Thursday, July 9, 2009

Economic overview of BRIC countries

Here is an overview of the economic performance of the BRIC countries (Brazil, Russia, India & China) in the current global crisis. This should give us an idea of the economic health and future outlook of the world's leading emerging markets. Keeping an eye on these four economies is especially important considering the share of world GDP that they account for (close to 15%.) Since Goldman Sachs economist Jim O'neill coined the term 'BRIC' a few years back, the world has been waiting and watching to see if the big four will live up to the expectations thrust upon their shoulders by international investors and companies looking to take advantage of profit opportunites.


Growth pulled back from an extraordinary 13% in 2007 to 9% in 2008. This was the lowest rate since 2002. The IMF projects growth to slow to 6.5% in 2009 before picking up again to 7.5% next year.

China's heavy reliance on export-led development made it especially vulnerable to the contraction in global demand. Fortunately, the government had saved much of its revenue in foreign exchange reserves (exceeding US $2 trillion at one point) and was able to respond with massive liquidity injections into the economy to offset the large drop in exports.

In the absence of significant aggregate demand recovery in developing countries - especially the U.S. - China is reconsidering its export-led growth strategy and looking to stimulate domestic consumer demand. But as previously touched upon here and here, the problem for Chinese planners is not simply one of fiscal and monetary policy. It is a social policy problem. How to change the 'culture of thrift' among the masses and turn them into spending machines. China's tumultuous contemporary history has forced many Chinese to follow a rigid doctrine of 'work hard' and 'save your shiny penny for the rainy day'. Changing society's risk-averse spending habits will not be an easy task.


The IMF predicts the Indian economy will slow its growth to 4.5% for 2009 before picking up slightly to 5.6% for 2010. The Indian ruling party (Indian National Congress) has won a strong mandate to govern in the recent federal elections. This should ensure the Congress's ability to continue moving forward - albeit at a gradual and careful pace - with its liberalization and reform measures for the economy.

A growing Indian middle class is responsible for increased import demands which has increased the current account deficit. On the export side, India is majorly reliant on Chinese demand for primary resources such as steel and minerals to feed China's industrialization boom. India is well aware of its junior partner position with respect to China, this is a motivating reason pushing it to diversify its economic links with the outside world in order to offset China's increasing economic power.


The IMF predicts an economic contraction of -1.3% in 2009 before resuming growth at 2.2% in 2010. But Brazil is likely to make it out of the crisis in relatively good shape and without too much deterioration in its economic fundamentals. This is largely due to the government's fiscal prudence over the years, and its 'old fashioned' regulation policies which have kept banks in line and away from adventurism into risky waters of global finance. Exports have taken a hit like all countries, but much like China, government policies to stimulate the domestic economy have been quick and substantive. This has led to a deterioration in its fiscal position but should not be a cause of investor panic, if anything because most governments around the world are in the same boat.

Brazil has also been one of the most outspoken advocators of global financial coordination and reform of international institutions. It has used its relative position of strength amidst the recent global problems to push the case of developing countries for more democratic and equal decision-making power within international organizations.


Russia has undoubtedly been the hardest hit of the BRICs from the global crisis. The IMF predicts a -6.5% contraction in 2009, before growth picks up by 1.5% in 2010. Their are two main reasons for this large economic deterioration. First, Russian banks and companies were highly integrated into Western financial markets and as a result exposed to toxic assets. Secondly, the Russian government's primary source of revenue comes from exports of oil, which suffered large price drops on international markets.

The Russian government is trying to comfort its citizens and pledges that a repeat of the 1998 crisis, in which millions of Russian lost their life savings, will not be forthcoming. Russia's policy so far has been to focus on supporting banks and enterprises in need of financing by targeting those deemed most essential to the economic prosperity of the nation. The total amounts contributed as of April 2009 amounted to 6.7% of GDP - more than most G-20 government interventions so far.

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