Chapter 17

1. Chapter 17 The BRIC Countries in the World Economy

2. Learning Objectives • Define the meaning of the term BRIC and state why it has been adopted into common usage. • Explain the demographic challenge facing China and Russia. • Narrate a description of the economic reforms in each BRIC economy. • Compare and contrast the transition from socialism to capitalism in China and Russia.

3. Learning Objectives (cont.) • Discuss three challenges confronting the world economy as the BRIC countries become more integrated into international trade and investment flows. • Analyze four unresolved issues for the BRIC countries.

4. Introduction: The BRICs • In 2001, James O’Neill, of Goldman Sachs, wrote a paper, “Building Better Global Economic BRICs” • The BRICs acronym in the title referred to • Brazil • Russia • India • China • These four countries are dramatically reshaping the international economy with the potential to change global trade and capital flows

5. Introduction: The BRICs (cont.) • BRICs are large, ranking among the world’s top 10 in population and top 11 in GDP • All have undergone reforms that have transformed them are more internationally integrated and central to the future of the world economy • Each has an abundance of unrealized potential which conceivably have larger impacts on the global economy in the not-too-distant future

6. Demographic and Economic Characteristics • In 2010, these countries had approximately 41 percent of the world’s population and 25 percent of world GDP when measured in PPP terms. • China’s economy is 2nd only to United States in size; the largest in next decade at current rates of growth • Brazil is the world’s seventh largest economy • India the ninth • Russia the eleventh, measured in U.S. dollars (2010).

7. Demographic and Economic Characteristics (cont.) • During the first decade of the 21st century, the BRIC economies experienced spectacular growth in per capita income • A shift in the balance of world economic power has come about through the hard work and careful policies of the BRIC countries

8. TABLE 17.1 Population and Income in the BRICs, 2010

9. FIGURE 17.1 BRIC and G-7 Shares of World GDP (PPP)

10. FIGURE 17.2 China and India In the World Economy, 1700-1950

11. FIGURE 17.3 Population, 1960-2050, in Millions

12. TABLE 17.2 The Aging of China and Russia

13. Economic Reforms in the BRIC Economies • Reform of the Communist system in China began in 1978 • Prior to reform, private enterprise did not exist • All decisions were made from the top-down • India’s reforms began in the 1980’s and gained momentum in the 1990’s in response to a balance of payments crisis • Prior to reform, India was best characterized socialist • Heavy industry was state owned • Private industry was heavily regulated

14. Economic Reforms in the BRIC Economies (cont.) • Russia’s transition began with the collapse of communism and the dismantling of the Union of Soviet Socialist Republics (USSR) in 1991 • USSR was replaced with fifteen newly independent states including three that would soon join the European Union (Estonia, Latvia, and Lithuania) and the Russian Federation (Russia)

15. Economic Reforms in the BRIC Economies (cont.) • Countries transitioning from socialist to capitalist systems implemented a wide range of reform tasks • Most immediate problem in most countries was a sudden collapse of GDP • Property rights had to be defined • New institutions had to be created to establish rules for businesses and workers • Define the scope of government

16. Economic Reforms in the BRIC Economies (cont.) • Brazil’s large domestic market enabled many firms to capture economies of scale • Brazil’s economy in 1950s into early 1970s boomed • Described as the Brazilian Miracle

17. Economic Reforms in the BRIC Economies (cont.) • The Latin American Debt Crisis brought these developments to a complete halt in the 1980s • Brazilian leaders resorted to money creation as a means of financing government operations, the consequence was rapid inflation • After several currency reforms in the 1990s, Brazil finally gained control over inflation and restored a system of sustainable government finances

18. Economic Reforms in the BRIC Economies (cont.) • Two key factors to Brazil’s restoration of high growth rates: • One, a series of two-term presidents bringing stability in policy and competent leadership • Two, Brazil benefited from China’s appetite for resources and foodstuffs, both directly by selling to China and indirectly through the rise in commodity prices that China’s demand helped create

19. The Reform Process in China • Leader of reforms was Deng Xaioping, gradually dismantling of controls exercised by Communist Party • Foreign trade under the old system controlled by 12 foreign trading corporations (FTC), with no consideration given to comparative advantage • Created Special Economic Zones (SEZ) that gave local provinces authority to establish economic and trade policy • China applies to joint the GATT in 1986 and gained WTO membership in 2001

20. Indian Economic Reforms • Three forces played roles in the move toward reform: • The USSR, India’s primary trading partner, dissolved in 1991 • Other South East Asian countries were having success with reforms • A financial crisis had developed as a result of heavy borrowing by the government

21. Indian Economic Reforms (cont.) • Details of the reforms: • De-nationalization, led by finance minister Mammohan Singh • Elimination of a regulatory permitting process that interfered with competition • Transition from import substitution industrialization policies toward export lead growth policies • Dismantling of restrictions on international trade and foreign investment

22. Russian Economic Reforms • Transition economies: The economies that abandoned socialism or communism in favor of market based systems • One of the first controversies; speed of transition • Economy had to be stabilized to avoid unsustainable budget deficits and hyperinflation • The barriers of entry were dismantled • Important new markets were created

23. Russian Economic Reforms (cont.) • New labor markets required unemployment insurance, pension systems, and safety nets • New financial markets needed regulatory apparatus for banking oversight, security laws, and tax rules • The transfer of property rights was begun • Government created the legal infrastructure for settling disputes and enforcing contracts • One of the most complicated and difficult tasks: privatizing state-owned firms and factories

24. Russian Economic Reforms (cont.) • Outcome was tragic for a large segment of the population - By 1996 Russia’s economy was about 64 percent of its size in 1990 • Infant mortality increased dramatically, birth rates fell below replacement levels, and wealth became highly concentrated • Russia was not unique; all but one of the new fifteen countries from the USSR saw income declines of 25 percent or more

25. Brazilian Economic Reforms • Brazil has always been a capitalist economy • High inflation, stagnant per capita GDP growth, several government failures caused rethinking of development strategies • New leadership and more open strategy towards trade and investment restored confidence and necessary changes in government policies brought inflation under control

26. The Next Step for the BRICs • All four of the BRICs implemented reforms • One challenge; they are not easy places to do business • Problems include - starting new businesses - obtaining necessary business permits • Operation, tax compliance, range of other issues make these economies a difficult challenge for businesses.

27. The Next Step for the BRICs (cont.) • State capitalism: Capitalist economies with private ownership playing a dominant role, each uses the power and authority of their national governments to control a significant share of industry • The national government uses the economy for national purposes • Less true in Brazil and India than in Russia and China

28. Why Did the USSR Collapse and China Succeed? Dual track strategy: localized reforms to certain areas or sectors (e.g., agriculture) while maintaining traditional, central planning structures in the remainder of the economy Proponents of rapid reform- China was special case • central planning was less extensive in China resulting in economy less distorted and less over concentrated on heavy industry • most importantly, China’s economy more agricultural

29. The BRICs in the World Economy • The BRICs have profoundly influenced the direction of world trade and investment. • As they have become more integrated with the rest of the world, multinational businesses have quickly moved to establish production and distribution networks inside the BRICs, and BRIC firms have begun to invest outside their home markets.

30. FIGURE 17.4 Trade-to-GDP Ratios

31. FIGURE 17.5 BRIC and G-7 Exports

32. Trade Patterns • Rising shares of world trade and foreign direct investment are characteristics of the BRIC economies • BRIC economies are not capable of entering the most technical and sophisticated markets on a routine basis

33. Trade Patterns (cont.) • Brazil is one of the most successful manufacturers of mid-sized commercial jet aircraft (Embraer) • China has its own space program • Russia is the lead country in the International Space Station • India is famous for its software and sophisticated business services

34. Trade Patterns (cont.) • China is not a major producer of high-technology products, but becoming more so • Indian trade has captured the world’s attention through services trade. • India’s leadership has consistently emphasized higher education and technology, • India’s Institute of Technology (IIT) is among the world’s best.

35. Trade Patterns (cont.) • India’s computer and information services include medical consultations, data entry, legal briefs, plus other activities performed at a distance and sent over the Internet to the final user • Brazilian and Russian exports depend far more than China’s and India’s on primary commodities, including oil and gas (Russia) and agricultural products (Brazil)

36. The Challenges of the BRICs in the World Economy • Those who oppose this services and IT trade fear that all work will end up in developing countries • Highly unlikely: the U.S. Bureau of Labor Statistics projects significant job growth in the United States in IT-related occupations

37. The Challenges of the BRICs in the World Economy (cont.) • China’s emergence as an manufacturing export platform and high-volume manufacturer of consumer goods challenges existing trade patterns and manufacturing trends • The challenge to middle-income markets such as Mexico, Brazil, Malaysia, and Thailand; reduce their dependency on low wages as the primary source of their comparative advantage

38. The Challenges of the BRICs in the World Economy (cont.) • China has several sources of comparative advantage in manufacturing • abundance of low-wage, low-skilled labor • large domestic market with the advantage of scale economies • With growth and expansion of its middle class, the demand for manufactured goods is increasing rapidly

39. The Challenges of the BRICs in the World Economy (cont.) • A third advantage: China’s coastal areas- potentially convenient logistics for trading internationally • China continues to invest heavily in its port facilities and coastal infrastructure to develop its geographic advantages.

40. Unresolved Issues • Unbalanced trade • Competition created by the rapid growth of China’s exports has generated pressures for protectionism in a number of countries.

41. FIGURE 17.6 Current Account Balances

42. Unresolved Issues (cont.) • Unbalance trade • In 2007 the U.S. had a $268 billion merchandise trade deficit with China • Chinese savings finance U.S. government deficits • China then takes a large portion of the newly created off the market by selling bonds, known as sterilization

43. Unresolved Issues (cont.) • Environmental pressures; China will likely become a major produce of carbon dioxide • State Capitalism; Market forces are used and relied on, but when a market outcome is thought to be harmful or less beneficial to national interests, states intervene • Political reform and protest; Freer markets and access to information make it more challenging for the Communist Party to maintain social control

44. Remaining Issues • The breadth and depth of the reforms represent a break in each country’s historical path • Both are shifting from low growth, isolationist policies toward high growth and integration with the world economy • World Bank’s 2009 Doing Business Index ranks China 83rd and India 122nd out of 181 nations

45. China and India in the World Economy • Both are members of the WTO • Both have experienced tremendous export and import growth • A fundamental difference is what they trade • China’s emphasis is manufacturing • India’s emphasis is the service sector

46. The Choices Ahead • BRICs success will add pressures to limit their participation in world markets • If Chinese success in particular is frightening, Chinese failure should be seen as an even greater threat • Serious headway in addressing environmental problems minimal unless political stability and some degree of economic prosperity is achieved

47. The Choices Ahead (cont.) • Large populations of in the BRICs still live in poverty • Conditions have improved but not everyone has benefited resulting is growing dissatisfaction and rising protest in China • China’s growing inequality seen as a potential threat to the current system • India’s democratic system creates more legitimate means for changing leaders who do not deliver