Montrose Journal Winter 13
THE ORIGINAL BRICS: UNCERTAIN AS LEADERS, UNCONVINCING AS REFORMERS -JONATHAN FENBY
The BRIC concept is now a dozen years old. It has expanded with the addition of a final S – South Africa which in 2010 joined the originals brought together by Jim O’Neill, then of Goldman Sachs, in 2001. Leaders of the five nations hold annual summits and much time has been expended on discussing when and whether they will overtake the G7 developed nations and whether South Korea and Mexico should be added to swell the grouping further. What has been less addressed is the rather basic issue of what the acronym actually means in a world which has seen the four original participants evolving along specific paths during the present century while the new member has run into problems of its own.
The formulation was useful in identifying four countries which seemed, back then, to be part of a globe-changing trend – the transfer of economic weight from the old, rich world to up-and-coming nations with great potential and, it was believed, a vigour lacking in the old West and Japan. That re-weighting of the world economy has certainly been a feature of the past decade but it has not happened in an ordered manner and what we see now is the five economies set on very different trajectories. That is hardly surprising given the basic question which was obscured by the array of charts deployed by O’Neill and his investment bank colleagues.
First and fundamentally – what have the countries involved got in common? China is a cheap manufacturing powerhouse which lives off globalisation. India’s economy is domestically-focused. There is a sketchy similarity between Russia’s dependence on energy exports and Brazil’s sales abroad of iron ore and soft commodities of which China buys a lot. But long drawn-out negotiations for an obvious deal – Russia selling natural gas to China – drag on and on. Economic links between India and China have never lived up to the hopes at the turn of the century that the software skills of the first would dovetail with the hardware capability of the People’s Republic. As for South Africa, it exports hard commodities, indeed, but China’s expansion in Africa is hardly to its taste and President Zuma has called for a re-calibration of relations with Beijing while its relations with the other three are sketchy.
Politically, Brazil and India are democracies, each currently going into an election phase. Russia is ruled by its own brand of authoritarians with democratic trappings. China is a one-party state in which the bottom line for the leadership is the perpetuation of Communist rule, if not the application of Communism as most people understand it. The five societies are very different and their geo-politics show no coherence.
But there is one element which does bind them together, even if it is not one BRICS-boosters may relish – they each, in their separate ways, face a moment of truth.
The politics of Putin apart, Russia will have to cope with its failure to diversify from energy to create a broader economy capable of supporting its ambitions to be a major world player. Its new central bank governor has a definite sense of purpose and the government seems to be intent on containing inflation but a significant drop in energy prices could throw everything out of kilter. Brazil’s economic model is under strain, held back by problems with infrastructure and excessive dependence on raw material exports, especially to China. Despite the Lula inheritance, Dilma Rousseff has worked herself into a stiff battle for the 2014 presidential election. India’s race for growth has faltered though it still has the demographic dividend of a young population. Though the new central bank Governor Raghuram Rajan has been showing considerable energy and application, its politics seem to be inimical to economic efficiency unless next year’s election produces a major reversal of fortune and the autumnal impact of forecasts of US tapering showed its vulnerability. Meanwhile, for all its huge potential, South Africa is prey to high unemployment, violence and social discord.
In each case, governments have, to date, shown little ability – indeed, in some cases, little will – to address such issues as if they could still coast on the high growth rates acquired in years of greater global prosperity. In some countries, there is a distinct lack of convincing alternative leaderships. Coming to terms with the changed world, in which an energy revolution in the United States may spell even more radical change and in which the current downgrading of Europe may prove premature, is a difficult task. The father of the BRICS is talking about a new acronymic grouping, MINT - Mexico, Indonesia, Nigeria and Turkey; O’Neill notes that all have very favourable demographics for at least the next two decades but, without wishing to rain on his new parade, question marks hang over each for the same reason that applies to the famous five – the readiness and ability of governments to undertake the reform needed for sustainable progress.
That brings us to China, the BRIC that has lived up most closely to the original vision of a re-balanced world but where the reform question matters most both for the country itself and for the world at large is posed most. The growth and globalisation of the last major state ruled by a Communist party has been the most important global development since the end of the Cold War. I do not go along with the fashionable notion that the People’s Republic will rule the world, for reasons I lay out in a new book. 1 This is in no way to gainsay the huge impact the country and the sheer force of its 1.3 billion people exert on everything from the prices of raw materials to the redevelopment of the South Bank of the Thames. Since Deng Xiaoping launched economic reform at the end of the 1970s, more people have been lifted out of poverty on the mainland than ever before in human history – and in a shorter space of time. That, allied with the emergence of a middle class of more than a hundred million, not to mention the free-spending of the super-rich, has been a global game-changer.
But China, too, faces its moment of truth. The Party Plenum held in November produced a document entitled ‘Sixty Decisions’ which acknowledges that things cannot go on as before. The Deng-era equation of cheap labour, cheap capital and welcoming markets for exports no longer works. Wages have gone up significantly and capital is more expensive while developed markets aren’t what they used to be. In his first year as the country's leader, Xi Jingping has enunciated his 'China Dream' of national rejuvenation, aiming to become number one with the USA. That means moving up from being a producer of textile goods, toys and basic household appliances and the low-margin assembly shop for the electronics giants of California, Japan and South Korea.
So, for all China’s huge material success, reform is now the order of the day as Xi establishes himself as the strongest leader the People’s Republic has known since Deng (and certainly the Man of the Year for 2013). But what this actually means is a very open question.
China’s reform agenda should entail such changes as privatising ownership of land to enable the creation of larger, more efficient farms which could boost supply as demand for food grows and becomes more varied. It should mean ending the hukou household registration system which ties people to their homeplace for welfare, education and the right to buy property or start a business. It should mean liberalising the financial sector so that the market can allocate capital through interest rates rather than the present system of administrative quotas. It should mean ending the monopolies or oligopolies of big state enterprises, reducing their political clout and making them pay market rates for resources and credit. It should mean raising the price of water and energy so that China wastes less of two resources of which it short – chronically so in the case of the first in the north of the country. It should, last but by no means least, mean the installation of an independent legal system and open accountability.
That laundry list has been evident for years. Xi Jinping’s first campaign after becoming General Secretary of the Communist Party (the top job in this Leninist state) in November, 2012, did not, however, concern the economy. It was aimed against corruption which, he said, threatened the regime as it had dynasties of the empire of two millennia. With that went a drive to reduce the gap between the people and the Party, wrapped in all the trappings and perks of more than six decades of unchallenged rule. Economic matters were left to the Prime Minister, Li Keqiang, who has been advocating reform for at least four years. With the November Plenum, however, Xi moved into the economic mainstream, letting it be known that he had been the main figure to approve the Sixty Decisions – Li’s name was not on the document.
Though, as so often in China, the document was lengthy and filled with resonant phrases, it actually committed the new leadership to rather little in terms of short-term measures. Its time frame was to 2020 when Xi will be preparing to hand over to a new generation of leaders at the Party Congress of 2022. But there were positive steps. It proposed making state enterprises pay 30 per cent dividends, though it was not specified how this money would be used by the state owner. Market forces are to be employed for allocation of resources. It alluded to market reforms in the rural world.
If the overwhelming impression was that Xi and his colleagues were setting out a very general stall and would take their time to decide how to proceed in concrete terms, the important thing was that the new leadership has committed itself to change, and in a very public manner. If Xi and colleagues are cautious, that is highly understandable. The structural changes listed above would reduce growth and boost inflation, at a time when economic expansion is falling to a range of 7-7.5 per cent and food prices were rising by 6 per cent last autumn. Above all, they would bring a significant loss of control for the Party State that runs China.
There is one name held up as a spectre by Xi and the leadership – Mikhail Gorbachev. In the Chinese playbook, it was his ill-considered reforms that brought down the Soviet Union plus, as Xi has said, the absence of a strong leader to defend the system. There is little doubt who the Chairman sees playing that role in the People's Republic, if push comes to shove.
Another reference point, which was on the reading list of the new leadership when it took over a year ago, is Alexis de Tocqueville’s account of the fall of the Bourbon monarchy in France – against badly-applied reforms, though equally pertinent is the Frenchman’s observation that the most dangerous moment for an autocracy is when the middle class has made enough money to have time to think and ask questions. That is exactly the case in China today as better-off urban residents wonder why toxic smog cuts life expectancy in northern cities by an estimated 5.5 years, why they have to boil tap water and why they cannot use Chinese baby formula for fear of poisoning their offspring with milk laced with melamine.
In China, as in the other BRIC nations, the second generation of growth is proving to be the testing time. In Moscow, the post-Putinocracy outlook is uncertain and Economy Minister Alexei Ulyukayev said in November that the country’s share of the world economy would probably shrink during the next 20 years as growth trails the global average. In Brazil, a panel of economists sees 2014 growth dropping to 2.2 per cent as the country prepares to host both the Olympic Games and the World Cup. Auctions of infrastructure concessions have aroused little interest recently and the opposition is coalescing to challenge Dilma.
In India, economic reformers may pin their hopes on Narenda Modi becoming Prime Minister and spreading the Gujarat model across the country but this is a stiff task, to say the least. His attempt to run a presidential campaign in a parliamentary system may go awry while, given his track record in his home region, a Modi government would arouse inevitable communal tensions between Hindus and Muslims that would complicate an already complex patchwork of national and state governments. In all these countries, plus South Africa, social tensions show a failure to spread the benefits of growth adequately and in ways that sustain growth. Those are very difficult for government to cope with as they seek to maintain growth and have to deal with vested interest groups which have entrenched themselves as a result of the good years.
The BRICS were a neat idea for their time that marketed well. But they never represented a coherent entity beyond the spread sheets and Power Point presentations. Each of the countries will remain worthy of analysis as we do at the research service, Trusted Sources, of which I was a founding partner and where I run the China team. But they need to be slotted into both a broader context as our Chief Economist Larry Brainard does in his wide-ranging and authoritative monthly Strategy Reports - and a closely-targeted national focus as we do with the four original countries.
What happens to Chinese growth matters for Brazil because of its exports to the mainland, but Russia is more concerned with the price it can get for its gas and India worries most about diversion of water flowing down from the Tibetan plateau and the potential for clashes on the Himalayan border. As always, the fundamental issues are domestic. Most important among them is the matter of reform which, rather than the growth which once marked the BRIC countries, is now the common theme between nations that have too many challenges at home to presume to lead the world.
FOOTNOTE 1: Will China Dominate the 21st Century? (Polity, 2014)
Jonathan Fenby, China Director at Trusted Sources (www.trustedsourcs.co.uk), is the author of Tiger Head, Snake Tails: China Today and the Penguin History of Modern China. His new book, Will China Dominate the 21st Century? is to be published in early 2014.