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Broken BRICs


HITTING A WALL? Heads of government from Brazil, Russia, India, China and South Africa strike a pose at a BRICS Summit - now a regular feature on the global calendar for nations that may actually have little in common

Over the past several years, the most talked-about trend in the global economy has been the so-called rise of the rest, which saw the economies of many developing countries swiftly converging with those of their more developed peers. The primary engines behind this phenomenon were the four major emerging-market countries, known as the BRICs: Brazil, Russia, India, and China. The world was witnessing a once-in-a-lifetime shift, the argument went, in which the major players in the developing world were catching up to or even surpassing their counterparts in the developed world.

These forecasts typically took the developing world's high growth rates from the middle of the last decade and extended them straight into the future, juxtaposing them against predicted sluggish growth in the United States and other advanced industrial countries. Such exercises supposedly proved that, for example, China was on the verge of overtaking the United States as the world's largest economy - a point that Americans clearly took to heart, as over 50 per cent of them, according to a Gallup poll conducted this year, said they think that China is already the world's "leading" economy, even though the US economy is still more than twice as large (and with a per capita income seven times as high).

As with previous straight-line projections of economic trends, however - such as forecasts in the 1980s that Japan would soon be number one economically - later returns are throwing cold water on the extravagant predictions. With the world economy heading for its worst year since 2009, Chinese growth is slowing sharply, from double digits down to seven pe rcent or even less. And the rest of the BRICs are tumbling, too: since 2008, Brazil's annual growth has dropped from 4. 5 per cent to two per cent;Russia's, from seven per cent to 3. 5 per cent;and India's, from nine per cent to six per cent.

None of this should be surprising, because it is hard to sustain rapid growth for more than a decade. The unusual circumstances of the last decade made it look easy: coming off the crisis-ridden 1990s and fuelled by a global flood of easy money, the emerging markets took off in a mass upward swing that made virtually every economy a winner. By 2007, when only three countries in the world suffered negative growth, recessions had all but disappeared from the international scene. But now, there is a lot less foreign money flowing into emerging markets. The global economy is returning to its normal state of churn, with many laggards and just a few winners rising in unexpected places. The implications of this shift are striking, because economic momentum is power, and thus the flow of money to rising stars will reshape the global balance of power.

The notion of wide-ranging convergence between the developing and the developed worlds is a myth. Of the roughly 180 countries in the world tracked by the International Monetary Fund, only 35 are developed. The markets of the rest are emerging-and most of them have been emerging for many decades and will continue to do so for many more. The Harvard economist Dani Rodrik captures this reality well. He has shown that before 2000, the performance of the emerging markets as a whole did not converge with that of the developed world at all. In fact, the per capita income gap between the advanced and the developing economies steadily widened in most cases from 1950 until 2000.

This is not a negative read on emerging markets so much as it is simple historical reality. Over the course of any given decade since 1950, on average, only a third of the emerging markets have been able to grow at an annual rate of five percent or more. Less than one-fourth have kept up that pace for two decades, and one-tenth, for three decades. Only Malaysia, Singapore, South Korea, Taiwan, Thailand, and Hong Kong have maintained this growth rate for four decades. So even before the current signs of a slowdown in the BRICs, the odds were against Brazil experiencing a full decade of growth above five per cent, or Russia, its second in a row.

Meanwhile, scores of emerging markets have failed to gain any momentum for sustained growth, and still others have seen their progress stall after reaching middle-income status.

In the opening decade of the twenty-first century, emerging markets became such a celebrated pillar of the global economy that it is easy to forget how new the concept of emerging markets is in the financial world. The first coming of the emerging markets dates to the mid-1980 s, when Wall Street started tracking them as a distinct asset class. Initially labeled as "exotic, " many emerging-market countries were then opening up their stock markets to foreigners for the first time: Taiwan opened its up in 1991;India, in 1992;South Korea, in 1993;and Russia, in 1995. Foreign investors rushed in, unleashing a 600 per cent boom in emerging-market stock prices (measured in dollar terms) between 1987 and 1994. Over this period, the amount of money invested in emerging markets rose from less than one per cent to nearly eight per cent of the global stock-market total.

This phase ended with the economic crises that struck from Mexico to Turkey between 1994 and 2002. From 1987 to 2002, developing countries' share of global GDP actually fell, from 23 per cent to 20 per cent. The exception was China, which saw its share double, to 4. 5 per cent. The story of the hot emerging markets, in other words, was really about one country.

The second coming began with the global boom in 2003, when emerging markets really started to take off as a group. Their share of global GDP began a rapid climb, from 20 per cent to the 34 per cent that they represent today (attributable in part to the rising value of their currencies), and their share of the global stock-market total rose from less than four per cent to more than ten per cent.

The third coming, an era that will be defined by moderate growth in the developing world, the return of the boom-bust cycle, and the breakup of herd behaviour on the part of emerging-market countries, is just beginning. Without the easy money and the blue-sky optimism that fuelled investment in the last decade, the stock markets of developing countries are likely to deliver more measured and uneven returns.


No idea has done more to muddle thinking about the global economy than that of the BRICs. Other than being the largest economies in their respective regions, the big four emerging markets never had much in common. They generate growth in different and often competing ways -Brazil and Russia, for example, are major energy producers that benefit from high energy prices, whereas India, as a major energy consumer, suffers from them. Except in highly unusual circumstances, such as those of the last decade, they are unlikely to grow in unison. China apart, they have limited trade ties with one another, and they have few political or foreign policy interests in common.

A problem with thinking in acronyms is that once one catches on, it tends to lock analysts into a worldview that may soon be outdated. In recent years, Russia's economy and stock market have been among the weakest of the emerging markets, dominated by an oil-rich class of billionaires whose assets equal 20 per cent of GDP, by far the largest share held by the superrich in any major economy. Although deeply out of balance, Russia remains a member of the BRICs, if only because the term sounds better with an 'R'. Whether or not pundits continue using the acronym, sensible analysts and investors need to stay flexible;historically, flashy countries that grow at five per cent or more for a decade - such as Venezuela in the 1950s, Pakistan in the 1960s, or Iraq in the 1970s - are usually tripped up by one threat or another (war, financial crisis, complacency, bad leadership) before they can post a second decade of strong growth.

The current fad in economic forecasting is to project so far into the future that no one will be around to hold you accountable. This approach looks back to, say, the seventeenth century, when China and India accounted for perhaps half of global GDP, and then forward to a coming 'Asian century, ' in which such preeminence is reasserted. In fact, the longest period over which one can find clear patterns in the global economic cycle is around a decade. The typical business cycle lasts about five years, from the bottom of one downturn to the bottom of the next, and most practical investors limit their perspectives to one or two business cycles. Beyond that, forecasts are often rendered obsolete by the unanticipated appearance of new competitors, new political environments, or new technologies.


In the decade to come, the United States, Europe, and Japan are likely to grow slowly. Their sluggishness, however, will look less worrisome compared with the even bigger story in the global economy, which will be the three to four per cent slowdown in China, which is already under way, with a possibly deeper slowdown in store as the economy continues to mature. China's population is simply too big and aging too quickly for its economy to continue growing as rapidly as it has. With over 50 per cent of its people now living in cities, China is nearing what economists call "the Lewis turning point" : the point at which a country's surplus labour from rural areas has been largely exhausted. This is the result of both heavy migration to cities over the past two decades and the shrinking work force that the onechild policy has produced. In due time, the sense of many Americans today that Asian juggernauts are swiftly overtaking the US economy will be remembered as one of the country's periodic bouts of paranoia, akin to the hype that accompanied Japan's ascent in the 1980s.

As growth slows in China and in the advanced industrial world, these countries will buy less from their export-driven counterparts, such as Brazil, Malaysia, Mexico, Russia, and Taiwan. During the boom of the last decade, the average trade balance in emerging markets nearly tripled as a share of GDP, to six per cent. But since 2008, trade has fallen back to its old share of under two per cent. Export-driven emerging markets will need to find new ways to achieve strong growth.

The uneven rise of the emerging markets will impact global politics in a number of ways. For starters, it will revive the self-confidence of the West and dim the economic and diplomatic glow of recent stars, such as Brazil and Russia (not to mention the petro-dictatorships in Africa, Latin America, and the Middle East). One casualty will be the notion that China's success demonstrates the superiority of authoritarian, state-run capitalism. Of the 124 emerging-market countries that have managed to sustain a five per cent growth rate for a full decade since 1980, 52 per cent were democracies and 48 per cent were authoritarian. At least over the short to medium term, what matters is not the type of political system a country has but rather the presence of leaders who understand and can implement the reforms required for growth.

The economic role models of recent times will give way to new models or perhaps no models, as growth trajectories splinter off in many directions. In the past, Asian states tended to look to Japan as a paradigm, nations from the Baltics to the Balkans looked to the European Union, and nearly all countries to some extent looked to the United States. But the crisis of 2008 has undermined the credibility of all these role models. Tokyo's recent mistakes have made South Korea, which is still rising as a manufacturing powerhouse, a much more appealing Asian model than Japan. Countries that once were clamouring to enter the eurozone, such as the Czech Republic, Poland, and Turkey, now wonder if they want to join a club with so many members struggling to stay afloat. And as for the United States, the 1990s-era Washington consensus - which called for poor countries to restrain their spending and liberalise their economies - is a hard sell when even Washington can't agree to cut its own huge deficit.

Moreover, because it is easier to grow rapidly from a low starting point, it makes no sense to compare countries in different income classes. The rare breakout nations will be those that outstrip rivals in their own income class and exceed broad expectations for that class. Although the world can expect more breakout nations to emerge from the bottom income tier, at the top and the middle, the new global economic order will probably look more like the old one than most observers predict. The rest may continue to rise, but they will rise more slowly and unevenly than many experts are anticipating. And precious few will ever reach the income levels of the developed world.

Foreign Affairs;www. foreignaffairs. com

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