The BRIC Road to Growth

By Jim O'Neill

The idea that Brazil, Russia, India and China (the "BRICs") are the rising stars of the world economy is now widely accepted. However, the "old" developed nations have not adjusted to the new world order as they struggle with the legacy of the financial crisis. The BRICs and others (especially Korea) have already ‘emerged’ as economic powers. This requires rapid adjustment in economic policies and especially global economic institutions. This book makes a strong case for a radical overhaul of global economic governance to put these powerful new economies at the heart of decision-making. The author argues that, while the new growth economies still have significant policy adjustments to make, it is also essential for old-world economies to learn from them too and to accept the new order. He looks at the roles of China, Korea and Africa and at the scale of South-South trade. What does all this mean for the EU and for the UK in particular? How should the world engage with the new economic powerhouses?

• Language: English
• Publisher: London Publishing Partnership
• Release date: Nov 23, 2013
• ISBN: 9781907994234

Book preview

Preface

At the time of going to press, it is highly fashionable to write off the emerging markets story of the past decade or so. Not only is this a mistake, but most people in the West have no idea how far the centre of economic gravity has already shifted away from the United States and Europe, and how quickly this shift occurred. This profound change in the global economy is not something that might happen at some point in the future; it is already the reality. Since 2010, for example, the increase in the US dollar value of GDP for the eight largest emerging economies has been more than $3.5 trillion, close to the equivalent of creating a new Germany.

The fact of this shift away from a Western-­dominated global economy to one with other, stronger, engines of growth has some important consequences. This book focuses on two: the lessons for the West from the success of alternative models of growth, and the urgent need for changes in global economic governance arrangements.

The ‘adaptive’ capitalism practised by the Growth Market countries, especially China and South Korea, has lessons for the Western European and North American economies as they struggle with the legacy of the 2008 financial crisis and underlying structural problems. We in the West need to learn from the world’s fast-growing economies, just as much as they need to learn from us. Of course, they have to adapt their own models further, but equally so do we. These economies have apparently succeeded in positioning their financial institutions to serve the prevalent needs of their nations, with less focus on a goal of short-term profit performance. Their success in supporting and encouraging so many of their people to devote a significant amount of their time to gaining a better education and to adapting new technologies suggests other areas we can perhaps learn something from.

The BRIC economies (Brazil, Russia, India and China) have been adding the equivalent of a new Italy to their combined GDP each year; China itself has been adding another Spain annually, while the contribution to world growth from the BRICs and other emerging countries in the past decade exceeds that of all of Europe and the United States put together. Even if China’s growth rate remains slower this decade than it was in the 2000s, it will still attain a pace of economic growth never achieved by the United States over a ten-year period. The first cities running on battery-operated cars will be Chinese, not American. Some of the near future’s most important scientific innovations and new technologies will come from South Korea, not Britain or Germany.

This is already the reality. When the euro was launched, Germany expected that France would always be its biggest trading partner, but, going on current trends, by 2020 Germany will be exporting twice as much to China as to its eurozone neighbour.

The second issue concerns the institutions of global economic governance, which urgently need to change to reflect today’s realities. Many policymakers, especially in the West, are in denial over the facts of the current global economy. While many talk excitedly about exporting to emerging nations, most are unwilling to give up any of their dominance of international institutions to give these countries representation to match their growing importance. Although the increasing influence of China and the other BRIC countries and Growth Market economies is appreciated, it is often seen as something that could have an impact at some point in the future, not as having in fact happened some time before the 2008 ‘North Atlantic crisis’ (as many in Asia describe it). The sooner the global shift is understood, the sooner a new and more effective set of institutions for global governance can come about. The BRIC countries must have a place in key institutions, including the IMF and the World Bank. Europeans need to step back and be prepared to learn from today’s fast-growing emerging economies.

The rate of growth the BRIC countries have been enjoying will slow. Such a rapid pace cannot continue indefinitely, and, moreover, the fast-growing economies need to give a higher priority to the quality of growth and the needs of their citizens. The fast-growing emerging economies face a range of economic, social and political challenges. The unrest in Brazil and Turkey is a warning signal about the importance of both governance and quality-of-life issues. However, the likely slowdown compared with the 1980s to 2000s should not become an excuse for dismissing the BRIC phenomenon as hype. Their growth performance will continue to outstrip the economies of the West, with their profound structural problems.

For our part, we in the West must be less dogmatic than in the past in assuming our model of capitalism is best. China and the other BRIC countries can offer important lessons to the rest of us, about the role of the state and of local culture, even though they all have significant economic and political challenges ahead of them. We all need to embrace the era of adaptive or flexible capitalism. And we will all benefit from international organizations and governance that reflect the present reality of the global economy, not its distant past.

Chapter 1

What’s been happening in the BRIC countries?

It is nearly twelve years since I first coined the acronym BRIC to highlight the remarkable impact these rapidly growing countries were starting to have on the rest of the world, as well as the changes they were experiencing for themselves. The first decade of that period, as I have described elsewhere, ¹ turned out to be even more dramatic than I had anticipated, but as we move further into the second decade, there is evidence of slower economic growth in each of Brazil, Russia, India and China. Some observers are now suggesting that the tailing off of BRIC growth means that the whole phenomenon was overhyped ² and was never a great investment proposition anyway. ³ It is true that the BRIC economies are currently growing by less than in the past decade, but it is not clear whether this is a structural slowdown or just a cyclical one. For reasons I outline below, it was highly unlikely that they would have continued to see GDP growth at the same rapid pace.

Moreover, while it is interesting to look at their collective economic performance, it is also clear that there are big differences between the four economies. China is of particular importance, as the next chapter will discuss in more detail.

Table 1.1 shows GDP growth for each of the BRIC countries by decade, going back to the 1980s,