Recent figures have shown that the trade from developing country to developing country (South-South) has now exceeded developing country to developed country (South-North) – see chart from The Economist. The World Bank reported that in 2002 developing countries bought only 40% of total developing country exports with the remainder going to developed nations. According to the World Bank this figure is over 50% today but is not surprising when you consider the following:
- Developing countries have been growing at fast rates
- Between 1991 – 2011 developing countries share of world trade doubled from 16%-32%
- Developing countries have also been major borrowers
- Developing countries have had major foreign investment especially BRIC countries
- As developed nations struggle in the aftermath of the GFC developing countries have taken over more of their export markets.
But there is still a lot of interdependence – developed countries are of great importance to developing nations. The Euro crisis has had an effect on trade to and from developing countries and although trade between developed countries has increased it has been that with developing countries that has grown considerably greater.
With the CIE A2 Paper 4 exam approaching I thought it would be useful to update what is happening in the BRIC countries – remember developing countries is a popular area that is examined. I was very fortunate to attend the Tutor2u 10th Anniversary Conference in June this year where one of the keynote speakers was Jim O’Neill of Goldman Sachs who coined the acronym in a 2001 paper entitled “Building Better Global Economic BRICs”.
The BRIC’s are struggling hard to ease policies and maintain economic growth in the face of a slowing global economy not of their own making. Although you might think that these rates are high in a developed nation for these 4 developing countries growth rates need to be maintained at much higher levels in order to keep apace with the factors of production that are coming on stream.
One of the reasons for the slowdown is the economic situation in Europe and the downturn on the USA followed by their own uncertainty associated with the coming fiscal cliff. There are also consequences of the BRIC slowdown are on the commodity market. BRIC countries were the reason behind the economic growth in the past decade, which meant they had a great affect on commodity prices. As economic growth decelerates rapidly in these countries, so does energy and commodity demand. Downward pressure on oil prices and other key commodities, such as copper, are likely to continue until one can be sure that the growth trend in the emerging market countries is moving higher again. We are not at that stage yet. BRIC nations, in their own
Other reasons for the growth slowdown is the ever worsening economic situation in Europe, followed closely by the general lack of economic leadership and market confidence coming from the aging industrial countries. One cannot, however, lay all of the economic challenges in the BRIC countries at the doorstep of Europe’s debt crisis and the massive policy uncertainty associated with the coming fiscal cliff in the US.
BRIC currencies represent high-risk, high- return carry trades, due to the near-zero level of interest rates in the U.S., Europe and Japan compared to the much high rates in the emerging market world. When BRIC currencies start to appreciate it will be a sign of confirmation of two important new trends.
1. A necessary, but not sufficient, condition for BRIC currency appreciation is that the global deleveraging process is abating.
2. To complete the scenario, economic growth and the ability to attract capital needs to return to the BRICs.
Source CME Group Market Insights – 25th July 2012
BRIC’s in 2011 – Source: The Economist – 29th Sept 2012
HSBC produced a very good report in which it seeked to identify the Top 100 economies by size. The ranking is based on an economy’s current level of development and the factors that will determine whether it has the potential to catch up with more developed nations. These fundamentals include current income per capita, rule of law, democracy, education levels and demographic change, allowing us to project forward GDP to 2050. They came up with the following findings:
1. The striking rise of the Philippines, which is set to become the world’s sixteenth-largest economy, up 27 places from today.
2. Peru could sustain average growth of 5.5% for four decades and jump 20 places to twenty-sixth. Chile is another star performer in Latin America.
3. Massive demographic change: in 2050 there will be almost as many people in Nigeria as in the United States, and Ethiopia will have twice as many people as projected in the UK or Germany. The population of many African countries will double. Pakistan will have the sixth-largest population in the world. Even if some of these countries remain relatively poor on a per-capita basis, they could see a dramatic increase in the size of their economies thanks to population growth.
4. By contrast, the Japanese working population looks set to contract by 37% and the Russian one by 31%. The eurozone faces similar problems with working population declines of 29% in Germany, 24% in Portugal, 23% in Italy and 11% in Spain, adding a whole new perspective to the sovereign debt crisis.
5. It is not just about population. Ukraine is set to jump 19 places to fortieth because of its education system and rule of law, even though its population is set to fall to 36m from 45m.
6. We divide the Top 100 into three categories: 1) fast growth – with expected average annual growth of more than 5%; 2) growth – with expected annual growth of between 3% and 5%; and 3) stable – those countries expected to expand less than 3% a year.
7. We identify 26 fast-growth countries. They share a very low level of development but have made great progress in improving fundamentals. As they open themselves to the technology available elsewhere, they should enjoy many years of ‘copy and paste’ growth ahead. Besides China, India, the Philippines and Malaysia, this category includes Bangladesh, the central Asian countries of Uzbekistan, Kazakhstan and Turkmenistan, Peru and Ecuador in Latin America, and Egypt and Jordan in the Middle East.
8. The growth category extends to 43 countries. It includes 11 Latin American countries such as Brazil, Argentina, Chile, El Salvador, Costa Rica and the Dominican Republic; Turkey, Romania and the Czech Republic in central and eastern Europe; as well as the war-ravaged Iraq and Yemen.
9. Africa will finally start to emerge from economic obscurity. Five of our fast-growth countries come from Sub-Saharan Africa and three are in the growth category.
10. Most of the economies in our ‘stable’ group are in the developed world. The West is not getting poorer, but high levels of income per capita and weak demographics will limit growth. It is the small-population, ageing economies in Europe that are the big relative losers, seeing the biggest moves down the table.
11. Our Top 30 list changes slightly. Our forecasts for the countries considered in the original document have not changed, but after expanding the pool of countries considered, Peru, the Philippines and Pakistan leapfrog into the Top 30. Pakistan makes it into the top league, less because of individual prosperity, than because of population size.
12.This research strengthens the conclusions of the original report, which found that 19 of the top 30 economies will be countries that are currently ‘emerging’. Our update shows that it is not just the likes of China and India that will be powering global growth over the next four decades. Countries as varied as Nigeria, Peru and the Philippines will also be playing a significant part.
Steve Fritzinger, on the BBC Business Daily programme, gave an interesting insight into how just about every financial journalist has made some comparison of the present day crisis to that of the Great Depression in 1929. He referred to a short paper by Stephen Davies of the Insitute of Economic Affairs entitled “Are we Looking at the Wrong Depression?” It compares the current crisis with that of the “Long Depression” that gripped the US and Europe from 1873 to 1879 and suggests that policymakers are applying the wrong policies and making things worse.
Dangers of comparing current crisis to just 1929 onwards
He stated that focusing on one economic downturn – 1929 – which has its limitations in that:
- Interventions didn’t stimulate aggregate demand
- Governments tried raising taxes and tariffs and employing people on huge public works projects to no avail
- Deficit-financed spending didn’t work
- Currency manipulation had little affect
- Regulation of banks and industry – ineffective
Despite all of the above the Great Depression continued for over a decade.
The “Long Depression” – is this more comparable?
This happened between 1873 to 1879 and was triggered by a global financial panic which caused speculative markets like the railroads and real estate to burst. What followed was 30 years of deflation in most parts of the world. With agricultural prices collapsing there was a large movement of labour from the poorer parts of the world to those more affluent like UK, Europe, and the US. Although there was a sigificant slowdown in growth between 1873 and 1896 there wasn’t the exceptional reduction in GDP after 1930.
What Stephen Davies did allude to was the fact that profitable inventions in the late 18th century and the early 19th century has used up their capacity to raise productivity and growth by the 1860’s. This led to poor investment and a large build up of debt by the early 1870’s in both Europe and the United States. What followed was the reality that a lot of investments were not going to be profitable and as a consequence a process of deleveraging followed. However around this time there was an increase in technological and organisational innovation. This increased productivity and and created many new products but also led to large adjustments as older industries and forms of employment shrank, prompting a movement of labour. What is also noteworthy is that there was a shift away from the established economies – UK and France – towards those that were developing namely Germany, US, Japan. Stephen Davies asks are we going through this same transformation with the decline of the US and many EU countries and the rise of the BRIC countries. It seems that an exhaustion of profitable investment opportunity in countries leading to an artifiically stimulated bubble the bursting of which has triggered sustained deleveraging and a decline in GDP in many parts of the world.
The Economist recently had a special report on “State Capitalism” and although it is a long read here are some prevalent points which could be used in AS or A2 essays especially in the discussion parts of questions.
Basically state capitalism attempts to combine the control of the state with the potential of capitalist system. It relies on the government to select and fund organisations which it sees as potential successes and uses the capitalist toolbox of raising finance through the stockmarket and adopt globalisation. Historically this was type of system was evident in Japan in the post WWII period as it started to rebuild its economy. However one only needs to look at China to see the success of state capitalism – over the past 30 years its economy has:
- grown on averge 9.5%
- international trade has grown by 18% in volume terms
- GDP has more trebled in the last 10 years to $11 trillion
- it has over taken Japan as the second largest economy
- it has over taken the US as the world’s biggest market for consumer goods
A key point in these achievements is that the Chinese government is the biggest shareholder in the country’s 150 biggest companies and manages and incentivises thousands more.
State capitalism is also very prevalent in big firms. The 13 biggest oil firms which supply 75% of all oil reserves as state backed. Some other examples from The Economist include:
- Gazprom – biggest natural gas company
- China Mobile – has 600m customers
- Saudi Basic Industries – world’s most profitable chemical company
- Sberbank – Russian Bank and 3rd largest in Europe by market capitalisation
- Dubai Ports – third largest port in the world by volume
- Emirates – airline that is growing at 20% a year.
On stockmarkets State companies are also very prevalent – see graph below:
- 80% of stockmarket in China
- 62% of stockmarket in Russia
- 38% of stockmarket in Brazil
Remember the above are very much emerging economies and make up 3 of the countries in the BRIC group. Also the Crysler building in New York is owned by Abu Dhabi and Manchester City football club is now owned by Qatar. The Chinese have a phrase “The State advances whilst the private sector retreats”
10 years ago Jim O’Neill of Goldman Sachs coined the acronym BRIC – Brazil, Russia, India, China. This group of countries were seen as the emerging economic superpowers. However a new group of countries is now challenging their presence in the world economy – CIVETS.
Columbia – Indonesia – Vietnam – Egypt – Turkey – South Africa
Columbia – Already a key target for foreign investment thanks to a pro-business government and a wide variety of industries beyond oil and natural resources. 2010 growth: 4.3%
Indonesia – The primary attraction of the world’s fourth most populous country is “a vast pool of educated manpower, giving it the lowest unit labour costs in Asia”, says HSBS. 2010 growth: 6.1%
Vietnam – It’s also targeted as a potentially profitable new manufacturing hub, though there are concerns the economy and banking system may be vulnerable to shocks. 2010 growth: 6.8%
Egypt – If the political unrest abates, it could become a key trading hub linking Europe and Africa. 2010 growth: 5.1%
Turkey – A decade of political and economic reform is beginning to pay dividends in Turkey’s services-dominated economy. 2010 growth: 8.2%
South Africa – Foreign investors have long been attracted to South Africa’s rich resources, but there are concerns about unemployment, political stability and growth. 2010 growth: 2.8%
Source: The Week – 26th November 2011