Are the BRICs Broken? - Iliana Olivié (Elcano Institute)

Are the BRICs Broken?

Iliana Olivié

Expert Comment 34/2012 - 6/11/2012

Over four years ago, when Lehman Brothers went bankrupt, what had so far been the US subprime meltdown turned into a global financial crisis. Since then, life has been tough for the Western economies, struck by low growth or recession, unemployment, financial drought, fiscal deficit, mounting public debt, consumption in the doldrums and social unrest. These are just some of the symptoms of the West’s deep financial, economic and even social and political crises.

In such a context, it is very tempting to interpret the slow growth in China or Brazil as an indicator that the so-called emerging countries also jumped on the decade’s cheap financing bandwagon that has now come to an end for all of us. In fact, this appears to be the main argument underlying Ruchir Sharma’s recent analysis on the current performance of the BRIC countries (Brazil, Russia, India and China).

China’s growth has cooled down from double digits to less than 7%, while the other BRICs have taken a tumble, with their growth rates down by half. The evidence, the argument goes, suggests that emerging economies might always just be emerging and that what was thought to be the ‘rise of the rest’ might only be another boom-bust episode for developing and emerging countries –like the surge prior to the Tequila crisis of the 1990s, the Asian crises later in the decade or the Turkish crisis in the early 2000s–.

As the author points out: ‘[The] forecasts typically [take] the developing worlds’ high growth rates from the middle of the last decade and [extend] them straight into the future’. I fully agree with Sharma: this is misleading. However, it is advisable to look at some qualitative changes that have occurred before and during the golden 2000s and that might lead us to a different world economic and power map in the medium and long terms.

Growth versus Structural Change and Development

No doubt part of the reason why China and the rest of the BRICs grew so fast over the past decade is that the Western countries were growing too. Therefore, the BRICs took the opportunity to increase their exports to the main global consumption markets.

However, this economic dynamic was possible because the pillars for a steady –not necessarily even and constant– growth and economic development had been established and renewed for the previous three decades in several of the emerging economies. For instance, China’s first economic reform dates back to 1978, when the Communist Party decided to de-collectivise the agrarian sector. Since then, economic reforms have been constant. The main feature of the Chinese development model is that it has been able to adapt to new challenges (that is, economic challenges) both at the local and global levels. Brazil has been testing different development models since the 1950s. The expansion of the domestic market, regional exports and the consolidation of a local industry might be the muscle necessary to cope with the current slowdown in growth.

Actually, this steady path towards development in a very few but highly populated developing countries explains –mainly but not exclusively– the drop in hunger and extreme poverty levels that should lead to the accomplishment of the first of the Millenium Development Goals.

Emerging Countries have been Financing Developed Countries (and, this Time, Not Just Petro-dollars)

Another difference between what happened in the 2000s and previous boom episodes is that excess liquidity did not come from the developed countries or from oil-exporting economies. This time, part of the money came from emerging manufacturing countries. In fact, over the past decade the South was financing the North –as shown, for instance, by China’s accumulation of US public debt during most of the period–.

BRICs are Big (Individually)

It is big countries we are talking about. Of course, this is not the first time a developing country actually develops after the Second World War, in the current international order. It happened before to others like Norway, South Korea, Taiwan, New Zealand and Spain. But it is the first time this process is going on at the same time in at least three very big countries: China, Brazil and India.

Why is this so important? Because these countries will not need to adhere to a pre-established union or to informally join a certain group of economies, or to accept the rules of the game the way they are. All of them are becoming powerful global players (whether they like it or not) before being rich, and this is a new thing. This will probably change the current world order.

So it is difficult to predict what will happen in the near future. We do not even know whether the rise of China will be seen as a manifestation of the ‘superiority of authoritarian, state-run capitalism’ –something that, according to Sharma, could happen–. Perhaps it is more likely that China will experience a similar process to that of several of its neighbours –as its development model shares similarities with the South Korean, Taiwanese and Malaysian–. Social unrest should continue to rise as a new low-to-middle-class demanding more economic and new political and social rights starts to emerge out of extreme poverty and begins to flourish.

Sharma’s provocative and interesting article shows that analyses that view the development divide as a withering phenomenon due to a global catching-up process are far too optimistic –world inequalities are actually increasing, not decreasing–. Nevertheless, the 2000s have probably been much more than simply another episode involving a boom for the developing countries that will necessarily be followed by a bust, leaving things just the way they were last century.

Iliana Olivié is Senior Analyst at the Elcano Royal Institute and coordinator of the Elcano Global Presence Index (IEPG)