“China is the only BRICS country to have either met or possibly slightly surpassed my expectations”, BRICS inventor Jim O’ Neil from the World Economic Forum 2015 in Davos
The BRICS Agenda session (WEF, 22/01/2015)
Being at the second day of the World Economic Forum 2015 in Davos a session that monopolised the interest of the world was titled “The BRICS Agenda”. It was there where everybody was anticipating to see how the BRICS countries contribute to the global economy. Most importantly we were eager to see the reasons behind their substantial economic slow down that certainly affects significantly the global growth rate.
The session was supported by Globo News TV channel in Brazil and was broadcast live. The excellent panel was lead by SIllio Boccanera, foreign correspondent of Brazilian media based out of London. He welcomed key personalities from the BRICS countries, Brazil, Russia, India, China and South Africa to table their views on BRICS evolution and future. The BRICS panel was comprised of Mr Marcelo Neri, Minister of Strategic Affairs of Brazil, Mr Alexei Kudrin, former Minister of Finance of Russia and presently Dean at the University of Saint Petersburg, Mr Arun Jaitely, Minister of Finance, Corporate Affairs and Information and Broadcasting of India, Mr Justin Lin, Professor at the University of Beijing and Mr Nhlanhla Musa Nene, Minister of Finance of South Africa. The stimulating dialogue was to be completed by the positive contribution of a huge BRICS investor, Renault-Nissan Alliance, which was represented at the panel by Carlos Ghosn, Chairman and Chief Executive Officer of the group.
A BRICS paralysis?
Mr Boccanera, the experienced moderator of the discussion, set the first stimulus to the panelists by wondering whether the BRICS are going through “a middle life crisis”. Things do not get better, he continued. Are we talking about a BRICS “paralysis”, he wondered? “Are we reaching the time of retirement of the BRICS”?
The Brazilian senior journalist continues with reference to some BRICS basics. He recalled that Jim O’ Neil, the famous British economist, when he created the acronym BRICS back in 2001, he had made some assumptions about how those countries would grow. Today, he stresses that “China is the only one to have either met or possibly slightly surpassed my expectations”. He is clearly disappointed with Brazil, Russia and India; although India has been showing lately some optimistic uprising course. India grew 5.5% last year and is expected to grow at 7% this year with Mr Modi’s government, which is openly positioned as a business oriented one.
The investor’s viewpoint
Right after the stimulating introduction, Mr Boccanera called on Carlos Ghosn, Chairman and CEO of Renault-Nissan alliance to bring to the table the investor’s view on the BRICS “situation”. Mr Ghosn did not hide his disappointment with some of the BRICS. He confirmed that his company is a big investor in all those countries and it still sees the big potential. He then explained that the car industry always invests with a horizon of 10–15 years and is not a hit and run industry. Usually, he commented, it takes around 4 years to see the results of a decision in his industry, showing how patience is importance when one invests in the BRICS. Nevertheless, he admitted that China has already delivered the ambitious aims of Renault-Nissan. Brazil has a huge potential but there is a disappointment between that and current performance. He proceeded with his thoughts stating that there is a big question mark over Russia today about when it will “get out of this hole”. He concluded in a reassuring tone saying that “we need to invest…there is absolutely no retreat” from the BRICS.
The Russian “hole”
After the investor’s voice, the moderator passed the ball on to Alexei Kudrin to speak regarding the “Russian hole” that Mr Ghosn had referred to. It has to be noted here that the former minister of Finance in Kremlin was the only panelist who decided to speak in his native language. Mr Kudrin tried to initially deviate from the question by giving a rather insightful viewpoint on BRICS. He argued that it was not just Mr O’Neil who brought to life the BRICS. The leaders of these countries were already in favour of the idea; BRICS are countries that are close in mind, Mr Kudrin pointed. He characterised the potential of this bloc as substantially long term and he underlined how close the BRICS economies are in their economical interests.
He ended up making a clear point that the BRICS voices should be carefully heard in trade and world relations. He continued by saying that all BRICS leaders come together before IMF of G20 meetings and they discuss. “BRICS countries are 27% of the global GDP” he stressed, which is close to the European one. However, the time had come for him to make his major point; that despite the similar contribution share to the world’s wealth, Europe has a weight of 27% of the votes in the IMF meetings, while the BRICS 11%. The Russian Professor made a clear point there that emerging markets are under appreciated in IMF; something that is not in line with the status of the countries.
“That is why a decision was taken to redistribute the quotas in the BRICS”, he said. He gave the example of the Chinese proposition to go from 5% to 6,39% in the IMF vote share. But the American Congress blocked this, as Mr Kudrin reveals. And this gave him the right pass to talk about the recent development of the formation of the “BRICS Development Bank” or NDB, as it is known to the public. With a capital of 100 billion euros this financial institution, for the Russian technocrat, will be able to better support the BRICS economies.
Mr Boccanrra seeing that Mr Kudrin did nor reply to his question at all, he repeated with emphasis the question posed, expressing the eagerness of the world to learn about how the Russian “hole” is to be covered.
Mr Kudrin then could not avoid replying. He made a point by saying that the Russian debt is only 11% of the GDP, which is one of the lowest Debt/GDP proportions in the world. By that he wanted to make a clear point on is that there is no fear of bankruptcy in Russia as the gold reserve of Moscow is substantial. He blamed the Russian recession first on the drop of the oil price in the world. He did not hide though to admit that 60–80 dollars is the realistic price that the world should adjust to. What is more, he maintained that Russia is undergoing a period of structural reforms for the next two years, in order to confront with recession. Oil price drop and sanctions for him have brought the recession in his country. He ended by expressing his support to the President of the country and he showed optimism that Russia will overcome the shaky moments and avoid economic collapse.
Brazilian “confidence shock”
The turn of Brazil had come and Minister Marcelo Neri took the floor to share with the world the “Brazilian reality”. Mr Neri claimed that Brazil was the only BRICS country where inequality fell significantly. Even if Brazil is not doing well in terms of GDP growth (around 0,5%), the GDP per capita has grown 5.5%. Unemployment is also low he acknowledged. Hence, he believes that Brazil mainly focuses on the alleviation of the huge chasm in redistribution of wealth in his vast country. Mr Neri committed to a pro business strategy from the side of his government that will provide a “confidence shock to the economy”. He ended his position by announcing the government’s rigid plans for reforms and fiscal adjustment.
“Vision 2030″ for South Africa
Later the moderator passed the discussion to Minister Nene from South Africa by referring to the IMF’s crucial warning to the African country concerning the big structural problems faced. Mr Nene could do nothing but admit the big challenge he is facing. He argued though that all BRICS countries face the same challenges and that it is not an African issue per se. He posited that for the first time South Africa has openly put before its citizens the growth strategy, called “Vision 2030″. There are three cornerstone values of the South African plan: “create environment for private sector to thrive… a better public sector and… active citizens”. Last but not least, Mr Nene committed, similarly to the other BRICS leaders, to necessary reforms and fiscal consolidation for the next two years with President Zuma’s current government. This certainly reminds us of European austerity to some extent.
India: “We must Grow!”
The moderator passed with an optimistic spirit the microphone to Minister Jaitley from India. The biggest democracy in the world, for Mr Jaitley, is not only about the current positive political change with Mr Modi. In India, he interestingly reveals, there is a “change of mindset”. “We must Grow”, people say today in this vast country. He also reassured the moderator and the world that bureaucracy is no longer an obstacle for the growth plans of the new government. While the new government knows exactly what to do, he maintained, there is a lot of distance yet to cover in investments, infrastructure etc. Most importantly, the major Indian politician said that the current 5,5% growth rate of India is much below its real capacities but a rather 8–9% is a more realistic one to be witnessed in the years to come.
China, the world’s growth engine
While Mr Boccanera, the moderator of the panel, had always something to complain about Brazil, Russia, India and South Africa, he addressed Professor Lin with a reassurance that China is certainly the best student from the BRICS countries. He did mention though that there is a substantial drop in the growth rate we are used to from 12% to 7,4%. It has to be mentioned here also that Mr Lin was given three times the time his fellow panelists were given; probably because of the paramount importance of C letter in the BRICS acronym in terms of global growth.
Professor Lin first wanted to explain that the continuous 12–13% growth rate is not at all sustainable. He insightfully observed that in the past 36 years China achieved 12–13% for a few years only. However, when China attained this immense growth rate it faced an awful increase of inflation. He continued by making the remark that in the past 36 years the average consecutive growth rate in China was 9,7%. That is already a “miracle”, as he described. Mr Lin made it clear then that it is a misunderstanding or a misconception to anticipate from China to grow in such rates in the following years. This is not possible for several reasons according to him.
A gigantic economy like China, according to Mr Lin, which overtook the US economy in terms of size last year, is not affordable to grow with rates greater than 9,7%. Nevertheless, a 8% growth rate is closer to reality for the coming years in China, the Chinese Professor argued. He clearly stressed though that this is only a domestic growth rate. It certainly depends on what is going on at the rest of the world.
Mr Lin presented afterwards the three elements of growth for each country: “export, investment and consumption”. He also revealed to us that China will not focus on export in the next few years and that its growth will not be structured and based on exports per se. This is related heavily to the global economic crisis outcomes in the Chinese export markets. On the contrary, China needs to focus on the other two elements: investment and consumption. China is an incredibly fertile country for foreign investment, Mr Lin underlined. He also made a reference to the Chinese Premier’s sayings at Davos, who positioned China as still a developing country. Investment in technological innovation, infrastructure, environmental protection and urbanisation are the cornerstones of the investment plans in China. According to Professor Lin, this is exactly what distinguishes China from the developed countries. Making a clear innuendo to the European stagnation/recession trend, he claimed that whenever there is a crisis in the developed markets it is very difficult to invest on.
On the other hand, the senior Chinese academic from the university of Beijing, continued by saying that China is a great player not only in attracting investments but also in making investments abroad. The main reason is that the public debt is confined to some 40% of the GDP, which is definitely among the best Debt/GDP proportions in the world. In addition to that, private saving in China is up to 50% of the GDP. This means that all this capital can be used as investment flow capital by the Chinese government.
What is more, Professor Lin wanted to alternatively show how China is primely positioned as a world economic power against the rest of the developing world. He spoke about the 4 trillion reserve in US dollars that the Chinese coffers contain today. This is the biggest reserve in the world by the way, Mr Lin underlined. In the rest of the developing countries investment might face problems, because of fiscal problems or limited capital reserve or even small private savings. China does not have this kind of problem according to Mr Lin. He further posited that with the good investment environment in China, more jobs will be created and hence the third aforementioned element of an economy’s growth, consumption, will be also satisfied and thus increased.
Mr Lin concluded by saying that China will maintain the 7% growth rate in the next 5 years. This might be lower than the 36 year average he cited above, but certainly will be among the biggest in the globe. That is estimated to amount to a 25–30% of the global growth. Thus Mr Lin like this reassured the world that China will continue to be the “growth engine of the world”.
All in all, “The BRICS Agenda” session at the World Economic Forum 2015 in Davos gave some crucial takeaways to the world. And this is not only confined to the most relevant update on how the BRICS are growing or not growing, which is also significant of course. What is of paramount importance though is that the developed world learns the right lessons from the BRICS agenda. Particularly, the lessons that Europe should learn learn from the BRICS are plenty.
And those according to the Sting should be the following:
1. Reforms is a necessary evil that the world economy already adjusts to. Europe needs to take its calculated share.
2. Europe should not expect substantial foreign investment. It is rather time to focus on export.
3. Europe should not “drawn” its people with austerity but make private saving affordable and create jobs to incentivise it.
You can view the full session from Davos here:
Originally published at europeansting.com on January 28, 2015.