It is now more than eight years since we at Goldman Sachs first wrote about the BRIC conceptthe idea that the emerging markets of Brazil, Russia, India, and China would come to play a new and more muscular role in the global economy. Throughout the period leading up to the collapse of Lehman Brothers, we often felt that the durability of the BRIC concept needed to be tested through an economic shock.
It is one thing to have strong growth when everything elsewhere seemed fine, but strength can only really be proven through less favorable external conditions. The recent turmoil certainly qualified as that, and the BRIC economies survived it well. Indeed, these days we think that the combined GDP of the BRICs might exceed that of the G7 countries by 2027, about 10 years earlier than we initially believed. So why has this crisis been good for the BRICs?
For China, it has forced changes in the country’s previous, unsustainable export model. The decline in U.S. and European spending convinced Chinese policymakers that they must quickly stimulate domestic demand if they are to have any chance of maintaining their goal of annual GDP growth at 8 percent or higher. Already it looks like Beijing’s swift and savvy stimulus plan is working. China will likely overtake Japan as the No. 2 economy in the world by the end of 2009. We estimate that within 17 years, China will also overtake the U.S.
Brazil also had a good crisis. Despite a commodity-price collapse, Brazilian policymakers didn’t panic, and the stability culture fostered by President Luiz Inácio Lula da Silva since 2001 has survived. Low inflation is a new reality, and the investment climate is strong. Assuming a smooth transition to post-Lula leadership, Brazil can continue to enjoy an estimated 5 percent annual growth.
India, too, has weathered the worst of the crisis well. Who would have thought that the world’s largest democracy would be likely to grow by 6 percent or more in the same year that the U.S. and U.K., historically India’s two most important trade and investment partners, experienced their worst declines in decades? Since Prime Minister Manmohan Singh’s big victory in May’s elections, the prospect of fresh policy reforms has grown more likely. If India can boost its infrastructure and both improve and speed up its policymaking, it might unleash the spending power of its own billion-plus populace and see Chinese-style growth rates for the next decade.
The big caveat in the BRIC success story is Russia. The collapse of the world economy and the speedy drop in oil prices exposed not only Russia’s commodity dependence but also the fact that too much money and power there has been concentrated in the hands of too few. To remain in the high-growth category long term, Russia must arrest its population decline, improve the rule of law to encourage business, and boost efficiency in nearly every aspect of its economy.
What about the other large emerging-market countries? We have identified a promising group known as the N11, or the "Next 11," many of which have emerged from the crisis in better shape than predicted. In Asia, populous Indonesia is perhaps the most exciting of these countries, and some people are suggesting it might even become as big as one of the BRICs. While I doubt that, it does look as though it might be on track for sustained growth in domestic demand. It will take a few years to see whether recent signs of optimism about stronger governance will persist, but the prospects seem quite encouraging.
Mexico, Nigeria, and Turkey also show great promise. Turkey is especially intriguing, given its young and vibrant population and its unique position as a bridge between East and West. As for Mexico, I occasionally think it should have been included in the original BRIC list, as it has such a big population. But Mexico hasn’t done much to improve its productivity performance and dependency on oil revenues, in part because it sits on the U.S. borderit’s too easy to grow by satisfying the low-end manufacturing and energy needs of its large neighbor. Commodity-rich Nigeria could also be a lot more exciting if it got its economic act togetherit is Africa’s most-populous nation, with a potential market around four times the size of South Africa’s.
What is the world going to look like as it adjusts to these emerging powers? The first and probably most important thing to say is that there are likely to be all sorts of unpredictable political and economic developments associated with their rise. This makes the advent of the G20 all the more important as a venue for reducing conflicts.
Already, the rise of the emerging markets has raised big new questions and risks. For example, since the end of World War II, the world’s largest economies have been liberal democracies. While China will presumably evolve into a freer political system over time, it is by no means certain that it will become true Western-style democracy. How will the U.S. and Europe accommodate themselves to Beijing as a global partner?
And will the BRICs themselves get along? China and India, for example, have fought wars along their long and mountainous border before. Could there be future conflicts between these two rising giants? And what kind of impact would these have on the global economy?
This leads me back to the economic and financial paradigms of the new world. It is widely presumed that it is merely a matter of time until China will allow its currency to float freely and dismantle all its capital controls. I have assumed this myself for many years. After a recent trip to the Far East, however, I found myself wondering whether this is actually as inevitable as many of us presume. The existence of capital controls in different forms has helped countries like China and India weather this crisis. Policymakers in both countries are pleased that they didn’t accept expert Western advice to dismantle controls any faster than they did.
Now, fast-forward to 2020. At that point China will probably represent around 15 percent of global GDP, andIndia somewhere between 5 and 10 percent, which would put both countries close to both the U.S. and Europe in economic size. This new heft could put them in a position to suggest something quite alien to many Western policymakers todaythat they should consider a more heterogeneous global financial system.
One of the most intriguing policy statements I have read in many years came from People’s Bank of China governor Zhou Xiaochuan back before the April 2009 G20 meeting. His suggestion that the world use IMF-backed "special drawing rights" rather than the dollar as a reserve currency has had my mind in overdrive ever since. What if we were to move to a more managed currency system in which the dollar, euro, yuan, and others, possibly the yen, were managed against each other? It used to happen with gold. Maybe it might work in this new and different guise. A new multipolar global currency system would allow more diverse patterns of global trade and investment to emerge and help mitigate the global imbalances in saving and spending that have grown out of our dependency on the dollar. The result could be a wealthier, and economically healthier, planet.
O’Neill is the chief economist at Goldman Sachs.
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