Mar 19, 2013

India - Anointing Asean

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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

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