A Second Look. . . .

July 1, 2007 Topic: Economics

A Second Look. . . .

Mini Teaser: When it comes to BRICs, the Brazilian tortoise might end up beating the other three hares.

by Author(s): Ian Bremmer
 

SINCE A team of Goldman Sachs economists popularized the term "BRICs" (Brazil, Russia, India and China) in October 2003, this group of emerging-market countries has assumed ever-greater importance in the international investment community's collective imagination. The Goldman Sachs analysts argued that, with sound political leadership and a bit of luck, these four economies could outpace the original G-6 industrialized nations in dollar terms by 2040-a profound shift in the world's economic balance of power.

Yet, the political factors that help drive economic policy in these countries differ in crucial ways, undermining any notion that they carry collective weight as a coherent economic bloc. Their growth stories (thus far) are impressive. But the sorts of future risks they will face reveal that they have much less in common than meets the eye.

Her Name is Rio

FOUR YEARS ago, when Luis Inácio Lula da Silva became Brazil's first elected "leftist" president, many feared he would renege on pledges to pursue disciplined economic policy at the first sign that profligate social spending would boost his popularity. Some worried that he would follow the lead of Venezuelan President Hugo Chávez and throw Brazil's economic liberalization into reverse. None of that has happened. Lula is known as a "leftist" mainly because he made his reputation as a tough-minded labor negotiator. But he also understands the value of compromise and of keeping his promises. Lula is a pragmatist and deal-maker, not a Chávez-style ideologue.

The Brazilian president has, for the most part, successfully balanced the need to raise living standards for Brazil's poorest citizens with the demands of responsible economic policy. Since he was first elected in 2002, the state has made its debt repayments on schedule. The economy has generated more than 4.5 million new jobs. Trade surpluses top $40 billion per year. The lowest inflation rates in decades and an expansion of consumer credit have bolstered the purchasing power of millions. Many among the rural poor receive small but badly needed monthly payments from the state in exchange for keeping their children in school and ensuring they are properly vaccinated.

Brazil has come a long way over the last half decade. The variables that now determine how fast Brazil's economy will grow and how much foreign investors can earn there have more to do with economic reforms, inflation, growth forecasts and fiscal policy than with risks of serious political instability or debt default. In these ways Brazil is unlike Argentina in the 1990s in that it has acknowledged the importance of not just paying its debt but also paying it on schedule. In that sense Brazil is well on its way to graduating from emerging-market status. It is no longer simply an eternally promising Latin American economy.

Among the BRICs, Brazil may seem an odd choice for best bet. It has by far the lowest average growth rate of the four countries, driven by a tax burden of nearly 40 percent of GDP and torpid reform projects. But the transformation of Brazil's political left, a domestic political consensus in favor of disciplined and market-friendly macroeconomic policy, and its stable democratic governance have created a solid foundation for growth over the next several years.

Easily re-elected in a second round of voting last October, Lula now faces tough political battles as he works to accelerate growth, create more jobs and raise education standards. But he now has a proven track record of success in balancing Brazil's fiscal demands and social needs. The president who some feared might become "Chávez-lite" has joined Washington as an active promoter of international trade. Though shared hemispheric interests exist and the relationship lacks the potential for a superpower rivalry, Brazil's relationship with the United States is not unlike those of the other BRICs in that important trade agreements, such as on ethanol tariffs, still exist between the two capitals.

China Syndrome

CHINA MUST manage a much broader range of domestic and international challenges than those facing Brazil. The country's demand for secure and reliable long-term supplies of oil, natural gas and other commodities needed to fuel its blistering economic growth exposes China to the tangle of international politics as never before. The Communist Party leadership has relatively little experience managing political risk in the Middle East, Africa and Latin America, as well as protectionist threats from Europe and the United States. For years to come, the need to import raw materials and to export finished products, not domestic demand, will define China's growth prospects.

But China's greatest challenge is in managing the growing risks generated at home by globalization-the various processes by which ideas, information, people, money, and goods and services cross international borders at unprecedented speed. Globalization bolsters longer-term stability in emerging markets that are democracies (such as Brazil or India) by making their opening economies and societies more dynamic. This is true to some extent in China as well, where the leadership has embraced public- and private-sector entrepreneurship as a risk it must accept. But globalization has also brought China severe environmental damage, widening gaps between rich and poor, large-scale social dislocations via urbanization and the social unrest that bubbles up whenever an authoritarian government provides its citizens with so few opportunities to openly vent their anger over all these changes. Tens of thousands of large-scale public protests-over land expropriation, pollution, corruption and other complaints-roil China every year. The state, which fears that public recognition of the legitimacy of these grievances will undermine Communist Party authority, is left to contain the threats these protests pose with ever-increasing numbers of riot police.

In addition, China's long-term growth prospects may fall victim to the success of its one-child policy. According to analysis from Deutsche Bank, the percentage of working-age Chinese in the population (those aged 15 to 64) will peak around 2010 at 72.2 percent. Over the next forty years, that number will fall to just 60.7 percent, according to un forecasts. The picture may be darker than these numbers suggest. Many Chinese leave the workforce well before the age of 64; the current retirement age is fifty for most women and sixty for most men.

The country's pension system is not prepared for this problem. The International Monetary Fund has projected that the transition from the current pension system to a more sustainable one could cost China $100 billion, not including local-government obligations, though it is clearly difficult to forecast what it will cost China to care for the estimated 265 million people who will be 65 or older by 2020.

China's growing demographic problem-along with other challenges-may eventually persuade some foreign investors, already wary of its opaque, authoritarian political system, to further diversify their portfolios away from risks there. The impact on China's longer-term growth is likely to be considerable. But for the moment, the country's economic interests compel its government to actively support geopolitical stability. To accomplish this, Beijing knows it must work within established international institutions rather than working to replace them.

A Passage to India

AS IN BRAZIL, democracy in India gives this emerging-market country important long-term growth advantages. Its political transparency and (relative) progress on economic liberalization have created attractive opportunities for investors looking to diversify risks associated with China's longer-term vulnerability to domestic instability. As in Brazil, the likeliest and most serious threats to India's ability to sustain high growth and to attract higher levels of foreign investment have more to do with economic fundamentals than with political risk.

One measure of India's openness to foreign investment is that the country now accounts for nearly two-thirds of all the information-technology (IT) work offshored from the United States. The resulting revenue is expected to nearly quadruple over the next half decade to some $60 billion.

Yet structural challenges remain, including some directly related to India's ability to continue growing its appeal as an it investment destination. If the Indian government does not undertake substantive education reform, the country will soon face shortages of the skilled workers its growing service sector will need. India's it and engineering schools remain world-class, but its primary schools and universities cannot keep pace with growing demand for high-skilled workers. Only 25 percent of India's university graduates now have the basic skills needed for work in the sectors that attract foreign investment and fuel India's economic expansion.

Local governments, which control education policy, pose the toughest challenges for reforms addressing faculty shortages and poor infrastructure. In the near term, the system can be improved at the margins. But the country's factionalized politics continues to limit cooperation on these issues between the central and local governments. This looming shortage of skilled labor suggests that India's recent economic performance provides no guarantee of future results.

On the other hand, the country continues to slowly but steadily shed the statist economic model that generated the infamous "Hindu rate of growth" before ambitious liberalization began in 1991 under former-Finance Minister (now Prime Minister) Manmohan Singh. India's thawing relations with key states, especially China, the United States and-most importantly-Pakistan, also add to its appeal as an investment destination and suggest that India's long-term political stability is an increasingly strong bet.

Essay Types: Essay