Learning from the successes and stumbles of the world's great rising economies.
Leaders attend a joint news conference during BRICS summit in Sanya, China / Reuters
In 2001, Jim O'Neill, the chairman of Goldman Sachs asset management, famously predicted the four fastest-growing emerging markets for the decade. We know that foursome by the acronym BRIC: Brazil, Russia, India, and China. That the economic world remembers his prediction owes as much to the handiness of the acronym as it does to the accuracy of his forecast. China, India, and Brazil are among the most dynamic and exciting emerging powers in the world. Indeed, to call them "emerging" feels like a slight. India is the world's largest county, China the world's largest manufacturer, and Brazil the Western Hemisphere's most vibrant expanding consumer economy. (Russia, the runt of the group, is beset by awful demographics and a weak private sector outside of its natural resources.)
As investors and economic analysts cast about for the next batch of high-growth markets, let's pause to recall the lessons from the BRICs: (1) Work on the middle-income transition plan; (2) Trade, trade, trade; (3) state capitalism can work; (4) corruption kills; (5) strong civil society matters.
(1) THE RISE OF THE MIDDLE CLASS
Perhaps the broadest lesson from the emergence of the BRICs is that no rise is complete without the triumph of the middle class. The record across these four countries is exceptional, but there is still considerable room for growth. In Brazil, credit card balances grew by a whopping 30 percent in 2008, the worst year of the Great Recession, reflecting the country's considerable appetite for consumer credit. Even in Russia, real incomes rose 142 per cent between 1999-2009. In China and India, the middle class has been buoyed by a kind of 21st-century Industrial Revolution. By 2050, half of the global middle class as defined by OECD will live in those two countries. But there are still considerable risks. Food inflation in India and a precarious housing market in China threaten to destabilize both country's fantastic ascents.
(2) TRADE IS EVERYTHING
For any economy, growing is all about selling. And when you're a small economy, growing is about selling to somebody bigger. In other words, there is no such thing as extraordinary growth without extraordinary growth in trade. We see this maxim playing out across the BRICs. As the world knows, China is the great trade success story of the last 20 years thanks to cheap labor and smart government planning to coordinate supply chains and streamline the manufacturing of electronics, textiles, and more. India's share of global trade tripled between 1993 and 2010. The country has also diversified. In 2000, one in five export dollars came from the U.S. Today it's one in seven. Russia, overly reliant on commodities and underdeveloped in technology, somewhat lucked out in the last half of the 2000s, as oil prices surged to record highs. The Great Recession took a particularly nasty toll, as the stock market fell a remarkable 70 percent due to the collapse of oil prices. Finally, Brazil has seen considerable growth in both agricultural and industrial exports, but more than any other BRIC country, it has been the beneficiary of significant international investment, which has helped its domestic industries grow -- and made its consumers rich -- at the expense of raising its currency compared to other developing countries.
(3) STATE CAPITALISM WORKS
Only one of the four BRIC economies could be considered free: India. The other three are deeply capitalist, sure -- finding success on international markets has been a big part of their rise -- but their version of capitalism includes the strong guidance of the government. State capitalism means state-owned firms like the massive China National Petroleum Corporation or Gazprom, but it also means heavy regulation, frequent intervention, and sometimes a degree of state control over markets and firms that doesn't look so capitalist. But this a statist means to a capitalist ends, designed to maximize long-term growth and encourage development. It doesn't always work out that way, but their success is hard to ignore, especially as the great free market stalwarts -- the U.S., Europe, Japan -- fall on increasingly hard times.
The state capitalist model will be an attractive one for other developing economies. Rising neighbors in Asia, Africa, and Latin America may seek to engage with the global markets but, rather than opening everything overnight and letting Westerners conquer their entire economies, protect and grow domestic firms that can compete internationally and will funnel money back into development. But the West can learn as well. As free markets -- especially financial markets -- fail and fluctuate, free marketeers in Washington and London and elsewhere may want to ask if a bit more state intervention and regulation is worth considering.