In late November 2001, while fires still burned in the rubble of the Twin Towers, Goldman Sachs economist Jim O’Neill put out a report reframing the global balance of power. Four countries, he said, would dominate economic growth—China, Russia, India and Brazil. Reaching for a name to call this new club (he dismissed the acronym “Crib” because of its association with infants), O’Neill settled on the BRICs.
At first, his BRICs report attracted only modest attention. Then, as the four economies, in particular, China, began to soar—and as the popular narrative of America’s decline took hold—the BRIC mantra became ubiquitous. Financial institutions launched dozens of BRIC-themed funds to meet insatiable investor demand. Politicians extolled the importance of hitching their economies to the BRIC wagon. And, in recent years, the BRICS themselves (the “S” now stands for South Africa) have worked to create a $100-billion “BRICS development bank” for emerging nations.
So it was last week that O’Neill was asked to revisit his BRIC concept, in light of Russia’s unfolding economic crisis and Brazil’s moribund growth outlook. Those two countries, he said, are at risk of losing their membership. “I might be tempted to call it just ‘IC.’ ”
“Ick” might be more like it. The BRICs, both the countries and the giddy investment thesis that once bound them so neatly together, are crumbling. It’s not that O’Neill’s forecast was wrong. Quite the opposite. At the time, the BRIC economies were about 10 per cent the size of the G7 nations. Today, the BRICs are half the size (though China accounts for most of the gain). Where the problems lie is in the squandered resources and wasteful spending that fuelled so much of their rise.
Russia’s woes are many. The country is heavily dependent on energy exports, and the collapse in oil, coupled with sanctions over its invasion of Ukraine, have plunged it into chaos. The ruble is in free fall and inflation has soared to 11.4 per cent, devastating Russian consumers. At the same time, the end of the commodity supercycle has slashed the value of Brazil’s mining exports and brought its economy to its knees. Analysts now expect Brazil to grow just 0.4 per cent this year. Even the creaky eurozone will manage faster growth.
O’Neill is still bullish on China, which remains the conventional view in the West. But there are reasons to believe China faces a crisis that will be every bit as shocking and disruptive as the oil price collapse. Having expanded at more than 10 per cent a year for much of the last decade, China’s growth has stalled at around seven per cent and is grinding lower. What’s changed? China’s central government has sought to curb wasteful spending on fixed-asset investments (such as ghost cities, unused airports, abandoned steel mills, etc.), much of which served no value other than to add a few more notches to GDP.
One recent attempt to put a price on this waste, by a pair of Chinese state economists, Xu Ce and Wang Yuan, pegged the amount of misspent funds over the past five years at US$6.8 trillion. It was a heart-stopping number. And while some economists challenged their methodology, there remains no question that a large portion of China’s growth has been due to recklessness on a scale unseen in human history. (It also goes a long way to explaining the corresponding boom and subsequent bust in Russia and Brazil, which supplied oil, gas, coal and metals for China’s manic spending sprees.) Echoing these concerns, Charlene Chu, a senior partner at Autonomous Asia and former analyst at the Fitch credit rating agency, warned this week that China’s debt load has exploded to unmanageable levels: “We’ve got the biggest debt bubble the world has ever seen.”
History is likely to look back at the ridiculously showy 2008 Summer Olympics in Beijing and last year’s Winter Games in Russia—which together cost their hosts US$95 billion—as the exuberant peaks in the growth narratives of both countries. It will take all the resources of Brazil’s central bankers and politicians to hold the economy together long enough to host the games in 2016.
Once you lose the B, the R and the C, of course, that leaves India—incidentally, the only country that didn’t pursue shortcuts to easy growth or host the Olympics. India’s future remains bright, but it has grown at the slowest pace of all the BRICs. It also has an economy only slightly larger than Canada’s, despite a population 36 times bigger.
In the end, we can’t dismiss the BRICs as a fad. Their impact on the world has been too great. But the enthusiasm for the BRIC story was wildly overdone, and unwinding the excess will be a long and painful process.
Oh, and by the way, the USA’s share of global economic growth is set to trump the BRICs in 2015 for the first time in a decade. Not that you’ll have heard very much about the rise of that acronym.