WASHINGTON: Just in case you didn’t hear it, that was the sound of the BRIC bubble popping.
The acronym stands for Brazil-Russia-India-China. Coined by economist Jim O’Neill of Goldman Sachs, it symbolizes the rise of once-poor countries (“emerging markets”) into economic powerhouses. More recently, the message has been: The rapid expansion of emerging-market countries will help rescue Europe, the United States and Japan — the “old world” — from their economic turmoil. The BRICs will prop up the global demand for industrial goods and commodities (oil, foodstuffs, metals).
For a while, the prospect seemed plausible. During the 2007-09 financial crisis, some BRIC countries — China, most notably — adopted large stimulus programs, and others just grew rapidly. In 2010, China’s economy expanded 10.4 percent, India’s 10.1 percent and Brazil’s 7.5 percent. Today’s outlook is more muted. In 2012, China will grow 7.8 percent, India 4.9 percent and Brazil 1.5 percent, according to the latest projections from the International Monetary Fund (IMF). Although the IMF predicts slight pickups in 2013, some economists forecast further declines.
True, Americans would celebrate China’s and India’s growth rates; in 2012, the U.S. economy will grow only about 2 percent. But comparisons are misleading because China and India still benefit from economic “catch-up.” They’re poor countries that can expand rapidly by raising workers’ skills and adopting technologies and management practices pioneered elsewhere.
Every decade produces a powerful economic idea that captivates popular imagination, argues Ruchir Sharma of Morgan Stanley. In the 1980s, the idea was that Japan would dominate the world economically; in the 1990s, it was that the Internet was the greatest innovation since the printing press; and in the 2000s, it’s been the inevitability of the BRICs’ economic advance. These are intellectual bubbles; sooner or later, reality pricks them.
In his prescient book Breakout Nations: In Pursuit of the Next Economic Miracles, Sharma does this for the BRIC bubble. He writes: “The perception that the growth game had suddenly become easy — that everyone could be a winner — is built on the unique results of the last decade, when virtually all emerging markets did grow together.”
In reality, the early 2000s were simply an old-fashioned boom. China’s rapid growth fueled demand for raw materials (oil, grains, minerals) that raised prices and enriched producers, including Brazil and Russia. Easy credit in the United States, Europe and Japan encouraged money flows into other developing countries, where interest rates and returns seemed higher. In 2007, the boom’s peak year, about 60 percent of the world’s 183 countries grew at 5 percent or better, notes Sharma. Only three countries (Fiji, Zimbabwe and the Republic of Congo) didn’t grow at all.
When the boom collapsed, countries rediscovered that achieving rapid economic growth is neither easy nor automatic. It encounters political, cultural, financial and geopolitical (wars, terrorism) obstacles. Some countries overcome the obstacles; some don’t.
As opportunities for economic catch-up shrink, growth also subsides. Sharma thinks China’s average annual growth will fall to a 6 percent to 7 percent range. He’s also skeptical of Brazil. Without the commodity boom, Brazilian growth may be mired at 2 percent to 3 percent. He thinks government spending (about 40 percent of the economy) is too high, and investment in roads and other infrastructure is too low.
“No wonder it takes two to three days for trucks to get into the port of Sao Paulo,” he writes.
India faces comparable problems. Some reflect the hangover from the recent boom. “India has among the world’s highest inflation rates — at or close to double-digits,” says economist Arvind Subramanian of the Peterson Institute. “The budget deficit is around 10 percent of the economy. Investor confidence has slumped.” To spur growth, the government is trimming subsidies and has liberalized foreign investment in retailing, airlines, broadcasting and power generation.
Everywhere, the global economy is weak or weakening. After the election, the United States faces the “fiscal cliff” — tax increases and spending cuts that together would administer about a 4 percent blow to the economy. Europe’s struggle to preserve the euro founders. Skeptical financial markets impose high interest rates on precisely the countries (Spain, Italy) most needing lower rates to ease their debt burden and revive their depressed economies.
Against this dismal backdrop, it was tempting to think that resilient BRICs would act as a shock absorber. They would buy more European and American exports; they would send more tourists to Disney World and the Eiffel Tower. This would provide the old world more time to make adjustments.
Just the opposite occurred. The weakness of advanced economies transmitted itself, through export markets, to the BRICs. The world economy is truly interconnected. What was hoped would happen was wishful thinking.
Samuelson is a Washington Post columnist.