http://www.thehindubusinessline.com/2003/10/27/stories/2003102700230900.htm
The future of the `BRIC' group — Brazil, Russia, India and China will come into their own
S. Venkitaramanan
A recent Goldman Sachs report has forecast that Brazil, India and China together with Russia (BRIC) will outstrip the current dominant members of the global economy within half a century. It will be heartwarming if the BRIC nations turn out to be affluent in the way the report forecasts, and particularly if they co-exist and flourish with the current occupants of the economic high ground.
THE world has been seeing a refreshing reversal of roles. The developing countries are increasingly playing an important role in the global economy. Far from stories of gloom and doom about countries like China and India, we are hearing stories of their successes, their rising reserves, their technological and economic prowess, which are seen as a threat by the richer nations.
Instead of stories that predict these countries being consigned to the scrap-heap, they are becoming objects of envy and attack. Now, China has done the rope-trick by its magnificent space mission.
It is being advised that it should spend its resources better by directing them to repair its roads and waterways — advice that can also be proffered to the world's richest economies, such as the US, which have also many black holes to fill in their infrastructure.
Now, the attention of the world's economic media has been temporarily transfixed by a report issued by Goldman Sachs, the well-known investment bankers, forecasting an even brighter future for the "deprived" nations of the world.
In the recently published report, Goldman Sachs has forecast that Brazil, India and China together with Russia (a group called "BRIC"), will grow to outstrip the currently dominant members of the global economy, G-6, (US, Britain, France, Japan, Germany and Italy) within half a century.
It estimates that BRIC will eventually overtake the economic output of G-6. China itself is likely to be bigger than any of the current members of G-6, a sobering thought for the triumphalists of Washington.
A more interesting prediction is that many of the current members of the G-7 may be ineligible to attend the meetings of the world's largest economic powers.
This is a considerable change from a situation in which these BRIC economies account for only one-eighth of the output of G-6. Its startling forecast is a result of the faster rate of growth of BRIC, combined with the slowing down of the currently richer nations.
Obviously, we have to take the forecasts with a pinch of salt. We cannot rush to celebrate the coming of the BRIC. Many unforeseen factors can intervene. Wars and pestilence cannot be ruled out. Recurrence of an epidemic like SARS or AIDS can do great damage to the growth of countries. Russia can self-destruct by overexploitation of its resources and internal intrigues among the new elite.
Further, economies like China can go overboard with their exuberance, overstraining their financial system. Above all, the scenario of richer countries tolerating the growth of poorer nations depends on the continuance of an open trading system in which the US and Europe accept the growing inroads of China's manufacturers (and India's software warriors). Protectionism is still a dangerous portent, which has to be avoided.
It was entirely in the fitness of things that the alliance which the Law and Commerce Minister, Mr Arun Jaitley, forged among the poorer countries, focussed on Brazil and China, which are now emerging as new power centres a la Goldman Sachs' forecast.
The alliance is, however, cracking some of the poorer countries being tempted by offers of aid and bilateral trade openings by the US to break the Cancun accord. Ultimately, the poorer countries of the world have to find ways of suborning the intransigence of the affluent West in WTO matters.
It is futile to try to obstruct the coming of a WTO accord by the economically weak combining against the currently strong. Such alliances can be easily breached by tempting offers of aid and trade.
While Cancun was a brilliant beginning, it also exposes the weaknesses of the poorer half of the world. "Stoop to conquer" may be the right slogan to follow, given the power of the West to breach am alliance against a WTO accord.
"Try to get the maximum advantage out of agreeing to WTO" may be a sensible policy option. But, that requires unravelling the many strands of policy that have been painstakingly woven together into our stand at Cancun. But, the reality is that some sort of give-and-take is needed if the US is not to retreat into a protectionist shell.
The Goldman Sachs' forecast obviously assumes that BRIC still steer clear of political implosions and economic indiscretions. Currently, the trend of India's stock markets seems to be a vote cast in favour of India reaching higher rate of growth. But stock markets have not been reliable indicators of the trend of economic fundamentals.
India's rulers need to take a more realistic view of the genuine strengths and weaknesses of the economy and nurse the prevailing mood of optimism with strong pro-growth actions. The weather-gods seem to be favourable and the economy stems set to reach the higher trend rates of growth.
India seems poised to return to the high rate of growth it saw in the 1980s and the mid-1990s. Investment flows into the economy — both domestic and forex — should be sustained.
One of the highest rates of growth of the Indian economy took place in the late 1980s, when public investment was high and credit flows robust. Public investment in infrastructure has a tendency to "grow" manufacturing, especially in steel, cement and capital goods. Public investment in infrastructure does not "crowd out" but "crowds in" private investment. This is already happening, thanks to Government's initiatives in road building and railways. This effort needs to be sustained.
While all efforts should be made to raise tax revenues, investment outlays in the public sector should not get derailed by fiscal imbalance. The best cure for fiscal imbalance may be the speeding up of the economy, which will itself "grow" tax revenues.
A shortsighted view of fiscal consolidation and credit flows may prove to be the poison pill for the economy. Given the good monsoon and comfortable forex resources, the economy should be able to avoid inflationary shocks by imports of essential goods, including food-grains and edible oil, if need be.
On no account should we risk choking off the embryonic signs of resurgence of growth of the economy by contra-cyclical policies, be they monetary or fiscal. If Goldman Sachs is right, BRIC seems all set to be the G-4 of the future. But the ways of the global economy are difficult to predict, even in the short run. Predictions over fifty years are more difficult. Given all their limitations, the Goldman Sachs' forecasts are a reminder of how changeable the global economic scene can be.
The dominant powers of today may well turn out to be the supplicants of the world 50 years from now. Whether or not the forecasts turn out to be true, they serve to remind us that the future can be very different from the present and holds both risks and rewards.
Whether BRIC will reign or turn to ruin is very much in its own hands. Let us remember that at the turn of the twentieth century, the Argentine economy was almost as large as America's and look at how it declined over the century.
Dramatic reversals are quite on the cards in the global economy. Much will depend on how policy and economic circumstances will work. Proper governance and appropriate economic management hold the key to the brave new world of BRIC.
Lest we forget, we should recall the earlier optimistic forecasts. Earlier stock market booms had led inevitably to Japan's bitter experience after the stock market boom of the 1980s. This is still fresh in our memory.
So too, the recent dotcom boom and the irrational exuberance, that Greenspan warned against, left the US in the grip of a deflationary trend. The economies of East Asia and the Pacific had also their brief encounter with dreams of glory in the 1990s.
The growth of nations and economies is often subject to unexpected implosions, often least expected and with varying degrees of intensity. Forecasts are only linear extrapolations of economic trends of the present. They can go wrong.
The path of wisdom is not to believe blindly in prophecies, either of boom or doom, but beware of dangers, which exist in the unpredictability of human behaviour. Growth is, ultimately, a game of patience, of economies trying to beat the odds which Nature places in their path.
Let us hope that the 21st Century will truly be an age in which nations of the BRIC group come into their own, albeit not at the expense of the current occupants of the high ground in the global economy. There is scope for both groups to co-exist and flourish, given the extent of global deprivation and leeway to make up in many areas of the world.
It will be truly heartwarming if the nations that belong to the BRIC group turn out to be affluent in the manner in which the forecast delineates. May the Goldman Sachs report be a harbinger of a golden age to come in the world economy