AFRICANGLOBE – Just as the green shoots of recovery are appearing in the UK, and positively sprouting upwards in the US, so it seems that the so-called BRICS economies – Brazil, Russia, India, China and South Africa – are slowing.
Why is this happening and does it suggest a waning of the whole Emerging Market phenomenon which has so influenced the world over the past two decades?
The BRICs really matter. They now account for one quarter of global GDP and, since 2005, they have produced nearly two fifths of global growth. So their recent slowdown has surprised many people.
When seeking an explanation in more or less any subject, the most intellectually rewarding one – and the best approximation to the truth – is usually the simplest. You need to beware explanations that list a whole load of different factors. We even have an expression for seeking the simplest explanation. It is “to use Ockham’s razor”, after the 14th century philosopher, William of Ockham.
In this case, with all of these supposedly similar economies experiencing a marked slowdown simultaneously, it is tempting to believe that there is some common factor affecting them. But this would be precisely the wrong conclusion.
For a start, these countries are not at all similar. Why is Russia included in the group? Because its name starts with the letter R. Without its inclusion you would have the BICs, and that would make them sound like a group of Biros.
Russia has no business being in this group. True, she enjoyed a burst of pretty strong growth from 1999 to 2008 but this was brought about by a combination of one-offs – a sharp rise in oil prices and the ability to work off the excess capacity that was the legacy of the post-Soviet collapse. This allowed the economy to increase output even though investment remained weak.
But capacity constraints are now starting to appear and, of course, oil prices are no longer rising. More importantly, there is no sign of economic transformation in Russia. In fact, rather the opposite.
One of the few things at which modern Russia excels is corruption and the government has reverted to the worst sort of self-serving autocracy.
Meanwhile, the demographics look awful. Because of this, droves of young professionals are leaving, or wanting to leave, the country.
China is the nation which gave rise to the idea of a group of dynamic, rapidly expanding countries with a very big future. Understandably. After all, it has undergone a transformation. The issue was whether China’s success could be mirrored by other countries but recently Chinese growth has slowed. Growth this year will probably be about 7pc.
It was always unrealistic to expect China to carry on growing at the sort of rates experienced a few years ago – an average of 10pc in the years from 1995 to 2010 and 15pc at the very peak.
Moreover, even during the go-go years, China faced a major future challenge which threatened not just to lower the growth rate but to cause a real economic crisis. Chinese growth has been severely unbalanced, with excessive reliance on investment and, to a much lesser extent, exports.
China has now passed the point at which it can grow at 10pc each year simply by building roads, putting up factories and encouraging people to work in them rather than on farms.
You can’t go on investing forever; in the end, someone has to want to buy what you produce.
China now has to foster greater consumption by putting more of national income in the hands of families. This shift would not be a disaster – China should still be able to grow by 6pc plus – but it is a big comedown, given the misplaced expectations that the economy could grow at 10pc indefinitely.
India is the country which is most often compared to China. After all, she has a massive population and it is even poorer than China’s. So, if China could transform itself by a period of rapid economic growth, why can’t India?
A decade ago India’s growth accelerated on a wave of reform and five years ago it wasn’t far short of the elevated Chinese level but it has dropped to just 5pc now, which is disappointing for a country with such poverty and such potential. The reform impulse has been allowed to peter out. The gains from past liberalisations have been realised and over-regulation and closed markets are holding the economy back from reaching its potential.
Brazil has also slowed. Last year it grew by less than 1pc. But it is a very different kettle of fish.
For years now, in marked contrast to China, consumer spending has been the driver of growth. It can no longer continue to increase at rapid rates.
Consumption has been supported by two factors – improving terms of trade (related to higher commodity prices) and an increase in consumer debt.
On the supply side, decent growth rates of output were made possible by a sharp fall in unemployment. Yet, crucially, productivity growth has been poor.
Commodity prices have fallen, and may well fall further, and Brazilian households spend roughly a fifth of their income servicing debt – far more than overleveraged US households before the financial crisis. Meanwhile, unemployment is at record lows. The combination of all these factors has meant weaker growth.
The explanations for how the four countries have got to the present situation are different but, with regard to how they get out of this mess and regain their vigour, they share something in common. They all require major structural economic reform.
China needs to become more like Brazil with its consumption-led growth; Brazil and Russia need to become more like China and raise investment rates and India needs to break out from its over-regulation and invest more in infrastructure. But in all four cases, vested interests are likely to prevent a radical shift in policy.
This does not mean, though, that we should write off the emerging markets boom overall. Far from it.
Just as the BRICS have slowed, so other emerging markets have started to improve.
I reckon that the two countries with the most exciting prospects over the next 10 years are African – Ghana and Nigeria – with several other African countries not far behind.
In the end this is far more important for the relief of poverty and the shape of the world than whether the BRICS grow at slower rates in the years ahead.
By: Roger Bootle