BRIC The Changing Faces of Global Power

Submitted By Abhishek Kumar Roll No: 01 MICA-EDC

Brazil, Russia, India, China BRIC

Introduction:

Brain child of Goldman Sachs and is acronym for emerging and fast growing economies of Brazil, Russia, India and China. This acronym was coined by Jim O'Neill in a 2001 paper entitled "The World Needs Better Economic BRICs". The acronym has come into widespread use as a symbol of the shift in global economic power away from the developed G7 economies toward the developing world. According to this paper these countries encompass over 25% of the world's land coverage and 40% of the world's population and hold a combined GDP (PPP) of 18.486 trillion dollars. On almost every scale, they would be the largest entity on the global stage. These four countries are among the biggest and fastest growing emerging markets. Facts to support BRIC claims, Goldman Sachs Report excerpt:

1. Growth and Trade: Between 2000 and 2005, the BRICs contributed roughly 28% of global growth in US Dollar terms and 55% in Purchasing Power Parity (PPP) terms. More than 30% of total world demand in the past five years originated in the BRICs economies.

The BRICs share of global trade continues to climb rapidly. At Close to 15%, it is now double its level in 2001.

Trade among the BRICs has also accelerated, with intra-BRICs trade now nearly 8% of their total trade, compared with 5% in

2000. New trading patterns have emerged, including a growing trade and investment relationship between Brazil and China.

2. Capital Flow:

The BRICs now hold more than 30% of world reserves, according to latest estimates. China is the dominant contributor, but Russia, India and Brazil have also accumulated substantial reserves.

Despite this reserve accumulation, real exchange rates in each country have appreciated over the last two years. Real exchange rate appreciation was and remains an important part of our projected paths out to 2050.

BRICs current accounts are in healthy surplus, reflecting the groups key role in the global supply of savings. The BRICs aggregate current account surplus is now nearly a quarter of a trillion US Dollars, or close to 6% of the BRICs GDP. The BRICs are increasingly important counterparts to the US current account deficit.

The BRICs are an increasingly important destination for global FDI. Their 15% share of the global total is up nearly three times from 2000 levels. Even more striking is the fact that BRICs FDI total flows have raised more than six fold since 2000, to more than 3% of the global total. 3. Markets:

BRICs stock markets have generally performed very strongly since 2003, with Brazilian, Russian and Indian indices all up by around 150% over that period. China is the one exception, where the idiosyncrasies of the local market have led to lacklustre performance. China provides a warning that the local market may not be the best investment vehicle for the local growth story. BRICs market capitalisation continues to climb; currently at close

to 4% of the global total, and Russian and Chinese equity offerings were a key feature of the global equity calendar in 2005.

The BRICs account for 18% of global oil demand and their share is moving steadily higher. This dynamic still has a long way to run, with the next decade in particular the likely point of maximum pressure on energy and other natural resources.

4. Politics: As the BRICs economic impact is growing, so is their political clout. Although the G8 is still formally dominated by the US, Europe and Japan, in practice it has begun to widen its scope. China has been invited to G8 summits for several years; the July 2005 summit included the heads of state of India, Brazil, Mexico and many African countries; and the 2003 and 2004 summits included leaders from the Middle East and Africa. Russia holds the G8 chairs position for the first half of 2006. The rapid growth of the BRICs since the start of the decade, in our view, only strengthens the case for a formal reform of the G8. The BRICs have also begun to exercise their political muscle in other fields, including energy security, intellectual property and agricultural policy. BRIC and world by 2050:
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China's economy will surpass Germany in the next few years, Japan by 2015, and the United States by 2041.

India's growth rate will be the highestnot China's -- and it will overtake Japan (today the world's second-largest economy) by 2032.

BRICs currencies could appreciate by 300% over the next 50 years, providing a big tailwind for investors in BRIC assets.

Taken together, the BRICs could be larger than the United States and the developed economies of Europe within 40 years.

By 2025, BRICs will bring another 200 million people with incomes above $15,000 into the world's economy. That's equal to the combined populations of Germany, France and the United Kingdom.

However, Goldman Sachs has now become more bullish on the BRICs since it published its original report. The size of China's economy overtook Germany's economy in 2007, a year earlier than expected, and has over taken Japan's in July 2010.Goldman Sachs now believes that the Chinese economy will overtake the United States by 2027. The latest prediction after Global Financial Crisis occurs, November 2010: Standard Chartered Plc. says, China will overtake the US to become the world's largest economy by 2020. And then China's economy will be twice as large as the US by 2030 and account for 24 percent of global output, up from 9 percent in 2010.And with India accounting for 10 of the 30 fastest-growing urban areas in the world and 700 million people moving to cities by 2050, its influence on the world economy will be bigger and quicker than was implied in 2003. The BRIC thesis recognizes that Brazil, Russia, India and China have changed their political systems to embrace global capitalism Goldman Sachs predicts that China and India, respectively, will become the dominant global suppliers of manufactured goods and services while Brazil and Russia will become similarly dominant as suppliers of raw materials. It should be noted that of the four countries, Brazil remains the only nation that has the capacity to continue all elements, meaning manufacturing, services, and resource supplying simultaneously. Cooperation is thus hypothesized to be a logical next step among the BRICs because Brazil and Russia together form the logical commodity suppliers to India and China. Thus, the BRICs have the potential to form a powerful economic bloc to the exclusion of the modern-day states currently of Group of Eights status. Brazil is dominant in soy and iron ore while Russia has enormous supplies of oil and natural gas. Goldman Sachs' thesis thus documents how commodities, work, technology, and companies have diffused outward from the United States across the world. Following the end of the Cold War or even before, the governments comprising BRIC all initiated economic or political reforms to allow their countries to enter the world economy. In order to compete, these countries have simultaneously stressed education, foreign investment, domestic consumption, and domestic entrepreneurship.

Analysis: The BRIC contributed about half of global growth between 2000 and 2008 sharply higher than in the previous decade. Yet along with this growth has come an unbalancing of the global economy.

The story of their rapid progress is familiar but still dramatic. A decade ago, only one had an investment-grade credit rating; now all do. Only 12 years ago, a Russian debt default and Brazilian currency crisis rocked the world economy; today, they have accumulated vast foreign exchange reserves.

Like a boy band or a street gang, the BRIC might almost have been chosen for their disparate abilities rather than their similarities. Chinas size and openness to trade give it as much economic clout as the rest put together. India, similar in population but poorer and economically more insular, is chiefly notable to investors and trading partners for its software and business services. Brazil, despite a sprinkling of manufacturers, remains one of the worlds most efficient agro-exporters; Russia, after feebler attempts to diversify, essentially just sells oil and gas. Without China, the BRICs are just the BRI, a bland, soft cheese that is primarily known for the wine that goes with it. China is the muscle of the group and the Chinese know it. There are many uncertainties and assumptions in the BRIC thesis that could mean that any or all of these four countries will not live up to their promise. The preeminence of China and India as major manufacturing countries with unrealised potential has been widely recognised, but some commentators state that China's and Russia's large-scale disregard for human rights and democracy could be a problem in the future. Human rights issues do not inform the foreign policies of these two countries to the same extent as they do the policies of other large states such as Japan, India, the EU states and the USA. There is also the possibility of conflict over Taiwan in the case of China and smaller democracies that lie in the vicinity of these two authoritarian giants will no doubt be affected by human rights issues being relegated to a lower global priority. There is also the issue of population growth. The population of Russia is beginning to shrink fast. Brazil's and China's populations will begin to decline in several decades,

with their demographic windows closing in several decades as well. This may have implications for those countries' future, for there might be a decrease in the overall labour force and a negative change in the proportion of workers to retirees. Brazil's economic potential has been anticipated for decades, but it had until recently consistently failed to achieve investor expectations. Only in recent years has the country established a framework of political, economic, and social policies that allowed it to resume consistent growth. The result has been solid and paced economic development that rival its early 70's "miracle years", as reflected in its expanding capital markets, lowest unemployment rates in decades, and consistent international trade surpluses - that led to the accumulation of reserves and liquidation of foreign debt (earning the country a coveted investment grade by the S&P and Fitch Ratings in 2008). Finally, India's relations with its neighbour Pakistan have always been tense. In 1998, there was a nuclear standoff between Pakistan and India. Border conflicts with Pakistan, mostly over the longheld dispute over Kashmir, have further aggravated any economic ties. The BRIC countries have enormous populations of extremely impoverished people. This impedes progress by limiting government finances, increasing social unrest, and limiting potential domestic economic demand. Factors such as international conflict, civil unrest, unwise political policy, outbreaks of disease and terrorism are all factors that are difficult to predict and that could have an effect on the destiny of any country. Other critics suggest that BRIC is nothing more than a neat acronym for the four largest emerging market economies, but in economic and political terms nothing else (apart from the fact that they are all big emerging markets) links the four. Two are manufacturing based economies and big importers (China and India), but two are huge exporters of natural resources (Brazil and Russia).

BRIC and its Extension: Mexico and South Korea are currently the world's 13th and 15th largest by nominal GDP. While South Korea was not originally included in the BRICs, recent solid economic growth led to Goldman Sachs proposing to add Mexico and South Korea to the BRICs, changing the acronym to BRIMCK, with Jim O'Neill pointing out that Korea "is better placed than most others to realize its potential due to its growthsupportive fundamentals. According to a recent report on key emerging markets from Spanish bank BBVA, investments in emerging markets are assuming more and more importance. However, the all-encompassing term emerging market covers a multitude of countries whose individual economies are incredibly diverse. It includes not only major economies such as those of China, India and Mexico, but also a host of tiny island states such as Grenada, Vanuatu and the Seychelles.

BRICs or EAGLE?

The concept of BRICs has become outdated as the four countries economies have diverged over the past decade. Any term comprised of country names will inevitably date fairly quickly, and become much less useful.

Now, BBVA has proposed the use of the term EAGLE to cover the worlds Emerging and Growth-Leading Economies. The member states of this exclusive EAGLEs club are:
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China India Brazil Russia South Korea Indonesia Mexico Turkey Egypt Taiwan

These ten countries are each expected to contribute more to global economic growth than the average of G7 members. Combined, the ten EAGLEs are expected to account for 50% of all global growth in the next 10 years. A further eleven countriesNigeria, Poland, South Africa, Thailand, Colombia, Vietnam, Bangladesh, Malaysia, Argentina, Peru and the Philippinesare identified by BBVA as having the potential to join the EAGLEs if their economies grow more than expected. Conclusion: The justification for the BRIC acronym, according to its original proponent, is the extent to which these economies have an impact on the global economy, as well as their capacity to shape the future of other developing nations. Barring Brazil, with very modest growth rates over the last years, the three other BRICs have been gaining weight and importance globally and within sectors. it is unlikely to indicate global economic development trends, as these are caused by technological transformation and capital, scientific and strategic information flows as shown by the history of capitalism.

Basically, despite the BRICs decisive economic impact, this feature by itself says nothing about the other factors behind a complex relationship that goes beyond GDP and exports, and into reciprocal interdependency not between the BRICs but between each of them and their various economic partners. From this point of view, the BRICs group do not have an economic existence per se and is purely a creation of the economic spirit.

Despite arguments about the decoupling of the main emerging economies from the G7 and other developed nations economic cycles, the truth is that the dominant economies impact on BRIC is more decisive than normally admitted. It is not only about consumer markets and direct investment sources. The global economy is not just an economic space for the exchange of goods and services, where each nation can have greater or lesser physical interaction. It is, essentially, an arena for the exchange of ideas, in which the intellectual domination of the so-called developed Western world looks set to remain throughout the foreseeable future.

Looking at the overall picture for the global economy, the same forces that have transformed the world since the 16th century are still shaping the contemporary world. These forces include not only the flow of goods and services, but forms of economic organization and above all, the production of ideas and concepts to support those physical flows. Therefore, it is inconceivable to consider that developing or emerging nations could be independent from the core of the global economy. The path and economic destination of the BRIC and other emerging economies cannot be different from those followed by developed nations. The latter set the basic parameters on which the economy is based. However, this dynamic process is not exclusive to a specific centre, but shared by several centres producing and spreading ideas and practical knowledge.

BRICs two former socialists have authoritarian characteristics that represent a legacy of centuries of totalitarian states. The other two members have had democratic trajectories -with faults in terms of functioning and social justice and are the market economies closest to capitalist organization patterns. Of all the members, Brazil has the most advanced capitalist structures and the most modern society. It is also the most integrated society in language, cultural, ethnic and possibly religious terms,

which in principle enables a more efficient political administration - without institutional ruptures - and more favourable conditions for modernization. Although social democratization can slow growth and adaptation to new environments, it also contributes to greater cohesion around national goals.

The main issues dividing the world today are no longer ideological, as they were less than three decades ago, when competing projects were trying to win peoples hearts and minds. Neither are they technical, as there seems to be reasonable consensus and collaboration among the worlds researchers and scientists about the challenges of medicine, physics and biology. Todays main dilemmas are about political priorities and alternative economic measures to be chosen by heads-of-state for solving the ageold problems that afflict mankind: hunger, unemployment, health, education, security and welfare.