The BRIC Road to Growth. Jim O'Neill

Markets5.15.26.96.2World3.33.33.54.2

      Source: IMF and GSAM.

      By 2015 the size of the BRIC economies in US dollar terms will surpass that of the United States. This means that if their growth rate exceeds that of the United States, their contribution (in current US dollar terms) to world GDP growth will be more than double that of the United States as can be seen in Figure 1.2. In purchasing power parity (PPP) terms, or, in other words, with GDP adjusted for the cost of living in different countries, the relative size of the BRIC countries is even larger. This is the basis on which global GDP growth rates are normally calculated and compared, but some people argue that PPP calculations distort the contribution of the BRIC countries. Even on the nominal US dollar basis, though, their 6.6% growth contribution is more than double that of the United States. Another way of thinking about it is to imagine what world GDP would look like if the United States grew by 6.6%. Seen in this light, one could even argue that it is a good thing that the BRICs’ real GDP growth will slow as their economies get bigger, as otherwise there would be even more dramatic changes in world trade.

Figure 1.2. Contribution to GDP (USD) 2011–20.Source: GS Global ECS Research.

      As I discussed in The Growth Map,1 long-term growth is really driven by two variables: the number of people in a country’s workforce and how productive they are. Countries with large and rising numbers in the workforce, and with rising productivity, will see their real GDP growth rates accelerate, and countries with declining populations, and weak and declining productivity, will see their growth rates weaken. Table 1.3 sets out the conflicting pressures for each of the BRIC countries.

Table 1.3. Labour force participation.

	Size of working age population (millions)	Growth this decade of working age population
China	1,013	0%
India	822	16%
Euro area	219	–2%
US	213	4%
Brazil	137	11%
Russia	102	–8%
Japan	79	–9%
UK	41	1%

      Source: UN and GSAM.

      As things stand, none of the BRIC countries has the ‘ideal’ combination. India easily has the best demographic profile; its large, young population gives it a rapidly increasing labour force and the highest potential growth rate of all the BRIC economies. I frequently think that, for this reason alone, India has the highest potential to do better than expected in this decade and beyond. In contrast to this, India probably has the weakest productivity of the four BRIC countries. As explained elsewhere,1 I use an index produced by GS and based on a total of eighteen different variables, called a growth environment score (GES), to measure sustainable potential growth and productivity. India scores the lowest of the BRIC countries and has the most need – but also the most scope – to improve. If it did introduce the reforms needed to boost productivity, it surely has the greatest capacity to achieve unexpectedly strong growth. India could easily surprise us, despite its disappointing progress in the past two years.

      In June 2013, I visited India to meet the probable candidate for the BJP (Bharatiya Janata Party) in the 2014 elections, Mr Modi, the chief minister of the state of Gujarat. If he were to become elected, despite considerable challenges, and if he could implement his mantra of ‘maximum governance and minimum government’, India could become an extremely exciting place. Poor governance, both centrally and in many regions, has hindered the effectiveness of many policies, economic ones included. Transformation of central governance and its links to the different states would be a huge, but very difficult, step forward for India.

      Table 1.4. Trend growth in the BRIC countries (% change in real GDP).

	Realized			2050 projections by decade*
	1981–90	1991–2000	2001–10			2011–20	2021–30	2031–40	2041–50
Brazil	1.6	2.6	3.6			5.2	4.6	3.9	3.1
Russia	–	–2.1	4.9			5.4	3.8	2.7	1.8
India	5.6	5.6	7.5			6.5	6.0	5.6	5.1
China	9.3	10.5	10.5			7.1	5.2	3.4	2.9

      Source: IMF and GS Global ECS Research.*From GS Global ECS projections model.

      None of the other three countries has as favourable a demographic profile as India, and so, in order to boost real GDP growth significantly, they have to rely more on productivity-enhancing policies to exceed expectations. So it is difficult to believe that their growth will accelerate in the future. Brazil has reasonable demographics and, with much improved policies that could unleash private sector investment, it could also show stronger growth than over the last decade. I have assumed that Brazil will grow by more, and this currently looks somewhat optimistic.

      Once economies become very big, of course, there is less scope for them to grow rapidly. So, by 2050, it is assumed that all four of the BRIC countries will have slowed down. The two with the most challenging demographics are China and Russia, which both have ageing populations. Yet in the decade 2040–50, the BRIC countries combined will have surpassed the G7 in size, having overtaken the United States some twenty years earlier. Their average growth rate of 3–4% over that period, while significantly slower than today’s 6–7%, would still be the envy of Europe and the United States.

      While all four of the BRIC countries need to introduce policies to boost their productivity, there is a danger of being too pessimistic about their outlook. There is evidence that demographic trends in Russia and China will not be as bad as I have just assumed. In March 2012, I participated in the annual workshop of the Ambrosetti Forum and, in a session on the ‘emerging world’, the chief economist of Sberbank compared official Russian projections for population size in recent years and the latest estimates of the actual figures. It would seem that the population has increased slightly, and so, as yet, shows little evidence of the widely assumed decline. There continues to be growing evidence that, as Russians become wealthier and more knowledgeable, they are adopting behavioural attributes that are extending their life expectancy. This includes drinking less cheap alcohol, especially vodka. There are perhaps other factors at work as well, including some signs of increased immigration from some of the countries of the former Soviet Union.

      Russia faces considerable challenges, but so far this decade its growth has been slower than previously, but not materially slower than I expected.

      It is worth underlining once again the significant position the BRIC countries already hold in the world economy: if Russia grows, as assumed, by 5% on average this decade, its contribution to global GDP will be bigger in US dollar terms than that of the euro area.

      What about China’s demography, the result of its all-too-successful one-child policy? Recently, the State Council announced the closure of a number of ministries, including the one responsible for overseeing this policy. Some people see this as another sign that the one-child policy is in the process of being relaxed. If so, and if China’s birth rate were to rise as a result, this would not affect China’s labour force until well after 2020, but by 2030 China’s population would not be shrinking to the degree currently assumed.

      Turning from workforce size to productivity, each of Brazil, Russia and India need to introduce policies to boost their performance. Suppose that they decided to learn from the experience of South Korea. At the end of 2012 South Korea had the second highest GES of the 180 countries in the ranking, and it is also the only large populated emerging nation