It has been 13 years since Jim O Neill from Goldman Sachs declared it was “time for building better economic BRICs,” introducing Brazil, Russia, India and China as the next four powerhouses of the global economy. In the ten years since the announcement, China secured itself as the second largest economic power in the world, India’s GDP quadrupled to $2 billion, the value of Brazilian exports rose by 400 percent and Russia’s middle class doubled in size to 104 million.
BRICs Have Outpaced the US and EU In Terms of Growth
Turn to 2014 and the BRICs are forecast to be as large as the G7 by 2035. China’s economy will be larger than the US in 2027 and India will overtake France to become the world’s fifth largest economy by 2017. This is despite China’s GDP growing at 7.4 percent, the slowest it has for nearly fifteen years. Russia is in recession, battered by sanctions related to the crisis in Ukraine, with its GDP expected to contract by 3.5 percent in 2016. Brazil is also in uneasy territory with forecasted growth of less than one percent for 2014.
What has happened? We would suggest an overdose of State Capitalism. The excessive role of the public sector, alongside intervention by state-owned banks in allocating resources to investment and credit creation, has stifled market-oriented reforms that would stimulate development. Excessive credit growth, in part driven by increasing capital inflows, has led to the overheating of markets and in some cases external deficits. With expectations that the Fed will soon raise rates, a stronger dollar, weaker commodity prices and lower growth are affecting the BRICs in a variety of ways.
High Expectations Remain for BRICs, Despite Amended Forecasts
In spite of the above, there are several reasons to be optimistic about the BRIC’s prospects. So far in this decade, they have achieved an average of six percent GDP growth per annum – more than double that achieved by the G7. Representing 3 billion people and 41 percent of the world population, they have a combined nominal GDP of $ 16 trillion. Urbanization, industrialization, increasing per capita income and the rise of the middle class in all of these emerging economies are setting the foundations for consumer-oriented societies and economies that will nurture growth.
Joaquim Levy, Brazil’s new Finance Minister, spoke of a period of austerity for his country at the World Economic Forum’s Summit in Davos last week. In order to get government finances in order, Levy stated he will eliminate subsidies and reform out-of-date government welfare programmes. Efforts to promote private investments will continue with licenses worth US$ 250 billion going for auction, which will develop railways, airports, motorways and other infrastructures. Slowly abandoning the model of state capitalism, structural reform processes are underway including the preparation for large-scale privatizations across the country.
Future success of the emerging BRICs will depend on the implementation of such structural reforms, shedding state capitalism and opening up the economies to further global trade and investment.