BRICS : THE CHANGING FACE OF GLOBAL POWER / THE FINANCIAL TIMES ( VERY HIGHLY RECOMMENDED READING )

Brics: The changing faces of global power

By Alan Beattie

Published: January 17 2010 19:05

Put a jaguar, a bear, a tiger and a panda together and you might get a good show but you won’t get a quiet life.

The Bric grouping – Brazil, Russia, India and China – has become a shorthand for the rise of emerging markets in the global economy. And after a rather stellar decade, the Brics mainly had a good crisis from which they are now rapidly exiting.

Goldman Sachs, the financial group that invented the category, reckons that China may well become the world’s largest economy before 2030. Collectively, the Bric economies could well surpass output in the Group of Seven wealthy nations – which have dominated the management of the global economy – by 2032.

The Brics already have a bigger share of world trade than the US. China, probably the world’s biggest goods exporter last year, has been supplemented by India’s software and back-office exports, Russia’s oil and gas and the domination of a number of agricultural commodity markets by Brazil’s super-competitive farmers.

While equities in G7 countries were struggling to stay in positive territory during the past five or so years, the Bric share prices, albeit with a steep drop and rapid recovery during the global financial crisis, finished the decade more than twice as high as in 2005. Bric equity indices have emerged; Bric funds have sprung up for investors to pile into the sector.

So as the world emerges from recession, is this a transformational moment when the centre of gravity in the global economy and its governance decisively shifts? Is this a pivot point such as the second world war, where the confident, innovative US muscled aside the weakened, debt-laden economies of Europe and remade the global financial architecture? And, most immediately, are Bric consumers up to the task of rebalancing the world economy by supplanting their acquisitive American counterparts?

The most likely answer is: not yet. Not only are the Brics such a disparate group that almost any generalisation is problematic, but China, the dominant member of the quartet, still seems wedded to an economic model dependent on demand elsewhere.

“The so-called emerging economies, even some like Bangladesh, are undoubtedly players on the global stage,” said Jean-Pierre Lehmann, professor of political economy at the IMD management school in Lausanne, Switzerland. “But I don’t see any great cataclysm in the next 10 years, nor the centre of finance definitively moving east.”

Like a boy band or a street gang, the Brics might almost have been chosen for their disparate abilities rather than their similarities. China’s size and openness to trade give it as much economic clout as the rest put together: Markus Jäger, of Deutsche Bank, calls the hypercompetitive manufacturing exporter “the 800lb panda in the room”. India, similar in population but poorer and economically more insular, is chiefly notable to investors and trading partners for its software and business services. Brazil, despite a sprinkling of manufacturers, remains one of the world’s most efficient agro-exporters; Russia, after feebler attempts to diversify, essentially just sells oil and gas.

The story of their rapid progress is familiar but still dramatic. A decade ago, only one had an investment-grade credit rating; now all do. Only 12 years ago, a Russian debt default and Brazilian currency crisis rocked the world economy; today, they have accumulated vast foreign exchange reserves.

The Brics contributed about half of global growth between 2000 and 2008 – sharply higher than in the previous decade. Yet along with this growth has come an unbalancing of the global economy.

A Chinese growth model based on heavy investment and exports has accompanied vast current-account surpluses across east Asia, matched by a current-account deficit in the US. And despite doing its bit to keep economic growth going during the crisis, it is far from clear that the Middle Kingdom has effected a shift towards consumer demand that a true engine of world growth would achieve.

With a great flourish, Beijing announced a $585bn stimulus package in November 2008 and loosened bank credit. But its ability to create self-sustaining growth was suspect. Rather than handing out cash to consumers to get them spending – a move that might also have encouraged imports – a large chunk of the stimulus went into the old favourite, fixed investment. “If global demand does not recover in time or the stimulus measures fail to stir the animal spirits, China may end up creating overcapacity,” said Mr Jäger.

Razeen Sally, a trade expert at the London School of Economics, said: “The Chinese interventions had the effect of reinforcing existing problems and imbalances. We are going to see a lot of excess capacity in export-oriented industries like steel at exactly the wrong time.”

The repegging of the renminbi against the dollar in 2008, after three years when it was allowed to crawl higher, has also done nothing to shift the Chinese economy from exports to consumer demand. The effect of that decision is multiplied by the copycat actions of many emerging-market countries holding their own currencies down lest they lose competitiveness to China.

Indeed, although the worldwide reduction in consumer demand has cut the absolute level of China’s current-account surplus during the crisis, with fewer ships carrying toys and iPods out of Shenzhen and Shanghai, China continued to gain market share abroad. The International Monetary Fund and others reckon that the apparent rebalancing of the global economy over the past year is temporary. When demand picks up, so will Chinese exports, along with the old surpluses and deficits.

Despite pockets of profligacy, if anything, China’s has become less rather than more of a consumer economy in the past decade. Its overall savings rate grew over the decade. Although much of this rise reflected corporate savings, household savings rose, too, and a greater share of national income went to companies rather than consumers in the first place.

A survey last year by the McKinsey Global Institute backed up what many economists have long argued: that the lack of a social safety net is one of the main reasons that Chinese households save. The top three reasons given were: educational needs, security in case of illness and caring for parents. Changing deep-seated structural factors such as this will not be quick. Nor will it be achieved simply by letting the renminbi rise.

As for the other Brics, whose trend growth rate is slower than China’s, they are unlikely to have a noticeable effect on global demand for some time. Although growth in Brazil and India held up well during the crisis, the former is a relatively mature economy with less scope for rapid growth; the latter an underperformer with a chronic public finance problem and a household savings rate even higher than China’s. Meanwhile, Russia, whose economy contracted sharply during the global recession, still depends on oil prices.

A decade of rapid growth is not enough for the Brics to seize the baton of global economic leadership from the US and western Europe. The grouping, or some of them, may have astonished the world with their progress over the past 10 years. But it will require a qualitative improvement as well as more growth to consolidate that shift of power.
Copyright The Financial Times Limited 2010