The BRIC rescue that wasn’t

Just in case you didn’t hear it, that was the sound of BRIC bubble popping. The acronym stands for Brazil-Russia-India-China. Coined by economist Jim O’Neill of Goldman Sachs, it symbolizes the rise of once-poor countries (“emerging markets”) into economic powerhouses. More recently, message has been: rapid expansion of emerging-market countries will help rescue Europe, the United States and Japan, the “old world”, from their economic turmoil. The BRICs will prop up the global demand for industrial goods and commodities (oil, foodstuffs, metals). Forget it. (Robert J. Samuelson – The Washington Post – 15/10/2012)

For a while, the prospect seemed plausible. During 2007-09 financial crisis, BRIC countries, China, most notably, adopted large stimulus programs, and others just grew rapidly. In 2010, China’s economy expanded 10.4%, India’s 10.1%, Brazil’s 7.5%. Today’s outlook is more muted. In 2012, China will grow 7.8%, India 4.9%, Brazil 1.5%, according to latest projections from International Monetary Fund. Although the IMF predicts slight pickups in 2013, some economists forecast further declines. True, Americans would celebrate China’s and India’s growth rates; in 2012, the U.S. economy will grow only about 2%. But comparisons are misleading because China and India still benefit from economic “catch-up.” They’re poor countries can expand rapidly by raising workers’ skills, adopting technologies and management practices pioneered elsewhere. Every decade produces a powerful economic idea that captivates popular imagination, argues Ruchir Sharma of Morgan Stanley. In the 1980s, idea was that Japan would dominate the world economically; in the 1990s, it was that the Internet was the greatest innovation since the printing press; and in 2000s, it’s been the inevitability of the BRICs’ economic advance. These are intellectual bubbles; sooner or later, reality pricks them. In his prescient book “Breakout Nations: In Pursuit of Next Economic Miracles,” Sharma does this for the BRIC bubble. He writes: “The perception that the growth game had suddenly become easy, that everyone could be a winner, is built on the unique results of last decade, when virtually all emerging markets did grow together.” In reality, early 2000s were simply an old-fashioned boom. China’s rapid growth fueled demand for raw materials (oil, grains, minerals) raised prices+enriched producers, including Brazil, Russia. Easy credit in US, Europe, Japan encouraged money flows into other developing countries, where interest rates and returns seemed higher. In 2007, the boom’s peak year, about 60% of world’s 183 countries grew at 5% or better, notes Sharma. Only 3 countries (Fiji, Zimbabwe and the Republic of Congo) didn’t grow at all.

When the boom collapsed, countries rediscovered that achieving rapid economic growth is neither easy nor automatic. It encounters political, cultural, financial and geopolitical (wars, terrorism) obstacles. Some overcome the obstacles; some don’t. As opportunities for economic catch-up shrink, growth also subsides. Sharma thinks China’s average annual growth will fall to a range of 6% to 7%. He’s also skeptical of Brazil. Without the commodity boom, Brazilian growth may be mired at 2% to 3%. He thinks government spending (about 40% of the economy) is too high, and investment in roads and other infrastructure is too low. “No wonder it takes two to three days for trucks to get into the port of Sao Paulo,” he writes. India faces comparable problems. Some reflect the hangover from the recent boom. “India has among the [world’s] highest inflation rates, at or close to double-digits,” says economist Arvind Subramanian of Peterson Institute. “The budget deficit is around 10% [of the economy]. Investor confidence has slumped.” To spur growth, the government is trimming subsidies and has liberalized foreign investment in retailing, airlines, broadcasting and power generation. Everywhere, the global economy is weak or weakening. After the election, United States faces “fiscal cliff”, tax increases and spending cuts that together would administer about a 4% blow to the economy. Europe’s struggle to preserve the euro founders. Skeptical financial markets impose high interest rates on precisely the countries (Spain, Italy) most needing lower rates to ease their debt burden and revive their depressed economies. Against this dismal backdrop, it was tempting to think resilient BRICs would act as a shock absorber. They would buy more European and American exports; they would send more tourists to Disney World and Eiffel Tower. This would provide old world more time to make adjustments. Just the opposite occurred. The weakness of advanced economies transmitted itself, through export markets, to the BRICs. World economy is truly interconnected. What was hoped would happen was wishful thinking. 

Acerca de ignaciocovelo
Consultor Internacional

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