Just another BRIC in the wall?
The term BRIC’s represents four countries that have the potential to become the world’s next global powers: Brazil, Russia, India and China. Yet these nations are struggling to live up to their promise as they each face different problems with their economies.
Brazil is South America’s largest country and economy, as well as the 6th largest economy in the world. The nation has huge potential, with two future international events set to be staged in the country in the next 4 years, a thriving industrial sector, low unemployment and lots of FDI still pouring into Brazil. Above all they can boast a reliable democracy and good institutions that instil the rule of law, none of the other BRIC nations can match this. Yet Brazil is still on a worrying path. In 2010 Brazil grew by 7.5% to great applause from the rest of the world, but in the following year slumped to just 2.7%, well below the rest of the BRIC nations and Brazils high expectations of themselves. This year Brazil have forecasted growth of 4.5%, but external sources are much more pessimistic predicting just 3.5% a figure that is too low for a country like Brazil that needs high growth to keep up with the social costs of modernising its economy. So what are the reasons behind this slump in growth? For that there are many answers; the euro crisis and a strong currency slowing down demand for Brazilian exports, falling commodity prices (which help fuel Brazil’s economy), a complex tax system (that takes a higher percentage than any other middle income country) and their government. The last factor is a big reason for their slowdown in growth as the government continues to badly manage the country’s economy. Brazil remains a nation full of inequality, this is a problem the government has failed to solve for years now, as spending has been focused on financing government projects and an over generous pension system rather than reallocating funds to the poorer regions of the country. The government has also failed to invest in infrastructure with the transport system truly a mess, though the impending World Cup could help push the government into action. This leads on the next point that the government desperately needs to reform the economy to keep boosting growth, yet seems unwilling to make any big changes while the going is still good. The main reform that is needed is to free up their economy, protectionism is still a key policy of the government (especially in the oil industry) and it keeps inefficient Brazilian firms in business that should have gone under years ago. The best option could be to sign a free trade agreement with the rest of South America, which could in turn help boost Brazilian exports like the eurozone did for Germany. Without these reforms Brazil could face low growth for the next few years yet, undermining their status as one of the BRIC nations.
Brazil showed the lowest growth last year out of the BRIC nations.
Next is Russia, whose political corruption remains their biggest problem. Vladimir Putin recently swapped jobs with Dmitry Medvedev to once again become Russia’s president, allowing Medvedev to take up his old position of prime minister. This was greeted by mass protests on the streets, but to little effect as the Kremlin kept their control over Russia. The problem is Putin seems unwilling to reform the economy, while the corruption that is rife in Russia makes it an unlikely destination for businesses to conduct deals (ranking 143rd in the world for transparency and 120th for “ease of doing business”). Its BRIC standing creates the perception that Russia is still an emerging economy with lots of potential, but instead it has become an oil dependant nation that seems stuck in its ways. Inequality is also a big problem, where the country is split into the very rich and the very poor, with only recently a middle class looking to emerge. Still the ultra rich have too much of a say in how the country is run, with government policy dictated by how it can profit the monopolies in Russia’s markets. The city of Moscow has the largest proportion of Billionaires in the world, where conveniently power is heavily centralised, while 20% of GDP is supplied by the ultra rich in the country (again the highest percentage in the world). Putin has made some promises in changing the economy (like improving investment) but has failed to implement promised policies in the past and there are no signs that he has changed his ways. Despite this Russia still enjoyed 4.3% growth in 2011 and are projected to grow again this year by 3.6%, this will keep the market wolves at bay and as long as there aren’t any big oil crises then Russia should continue to improve. But if Russia is to really become a global power then they will need to diversify their economy away from oil and make their country more attractive to outside investment.
Russia with the second highest amount of Billionaires, beating the other BRIC members.
Then there is India, a country with huge resources at their disposal (huge population, lots of natural resources) yet one that is not quite achieving their potential. The economy of India is still growing at levels that Europeans could only dream of, with the average growth level since 2000 being 7.4%, but this is mainly down to the radical economic reforms that India made in the 1990’s, which freed up its economy. Similar reforms are now needed again to keep up growth, but the current government seems reluctant to act. The problem is that India now has a worse current account deficit and worse debt level than they did back then, meaning if anything reforms are even more vital. The country needs to attract investment into its country first and foremost, with a recent controversial “retroactive tax” policy causing more harm than good with a damaging fight with Vodafone over the tax that the firm is suggested to owe the Indian government from the acquisition of Hutchinson’s Indian business in 2007. The tax bill came in total to $3.75 billion and has only deepened the worry that foreigners have in investing in the country, though Vodafone have confirmed they will continue an $18.6 billion investment into the country. The country relies on good FDI (foreign direct investment) to finances its current account deficit at around 4% of GDP (the country exports more than it imports), so good relations with investors are a must. There is also too much regulation over foreign investment and too much intervention into the countries markets by the government. The power production industry is still largely state run, while the telecoms, insurance and retail markets are made extremely hard to enter for foreign firms (through a mix of corruption and regulation). Add to this the fact that Western investors are now much more reluctant to throw money around and India is facing a big problem attracting investment, on which its economy is run on. For a country with one of the best manufacturing sectors and a big potential service market (with over a billion people in the country), attracting FDI should not be a problem, yet the government’s antics have made companies question such decisions. The expensive subsidies that India pays to help its local companies cost them around 2.4% of GDP, increasing an already high budget deficit of near 6% and high inflation at near 7% which show the country’s economy is potentially overheating, as it relies too heavily on foreign capital. That isn’t to say progress hasn’t been made, with 52 million people being lifted out of poverty in the last 5 years, but the fact that half of all Indians still have to defecate in the open shows there are still major problems with the country. For India high growth of at least 6% is necessary to support their burgeoning population (of which a third still live below the poverty line) and pay off their high debts, while only a rise in wages and a major improvement in the country’s infrastructure will allow India to finally achieve their status as a new world power.
India has the highest budget deficit and highest public debt to GDP ratio compared to the other BRIC members
China completes the list, with the world’s second largest economy and is widely predicted to overtake the USA in the near future to take the top spot. Yet China faces similar issue to India, with its economy slowing down and its people reliant on high growth. China’s predicted growth this year is 8.2%, a world high still but actually China’s weakest expansion in 13 years. Like India, China needs high growth to support its huge population and keep the economy running, with 8% probably the minimum requirement. The country experienced a fast decline in industrial production, construction and electricity output in the last year which has lead many critics to suggest the economy is overheating. But China’s economy is surprisingly unreliant on foreign capital and is actually financed heavily by the state, which has the nasty habit of creating barriers to entry for foreign firms but does help make China more resilient than India and less dependent on private confidence. This investment by the state into the country’s infrastructure and factories is what boosts growth more than its exports, as it counted for 48% of GDP last year. China also the capital to re-finance any banks that might go under (a serious problem in Europe) and is one of the few countries not facing a liquidity problem. China’s general population is also much older than India’s, meaning the high growth needed to supply such a hefty workforce may no longer be needed in the future. Out of all the BRIC countries China is undoubtedly the strongest and can already call itself a world power, but the country does face some issues in the future. China will have to free up its economy sooner or later to foreign investment or risk inefficient national firms wasting the countries resources, while inequality between the countries inner and outer regions is high, something the government will have to try and fix in the long term. China also has competitors in its industrial sector; as once the cheapest option for foreign firms, countries like Vietnam can now boast cheaper costs, making China less attractive. This could be a factor in China’s current account surplus, once as high as 10% in 2007, dropping to 2.8% of GDP this year, though the main reason is probably the increased investment by the state as mentioned earlier. This is still a good surplus and in fact many countries felt China wasn’t spending enough anyway and was manipulating their currency to keep it low, but it could prove a problem if investment isn’t sustainable as many economists believe. China’s big problem is that their population is still incredibly poor for such a big economy (China ranks 90th in the world for income per person) and the investment that causes such high growth is not a long term option, meaning China will have to free up its services and financial markets if it to continue high growth and increase the income of its population to the standing that its economy now holds.
China’s current account surplus drops from 10% to 2.6% in the last 5 years.