Economically and politically the five economies could not be more different when it comes to size, structure, values and national interestsby George Magnus / July 25, 2014 / Leave a comment
Emerging economies: is the party over? © Sergio Luiz Once upon a time, not long ago, the acronym “BRICS” suggested the biggest transformation in the way the world works and its governance structure since the Industrial Revolution. The term stands for “Brazil, Russia, India, China and South Africa,” and it captured the inevitability of economic dominance by large, rapidly growing emerging countries, and the decline of a mature and, more recently, beleaguered Western world. But this view was always tainted by hyperbole, prediction-by-spreadsheet, and a complete disregard for political economy. While these problems with the BRICS concept have become increasingly apparent over time, Russia’s conduct in the Ukraine and the latest, tragic consequences of its support for separatist rebels have put a large nail in the coffin of the idea. It all looked so different in 2001, when the BRICs term was coined at Goldman Sachs in the aftermath of the 9/11 attacks on the US. At the time, it was the BRICs (lower case s), with the capital S for South Africa coming later. As a marketing tool for Goldman Sachs (and subsequently others), BRICS was an outstanding success. It became a metaphor for a new world order (or the restoration of a much older pre-18th century structure). The term embraced new business opportunities, the world’s next billion consumers, radical changes in trade and investment flows, and the gradual but inexorable shift in global governance towards China and other emerging market giants. The Great Financial Crisis arrived as ‘proof’ that this was indeed so. Read more on the BRICS: World Cup 2014: Brazil’s century? Investment report: Population and profits But things haven’t quite worked out according to that script. The 2008-9 financial crisis turned out to be a shock for the emerging world as well. It is now clear that the story of the BRICS and emerging markets relied on economic catching up, facilitated by unprecedentedly fast and favourable globalisation. Today, the key drivers of catching up have become a spent force or are no longer as effective, and big question marks hang over globalisation. Global trade is growing more slowly and is subject to greater restraint, global investment flows are significantly lower, global financial flows are a shadow of what they were before 2008, and the commodity price boom is over. China, Brazil, Russia and some other emerging countries are now left with flawed economic models, and are reliant on unsustainable credit creation to sustain (weaker) growth. Economically, things were going poorly for Russia even before the annexation of Crimea, but the economic consequences of its new geopolitical predicament, including the evolving sanctions regime, will exact an important toll. It has been a struggle for Russia to keep its growth in over 1 per cent, but this year, it’s quite likely that the country will slide into a recession, with little prospect of a significant recovery in 2015. The balance sheets of the Russian state and its leading companies are going to be adversely affected, while sanctions will gradually restrict their ability to access global capital markets and borrow money. This is an extreme example of the antithesis of globalisation but China, Brazil and South Africa are all losing economic lustre. Exports are stagnant in the post-crisis world, and many commodity prices are weaker. The World Cup has done little to enliven Brazil’s stifled private sector and 1 per cent growth economy, while China is at the start of a multi-year slowdown and important transition, in which its leading edge of construction and property investment is being sidelined. The consequences of a China whose economy grows by 4 per cent (as I predict it will) as opposed to 8-10 per cent are still not fully understood. Whether Narendra Modi’s India can overcome the heavy hand of regulation, bureaucracy and hostility to foreign capital, as he has vowed, remains to be seen. Politically, the widespread negative reaction to Russia’s role and behaviour, has undermined what little claim the country had to be perceived as a part of an alternative world order. If anything, it is now retreating behind a wall of isolationism, made in Moscow, with sovereign friends that most other countries shun or from which they stand at a distance. And yet Russia is hardly alone in coming up very short as an example of new and effective global governance. As a group, the BRICS now hold their own summit meetings, and this year set up their own fairly well-endowed New Development Bank, based in Shanghai, to rival the IMF and World Bank. This aspiration looks far-fetched, as it endeavours to overcome important governance operational limitations. China is the only country in the group that might offer global leadership but it lacks the institutions and the credibility to be able, and in any event, it is unwilling. President Xi has amassed enormous power and is waging an anti-corruption crusade to both improve the legitimacy of the Communist Party, and dispose of enemies. If he is successful, he will have done more for dictatorial government than any leader since Mao but without raising China’s economic potential, and if he fails, China’s stability will be at risk. The BRICS are a motley bunch that have nothing in common, except that they are large, emerging, and not-the-US. Economically and politically they could not be more different when it comes to size, structure, values and national interests. They certainly have the ability to shake the world order, but they lack the capacity and characteristics to shape it.