The growth slippage in BRIC economies, post-crisis, has been due to their structural imbalances.
The share of BRIC (Brazil, Russia, India, China) economies in world GDP has risen to 26.5 per cent in 2012 from only 16.4 per cent in 2000. In fact, the increase in BRIC GDP in purchasing power parity terms over the last decade was even larger than the GDP of the entire euro area in 2012.
Historically, BRIC economy cycles have moved in tandem with the cycles of the advanced countries. Over the last three years, however, the growth in BRIC countries has fallen much more sharply than that warranted by a slowdown in the advanced economies (graph).
The gap between GDP growth in BRIC economies and advanced countries remained stable at 8.6 per cent during the pre-global financial crisis (GFC) boom year of 2007 and 8.7 per cent at the peak of the GFC in 2009. After that, the gap started narrowing and fell to 4.7 per cent in 2012.
This slippage in growth of BRIC nations to well below pre-crisis trends cannot be attributed to external factors alone. Whereas Brazil, Russia and India suffer from low investments and high inflation, China relies excessively on investments to boost growth.
In sharp contrast to Brazil and India, Russia is rather under-diversified and highly dependent on swings in oil fortunes. Over the next decade, India faces the challenge of harnessing its demographic dividend for higher economic growth, whereas Russia faces a shrinking working age population and China’s population is beginning to age at a faster pace.
The constraints from these imbalances have amplified due to the slowdown in external demand over the past three years. And BRIC economies can no longer ignore them.
In 2012, Brazil’s economy is estimated to have grown at 1 per cent — lower than its pre-crisis rate of 4.8 per cent and a sharp fall from 7.5 per cent in 2010. At 19.3 per cent, Brazil’s investment as a share of GDP is also the lowest among BRIC economies.
Consequently, capacity utilisation is very high; even a small increase in demand during high-growth years leads to a surge in inflation, which forces the central bank to keep rates high. Moreover, Brazil’s corporate tax rate, at 34 per cent, is the highest among the BRIC economies and acts as a dampener to investments.
In many ways, Brazil’s economic imbalance is similar to that of India’s. Both countries need to rebalance their economies from consumption to investment. The Reserve Bank of India has been struggling to combat inflation, despite high policy rates.
Although India’s investment rate is relatively higher at 35 per cent of GDP, growth in private corporate investment has fallen sharply over the past few quarters due to lack of policy reforms, supply-side bottlenecks and high interest rates. Like in Brazil, the Government spends too much on welfare spending.
Unlike the other three BRIC nations, Russia’s most striking economic imbalance is its excessive reliance on oil. Oil accounts for half of federal revenue and fuel exports 60 per cent of total exports.
Although the Russian government recorded a budget surplus of 1 per cent of GDP in 2012, its non-oil fiscal balance as a share of GDP was a negative 10.5 per cent. Russia’s economic growth is synchronous with oil price movements.
Over the last two years, for instance, when economic growth slowed sharply in most of the other BRIC economies, Russia remained fairly resilient with an average growth of over 4 per cent, because oil prices remained high.
Like Brazil, Russia’s investment as a share of GDP is low (21 per cent, according to World Bank, 2011). Also, fixed investments in mining are higher than in manufacturing.
Due to lack of investment, Russia’s average inflation over the last three years, at 6.8 per cent, is second only to India among BRIC economies. Most of the country’s large companies are state-owned and belong to commodity industries.
One of the reasons for low investments in Russia is that government policies are not conducive to small and medium-sized businesses. Russia’s working-age population will shrink by roughly 2.4 per cent over the next five years.
While India, Brazil and Russia will have to rebalance from consumption to investment, China’s challenge is just the opposite.
Investments in China are 45 per cent of GDP and exports around 30 per cent of GDP. China’s investments (in current US dollar) in 2011 was almost equal to the entire GDP of Spain and Italy put together in 2011.
Excessive investments create financial and fiscal risks, and there is growing evidence of this in China. At 35 per cent, the share of private consumption in GDP in China is the lowest among BRIC economies. China needs to rebalance its economy away from investment towards consumption to make its growth sustainable.
This will be a gradual process and the country will have to settle for lower growth rates of 7.5-8 per cent over the medium run.
The graph shows the divergent growth trends between BRIC nations and the advanced economies. Although BRIC economies are expected to grow faster than advanced countries, the gap between their growth rates could narrow unless the BRIC countries address their structural economic imbalances.
Advanced economies are unlikely to provide much support over the next five years.
So, BRIC nations must rebalance their economies to regain and sustain their past high growth rates and maintain their rising global prominence.
(The authors are Chief Economist and Junior Economist, respectively, at Crisil.)