Table of Contents
More than 10 years ago, no one, including the initiator of the meeting of the BRICS leaders, did not suppose that an abbreviation proposed by Jim O’Neill would appear as something else than just new emerging countries. Nowadays, BRICS, on the one hand, will exceed “G7” in terms of their economies in a long-term period and, on the other hand, are currently interesting for businesses of G7.
Moreover, the acronym itself was just a marketing tool designed only to promote the intellectual product to American businesspeople. According to its creators, the choice of countries included in BRICS was carried out on random euphony in a combination of letters.
The project was launched in the 2000s and turned into a block of four and later five states united by the idea of reforming the modern system of international relationships and economic decision-making. It seems strange that countries so different in terms of political, ideological, economic, demographic, and military characteristics have grouped together, but the project has actually benefited them.
The current paper analyzes core factors of BRICS countries that have resulted in their competitive position in the world economic arena. The research paper also examines whether the key to prosperity lays in an enormous amount of natural resources and human capital or whether it is an ideal balance between regulatory policy and private sector stimulation. In addition, it evaluates further challenges for these countries and proposes some ways to face them adequately.
BRICS in Brief
During the last decade, BRICS has been enforcing economic cooperation with developed and developing countries due to its financial and technical growth.
Nowadays, among the group of other developing countries, BRICS plays a crucial role in the world economy.
Three main aspects are underlining the relevance of BRIC as protagonists in development cooperation:
- The outstanding size of their economies,
- Strong growth rates, leading to increasing significance in world economy, and
- The demand for a stronger political voice in international governance structures, which corresponds to their economic status. (as cited in De Morozan, Knoke, Knoblauch, & Schafer, 2012)
In order to understand how BRICS countries have become growth markets in the world economy, it is necessary to conduct analysis of the influence of all factors during recent historical processes. First, it is worth mentioning that in terms of demographics BRICS holds substantial population, including two of the most populated countries in the world. China has one-fifth of the world’s population, being followed by India (18%), Brazil (2.9%), and Russia (2.2%).
De Almeida (2009) estimated:
Despite their large territories – Russia’s 17 million km2, India’s 3.2 million km2, China’s 9.3 million km2 and Brazil’s 8.5 million km2 –, the Brics differ from each other in terms of natural resources, level of industrialization and impact on the global economy. In order to be accurate about each country’s actual weight in the world, we should perhaps change the acronym to CIRB. (p. 1)
Despite the fact that all the members were culturally and politically different, they all understood that this union would help its members to grow faster. Each member had its exceptional advantages, which could be effectively used for economic growth. Brazil is rich in such resources as sugar cane, iron ore, crude oil, and coffee with almost 60 million hectares of cultivated land. Russia is known for its deposits of oil, natural gas, and other minerals. India is an outsourcing provider with a big amount of different services and China is the world’s largest manufacturer with low wages and skilled workforce. South Africa is the main Africa’s electricity supplier and the largest producer of various metals like manganese, platinum, and chromium.
The main showcase area for Brazil was agriculture. Due to its development in the agricultural area, Brazil has transformed from an importer of grain to the world’s exporter of food. This transformation has happened because of extension of cultivated territories in the region of Cerrado where there was good acid soil concentration with a low level of phosphor and nitrogen. Embrapa organization created by the Brazilian government to conduct researches in the agricultural sphere has made the territory of the Cerrado region appropriate for agricultural cultures as well as for livestock farming. It has implemented, inter alia, acidity correction technologies by pouring industrial quantities of lime to improve soil quality for breed feeding and soybeans. Today, the Cerrado region covers more than 70% of the agricultural output of the country. Over 20-25 tons of grass grow there and are used for cattle feeding.
A mix of agricultural development and private sector stimulation has fostered strong growth during the last ten years in Brazil.
China opened its economy to the external world in 1978 and received labor-intensive FDI. Later, in the 90s, China began its cooperation with similar economies and survived the Asian economic crisis. Due to positive changes in the FDI policy framework, China has turned out to be an investment “hot spot”. Immense flows of direct investment to the China’s economy amount to more than 1 trillion dollars in total. It has created a huge internal volume of international currency and has further helped China to strengthen its global economic position after the financial crisis of 2009.
FDI has also attracted all types of international professionals to the country, which have made their contribution to technological, financial, and managerial experience. As China was speeding up towards economic development and globalization, many investors started to have a substantial income. The other core characteristic of the Chinese investment program was that the government stimulated investments in non-competitive sectors: agricultural, forestry, and social-houses construction. The infrastructure of China was badly developed so that foreign investments were also directed to infrastructural projects rather than the financial sector.
The Chinese government has conducted the policy of balance between fiscal and monetary instruments of economy regulation and due to that the banking system has had a push towards increasing its market value. Reforms in shareholding and corporate governance have had a significant impact on banking of China. Nowadays, 84 banks of China are in the list of 1,000 biggest banks in the world and the ICBC bank is the bank with the biggest market value.
The government has paid attention to stock markets and has thus improved bond and equity market infrastructure, as well as currency brokerage. Optimization of the legal system has minimized the possibility and the desire of market participants to break the rules of trade. Moreover, the whole market safety has been increased, which has decreased special risks for investors and guaranteed the clarity of market deals. The course of opening the economy for the external world has created a unique opportunity for China to develop and prosper.
The main key to the prosperity of India lays in its home-private entrepreneurship. During the last decade, over 115 million of small businesses have been created and they are now united into highly specialized clusters. Along with the activity of MGNREGA organization, this trend has helped to solve the core problem of the India’s economy, which is unemployment. Each person in India can work at least 100 days with a minimum salary and more than 43 million households have a temporary employment. Such change has helped to raise living standards and has kick-started the era of low-cost innovations such as annual water filters for 65 cents and on the like. Deregulation and liberalization in the spheres of telecommunications and capital management have increased the FDI rate, which has grown to a level of 48 billion dollars of investment into the IT sector. Due to this, India has become the main outsourcer of telecom services and has brought world fame to such companies as Tata, HCC, etc. However, Indian companies have also invested abroad in order to invade the foreign market. Thus, the outwards FDI has reached 13 billion dollars spent on M&A deals.
External debt management has also played a crucial role in the rise of Indian economy. First, the debt-to-GDP ratio has decreased because of intensive money interflows. Second, the External Debt Monitoring Unit, a special commission for external debt regulation, has controlled the level of money borrowings by residents and supervised whether money is invested into the target sector. In 2008-2009, its program helped to avoid a significant recession, providing the policy for management of the payment balance (“The BRICS report: A study of Brazil, Russia, India, China and South Africa with special focus on synergies and complementarities,” 2012).
In total, wise deregulation in the spheres of finance and law has given a push towards further economic integration and improvement of the internal business environment. These positive changes have turned India from a third-world country into a prospective rival of main world economies.
The scenario for South Africa’s development and growth is quite similar to the India’s one. Strict tax collection policy, reform in financial liberalization, and extreme external debt management have been conducted. In the 1990s, a deep external debt crisis was defeated by an effective tax collection system thanks to which a strong inclusive growth of economy stimulated creation of new infrastructure projects, social services, etc.
In addition, a substantial impact has been made by the bond market. Bid-holders have started to change illiquid bonds into the larger ones with a low coupon. It has significantly reduced the debt by increasing annual turnover of the bond market to R28 trillion and it has improved methods of debt-size evaluation.
Borrowings from abroad in a foreign currency have been limited to 20% of the total debt volume in order to stabilize the currency market and control the debt gap. The government of South Africa has provided the policy of private investment into large social projects that provide water access, build homes for poor people, and create new jobs.
To attract foreign investment to the national economy, the inflation-targeting policy has been conducted. Thus, 6.3% of the inflation rate was achieved in 2010, which guaranteed a low level of market volatility and secured investment projects against local currency instability.
The strategy of inclusive growth has been based on the strong financial sector. Fundamental changes include improved regulatory framework, credit legislative basis, conservative risk management, and limited exposure to foreign assets.
Evidently, in the 1990s South Africa also had a badly developed social area and, thus, the government had to fight poverty and unemployment. So-called Public Works Programs were created to provide job seekers with free trainings, internships, and certification courses. It has helped not only to improve living standards, but also to increase success of technical facilities. The problem with unemployment has been solved by subsiding export-oriented industries and diversifying value-added production.
The Russian growth strategy does not seem to be deep and innovative. After a hard recession in 1991-2001, reforms in budgeting and monetary policy were to be made. Thus, the first step was decentralization of administrative boards in order to gain more control of capital flows inside the country. The high rate of the budget deficit had to be lowered down and decentralization was the key. The inflation rate decreased from 85% in 1998 to 8.8 in 2009. The government has set an aim to reach the zero budget deficit in 2015, but now this aim seems to be unreal due to sanctions and international isolation of Russia.
There are more than 36% of pensioners in Russia, thus explaining pension reforms introduced in 2003-2013, which has significantly improved living conditions and stimulated a new wave of consumer demand for basic goods.
A huge role in market regulation has been played by the Stabilization Fund. It helped the Russian economy to survive during the world financial crisis and surpass the -0.25% of economic growth in 2009. The main funds of this regulator were formed by so-called oil-dollars that were effectively used to stabilize the currency exchange rate or deficit of the trade balance.
Moreover, the policy of anti-dollarization of the economy has been implemented. All operations are restricted to be made in the national currency rouble to reduce dollar influence on the unstable economy. This step has been the core one in the Russian monetary policy. In addition, the government has intended to attract private investment to the social sector, liberalize the exchange rate by making it more flexible, and provide wide macroeconomic regulation. De Almeida (2009) says that “Russia reconverted to Mafia-style capitalism in the 1990’s and became more of an energy raw-material supplier than an active player in the global economy” (p. 155).
Until the last year, Russian international position was strengthening, especially due to the CIS development, but because of the war conflict the country has been recently supporting in Ukraine, prospects of its further development are extremely small. Substantial price decrease of BRENT oil and economic sanctions can kill Russian economy in 2-4 years and it can dive into the Mafia period once again.
Thus, one can make a conclusion that BRICS countries have spent approximately two decades on transforming themselves from third-world countries into real competitors of world economy leaders.
Nevertheless, challenges are still present with respect to economic and political growth of these countries. Rapid growth of these countries has been primarily based on their substantial natural resources (Saran, Singh, & Sharan, 2013). In the near future, according to the UN reports, extensive usage of natural resources reserves will affect greatly the environment and will push the economies back because of financial treatment of these problems. In addition, the strategy of extensive resource usage is not up-to-date in the 21st century when services and the IT sector generate more revenues than the industry. As a result, the governance system of the climate change policy must be reviewed and updated to account for new circumstances.
According to The Centre for the Study of Governance Innovation (2011):
Twenty-first century demands a fundamental shift toward decentralization and more efficient transport. Microgrids and off-the-grid solutions could provide much-needed energy independence to hundreds of millions of people in the developing world, including the BRICS. Technological advances in the field of 3D printing and open-source hardware, which allow individuals to design and produce their own artifacts (and sell them locally), hold the potential to reorganize the current industrial system into a network of local small-scale producers, where innovation and creativity (rather than mass productivity and low cost) are the drivers of growth. (p. 18)
Moreover, there are some threats for this union from the Russian side. As Russia is a serious trade partner of all members, sanctions and world isolation of this country can have a detrimental influence on its purchasing ability and, thus, trade balances can suffer a deficit. The Russian economy would probably try to substitute import with internal production and, in case of ineffective management, consequences would be even worse. Russian instability and, what is more important, unpredictability can make BRICS lose their positions in the world economy arena and further two-three years will be spent on recovering and reaching previous results.
BRICS is a union of “other” economies with peculiar features and prospects and its potential lays in their resources and giant markets with China being ahead of the rest. BRICS is a significant threat for current world leading countries. The countries have showed substantial growth within the last decade. This could be explained with effective transformation processes in the field of the FDI, banking and financial sectors, as well as infrastructural projects. Deregulation of markets and the private sector has created a runway for the BRICS economies.
Even though the competitiveness index of BRICS is at the stage of significant growth, future challenges may slow it down. These countries have to use their natural resources not in an extensive way, but rather create a long-term plan of their usage and further distribution between other economic players. Moreover, new infrastructural projects need a lot of energy in addition to investments, which can cause a new problem. Production of electricity pollutes the atmosphere and influences the environment. This is already evident in big cities of China where it is impossible to breathe freely and the sky is always gray because of smoke.
The common political vector of BRICS will lead it to new positions on the global economic and political arena, making its opinion a significant part of the world’s decision-making process.