Broken BRICs
Why the Rest Stopped Rising
Collection
At first they were known
as the BRICs -- Brazil, Russia, India, and China -- the large, rapidly
growing developing states ready to remake the world economy. Now,
Indonesia and others have been added to the list. But few can say if
these new powers will overcome their own challenges, and more, if they
will accept the current world order, or change it.
Over the past several years, the most talked-about trend in the
global economy has been the so-called rise of the rest, which saw the
economies of many developing countries swiftly converging with those of
their more developed peers. The primary engines behind this phenomenon
were the four major emerging-market countries, known as the BRICs:
Brazil, Russia, India, and China. The world was witnessing a
once-in-a-lifetime shift, the argument went, in which the major players
in the developing world were catching up to or even surpassing their
counterparts in the developed world.
These forecasts typically took the developing world's high growth
rates from the middle of the last decade and extended them straight into
the future, juxtaposing them against predicted sluggish growth in the
United States and other advanced industrial countries. Such exercises
supposedly proved that, for example, China was on the verge of
overtaking the United States as the world's largest economy-a point that
Americans clearly took to heart, as over 50 percent of them, according
to a Gallup poll conducted this year, said they think that China is
already the world's "leading" economy, even though the U.S. economy is
still more than twice as large (and with a per capita income seven times
as high).
As with previous straight-line projections of economic trends,
however-such as forecasts in the 1980s that Japan would soon be number
one economically-later returns are throwing cold water on the
extravagant predictions. With the world economy heading for its worst
year since 2009, Chinese growth is slowing sharply, from double digits
down to seven percent or even less. And the rest of the BRICs are
tumbling, too: since 2008, Brazil's annual growth has dropped from 4.5
percent to two percent; Russia's, from seven percent to 3.5 percent; and
India's, from nine percent to six percent.
None of this should be surprising, because it is hard to sustain
rapid growth for more than a decade. The unusual circumstances of the
last decade made it look easy: coming off the crisis-ridden 1990s and
fueled by a global flood of easy money, the emerging markets took off in
a mass upward swing that made virtually every economy a winner. By
2007, when only three countries in the world suffered negative growth,
recessions had all but disappeared from the international scene. But
now, there is a lot less foreign money flowing into emerging markets.
The global economy is returning to its normal state of churn, with many
laggards and just a few winners rising in unexpected places. The
implications of this shift are striking, because economic momentum is
power, and thus the flow of money to rising stars will reshape the
global balance of power.
FOREVER EMERGING
The notion of wide-ranging convergence between the developing and the
developed worlds is a myth. Of the roughly 180 countries in the world
tracked by the International Monetary Fund, only 35 are developed. The
markets of the rest are emerging-and most of them have been emerging for
many decades and will continue to do so for many more. The Harvard
economist Dani Rodrik captures this reality well. He has shown that
before 2000, the performance of the emerging markets as a whole did not
converge with that of the developed world at all. In fact, the per
capita income gap between the advanced and the developing economies
steadily widened from 1950 until 2000. There were a few pockets of
countries that did catch up with the West, but they were limited to oil
states in the Gulf, the nations of southern Europe after World War II,
and the economic "tigers" of East Asia. It was only after 2000 that the
emerging markets as a whole started to catch up; nevertheless, as of
2011, the difference in per capita incomes between the rich and the
developing nations was back to where it was in the 1950s.
This is not a negative read on emerging markets so much as it is
simple historical reality. Over the course of any given decade since
1950, on average, only a third of the emerging markets have been able to
grow at an annual rate of five percent or more. Less than one-fourth
have kept up that pace for two decades, and one-tenth, for three
decades. Only Malaysia, Singapore, South Korea, Taiwan, Thailand, and
Hong Kong have maintained this growth rate for four decades. So even
before the current signs of a slowdown in the BRICs, the odds were
against Brazil experiencing a full decade of growth above five percent,
or Russia, its second in a row.
Meanwhile, scores of emerging markets have failed to gain any
momentum for sustained growth, and still others have seen their progress
stall after reaching middle-income status. Malaysia and Thailand
appeared to be on course to emerge as rich countries until crony
capitalism, excessive debts, and overpriced currencies caused the Asian
financial meltdown of 1997-98. Their growth has disappointed ever since.
In the late 1960s, Burma (now officially called Myanmar), the
Philippines, and Sri Lanka were billed as the next Asian tigers, only to
falter badly well before they could even reach the middle-class average
income of about $5,000 in current dollar terms. Failure to sustain
growth has been the general rule, and that rule is likely to reassert
itself in the coming decade.
In the opening decade of the twenty-first century, emerging markets
became such a celebrated pillar of the global economy that it is easy to
forget how new the concept of emerging markets is in the financial
world. The first coming of the emerging markets dates to the mid-1980s,
when Wall Street started tracking them as a distinct asset class.
Initially labeled as "exotic," many emerging-market countries were then
opening up their stock markets to foreigners for the first time: Taiwan
opened its up in 1991; India, in 1992; South Korea, in 1993; and Russia,
in 1995. Foreign investors rushed in, unleashing a 600 percent boom in
emerging-market stock prices (measured in dollar terms) between 1987 and
1994. Over this period, the amount of money invested in emerging
markets rose from less than one percent to nearly eight percent of the
global stock-market total.
This phase ended with the economic crises that struck from Mexico to
Turkey between 1994 and 2002. The stock markets of developing countries
lost almost half their value and shrank to four percent of the global
total. From 1987 to 2002, developing countries' share of global GDP
actually fell, from 23 percent to 20 percent. The exception was China,
which saw its share double, to 4.5 percent. The story of the hot
emerging markets, in other words, was really about one country.
The second coming began with the global boom in 2003, when emerging
markets really started to take off as a group. Their share of global GDP
began a rapid climb, from 20 percent to the 34 percent that they
represent today (attributable in part to the rising value of their
currencies), and their share of the global stock-market total rose from
less than four percent to more than ten percent. The huge losses
suffered during the global financial crash of 2008 were mostly recovered
in 2009, but since then, it has been slow going.
The third coming, an era that will be defined by moderate growth in
the developing world, the return of the boom-bust cycle, and the breakup
of herd behavior on the part of emerging-market countries, is just
beginning. Without the easy money and the blue-sky optimism that fueled
investment in the last decade, the stock markets of developing countries
are likely to deliver more measured and uneven returns. Gains that
averaged 37 percent a year between 2003 and 2007 are likely to slow to,
at best, ten percent over the coming decade, as earnings growth and
exchange-rate values in large emerging markets have limited scope for
additional improvement after last decade's strong performance.
PAST ITS SELL-BY DATE
No idea has done more to muddle thinking about the global economy
than that of the BRICs. Other than being the largest economies in their
respective regions, the big four emerging markets never had much in
common. They generate growth in different and often competing
ways-Brazil and Russia, for example, are major energy producers that
benefit from high energy prices, whereas India, as a major energy
consumer, suffers from them. Except in highly unusual circumstances,
such as those of the last decade, they are unlikely to grow in unison.
China apart, they have limited trade ties with one another, and they
have few political or foreign policy interests in common.
A problem with thinking in acronyms is that once one catches on, it
tends to lock analysts into a worldview that may soon be outdated. In
recent years, Russia's economy and stock market have been among the
weakest of the emerging markets, dominated by an oil-rich class of
billionaires whose assets equal 20 percent of GDP, by far the largest
share held by the superrich in any major economy. Although deeply out of
balance, Russia remains a member of the BRICs, if only because the term
sounds better with an
R. Whether or not pundits continue using
the acronym, sensible analysts and investors need to stay flexible;
historically, flashy countries that grow at five percent or more for a
decade -- such as Venezuela in the 1950s, Pakistan in the 1960s, or Iraq
in the 1970s -- are usually tripped up by one threat or another (war,
financial crisis, complacency, bad leadership) before they can post a
second decade of strong growth.
The current fad in economic forecasting is to project so far into the
future that no one will be around to hold you accountable. This
approach looks back to, say, the seventeenth century, when China and
India accounted for perhaps half of global GDP, and then forward to a
coming "Asian century," in which such preeminence is reasserted. In
fact, the longest period over which one can find clear patterns in the
global economic cycle is around a decade. The typical business cycle
lasts about five years, from the bottom of one downturn to the bottom of
the next, and most practical investors limit their perspectives to one
or two business cycles. Beyond that, forecasts are often rendered
obsolete by the unanticipated appearance of new competitors, new
political environments, or new technologies. Most CEOs and major
investors still limit their strategic visions to three, five, or at most
seven years, and they judge results on the same time frame.
THE NEW AND OLD ECONOMIC ORDER
In the decade to come, the United States, Europe, and Japan are
likely to grow slowly. Their sluggishness, however, will look less
worrisome compared with the even bigger story in the global economy,
which will be the three to four percent slowdown in China, which is
already under way, with a possibly deeper slowdown in store as the
economy continues to mature. China's population is simply too big and
aging too quickly for its economy to continue growing as rapidly as it
has. With over 50 percent of its people now living in cities, China is
nearing what economists call "the Lewis turning point": the point at
which a country's surplus labor from rural areas has been largely
exhausted. This is the result of both heavy migration to cities over the
past two decades and the shrinking work force that the one-child policy
has produced. In due time, the sense of many Americans today that Asian
juggernauts are swiftly overtaking the U.S. economy will be remembered
as one of the country's periodic bouts of paranoia, akin to the hype
that accompanied Japan's ascent in the 1980s.
As growth slows in China and in the advanced industrial world, these
countries will buy less from their export-driven counterparts, such as
Brazil, Malaysia, Mexico, Russia, and Taiwan. During the boom of the
last decade, the average trade balance in emerging markets nearly
tripled as a share of GDP, to six percent. But since 2008, trade has
fallen back to its old share of under two percent. Export-driven
emerging markets will need to find new ways to achieve strong growth,
and investors recognize that many will probably fail to do so: in the
first half of 2012, the spread between the value of the best-performing
and the value of the worst-performing major emerging stock markets shot
up from ten percent to 35 percent. Over the next few years, therefore,
the new normal in emerging markets will be much like the old normal of
the 1950s and 1960s, when growth averaged around five percent and the
race left many behind. This does not imply a reemergence of the
1970s-era Third World, consisting of uniformly underdeveloped nations.
Even in those days, some emerging markets, such as South Korea and
Taiwan, were starting to boom, but their success was overshadowed by the
misery in larger countries, such as India. But it does mean that the
economic performance of the emerging-market countries will be highly
differentiated.
The uneven rise of the emerging markets will impact global politics
in a number of ways. For starters, it will revive the self-confidence of
the West and dim the economic and diplomatic glow of recent stars, such
as Brazil and Russia (not to mention the petro-dictatorships in Africa,
Latin America, and the Middle East). One casualty will be the notion
that China's success demonstrates the superiority of authoritarian,
state-run capitalism. Of the 124 emerging-market countries that have
managed to sustain a five percent growth rate for a full decade since
1980, 52 percent were democracies and 48 percent were authoritarian. At
least over the short to medium term, what matters is not the type of
political system a country has but rather the presence of leaders who
understand and can implement the reforms required for growth.
Another casualty will be the notion of the so-called demographic
dividend. Because China's boom was driven in part by a large generation
of young people entering the work force, consultants now scour census
data looking for similar population bulges as an indicator of the next
big economic miracle. But such demographic determinism assumes that the
resulting workers will have the necessary skills to compete in the
global market and that governments will set the right policies to create
jobs. In the world of the last decade, when a rising tide lifted all
economies, the concept of a demographic dividend briefly made sense. But
that world is gone.
The economic role models of recent times will give way to new models
or perhaps no models, as growth trajectories splinter off in many
directions. In the past, Asian states tended to look to Japan as a
paradigm, nations from the Baltics to the Balkans looked to the European
Union, and nearly all countries to some extent looked to the United
States. But the crisis of 2008 has undermined the credibility of all
these role models. Tokyo's recent mistakes have made South Korea, which
is still rising as a manufacturing powerhouse, a much more appealing
Asian model than Japan. Countries that once were clamoring to enter the
eurozone, such as the Czech Republic, Poland, and Turkey, now wonder if
they want to join a club with so many members struggling to stay afloat.
And as for the United States, the 1990s-era Washington consensus --
which called for poor countries to restrain their spending and
liberalize their economies -- is a hard sell when even Washington can't
agree to cut its own huge deficit.
Because it is easier to grow rapidly from a low starting point, it
makes no sense to compare countries in different income classes. The
rare breakout nations will be those that outstrip rivals in their own
income class and exceed broad expectations for that class. Such
expectations, moreover, will need to come back to earth. The last decade
was unusual in terms of the wide scope and rapid pace of global growth,
and anyone who counts on that happy situation returning soon is likely
to be disappointed.
Among countries with per capita incomes in the $20,000 to $25,000
range, only two have a good chance of matching or exceeding three
percent annual growth over the next decade: the Czech Republic and South
Korea. Among the large group with average incomes in the $10,000 to
$15,000 range, only one country -- Turkey -- has a good shot at matching
or exceeding four to five percent growth, although Poland also has a
chance. In the $5,000 to $10,000 income class, Thailand seems to be the
only country with a real shot at outperforming significantly. To the
extent that there will be a new crop of emerging-market stars in the
coming years, therefore, it is likely to feature countries whose per
capita incomes are under $5,000, such as Indonesia, Nigeria, the
Philippines, Sri Lanka, and various contenders in East Africa.
Although the world can expect more breakout nations to emerge from
the bottom income tier, at the top and the middle, the new global
economic order will probably look more like the old one than most
observers predict. The rest may continue to rise, but they will rise
more slowly and unevenly than many experts are anticipating. And
precious few will ever reach the income levels of the developed world.
