In 2003, Goldman Sachs introduced what they perceive as the new wave of economic powerhouses. Brazil, Russia, India and China are listed as the four countries that will become the economic juggernauts by the year 2050. Out of the four countries selected by Goldman Sachs, China is performing the best; they have the largest increase in growth and the highest GDP but the least amount of democracy. Brazil, Russia and India pose the biggest questions and have the most work to do to prove Goldman Sachs correct.
The BRIC theory was first developed by Goldman Sachs as a way to classify the countries with the largest potential for economic growth. Since then other countries, such as Mexico, South Africa and Eastern Europe have been included in other terms for markets. It is the BRIC countries, specifically Brazil, Russia and India that I focus on for this essay. China has a much larger GDP and does not have the democratic values of the other countries, so in a sense it is playing on an uneven field.
Brazil is a country used to having great expectations placed upon. It is also used to falling far below those expectations. Investors have been drooling over the promise of a modern Brazil for decades. Finally the GDP, growth rate, per capita GDP and the emergence of a strong manufacturing industry along with an abundance of raw materials has given Brazil a chance to play among the economic elite.
In the 1960’s and 70’s Brazil had the world’s second fastest growing economy; but investors still referred to Custo Brasil (Cost of Brazil), referencing the high costs of doing business in Brazil (Economist 4-14-07). During Brazil’s recent economic success came a high debt to GDP ratio of 44-50%, this is calculated by taking the National Debt divided by the GDP (www.brazilcham.com). Seeing that 10% is considered high, Brazil faces a mounting problem in dealing with National Debt.
Even though inflation is under control and Export-Led Economic Growth has occurred, the debt will keep Brazil’s credit standing low and keep them in the semi-periphery. Even though mounting debt is troublesome, India has a much worse debt burden, which it will not be able to outgrow, while Brazil has a good chance of outgrowing its debt burden. Since the introduction of the Real as Brazil’s currency inflation has been down substantially and foreign trade has increased dramatically. Brazil has change into an export-led economy, with great success.
Brazil is one of the world’s largest exporters of raw materials, such as, iron ore, steel, coffee, soybeans, beef, and orange juice. Brazil’s recent growth is not only supported by exporting raw materials, but also advanced technologies. Aircraft, automobiles, and electrical equipment are just some of Brazil’s advanced industries.
Economic growth is not the only indicator of ‘how well-off’ a country is. Brazil has been plagued by large income disparities and a burgeoning inefficient bureaucracy. “Nelson Marconi, of the Fundacao Getulio Vargas, believes that public employment could ‘easily’ be slashed by 30% without making services worse” (Economist, 4-14-07). The pension system is crippling, with 11% of Brazil’s GDP going to finance public pensions. Along with tremendously high transportation costs (at nearly 13% of the GDP), Brazil is a wasteful country that desperately needs to increase its investment in infrastructure and in the private-business sector. This is difficult to do because it costs businesses 60% more to hire employees in Brazil due to high taxes. Brazil has tight work place regulations as well, opening up the possibility of frivolous lawsuits.
“In a league table of the ease of doing business in 175 countries, the IFC ranked Brazil 121st. The average firm takes 2,600 hours to process its taxes, a world record. Opening a business, on average, requires 17 procedures and 152 days, putting Brazil in 115th place” (Economist 4-14-07).
If it is so hard to do business in Brazil, why did Goldman Sachs list it as a BRIC country? Brazil has a stable economy with low inflation (around 3%) and is politically stable. Unlike India, Russia and China; Brazil does not have any disputes with neighbors and does not have nuclear weapons. Brazil is the only one of the BRIC countries to be considered a full-blooded democracy. India is still operating in a cast system, China does not allow suffrage or have any human rights concerns and Russia frequently censors the media and has business moguls go missing. For investors, Brazil is a country to watch, mainly because it is nearly the size of the U.S. and has the potential for long-term growth and stability. While the other countries in the BRIC theory face political changes in the future (Economist 4-14-07).
Over the past two decades India has been one of the fastest growing economies. Specifically in the past five years India’s growth rate has gone from 3.6% in 2002 to 9.2% in 2006, a tremendous increase. (Economist.com) Exports have gone from $51 billion in 2002 to $121 billion in 2006, more than a 100% increase. This tremendous growth, along with being the world’s most populated liberal democracy makes India a potential economic leader.
Even with India’s growth rate hovering around 9%, it has a horrendous debt problem to face. As the growth rate has climbed so has the debt rate, with the Debt to GDP ratio topping 85%. “We do not believe that India’s public debt dynamics are explosive. Nonetheless, the fact that the debt/GDP ratio has continued to edge up to over 85 per cent even as growth has accelerated to 7-8 per cent indicates that India is unlikely to simply outgrow its debt burden,” (www.rediff.com).
India’s strengths, such as population and agriculture, are also its weaknesses. Over 70% of India’s population lives in rural areas contributing to its per capita income of $979, which ranks 128th in the world. The labor force of India is disproportionately employed in the agriculture industry with 60% of the total labor force employed in agriculture of a similar industry. Even though 25% of India’s population lives on less than $0.40 a day the income disparity is relatively low and the labor force is well educated (www.economist.com).
The services industry is expanding rapidly and many U.S. companies are flocking to India to take advantage of the cheap, well-educated work force. Services account for over 54% of India’s GDP, compared to 56% of Russia’s economy (www.economist.com). India’s economy is much more diverse than that of Russia’s, relying much more on manufacturing and agriculture. The growing services industry along with the growing population and increasing per capita GDP makes India a great destination for consumable goods.
Already the U.S., China and Singapore have taken advantage of India’s growing demand for various goods. In this situation it is win-win, primarily because India is also finding many destinations for its exports, including the potential of introducing an automobile in western markets. All of these indicators, along with the large population of India make many believe that the future for India is bright.
With the recent death of former President Boris Yeltsin many are taking the time to remember the turbulent years in Russia after the fall of the USSR. When Russia first jumped into privatization they did it in a fire-sale manner. The rich were able to buy public corporations and public land for cheap, this allowed the rich to get richer very quickly.
As an oligarchy gained control, many in Russia were concerned about the growing income disparities. After economic collapse in the late 1990’s, Russia started to stabilize under the auspices of oil revenue. The GDP increased from $345 billion in 2002 to $978 billion in 2006. The growth rate of the economy has also increased from 4.7% in 2002 to 6.7% in 2006 (www.economist.com). These indicators show a trend of growth and potential. But it is important to note that 65% of Russia’s exports are oil, fuel and gas. Russia’s economic success is variable due to the unpredictable nature of oil prices.
Even if oil prices continue to rise, eventually Russia will lose out. By 2050 petroleum consumption will be significantly lower in the modern states. India and China are important to the success of Russia’s economy, because they will become the largest consumers of petroleum in the next decade.
Even with India and China help to boost Russia’s Economy, the debt problem will become a major factor. Russia’s debt is in much better shape that ten or fifteen years ago, but it is still 25% of its GDP (www.gateway2russia.com). Compared to India and Brazil, Russia’s debt is manageable. But why would Putin want to pay off Russia’s debt with money from the oil-boom, when he can just put it into infrastructure, social programs or military? Paying off the debt will not make Putin a memorable and loved leader, but bringing the glory of the Soviet Union back to Russia will make him loved. Russia will not be controlling its debt issues anytime soon, unlike India and Brazil which seem on their way to long-term growth and stability.
As much as Russia’s economy depends on oil prices, it also depends on how authoritarian Russia’s government continues to be. Foreign Direct Investment is much lower than it should be for a country the size of Russia, at less than 12% of the GDP (www.economist.com). Russia continues to be nagged by a crumbling infrastructure that desperately needs to be rebuilt. At least it is not nagged by the complete lack of infrastructure, as much of Brazil is.
The BRIC countries were selected by Goldman Sachs because of their impressive growth rate and relative political stability. It remains to be seen how well Brazil accepts the manufacturing industry, will the government loosen tight regulations to let business flourish, or will they maintain their tight grip? India needs to maintain their growth in the services sector and they need to continue to court U.S. and European corporations to move their facilities to India. The cheap and well-educated labor will be taken advantage of.
A return to a strong and authoritarian leader in Putin has brought recent success in Russia. But most of that is due to the oil boom. The revenue is going to the wrong places, instead of building and repairing the nation’s infrastructure Russia has wasted the money on upgrading the military and hiding the problems of an overbearing government. What happens to Russia in 2025 or 2050 when the oil reserves are dried up or when there is less demand? An economy based on a primitive product such as petroleum will collapse once there is no more demand for oil (Economist 4-13-07).
How well these countries do is anybodies guess. There are too many variables to account for. It seems as if Brazil has finally positioned itself to play among the elite in the future. India will continue to grow as well, but will not have as large of a middle-class as Brazil will. Russia will continue to deal with control tendencies which will make foreigners leery of investing. Recently the four countries in the BRIC theory have started to align. Russia and Brazil are supplying raw goods to India and China to be consumed by large populations. How well these countries do is largely dependent how much cooperation they initiate with each other.
Author’s note: This article was written in 2007.
Works Cited
Brazilian-American Chamber of Commerce. 5 Apr. 2007. http://www.brazilcham.com/default.asp?id=248&c002_ui=sa&c002_id=203
“Country Briefings: India.” Economist 12 Mar. 2007. 30 Apr. 2007 <http://www.economist.com/countries/India/profile.cfm?folder=Profile%2DEconomic%20Structure>.
“Country Briefings: Russia.” Economist 13 Apr. 2007. 30 Apr. 2007 <http://www.economist.com/countries/Russia/profile.cfm?folder=Profile%2DEconomic%20Data>.
“Crocodile Tears.” Economist 28 Apr. 2007: 60.
“Dreaming of Glory: a Special Report on Brazil.” Economist 14 Apr. 2007: 1-16.
“Land of Promise.” Economist. 12 Apr. 2007. 24 Apr. 2007 <http://www.economist.com/surveys/displaystory.cfm?story_id=E1_RJVNQGG>.
“Rediff India Abroad, India As It Happens.” 18 Jan. 2006. “Fitch Warns India on Mounting Debt/GDP Ratio.” http://www.rediff.com/money/2006/jan/18fitch.htm
“Russia Fails to Agree with Paris Club,” 17 Jan 2005. Gateway to Russia, http://www.gateway2russia.com/st/art_264728.php
“World FactBook.” CIA. 17 Apr. 2007. CIA. 30 Apr. 2007 <https://www.cia.gov/cia/publications/factbook/geos/br.html>.
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