Correcting structural imbalances of the BRIC for sustainable growth

The global economic recession of 2008-09 has exposed the differences in the economic structure of the BRIC economies. China and Russia are heavily trade dependent whilst Brazil and India are less globally integrated.

Additionally, each of the quartets faces long-term internal challenges that could seriously hamper its economic progress, regardless of how well it is integrated in, or insulated from, the global economy.

Key points

  • The emerging economies of Brazil, Russia, India, and China (BRIC) have been steadily increasing their presence in the global economy. The rate and structure of growth, however, varies by country and the 2008-09 global economic downturn has exposed their differences;
  • China and Russia are significantly more trade dependent, with the ratios of exports to GDP at 30.5% and 27.3% in 2009, respectively. Brazil and India, on the other hand, are less globally integrated, with exports to GDP ratios of 18.6% and 11.3%, respectively, in 2009;
  • Russia’s heavy reliance on commodity exports, especially oil and natural gas, led to an annual real GDP contraction of 7.9% in 2009, as oil prices plummeted during the global economic crisis. Chinese merchandise exports also fell by15.9% year-on-year in US$ terms in 2009, although the Chinese economy still grew by 8.7% in 2009 thanks to government stimulus measures;
  • The Brazilian economy, with a diversified export profile and well-developed agribusiness and eco-business sectors, experienced a mild annual contraction of 0.2% in 2009, but it is one of the first emerging markets to begin a recovery. Meanwhile, the Indian economy, led by a dynamic services sector, grew by 5.7% in 2009;
  • Each of the BRIC faces long-term internal challenges that could seriously hamper its economic progress. However, all the BRIC countries are committed to correcting the structural imbalances in order to rise as strong global economic powers and competitors to the USA, the European Union (EU) and other advanced industrial countries.

The emerging BRIC economies

  • Ever since Brazil, Russia, India and China was collectively identified by the investment bank Goldman Sachs in 2003 as the four prospective “engines of growth” for the global economy, the BRIC countries have been increasing their presence in the global economy. In 2009, they collectively accounted for 23.6% of global GDP, measured on purchasing power parity (PPP) basis that adjusts for price differences. Back in 2000, the share of the BRIC in the global economy was 16.4% (in PPP terms);
  • The global presence of the BRIC countries is also significant in terms of their extensive land area and large population. As of January 2010, the total population of BRIC countries reached 2.9 billion, out of the global population of 6.9 billion;
  • In addition to the large population, income growth within the BRIC countries has also been significant. The number of households with an annual disposable income above US$7,500 rose rapidly from 58.2 million in 2004 to 161.2 million in 2009, making the BRIC an important driver of global consumption;
  • In 2007, prior to the 2008-09 global economic downturn, annual real GDP growth of the BRIC as a collective group reached a double digit 10.7%, driven by China’s 13.0% annual real GDP growth rate. The global financial crisis (starting in 2008) has however exposed the differences in the economic structure of the BRIC countries, as each economy responded to the crisis differently and their growth rates vary significantly.

China and Russia are heavily trade dependent

Russia and China are significantly globalised, with exports to GDP ratios in 2009 of 27.3% and 30.5% respectively, the latter quite extraordinary given China’s large economic size.

In Russia, a wealth of natural resources has been the main driver of growth for the economy:

  • In 2009, Russia was the world’s largest exporter of natural gas and the second largest exporter of oil (after Saudi Arabia). The country is also a major exporter of steel and primary aluminium. In 2009, oil and natural gas exports accounted for 62.0% of the country’s export revenues and 15.3% of GDP;
  • The heavy reliance on commodity exports, especially oil and natural gas, makes Russia vulnerable to shocks from the highly volatile swings in global commodity prices. In 2008-09, the Russian economy was one of the hardest hit by the global economic crisis as oil prices plummeted and the foreign credits that Russian banks and firms relied on also dried up as risk-averse foreign investors considered Russia the riskiest of the BRIC countries and pulled out of the country;
  • Due to falling oil prices which caused Russian merchandise exports to fall by 35.5% year-on-year in US$ terms in 2009, Russia’s annual real GDP growth plummeted to -7.9% in 2009, from 5.9% in 2008 and 8.0% in 2007.

China is also heavily reliant on exports as a driver of economic growth:

  • China, like many other East Asian economies, has followed the “East Asian development model” which has been based on export-oriented manufacturing as the prime engine of growth. In 2009, the manufacturing sector accounted for 34.4% of China’s GDP;
  • The largest destinations for Chinese exports are developed countries, with the USA and the EU collectively accounting for 39.3% of Chinese exports in 2007. Thanks to strong exports growth, the Chinese economy grew by 13.0% year-on-year in 2007;
  • In 2009, despite overtaking Germany as the world’s largest exporting nation, China saw its merchandise exports in 2009 down by 15.9% year-on-year in US$ terms as the 2008-09 global economic downturn reduced foreign demand for Chinese exports. As a result of falling exports, annual real GDP growth slowed to 8.7% in 2009, from 9.6% in 2008 and 13.0% in 2007. The share of exports in the Chinese economy has also fallen, from 38.8% in 2007 to 37.8% in 2008 and further to 30.5% in 2009;
  • Despite the fact that China weathered the global economic crisis better than any other BRIC economy thanks to a RMB4.0 trillion (US$585 billion) government stimulus package (launched in November 2008) to boost domestic demand, it became apparent that a heavy dependency on manufactured exports and on demand from a small number of key markets is unsustainable.

Exports-to-GDP ratios and real GDP growth rates for China and Russia: 2000-2009% of GDP; annual % change

Source: Euromonitor International from the IMF.

 

Brazil and India are less globally integrated

Brazil has a well-diversified economy:

  • Brazil has a diversified export base comprising of manufactured goods, agricultural products and mineral fuels. In addition, Brazil’s export industries are not overly reliant on demand from any one country;
  • Brazil’s exports to GDP ratio has consistently been the lowest among all the BRIC economies. In 2009, exports accounted for 11.3% of Brazil’s GDP, down from 13.4% in 2007 and 13.8% in 2008, as the global economic downturn dampened demand for Brazilian exports;
  • In addition to exports, the Brazilian government has been putting efforts into such areas as agriculture, cattle raising, and eco-business sectors in order to diversify the economy. Brazil is the world’s second largest producer of biofuel (after the USA), producing 11.5 billion tonnes of oil equivalent of biofuel in 2009;
  • In 2009, Brazil experienced three quarters of negative annual real GDP growth, but it was one of the first emerging markets to begin a recovery with real GDP growth reaching 4.3% year-on-year in Q4 2009. Brazil’s annual real GDP growth for 2010 is forecast at 7.1%, compared to -0.2% in 2009.

Economic growth in India, meanwhile, is led primarily by the service sector:

  • Although the ratio of exports to GDP has been increasing (from 13.2% in 2000 to 18.6% in 2009), India still has a large domestic sector which makes the economy less vulnerable from plunging external demand. In 2009, services accounted for 24.5% of GDP and manufacturing 13.6% of GDP;
  • In 2009, India’s real GDP grew by 5.7% year-on-year, compared to 6.5% in 2008 and 9.9% in 2007. Whilst the exports sector was hit hard by the global economic downturn (with merchandise exports falling by 13.6% year-on-year in US$ terms in 2009), the Financial Intermediation, Real Estate, Renting and Business Activities sector grew by a healthy 6.3% in 2009 over a year earlier in real terms;
  • The Indian economy is also concentrated on the agricultural sector, which employs around 60% of the workforce. However, in 2009, agricultural output fell by 0.2% year-on-year (compared to an annual growth of 1.6% in 2008). This means agriculture hardly plays any role in India’s economic growth, and is an unproductive sector.

Exports-to-GDP ratios and real GDP growth rates for Brazil and India: 2000-2009% of GDP; annual % change

 

 

 

 

 

 

 

Source: Euromonitor International from the IMF.

Challenges to growth

Each of the quartets faces long-term internal challenges that could seriously hamper its economic progress, regardless of how well it is integrated in, or insulated from, the global economy:

  • Brazil’s poor educational standards, particularly in maths and science, can adversely affect the country’s ability to grow rapidly. Even prior to the global financial crisis, Brazil registered an average annual growth rate of only 3.8% in real GDP during 2002-2007, compared to 10.7%, 7.9% and 6.9%, respectively, in China, India and Russia. In addition, income distribution in Brazil remains among the most unequal in the world, which can threaten social stability and the business environment. In 2009, Brazil’s gini index stood at 56.9, the highest score among all BRIC countries (a score of 0 indicates perfect equality and a score of 100 indicates total inequality);
  • In Russia, corruption and lack of economic reforms can deter foreign direct investment and slow economic growth. In 2009, with a corruption perception index deteriorating from 2.8 in 2004 to 2.2 (where 0 = highly corrupt and 10 = highly clean), Russia was ranked 146th out of 180 countries, as problems with corrupt officials at all levels of government persist and no significant measures to tackle corruption have been implemented;
  • In India, infrastructure is inadequate whilst poverty remains widespread. In 2005 (latest available year), 28.3% of the rural population and 25.7% of the urban population lived below the national poverty line. (India’s poverty line is based on the amount of money a person needs to purchase a daily minimal amount of food worth 2,200 kcal per day.) High food price hikes, resulting from frequent flooding and severe drought, can exacerbate the problem of poverty. In 2009, India’s annual inflation reached 10.8%
  • China is facing the serious long-term challenges of pollution and shortages of water and natural resources. Already, these issues are becoming increasingly political in China because of the real and serious threat they pose on economic growth, standards of living, and social stability. In addition, the Chinese population is also ageing rapidly. By 2020, the proportion of people aged 65+ is forecast to reach 13.1% of the Chinese population (up from 9.4% in 2008 and 4.5% in 1978) and account for a quarter of the global elderly population.

Prospects

All the BRIC countries are committed to correcting their imbalances in order to rise as strong global economic powers and competitors to the USA, the European Union (EU) and other advanced industrial countries:

  • Brazil is increasing investment in tertiary education, particularly for science and technology, in order to develop a skilled workforce. Meanwhile, efforts continued to be made to strengthen Brazil’s agriculture and livestock industry as well as eco-business sectors in order to ensure the country’s diversified economy is also competitive;
  • Russia is committed to diversification of the economy, despite rebounding oil prices following the global economic recovery. The Russian government aims to commercialise the country’s scientific heritage and will invest heavily in information technology, nanotechnology and pharmaceuticals;
  • India is focusing on the development of the manufacturing sector in order to effectively generate jobs, which is essential to cope with population growth (forecast at an average annual rate of 1.2% during 2010-2020 to reach 1.3 billion by 2020) and to alleviate poverty by shifting the workforce out of low-wage, unproductive agriculture;
  • China is striving to shift the foundation of economic growth from exports towards private consumption, which accounted for 34.7% of GDP in 2009. In 2009 China announced a US$123 billion plan to establish universal healthcare by 2011 for rural and urban areas. Universal healthcare could help to change Chinese consumers saving habits and unleash their spending power, which will help reduce China’s reliance on external demand for growth.

As a short-term forecast, all the BRIC economies are likely to rebound strongly from the 2009 global economic recession, with robust real GDP growth in 2010. It is expected that in 2010 the Brazil economy will grow by 7.1% year-on-year in real terms (compared to -0.2% in 2009), Russia by 4.3% (from -7.9% in 2009), China by 10.5% (from 9.1% in 2009) and India by 9.4% (from 5.7% in 2009).