The global financial crisis and the BRICs

  • 21 November 2011
  • From the section Business
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What's the future for the BRIC economies: Brazil, Russia, India and China? That's the question that Radio 4's World at One programme asked me to consider, as part of their BRIC season, which starts today.

There's no getting around it, the BRICs have come out of the global financial crisis remarkably well, especially China, whose diplomatic skills at the recent G20 Summit in Cannes impressed all who were there and left the American delegation rather nervous.

You will remember the summit began with talk of the Chinese running to the rescue of the euro, despite the fact that the eurozone countries are roughly eight times richer than China. It ended with Europe and America at loggerheads and the Chinese far above the fray, having not contributed one renminbi to any European rescue.

Not a bad week for the Chinese.

Balance of respect

You might say it's not just economic power that has shifted from West to East in this crisis. The global balance of respect has shifted as well.

But none of the BRIC countries can afford to leave it at that, because the crisis has raised questions about their approach to economic development as well, especially China's.

Russia is now considered the odd one out of the BRICs and you can see why. Its workforce is shrinking: incredibly, the working age population is likely to fall by around a third between now and 2050. It is outside the top 10 economies by GDP and expected to remain so.

Oil wealth will keep Russia at the top table of countries for some time to come, but it is unlikely to face the challenges faced by China, India or Brazil, of managing their economic success.

Endemic inflation

Brazil also depends on commodities for too much of its growth. Like India, its infrastructure is weak and its government institutions inefficient. Inflation in both countries is more or less endemic.

Brazil and India do have the great advantage of having a large home market and a lot of home consumers. Incidentally, you can say the same of Indonesia, which many think should now be an informal BRIC.

None of these countries has contributed in a significant way to global current account imbalances. Indeed, in the case of the Brazilians, the problem has been that they save too little, not too much. As I wrote in the summer, it has also been a victim of the global imbalances, struggling to deal with big inflows of global capital.

The same cannot be said of China, which has almost certainly saved and exported more in the past 30 years than any country in the history of the world, not just in absolute terms but as a share of its economy.

Too much spending

A handful of numbers, highlighted recently by Larry Summers, help make the point most vividly.

American households now consume just over 70% of US national output. UK households spend nearly as much. As we know, that is probably too much.

When Japan was an emerging market, the consumption ratio was lower: somewhere in the low fifties as a percentage of GDP. But last year, consumption by Chinese households came to barely 35% of the nation's output.

That distortion, supported by Chinese policies over the past two decades, has enormous consequences for its economy and society and for the shape of world demand.

Many economists, including the heads of the US and British central banks, say China's high savings and its semi-fixed exchange rate helped cause the financial crisis by producing a glut of global liquidity. Others say there is more than enough blame to go around.

But whether or not China helped cause the crisis, there is not much debate that it needs to be part of the solution, because without higher Chinese consumption in China, the only way the global economy will become more balanced in future, with less debt on countries like Britain and America, is by those countries also having little or no economic growth.

This is what the G20 Summit in Cannes would have been about had it not been so distracted by Greece, and the euro.

But when it comes to it, China might find it easier to contribute to the European rescue fund than to contribute to a more balanced global economy.