Wednesday, March 14, 2007

Here Come the BRICs

Here Come The BRICs

By Ajit Chaudhuri

Goldman Sachs, a Wall Street broking and investment firm, came out with a report in October 2003 entitled “Dreaming with BRICs: The Path to 2050” (Global Economics Paper No: 99 by Dominic Wilson and Roopa Purushothaman). This said that Brazil, Russia, India and China (the BRICs) would be among the world’s largest economies by 2050 and the drivers behind world economic growth over the next 30 years. The report did not really catch my attention, apart from wondering how the acronym would look had it been Paraguay or Pakistan instead of Brazil, until it was heavily quoted during the testosterone-filled initial election campaign of the then ruling party in India earlier this year. Are these guys (Goldman Sachs) serious, I remember wondering at the time, or is it another of those 3 monkey reports (see no problems, hear of no problems, speak of no problems) that ultimately aim to sell something to suckers. What does the report say, and what does it not say? What follows is my take on this.

What does the report say? In a nutshell, that the BRICs would be a much larger force in the world economy over the next 50 years. Today, the BRICs are 15 percent of the G6 (US, Japan, Germany, UK, France and Italy) in dollar terms. By 2025, they are likely to be more than 50 percent of the G6, and will overtake the G6 by 2039. Of the G6, only the US and Japan will be among the 6 largest economies in the world in 2050. China will be the second largest economy in the world in 2016 and will overtake the US in 2041. India will be the third largest economy in 2050, and will be about four times larger than the fourth largest, Japan. The attached table lists the world’s large economies in 2050.

The rise in GDP in the BRICs will be most dramatic over the next thirty years before tapering off. The main drivers of the increase will be real growth (accounting for about 67 percent of the increase), capital accumulation and appreciation in currency as real exchange rates converge on the purchasing power parity rates. India will be the only significantly growing economy of the ten in 2050, with GDP growth projected at more than 3 percent at the time. It will also be the only country in which working age population will continue to increase. Per Capita Income (PCY) in the BRICs will still be significantly lower than the G6 countries (see the attached table) with the exception of Russia. India’s PCY will be by far the lowest, about half of China’s and 20 percent of the US’s (which will be by far the richest).

The BRICs will therefore emerge as an engine for economic growth, demand growth and spending power over the next thirty years, and will offset the impact of low growth and ageing populations in advanced countries. In 2050, the largest economies (by GDP) will not be the richest (by PCY), thus making strategic choices for firms more complex.

These predictions are made using demographic projections and a model of capital accumulation that are explained in the paper but are unintelligible to the likes of me, and I am unable to question the mathematics of it all. The key assumptions are that the BRICs will maintain policies that are supportive of growth, i.e. stable monetary and fiscal policies (low inflation, low deficits), fostering of institutions such as legal systems, markets, financial institutions, health and education systems, and openness to trade and FDI. Interestingly, the report attributes an additional 0.3 percent of annual GDP growth over a thirty-year period to every additional year of schooling for the average citizen.

What does the report not say? My feelings upon having read the report are that it is certainly a bold one whose predictions grab attention - the BRICs, with the possible exception of China, don’t look like global economic superpowers of the future today. The predictions come across in the report as more or less inevitable. Are these actually so? Professor Paul Kennedy, a historian from Yale University, was talking about the report at the India Today Conclave earlier this year and was asked what the main threats to the predicted scenario in 2050 would be. He listed three. The first, he said, was that of maintaining social cohesion in a high growth environment. The second was the temptations of superpowerhood that high growth would bring, especially that of increasing expenditure in unproductive areas such as defense. And the third was his doubt whether the Earth’s ecology and environment would be able to handle 3 billion Chinese and Indians having lifestyles and consumption patterns similar to that of Americans today, cars for every two people and all.

The other matter that the report throws little light upon is the nature of spread of GDP within the BRIC societies. The PCY is an average – for India, for example, it gives no indication as to whether we are going to be a nation of 50 or 100 million very rich and a very large number of very poor, or a more egalitarian society. What would the social, economic and geographical fault lines look like during this period of growth? And would the pursuit of policies that spread wealth negate policies that create it? Maybe there are a few things about the India of 2050 that are still open to today’s influence.

GDP in 2050 (2003 US$ b)
PCY in 2050 (2003 US$)

BRICs Brazil, Russia, India and China
FDI Foreign Direct Investment
G6 US, UK, Japan, Italy, Germany and France
GDP Gross Domestic Product
PCY Per Capita Income

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