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October 2009
B.R.I.C. : THE NEW ECONOMIC SUPERPOWERS?
By Erica Butler
It’s amazing what’s in a name. Back in 2001, when the U.S. financial industry was still busy sowing the seeds of the massive collapse that has since shocked the world into recession, and well before the words “sub-prime mortgage crisis” made their way onto the front pages of North American newspapers, U.S. mega investment bank Goldman Sachs released a report naming the countries its writers claimed stood to be the next powerhouses in a rapidly changing global economy. That Goldman Sachs paper was entitled, “The World Needs More Economic BRICs” and named Brazil, Russia, India and China as the four countries to watch, giving them the catchy and resonant acronym BRICs.
Eight years later, there are growing numbers of BRIC investment funds on the market and financial analysts comment on the performance of the BRICs as a matter of course. Goldman Sachs has continued to update and expand on their original position paper regarding the BRICs.
Perhaps the most interesting outcome since the BRIC theory was posited took place this past summer. On June 16, 2009 the leaders of Brazil, Russia, India and China gathered in Yekaterinburg, Russia for their first ever BRIC summit. The leaders issued a joint statement calling for a more “multi-polar” world order and a greater role in global economic policy-making.
“We are committed to advance the reform of international financial institutions so as to reflect changes in the world economy,” said the BRIC summit leaders, as reported by the London Times. “The emerging and developing economies must have a greater voice.” And though many observers deemed the meeting otherwise fruitless, the four BRIC leaders did manage to schedule another summit for Brazil in 2010, so it remains to be seen what they will accomplish.
“That’s what one might call a feedback effect,” says Talan Iscan, professor of economics at Dalhousie University, referring to the BRIC theory as a self-fulfilling prophecy of sorts. A U.S. economist names four countries as a group and years later they end up actually getting together to formally create said group. “If the name has already been given to the play,” Iscan says, “why not show up at the stage?”
And like any good story, the BRIC economy is predictable enough to see its way through to fulfilling Goldman Sachs’s 40 year projection) and one part threat (that the current balance of economic power will be turned upside down by 2050).
A catchy and self-fulfilling tale, perhaps, but the BRIC theory isn’t unfounded. Goldman Sachs had its reasons for choosing Brazil, Russia, India and China as the next economic powers. They are the world’s biggest emerging markets, making up over a quarter of the world’s land mass and about 40 per cent of the world’s population. They average GDP growth in the neighbourhood of five to 10 per cent per year, while developed economies like Canada’s would do well to reach two or three per cent.
China has experienced the highest economic growth of the BRICs since 2003, with annual average growth of 10.7 per cent between 2003 and 2008, followed by India at 8.4 per cent. Russia and Brazil have experienced lower growth rates, although still averaging 7.1 per cent and 4.1 per cent respectively per year in the same period.
“There is some undeniable substance to it,” Iscan says. “What we’re essentially talking about here is, are we facing a future world where economic power shifts from where it is, in terms of its centre? The answer, according to the originators of the argument, is yes, there are probably emerging powerhouses, but not a single U.S.-style, homogeneous powerhouse. The idea is maybe we have Brazil, China, India and Russia coming and having as much influence over the world economy as the U.S. singlehandedly might have right now.”
But what stands the BRICs apart from any other emerging market that might propel them to rival US economic power? According to Goldman Sachs it’s their size. All four countries have big populations, creating a large and varied labour force and a large domestic consumer market. And all but Russia’s are expected to continue to grow in the coming years, meaning they will be well poised for the coming decades.
“Without a substantial population, even a successful growth story is unlikely to have a global impact,” wrote Goldman Sachs in its 2005 paper, How Solid are the BRICs? “Hong Kong will never be a global power nor Luxembourg, despite the very high levels of income and living standards they have achieved.”
Tom Puthiakunnel agrees that for India at least, a large domestic consumer market has been a major factor in the country’s growth. Puthiakunnel is with the Indo Canada Chamber of Commerce, a 30-year-old Toronto-based institution that opened its virtual doors in Halifax in 2007.
“The Indian economy has grown tremendously in the past decade or so,” Puthiakunnel says. “It has to do with India opening up for multinational corporations to come in and also the local trade within India. There has been huge growth. Even with this recession, India is only affected when it comes to exports because of the slowdown in the West. But as far as the domestic economy, it’s still pretty strong.”
Puthiakunnel considers the attention India is getting now as part of the BRIC phenomenon to be well deserved. “For those who didn’t have much it certainly was a big surprise.” But, he adds, “It’s certainly recognition that was overdue for India.
“There’s a fantastic opportunity for companies from Canada to do business in India,” Puthiakunnel adds. Of more than a billion people in India, an estimated 300 million are considered in the middle class, albeit not by North American standards. (Consider that your average Indian consumes two per cent of the electricity used by an average Canadian and you can imagine that a middle class Indian household looks a little different than its Canadian counterpart.)
But still, Puthiakunnel says, “there’s a lot of spending money, which means a lot of opportunity for Canadian companies to get involved in transportation, hospitality and sharing technology.”
Encouraging investors and businesses to consider the BRICs is one of the main outcomes of Goldman Sachs’s analysis. It only makes sense, as the investment bank is in the business of advising people what to do with their money and how to keep it growing. With the BRIC theory, Iscan says, “They’re saying to their clients, okay, you have a business portfolio and that includes the U.S., Europe and maybe some other countries like South Korea, but have you thought about the weight you put onto each of these countries in your portfolio? This could be a financial investment portfolio, or a firm selling or producing products in different parts of the world. Have you thought of what it might look like in 10, 20, 30 years? Are you prepared for that potential path?
“And the [BRIC] story tells them, get out of your cocoons, your established norms of thinking about the world economy and think something different. It’s a way of stimulating people to think about the world economic landscape 25 or 50 years from now.”
And Iscan says a little diversification might be a good thing for Canadians, considering the lion’s share of our international business is with one trading partner, the U.S. “Shouldn’t we want to diversify, sell some goods in China and India and Brazil? I think that’s a valid point, but it goes beyond the BRIC theory. It’s actually a point that has been out there for Canadian businesses for many, many years, predating the BRIC theory,” Iscan says. “Are we too reliant on the U.S. market? For one reason or another, we have actually increased our ties with the U.S. and haven’t really explored other options available to us. The BRIC theory I think bends that rod a little bit in the right direction. But my fear would be it unnecessarily focuses Canadian businesses on the four countries picked by Goldman Sachs.”
Many economists have suggested other candidates for the BRIC club, including Mexico, Indonesia and Korea. And then there’s the countries poised for growth, where it’s just not happening. “Why not Africa?” asks Iscan. The BRIC theory gave African countries a pass, including South Africa, with its own healthy growth rate. “Something seems to be blocking these countries. It’s complex things, obviously. But who knows, maybe something will go wrong in China or India or Brazil. Maybe the path we’ve seen over the past 20 to 25 years is just going to collapse under its own weight.”
Of course, all investments carry a risk and there’s a risk the BRIC countries will not live up to the promise held out by Goldman Sachs and other economists. “Economists aren’t particularly good at identifying the winners,” Iscan says, without a hint of irony. Though he points out that with the world’s attention focused on Brazil, Russia, India and China, it will be easier for them to attract capital and continue the kind of growth that put them on the Goldman Sachs list in the first place.
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