Brics Fade as Engine of Growth

By BOB DAVIS, The Wall Street Journal

BEIJING—Not too long ago, the Brics nations looked like they might be able to provide a powerful engine of growth for the global economy. Don’t count on it for 2013.

Brics refers to some of the stars of the emerging markets—Brazil, Russia, India, China and South Africa—which together represent 40% of the world’s population. But only one of the nations, China, has the economic heft to make a major difference internationally on its own, and it is just now starting to come out of a slowdown. The other four nations face a variety of economic challenges, ranging from inflation to inadequate foreign investment to labor unrest.

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Since 2009, the leaders of the group have held four leaders summits. South Africa, which joined the group at the end of 2010, is hosting the fifth summit in Durban, South Africa, in March 2013. But tThe hope that the Brics countries would help one another through increased trade, investment and political support hasn’t panned out. Officials and analysts from Brics nations say they act as much as rivals as allies, and their lack of cohesion adds to their economic problems.

China complains that other Brics countries increasingly target it in anti-dumping suits. Brazil objects to Moscow’s restrictions on Brazilian agricultural imports. Russia is trying to turn itself into a major farm exporter, which is bound to heighten competition with Brazil. Slower growth in China and India pushes down commodity prices, which hurts South Africa and Russia.

“The Brics is not about the economy,” said Fyodor Lukyanov, an analyst who chairs an influential Kremlin foreign-policy advisory board. “The bloc sees itself as an alternative to the West, but not a confrontational one, like Iran.” On the economic front, Brics nations “have different, sometimes conflicting interests,” he said.

The Brics view themselves as an alternative to the Group of Seven industrial nations—U.S., Canada, France, Britain, Germany, Italy and Japan—politically and economically. But the economies of the Brics and the G-7 remain interlocked. When the U.S. financial crisis spread to Europe, it didn’t stop there. The Brics nations weakened because they lost big export markets and sources of financing and investment.

In 2009, China’s vast stimulus plan helped shore up commodity prices, which helped its Brics partners—for Russia on oil and gas, for Brazil or iron ore and agricultural goods; and for India and South Africa on minerals. But China itself slowed in 2012, as did the other four Brics nations, which all are expected to register slower growth for 2012 than they did the previous year, according to JP Morgan JPM +1.02% . The bank predicts all but Russia, whose growth rate is expected to slow further, will see modest improvements in 2013.

“These countries face so many domestic problems,” said Arvind Subramanian, a former IMF senior economist who is now at the Peterson Institute for International Economics in Washington. “The common dynamism they had is coming under question.”

For China, 2013 looks as if it will yield somewhat faster growth than 2012, when its economy is expected to show a 7.6% increase, according to JP Morgan, the slowest pace in more than a decade. China slowed because European and U.S. export markets shriveled, but also because the country’s leaders, wrestling with the legacy of the stimulus spending, imposed restrictions on real estate to deflate a housing bubble.

Now, feeling more confident that it has housing and banking problems under control, officials have been easing restrictions and approving more infrastructure projects. A number of analysts project China’s growth in 2013 should top 8%.

“China should be able to generate a positive impulse for growth,” said RBS analyst Louis Kuijs, as imports of commodities and other goods needed to build Chinese projects pick up.

Modest gains by other Brics nations aren’t likely to matter nearly as much internationally. India, with nearly the same population as China, has an economy just one-third the size of China’s. With inflation in India above 7% and large current-account and budget deficits, growth isn’t the country’s main concern.

“The government has now little choice but to press for fiscal consolidation,” said an RBS analysis, to reduce deficits and reassure investors the country isn’t a candidate for default. New Delhi is focusing on pushing through politically difficult reforms that would boost foreign investment, open up closed sectors and spur infrastructure spending.

Brazil, with its history of hyperinflation, is also on guard for a resurgence in inflation, which may limit its potential for growth in the coming year. A number of Brazil analysts say that the country’s mix of high tax rates, poor infrastructure and heavy government intervention in industries gives it a natural speed limit of around 3.5% a year. Attempts to push the economy to go faster through stimulus spending would also speed up inflation.

“There are too many economic bottle necks right now,” says David Beker, a senior economist at Bank of America BAC +3.10% based in São Paulo.

The country’s leaders have tried to rely on their ties with other Brics nations to help out economically. President Dilma Rousseff was in Russia to meet with PresidentVladimir Putin in December 2012 and invited Prime Minister Dmitry Medvedev to come to Brazil for the annual Carnival celebration in February.

But Brazil’s efforts haven’t yielded much more than photo ops so far. The biggest disappointment for Brazil has been China’s refusal to buy more Brazilian goods. China has declined to allow giant Brazilian ships designed specifically to bring iron ore to Chinese ports to dock, citing safety concerns, though critics say China wants to retain much of the shipping business for Chinese carriers.

Russia has its own problem, including the woes of the European Union, Russia’s main trading partner and the largest buyer of Russian oil and gas.

As for South Africa, the country’s violence remains a barrier to growth. Since police shot and killed 34 platinum miners near Johannesburg in August, labor turmoil has crippled the mining industry and hobbled manufacturers. Standard & Poor’s Ratings Services and Moody’s Investors Service downgraded South Africa’s debt in the past three months, saying they feared the government wouldn’t be able to quell the unrest and wider social tensions.

Looking to give the group more cohesion and economic purpose, the BRIC nations have proposed to create a Brics development bank, but even that effort has come to highlight the group’s divisions.

Liu Youfa, vice president of the China Institute of International Studies, a Chinese government think tank, attended a September session of Brics academics in Chongqing, China, whose aim was to fill in details of the bank proposal. The bank’s financing would be reserved for member nations, including funding for big infrastructure projects and engineering contracts, he said. Construction would benefit China, whose firms build roads, dams and airports around the globe.

But other countries have different plans for the bank. South Africa wants the funding to be available for other developing nations. India, which proposed the development bank, likes the idea of infrastructure financing but fears that China wants to run the bank mainly to make yuan loans and further the international use of China’s currency, “One country wants to dominate due to its financial standing, which would not be acceptable to the others,” said Brahma Chellaney, an analyst with the Centre for Policy Research, a New Delhi think tank.

Where to locate the development bank has become another battle. Mr. Liu says India wants the bank headquartered there, while China would “very much appreciate it” if the bank is located in Beijing, Shanghai or Chongqing. China is expected to chip in the largest share of the financing and “money talks,” he said. Mr. Liu said he believes the disputes will be ironed out eventually and the Brics bank will be established in the next several years, though not in 2013.

—Patrick McGroarty in Johannesburg, John Lyons in São Paulo, Alexander Kolyandr in Moscow and Romit Guha in New Delhi contributed to this article.

A version of this article appeared January 2, 2013, on page A13 in the U.S. edition of The Wall Street Journal, with the headline: Hopes Dim Around Brics as Engine of Growth. 

 

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About Alexander Gordin
An international merchant banking professional with over twenty years of business operating and advisory experience in the areas of export finance, international project finance, risk mitigation and cross-border business development. Clients include foreign governments, municipalities and state enterprises as well as Fortune 500 and small/medium enterprises. Strong entrepreneurial instincts, combined with leadership and strategic skills. Transactional and negotiations experience in over thirty five countries. Author of the highly acclaimed "Fluent in Foreign Business" book and creator of the "Fluent in OPIC", "Fluent in EXIM","Fluent In Foreign Franchising", "Fluent in FCPA",and "Fluent in USTDA" seminar/webinar series. Currently developing "Fluent In ......" seminars and publications. Co-author of the Fi3 Country Business Appeal Indices. Extensive international business development and project finance transaction experience in healthcare, aerospace, ICT, conventional and alternative energy infrastructure, distribution and hospitality industries. Experience managing international public and private corporations. Co-Founded three companies abroad. Strong Emerging and Frontier Market expertise. Published and featured in numerous publications including: The Wall Street Journal, Knowledge@Wharton, NBC.com, The Chicago Tribune, Industry Week, Industry Today, Business Finance, Wharton Magazine Blog, NY Enterprise Report, Success magazine, Kyiv Post and on a number of radio and television programs including: Voice of America, CNBC, CNNfn, and Bloomberg. Frequent speaker on strategy, cross-border finance and international business development. Executive MBA from the Wharton School at the University of Pennsylvania. B.S. in Management of Information Systems from the Polytechnic Institute of NYU. Specialties Strategic Management Advisory, Export Finance, International Project Finance & Risk Management, Cross-border Negotiations, Structured Finance transactions, Senior Government and Corporate officials liason

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