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BRIC building: the future of Brazil, Russia, India and China

13 December 2012

Summary: Today we have a follow-up by Paul Schulte to Does corruption limit China’s growth, or pose a threat to its existence? He looks at the leading emerging nations, comparing them to the US and UK at similar point in their evolution to greatness.

20121213-BRICs

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Guest Post by Paul Schulte
Institutional Investor magazine, in press
Republished here with his generous permission.

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The challenge of the BRICs

The November/December 2012 edition of Foreign Affairs Magazine had an article called “How the BRICS Are Crumbling” by Ruchir Sharma (head of Emerging Markets at Morgan Stanley). The tone of the article seems off the mark. The BRICs {Brazil, Russia, India, China} are slowing because they are trying to slow credit growth due to the links of their currencies to the US dollar. They are trying to slow down credit growth while the West desperately uses zero interest rates to accelerate credit growth. So, the West and the BRICs are operating at cross purposes.

The BRICs countries have dollar-linked currencies, so when interest rates are zero in the West and high in BRICs countries they will be bombarded with capital seeking a higher return. This causes their currencies to appreciate, jeopardizing growth. Or, the BRICs countries must intervene domestically to force banks to slow credit growth as these banks fill with cash. Either way they encounter forces which cause their currencies to rise and credit growth to accelerate. This is a classic cocktail for a real estate bubble and accelerating inflation.

Brazil and China are experiencing the same phenomenon now. Both are essentially trying to slow down their respective economies, although China has been more successful.

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by Tim Bower, from the Christian Science Monitor, 17 May 2011

by Tim Bower, from the Christian Science Monitor, 17 May 2011

This is not all bad. These two countries have brought entire provinces of their respective countries — literally hundreds of millions — out of poverty in the past ten years and have welcomed competition in many areas of the economy which were off limits only ten years ago. China is now the world’s second largest economy and Brazil is now the sixth largest economy. They are both trying to slow down growth to keep inflation from getting out of hand. Their currencies have appreciated substantially and both continue to have significant capital inflows. The RMB keeps on hitting new highs. The Real is weaker after hitting a high of RS1.5/$1 last Summer.

And yet both of these countries have begun to move to the next chapter of their growth story. They seek alternative currency arrangements to escape their slavery to the US Dollar and US zero interest rate policy — policies suicidal for developing countries with functioning banks. Zero rates act as a poisonous recipe, creating asset bubbles and inflation – and eventually uncompetitive economies. This forces both countries prematurely to move up the value-added curve in order to preserve trade competitiveness. Both struggle to create intellectual firepower on a mass scale to accommodate this climb up the value ladder. This creates widespread social stress, including fear and economic dislocations.

They attempt to reform their economic policies, police procedures, judicial review, monopolistic practices and state intervention. This takes time. We should not despair about how long this takes given the history of the US and the UK. Both the US and UK had a history of crony capitalism, horrendous poverty, police brutality, extra-judicial killings and state-sponsored sabotage of unions. Let’s look at a few examples of how these two now-great countries overcame appalling poverty, police brutality, judicial disgraces and state-sponsored crony capitalism.

How the US and UK became great

At the height of its imperial power in 1900, almost 70% of the world’s reserves were denominated in British Pounds. The sun never set on the British Empire, a country wealthy beyond imagination. And yet, according to Pulitzer Prize Winner Barbara Tuchman in her wonderful book The Proud Tower, “one third of the country’s population was living in chronic poverty. …Families of 9 lived in a space of 1,200 cubic feet (often with four to a bed). …A piece of paper on the floor served as a toilet. …Workman had a 12 hour day, seven days a week.” Taking a day off without permission landed you in jail. And the Tory government was happy to keep it this way. The election of 1906 was a revolution that cleared out the Tory Party and brought in reformers who legalized unions and offered state support to alleviate poverty.

In the US, we see the same history. Books like The Gangs of New York by Herbert Asbury, Oil by Upton Sinclair (which inspired the Movie “There Will be Blood”) and L.A. Confidential by James Ellroy show the ways in which government, judicial and police were corrupt beyond belief from the late 1800s to the 1960s and were cleaned up by peaceful (and sometimes violent) means to bring about reform. (The movies based on these books are must sees to show how far the US has come). And yet, the US has large pockets of poverty throughout the country.

A look at the future

Progress is messy. Corruption is everywhere – always has been and always will be. The history of the UK and US is a forward moving panorama of progress away from appalling corruption and crony capitalism, sometimes glorious and sometimes messy. Brazil and China are examples of nascent political and economic powers which have quality problems of redistributing wealth, reforming judicial systems, allowing greater democratic freedoms and cleaning up police enforcement.

The chances of both countries pulling this off peacefully are pretty good. It seems both are on track to push forward for greater transparency and reform. It is being played out on the front pages of Chinese and Brazilian newspapers every day. The darker side of political reform is often a good sign. Both countries are naming and shaming and have the confidence to do this. Russia and India are slightly different stories – more on that next week.

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About the Author

Paul Schulte is a Senior Fellow at The Fletcher School of Law and Diplomacy at Tufts University, and an Adjunct Associate Professor of Finance at the Hong Kong University of Science and Technology. He is CEO of SGI Emerging Markets research. He has a long history in the global securities industry, and has worked at several major global investment banks.

For More Information

Posts about India:

  1. Terrorism in India, a roster of incidents, 16 May 2008
  2. About the 4GW between India and Pakistan, 6 January 2009
  3. “Some people just want to see the world burn”, 17 January 2009
  4. 4GW in India – more people who want to watch the world burn, 19 January 2009
  5. India looks at the monster in the mirror, 21 January 2009

Posts about Russia:

  1. More news about Russia’s demographic collapse, 6 June 2008
  2. A free lesson from Russia: how to manage a banking crisis, 6 February 2009
  3. “The Russian Economy and Russian Power” by George Friedman of Stratfor, 2 August 2009
  4. A view of the world from Russia, 30 May 2010
  5. The Truth and Beauty about the Pussy Riot, 26 September 2012
  6. The Truth and Beauty about Russia, 1 October 2012

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4 Comments leave one →
  1. guest permalink
    14 December 2012 1:00 pm

    “The chances of both countries pulling this off peacefully are pretty good.”

    If “we” let them — and given all the furore whenever a country rises to prosperity and starts acting independently, then one may be understandably doubtful…

    Like

  2. OldSkeptic permalink
    24 December 2012 7:54 am

    Tick, tick tick for the $US.. Going to be interesting to see how the US funds all its 1,000+ ‘bases’ around the World when it actually has to earn foreign currency, instead of just printing it.

    Like

    • 24 December 2012 2:28 pm

      OldSkeptic,

      Agreed, that will be the end of the mad, unprofitable US Empire. But luck has given us a few more rounds.

      The EU’s troubles have kept it off the board as a rival, and its severe fragmentation would do so for a generation or more. The other potential rival, Japan, looked powerful in 1988 — and has remained locked in an endless cycle of decline since then.

      Also, new tech has opened tight oil and natural gas formations. The resulting lower energy costs both reduce imports and help reduce the cost of our exports.

      The combination might have larger impacts than anyone expected five years ago.

      Like

Trackbacks

  1. Brazil's credit-driven consumer boom hits a limit - Washington Post « Brazil Economics Brazil Economics

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