Brazil, Russia, India, and China (BRIC)

TABLE OF CONTENTS

What Are the BRICs?

BRICs Growth in Global Dominance

Early Writing on BRIC s

Criticism of BRICs

What Is Brazil, Russia, India, and China (BRIC)?

BRIC is an economic initialization for the developing countries of Brazil, Russia, India,
and China. Economists believe these four nations will become dominant suppliers of
manufactured goods, services and raw material by the year 2050. China and India will become
the world's dominant suppliers of manufactured goods and services, respectively, while Brazil
and Russia will become similarly dominant as suppliers of raw materials.

This growth is due to lower labour and production costs in these countries. The BRIC
initialization expanded to include South Africa as the fifth nation in 2010. Many companies
also cite BRIC nations as a source of foreign expansion, or foreign direct investment (FDI)
opportunities. Foreign business expansion happens in countries with promising economies in
which to invest.

BRIC's Growth in Global Dominance

In 1990, BRIC countries accounted for 11% of global gross domestic product (GDP). By 2014,
this figure rose to nearly 30%. These figures include a high in 2010, following a plunge in
value, surrounding the 2008 financial crisis.

BRIC countries were originally projected to be the fastest growing market economies by Jim
O'Neill of Goldman Sachs in 2001. The Goldman Sachs thesis does not argue that these
countries are a political alliance, like the European Union (EU), or a formal trading association.
Instead, it asserts they have power as an economic bloc. BRIC countries have not announced
formal trade agreements, but leaders regularly attend summits together and often act in concert
with one another's interests. It has been postulated that by 2050 these economies would be
wealthier than most of the current major economic powers.

Goldman Sachs, which coined the term, also created an investment fund especially targeted at
opportunities in the BRIC economies. But it merged that fund with a broader emerging markets
fund in 2015 following a slowdown in growth prospects for the economies.

Introduction and Early Writing on BRICs

In O'Neill's 2001 report, published by Goldman Sachs, he noted while global GDP was set to
rise 1.7% in 2002, BRIC nations were forecast to grow more quickly than the G-7. The G-7
are a group of the seven most advanced global economies which includes Canada, France,
Germany, Italy, Japan, the United Kingdom, and the United States.

In the paper "Building Better Economic BRICs," O'Neill runs through four scenarios for
measuring and projecting GDP, adjusted for purchasing power parity (PPP). In these scenarios,
the nominal GDP assumption for BRIC rises from the 2001 measurement of 8% in U.S. dollars
(USD) to 14.2%—or, when converted at PPP rates, 23.3% to 27.0%.

In 2003, Dominic Wilson and Roopa Purushothaman wrote a report "Dreaming with BRICs:
The Path to 2050," again published by Goldman Sachs, claiming that by 2050 the BRIC cluster
could grow to a size larger than the G7 when measured in USD. The world’s most significant
economies would, thus, look drastically different in four decades, with the largest global
economic powers, by income per capita, no longer being the wealthiest nations.

The 2007 work, BRICs and Beyond focused on BRIC growth potential, along with the
environmental impact of these growing economies and the sustainability of their rise. The
report considered the Next 11, (N-11), a term for 11 emerging economies, in relation to the
BRIC nations. The study also looked at the overall ascendency of new global markets.

Criticism of BRICs
O’Neill’s BRIC thesis has been challenged over the years as the economic and geopolitical
climate has shifted. Arguments include the notion that raw materials in BRIC nations China,
Russia, and South Africa are limitless. Those critiquing the growth models say they ignore the
finite nature of fossil fuels, uranium, and other critical and heavily used resources. It has also
been argued that China outstrips the other BRIC members economies in GDP growth and
political muscle, putting it into a different category.

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Five questions about the BRICS nations

On July 8-9 BRICS holds its 7th annual summit in Russia. What is BRICS?
Why do these countries hold summits? Do they have enough in common to
make a difference in the global economics and politics? Six years after
BRICs and then BRICS started to hold annual summits, what have they
achieved?

What are the BRICS?

 In 2001, Jim O’Neill, then Chief Economist of Goldman Sachs, coined
the acronym for Brazil, Russia, India and China as the largest
emerging markets economies. He expected them to grow faster than
the developed countries and to play an increasingly important role in
the world.

And so they have. In the last 15 years, Brazil, Russia, and India have caught
up with the smallest G7 economy (Italy) in terms of nominal GDP, while
China has overtaken Japan and became the second largest economy in the
world. Together, BRIC’s nominal GDP is similar to that of the EU or US and
is likely to overtake both in the coming few years.

In 2009, BRIC countries held their first summit. In 2010, South Africa asked
to join and was invited – thus transforming BRICs into BRICS.

Why does the world need the BRICS?

Jim O’Neill’s point has been that the world is changing. The leading role of
the Group of Seven (G7) and, more broadly, of the Organisation for
Economic Cooperation and Development (OECD) is no longer undisputed.
Most multi-lateral institutions were designed in the era when the West
dominated the world. The US and Europe are over-represented in the IMF
and the World Bank. Together with Japan, they control most regional
development banks as well.

This imbalance has been especially clear during the recent global financial
crisis when the need for participation by non-G7 countries became evident.
This resulted in reviving the Group of 20 (G20) and proposals to redistribute
voting rights in international financial institutions. But change has been slow
and Western countries continue to control the international financial
institutions.

This is why BRICS summits are so important. These meetings provide a

unique forum where non-OECD leaders can discuss global challenges and
co-ordinate their actions within and outside global institutions. The small size
of the club and the absence of OECD partners helps in shaping the
discussions at the summit.

What have the BRICS nations achieved?

Even though BRICS are now playing a far more important role in the global
economy, they have not yet managed to get their act together. Even on key
issues like selecting a successor to Dominique Strauss-Kahn at the IMF,
BRICS countries were not able to put forward a credible alternative to the
conventional approach that IMF should be run by a Western European. Nor
have they been able to speak with one voice about the most important global
economic and financial challenges – co-ordination of monetary and fiscal
policies, macro prudential regulation, development aid etc.

Do they have enough in common to get things done?

BRICS countries are very different — both in terms of their resources and in
terms of their values and goals. The only thing they all have in common is,
well, membership of BRICS. Brazil and India are democratic, China and
Russia are not. Brazil and Russia export hydrocarbons, China and India are
net importers. China and Russia are permanent members of the UN Security
Council – the others are not. Structure of financial systems, levels of income,
education, inequality, health challenges also differ substantially within
BRICS. This is why it is very hard to speak with a unified voice and to co-
ordinate action. The fact that BRICS have not really established anything
tangible yet should not be a disappointment.

What could they do?

This problem of inaction will soon be overcome. BRICS now have a clear
leader than can address the issue of internal differences in goals and
resources. BRICS is quickly becoming a China-led club. Unlike 15 years
ago, China’s nominal GDP is now larger than that of the other club members
combined. The same its true with net international financial position, outward
Foreign Direct Investment and development aid.

China’s leadership has finally turned the long-debated plan for a “BRICS
Bank” into a reality. The BRICS have founded the New Development Bank
(NDB), which will become a major regional development bank – the first one
without OECD-countries’ membership (unless of course Greece joins.)

The establishment of NDB (head-quartered in Shanghai) suggests

international financial institutions should have been more flexible in adjusting
their governance to accommodate the increased role of BRICS in the world.
NDB is not likely – at least initially – to outperform existing development
banks in terms of skills and project quality. However, it will be the first
tangible multi-lateral project fully owned by the non-OECD countries – in a
sense confirming that Jim O’Neill’s vision was correct.
However, the very fact that the only tangible BRICS project is NDB is also
telling. NDB is taking off exactly because it fits into China’s grander New Silk
Road or “One Belt, One Road” vision. NDB is in this sense proof that the
BRICS club – like Shanghai Cooperation Organization – is now led by China.
In summits, BRICS’ leaders will talk as equals but whenever BRICS is up to
something real, it will be following China’s strategy.

A discussion of the importance of BRIC nations in the current world

The origin of BRIC
The world economy has changed a lot during the past fifty years. The changes in the world economy
in the next fifty years could be as dramatic as the last fifty. Many of the changes in the next few
decades are expected to come from the emerging markets, as opposed to the developed markets like
the US and the other European nations. The saturation of growth in the Western markets has forced
the world to shift its focus from the developed world to the emerging markets which are both growth
hungry and are brimming with opportunities. The four nations which stand out among the crowd are
China, India, Brazil and Russia. These countries stand out mainly due to their sheer size and growth
potential. The idea of these four nations combined together as a group came into being and thus
originated the term BRIC. BRIC in economics is now used as a term to collectively refer to the fast-
growing economies of Brazil, Russia, India and China. History has proved that the world economy
has the potential to change dramatically in a span of four to five decades. Fifty years ago, Japan and
Germany were war ravaged and were struggling to emerge from reconstruction. Singapore and Korea
were low-income nations, but these nations have made huge transformations fifty years down the line.
Hence, the future growth potential of the BRIC countries cannot simply be overlooked.

The term BRIC was first coined by Goldman Sachs in 2003. The company in its report predicted that
by 2050, the combined economies of the BRIC nations could overtake the combined economies of the
current richest countries of the world. These four countries are projected to be among the top six
economies in the world by 2050. This signalled the emergence of the BRIC as an increasingly important
political and economic force to reckon with. Ever since the report was published, these countries have
been getting considerable attention from economists, the media, political circles and, most importantly,
from the corporate sector.

BRIC can be looked upon as a potential team, where China and India will act as the dominant global
suppliers of manufactured goods and services and Brazil and Russia will be their commodity and raw
material suppliers. The main point is that all these countries have certain unique strengths of their own
which makes their position stronger. For China, it is their dominance in the manufacturing sector.
India’s advantage lies in its unrivalled position in the services sector lead by IT. Russia has its advantage
as Europe’s energy superpower and finally for Brazil, the strength lies in its rich natural resources. In
addition, all these nations have strong domestic markets which have tremendous potential for growth.
All four of these countries have experienced growth because of various reasons like changing political
systems, increased foreign investment and greater emphasis on education. Even though these countries
are as different as chalk and cheese, they make an awesome combination when joined together and
appear more powerful as a united group. This is because the
BRIC will emerge as a partnership of equals who are able to bring in complementary competencies on
a common platform for mutual interest. Together they cover over 25% of the world’s land area, 40%
of the world’s population and hold 15% of the current global GDP. On almost every scale, they are
poised to be the largest entity on the global stage. They provide a great opportunity for entrepreneurs,
multinationals and investors. They have the potential to redefine the way business is conducted in
various industries. Hence, the fortunes of the world economy over the next few decades might depend
to a large extent on what happens in these countries.

What can BRIC offer?

The BRIC group have got a variety of advantages to offer to the world. The BRIC advantage lies in a
wide range of factors like huge domestic markets, rich natural resources, skilled manpower, cheap
and abundant labour force, high-end technology, bulk manufacturing etc. However, their main USP
lies in being able to provide alternative solutions to many complex issues. There are many examples
of this. The BRIC opened up a sea of opportunities for the growth hungry Western multinationals that
were looking for new markets due to the saturation in Western markets. BRIC countries like India and
China were able to provide a cheap labour force to Western firms who were looking at ways to reduce
their operating costs and this led to the outsourcing factor. Russia as the major energy superpower is
the main answer to Europe’s growing demand for energy. Indian software firms were able to provide
high-end technology solutions to drive the online revolution in the Western commercial markets. And
last, but not least, Brazil with its rich natural resources and huge size can contribute a lot to the
world’s food security as it is the largest producer of almost any farm product we can imagine.

As stated earlier, the main attractive factor of the BRIC group is its burgeoning domestic market.
Globalisation has opened the doors for multinationals into previously inaccessible territories, especially
the developing nations. Many companies, especially those in the FMCG and manufacturing sector, now
look toward the emerging markets, mainly the BRIC due to their strong consumer base. These countries
have a huge number of people who have recently entered the middle-class segment. This is particularly
true for China, India and Brazil. The newfound wealth will create a fast shift in the spending habits of
these people and this will create a rising demand for new products. This provides tremendous growth
opportunities for the growth hungry global companies, both foreign and domestic. For the foreign
companies, the BRIC offer a sea of opportunity, mainly because many of these companies had been
witnessing stagnant growth in recent times due to the saturated Western markets.

A few sectors which have witnessed a tremendous growth in BRIC countries in recent times include
the IT sector, retail sector, automobile sector, telecoms sector, oil and energy sector, pharmaceutical
sector and the real estate sector. Many of the BRIC countries have become world leaders in these sectors
in the recent past. However, these sectors may not necessarily display a uniform growth pattern, as we
have seen recently. This is because some of these sectors are mainly export oriented, e.g., IT and energy,
while the growth in the other few sectors is based on strong domestic demand, e.g., retail, automobiles,
and telecoms. This, in a way, helps these nations to withstand the changes in the outside world to some
extent, though not fully. The growth in these sectors can be attributed to various factors such as
increasing FDI, political reforms, increasing domestic consumption and domestic entrepreneurship.
The recent growth figures released by the World Bank in June 2009 throw light onto the BRIC potential.
It estimates that the US economy will fall by 2.8% in 2009 and will grow at a snail’s pace of 0.9% in
2010. In the meantime, the Chinese economy is expected to display growth of 7.7% in 2009 and 9.3%
in 2010. The GDP of India is also expected to grow at 6% in 2009 and 7.2% in 2010. The World Bank
also projects that Brazil’s economy, which has fallen by 0.8% in 2009, will grow by 4% in 2010.

The first BRIC summit and the declining dollar dependence

The BRIC countries together are now being viewed as a potential bloc to counter the G8 nations,
which is the group of the world’s wealthiest nations. Therefore the group’s announcement to conduct
the first BRIC summit drew considerable worldwide attention. The first BRIC summit, which was
hosted by Russia, was held on 16 June 2009 in Yekaterinburg. The summit, which was attended by
the heads of state of the four nations called for a “multi-polar world order”, which is diplomatic code
for a rejection of the United State’s dominance as the sole global superpower. After the conference, a
16-point statement was issued in which the four nations pledged their commitment to advance the
reform of the international financial institutions in order to bring about changes to the world’s
economy. They have decided to create the conditions for a fairer world order and also plan to
cooperate to formulate policies to counter the current recession.

One of the meeting’s main agenda items was to reduce the world’s dependence on the US dollar. The
countries discussed the prospect of using of a mix of regional reserve currencies in order to reduce the
dependence on the US dollar. This move will have a significant impact on the US dollar’s future
importance. The economic crisis of 2008, which started in the US, spread to other countries mainly
because of the influence of US economy on the world economy and the US dollar’s status as the global
economy’s sole reserve currency. The sudden rise in gold prices after central banks gave up controlling
it was a strong sign of a loss of confidence in the US dollar as the international reserve currency.
Moreover, after the start of the financial crisis, the confidence in the US dollar declined further and it
has been widely questioned whether the US dollar should continue as the world’s reserve currency. The
BRIC countries decision to start using a mix of regional reserve currencies from now on has major
importance in such a scenario.

The four nations also decided to work together on various political and economic issues such as food
security, the energy crisis, science & technology and education. The group discussed the issue of
climate change and the group is expected to have a bigger say in Copenhagen’s climate change
conference in December 2009. The group might play a vital role in deciding the future course of the
Kyoto Protocol, which is set to expire in 2012. Finally, the coming together of the four nations also
raises expectations about India and Brazil’s demand for permanent membership in the United Nations
since they now have the support of two major permanent members Russia and China.

The major factors driving the growth in BRIC countries

The BRIC nations have large, young populations to propel this growth and a significant portion of them
are concentrated in major cities. The growing prosperity of these nations will depend largely on a
 rapidly emerging and expanding middle class. The increase in personal wealth among the people will
lead to increased domestic consumption. The increase in the domestic consumption will in turn help
these countries to reduce their dependence on exports to support economic growth. The number of
BRIC residents with incomes of more than US$3,000 has almost doubled from 2006 to 2009.
(US$3,000 is considered to be the margin for entering into the middle class segment in the emerging
markets region.) More than 800 million people are expected to cross this margin by 2015 and this
number exceeds the current total population of the US, Japan and Western Europe. Rising incomes has
also led to an increased number of high net-worth individuals in these nations. The expanding middle
class is indicative of the BRIC countries’ economic success and is very important to both local and
foreign players due to the significant purchasing power attached to them.

The BRIC countries together account for around 42% of the world population or, in other words, they
provide a huge market of 2.7 billion people. This is a relatively untapped market with a high purchasing
power. Hence this could have a profound influence on the growth of various sectors such as retail,
automobiles, real estate, telecoms, education, entertainment, computers etc. Apart from this, the
increase in the personal wealth among the people will also help the local and international banks to
expand on a broad range of financial products and wealth management services.

Globalisation
Globalization has made the world smaller and it has led to an increase in interdependence among
nations. It has cleared the way for the entrance of multinationals into the emerging markets. The arrival
of new entrants made the markets in these nations more competitive and this in turn led to the
production of more innovative and cheaper products. It also helped in finding international markets for
locally manufactured goods, thus increasing the profitability of local companies. Various factors like
the worldwide demand for energy, IT and the outsourcing process as well as the increased access to
global capital has helped to fuel the growth of the BRIC nations. Thus, globalisation has helped to a
great extent in making them world leaders in specific sectors, for instance, India in the services sector
and China in the manufacturing sector.

Corporate profitability
Another major factor supplementing this growth is the increased performance of the corporate sector
in these nations. Corporate profits in BRIC companies have been consistently positive over the last
few years mainly due to initiatives like corporate restructuring, reduced levels of borrowing and
improvements in the quality of corporate governance. The latest report on the world’s 200 most
reputable companies published by the New York based Reputation Institute indicates that the number
of companies from BRIC countries in the list has increased from 27 in 2006 to 61 in 2009. Another
reason for the growth in corporate sector is due to the low labour and production costs in these
nations and hence many big multinationals make use of these nations as a source of foreign expansion
opportunities.

Cheap skilled labour (India and China)

One of the biggest advantages of the emerging markets is the cheap skilled labour force available in these
nations. This has been particularly true in the case of India where there is a huge talent pool of young
graduates who can be employed at much cheaper rates compared to those on Western salaries. This fact
caught the attention of Western companies and led to the beginning of the current outsourcing boom.
Many companies in the West started outsourcing their non-core jobs to cheaper destinations in order to
lower their operating costs. Even though both India and China have a huge workforce, India has the edge
considering the fact that it has a much younger workforce. India has the largest population in the world
below the age of 25, whereas the bulk of the Chinese workforce is much older and hence they will soon
reach retirement age.

Saturation in the Western market

The markets for certain products generally tend to become saturated in some of the highly developed
Western societies. In such a scenario, it becomes increasingly difficult for existing companies to find
new customers and hence they have to seek new markets for profit generation. Emerging markets
provide a good alternative for such companies. These markets have huge middle-class populations
and a majority of these markets are untapped. Rising incomes in these economies have also led to the
creation of a new class of highly rich individuals with greater purchasing power. Such a scenario
offers huge growth potential for Western multinational companies. Studies have shown that over the
next 10 to 15 years most of the total world growth in the consumer market is likely to be concentrated
in the developing economies.

Political and economic reforms

The political and economic reforms taken by respective governments in each nation have also
contributed to the growth in these nations. The role of China in the world economy was quite minimal
before the 1980s. However, the economic reforms started by the Chinese government after 1978
helped the country to attain growth in investments, consumption and standard of living. The Chinese
leadership realised the importance of having a practical perspective on many political and
socioeconomic problems and reduced the role of Communist ideology in economic policy. The Indian
government adopted a path of economic liberalisation in 1991 after more than four decades of
government rule based on socialist-based policies. This helped to turn the strictly regulated, slow
moving and highly corrupt Indian economy into the second fastest growing major economy in the
world.

Similarly, in the case of Russia, the fall of the Soviet Union together with the financial crisis of 1998
led to the decline of the Russian economy. The country had 29.1% of its population living under the
poverty line in 2000. However, the Putin administration and their shrewd regulations to capitalise on
the energy sector helped the country to revive its economy. The eight years of the Putin administration
reduced the country’s poverty rate by half and furthermore witnessed a multi-fold increase in the per
capita income and average wage. In Brazil, President Lula, who came into power in 2002, introduced
a spate of economic reforms which helped to bring down Brazil’s alarming inflation rate of 17% to,
currently, a comfortable 4.4%. A more detailed analysis of the political and economic reforms is given
in the country analysis section in the following chapters.

Greater emphasis on education

The role of education in the growth of these nations cannot be undervalued. In 1986, the Chinese
government introduced a new policy of a compulsory nine-year basic education for every child and
this resulted in a high rise in Chinese literacy levels. India, on the other hand, has a significantly high
number of English-speaking young graduates which helped them to attain high growth in the
outsourcing industry. Both China and India produce the largest number of engineers in the world.
Every year 600,000 engineers graduate in China, followed by India with 450,000 engineers. This high
number of software engineers is the single most important reason for India becoming a leader in the
IT industry. On the other hand, Russia has the largest number of technically trained personnel in the
world and this ensures that the country will not have any shortage of skilled manpower for the
development of science and technology in the country.

Conclusion
As the world recovers from the financial crisis, the importance of the BRIC nations keeps increasing.
This is because a lot depends upon how these nations have been impacted by the crisis. The BRIC
nations are now playing a major role in the road to world recovery. This is contrary to what happened
in the past crisis, when developed nations like the US and European countries paved the way for
recovery. It used to be thought that the emerging economies like China, India and Brazil depended a
great deal on the Western markets and hence until the Western markets recovered, the emerging markets
would suffer. However, the truth seems to be rather different this time. According to the latest figures
released by the IMF, the four BRIC countries together have registered an average growth of 5.3% in
2009. At the same time, the global average growth rate stands at a mere 0.5%, while the US growth
rate has contracted by another 1.6% during the same period. At this point, we need to keep in mind the
fact that the BRIC together hold a considerable share of the global GDP. Hence, had it not been for the
BRIC, the global average growth rate would have probably plunged into negative figures. It is true that
the BRIC nations have been impacted to some extent by the global crisis. However, the impact on the
BRIC can be classified as a ‘slowdown’ rather than as a ‘severe hit’.

The reason for this can partly be attributed to the theory of decoupling. As per the decoupling theory,
the BRIC markets that have large middle-class populations will be able to offset the negative impact of
the Western crisis by means of their huge domestic consumption. The theory seems to be right because
the BRIC nations are currently witnessing a boom in their domestic markets. Increasing affluence
among the middle class is causing a boom in internal sectors like retail, telecoms, real estate,
automobiles, education etc. Foreign companies who were quick to realise this fact have quickly
established their presence in these markets to grab their share of the huge pie. Apart from this, contrary
to popular perception, the share of exports in India and Brazil’s GDP is just around 15%, which again
makes them less vulnerable to a Western crisis.

Currently, the BRIC nations are making an orderly plan to move away from the existing global
monetary system based solely on US dollar. Instead they are aiming at a new multi-polar monetary
system based on a basket of currencies. The volume of trade amongst the BRIC nations has increased
and is now often settled in respective local currencies instead of US dollars. In all these endeavours,
they are not being controlled by the industrial nations nor are they waiting for the developed countries
to call the shots. Instead they are acting with a high level of independence in order to consolidate their
relationships with each other as part of a group.

In order to maintain the pace of their current growth, these countries should follow a harmonious and
balanced approach to economic development so as to benefit each other. Thus China and India, who
are the leading players in the manufacturing and services sector, respectively, should be able to
complement the growth of Russia and Brazil by becoming their major commodity and raw material
importers. It is obvious that these nations are as different as chalk and cheese and that their strengths
and USPs lie in vastly different sectors. However, if they are driven by strong economic ties with each
other, then the BRIC nations can emerge as a partnership of equals who are able to bring in
complementary competencies on a common platform for mutual interest.