BRICS – From Hallowed to Abused in 2016
Around four years back, on my first real news reporting mission, the then rookie but fervent correspondent was designated to cover an event in Jaipur, Rajasthan where Ruchir Sharma, Head of Emerging Markets Equity and Global Macro at Morgan Stanley Investment Management, was scheduled to present his economic views on developing markets and the then much talked about bloc of emerging economies – Brazil, Russia, India, China and South Africa (BRICS).
The man, widely known for his honest but critical views on the BRICS, often complained during those days that his notions get consistently misconstrued. Even his then freshly released book “Breakout Nations” was inviting criticism from the conscience keepers of the developing world for plethora of reasons – some warranted others unwarranted.
Comfortably seated in the front row I began listening to what Sharma had to articulate that cheery afternoon. He began the session with tidily combined views on emerging markets. It was all plain talk for me until his arguments converged upon the BRICS angle. He was vociferous in his opinion that the BRCIS, mainly due to China, astoundingly indeed, will soon run out of “growth drivers.”
He pointed out to his latest authored book and his article in New York Times (2012) where had rationally argued that China (the main driver of BRICS family) bulls are too sanguinely defined, and in factual case, can’t protract growth rate of 8 percent, ad infinitum.
I was one of those that absolutely discarded the validation, since the BRICS had in recent times defined India’s clout in the international arena in a novel way, and we all assumed the model is not only unblemished but unmatchable. For someone lamenting its future, so premature, would only draw brickbats from us.
Conversely, Sharma appears to have had the last laugh now. Whatever transpired lately, mostly off-putting for the BRICS – devaluation of Brazil’s credit rating to junk status in September 2015, crash of commodity cycle hampering prospects of Russia, stagnancy in Chinese economy, devaluation of yuan posing negative impact on the global economy (India included) and South Africa on brink of recession – has appeared to squash the fairy tale that was technically grouped (without South Africa since it joined in 2010) in 2001 by British economist Jim O’Neil who anticipated their growing economic and political influence on the world economy.
Sharma had then declared the era of the BRICS to have ended, with China as exception, but now in 2016, the latter also appears to be on a slow downward trail with its Gross Domestic Product (GDP) shrinking sub-8 percent, and bourses facing new mayhem each trading day. India, indisputably, appears to be a healthy exception – but for how long?
Fall from Grace
BRICS – as of 2015, represents 3 billion people, 42 percent of the world population, combined nominal GDP of $16.039 trillion and an estimated $4 trillion in foreign reserves – that was once a threat to the developed nations finds its connotation vehemently debated after all these years.
But it was not such a few years back when in almost every conference panel, discussing world economy, the coveted club was a regular buzzword and found common mention.
Just after the Lehman crisis, a majority of developed economies bogged down by colossal debts, costly welfare mechanisms, and ageing population were largely seen inept to lead the world any longer. The emerging economies with huge working populations were seen as new alternative, where every potential investor wanted a slice of action.
All went well until oil-price-collapse and bust in commodity cycle hit the world. Additionally, sanctions imposed on Russia after its alleged misadventures in Ukraine, Brazilian economy slipping into recession and China missing its growth targets further fueled its slow collapse. India appears to be the only flickering hope for the bloc, at present.
In addition, all talks about the BRICS replacing the US have vanished into thin air. The illustrious testimonial – When US sneezes the world catches cold – still holds true considering the latest 0.25 bps (one basis point (bps) is equivalent to 0.01 percent) hike in interest rates by the Fed that reflected negatively in the economies of all the emerging markets including the nations in the BRICS. This clearly shows it’s still time to replace the US from the chair of the global leader.
Fissures in the Foundation
All was not well since the concept of the BRICS was materialized. The early stakeholders – Brazil, Russia, India and China – observed several disparities among themselves. For instance, China, the leader in the pack was way ahead with economic output almost double that of the rest pooled in the pack. The argument gathers further substantiation from the fact that South Africa (joined the club in 2010) was almost 30 times less in economic valuation than China alone.
Let alone economic discrepancy, all the nations in the club observe very distinct governance models – be it China’s one-party rule, India’s vibrant democracy, Russia’s proscriptive model of governance and Brazil’s welfare state democratic set-up.
Then there exists perennial bilateral disputes including a territorial disagreement between India and China. Even India’s bid for the UN Security Council has attracted relatively feeble backing from China and Russia (both permanent members) in comparison to its other allies.
The New Development Bank (NDB), formerly referred to as the BRICS Development Bank, was launched in Shanghai, in July 2015. Though the bloc believes it will soon challenge the long-standing authority of the World Bank or the International Monetary Fund (IMF), the critics think otherwise.
Among various views, Jim O’Neill’s theory that: this bank is only a “low-risk rehearsal” for China that intends to man the global leadership role at the IMF, the World Bank and the United Nations (UN) soon: holds extensive basis.
Although bank offers enormous benefits to the participant nations either due to position or size, there is a section of economists that believes the financial institution is a mere jack to serve Chinese interests in the energy rich African Continent. It’s not long before confrontation develops in this regard as well.
In addition, the newest challenges in form of stock-market turmoil and currency devaluation in China, sizable contraction in Brazilian and Russian economies in wake of busting commodity cycle and slowing of growth in South Africa have further aggravated problem. Though India maintains a relatively strong economy, inability of Narendra Modi-led government to effect important reforms is not going down too well with foreign investors.
Considering the recent gloomy scenario, Ruchir Sharma’s long held belief: “The Brics never were and never will be an economic miracle” turns true, against all optimistic souls including me that are still waiting for a miracle to occur.