By Parul Jain
BRICS – Brazil, Russia, India, China and South Africa, these countries became a rage in the past decade and the darlings of the investors abroad. But, if we see these countries’ current growth rates then may be the picture is changing and the prognosis is not good. In fact some eminent personalities like Ruchir Sharma, head of the emerging markets equity and global macro at Morgan Stanley investment management has tagged the term BRICS as a mere marketing ploy. He also opines that the clubbing of these economies together is also something which is peculiar in its own sense. These countries have their own objectives and goals to achieve and sometimes even contradictory for that matter and hence clubbing them together is not a very good idea but rather a gimmick to affect people’s /investor’s expectations.
Brazil’s GDP grew by only 1% last year, and may not grow by more than 2% this year with its potential growth barely above 3%.Russia’s economy may grow by barely 2% this year, with potential growth also at around 3%, despite oil prices being around $100 a barrel. India despite logging strong growth rates in the past decade is struggling to achieve even a 4% this fiscal with fears that it may drop down to the “Hindu rate of growth”. China’s economy grew by 10% for last three decades( which came as a shock to mainstream economists), but slowed to 7.8% last year and expects a rough patch all through this year. Lastly, South Africa, which seems to be too complacent in its liberation has recorded a growth rate of only 2.5% last year and expects a mere 2% this year.
But the present situation in BRICS nations is somewhat “not-so-surprising”. Between 2003-2011, GDP in current prices grew by 35% in the U.S., 32% in Great Britain, 36% in Japan and 49% in Germany whereas during the same time period BRIC nations’ GDP witnessed a tremendous increase where China’s GDP expanded by 346%, Brazil’s by 348%, India’s 203% and Russia’s 331%.But , this expansion in nominal GDP did not happen ONLY in BRICS but in other countries as well which did not enjoy as much limelight as the former. The hidden fact behind these astounding statistics is that expansion induced by real increase in output was really meagre in these nations. For example, Brazil’s only 11% of the nominal GDP expansion was attributable to increase in real output. For Russia, the figure stood at 12.5%.
Despite not so common goals, these countries have a few common problems. The most prominent one is excessive state intervention. In Brazil this has led to crowding out of private investment and a formation of a state that is no longer affordable with a weak infrastructure further distorting the efficient working of the economy. In India, policy paralysis, corruption, crony capitalism, high fiscal deficit and current account deficit, policy formation directed by populism, weak infrastructure, high and persistent inflation , lack of labour reforms, red tapism are the few results of its state intervention. In China, unlike other BRIC nations, state intervention has up till been very honest and intelligent but we see a state intervention in every corporation. There’s always a possibility of the good government turning bad and corrupt.Hence for its survival, producing good growth rates has become a necessity and hence we see a “growth at any cost “attitude in Chinese govt. For Russia, the greed for power and hence the danger of an authoritarian regime with Putin as its leader is one danger looming over it. Vladimir Putin did introduce a string of reforms which led Russia to be one of the fastest growing economies but it has become a land of extremities. There are two systems thriving at the same time in there. One is free capitalism and the other is authoritarian (in case of oil reserves).Russia has lost its thread now and more than fifty percent of Russians rely on state for living. In South Africa, there’s a sense of complacency that is keeping the government from triggering reforms. During 1980-90, SA developed an economy heavily under state control and rest in the hands of cartels. Sadly, the situation is pretty much the same even today.
??????????????? Another problem common to these nations is lack of financial deepening and naturally financial illiteracy. For instance, in India there is a staggering 80% of the population outside the ambit of its banking system. China has reached that level of per capita income where it HAS to establish more and better financial institutions for better appropriation of funds. The same goes for other countries too!
??????????????? The recent of all problems has been Ben Bernanke’s announcement of tapering its QE3, which is obviously good for U.S. , but had resulted in capital flight from these countries and also highlighted the dependence of their growth rates on U.S.’ fiscal or monetary policies.
??????????????? Brazil, Russia and South Africa witnessed growth rates heavily dependent on external commodity? demand. Today, with China investing heavily in alternate sources of energy, global slowdown and other factors have probably put a halt to their growth stories.
However to say that the party’s over is according to me would be a bit too pessimistic.
If Brazil can manage its interest rates, exchange rates and foreign funds flows along with? diversification of commodities it exports to avoid vulnerability, build better infrastructure to increase efficiency in the system, build better educational institutions? to control skill induced wage inflation , the party is ON! If Russia also invests in infrastructure diverting funds from altruistic state welfare expenditure, its productivity will hopefully increase. Liberation from state intervention in corporate world and also financial deepening (which goes for all the BRICS nations) is what can make a huge difference in Russia. If India can rein in its never ending scams, bring back the black money from tax havens, conduct a fiscally prudent and not populist policy, let the central bank work independently, gain its declining investor confidence back and achieve accountability along with the set of reforms that are still in queue , then it still has a big role in global economy. China is already shifting its focus from investment induced to consumption based growth. Hence a part of the slowdown is attributable to the shift as well. It also has to keep its currency from appreciating which uptil now has been the biggest of all factors in driving its exports up. Well, for South Africa, I think coming out of the honeymoon mode of the liberation should be the top priority.
?One thing that is true is that the economies have to increase their real productivities and also get on terms with their domestic issues. In fact, when crisis hit hard they do the CLEANING UP of the mess if dealt? with proper set of reforms and before it’s too late. Take for instance, situations did worsen in India till the famous economic reforms salvaged the economy from collapse in 1991. I think the time has come again. Economists like Swaminathan S.Ankaleshwar Iyer have portended of a next Asian Financial Crisis but has admitted that the impact is not going to be the same as before.I think the party is not over for these countries but the time has come to re-consider their problems, come up with new sets of solutions, contemplate where they went wrong and how it can be rectified. The boom , needs a hiatus more than anything else to prevent the bust!
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