A discussion of the importance of BRIC nations in the current world
The origin of BRIC
The world economy has changed a lot during the past fifty years. The changes in the world economy in the next fifty years could be as dramatic as the last fifty. Many of the changes in the next few decades are expected to come from the emerging markets, as opposed to the developed markets like the US and the other European nations. The saturation of growth in the Western markets has forced the world to shift its focus from the developed world to the emerging markets which are both growth hungry and are brimming with opportunities. The four nations which stand out among the crowd are China, India, Brazil and Russia. These countries stand out mainly due to their sheer size and growth potential. The idea of these four nations combined together as a group came into being and thus originated the term BRIC. BRIC in economics is now used as a term to collectively refer to the fast-growing economies of Brazil, Russia, India and China. History has proved that the world economy has the potential to change dramatically in a span of four to five decades. Fifty years ago, Japan and Germany were war ravaged and were struggling to emerge from reconstruction. Singapore and Korea were low-income nations, but these nations have made huge transformations fifty years down the line. Hence, the future growth potential of the BRIC countries cannot simply be overlooked.
The term BRIC was first coined by Goldman Sachs in 2003. The company in its report predicted that by 2050, the combined economies of the BRIC nations could overtake the combined economies of the current richest countries of the world. These four countries are projected to be among the top six economies in the world by 2050. This signalled the emergence of the BRIC as an increasingly important political and economic force to reckon with. Ever since the report was published, these countries have been getting considerable attention from economists, the media, political circles and, most importantly, from the corporate sector.
BRIC can be looked upon as a potential team, where China and India will act as the dominant global suppliers of manufactured goods and services and Brazil and Russia will be their commodity and raw material suppliers. The main point is that all these countries have certain unique strengths of their own which makes their position stronger. For China, it is their dominance in the manufacturing sector. India’s advantage lies in its unrivalled position in the services sector lead by IT. Russia has its advantage as Europe’s energy superpower and finally for Brazil, the strength lies in its rich natural resources. In addition, all these nations have strong domestic markets which have tremendous potential for growth. All four of these countries have experienced growth because of various reasons like changing political systems, increased foreign investment and greater emphasis on education. Even though these countries are as different as chalk and cheese, they make an awesome combination when joined together and appear more powerful as a united group. This is because the
BRIC will emerge as a partnership of equals who are able to bring in complementary competencies on a common platform for mutual interest. Together they cover over 25% of the world’s land area, 40% of the world’s population and hold 15% of the current global GDP. On almost every scale, they are poised to be the largest entity on the global stage. They provide a great opportunity for entrepreneurs, multinationals and investors. They have the potential to redefine the way business is conducted in various industries. Hence, the fortunes of the world economy over the next few decades might depend to a large extent on what happens in these countries.
What can BRIC offer?
The BRIC group have got a variety of advantages to offer to the world. The BRIC advantage lies in a wide range of factors like huge domestic markets, rich natural resources, skilled manpower, cheap and abundant labour force, high-end technology, bulk manufacturing etc. However, their main USP lies in being able to provide alternative solutions to many complex issues. There are many examples of this. The BRIC opened up a sea of opportunities for the growth hungry Western multinationals that were looking for new markets due to the saturation in Western markets. BRIC countries like India and China were able to provide a cheap labour force to Western firms who were looking at ways to reduce their operating costs and this led to the outsourcing factor. Russia as the major energy superpower is the main answer to Europe’s growing demand for energy. Indian software firms were able to provide high-end technology solutions to drive the online revolution in the Western commercial markets. And last, but not least, Brazil with its rich natural resources and huge size can contribute a lot to the world’s food security as it is the largest producer of almost any farm product we can imagine.
As stated earlier, the main attractive factor of the BRIC group is its burgeoning domestic market. Globalisation has opened the doors for multinationals into previously inaccessible territories, especially the developing nations. Many companies, especially those in the FMCG and manufacturing sector, now look toward the emerging markets, mainly the BRIC due to their strong consumer base. These countries have a huge number of people who have recently entered the middle-class segment. This is particularly true for China, India and Brazil. The newfound wealth will create a fast shift in the spending habits of these people and this will create a rising demand for new products. This provides tremendous growth opportunities for the growth hungry global companies, both foreign and domestic. For the foreign companies, the BRIC offer a sea of opportunity, mainly because many of these companies had been witnessing stagnant growth in recent times due to the saturated Western markets.
A few sectors which have witnessed a tremendous growth in BRIC countries in recent times include the IT sector, retail sector, automobile sector, telecoms sector, oil and energy sector, pharmaceutical sector and the real estate sector. Many of the BRIC countries have become world leaders in these sectors in the recent past. However, these sectors may not necessarily display a uniform growth pattern, as we have seen recently. This is because some of these sectors are mainly export oriented, e.g., IT and energy, while the growth in the other few sectors is based on strong domestic demand, e.g., retail, automobiles, and telecoms. This, in a way, helps these nations to withstand the changes in the outside world to some extent, though not fully. The growth in these sectors can be attributed to various factors such as increasing FDI, political reforms, increasing domestic consumption and domestic entrepreneurship.
The recent growth figures released by the World Bank in June 2009 throw light onto the BRIC potential. It estimates that the US economy will fall by 2.8% in 2009 and will grow at a snail’s pace of 0.9% in 2010. In the meantime, the Chinese economy is expected to display growth of 7.7% in 2009 and 9.3% in 2010. The GDP of India is also expected to grow at 6% in 2009 and 7.2% in 2010. The World Bank also projects that Brazil’s economy, which has fallen by 0.8% in 2009, will grow by 4% in 2010.
The first BRIC summit and the declining dollar dependence
The BRIC countries together are now being viewed as a potential bloc to counter the G8 nations, which is the group of the world’s wealthiest nations. Therefore the group’s announcement to conduct the first BRIC summit drew considerable worldwide attention. The first BRIC summit, which was hosted by Russia, was held on 16 June 2009 in Yakaterinburg. The summit, which was attended by the heads of state of the four nations called for a “multi-polar world order”, which is diplomatic code for a rejection of the United State’s dominance as the sole global superpower. After the conference, a 16-point statement was issued in which the four nations pledged their commitment to advance the reform of the international financial institutions in order to bring about changes to the world’s economy. They have decided to create the conditions for a fairer world order and also plan to cooperate to formulate policies to counter the current recession.
One of the meeting’s main agenda items was to reduce the world’s dependence on the US dollar. The countries discussed the prospect of using of a mix of regional reserve currencies in order to reduce the dependence on the US dollar. This move will have a significant impact on the US dollar’s future importance. The economic crisis of 2008, which started in the US, spread to other countries mainly because of the influence of US economy on the world economy and the US dollar’s status as the global economy’s sole reserve currency. The sudden rise in gold prices after central banks gave up controlling it was a strong sign of a loss of confidence in the US dollar as the international reserve currency. Moreover, after the start of the financial crisis, the confidence in the US dollar declined further and it has been widely questioned whether the US dollar should continue as the world’s reserve currency. The BRIC countries decision to start using a mix of regional reserve currencies from now on has major importance in such a scenario.
The four nations also decided to work together on various political and economic issues such as food security, the energy crisis, science & technology and education. The group discussed the issue of climate change and the group is expected to have a bigger say in Copenhagen’s climate change conference in December 2009. The group might play a vital role in deciding the future course of the Kyoto Protocol, which is set to expire in 2012. Finally, the coming together of the four nations also raises expectations about India and Brazil’s demand for permanent membership in the United Nations since they now have the support of two major permanent members Russia and China.
The major factors driving the growth in BRIC countries
1. Huge populations and emerging middle class
The BRIC nations have large, young populations to propel this growth and a significant portion of them are concentrated in major cities. The growing prosperity of these nations will depend largely on a rapidly emerging and expanding middle class. The increase in personal wealth among the people will lead to increased domestic consumption. The increase in the domestic consumption will in turn help these countries to reduce their dependence on exports to support economic growth. The number of BRIC residents with incomes of more than US$3,000 has almost doubled from 2006 to 2009. (US$3,000 is considered to be the margin for entering into the middle class segment in the emerging markets region.) More than 800 million people are expected to cross this margin by 2015 and this number exceeds the current total population of the US, Japan and Western Europe. Rising incomes has also led to an increased number of high net-worth individuals in these nations. The expanding middle class is indicative of the BRIC countries’ economic success and is very important to both local and foreign players due to the significant purchasing power attached to them.
The BRIC countries together account for around 42% of the world population or, in other words, they provide a huge market of 2.7 billion people. This is a relatively untapped market with a high purchasing power. Hence this could have a profound influence on the growth of various sectors such as retail, automobiles, real estate, telecoms, education, entertainment, computers etc. Apart from this, the increase in the personal wealth among the people will also help the local and international banks to expand on a broad range of financial products and wealth management services.
Globalisation has made the world smaller and it has led to an increase in interdependence among nations. It has cleared the way for the entrance of multinationals into the emerging markets. The arrival of new entrants made the markets in these nations more competitive and this in turn led to the production of more innovative and cheaper products. It also helped in finding international markets for locally manufactured goods, thus increasing the profitability of local companies. Various factors like the worldwide demand for energy, IT and the outsourcing process as well as the increased access to global capital has helped to fuel the growth of the BRIC nations. Thus, globalisation has helped to a great extent in making them world leaders in specific sectors, for instance, India in the services sector and China in the manufacturing sector.
3. Corporate profitability
Another major factor supplementing this growth is the increased performance of the corporate sector in these nations. Corporate profits in BRIC companies have been consistently positive over the last few years mainly due to initiatives like corporate restructuring, reduced levels of borrowing and improvements in the quality of corporate governance. The latest report on the world’s 200 most reputable companies published by the New York based Reputation Institute indicates that the number of companies from BRIC countries in the list has increased from 27 in 2006 to 61 in 2009. Another reason for the growth in corporate sector is due to the low labour and production costs in these nations and hence many big multinationals make use of these nations as a source of foreign expansion opportunities.
4. Cheap skilled labour (India and China)
One of the biggest advantages of the emerging markets is the cheap skilled labour force available in these nations. This has been particularly true in the case of India where there is a huge talent pool of young graduates who can be employed at much cheaper rates compared to those on Western salaries. This fact caught the attention of Western companies and led to the beginning of the current outsourcing boom. Many companies in the West started outsourcing their non-core jobs to cheaper destinations in order to lower their operating costs. Even though both India and China have a huge workforce, India has the edge considering the fact that it has a much younger workforce. India has the largest population in the world below the age of 25, whereas the bulk of the Chinese workforce is much older and hence they will soon reach retirement age.
5. Saturation in the Western market
The markets for certain products generally tend to become saturated in some of the highly developed Western societies. In such a scenario, it becomes increasingly difficult for existing companies to find new customers and hence they have to seek new markets for profit generation. Emerging markets provide a good alternative for such companies. These markets have huge middle-class populations and a majority of these markets are untapped. Rising incomes in these economies have also led to the creation of a new class of highly rich individuals with greater purchasing power. Such a scenario offers huge growth potential for Western multinational companies. Studies have shown that over the next 10 to 15 years most of the total world growth in the consumer market is likely to be concentrated in the developing economies.
6. Political and economic reforms
The political and economic reforms taken by respective governments in each nation have also contributed to the growth in these nations. The role of China in the world economy was quite minimal before the 1980s. However, the economic reforms started by the Chinese government after 1978 helped the country to attain growth in investments, consumption and standard of living. The Chinese leadership realised the importance of having a practical perspective on many political and socioeconomic problems and reduced the role of Communist ideology in economic policy. The Indian government adopted a path of economic liberalisation in 1991 after more than four decades of government rule based on socialist-based policies. This helped to turn the strictly regulated, slow moving and highly corrupt Indian economy into the second fastest growing major economy in the world.
Similarly, in the case of Russia, the fall of the Soviet Union together with the financial crisis of 1998 led to the decline of the Russian economy. The country had 29.1% of its population living under the poverty line in 2000. However, the Putin administration and their shrewd regulations to capitalise on the energy sector helped the country to revive its economy. The eight years of the Putin administration reduced the country’s poverty rate by half and furthermore witnessed a multi-fold increase in the per capita income and average wage. In Brazil, President Lula, who came into power in 2002, introduced a spate of economic reforms which helped to bring down Brazil’s alarming inflation rate of 17% to, currently, a comfortable 4.4%. A more detailed analysis of the political and economic reforms is given in the country analysis section in the following chapters.
7. Greater emphasis on education
The role of education in the growth of these nations cannot be undervalued. In 1986, the Chinese government introduced a new policy of a compulsory nine-year basic education for every child and this resulted in a high rise in Chinese literacy levels. India, on the other hand, has a significantly high number of English-speaking young graduates which helped them to attain high growth in the outsourcing industry. Both China and India produce the largest number of engineers in the world. Every year 600,000 engineers graduate in China, followed by India with 450,000 engineers. This high number of software engineers is the single most important reason for India becoming a leader in the IT industry. On the other hand, Russia has the largest number of technically trained personnel in the world and this ensures that the country will not have any shortage of skilled manpower for the development of science and technology in the country.
As the world recovers from the financial crisis, the importance of the BRIC nations keeps increasing. This is because a lot depends upon how these nations have been impacted by the crisis. The BRIC nations are now playing a major role in the road to world recovery. This is contrary to what happened in the past crisis, when developed nations like the US and European countries paved the way for recovery. It used to be thought that the emerging economies like China, India and Brazil depended a great deal on the Western markets and hence until the Western markets recovered, the emerging markets would suffer. However, the truth seems to be rather different this time. According to the latest figures released by the IMF, the four BRIC countries together have registered an average growth of 5.3% in 2009. At the same time, the global average growth rate stands at a mere 0.5%, while the US growth rate has contracted by another 1.6% during the same period. At this point, we need to keep in mind the fact that the BRIC together hold a considerable share of the global GDP. Hence, had it not been for the BRIC, the global average growth rate would have probably plunged into negative figures. It is true that the BRIC nations have been impacted to some extent by the global crisis. However, the impact on the BRIC can be classified as a ‘slowdown’ rather than as a ‘severe hit’.
The reason for this can partly be attributed to the theory of decoupling. As per the decoupling theory, the BRIC markets that have large middle-class populations will be able to offset the negative impact of the Western crisis by means of their huge domestic consumption. The theory seems to be right because the BRIC nations are currently witnessing a boom in their domestic markets. Increasing affluence among the middle class is causing a boom in internal sectors like retail, telecoms, real estate, automobiles, education etc. Foreign companies who were quick to realise this fact have quickly established their presence in these markets to grab their share of the huge pie. Apart from this, contrary to popular perception, the share of exports in India and Brazil’s GDP is just around 15%, which again makes them less vulnerable to a Western crisis.
Currently, the BRIC nations are making an orderly plan to move away from the existing global monetary system based solely on US dollar. Instead they are aiming at a new multi-polar monetary system based on a basket of currencies. The volume of trade amongst the BRIC nations has increased and is now often settled in respective local currencies instead of US dollars. In all these endeavours, they are not being controlled by the industrial nations nor are they waiting for the developed countries to call the shots. Instead they are acting with a high level of independence in order to consolidate their relationships with each other as part of a group.
In order to maintain the pace of their current growth, these countries should follow a harmonious and balanced approach to economic development so as to benefit each other. Thus China and India, who are the leading players in the manufacturing and services sector, respectively, should be able to complement the growth of Russia and Brazil by becoming their major commodity and raw material importers. It is obvious that these nations are as different as chalk and cheese and that their strengths and USPs lie in vastly different sectors. However, if they are driven by strong economic ties with each other, then the BRIC nations can emerge as a partnership of equals who are able to bring in complementary competencies on a common platform for mutual interest.