The BRICS countries are having their summit in South Africa this week, and the early news raises questions for some. China and Brazil announced an agreement to swap their currencies, if needed, in case of some global crisis, to facilitate continued bilateral trade. Is this an important indicator of a declining U.S. role in the global economy? And does the rise of the BRICS group portend some waning of overall U.S. economic pre-eminence?
The answer to both questions is no. The swap arrangement is symbolic, the sort of gesture that enhances awareness of the two nations’ growing strength and plays well to domestic audiences. But it is not likely to be used in the foreseeable future. Furthermore, the global economy is not a zero-sum game. Economic growth in other countries does not make us poorer. Indeed, it is better for us that there is less poverty in once-destitute nations.
This does not mean, however, that the rise of BRICS has no significance. But their rise needs to be taken in context.
Start with whom they are. The acronym was coined in 2001 by Goldman Sachs economist Jim O’Neill to describe four rapidly developing countries, Brazil, Russia, India and China. He argues that taken together, these four countries would soon have an economy larger than that of any individual nation, including the United States, and that they would be an economic force to be reckoned with. The four countries cover 25 percent of the world’s land area and have 40 percent of its population.
O’Neill did not predict or advocate that the four form any sort of political or economic alliance, but they did choose to begin regular meetings, starting in 2009. Since South Africa was subsequently added, for political reasons rather than its economic importance, the fifth such meeting is being held in Johannesburg.
Some commentators made sweeping predictions about how soon and how greatly BRICS countries would take a major role in the global economy. While some are, in fact, growing or have grown strongly, all have major structural problems. And their political and economic systems and interests are so disparate that it is hard to imagine them functioning as any sort of consistent bloc.
Start with South Africa, the least important, with an economy that makes up less than 2 percent of the total GDP of the five. Yes, it is resource-rich and the largest economy in Africa. It does have the most sophisticated manufacturing and financial sectors. But two decades after its transition to black-majority rule, its political problems remain deep. Income distribution actually has become more unequal, and social tensions simmer. It is in the group only to give Africa token participation.
Brazil in many ways has the fewest problems of the five. Nearing 30 years of civilian rule, it is an increasingly mature democracy. Its natural resources are vast, its population hard-working and entrepreneurial, its engineering, manufacturing and financial sectors world-class. It is an agricultural powerhouse, both in crops and livestock. There are problems in the judiciary, but the rule of law prevails, particularly in finance and commerce. Corruption is a problem but is diminishing, and it has the lowest level of political and economic corruption of the five. Over the past 20 years, it has accomplished great reductions in poverty.
However, it has some of the same problems of inadequate infrastructure that bedeviled it when I first went to live there 44 years ago. Education is weak.
There still is excessive petty regulation of business. Tax levels remain high and regressive. Savings rates remain chronically low and the cost of credit to businesses high. Monopolistic sectors still have great political power. There are many public employees with overall low productivity. Growth over the past decade was driven largely by strong demand for minerals and agricultural products globally, but especially driven by China.
Russia is resource-rich but seems to be receding rather than advancing. It is largely “Saudi Arabia with trees,” as the jest goes. Vladimir Putin is taking it backwards politically and economically. It has virtually no world-class corporations and its large enterprises, such as Gazprom, remain sclerotic. Its leaders’ dreams of remaining a global superpower with state-of-the-art military hardware drain resources.
India has a vigorous democracy and a legal system that could afford a splendid rule of law. After spurning the assumption of being limited to the “Hindu rate of growth” that prevailed for the first four decades after independence, its economy has grown greatly. It has many well educated people who speak English, an advantage in today’s global economy. Its information technology, engineering, medical and pharmaceutical capacities are strong.
It also has the most extreme poverty of the five and has done the poorest job in terms of broadly improving education and health. Bureaucratic constraints and local corruption are severe. There are high barriers to trade and foreign direct investment. Ethnic and regional tensions are high and military tensions with Pakistan are chronic.
And then there is China, both the greatest economic success story of the five and the one that perhaps faces the greatest structural challenges going forward. Key economic sectors are increasingly sophisticated. Merchandise exports and foreign-exchange reserves are huge.
Education is relatively good at all levels and university-level science and engineering education increasingly strong. There is an extremely high savings rate and a high level of investment in new infrastructure.
But despite free-wheeling capitalism in some sectors, China in many ways remains the most communistic nation in the world, save North Korea, both in its political system and its economic central planning. Much investment in housing is increasingly wasteful.
State-directed credit allocation is inefficient and a backlog of bad loans is building up. China’s economy still is directed too much toward investment and not enough toward consumption. There is no clear way forward in terms of democratization. The rule of law is largely absent and property and civil rights, particularly of the poor, are commonly trampled on. Popular unrest is growing, particularly in inland rural areas.
So why is cooperation among these nations not an important threat to the United States or Europe? And what are the purposes of the new currency swap arrangements? This must wait until the Sunday column.