The Brics narrative is crumbling—the five countries need transparent institutions and lessons in self-relianceby George Magnus / March 21, 2016 / Leave a comment
The term “Brics” lives on as an acronym linking the world’s largest emerging economies, Brazil, Russia, India, China and South Africa, but the notion it was meant to convey about the development of a new world order, based around them, is dust. When Goldman Sachs closed its “Bric” investment fund after nine years at the end of 2015, a period in which assets under its management had fallen from a peak of $800bn to just under $100bn, it seemed to signify the end of an idea. Only India looks as though it has the potential to sustain high economic growth, but even then not without qualifications. Last week provided some good examples of why the Brics are in the news, mostly for the wrong reasons.
Brazil is in its worst recession on record. Against this backdrop, the country’s political crisis is gathering momentum: a full-blown constitutional crisis may be near as the executive, legislative and judicial branches of the country’s government dispute each other’s powers, while President Dilma Rousseff may soon be impeached—it is alleged she broke federal accounting laws. Judicial investigations into alleged corruption involving the elite, oil giant Petrobras and the inflated contracts of construction and engineering companies are unrelenting. There have been large demonstrations in Brasilia and Sao Paolo over recent days as it has become known that former President Lula was offered a government post so that he will be shielded from investigation. The move was duly blocked by a Judge of the Brazilian Supreme Court. As I wrote last week, this spirited anti-corruption campaign could serve Brazil well in the long-run, to the extent it helps to bring about a change in government, attitudes and respect for stronger, independent institutions. For now though, economic policy is paralysed. Brazil’s economy is in intensive care, its fiscal position perilous.
Last week, Russia made headlines with its sudden announcement that it will withdraw its armed forces from Syria. Whatever this really means, Russia’s economy is paying the price not just for its over-dependence on hydrocarbons, but also for a series of foreign policy adventures in the wake of significant protests in 2011-12 in response to a flawed election process. Russian oil exports have fallen from over $50bn in 2010 to about $20bn, the Ruble has fallen from about 35 to the US dollar in 2014 to 70, though it has been weaker in the past, and although inflation has dropped from 15 to eight per cent, the Russian central bank kept interest rates unchanged. For the fifth consecutive meeting on the matter, rates have been kept at 11 per cent. This in the face of high inflation expectations and a weak currency. Oil aside, Russia faces a fractious medium-term outlook, as it is confronted by a falling population, little appetite for structural economic reforms, and of course, the west’s continuing sanctions regime against it.
China’s National People’s Congress, an annual meeting of China’s Parliament, took place over the past couple of weeks, attended by almost 3000 delegates. But this parliament meets mainly to rubber stamp laws and budgets already agreed by the Communist Party leadership, this time including the 13th “Five Year Plan” (2016-2020). This plan, which will receive additional scrutiny because the Soviet Union never managed to complete its 13th Five Year Plan, intends to deliver growth of 6.5-seven per cent per year. It also proposes “supply side reforms” including, for example, the restructuring of “zombie” industries which employ more people than necessary, such as coal and steel. These two sectors are supposed to lose 1.8 million jobs by 2020 “without mass unemployment,” at a time of slowing growth and rising unemployment in the country. Some observers suggest getting rid of over-capacity in China probably involves the loss of three-five million jobs. It seems implausible that the authorities will want or choose to do this.
The growth target looks too high, given that many economists doubt the economy is growing at that rate now. But the biggest problem is China’s passivity when it comes to the country’s credit surge, which must be addressed as part of any reform process. If it is not, this could easily lead to several years of very pedestrian growth, once the banking system’s capacity to fund it wanes. This would be associated with rising social tension, which is the Party’s biggest fear.
In fact, there is already evidence of this tension. The China Labour Bulletin, a Hong Kong-based NGO, reported that in the two months to Chinese New Year in early February, there were 1000 labour strikes and protests, compared with 2700 in 2015, which itself was double the rate in 2014. Most of these have been about low or unpaid wages. The Chinese government has little tolerance for industrial protest and even less for social and political protest at a time when President Xi is demanding unswerving obedience. This is highlighted by the very recent government campaign against real estate tycoon Ren Zhiqiang, who had publicly derided Xi’s demand to the media for unstinting loyalty. China has seen institutional practices that are not normally associated with economic advance.
In South Africa, the executive committee of the African National Congress met this past weekend against a background of a stalling economy, rising inflation, depreciating currency, and a growing political crisis. Allegations of corruption surrounding President Zuma have been rife and former ANC leaders have stated that it is high time that the government dealt with accusations of “state capture,” in which certain private interests are alleged to have been furthered by the “enlisting” of government ministers. Broader concerns also proliferate about the ANC’s ability to steer South Africa out of an economic funk that has been triggered partly by the fall in commodity prices, but also by continuing infrastructure bottlenecks, and the poor performance of state-owned companies.
India, then, is the last one standing out of the Brics. At an IMF-sponsored conference called “Advancing Asia” in New Delhi just over a week ago, Prime Minister Modi and other officials were happy to showcase India as a model for Asia, and implicitly, for the emerging world. India is certainly no paragon of virtue when it comes to corruption, nor is its economic infrastructure efficient, but it is endeavouring to accelerate economic reform, and is striving to encourage economic competitiveness.
None of this should be taken for granted, and no one should mistake Modi’s government for a South Asian Thatcher-government lookalike. The country is still riddled with red tape and restrictions, illiteracy rates are high, it will be difficult to replicate China’s manufacturing eruption, and its comparative advantage in service industries might well be undermined by do-it-at-home digital technologies. But India also has advantages. Its economy is relatively closed and so it is not as vulnerable to the slowdown in world trade; lower oil prices have unequivocally benefitted the country; and inflation, interest rates, and the final and external deficits are all falling. The government is trying to open up to more infrastructure spending, foreign investment and an array of improvement measures that should help the economy sustain growth rates of above seven per cent. And it has a rapidly-growing woking age population, which will be an undoubted asset if sufficient jobs can be created.
What the “Brics narrative” omitted or ignored was the central role that robust, transparent and inclusive institutions play in nurturing human and economic development. Maybe this was easily ignored as the rising tide of globalisation and economic catch-up rolled in during the 1990s and the 2000s. Now that tide is going out. The biggest change to which the BRICS and emerging countries in general have to adapt in the next years is the stall in or reverse of globalisation. America has been the staunchest global advocate of free and open trade and investment for a generation, but not one US presidential candidate currently seems willing to stand up for it. For the Brics, self-reliance and stronger institutions are going to be the lodestone of future success.