sign in sign up
<<
Home , Ruchir Sharma

Broken BRICs: Why the Rest Stopped Rising Author(s): Ruchir Sharma Source: Foreign Affairs, Vol. 91, No. 6 (NOVEMBER/DECEMBER 2012), pp. 2-7 Published by: Council on Foreign Relations Stable URL: http://www.jstor.org/stable/41720928 Accessed: 19-02-2016 16:39 UTC

Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at http://www.jstor.org/page/ info/about/policies/terms.jsp

JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact [email protected].

Council on Foreign Relations is collaborating with JSTOR to digitize, preserve and extend access to Foreign Affairs.

http://www.jstor.org

This content downloaded from 142.244.11.244 on Fri, 19 Feb 2016 16:39:59 UTC All use subject to JSTOR Terms and Conditions Broken BRICs

Why the Rest Stopped Rising

Ruchir Sharma

Over the past several years,the most heart,as over50 percentof them,according talked-abouttrend in the global economy to a Gallup poll conducted this year,said has been the so-called rise of the rest, theythink that China is alreadythe world's which saw the economies of manydevel- "leading" economy,even though the U.S. oping countries swiftlyconverging with economy is still more than twice as large those of theirmore developed peers. The (and with a per capita income seven times primaryengines behind this phenomenon as high). were the four major emerging-market As with previous straight-lineprojec- - countries, known as the brics: , tions of economic trends,however such , India, and China. The world as forecastsin the 1980s thatJapan would - was witnessinga once-in-a-lifetimeshift, soon be number one economically later the argumentwent, in which the major returnsare throwing cold water on the players in the developing world were extravagantpredictions. With the world catching up to or even surpassing their economy heading forits worst year since counterpartsin the developed world. 2009, Chinese growthis slowing sharply, These forecaststypically took the fromdouble digitsdown to seven percent developingworld s high growthrates from or even less. And the restof the brics are the middle of the last decade and extended tumbling,too: since 2008, Brazil's annual them straightinto the future,juxtaposing growth has dropped from4.5 percent to them against predicted sluggish growth two percent; Russia's, fromseven percent in the United States and other advanced to 3.5 percent; and India's, from nine industrialcountries. Such exercisessuppos- percent to six percent. edly proved that,for example, China was None of this should be surprising, on the verge of overtakingthe United because it is hard to sustain rapid growth - States as the world's largest economy for more than a decade. The unusual a point that Americans clearlytook to circumstances of the last decade made

Ruchir Sharma is head of Emerging Markets and Global Macro at InvestmentManagement and the author of BreakoutNa- tions:In Pursuitof the Next EconomicMiracles.

[2]

This content downloaded from 142.244.11.244 on Fri, 19 Feb 2016 16:39:59 UTC All use subject to JSTOR Terms and Conditions Broken BRICs it look easy: coming offthe crisis-ridden catch up; nevertheless,as of 2011,the 1990s and fueled by a global flood of easy differencein per capita incomes between money,the emergingmarkets took offin the rich and the developing nations was a mass upward swing that made virtually back to where it was in the 1950s. everyeconomy a winner.By 2007, when This is not a negativeread on emerging only three countriesin the world suffered marketsso much as it is simple historical negative growth,recessions had all but reality.Over the courseof any givendecade disappeared fromthe internationalscene. since 1950, on average, only a thirdof the But now, thereis a lot less foreignmoney emergingmarkets have been able to grow flowinginto emergingmarkets. The global at an annual rate of fivepercent or more. economy is returningto its normal state Less than one-fourthhave kept up that of churn,with many laggards and just a pace for two decades, and one-tenth,for few winners rising in unexpected places. three decades. Only Malaysia, , The implicationsof this shiftare striking, South ,, Thailand, and Hong because economic momentum is power, Kong have maintainedthis growth rate for and thus the flowof money to risingstars fourdecades. So even before the current will reshape the global balance of power. signs of a slowdown in the brics, the odds were against Brazil experiencing a full FOREVER EMERGING decade of growth above fivepercent, or The notion of wide-ranging convergence Russia, its second in a row. between the developing and the devel- Meanwhile, scoresof emergingmarkets oped worlds is a myth. Of the roughly have failed to gain any momentum for 180 countriesin the world trackedby the sustained growth, and still others have InternationalMonetary Fund, only 35 are seen their progress stall afterreaching developed. The marketsof the rest are middle-income status. Malaysia and - emerging and most of them have Thailand appeared to be on course to been emergingfor many decades and will emerge as rich countries until crony continue to do so for many more. The capitalism,excessive debts, and overpriced Harvard economist Dani Rodrik captures currenciescaused the Asian financial this realitywell. He has shown that before meltdown of 1997-98. Their growth has 2000, the performanceof the emerging disappointed ever since. In the late 1960s, marketsas a whole did not convergewith Burma (now officiallycalled Myanmar), that of the developed world at all. In fact, the Philippines,and Sri Lanka were billed the per capita income gap between the as the nextAsian tigers,only to falterbadly advanced and the developing economies well before they could even reach the steadilywidened from1950 until 2000. middle-class average income of about There were a few pockets of countries $5,000 in currentdollar terms.Failure to that did catch up with the West, but they sustain growthhas been the general rule, were limited to oil states in the Gulf, the and that rule is likelyto reassertitself in nations of southernEurope afterWorld the coming decade. War II, and the economic "tigers" of In the opening decade of the twenty- East Asia. It was only after2000 that the firstcentury, emerging markets became emergingmarkets as a whole startedto such a celebrated pillar of the global

• FOREIGN AFFAIRS November/December 2012 [3]

This content downloaded from 142.244.11.244 on Fri, 19 Feb 2016 16:39:59 UTC All use subject to JSTOR Terms and Conditions Ruchir Pharma economy that it is easy to forgethow mostlyrecovered in 2009, but since then, new the concept of emergingmarkets is it has been slow going. in the financialworld. The firstcoming The thirdcoming, an era that will be of the emerging markets dates to the definedby moderate growthin the devel- mid-1980s, when Wall Street started oping world,the returnof the boom-bust tracking them as a distinct asset class. cycle,and the breakup of herd behavior Initiallylabeled as "exotic,"many emerging- on the part of emerging-marketcountries, marketcountries were then opening up is just beginning.Without the easy money their stock marketsto foreignersfor the and the blue-sky optimism that fueled firsttime: Taiwan opened its up in 1991; investmentin the last decade, the stock India, in 1992; , in 1993; and marketsof developing countriesare likely Russia, in 1995. Foreign investorsrushed to deliver more measured and uneven in, unleashing a 600 percentboom in returns.Gains that averaged 37 percent emerging-marketstock prices (measured a year between 2003 and 2007 are likely in dollar terms) between 1987 and 1994. to slow to, at best, ten percent over the Over this period, the amount of money coming decade, as earnings growthand invested in emerging marketsrose from exchange-ratevalues in large emerging less than one percent to nearly eight marketshave limited scope for addi- percentof the global stock-markettotal. tional improvement afterlast decades This phase ended with the economic strong performance. crises that struckfrom Mexico to between 1994 and 2002. The stock markets PAST ITS SELL-BY DATE of developing countrieslost almost half No idea has done more to muddle think- their value and shrank to four percent ing about the global economy than that of the global total. From 1987 to 2002, of the BRics. Other than being the largest developing countries'share of global gdp economies in theirrespective regions, the actuallyfell, from 23 percentto 20 percent. big fouremerging markets never had much The exception was China, which saw its in common. They generate growth in - share double, to 4.5 percent.The storyof differentand often competing ways the hot emergingmarkets, in otherwords, Brazil and Russia, for example, are was reallyabout one country. major energyproducers that benefitfrom The second coming began with the high energyprices, whereas India, as a global boom in 2003, when emerging major energy consumer, suffersfrom markets really started to take offas a them. Except in highlyunusual circum- group. Their share of global gdp began stances, such as those of the last decade, a rapid climb, from 20 percent to the theyare unlikelyto grow in unison. China 34 percent that they representtoday apart,they have limited trade ties with (attributable in part to the rising value one another,and they have few political of their currencies), and their share of or foreignpolicy interestsin common. the global stock-market total rose from A problem with thinkingin acronyms less than four percent to more than ten is that once one catches on, it tends to percent.The huge losses sufferedduring lock analystsinto a worldview that may the global financial crash of 2008 were soon be outdated. In recentyears, Russia's

• [4] FOREIGN AFFAIRS Volumepi No. 6

This content downloaded from 142.244.11.244 on Fri, 19 Feb 2016 16:39:59 UTC All use subject to JSTOR Terms and Conditions economy and stock market have been among the weakest of the emerging markets,dominated by an oil-richclass of billionaireswhose assets equal 20 percent of GDP,by farthe largest share held by the superrich in any major economy. Although deeply out of balance, Russia remains a member of the brics, if only because the term sounds better with an R. Whether or not pundits continue using the acronym,sensible analysts and investorsneed to stayflexible; historically, flashycountries that grow at fivepercent or more for a decade - such as Venezuela in the 1950s, in the 1960s, or Iraq - in the 1970s are usually tripped up by one threator another(war, financial crisis, complacency,bad leadership) beforethey can post a second decade of stronggrowth. The currentfad in economic fore- casting is to project so farinto the future that no one will be around to hold you accountable.This approach looks back to, say,the seventeenthcentury, when China and India accounted forperhaps half of global GDP,and then forwardto a coming "Asiancentury," in which such preeminence is reasserted. In fact,the longest period over which one can find clear patterns in the global economic cycle is around a decade. The typicalbusiness cycle lasts about fiveyears, from the bottom of one downturnto the bottom of the next,and most practicalinvestors limit theirper- spectives to one or two business cycles. Beyond that,forecasts are oftenrendered obsolete by the unanticipatedappearance of new competitors,new political envi- ronments,or new technologies. Most CEOs and major investorsstill limit their strategicvisions to three,five, or at most seven years,and theyjudge resultson the same time frame.

[5]

This content downloaded from 142.244.11.244 on Fri, 19 Feb 2016 16:39:59 UTC All use subject to JSTOR Terms and Conditions Ruchir Pharma

spread between the value of the best- THE NEW AND OLD ECONOMIC ORDER performingand the value of the worst- In the decade to come, the United States, performingmajor emergingstock markets Europe, and Japanare likelyto growslowly. shot up fromten percent to 35 percent. Their sluggishness,however, will look less Over the next few years, therefore,the worrisomecompared with the even bigger new normal in emergingmarkets will be storyin the global economy,which will much like the old normal of the 1950s and be the threeto fourpercent slowdown in 1960s,when growthaveraged around five China, which is alreadyunder way,with percent and the race left many behind. a possiblydeeper slowdownin storeas the This does not imply a reemergenceof economy continues to mature. Chinas the i97os-era Third World, consistingof population is simplytoo big and aging uniformlyunderdeveloped nations. Even too quickly forits economy to continue in those days, some emerging markets, growing as rapidly as it has. With over such as South Korea and Taiwan, were 50 percent of its people now living in startingto boom, but their success was cities,China is nearingwhat economists overshadowed by the misery in larger call "the Lewis turningpoint": the point at countries, such as India. But it does which a country'ssurplus labor fromrural mean that the economic performance areas has been largelyexhausted. This is of the emerging-marketcountries will the resultof both heavymigration to cities be highly differentiated. overthe past two decades and the shrinking The uneven rise of the emerging work forcethat the one-child policy has marketswill impact global politics in a produced.In due time,the sense of many numberof ways. For starters,it will revive Americans today that Asian juggernauts the self-confidenceof theWest and dim the are swiftlyovertaking the U.S. economy economic and diplomatic glow of recent will be rememberedas one of the country's stars,such as Brazil and Russia (not to periodic bouts of paranoia, akin to the mention the petro-dictatorshipsin hype that accompanied ascent Africa,Latin America, and the Middle in the 1980s. East). One casualty will be the notion As growthslows in China and in the that Chinas success demonstrates the advanced industrialworld, these countries superiorityof authoritarian,state-run will buy less fromtheir export-driven capitalism.Of the 124 emerging-market counterparts,such as Brazil, Malaysia, countriesthat have managed to sustaina Mexico, Russia, and Taiwan. During the fivepercent growth rate fora fulldecade boom of the last decade, the average since 1980,52 percentwere democracies trade balance in emergingmarkets nearly and 48 percent were authoritarian. At tripledas a share of gdp, to six percent. least over the shortto medium term,what But since 2008, trade has fallenback to its mattersis not the typeof political system old share of under two percent. Export- a countryhas but ratherthe presence of drivenemerging markets will need to find leaders who understand and can imple- new ways to achieve stronggrowth, and ment the reformsrequired for growth. investorsrecognize that many will probably Another casualtywill be the notion of fail to do so: in the firsthalf of 2012, the the so-called demographic dividend.

• [6] FOREIGN AFFAIRS Volume9iNo.6

This content downloaded from 142.244.11.244 on Fri, 19 Feb 2016 16:39:59 UTC All use subject to JSTOR Terms and Conditions Broken BRICs

Because China's boom was drivenin part compare countriesin differentincome by a large generation of young people classes. The rare breakout nations will enteringthe work force,consultants now be those that outstriprivals in theirown scour census data looking for similar income class and exceed broad expecta- population bulges as an indicator of the tions forthat class. Such expectations, next big economic miracle. But such moreover,will need to come back to earth. demographicdeterminism assumes that the The last decade was unusual in termsof resultingworkers will have the necessary the wide scope and rapid pace of global skills to compete in the global market growth,and anyone who counts on that and that governmentswill set the right happy situation returningsoon is likely policies to create jobs. In the world of to be disappointed. the last decade, when a risingtide liftedall Among countrieswith per capita economies, the concept of a demographic incomes in the $20,000 to $25,000 range, dividend brieflymade sense. But that only two have a good chance of matching world is gone. or exceeding threepercent annual growth The economic role models of recent over the next decade: the Czech Republic times will give way to new models or and South Korea. Among the large group perhaps no models, as growthtrajectories with average incomes in the $10,000 to - - splinter offin many directions. In the $15,000range, only one country Turkey past, Asian states tended to look to has a good shot at matchingor exceeding as a paradigm, nations fromthe Baltics four to fivepercent growth,although to the Balkans looked to the European Poland also has a chance. In the $5,000 to Union, and nearlyall countriesto some $10,000 income class, Thailand seems extentlooked to the United States. But to be the only countrywith a real shot at the crisis of 2008 has undermined the outperformingsignificandy. To the extent credibilityof all these role models. Tokyo's that therewill be a new crop of emerging- recentmistakes have made South Korea, marketstars in the comingyears, therefore, which is still rising as a manufacturing it is likelyto featurecountries whose per powerhouse, a much more appealing capita incomes are under $5,000, such Asian model than Japan. Countries that as Indonesia, Nigeria, the Philippines, once were clamoring to enter the euro- Sri Lanka, and various contendersin zone, such as the Czech Republic, Poland, East Africa. and Turkey,now wonder if they want Although the world can expect more to join a club with so many members breakout nations to emerge fromthe strugglingto stay afloat. And as for the bottom income tier,at the top and the United States, the i990s-era Washington middle, the new global economic order - consensus which called forpoor countries will probablylook more like the old one to restraintheir spending and liberalize than most observers predict. The rest - their economies is a hard sell when may continue to rise, but they will rise even Washington can't agree to cut its more slowly and unevenly than many own huge deficit. experts are anticipating.And precious Because it is easierto growrapidly from few will ever reach the income levels of a low startingpoint, it makes no sense to the developed world.®

■ FOREIGN AFFAIRS November/December 2012 [7]

This content downloaded from 142.244.11.244 on Fri, 19 Feb 2016 16:39:59 UTC All use subject to JSTOR Terms and Conditions