Thursday, 10 September 2009

Reinventing the BRICs Amidst The Global Recovery

The silly talk is returning about emerging markets as the global economy is turning into a full-blown recovery mode. In particular, there is a renewed hype about the non-existent group formed by Brazil, Russia, India and China: the BRICs.

The reality is that the term BRICs has never made sense in either the International macroeconomics, or the global economics framework. For much of the 1980’s and 1990’s, emerging markets formed a marginalised asset class. Although global finance was itself materialising, most of the action took place in the mature economies, while the developing nations with their backward economies and underdeveloped financial markets entered the headlines only in times of crisis. When in 2001 Goldman Sachs started to use the term BRIC, it was a mere shorthand for the four largest emerging markets that could not be ignored any more. (See how the future of the BRICs was imagined in 2003. Or read the Goldman Sachs 2007 book 'BRICs and Beyond', which is a good book, apart from using the obsolete national economies framework -- it is also a brill reminder how rosy the pre-crisis outlook was. We are rapidly returning to the same dreams and myth now...)

However, apart from size, there never was much commonality among the BRICs. Russia and Brazil are commodity exporters. India, and especially China are commodity importers. China and Brazil are becoming important manufacturing bases of the world economy, and India a specialty exporter. In opposition to these, Russia has no manufacturing exports of importance whatsoever, almost all of its domestic dynamics is based on the raw material revenues the country is collecting. Brazil and India are full-blown democracies, Russia and China less so. India and Brazil have sheltered capital markets, unlike the wild waters of China and Russia. Furthermore, the term BRIC has never really taken off as an analytical notion, and stayed merely as an investment banking sales concept only. And, all attempts by the four governments to harmonise any of their international stances yielded empty rhetoric, no real action (see for instance the official BRIC summit website).

The height of the BRICs hype came in the middle of the credit crunch, when people had started to argue -- notably people who were not emerging market experts -- that the crisis will decouple the largest developing economies from the mature economies. This is based on the observation that while in 1992 only 5% of the global GDP was produced by these four countries, their combined share grew to 15% by 2008. In this process, they achieved breakneck growth speeds, and one could easily imagine how a small dip in their growth would still leave enough momentum to provide an effective demand a bridge during the crisis of the developed economies. A dream, as it turned out.

(The funny thing is that for most emerging market analyst crowd this argument never really made sense. The origin of the difference in the emerging market decoupling expectations might be in the difference of experience emerging economies had compared to the mature one. While the history of the developed economies, at least post-war, is mostly about the rise of their domestic demand followed by their opening up, the history of the emerging economies is more about external dynamics. In the case of the former, structural change tended to originate in processes generated by entities at home. In the case of the latter, almost without exception, the source of the change has always been outside the country. For the Asian tigers, it was Japan, then the US, then the world economy. For the resource rich developing countries, e.g., South Africa, or the Gulf, or Central Asia, it was the global demand for raw materials. For Central European transition economies, it was the West European economic dynamics. The point is that although the rise in exports tended to generate “rapid structural change”, which in turn creates domestic demand, it is a long time down the line of the development before their domestic dynamics takes over the export engine. Supporting this, the experience has always been that at the time of crisis not only exports fall, but so does the previously genuine domestic demand looking stuff as well.)

Thus there is no reason to group these four countries together now any more than before the crisis. However …

The mid 2000‘s, the category of emerging markets had been falling apart, giving space to a completely new grouping of developing economies. However, as the global economy was melting down, emerging markets started to behave like coherent group again. While, their rise was differentiated, they are plunged was synchronised. We were back to the old world.

Yet, now they are coming out of the ditch, and some are rising more unscathed than others. Early calculations even suggests that unlike the BRIC’s, there are some emerging markets that did even contribute to the global recovery. Indonesia and Turkey might be two candidates for this role. (But it is far too early, as the data for the summer is not out yet.) The pecking order, to say the least, has changed. If there is going to be a table at which the new global regulatory framework, or even a currency framework, will be set, some emerging markets will want to have a seat there. And it will be the large ones and the healthy ones only to have a chance to get it. (Ukraine, Hungary, Argentina need not apply.) And thus, even if neither the old term BRIC, nor its new versions would make any more analytical sense than any time before, a global politics shorthand to the new guys at the table might be handy.

If so, we surely have some better name for them than the one that sounds like the “rectangular-shaped, heavy clay object”.


  1. How about BUTTERFLIES? They are kind of the opposite of the bulkiness of a brick.

  2. Tamas, great post. Thanks.

    By the way, have you seen the US returning to China-bashing? How silly is that?

  3. do you see a correction in Emerging Markets at this high peak or does it suggests with the worldwide recovery and recessions signs easing that the emerging markets will continue its rally?

  4. there seems to have been a halt to the summer rally, perhaps more about profit taking than anything significant, but i don't think it will last -- as long as the recovery will stay with us. several big houses just came out with bullish outlooks for the autumn, which will help setting the tone. hence, as long as we will stay in this positive scenario, emerging markets will play very nicely.

    however, should the world economy switch to a double dip scenario (which, despite the confidence of policy maker investment banking crowd, could still be in the bag), they will fall even more. i would not be surprised, though, however, if unlike a year ago, such a fall would be differentiated. we know much more about the resilience of different emerging markets than at the September 2008 meltdown. I fully agree with Willem Buiter on the ignorance of global economics

  5. There is a continent ostensibly missing from your list: Africa. It is time to let the neglected continent with its neglected people come back to the world, and take a seat at the "Table". Too many people, too much resources, too important forests to ignore.

  6. Leaving Africa out of this list is not a prescription, it's an observation. None of the sub-Saharan countries match even the smallest of the list above, say Turkey, in either size of the economy or in the development of the structure. Even the most advanced sub-Saharan African country, South Africa, is dogged by a range of very serious development issues, mostly to do with human capital, which would make it unlikely to be able to claim a seat at the global economy management table.

    The sad thing is that a few years ago there was a real chance for a bunch of sub-Saharan countries, which has not gone away, but is rather than on hold. African countries have all that is needed to grow into a new role, but having the opportunity is not the same as using it.

  7. This comment has been removed by a blog administrator.