Does The Global Stock Market Sell-Off Signal The BRIC Age Is Already Over?

By Tomas Hult

Back in 2001, former Goldman Sachs chief economist Jim O’Neill coined the acronym BRIC to highlight the immense economic potential of the emerging markets of Brazil, Russia, India and China in the decades to come. They would be the economic engines of tomorrow, he wrote.

The BRICs, which cover a quarter of the world’s landmass and contain 40% of its population, had a combined GDP of US$20 trillion back in 2001. Today these increasingly market-oriented economies boast a GDP of $30 trillion (or 20% of global GDP), a figure forecast to reach $120 trillion by 2050. Together, they control more than 43% of the world’s currency reserves and 20% of its trade.

But times have changed. Every BRIC country is struggling, and the group’s growing footprint means their problems are bad news for the global economy. That’s especially true for the troubles of China, where recent economic gloom triggered a rout in stock markets around the world. All but India’s is now in bear market territory – a decline of at least 20% from its peak.

Does this suggest the nascent age of the BRICs is already over – even before it really began – and if so, what does this mean for the rest of us? And what does it mean for companies in the US, Europe and elsewhere that have been increasingly targeting the BRICs for future growth?

These are the kinds of questions we ponder at Michigan State University’s International Business Center, which I’ve directed for the past 17 years. To help shine some light on them, I’m focusing on one issue that each of the BRIC nations is facing. How each country’s leaders choose to tackle them may well determine where they go from here. And in this analysis, I’m sticking to the original BRIC members: that is, excluding South Africa, which joined the group in 2010.

Past promise

When I first wrote about the BRICs in 2009, the political leadership in Brazil, Russia, India and China were beginning to demonstrate their collective economic and political potential by joining in a loosely defined partnership.

To them, the 2008 financial crisis exposed the weakness of the so-called advanced economies, and these four emerging markets saw themselves at the center of a new world order that would supplant the one led by the US, Europe and Japan. It was in their political and economic interest to join forces.

It was never about forming a union akin to Europe’s or even North America’s. The BRIC partnership was formed to coordinate the four countries’ efforts globally, formulate common views of global economic problems, reform the world financial system and become a major factor of multilateral diplomacy.

While O’Neill probably chose the order of the acronym – B, R, I, C – for the way it sounded rather than relative significance, the true ranking today is pretty clear: it’s not BRIC, it’s really ICRB.

India is doing the best economically; China follows (even with its recent troubles). The laggards are Russia, with its petroleum-dependent economy, and Brazil, which is suffering a crisis of confidence as a result of significant financial, economic and political turmoil.

India plays lead in ‘Chindia’ as Fed rate hike looms

At the outset, India leads the BRIC pack, a sentiment displayed by its stock market, which hasn’t tanked nearly as much as its peers during the recent China-led sell-off.

Some argue India is in the best shape to handle China’s economic slowdown because of its political system and the economic freedoms that go along with it. While China maintains a top-down economy plagued by political interference and corruption, India has a vibrant private sector and more competitive freedom.

But an imminent hike in US interest rates is the biggest risk on the horizon and could hammer India. The country has attracted a flood of US cash in recent years thanks to the greater yields on offer, but higher rates in the US could reverse the tide. That in turn would cause India’s stock market to slump and currency to slide. Taken together with deep problems at its public sector banks, a sudden drop in the rupee would be potentially disastrous and could shatter consumer confidence.

Increased exports could offset some of the pain, but what India really needs to do is privatize its banking system to make it robust and better able to handle fluctuations in the global financial system such as a rise in US rates. That would help ensure India is able to keep its top spot on Asia’s dream team.

China’s hubris

China, meanwhile, is learning its ability to control has its limits.

The People’s Bank of China, the country’s central bank, earlier this month decided to change its formula for calculating the reference rate of the yuan, prompting its currency to fall to a four-year low. Just a few days later, China reversed course to keep it from falling any further. In a rare public move, the central bank’s chief economist said that China is “fully capable” of intervening in the global currency market as it see fit.

Hubris comes to mind. China can certainly affect things, but not as muchas it thinks – and this note can be applied to its handling of the economy and stock market as well, which it has been actively working to jack up.

With the stock market down more than 40% from its peak and economic growth slowing, China’s leaders must learn a tough lesson: they can’t control the market, economy and currency like play toys. If China truly wants to be the major player in the global marketplace that it thinks it already is, then the country has to give up some control and let market forces, internally and externally, play the dynamic role that they do in developed nations.

Russia’s commodity curse

Russia, with its diverse population spanning 11 time zones, might make you think the country’s economy would be just as diverse. But despite paying some lip service to reform, the country remains highly dependent on oil to keep it going. And that’s very bad news because the price of oil is hovering near six-year lows.

Very few companies, let alone countries, can achieve sustainable success by focusing on commodities. With little upward movement in oil prices expected and the ongoing sanctions taking a toll, there is little hope that Russia will come out of its full-blown recession any time soon. The massive devaluation of the ruble vis-à-vis international benchmark currencies has helped exports, but not anywhere near enough.

What does Russia need to do? President Vladimir Putin has been promising reforms since taking the presidency at the end of 1999. Apart from an unlikely rebound in the oil market, Russia will have to follow through on those long-promised reforms or something better. The key is to move the economy away from commodities in order for the country to achieve the potential prophesied in 2001.

Brazil’s lack of confidence

Of the BRICs, Brazil seems the furthest from reclaiming its role as a future powerhouse. Record-low consumer confidence has curbed consumption, industrial production is contracting, and the economy appears to be in a recession. At the same time, the president’s approval rating is in the single digits thanks to an ongoing corruption scandal.

So it’s pretty clear that Brazilians are in a sour mood, and their economy continues to disappoint. Can the 2016 Olympics turn that around? If it’s anything like the 2014 World Cup, it doesn’t seem likely.

But nonetheless, the Olympic Games present an opportunity to showcase Brazil around the world and offset the problem of its currency and the accompanying dearth of tourists. Big stadiums, fancy parties and lavish spending on everything but the Brazilians themselves won’t cut it.

Leveraging the Olympics better than the World Cup, in a way that really gets the economy moving again and benefits citizens by spending on infrastructure like transportation, is a must for the country (though perhaps a lot of medals in the Olympics will be necessary to erase the memory of Brazil’s losses during the World Cup).

End of an age? Not just yet

The BRIC economies may be stumbling, but it’s far too soon to declare their era over, the current market rout not withstanding. Stumbling doesn’t signify crumbling, and each of the BRICs could easily rebound tomorrow (well, in a few years), depending on whether their leaders follow smart policies that begin to fix the disparate problems that plague their economies.

The year 2050 remains a long way off, leaving plenty of time for the current $120 trillion prediction to come true. The problem for the BRICs, though, is that the economic prediction for 2050 (and beyond) is a moving target. The fluidity of moving targets require savvy political and business leaders, sound decision-making, market forces, strategic thinking and building on industry globalization drivers.

To concretely realize the 2050 forecast, Russia has to become less oil-dependent and commodity-based; China has to build stronger trust in the global money and banking community; Brazil has to succeed economically in the 2016 Olympics and, most importantly, elevate consumer confidence; and India has to privatize some of its banks to offset the impending US rate hike.

Despite these troubles, the BRICs remain sound investment areas for companies and cannot be ignored. The size of the countries’ populations alone is enough to warrant strong attention (India and China have more than a third of the world’s population).

Just keep that less catchy acronym in mind: ICRB.

Tomas Hult
Byington Endowed Chair and Professor of International Business at Michigan State University.

This article was originally published on The Conversation, © 2015, The Conversation