Fix the broken BRICS

Since Jim O’Neill coined the phrase BRIC back in 2001, the grouping has come a long way, from being formalised in 2009 to the incorporation of South Africa.

Today, BRICS (Brazil, Russia, India, China and South Africa) is a formidable economic and political force to reckon with. The high economic growth of BRICS economies and the natural demographic dividend of the BRICS are signs that a structural edge relative to the rest of the world rests with the BRICS.

The BRICS countries collectively represent almost 3 billion people (43 per cent of world population) with a combined nominal GDP of $14.8 trillion (about a quarter of global income), 17 per cent of world trade, and an estimated $4 trillion in total foreign reserves.

But the BRICS grouping seems to have lost steam along the way. While a long-term potential to return to a stable high-growth trajectory is not ruled out, as of now, there is sufficient reason to worry about the five-nation cluster.

Compared to the developed West, the BRICS economies have been performing badly in the last year or so. Even as the developed world seems to be on a slow path to recovery and BRICS are still growing faster than the West, the BRICS graph is on a downward trend. China’s growth rate fell below 8 per cent in 2013 on the back of slowing exports.

India’s growth scenario is bleak, with the government scrambling to make it to a moderate 5 per cent, while growth in Brazil fell from a high of 6 per cent to 2.5 per cent recently. South Africa and Russia registered growth rates of 1.9 per cent and 1.3 per cent respectively during 2013.

Three of the BRICS economies – Brazil, India and South Africa – are now part of what is known as the ‘Fragile Five’ that share macroeconomic weaknesses such as large current account and fiscal deficits, and rising inflation coupled with political uncertainty.

At home, with general elections around the corner and anti-incumbency at an all-time high, investor confidence has hit rock bottom, economic growth has fallen, inflation has remained stubbornly above comfort levels and interest rates have been rising continuously.

China, on its part, is on an unsustainable growth path as debt fuelled, export-led expansion has resulted in huge public debt and an unhealthy dependence on world demand.

And now that Russia is embroiled with Ukraine in a serious diplomatic tussle, impending EU and US sanctions might hurt its energy sector and the economy at large.

Brazil’s mineral extraction industry, on the other hand, is disproportionately dependent on external demand and thus its growth is volatile. Truth is, the BRICS economies somehow found themselves in a comfortable arrangement during their heyday, where high Chinese growth and consumption fuelled a huge demand for commodities. Major commodity exporters such as Russia (energy), Brazil (minerals, agricultural products) and South Africa (raw materials) tapped into this demand to ride high on the back of primary-exports led growth. Chinese import from BRICS partners rose manifold over the years and, while it is a sign of intra-BRICS trade going up, it also signals profound China-centrism and China-dependence which, as is manifest already, is a flawed path to growth. The boom years eventually led to the end of the commodity cycle, as it were, leaving other BRICS economies in the lurch.

Second, it seems that the good performance of BRICS was a by product of the West’s relative underperformance. For instance, after years of continued investor faith in the developing economies, all it took for investors to flock back to US markets was the Fed announcement that the Quantitative Easing would be tapered.

As for the real economy, recent manufacturing data from the EU and the UK showed not just a growth in recovery in the region but a parallel slowdown in China, where output fell to a seven-month low. French and German manufacturing output, on the other hand, registered strong growth, suggesting these economies are on the road to recovery, however patchy.

India’s industrial sector, however, is battling a horrible slowdown. Its gross fixed capital formation growth of 0.7 per cent in April-September 2013 coupled, with an abysmally low IIP (index of industrial production) growth of 0.1 per cent in January 2014, after registering a 20-year low in average IIP growth as of March 2013, shows the economy has almost come to grinding halt.

The premise on which BRICS was instituted was that the group would be positioned as a viable alternative to the West in an increasingly multi-polar world, less dominated by the West.

But while there has been some geopolitical solidarity in the recent past amongst BRICS countries, the set must continue to perform well on the economic front to continue to be relevant.

Already, newer formations like MINT (Mexico, Indonesia, Nigeria, Turkey) seem to be catching investor, academic and policymaker attention, while the Philippines is being keenly watched for its curiously high growth rates.

There is a need to fix the BRICS, by altering growth strategies, reducing external dependence, securing domestic demand and investments, providing jobs to the unemployed, and aiming at lowering untenable inequality.

The writers are with Observer Research Foundation

COMMENT NOW