Has the Brics bubble burst?

Brazil, Russia, India, China and South Africa seem to be failing to justify predictions of
21st century domination

Simon Tisdall
Sun 27 Mar 2016 13.14 BST

The political crisis in Brazil over economic mismanagement and high-level corruption, likely to
come to a head next week, has reinforced the fashionable view, popular among western
governments and businesses, that the Brics bubble has burst.

Members of the exclusive Brics club of leading developing countries – Brazil, Russia, India,
China and South Africa – are failing to justify predictions that, separately and together, they
will dominate the 21st century world, or so the argument goes.

The Brics concept, plus acronym, was dreamed up in 2001 by Jim O’Neill, chairman of
Goldman Sachs Asset Management. He highlighted the combined potential of non-western
powers controlling one quarter of the world’s land mass and accounting for more than 40% of
its population.

O’Neill’s idea morphed into a formal association, with South Africa joining the original Bric
group in 2011. The five nations, with a joint estimated GDP of $16tn, set up their own
development bank in parallel to the US-dominated IMF and World Bank and hold summits
rivalling the G7 forum. Their next meeting will be in Goa, India, in October.

But ambitious plans to create an alternative reserve currency to the US dollar and challenge
American dominance in IT and global security surveillance have come to little. Meanwhile,
adverse economic conditions compounded by falling global demand and lower oil and
commodity prices are taking their toll.

Last November, Goldman Sachs, where the idea originated, closed its Bric investment fund
after assets reportedly declined in value by 88% from a 2010 peak. The bank told the US
securities and exchange commission it did not expect “significant asset growth in the
foreseeable future”.

“The promise of Bric’s rapid and sustainable growth has been challenged very much for the last
five years or so,” Jorge Mariscal, the chief investment officer of emerging markets at UBS
Wealth Management, told Bloomberg Business. “The Bric concept was popular. But nothing is
eternal.”

The problems facing Brics members are remarkably similar, even though each country is
different. Russia and Brazil have both fallen into recession, while China, the principal engine of
world growth, has seen a sharp contraction in overall economic activity.

Brazil’s economic woes have been compounded by scandals that could yet force the
resignation or impeachment of Dilma Rousseff, the country’s president, and the trial of her
predecessor, Luiz Inácio Lula da Silva (Lula). With about a quarter of members of Brazil’s
congress facing some form of criminal investigation, the crisis has become structural and
existential in scope, raising worries about the durability of Brazil’s young democracy.

Identical concerns have arisen in South Africa where Jacob Zuma, the country’s president, and
the ruling African National Congress government are beset by allegations of corruption and
malfeasance. Big questions surround the influence wielded by private individuals and
businesses over government appointments and policies. The backdrop is under-performing
state-owned companies, a depreciating currency, falling exports and rising inflation.

If this sounds familiar, look at Russia, where the value of the rouble has plummeted due to
lower oil exports – on which the economy is unhealthily dependent. Oil revenues are said to be
down about $30bn in five years. State-condoned or tolerated corruption is a big issue for
Moscow, too.

Cost considerations may have been a factor in the recent, surprise decision by Russia’s
president, Vladimir Putin, to pull most of his forces out of Syria. Russia’s economy also
continues to suffer as a result of western sanctions imposed following Putin’s 2014 annexation
of Crimea.

A common factor for all Brics countries as they struggle economically is institutional weakness,
in particular a lack (or in some cases, a total absence) of democratic accountability,
transparency in public life, and independent media scrutiny of official behaviour. This holds
especially true in China, where a fearful ruling Communist party has cracked down on public
debate, labour activists, independent lawyers, and civil society organisations as economic
woes triggered by falling exports and market instability have mounted.

As in Brazil and Russia, the Chinese authorities’ unspoken worry is spreading social unrest.
This risk is increasing as Beijing seeks to restructure unprofitable state-owned industries, such
as coal and steel, with the potential loss of millions of jobs. Meanwhile growth targets of 6.5-
7% in the 2016-20 13th five-year plan look optimistic.

Nor does the Brics group lack internal challenges. Efforts at closer political cooperation have
foundered over differences about who is in charge, how best to achieve UN security council
reform and, for example, territorial disputes between India and China.

But not all the Brics are floundering. As the analyst George Magnus noted in Prospect
magazine, India currently presents a model of relative progress which the others might study
to their advantage.

“India is certainly no paragon of virtue when it comes to corruption, nor is its economic
infrastructure efficient, but it is endeavouring to accelerate economic reform, and
competitiveness,” Magnus wrote.

“India’s economy is relatively closed and so it is not as vulnerable to the slowdown in world
trade; lower oil prices have unequivocally benefited the country; and inflation, interest rates,
and deficits are falling. The government is trying to open up to more infrastructure spending,
foreign investment and an array of improvement measures that should help the economy
sustain growth rates of above 7%.”

Given their sheer size, their vast resources, and their youthful populations, it would plainly be
foolish to write off the Brics, especially as a declining US grows more introspective and
Europe’s confidence falters. But economic performance cannot be the only measure of success
or failure.

To take their rightful place in the 21st century, the Brics countries must create more open,
accountable, and trustworthy systems of governance. This is a challenge of leadership, not
profit and loss.

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Topics
Brics
Brazil
Russia
China
India
South Africa
analysis