The grouping of emerging markets known as the ‘BRICs’ — which comprises of Brazil, Russia, India, China, and South Africa — helped to drive the global economy following the 2008 financial crisis, however the dynamics among these nations are changing, as economic growth from long time powerhouse China continues to slow and perennial laggard India is building momentum under its new government.
Jim O’Neill, the former chairman of Goldman Sachs Asset Management who coined the term BRICs, says that although some of the countries in the group are encountering headwinds, don’t count them out yet.
To better understand these shifts, the Nikkei Asian Review recently conducted an interview with Jim O’Neill:
Q: Brazil and Russia are grappling with economic difficulties, and China’s growth is slowing. Are the BRICs losing power, and will they be able to regain their former strength?
A: Of course the BRICs countries are not growing as strongly as they did in the noughties. It would be very hard for them to repeat that and, very importantly, I never assumed they would. I expected BRICs growth to be 6.6% this decade, and from 2011-2013 it was. This is down from 8.5% the previous decade but in line with what I thought and three times more than the G-7 [major industrialized nations]. They have managed to do this because China is so big that it influences the average so much. It is one and a half times bigger than the other three collectively.
It is true that because China slowed to less than 7.5% [growth] in 2014 the weakness elsewhere becomes a bigger problem, but this is probably only relevant for 2014 and 2015. Of course, if Brazil and Russia were to have permanent low or no growth, then it would be a bigger story to say the rise of BRICs is waning, but far too premature. China growing at 7% adds another trillion U.S. dollars to global GDP, and in PPP (purchasing power parity) terms is more than double the U.S. This year India will add more than double the U.K. — the strongest G-7 country outside the U.S. — in PPP terms to global GDP.
Q: Russia is struggling with sanctions and plunging oil prices. What do you make of its current straits, and what is your outlook for its economy?
A: I think Russia’s underlying economy has been very vulnerable to a big slowdown in oil prices and in some ways maybe that is why [President Vladimir] Putin tried to take on Ukraine as a distraction from economic problems. His miscalculation of the size of the oil price drop is very bad news for Russia.
They need to change their economic model so it is much less energy dependent and more open and more competitive. The decline in oil prices is very good news for real incomes and consumers in oil-importing countries, especially Europe and Japan.
Q: How about Brazil, which has fallen into recession due to mounting inflation and a weakening currency?
A: It is also far too dependent on commodities. They need to reduce their dependency on the state and allow the private sector to try and grow. More private sector investment is vital.
Q: India’s economic growth has been slow until recently. But the country seems to be faring somewhat better than its BRICs counterparts, especially since its general election last year. What is your take on India’s performance?
A: I am quite excited about India under [new Prime Minister Narendra] Modi. He gives them the best leadership in probably a generation. Together with lower oil prices and their demographics, they could outgrow China, [expanding at a rate of] more than 7.5% for the rest of the decade.
Q: Some are saying that if the U.S. Federal Reserve raises interest rates this year, global money will flow back to the U.S. and away from emerging economies. Do you agree with that view? Also, are global markets growing more volatile?
A: One thing that is guaranteed is markets will always have volatility. I don’t think this year is necessarily special.
As far as the Fed is concerned, the consensus said that last year and look what happened. China and India had massive bull markets in equities. They have more than a billion people each. Their futures depend on themselves, not the U.S. or the Fed. Although obviously if the Fed ever gets around to tightening, then those with poor fundamentals will be vulnerable whoever they are.
Q: Should we assume that India and China will perhaps be the only countries to continue growing at high speed? Is there there any way Russia and Brazil can regain their former growth momentum?
A: Economic growth is driven by two things over the long term: productivity and the size of the workforce. China and India have large urbanizing workforces, so this makes it much easier for them to grow than Brazil and Russia. Brazil and Russia can never sustain similar growth rates as they simply have smaller populations.
This said, I assumed both should grow around 5% this decade as I believed they would embrace productivity change. Both could and probably eventually will, and it’s very unlikely they will grow as poorly as they have the last three years.
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Courtesy of Nikkei Asian Review, © 2015 Nikkei Inc.