By Douglas Bulloch at Forbes
The concept of the BRICs isn’t heard much these days beyond some cooperative institution building efforts. Originally a Goldman Sachs authored attempt to identify growth opportunities for investors (referring to Brazil, Russia, India and China), it was picked up by those countries to symbolise a hoped-for rotation in the world order: away from the old hierarchy of the West and the Rest, towards a more balanced configuration of global economic progress. For inclusiveness, the ‘s’ was eventually capitalised into ‘South Africa’ so that the African continent was not left out.
With hindsight, it remains curious that the idea was ever taken seriously beyond the confines of investor advice. The nominated states have little in common, although the public diplomacy of developing economy cooperation has a lingering appeal. The Russian economy was always based largely on hydrocarbons, and Brazil’s expansion was a broader commodity play. Each, therefore, nurtured an important relationship with China. Now, though, as commodity prices have sunk, China is the only buyer left and has no qualms about driving a hard bargain.
Massive Chinese infrastructure investment created the temporary illusion of wealth while global debt levels grew relentlessly. The commodity curse then undermined real economic progress around the world, as elites chased diminishing surplus for patronage and popularity. This has left producers exposed; one – Venezuela – rapidly becoming a wasteland. In other countries, what limited democracy there was has been hollowed out, leaving Russia in a state of egregious industrial and demographic decline, and Brazil confirming stereotypes about Latin American corruption. All because the orders are drying up and the money has run out. Both Brazil and Russia are facing the possibility of imminent collapse. India, by contrast, is its own story, a perpetual tale of slow promise that plays tortoise to China’s hare.
The only real story behind the BRICs was always just the ‘C,’ as in China, and the huge investment boom that powered commodity prices towards the fantasy of a ‘super-cycle’ – another word we don’t hear much anymore – drove the whole world mad. There was money for social programs in Brazil to lift up the poor, money for Putin’s new model army in Russia to restore imperial prestige, and money for the Olympics and World Cup in both countries. Then there was money for London palaces, money for Panamanian bank accounts, money for small wars and some leftover for the supposed institutions of a ‘new world order,’ since deferred.
Now, China’s policy dilemma belongs to everyone. Having spent 15 years sucking consumption and investment from everywhere, China now has a productive capacity it cannot possibly sustain, and faces a world reluctant any longer to make up for the deficiencies in Chinese demand. It therefore confronts a build up of debts it will struggle to pay and investors who expect a return they may not receive.
Worldwide redundancies in the steel and coal industries have raised the prospect of protectionism, but the problem will not end there. Unless China can stoke up private, domestic consumption, their huge export surplus will start to look abusive to job hungry and mutinous populations in the US and Europe. Particularly as Chinese markets remain deliberately hard to access for foreign producers, not to mention China’s constant stalling on serious TRIPS reforms.
Currently, China is revving up the investment engine once again, as real growth rates – behind the increasingly mistrusted official figures – stumble. Long promised structural reforms are being progressively deferred in search of the sugar high of instant – debt fuelled – growth, and the suspicion is rising that the RMB exchange rate will soon be allowed to fall.
Unfortunately for China, the world is watching now. For as long as China was an engine of growth, her protectionist instincts were tolerated. Now that China is a source of global deflation, as the vast productivity overhang depresses prices, wages and earnings worldwide, there are fewer reasons to be sanguine. And for a country so dependent upon exports as China, a rise in protectionism around the world, in the form of outright tariffs, competitive devaluations, or just domestic preferences, could prove catastrophic.
Often overlooked, in the general opposition to protectionism, is that although it is bad for everyone, it has differential effects. The causes and consequences of the Great Depression, for example, are still hotly debated, but the impact of Smoot Hawley is probably underestimated. Although net exports occupied only a small share of the US economy in 1929, bankruptcies and bank failures were concentrated in the industries and regions most exposed to exports; agriculture, minerals and steel. In each case, the markets that disappeared in response to Smoot Hawley tariffs produced a domestic surplus, a large fall in prices and a tipping point for a highly leveraged economy. Most economists talk more about the failed policy responses, rather than the constitutive vulnerabilities, but it should be obvious that an economy heavily dependent upon exports has many reasons not to upset its customers.
The BRICs were always an illusion looking for an explanation, but that explanation was in plain view the whole time. China’s accession to the WTO created an investment boom of unprecedented scale, and which may not yet have ended. But all investment booms must eventually reach a point where they start generating economic returns able to cover the accumulated debts. We have instead reached a point where debts continue to rise, while unemployment spreads and global growth diminishes.
As China and the wider world contemplate the next steps along the current and perilous economic path, they might remember that the key economic question is, and always was, how it all fits together: how policy in one part of the world has an impact elsewhere. Having spent years thinking about the BRICs as a kind of separate challenge to the world order and source of new thinking on how to conduct policy, we lost sight of how decisions in Beijing have a direct impact on jobs, and therefore political realities, around the world. The consequences of this oversight can be seen in the ongoing Trump/Sanders insurgency in the USA. It all fits together in the end. In other words, forget about the BRICs and concentrate on the mortar.