The rapid loss of halo around BRIC has a lot to do with the fact that
while their economies made some progress in few areas, their politics and
institutions remained stuck in a time warp.
An online magazine recently asked
aloud if the Association of Southeast Asian Nations (Asean) was the new BRIC
(Brazil, Russia, India and China). That question must set off alarm bells in
the Asean community instead of making them euphoric. The rise of BRIC was too
fleeting and its fall sobering. Jim O’ Neill of Goldman Sachs deserves credit
for his immaculate timing with BRIC. However, Asean cheerleading has started
late.
In 2002, Brazil had an election
and it was a disaster for Brazilian assets. American investors feared the
potential victory of Lula Da Silva to the Brazilian presidency. They feared
that he would nationalize all private and foreign assets. In dollar terms, the
Morgan Stanley index of Brazil stocks (MSCI Brazil) dropped 34% during the year
even though MSCI Brazil eked out a small gain in terms of the Brazilian real
after two negative years in 2001 and in 2002. In other words, the Brazilian
real collapsed against the US dollar. Brazilian bonds sold off too. The yield
on the Brazilian US dollar bonds spiked up from 12% in early 2000 to around 28%
by October 2002.
China’ Shanghai Composite Index
had come down from around 2,200 points in mid-2001 to around 1,400 points by
the end of 2002. The Chinese currency was poised to benefit from the dramatic
weakening of the yuan along with the US dollar. The former was pegged to the
latter. The dollar’s ensuing weakness over the next five years up to 2007
ensured a super-competitive yuan and delivered an export and investment-led
growth boom to China. The Shanghai stock index did not participate in China’s
export and economic growth boom. By the end of 2005, the Shanghai Composite
Index was trading at around 1,000 points.
India has had a mostly uneventful
decade in the 1990s. India’s economic growth had done better than in any of the
previous two or three decades but the initial impact of economic reforms
unleashed in the 1990s had waned and the country, while having escaped the big
consequences of the Asian crisis of 1997-98, had not really taken off. The
sanctions that followed the nuclear explosion in 1998 and successive failures
of the monsoon had pegged India’s growth rate back to below 5% and the Sensex
had spent a decade oscillating between 2,600 and 4,000 points. The real estate
markets in major cities had endured a prolonged slump and, hence, valuations in
Indian assets—financial and real—were quite attractive.
Russia had declared a default on
rouble-denominated debt in 1998 and had substantially devalued the currency
too. The Russian Trading System Index (RTSI) denominated in US dollars had
peaked at around 500 points in summer 1997 and had collapsed to little over 100
by end-1998. It did not regain the previous peak of 500 until mid-2003. The
rouble did not stop weakening against the US dollar until 2003.
It is against this backdrop that
Jim O’ Neill and his team of economists came up with “BRIC”, arguing that these
four countries would overtake the rusting G-7 dominated by the US and European
nations. This boosted the deflated egos in these four countries and BRIC leaders
believed that these outcomes would materialize automatically.
Now about 10 years later, BRIC
nations face uncertain and challenging times. India has made an incredibly fast
return to the growth rates of around 4%. The worst is not over. China is yet to
get over its addiction to credit. Its stock of investment is over 70% of GDP.
Its corporate sector is in recession. It would take six years of operating cash
flows for Chinese companies to pay down their debt. Indian corporations too are
in a similar situation. The Brazilian economy is barely growing but inflation
rates both at the wholesale and retail level are high. Capital formation is not
happening. The index of hours worked has stagnated in the last four years. The
currency is massively overpriced and its current account deficit is steadily
becoming larger. Russia remains in the fringes of global economic discourse
despite its size and energy reserves.
The rapid loss of halo around
BRIC has a lot to do with the fact that while their economies made some
progress in few areas, their politics and institutions remained stuck in a time
warp. Corruption and weak governance are rampant and the necessary
institutional competence and autonomy that would counter both have either not
been put in place or have been systematically eroded.
Asean nations face a similar
situation. If anything, in some of these aspects they fare worse than their
BRIC counterparts do. Both sets of nations do not have it in them to migrate to
higher standards of living for their population and to rich country status. In
that sense, it is appropriate to equate them to the BRIC nations. More
importantly, their assets are nowhere near as cheap as the BRIC assets were in
2002.
Hence, those who call for Asean’s
rise to pre-eminence have missed the asset price boom already. It is too late
to join that ride.
V. Anantha Nageswaran
Business & Investment Opportunities
Saigon Business Corporation Pte Ltd (SBC) is incorporated in Singapore since 1994. As Your Business Companion, we propose a range of services in Strategy, Investment and Management, focusing Health care and Life Science with expertise in ASEAN 's area. We are currently changing the platform of www.yourvietnamexpert.com, if any request, please, contact directly Dr Christian SIODMAK, business strategist, owner and CEO of SBC at christian.siodmak@gmail.com. Many thanks.
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