| Carnival in Brazil
The author is former governor, Reserve Bank of India
A recent interesting forecast by Goldman Sachs, the well-known American investment-banking company, has raised the question of the BRIC nations — a group consisting of Brazil, Russia, India and China — coming to dominate the global economy in the not-too-distant future. This will be an exciting reversal of roles in the global scenario. Countries long consigned to the scrap- heap of the global economy, these economies have, according to the forecast, challenged the purveyors of conventional wisdom and Malthusian pessimists, who had predicted their being choked by their growing populations and misgovernance. In the last two decades, at least two of these econo- mies have clocked a higher rate of growth than the economies of the affluent group of seven, which includes the United States of America, France, Italy, Japan, the United Kingdom, Germany and Canada (Canada contributes little to the total of the G-7). So, the Western media have raised the question of whether the G-4, the BRIC, will soon overtake the G-6.
As is to be expected, the forecast suffers from the limitations of all long-term predictions. Forecasts are usually liable to error, especially long-term ones. Many unforeseen developments can upset the assumptions. But, based on present indications and reasonable projections of the rate of growth of different countries, the Goldman Sachs forecast states that BRIC will grow to outstrip the currently dominant members of the economy, within half a century. The forecast estimates that the BRIC group will be larger than the current big powers of the G-6. China itself is likely to be larger than any of the current occupants of the high ground on the global economic stage. The power-brokers of Washington, who ride herd over the Bretton Woods institutions on the basis of the “strength” of their pocketbooks, had better take care.
The Goldman Sachs forecast includes a sobering prediction that the current members of the G-7 may even become ineligible to attend the meetings of the powerful economies, which have laid down the law for the financial institutions of the world. The forecast is basically a result of the discrepancy in the rate of growth of the two groups of nations. The higher rate of growth of BRIC will inevitably lead to the current gap between the two groups being bridged over the years, thanks to the factor of compounding. Further, the rich mineral and other resources of the countries of BRIC, particularly Brazil, Russia and China, and the intellectual prowess of China and India will make the forecast come true.
It is true that like all forecasts, Goldman Sachs’s forecasts have to be taken with a pinch of salt. The countries that belong to the BRIC group have been known to be vulnerable to political implosions from time to time. So also, we cannot rule out the impact of epidemics, like SARS and AIDS. Hopefully, the nations that belong to BRIC have learnt the lessons of their recent history. They will need to know how to avoid the pitfalls of such catastrophic occurrences by prompt corrective action and preventive policies. Above all, the emergence of democratic forms of governance in Brazil, Russia and China and the strengthening of transparency in governance in India give reason for hope that such occurrences will be infrequent.
That forecasts of this kind have been made before should be a sobering thought. Let us reflect that before the bust of the Nineties, the Japanese economy was forecast to outgrow the American giant. There were even predictions that Japan will be able to out-compete America’s technological prowess. The coming of the Japanese century was very much dreaded in Washington and London. But, all this went up in smoke, with the bust of the Japanese bubble and over-reactions by the Japanese Central Bank. It has taken quite a long while for Japan to catch its breath and to revive the growth impulses. It is still battling deflation, the erosion of business confidence and lack of entrepreneurial initiatives.
What the Goldman Sachs forecast conveys is, however, the definite potential of nations of BRIC to grow. But, the realization of that potential itself depends on the continuance of an open global economic and trading environment. As at present and for many years to come, the growth of the members of BRIC will depend on the state of health of its potential competitor and future rival, the economies of the G-7, particularly the US. It is ironic that even as the growing forex reserves of the BRIC countries sustain the growth of the American economy by being invested in the US’s securities, the growth of America’s consumption, which the US’s growth implies, sustains the expansion of manufacturing and services sectors of the countries of BRIC.
The dangerous trends of protectionism, which are showing signs of renewed resurgence in America, especially in reference to imports of manufactured goods and services, can cause a mutually destructive development, which slows down BRIC even as it hinders the growth of America’s economy. In any event, the maintenance of a barrier-free trade regime is vital if the Goldman Sachs forecast is to be realized.
In this context, it is worth noting that the Union law and commerce minister, Arun Jaitley, formed an unbeatable combination at the Cancun conference, when he joined with Brazil and China to block the unfair machinations of the Western countries. He seemed to have had a premonition of the Goldman Sachs forecast of BRIC’s emergence. The Brazil-India-China combination did its best to prevent the Cancun accord from going the way the West wanted it. But it is time to reflect on this pyrrhic victory to re-evaluate the strength of the Jaitley-inspired coalition.
The international financial media are already full of stories that the “coalition” is facing threats and temptations being offered by the West. There are suggestions that the alliance will be breached at its weakest links by tempting offers of aid or trading concessions by the US. The path of wisdom for BRIC countries is to be aware of such possibilities and protect themselves against counter-moves by the West. It is time they realized that in the current conjuncture, the West is more powerful than BRIC and a world with a World Trade Organization accord is better than one without an accord.
“Stoop to conquer” is advice, which may be bitter medicine for the Jaitleys of the world. But, the glorious future of BRIC is yet to be — in the period in between, BRIC has to survive and grow. BRIC needs free trade with the West. It is time we revisit the issue of a WTO accord and reassess what is good for us — in spite of the West’s reservations. In the longer run, an open trading environment with some of the West-imposed constraints may be better for all — rather than the current conspiratorial goings on in the chancellories of Washington, London, Berlin and Paris, which tend to dilute even the WTO-inspired arrangements. Let us hope that WTO issues will be solved and BRIC will emerge relatively unscathed. In any event, in the long run of history, BRIC will be the countries that dominate the future.
Anyway, BRIC is the future. The Goldman Sachs forecast may be in error by a decade or two. But, the 21st century is, indeed, a century in which the once-deprived millions of the BRIC countries will come into their own. But, this depends on the managers of these economies avoiding errors, which may cost them dearly. For one thing, irrational exuberance can be costly, whether in matters of economic growth or stock markets. Care has also to be taken that the poison pills of advice tendered by the Western reformers to the BRIC countries be examined carefully before they are accepted.
China and India, in particular, need to take care, lest their growth be stifled by excessive resort to financial compression and monetary tightening, as well as premature capital account liberalization. The BRIC countries are currently in the hands of mature political and economic managers. I am confident that they will do their best to avoid such tempting offers of policy advice, which may turn out to lead to costly errors.
The Goldman Sachs forecast is a reminder that there is nothing as changeable as the global economic scenario. At the turn of the last century, Argentina was almost as large as the American economy. One hundred years later, Argentina was a basket case. It is not surprising, therefore, that the forecast offers the prospect of a similar sharp reversal of roles among the economic powers of the world. There is a definite prospect that the forecast may well turn out to be true, and the 21st century may be the “golden” century of the BRIC countries.