growing emerging economies account for about 30% of world GDP and for about 70% of all world growth in GDP since 2000. This means that we will need to look to the BRIC countries and other emerging Growth Markets for economic dynamism, and I will turn to that future in later chapters. First, though, it is important to understand the absolutely key role China has played in transforming the economic map of the world.