Brics

By Kevin Gallagher

In Germany this week Brazilian president Dilma Rousseff rebuked industrialised countries for creating a “liquidity tsunami” of speculative capital that is bubbling currencies, stock and bond markets across emerging markets and the developing world.  To stem the tide, her government extended a tax on speculative inflows of capital into Brazil.

A new task force report entitled Regulating Global Capital Flows for Long-Run Development, released this week, argues that regulating flows to tame the liquidity wave are justified more than ever in the wake of the global financial crisis.  Countries have more flexibility to deploy such measures given the new consensus in the peer-reviewed academic literature and at the IMF that capital account regulations have been effective tools to prevent and mitigate financial crises.  In this new environment Brazil, Indonesia, Taiwan, Peru, Thailand, South Korea, and many others have regulated flows.

Brazil's president Dilma Rousseff

However, the report also expresses serious concern that many countries lack the ability to regulate flows because many of the world’s economic integration clubs and trade and investment treaties have started to mandate capital account liberalisation. 

By Eswar Prasad and Karim Foda

Despite a number of recent shocks, the global economic recovery is getting on to a firmer footing.

The latest update of the Brookings Institution-FT Tracking Indices for the Global Economic Recovery (TIGER) indicates that resurgent job growth and rising business and consumer confidence are solidifying the recoveries in many advanced economies. Emerging markets are still doing well but some of the shine is coming off these economies as they tighten policies to cope with inflationary pressures.

The Overall Growth Index for the G20 economies shows a slight uptick in recent months, led by a gradual rebound in real activity. After the initial post-recession surge, financial markets have pulled back a bit, at least in terms of growth in stock market indexes and valuations. One bright spot is the resurgent business and consumer confidence in both advanced and emerging economies. 

As part of the FT’s week-long series on the Brics emerging markets, experts on each of the four economies will contribute to the debate about the role of Brics consumers in the global economy. The last entry focuses on China, read the entries from the other countries below.

By Michael Pettis

Given the speed of its economic transformation, its sky-high bank-stock valuations, the unprecedented size of its accumulated reserves, and its much-advertised desire to change the global monetary system; it is tempting to assume that China will radically transform the world’s capital markets and financial systems with the same ruthless speed with which it has transformed export markets.

But this won’t happen.  Beijing is skeptical of arguments supporting rapid financial and monetary deregulation, and policymakers continue to measure the usefulness of the financial system mainly to the extent that it serves the needs of rapid growth in manufacturing and infrastructure. This means continued heavy-handed control of the capital allocation process and the level of interest rates, the relinquishing of which are the two key measures of real financial sector liberalisation.

China’s main impact on the global financial system will continue, for the foreseeable future, to be limited to its massive accumulation of reserves. And because the US is still the only economy large and flexible enough to accommodate the high trade surpluses that the Chinese economy relies on, it will continue to accumulate dollars. 

As part of the FT’s week-long series on the Brics emerging markets, experts on each of the four economies will contribute to the debate about the role of Brics consumers in the global economy. Today’s entry focuses on India, check back throughout this week for entries from the other countries.

By Suhel Seth

Much has been made of India’s brisk economic march and that in the global comity of economic superpowers, India is inching towards the high table but the fact is that there are two Indias and both shall remain for a long time to come. One which still experiences the ravages of poverty and poor infrastructure while the other that sees luxury brands tempting the now-rich-and-arrived Indian. But brands in India, more than the politician ironically, have understood the power that both these Indias possess in their own unique way.

Much of what happened in 2009 in the world economy escaped India only because while one part had become dysfunctional (no de-coupling here), the other was happily untouched by the global meltdown, which is what continued to propel India’s almost 8 per cent GDP growth.

But the real story of India and the brands within is in effect the story of the quintessential Indian consumer and the DNA which remains largely unaltered. So while on the one hand, 185 Bentleys were sold in 2009 in India, the country also witnessed the launch, and then the delivery of the Nano: a $2500 car from the house of Tatas. From October, 2009 to January 2010, the Tatas have already sold more than 16,500 Nanos: in a country, which also boasts of the world’s largest two-wheeler population. 

As part of the FT’s week-long series on the Brics emerging markets, experts on each of the four economies will contribute to the debate about the role of Brics consumers in the global economy. Today’s entry focuses on Russia, check back throughout this week for entries from the other countries.

By Anders Aslund

Uniquely Brics (Brazil, Russia, India and China) has become a political grouping after having been invented by Jim O’Neill at Goldman Sachs. In June 2009, Russia organised the first BRIC summit, but will it hold?

The emerging economies will soon account for most of the world economy. We are at a crossroads of world history, as Oswald Spengler caught in his pessimistic 1918 book Der Untergang des Abendlandes or Paul Kennedy in his 1988 book The Rise and Fall of the Great Powers.

The relative decline of the west is all too evident, but this is the victory of capitalism. Modern neoclassical growth theory suggests that with converging economic resources open capitalist economies should converge. Then, the most populous countries would become the leading economies.

But are the Brics the most relevant representation of the emerging economies? 

As part of the FT’s week-long series on the Brics emerging markets, experts on each of the four economies will contribute to the debate about the role of Brics consumers in the global economy. Today’s entry focuses on Brazil, check back throughout this week for entries from the other countries.

By Arminio Fraga

Brazil is thought to be the most western of the Brics—a democracy full of life, an open society, porous to global fads and tastes.

One feature that supports this view is that Brazil’s consumer seems to be totally American, and I mean this neither as an insult nor as compliment, even after the global economic mess we are still digesting. Brazilian households like to buy the newest gadget and prefer to spend on items that will enhance their short-term wellbeing rather than save for a rainy day. This partly explains Brazil’s low saving rate – which has fluctuated around 17 per cent of GDP over the last decade, a number that contrasts sharply with China’s 45-50 per cent.

This massive discrepancy is also driven by the difference between the social safety nets in the two nations: Brazil’s being extensive in coverage (universal health care, education and social security) and extravagant (early retirement with full pay, for example), whereas China’s is very modest. 

The invention of the Brics by Jim O’Neill of Goldman Sachs was a stroke of marketing genius. But does it have analytical relevance? My answer is: no and yes.

No, because the four countries have next to nothing in common, apart from the fact that none is a high-income country.