Learning from the successes and stumbles of the world's great rising economies.
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.
(4) CORRUPTION IS THE KILLER
Think about how much of a problem corporate and industrial influence over politics has become in the U.S. Now imagine the companies are bigger, politicians face little or no public accountability, and there's often not a clear line between CEOs and the government bureaucrats who regulate them, who might even share an office or a boss. Add in billions of dollars in exploding growth and you'll get a sense of why corruption could be one of the biggest problems facing BRICs and other developing economies.
State capitalism doesn't always work, and sometimes can fail badly. Politicians and party officials aren't always motivated by the selfless devotion to national well-being that is supposed to guide their management of markets and firms. Cronyism, corruption, and industrial capture are always big risks, but they seem to become more likely and more dangerous as the economies grow. After all, it's one thing for a Chinese Communist Party official to remain dispassionate and fair-minded when managing, say, a local bank. But it can't be as easy for the officials who guide the Industrial and Commercial Bank of China, which has $1.9 trillion in assets and a significant interest in guiding public policy.
This means more than just free-riders leaching off the system. Growing economies sometimes have to make major changes to domestic industries to keep growth from stalling, but the private citizens and state officials who got rich and powerful off those domestic industries will want to resist changes that could hurt them. In China, for example, some analysts wonder if the Communist Party will be able to push through some overdue reforms that would boost domestic consumption but weaken state-controlled exporters, who are entrenched in the economy and political system. In Russia, the needs of Gazprom can seem to occasionally foreign policy, sometimes to the detriment of Russia and even its neighbors, as when Moscow cut off all natural gas to Ukraine as punishment for siphoning some off. Ukrainian officials fessed up and Gazprom got its money, but Russia's relationship with Europe was badly damaged.
Free-market India is not immune from corruption's terrible effects, either. As investment money rushes in, politicians who feel little-constrained by the country's weak oversight and legal system are cashing in. In 2008, Indian government officials were bribed to sell cellphone bandwidth rights for far below market rates, effectively robbing the state of the $40 billion dollars by which it under-sold to telecom companies. A national protest movement, led in part by activist Anna Hazare, is channeling the country's collective outrage at corruption. But the movement has so far achieved little.
(5) STRONG ECONOMIES NEED STRONG STATES AND STRONGER SOCIETIES
If state capitalism is the BRICs' greatest strength, and corruption their greatest weakness, then the lesson may be that healthy government-led economies require healthy governments. That means a state that will manage the economy responsibly and selflessly, something that's not so easy when the only powerful institutions in a country are the state and the industries it must manage. At some point, the relation gets a little too cozy, and the intended beneficiaries -- the actual population of the country -- get forgotten. The best way to keep that from happening, or at least the best way that anyone has come up with so far, is for civil society to become a player in it's own right, strong enough to assert its interests and to pressure both the state and industry to behave responsibly.
A strong civil society can come from a number of things: labor unions, public interest groups, political parties, and most importantly the right to elect and unelect leaders. Civil society is very weak in China and Russia, it is large but struggling in India, and it is relatively successful in Brazil. This may help explain why, of the four BRICs, Brazil seems to enjoy the greatest stability. Compared to China's looming threats from inflation or a transition trap, Russia's demographic crisis, and India's rampant corruption, Brazil is downright boring. Its economy is lightly but competently managed, the hyperinflation crisis of the 1980s is behind it, and both the state and market seem to work in some kind of benign concert. The country has the greatest political rights and civil liberties of the four BRICs, according to the latest rankings from Freedom House, and its civil society actively participate in politics (unlike in India, where citizens vote but often have few other outlets, such as unions, for participation). It's not a cure-all to solve the problems of a developing economy, but a strong and free civil society seems like a good way to at least deter them from getting too bad.