BRICS or Bust?

Escaping the Middle-Income Trap

Hartmut Elsenhans, Salvatore Babones

• Publisher: Stanford Briefs
• Year: 2017
• ISBN:
  9781503604919
• Edition: 1
• Topic: Economia
• Subtopic: Economia dello sviluppo

Once among the fastest developing economies, growth has slowed or stalled in Brazil, Russia, India, China, and South Africa. What policies can governments enact to jump-start the rise of these middle-income countries? Hartmut Elsenhans and Salvatore Babones argue that economic catch-up requires investment in the productivity of ordinary citizens.

Diverging from the popular narrative of increased liberalization, this book argues specifically for direct government investment in human infrastructure; policies that increase wages and the bargaining power of labor; and the strategic use of exchange rates to encourage export-led growth. These measures raise up the majority and finance future productivity by driving broader consumption and fostering investment within national borders.

Though strategies like full employment, mass education, and progressive taxation are not especially controversial, none of the BRICS have truly embraced them. Examining barriers to implementation, Elsenhans and Babones find that the main obstacle to such reforms is an absence of political will, stemming from closely guarded elite privilege under the current laws. BRICS or Bust? is a short, incisive read that underscores the need for demand-driven growth and why it has yet to be achieved.

1

THE BRICS TRAJECTORIES: ECONOMIC, POLITICAL, AND SOCIAL

The BRICS countries are neither leaders nor followers, neither rich nor poor, neither successful nor unsuccessful. They stand for the great in-between. Other large in-betweens include the MINTs (Mexico, Indonesia, Nigeria, Turkey) and also many non-acronym countries like Argentina, Colombia, Iran, Kazakhstan, Malaysia, and Thailand. All of eastern Europe might look much like the BRICSs were it not for the influence of European Union membership (or its promise). All of these countries have reasonably well functioning economies that participate in global value chains and support Western style consumerism, at least among a privileged portion of the population. All have the state capacity to manage their own affairs, though they often manage these affairs in short-sighted and morally dubious ways. All have societies that are recognizably modern in the central cities but notably less modern in more remote regions. And all of them seem prone to sometimes catastrophic environmental degradation, especially air, soil, and water pollution.

Brazil is by far the largest country of Latin America and in many ways representative of the region. In contrast to the rest of the region, Brazilians speak Portuguese, not Spanish, but otherwise Brazil’s culture, religion, and historical experiences parallel those of its neighbors very closely. Brazil achieved its independence from Portugal in the 1820s, at the same time as Spain’s American colonies. Like most of Latin America, Brazil is a predominantly Catholic country populated by the descendants of a mix of (mostly southern) European colonizers, indigenous Americans, and African slaves. Brazil makes up about 40 percent of the total population of Latin America and is only slightly richer than average for the region. Like many other countries in the region, it has experienced wild political swings between left-wing populist governments and ultraconservative military dictatorships. Also like most of the region, its violent internal politics have been matched by remarkably peaceful external relations. Brazil is again typical for its high levels of criminality and inequality paired with traditional Catholic family values. In short, Brazil is important as Brazil, but it is just as important as a stand-in for Latin America as a whole.

Russia has a very different history and is perhaps the most distinctive of the BRICSs. Before 1917 Russia might have been considered representative of eastern Europe in the same way as Brazil is representative of Latin America: larger and a little richer than its peers, but similar in culture and social structure. But the events of the last one hundred years changed all that. Soviet communism, experienced as an indigenous development inside Russia, was experienced as an external force in the rest of the Soviet Union and eastern Europe. Since the 1990s most of Russia’s former client states have linked their economies to that of the European Union, leaving Russia (along with Ukraine, Belarus, and a motley collection of other jurisdictions) out in the cold. Thus although Russia is in itself an important country—a nuclear superpower, the world’s largest country by area, the ninth largest by population, by most counts a top-ten economy, and a collection of similar superlatives—it is not very representative of other middle-income countries. Poland might be a better proxy for postcommunist Europe. But Russia is permanently fixed on the global agenda in a way that Poland is not.

India is the dominant country of South Asia, constituting more than 70 percent of the population and economy of the region. Nearly all of South Asia was part of the British Empire until partition and independence in 1947, as were substantial portions of Southeast Asia. Strong Indian cultural influences extend as far east as Bali in Indonesia, and British Indian historical influence extended as far west as present-day Iraq. Although all of the countries in the region are distinctive and many of them are bitter rivals, India is nonetheless a useful proxy for understanding the economic pressures and opportunities experienced by all of the countries in the broad region running from Iran to Indonesia. India itself, with a population of 1.25 billion, is home to more people than the entire continent of Africa and is an important country in its own right. India’s northern state of Uttar Pradesh, with a population of around 200 million, is much larger (and much poorer) than Nigeria, while other areas of India are home to world-class software and business process outsourcing industries. India’s sheer size and diversity make it a useful country for international comparisons.

China is, of course, China. No discussion of emerging market economies, their successes, the challenges they face, and their aspirations for the future would make sense without China. China is the most populous country in the world, the second in land area, and the second-largest economy. It is first in international trade. More importantly, it has risen from being one of the ten poorest countries in the world at the beginning of its reform period in 1978 to being firmly in the middle of the world’s income distribution today. This miracle is not really as miraculous as it seems: China in 1978 had many of the social and political attributes of a middle-income country, even if its measured economic output was very small in dollar terms. That said, there is no denying the appeal of China’s story—nor the reality of the transformation that underlies it. Where the other BRICSs tell stories of rise and fall, China tells a story of rise and rise. Where the other BRICSs offer promise for the future, China offers promise for the present. People in developing countries rarely talk about emulating Brazil, Russia, India, or South Africa. They talk about becoming the next China.

South Africa is a latecomer to the BRICSs, not one of the acronym creator Jim O’Neill’s original BRICs but a later addition. South Africa got itself added to the BRICs through a decade-long political lobbying effort; it is perhaps the only country to ever successfully lobby to join an acronym. But though it may seem strange to people outside the investment community, lobbying to be included in multinational stock market indices and emerging-market asset managers’ international allocation lists is actually quite routine. Hundreds of billions of dollars of portfolio investment are benchmarked to these indices and lists. South Africa’s inclusion in the BRICSs gives it greater access to international capital markets and the opportunity to exercise influence in emerging BRICS institutions like the Shanghai-based New Development Bank. South Africa’s inclusion is analytically meaningful as well. South Africa is the leading economy of sub-Saharan Africa and a realistic example for the rest of Africa to follow. It shares in many of the social and health challenges of the region but is nonetheless a (relatively) stable democracy with a middle-income economy. While it may be difficult to imagine a path from the Congo basin to the Pearl River Delta, it seems easier to imagine a path to the Cape of Good Hope.

The five BRICS countries are all very different, yet somehow, too, they are the same. Somehow the label sticks, and not just because it makes for an easy-to-pronounce acronym. The “MINTs” sounds just as clever but has failed to capture the popular imagination. These countries also represent a wide range of human experience, but they lack the sense of commonality conjured up by the BRICSs. The BRICS countries may come from very different backgrounds, but they seem to be ending up in a similar place. They all have or are approaching middle-income status, to be sure. But they also share high levels of state capacity coupled with extraordinarily high levels of income inequality. They all have functioning education and health systems even if there are serious inequities in access to services. Students actually want to study at BRICS universities, which is (much) more than can be said for universities in most of the developing world. The BRICS political systems run the gamut from wildly democratic to oppressively authoritarian, but whatever their levels of democracy all of them are characterized by winner-take-all politics and a high level of central control. Like most of the rest of the developing world, all five BRICS countries have questionable records when it comes to environmental governance.

Perhaps most importantly, the BRICS countries have flatly refused to play by the set of rules laid out by Western governments and intergovernmental organizations in the “Washington Consensus” model of development. The 1990s Washington Consensus stressed liberalization (of trade, investment, interest rates, and exchange rates), privatization, deregulation, the elimination of subsidies, and the protection of property rights. The BRICSs (and especially China) have flagrantly violated all of these principles. Yet they (and especially China) are perceived to have succeeded where others have failed. This success is to some degree real and to some degree illusory, but that it has been accomplished in defiance of advice from Washington is certainly true. The BRICSs have stuck a finger (or five) in the eye of the Washington Consensus, and Washington itself, and for that they are widely admired throughout the developing world (and beyond). Whether or not they will continue to be admired in five, ten, or twenty years’ time depends on what they make of the successes they have enjoyed so far.

THE BRICS ECONOMIES

The BRICS mystique arose first in the economic sphere, and it is in the economic sphere that they are perceived to have scored their greatest successes. In 2011 Jim O’Neill identified the BRICs (minus South Africa) as the emerging market economies to watch, and in fact between 2000 and 2015 the BRICSs were some of the best-performing economies in the world. In the first fifteen years of the twenty-first century, the world’s developed economies experienced the bursting of the dot-com bubble in 2000–2001, the global financial crisis of 2008–9, and the ongoing euro crisis that began in 2010. Over that period the developed world’s best-performing major economy, the United States, experienced real (inflation adjusted) annual gross domestic product (GDP) growth of less than 2 percent per year. Major European and Asian economies fared worse. By contrast every one of the BRICS economies exceeded 3 percent annual growth, with Russia recording 4.5 percent, India 7 percent, and China nearly 10 percent compound annual growth in real GDP. The economies of Brazil and South Africa were some 50 percent larger in 2015 than they were in 2010. Russia’s economy was nearly twice the size and India’s nearly three times. China’s economy quadrupled in size, rising to the second largest in the world.

The economic growth of the BRICS countries—even that of the weaker BRICS economies of Brazil and South Africa—was truly impressive in the first years of the new millennium. But a wider perspective offers different insights. Figure 1 charts the long-term economic trajectories of the five BRICS countries since 1980. Each line represents a country’s GDP per capita expressed as a percentage of the US level for the same year. For this comparison the BRICS countries’ GDPs have been converted into US dollars using standard purchasing power parity (PPP) conversion rates, which smooth out the annual volatility that can make comparisons difficult when using market exchange rates. The longer thirty-five-year view presented in the figure leaves a very different impression from the recent fifteen-year timeframe over which the BRICS economies are usually judged.

FIGURE 1. Time series of BRICS countries’ GDP per capita compared to that of the United States, 1980–2015.

Source: Authors’ calculations based on data from the International Monetary Fund’s October 2016 Economic Outlook database.

A few facts are obvious from even a quick glance at Figure 1. First, Brazil and South Africa haven’t done very well at all when viewed over a longer time frame. In fact, they’ve been bouncing up and down between 20 and 40 percent of US levels of GDP per capita for as long as such data have existed. The perennial “sleeping giant” of Latin America, Brazil in particular has repeatedly been named as a potential challenger to the United States for regional economic supremacy, most recently in the 1970s—just before entering twenty years of relative stagnation. South Africa’s economy declined dramatically throughout the late apartheid era and only began to recover several years after its transition to full democracy in 1994.

Second, Russia’s dramatic growth in the first decade of the new century was nothing more than a bounce back from Russia’s equally dramatic decline in the last decade of the old century. The economic merits of communism may be difficult to judge using contemporary economic measures like GDP per capita, but there is no doubt that Russia’s transition from communism to capitalism was accompanied by massive economic dislocation. Whether or not the “shock therapy” (as it has come to be called) of the early 1990s was a necessary or appropriate policy for Russia can be and has been debated, but there can be little doubt that Russia’s high rate of economic growth after 1999 is due at least in part to a bounce back to Russia’s previously established levels of output. Between 1992 and 1998 Russia’s labor force participation rate fell from 70 percent to 61 percent, suggesting a sharp drop in capacity utilization. Since 1998 it has returned to 69 percent, the highest in the BRICSs and much higher than in the United States. The collapse of communism was a supply-side shock from which Russia had only just recovered when it ran into Western economic sanctions stemming from the Ukraine crisis in 2014.

Third, India and China are the only two of the five BRICS countries that exhibit secular growth paths spanning the last quarter century. Both started their current trajectories following major reforms that opened their economies to the outside world. The Communist Party of China officially heralded the beginning of the reform era in its historic December 22, 1978, communiqué, in which it exhorted the Chinese people to “advance courageously to make a fundamental change in the backward state of our country.” The rest is history. Careful historians point out the social foundations for growth laid down during the collectivist era of Mao Zedong and the precursors of reform in China leading up to 1978. But the post-1978 growth in China has been epic. India, by contrast, had a much less extreme break with the past following a 1991 foreign exchange crisis. In the 1990s India liberalized its currency, dismantled its system of import licensing, and eliminated many government monopolies, especially monopolies for the sale of imported goods. There was also widespread industrial deregulation. As in China a decade earlier, growth in India accelerated as India began to converge toward middle-income status.

And that’s the point. Absent self-destructive policies that isolated their economies from the larger global economy, China has converged and India is converging toward middle-income status. Neither country has experienced so much as a single year of negative growth since the beginning of its reform and opening process. Their direction has been uniformly upward—toward the middle. Brazil and South Africa, having long been in the middle, wobble up and down with no clear direction in sight. Russia, the only one of the BRICSs that is also a major energy exporter, has seen its economic fortunes rise and fall with the global oil price. Oil and gas account for more than two-thirds of Russia’s exports and as much as a quarter of the entire Russian economy. The 2014 collapse in oil prices cost the Russian economy dearly—or one might just as well argue that the ninefold increase in oil prices between 1999 and 2011 benefited the Russian economy mightily. If China and India are best understood as middle-income countries in the making, Russia might be best understood as a middle-income country plus oil. All three are joining a club that Brazil and South Africa have exemplified for decades.

A careful look at Figure 1 reveals that the five BRICS countries are all converging in GDP per capita relative to the United States. Despite very different starting points (both economic and historical) they are converging toward income levels that are roughly one-quarter that of the United States. China may yet grow past this point, but its growth began to slow decisively in 2015 and even the Chinese government has now embraced the rhetoric of a “new normal” era of slower growth. With the exception of Russia’s unique post-1991 experience, Figure 1 doesn’t give any suggestion of historical instability that might presage an impending collapse. But it does suggest that there’s not much to the BRICS story after all. Viewed in isolation China’s rise has been extraordinary. Viewed in comparative perspective, China has “merely” joined the long-standing middle-income club. China’s rise may have been extraordinary in its scale and speed, but it has brought China to an all too ordinary destination. Whereas India has been slow to rise to economic mediocrity, China has been very fast.

Looking beyond the BRICSs, the entire middle-income tier of the global economy (which includes much of Latin America, the Middle East, east-central Europe, and South Asia) recapitulates the general pattern of long-term rise and fall within the broad band of 15–35 percent of US GDP per capita. Over the long term the US economy has grown on average around 2 percent per year, and over the last century or more the middle-income band has grown along with it, benefiting from technological improvements and foreign investment that originate in the United States and other developed countries. But the basic structural relationship between the economies of the United States (the world’s leading economy and leading foreign investor since before World War I) and the middle-income band has remained remarkably stable over the long term. For example, the overall GDP per capita of Latin America as a whole has fluctuated within the narrow band of 20–29 percent of the US level of GDP per capita for the entire century since 1913. The equivalent range for east-central Europe is 19–33 percent and for the Middle East, 18–34 percent. The middle-income regions of the world have been stably middle income for a very long time.

The BRICS economies may be similar in GDP per capita, but in other aspects they have taken many different economic paths to arrive at similar income levels. For example Brazil has a very large service sector (71% of GDP, similar to European levels) while China’s economy is built around massive levels of investment (44% of GDP, among the highest in the world). Brazil has very high levels of government debt (65% of GDP) while Russia has very low levels (18%). India and South Africa still have very large agricultural sectors (both 18% of GDP) while Brazil and Russia no longer do (6% and 4%). Brazil is a major agricultural exporter even though agriculture accounts for a relatively small portion of Brazil’s total economy. Brazil, India, and South Africa routinely run large trade deficits; China and Russia run large surpluses. All figures here are for 2014, but these general patterns are relatively stable. T...