Bearish BRICs: Have the BRIC Nations lived up to the Hype?

Michele Lin

Last Updated: 4, September 2012

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Over the past decade, very few countries can claim to have matched the economic success of those of the BRICs. Ever since the term ‘BRIC’ was born in 2001, the bloc has grown rapidly – now accounting for almost a quarter of the world’s total economic output. Nevertheless, as the eurozone crisis has shown, the bloc is not immune to a weakening global economy; and the outlook for the BRICs is now uncertain. Have the BRIC nations lost their momentum?

With over $70 billion poured into the BRIC nations in the last ten year, the bloc’s overall growth has now outpaced that of Europe’s; and remarkably is growing four times faster than the United States.

The BRIC nations have also performed nothing short of an economic miracle, particularly China, by coming out of the last financial crisis relatively unscatched; and the bloc now accounts for approximately 40 percent of the world’s total population and about a quarter of the total world output – impressive for a collective that only rose to prominence a decade ago.

Nonetheless most experts believe that the BRIC countries – Brazil, Russia, India and China – are unlikely to repeat the performance of the past decade, over the next; and the latest data suggests that the bloc is already showing early signs of economic dampening.

Rising energy costs and an uncertain economic climate in the US and Europe have undoubtedly affected their growth momentum. Not only is growth slowing, untameable inflation in countries like Brazil and India, for example, mean that their respective central banks have fewer options and flexibility when it comes to reducing interest rates and enacting corresponding stimulus policies.

“Each member of the BRIC has its own specific set of economic problems”

The term “BRIC” was first coined in 2001 by Goldman Sachs economist Jim O’Neill (now head of the Goldman’s international asset management division) who citied the countries’ potential for rapid economic growth.

That premise had been mostly accurate for several years. Since the 2008 financial crisis, it has been the voracious appetite and sheer demand from the BRICs that helped keep the global economy from total collapse.

But all that may be coming to an abrupt end, suggests some analysts. Goldman Sachs commented, contradictorily, last year that “the best is over for the largest emerging markets”.

Brazil, for years, had enjoyed a substantial credit-fuelled consumer boom before policymakers stepped in with cooling measures. The high yields and relatively strong growth were reasons enough to sustain a constant inflow of foreign capital, but that also caused the real to soar to uncompetitive levels. Subsequently, the growth of private debt has outpaced income growth since 2004 and Brazil’s consumer default rate rose to its highest levels this year since 2009. Not surprisingly, analysts have trimmed Brazil’s growth forecast to 1.64 percent in 2012 – a sharp contrast from the 7.5 percent growth registered in 2010.

In Russia, corruption and commodity dependency continues to plague many sectors and may stunt an already weakened economy. The country’s recent accession to the World Trade Organisation may shift the Russian economy towards an open trade and investment model of economic growth, ridding off its old system of inefficient import-substitution and state-subsidised industrialisation, but as the world’s largest energy exporter, Russia depends heavily on global demand. If world markets slow, so will Russia.

India, in particular, is by far the worst performing BRIC nation. According to Raghuram Rajan, former chief economist at the International Monetary Fund, India’s lame duck government bears a large part of the blame, with political uncertainty often the motivation behind populist programmes instead of necessary and meaningful, albeit painful, economic reforms.

On the surface, China appears to be the best performing BRIC nation. Growth in China is expected to reach 7.5 percent this year – the highest amongst the BRICs – while it also boasts the world’s largest stockpile of foreign exchange reserves at $3.2 trillion.

Yet, for export-reliant China, official statistics are often suspect, its property market bubble has popped and its shadow banking system could hardly be more opaque.

China’s critics have long pointed out that the economy is inherently imbalanced, relying too much on state-driven domestic investment rather than private consumption.

For Michael Pettis, finance professor at Peking University, China’s debt “is the most worrying problem”. He explains:

[quote] I have always argued that the biggest worry is the unsustainable increase in debt, which historical precedents suggest is an almost automatic consequence of an aging investment-driven growth miracle … We need to be worried about debt, in Europe and the US of course, but we need also to be worried about debt in China. [/quote]

Are the BRICs overrated?

Just as the BRIC acronym was created by one of the biggest speculative banks in history, perhaps the overhyped BRIC concept should be retired and laid to rest.

The BRIC acronym in one important sense represents pure fabrication. Except that the BRIC countries were big and had one of the fastest growing economies a decade ago, these countries have nothing else in common.

Relations between China and India have long been plagued by tensions over trade and border disputes, as well as friction due to China’s political and military support for India’s rival, Pakistan. As a whole, the group has struggled to appear as a credible voice that can rival the West, as an alternative power on the basis of economic growth – but that has not materialised, at least not yet.

As Forbes wrote:

[quote] In sum, the BRICs was invented as an upside speculative acronym by bankers who like to create concepts to market it to clients, as for the PIIGS acronym for European government bond sell off. However, despite milder growth, the BRICs should keep, amongst other emergers, enough assets, the size of their natural resources and labour force is massive, to justify stronger prospects than the aging West which seems doomed to decline, relatively. [/quote]

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About Michele Lin PRO INVESTOR

20 something avid reader, occasional writer, and full-time soccer aficionado.

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