A Broken BRIC | Trade Samaritan

A Broken BRIC

BRIC stands for Brazil, Russia, India and China – Four hybrid socialist economies (supposedly) destined to become the world’s most powerful economies by 2050.

Projections on the future power of the BRIC economies vary widely. Some sources suggest that they might overtake the G7 economies by 2027. More modestly, Goldman Sachs has argued that, although the four BRIC countries are developing rapidly, it will be only by 2050 that their combined economies could eclipse the combined economies of the current richest countries of the world.

The most important and common factor between these countries is low labor and cost of production.  These countries are also considered to be investor’s paradise as they offer comparatively higher interest rates. In this article we are going to explore some statistical similarities and provide an insight to the current economic condition of BRIC. These four economies did grow exponentially over the last decade but it is becoming increasingly challenging to sustain the growth rate. We will leave it to the readers to infer whether these four economies can indeed compete with U.S and EU to become the most powerful economies in the world by 2050.

Below data and graphic representation provides each of the BRIC economies performance against the basic growth indicators which are as follows:

  1. Interest rates,
  2. Gross Domestic Product
  3. Foreign Direct Investment net inflow
  4. Exports

BRIC

BRIC Interest rates
BRIC GDP

BRIC FDI

BRIC Interest rates

BRIC population constitutes 40% of world population. While all four economies put together contribute to 25% of the world output, there are certain global as well as domestic factors adversely affecting the growth rates of these four economies. Global factors include flat commodity prices, quantitative easing/sterilization strategy of Fed which is boosting the U.S economy thereby raising the bar, overall economic slowdown (emerging economies growth rate fell by 0.5% in 2013 compared to 2012) and the E.U recovery. Dollar and Euro are longer the two wobbly legs; China is growing faster than most economies in the world however chose to reserve the convertibility of its currency and hampering the growth of its domestic markets.

High inflation is a common factor in all four economies – inflation in the range of 5%-8%. Increasing inflation negatively impacts the real income and poses a risk to overall macroeconomic stability. Second common factor is the deflating exchange value of Russian, Brazilian and the Indian currency, China has pegged its currency (Renminbi) with U.S dollar through dollar reserves hence China manages to neutralize the currency fluctuation.

Now let us look at some more domestic factors which are inherent to these economies:

Brazil: Brazil is has reported a rise in exports; record breaking exports were reported for October 2013. But the foundations for long-term economic development still remain fragile in Brazil due to the absence of an efficiently functioning legal and regulatory framework. Progress with market-oriented reforms has been uneven. The burdensome regulatory environment discourages private-sector growth and hampers realization of the economy’s full potential. Brazil is also witnessing a decline in Foreign Direct Investment – about 40%. 2014 World Cup and 2016 Rio Olympic games will deliberate Brazil to uplift its infrastructure and will also challenge its Government’s capacity.

Russia: Before settling down as a socially democratic country, Russia has undergone several phases of socialism. The legal framework of Russia is not totally modernized making it unfavorable for the businesses. Russia is too dependent on Oil and Gas exports. Russia needs to battle its shrinking population and poor infrastructure.

India: India has recorded an average growth rate of 6.4% for last decade. However it is becoming increasing difficult to spike the growth rate or even maintain it. India happens to be the biggest democratic economy in the world and therefore its problems have a deep origin. Countries like Philippines and Thailand are showing up as cheaper labor countries. India is battling poverty and illiteracy for over 5 decades. Inequalities of incomes and skill set pose a threat to economic development. Several reforms and structural projects are halted and way beyond the target dates, Government has a tendency to announce various reforms are announced however the set targets or the goals are never accomplished.

China: China has encountered a stupendous amount of growth in last 15 years. Supply Chain, Exports and hyper globalization are the winners. China’s export oriented attitude in way had a spillover effect on SARC (South Asian Regional Cooperation) and ASEAN (Association of South East Asian Nations). China’s growth rate has been hovering between 7.2 to 7.8% however excessive reliance on exports is making it challenging, world demand for exports is on a reducing trend. China’s GDP, which was growing at an incredible 10 percent, has slowed down to 8.9.China’s financial market is semi developed; besides that ageing population and labor unrest are some of the main challenges faced by China. China has also halted/discontinued some of its infrastructure and power projects as a response to the reducing demand for exports.

It is evident that all the four economies (Brazil, Russia, India and China) need a strong commitment to foster growth and financial stability. It also appears that the entire growth forecast of BRIC is based on an assumption that factors of production are infinite, which is not the case. Only time will be able to tell whether BRIC is broken or intact.

 

 

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