In 2001, Goldman Sachs came out with the concept of the BRICs – Brazil, Russia, India China – as high-population countries that would dominate the world economy by 2050. At the time, global financiers sneered that this was a facile formulation to get business from the gullible. Very little global finance trickled into the stock markets of the four countries in 2001.
Seven years later, the BRICs have outperformed the most optimistic projections. Goldman Sachs had predicted that these countries would account for 10% of world GDP by the end of the decade. They have already crossed 15%.
Analysts have offered various explanations for their success. Let me suggest one more. Without consultation or planning, the BRICs have stumbled into a four-way division of labour yielding huge gains in productivity and synergy.
China has specialised in manufacturing. India has specialised in service exports. Russia has specialised in energy. And Brazil has specialised in other commodities (iron ore, sugar, ethanol, soyabeans, beef, orange juice). All four have become world-beaters in their respective specialisations.
Of the four, only China looked remotely like a champion in 2001, and it too was struggling with social discord in interior provinces that had missed the great export boom. In 2001, Russia was in financial straits after defaulting on its external debt in 1998, Putin was struggling to re-establish Moscow’s control over the provinces, and the price of oil was just $18/barrel. India’s growth rate had plunged after 1997, and in 2001 was down to the 5.8% level of the 1980s. Brazil had barely overcome its financial crisis of 1998.
Seven years later, the BRICs have exceeded all projections. China contributed more last year to incremental world GDP than even the United States, whose economy in absolute terms is four times bigger. India has averaged almost 9% growth for several years. Russia has become an energy superpower, and in place of its huge current account deficit in 2001, it now has a huge surplus approaching $200 billion a year. Brazil, with 5.4% growth, is the slowest of the four, yet is among the few countries that looks like growing strongly even in the coming global recession.
Few Indians realise how dominant Russia has become in energy. I am sure 99% of readers think Saudi Arabia is the world’s biggest oil producer. Wrong. Saudi Arabia has the biggest oil reserves by far. But in terms of production, Russia at 10.1 million barrels/day beats Saudi Arabia’s 9.3 million barrels/day.
Russia is even bigger in natural gas. Its dominance in world gas reserves parallels that of Saudi Arabia in oil reserves. Huge new gasfields have been discovered offshore in the Arctic Sea, encouraging Russia to lay claim to the Arctic seabed all the way to the North Pole. Western European governments are horrified to find themselves woefully dependent on Russian gas for future energy needs, but see no alternative.
Brazil’s commodity dominance is not well known in India. It is a huge producer of iron ore and sets the world price. This year Vale, Brazil’s biggest producer, negotiated a 65% increase in iron ore prices with East Asian importers like China, and the world market (including India) has followed suit.
Brazil has a huge land area and ample rainfall, but a modest population. So, at a time of soaring prices, it is among the few countries that can rapidly expand high-quality acreage and exports. It is the world’s largest producer of sugarcane, from which it makes ethanol that is much cheaper than petrol, and fuels Brazil’s ethanol-based cars. It is the biggest exporter of soyabeans and orange juice. What’s more, it has discovered the two biggest oilfields offshore in recent years, containing an estimated seven billion and 33 billion barrels respectively.
Indian readers are fully aware of China’s phenomenal success in manufactured exports, especially labour-intensive items like garments, footwear and toys. Readers are also fully aware of India’s phenomenal success in service exports, especially software and business outsourcing, which are projected to touch $50 billion this fiscal year. Notwithstanding huge increases in salaries in the last five years, Indian companies remain as competitive as ever, and their future looks bright.
Two final points need to be made about the unplanned but serendipitous specialisations of the four BRICs. Specialisation brings a country high benefits from productivity growth, but also creates vulnerability. In the event of a technological change or sudden fall in global demand, a specialised producer can be particularly hard hit.
The BRICs, however, have all become producers of a wide range of manufactures and services, including high-tech ones. Brazil is the most high-tech manufacturer in Latin America, and even has a competitive aircraft industry. Russia has more engineers than the US, and so should do well when its Soviet-era industries are completely replaced by 21st century ones.
India’s merchandise exports have been sizzling recently, and Indian manufacturing companies are acquiring dozens of giant multinationals. China, which started as an exporter of labour-intensive goods, has moved sharply up the value chain. Less than half its exports are now labour-intensive, and it is a big exporter of heavy machinery and chemicals. This diversified profile means that the BRICs will be resilient in the face of external shocks that may hit their specialised activities from time to time.
The second point to be made is that the different specialisations of the BRICs are synergistic and self-reinforcing. The fast growth of India and China, both of which are at a material-intensive stage of development, has helped spark a huge and rising demand for commodities (which benefits Brazil) and energy (which benefits Russia).
