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

India will more often compete for commercial opportunities with China than join it in some project to undermine existing economic institutions. Its government would rather join the G-8 than replace it. For years to come, India will continue to trade with the United States and other Western countries more than with China.


RUSSIA'S GROWTH is based on (and limited by) very different factors than exist in Brazil, India and China. When Vladimir Putin first came to power in 2000, Russia, with its well-educated workforce and abundant supplies of oil and natural gas, seemed a potential emerging economic powerhouse. Putin said all the right things about democracy, transparency, rule of law and openness to foreign investment.

Today, Russia's growing middle class offers excellent opportunities for investors in retail sectors of the economy. Generally speaking, there are also profits to be made by foreigners in banking, high-tech, telecoms, pharmaceuticals, automotive assembly and food production-though endemic corruption clouds the picture in all these areas.

But in sectors the state has formally designated as "strategic", the story is quite different. The Kremlin has proven less interested in opening Russia's economy to market forces than in leveraging its enormous energy wealth to consolidate control of Russia's domestic politics and to restore Moscow's international influence, particularly within former Soviet territory. This strategy limits Russia's long-term economic growth potential in several ways.

First, the key assumption underlying the Goldman Sachs projection was that the BRICs would hit their long-term growth targets only if their political leaders committed themselves to "maintain policies and develop institutions that are supportive of growth." In the short term, Russia has enjoyed strong growth. But this surge is not based on sustainable growth-promoting institutions but on high oil prices, leaving much of the country's revenue generation at the mercy of cyclical global energy markets. Brazil, India and China have neither Russia's natural resources nor the temptations they offer to resist foreign investment and economic diversification.

Second, Russia's small- and medium-sized businesses account for only 13 percent of Russia's GDP. While energy exports account for one-fifth of the country's economic growth, the sector has produced only about 1 percent of Russia's jobs. This lack of economic diversification limits the country's capacity for technical innovation, on which longer-term growth will depend.

Third, as the Goldman Sachs report notes, "openness to trade and foreign direct investment has generally been an important part of successful development." But in the so-called strategic economic sectors, the Kremlin builds more ring fences than bridges, limiting foreign investment in energy, aerospace, military technology and elsewhere. Kremlin efforts to force Shell and Mitsubishi to sell stakes in the Sakhalin 2 oil fields offer only the most obvious recent example. Russia's dependence on energy revenues and the Kremlin's drive to consolidate control of key economic sectors are highly unlikely to prove short-term trends. For all these political reasons, Russia should be considered in a different category than Brazil, India and China.

THE ANALYSTS at Goldman Sachs were wise enough to hedge their bets on all four countries, but long-term economic projections that hold political variables constant are likely to be revised many times before they reach maturity. Had we turned to economists in 1977 to offer thirty-year growth projections on Brazil, India, China and the Soviet Union, we would not have been well-served by their forecasts. Among other things, they predicted that rising oil prices would buoy Soviet growth. In any emerging-market country, politics matters at least as much as economic fundamentals for market development.

Clearly, it is premature to argue that the BRICs will inevitably sweep aside the G-7 economies as the primary engine of global growth. More to the point, differences in the political factors that drive the development of their economies suggest that these four countries do not form a coherent economic bloc. In particular, Russia's petro-wealth limits its need for foreign investment, pushing the country into a separate category.

Finally, growth in Brazil, India and China will depend on expanding commercial relations with more developed states. Their growing economies profit from stability in the global economy, giving them powerful incentives to work within existing international institutions, rather than trying to forge new ones. More to the point, differences in their political systems may well send their economies in different directions over the next two decades. The Goldman Sachs analysts who made the BRICs idea famous wisely hedged their bets on its future. Those who have since adopted the idea would do well to follow their lead.

Ian Bremmer is the president of Eurasia Group and author of The J-Curve: A New Way to Understand Why Nations Rise and Fall. He is also a contributing editor to The National Interest.

Essay Types: Essay