This article first appeared in the St. Louis Beacon, May 15, 2012 - Current discussions of economic events usually focus on the European malaise or the U.S. fiscal disorder. Just a few years ago it was the impending economic dominance by the so-called BRIC countries. Wither the BRICs?
BRIC is an acronym for Brazil, Russia, India and China. Not too long ago they were widely regarded as future economic powerhouses. The last few years have not been kind to that forecast, however. Even if they recover from the current downturn, they will face longer-term obstacles to realizing living standards comparable to other developed economies.
The BRICs suffered from the economic crisis that began in 2008. Brazil and Russia experienced negative growth rates. Russia’s decline was especially steep with real output falling at a rate of more than 10 percent in 2009. The economies of China and India did not suffer negative growth, but experienced notable decreases in their previously rapid expansions.
Will they regain their standing as up-and-comers in the global economic hierarchy? The long-term picture is not rosy.
Let’s start with China. From 1999 through 2007 China’s economy experienced an amazing expansion. Its annual growth rate increased from about 8 percent in 1999 to nearly 14 percent by 2007. This unmatched growth reflects extensive development in China’s infrastructure, largely funded by the government. Today, stories of vacant buildings, empty apartment complexes, airports and roadways abound. This hangover of central planning will slow future economic expansion. Though it will continue to grow, the trend indicates that China’s growth rate is converging to that of other developed economies.
Since their respective recoveries from the 2008-2010 crisis, growth in Brazil, India and Russia has slowed. Compared to China, they have been more susceptible to the global downturn in consumption.
Brazil, an export-based economy, is experiencing continued declines in the demand for its raw commodities as the economic recoveries in United States and the European economies fail to launch.
Russia’s economic success rode price of oil upward. If oil prices drop in world markets, as they have recently, Russia’s trade revenues and its economy in general will suffer.
The failure to enact much-needed social reforms in India will drag down its economic growth. Recent failed attempts at reform led Standard and Poor’s to lower India’s rating outlook. Because India’s current rating is BBB, the lowest investment grade, a further decline would make negatively impact the government’s ability to raise funds.
Some of problems facing BRIC economies will lessen as the world economy expands. But there are two institutional factors that will dog their future success: corruption and a lack of economic freedom.
The 2011 Corruption Perception Index ranks 183 countries; and none of the BRICs came in close to the “clean” category. Brazil and China ranked 73 and 65, respectively. India was even further down the list at 95, and Russia came in at 143. These scores reveal economies characterized by graft, bribery and political payoffs. As reported in The Economist, difficulties faced by the Brazilian government’s investigation into political influence trafficking highlights the struggle of achieving reform in a country where such corruption is routine.
Economic freedom is often viewed as a key element to achieve higher levels of economic growth. Unfortunately, the BRIC countries do poorly in this category, too. The most recent (2009) Economic Freedom of the World index, published by the Fraser Institute in Vancouver, ranked Russia at 81 out of 141 countries, the highest score of any BRIC country. As with corruption, economic freedom is not a commodity commonly enjoyed by BRIC residents.
The evidence from many research studies indicates that corruption and less economic freedom leads to slower economic growth. The BRICs’ rankings in both categories portend slower improvement in the standards of living for their residents.
The daunting task they face is how to ensure that previous economic achievements will not be transitory headlines but translate into permanent gains for their populations. Reducing corruption and increasing economic growth are two areas to start with.