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Table of Contents------------------------------------------------------------------------------------2 1. Introduction---------------------------------------------------------------------------------------3 2. The Story of Shifting Economic Power to BRIC--------------------------------------------3 2.1 Facts and Figures Projecting the Shift of Economic Power......................................4 2.1.1 Economic and Market Growth............................................................................4 2.1.2 Geographic Development...................................................................................5 2.1.3 Changes in Political System................................................................................6 3. Impact of Shift of Economic Power to the BRIC countries on themselves-------------6 3.1 Impact of shift of Eco-Power to BRIC countries at India..........................................6 3.2 Impact of shift of Eco-Power to BRIC countries at China........................................9 4. Impact of Shift of Economic Power to the BRIC countries on global economy-----11 5. Challenges and Risks--------------------------------------------------------------------------15 6. Conclusion---------------------------------------------------------------------------------------15 7. References---------------------------------------------------------------------------------------17
BRIC is widely used term in modern economics. BRIC stands for the Brazil, Russia, India and China; typically these four countries are referred to as big four and are grouped as BRIC. The four countries in the group are today considered to be at a comparable stage of newly advanced economic development (Smith, 2011). Jim O’Neill is a famous economist; he was the person to coin the term BRIC in 2001 in his paper which was titled as “The World Needs Better Economic BRICs” (Kowitt, 2009). After that the term BRIC gained popularity and it is being used rapidly to symbolize the transfer of the global economic power from G7 or developed countries to the developing countries i-e Brazil, Russia, India and China and now South Africa. The following assignment will critically discuss that how the shift of economic power to BRIC countries will impact at their economy and society and rest of the world and what challenges or risks it might face. The assignment will focus on context of China and India.
2. The Story of Shifting Economic Power to BRIC
Young (2006) conducted a research in which she argued that BRIC countries are developing so rapidly that by 2050 their economic development may surpass the combined economies of the G7 countries as approximately these countries constitute 40% of total world’s population and more than a quarter area of the total area of the land. The BRICs countries are aimed to form a geopolitical group using their strengths of economic powers and for the purpose BRIC countries organized their first conference at 16th June, 2009 in Yekaterinburg. In conference the BRIC countries announced to deduce a democratic, equitable and multi-polar world order. In continuation of the efforts to reach the aim, another conference was held in 2010 in Brazil, and further another conference is to be held in 2011 in China (Halpin, 2009). United States put the western countries and rest of the developed countries into a recession, many European and non European companies and financial institutions got Page: 3
affected badly. After the severe effects of the great financial crisis China, India, Brazil and Russia were the least affected countries by the financial slump and the stock market of emerging markets (BRIC) seemed to rise. It is being assumed that the transfer of the economic power to the BRICS countries especially India and China can help for the survival of the global economy. According to Neill and Stupnytska (2009) BRICS will equate G7’s economic power by 2032 rather than 2039, 45% of the global growth was a contribution of the BRICS during the financial crisis in 2007, it added 30% towards the global growth in comparison to the previous decade when it contributed 16% to the global growth. Projection by the researchers suggested that by 2050, BRICS can collectively account for 50% of global equity market.
2.1 Facts and Figures Projecting the Shift of Economic Power
2.1.1 Economic and Market Growth
1. China’s economy already took over the Japan’s economy in July 2010(Wang and Wheatley, 2010). Japan’s GDP decreased by 1.1% and China’s became $5.88 trillion which surpassed Japan’s GDP of $5.47 trillion (Tabuchi, 2011). It surpassed United Kingdom’s economy in 2007 and overtook the German economy in 2007(Adam, 2010; Wang and Wheatley, 2010). 2. China is the second largest trade partner of U.S and being the largest holder; holds the treasury notes of United Stated (Bhushan, 2009). 3. Goldman Sachs Group Inc. projected that China will surpass the U.S. economy by 2027. The market is expanding startlingly; it will be two times larger than US economy by 2030 and will have 24 % share in global output which was 9% in 2010 as forecasted by Kwan (Adam, 2010). 4. Chinese market grew on an average of 10.3% per year as compared to the average growth of 1.8% of United States market during the last decade (Adam, 2010) which projects the shift of economic power to China. 5. According to Nicholas Kwan, who is regional head of Standard chartered Asia research; United States’ economy still has to face slower growth in the next one year or
two. He predicted average growth of 1.9% for 2011, and 2.5% for next four years (Adam, 2010). 6. According to Goldman Sachs; Chinese stock market capitalization can over take United Stated in 2030 because of the fact that during the year 2010 the value of China’s stock market grew from $ 14,000 billion to $80,000 billion (Wagstyl, 2010). 7. Goldman Sachs further predicted that market share of BRIC countries is expected to increase to 41%; the rise in the market share of these counties can enhance the value of the shares of emerging markets of global equity market from 31% to 55%. Alone China’s global equity’s value increased from 1% to 10% during last decade and is expected to increase from 11% (up till 4th Quarter of 2010) to 28% in the coming two decades (Tabuchi, 2011; Wagstyl, 2010). 8. Goldman Sachs predicted that India’s Gross Domestic Product per capita will be quadruple from 2007 to 2020 and there is a greater possibility that Indian economy can over take US economy by 2034, collectively BRIC can surpass the G7 in 2032 (Poddar and Yi, 2007). 9. Indian stock index surpassed the 64 % in 2009 (Bhushan, 2009). 10. India will become the third biggest economy surpassing Japan during the following decade (Adam, 2010). 11. Reports projected that last decade was very important for BRICs and can be called as BRICS’s decade, during it Russian stock index risen by 884%, China’s risen by 610%, India’s BSE risen by 319% and Bovespa in Brazil risen by 294% (Willson et al., 2010). 12. According to Willson et al. (2010) by 2020 Brazil’s economy will be larger than Italy and Russian economy will be larger than Spanish, Canadian and Italy’s 18.104.22.168 Currency Appreciation According to the Kewn, the faster appreciation of the Chinese currency with an expected growth rate in value by 25% speaks itself to make certain that Chinese GDP will exceed the United States’ GDP by end of the following decade (Adam, 2010).
2.1.2 Geographic Development
Russia is the biggest country by area occupied, China is the 3rd largest country by area, Brazil 5th and India is the 7th biggest country by area. Over 25% of the land of the world Page: 5
has been covered by these countries (Halpin, 2009). India, China and Russia being in the same region i-e Asia can become largest economic power. Going to the fact that these countries already have occupied the larger growth rate of their economies in global market, if go collectively; can beat severely the economies of G7 countries.
2.1.3 Changes in Political System
To align with the global capitalism; Brazil, Russia, India and China have changed their political ideologies and systems. The four countries are arranging the conferences and meetings to help the political cooperation between the countries. The aim of the political cooperation is to influence the position of the United States on political and financial affairs and to put some pressure on U.S as new economic powers (Poddar and Yi, 2007).
3. Impact of Shift of Economic Power to the BRIC countries on themselves
As the assignment is focused only at China and India, therefore Russia and Brazil will not be discussed in this part. China and India have been emerging as the big players in the world’s market since 2000s.
3.1 Impact of shift of Eco-Power to BRIC countries at India
According to Poddar and Yi (2007) India is expected to sustain a growth rate of 8.4% till 2020.A shift of economic power to the country can bring many fruitful impacts at its economy, society and its political and technological conditions. In the Indian government continue to support the policy of growth-supportive policies then India’s economic growth can surpass that of the G6 countries. Goldman Sachs further predicted that a transfer of economic power to India can make it the second largest economy of the world by initiating an increase in its GDP; which can exceed the GDP of US before 2050. The projected increase in its economy growth by 8.4%, 3.3% in productivity and in its GDP from $1256 billion to $ 37668 billion in 2020; can produce more favorable results for Indian social, political and technological environmental factors.
Figure 1: India geared up for higher potential growth
Figure 1: GDP Growth of 10 top economies in 2050 (millions of USD)
Following the Projected growth rate of the economy and GDP after the shift of economic power, 700 million Indian people living in villages and rural areas will move to the cities by 2050; which will further increase the demand of urban infrastructure, services and real estate. The investment/GDP ratio is expected to stay constant at 29% of GDP; there is an expected increase from 5.8 (in 2006) to 7.3 by 2020 in average years of schooling. Following the demographic trends in labor market, there will enter 140 million people into the labor force till 2020, which means average unemployment rate seems to remain as natural as it was till 2007 i-e 4.4%. TFP growth rate has been expected to rise by 3.3% as it is expected that there will be much openness in trade, financial funds, investments in communication and information technology and more roads and highways will be build and land and labor inputs will move from the agricultural sector to the industrial sector.
Figure 2: Contribution to growth from factors of production
After the transfer of economic power to India; Employment rate is expected to increase over 70% in 2020, dependency ratio is expected to fall below 50% (Shown in figure 4).
Figure 3: Employment to rise and dependency ratio to fall
The average saving rate is expected to increase as a result of the expected decrease in dependency ratio. According to the U.S National Intelligence Council over the coming 15-20 years India will struggle to make a multi-polar system and Delhi will be made one of the poles. Indian’s military expenses due to the increasing economic power are also expected to rise in the coming years and it has been projected that it will procure two aircraft carriers, battle tanks, multi-role combat aircrafts and aerial vehicles (Thayer, 2009). Besides this all educational growth rate is expected to increase, life expectancy is expected to increase by 2020, India will adapt emerging technologies which will have positive affect on its manufacturing side, industrial sector and agricultural sector. The trade deficits will be adjusted, exports will increase, and imports will decrease and over all economy is expected to flourish at higher than expected rates (Poddar and Yi, 2007).
3.2 Impact of shift of Eco-Power to BRIC countries at China
Recording the Goldman Sachs projection about China, it is expected that Chinese economy will grow at a rate that it will become the largest economic power by 2027, which will cause it to have 24% market share of the world (Adam, 2010). The shift of economic power to China has caused a rapid growth rate of its economy and its global Page: 9
equity value is expected to increase from 11% (2010) to 28% by 2020 (Wagstyl, 2010). There are certain problems projected in case of china, china’s ageing is the biggest problem for it to be rich and not the richest despite of the fact of expected highest growth rate of the world of its economy growth. Its demographic outlook proposes that after 2030 China’s growth of labor force will decline and before 2030 it will be quite slow. China will become old but much more developed country of the world but not richer than US or Japan as compared in terms of the per capita income. Goldman Sachs analysis projected that China’s per capita GDP in 2027 will exceed $10,000 on average, however going optimistically by 2030; China’s per capita GDP can reach $49,576 which is considerably high but not higher than project per capita GDP of U.S ($91,697) and Japan ($66,825) by 2050. According to Qiao (2006), China’s Gross Domestic Product will rise from 4696 $billion (in 2006) to 70605 $billion in 2050. While real GDP growth rate will be 2.5% by 2050. Population of China is expected to be 1424 million by 2050.Goldman Sachs further projected that china’s population growth will piercingly be slower down by 2050, and youth population share in total population will decline by 2050 and elderly share will grow which will make the china aging and China may face labor scarcity by 2050, because of larger part of the population will be older people. As projected by Goldman Sachs that 751 million labor force will be available by 2050 which was 894 million in 2006 (Qiao, 2006).
Figure 4: Population growth and Young's and Old people’s share
The reason of this scarcity of labor force and declining share of young people in population is driven by two key forces; the increased longevity i-e increased number of
elder people and the other one is one child policy. By 2050 there will be more retired workers and young population growth rate will be slower so as a result dependent per worker ratio will increase and demographic bonus of china will end. Goldman Sachs further predicted that rapidly generating the human capital and discharging of superfluous labor from the agriculture side will moderate the negative effects created by ageing.
Figure 6: Ageing of China Figure 7: dependency ration to rise
There are certain problems which china has to face; these problems flow from ageing of its population, now china has one child policy, living standard of people is very improved, education level is very advanced, the one child policy has led China to invest on a per child basis, due to this in 2050 dependency ration will surpass 70%, every 10 working person will have to carry 7 dependents including both young and elders. China’s Gross Domestic Product (per capital) will become $11,000 and dependency ration will touch 50% by 2030. However going optimistically by 2050, 27 million superfluous laborers will leave the agriculture sector. These all will affect and may hinder China to become the economic power.
4. Impact of Shift of Economic Power to the BRIC countries on global economy
A shift of economic power to BRICS nations will not only impact on the countries themselves but it will also drive the global economy because two partners India and
China are the least suffered countries from the financial crises world-wide (Bhushan, 2009). Paul R. La Monica who is an editor of CNNMoney.com, proposed in a research for CEBR, that BRICS economies may overtake the US and G7 countries in 2011 instead of 2015 (Bhushan, 2009). The commitment to recuperate the financial stability lead the BRICS towards the integration of the resources of all BRICS countries to seek their coordination in software development, aircraft manufacturing, transition of economic growth patterns and the industrial restructuring. The shifting power of economic powers to BRICS can lead the global economy to revival from the financial crisis. Russian Deputy Prime Minister, Mr. Sergei Ivanov said that “It’s the time to become known with the fact that the China and India are emerging markets which are rapidly becoming the new economic power houses for the whole world (Bhushan, 2009). The day is not far when BRICS countries will be the locomotive to rein the global economy to the track of development and progress. As the market share of these countries rises the world can again trail its reins towards the development especially those areas of the world which had been ignored in the past by super powers or G7’s developed nations. The impact of the shift of economic power to the BRIC countries can be outstanding. The job market can re-flourish as more employment opportunities can be created once triggered towards the development. More educational opportunities can be provided in Asia, Africa and relative continents and countries. The flow of wealth will be more equitable among the continents of the world which can bring peace and prosperity to the nations, the flow of trade can catch the swiftness, businesses can blossom their earnings, financial market can rejuvenated, Per capita income of the poorer countries can rise (Frank and Frank, 2010). As a result of shift of economic power to these countries, the regions of Asia which were considered as the third world; are becoming increasingly important for the G7 or developed nations. China, India and Russia are the rising forces from Asia which can be threatening to many other continents especially North and South America. Another impact of shift of power to BRIC countries is the creation of the global middle class, which is adding up 80 million people every year. The global middle class has put down Page: 12
the global inequality created by those so called middle classes of G7 countries. This is another positive and outstanding effect of shift of economic power to BRIC as it will directly contribute towards the world’s economy; improved living standard, greater provision of health services and greater life expectancy (Global Middle Class, 2009).
Figure 5 Figure 6
In March 2010 The BRIC countries decided to integrate the resources and share the experiences to help in provision of the food, house and clothes to the vulnerable people of natural disasters and agreed to provide the swapping technology to agricultural poor affected countries to help eliminate the effect of natural disasters on food production (Budrys, 2010). BRIC constitutes 40% of world’s population; economic development through BRIC can help the world to develop rapidly. According to Goldman Sachs during the following decade BRIC will contribute to the global growth twice as the G3 in the next decade.
Some of the facts can be seen in the figures given below:
Figure 8 Figure 9
The time is not afar when China and India will supply the services and manufactured goods, while Brazil is already global supplier of different manufactured goods and services. BRIC will add 200 million people who will have income over $15,000 into the world’s economy, which is comparable to the combined income of Germany, France and UK.
5. Challenges and Risks
Loss of economic power from the G7 or developed countries can annoy them which can lead towards the cold war between the G7 countries and the emerging BRIC economies. Long term projections about the growth can be proved wrong because in course of time of 40 years any thing can happen, sudden natural disasters, sudden fall of economies due to the uncertain business environment, increased interest rates, currency devaluation, wrong monitory or fiscal policy, wrong economic policy, political instabilities, nuclear wars, extremism and terrorist threats can hinder the performance of the BRIC (Adam, 2010). India has security and terrorist threats and is every other year caught by natural disasters and China has greater threats from its ageing of population. The banking and financial institutions in China are very poor which can make it fall abruptly because of the asset bubbles, widened imbalances and bad debts. Russia has power culture which may cause certain difficulties in integration of the nations at the larger scale or elimination of the social-disparity between the developed and developing countries.
India and China have become the global key players to stabilize the financial crises and world’s economy. BRICs as a whole are growing at a faster rate and if all the things keeping constant and assumptions true; BRICs can surpass a combined growth and value of G7 countries by 2040. BRIC countries can prove to be helpful in not only driving their own economies but the contribution is more towards the world’s economy. New countries form N-11 can become the part of this BRIC in the near future. Urbanization, economic growth, more employment opportunities, higher living standard, prosperous and openness in trade, higher investment rates, technological innovation, equitable distribution of wealth, elimination of social disparity between the developed and underdeveloped or developing countries are a few benefits which the world prospects from the shift of economic power to BRIC countries (Adams, 2010). However the BRIC countries
need to adapt the right policies and should restructure their economic system, adapt flexible models of economic growth and should reorient their own markets.
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