Commentary: Will The BRICs Come Tumbling Down?

Aaron Johnson

Wednesday, July 3rd, 2013

Paul Mason from the British publication, The Independent, writes about the evolutions that are taking place from the four emerging countries, whose acronym BRIC represents Brazil, Russia, India, and China.  The combination of social media and rising inequality are threatening the social fabric of each of those countries.  In particular, Brazil is going through turmoil that was ignited from a significant rise in bus fare.  The narrative impacting many of the emerging countries highlights the fine line policy makers ride in encouraging economic growth while holding down inequality.

All four countries have achieved healthy gains in economic growth due to varying combinations of loosening their the state’s grip on the market economy and taking advantage of their natural resources.  From 2000-2012, the average real GDP growth rates for each of those countries are below:

  • Brazil:  3.41%
  • Russia:  5.15%
  • India:  7.03%
  • China:  10.04%

In comparison, none of the advanced economies of Canada, France, Germany, Italy, Japan, United Kingdom, or the United States matched even Brazil during that same time period.  While some of this can be explained by the catch-up effect, which says that poor countries will grow at faster rates than rich countries due to comparatively lower infrastructures, it is still impressive.  One way to explain this is comparing two students, Frank Failure and Alan Ace.  Frank, who had a very low GPA of 1.0 during his freshman year, can more easily double his GPA than Alan, whose freshman GPA is 3.8.  Through a little more effort, Frank can raise his GPA from 1.0 to 1.5 from his freshman to sophomore year by only attaining a 2.0 the next year.  That would be an increase of 50%.  On the other hand, Alan would have to work really hard to grow his GPA to 3.9 after his sophomore year.  He would have to earn a perfect 4.0 to that and the percentage increase would only be 2.6%.

All four countries have embraced the market economy in varying degrees where compensation is driven by skill level and accessing scarce resources.  Previously, all four countries embraced various forms of command economies where private property rights were discouraged.  However, they are slowly changing course, but still not fast enough.

A look at the Index of Economic Freedom allows us to compare how each of them score in terms of economic freedom.  Economic freedom is defined as the fundamental right of every human to control his or her own labor and property.  Market economies score high in economic freedom, while command economies score low.

When comparing countries in terms of economic freedom, the Heritage Foundation came up with five categories:  free (100-80), mostly free (79.9-70), moderately free (69.9-60), mostly unfree (59.9-50), and repressed (49.9-0). Here is the current ranking of each country.

  1. Brazil:  57.7
  2. India:  55.5
  3. China:  51.9
  4. Russia:  51.1

With the exception of Russia being the outlier, the countries with the highest economic freedom score had better living standards.  Since all four countries are considered to be mostly unfree, their GDP per capita rates are far below countries scoring either free or mostly free.  This demonstrates the importance of governments unleashing markets from severe government oversight.

Their problem is that there are limited segments of the populace that actually enjoy the fruits of their prosperity.  Low access to strong educational systems are inhibitors to creating more broad-based economic gains.  High youth unemployment is causing unrest.  However, solutions to both of those problems do not have any quick fixes.

When looking at their living standards, this shows a different story where recent high growth rates have done little to raise the living standards to even the world average.

  • Russia:  $16,736
  • Brazil:  $11,769
  • China:  $8,382
  • India:  $3,694

Even though it is encouraging to see improved economic growth rates within BRIC and their economic policies have lifted many out of poverty, the rate of change has not been quick or broad enough.  With relatively low scores in economic freedom, they must find ways to unleash and nurture the human capital potential of its citizens, so that they can achieve sustained, broad-based economic growth.

All four countries must come up with multifaceted strategies that combines open markets, along with more robust investments in public infrastructure and education in order to minimize the divide.  Otherwise, we will continue to see a hollowed-out middle class where very few prosper, resulting in more political instability.

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