Economic Trends in the BRIC Countries
David Bartlett, economic advisor for RSM International, looks at the growth of BRIC countries in a slowing global economy.Date: 07 Apr 2008
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The BRIC countries appear well positioned to weather the global economic downturn. Based on newly revised GDP growth projections, the International Monetary Fund (IMF) anticipates a modest deceleration of China’s blistering growth path (from 11.4% in 2007 to 10% in 2008). The IMF projects smaller reductions of the GDP growth rates of India (8.9% to 8.4%) and the Russian Federation (7.0% to 6.5%). GDP growth in Brazil, the slowest growing of the BRIC economies, is projected to fall from 4.4% to 4.0%. SUB-PRIME MORTGAGE CRISIS "Russia's economy is integrally linked to the EU."
The BRIC countries are not wholly immune to the economic woes of the US, whose sub-prime mortgage crisis triggered the recent turmoil in global financial markets. The US is a major trading partner of Brazil and China, and the foremost customer of India’s burgeoning IT services industry. Similarly, Russia’s economy is integrally linked to the EU, whose already weak growth rate is expected to dip below 2% in the wake of the US recession. But, three factors enable the BRIC countries to withstand the slowdown of the developed Western economies:
FOREIGN INVESTMENT Between 2000 and 2006, inward FDI stock in the four BRIC countries grew from $136.9bn (8% of global FDI stock) to $1.53tn (13%). This represents a compound annual growth rate of 41.3%, against a CAGR of 24.1% in the US (the single biggest recipient of FDI) and 32.7% in the EU (the largest regional destination). "The strong FDI performance of the BRIC countries continued in 2007."
The strong FDI performance of the BRIC countries continued in 2007. China, by far the leading emerging market destination of foreign direct investment, received $67.3 FDI inflows last year. Combined with the $54.4 FDI reaching Hong Kong (chiefly comprised of foreign capital ultimately destined for the mainland), the PRC ranks second behind the US in the bidding for foreign direct investment. The Russian Federation received $48.9bn FDI in 2007, a 70.3% increase over the previous year. Brazil, which has traditionally underperformed in the FDI sphere relative to its size and resource endowment, experienced a near-doubling of inbound foreign investment between 2006 and 2007 ($18.8bn to 37.4bn). India remains the laggard of the BRIC group, attracting $15.3bn inbound FDI last year. A recent study by the Economist Intelligence Unit (World Investment Prospects to 2011) signals the growing prominence of the BRIC countries as foreign investment hosts in coming years. The unit forecasts average annual FDI inflows to China and Hong Kong of $134.8bn, behind the US ($250.9bn) but ahead of the UK ($112.9bn) and France ($78.2bn). Russia and Brazil are projected to receive annual FDI inflows of $31.4bn and $27.5bn respectively, while inbound investment reaching India is expected to rise to $20.4bn per year. EVOLVING ECONOMIES The trajectory of inbound FDI in the BRIC countries reflects the evolving positions of the four economies in the global economy: China "Manufacturing remains the centerpiece of China’s foreign investment sector."
WTO-mandated liberalisation of Chinese foreign investment has stimulated FDI in financial services, real estate, construction, and other non-manufacturing sectors. Meanwhile, rising wages in Shanghai and other coastal regions have eroded China’s cost advantages in labour-intensive production, precipitating a diversion of manufacturing-related FDI to Vietnam and other lower-cost locales. But manufacturing remains the centerpiece of China’s foreign investment sector, accounting for nearly 70% of the country’s inbound FDI stock. China’s large installed manufacturing base enables the country to bootstrap sequential investments in key industries (automotive, consumer durables, garments, microelectronics, telecommunications), solidifying China’s standing as the world’s manufacturing platform. Russia The Russian Federation is a late mover in the foreign investment sphere. During the 1990s, Russia received lower amounts of FDI than the smaller and less well-endowed countries of East Central Europe. While Russia has now surpassed the CEE countries as an FDI host, the Russian business environment remains less attractive to foreign investors than the EU accession states that are converging toward Western-style legal/regulatory norms. Furthermore, the continued delay in Russia’s entry to the World Trade Organisation has stalled the country’s adoption of intellectual property protections and related reforms critical to the foreign investor community. Moscow’s heavy-handed treatment of the dispute over Sakhalin-2 (which resulted in the transfer of majority ownership from Royal Dutch Shell to Gazprom) deepened anxieties over foreign investment conditions in Russia’s energy sector, the country’s primary FDI destination. But Russia’s centrality as an oil and gas supplier to Europe indicates growing inflows of hydrocarbon-related FDI. Meanwhile, Russia’s rising per capita income and expanding middle class are stimulating foreign investment in non-energy sectors, notably banking, consumer goods and real estate. Manufacturing-related investment in Russia remains small (about 7% of inbound FDI), but is likely to grow in the coming years as Russian manufacturers seek foreign investment to bridge the competitive gap with China, Brazil and East Central Europe. Brazil A number of leading multinational corporations have been active in Brazil for decades. The country’s size, resource endowment, industrial base and geographic locale offer huge rewards for foreign investors. But a variety of factors (high levels of corruption, acute income inequality and a long history of political-economic instability) has hindered Brazil from realising its FDI potential. "A number of leading multinational corporations have been active in Brazil for decades."
While Brazil is unlikely to attain Chinese FDI levels, recent developments bode well for the country’s ability to boost foreign direct investment. The Lula government’s economic reform program has improved business conditions, while its privatisation campaign has spurred cross-border mergers and acquisitions in financial services, telecommunications and other sectors. Brazil’s automotive, food and beverages and retail distribution sectors are receiving increasing amounts of FDI. The Brazilian biofuels industry, which has become a world leader amid growing demand for renewable energy products, is also garnering significant attention from the foreign investor community. India At $66bn, India’s inbound FDI stock is the smallest of the BRIC countries, and smaller than the FDI stocks of other, far less populous emerging economies like Chile, Czech Republic and Hungary. India’s weak performance in the FDI arena demonstrates several factors:
The central challenge facing India is leveraging the country’s success in IT services to stimulate technology-intensive investment in manufacturing and other non-service sectors. To that end, the Indian government has accelerated privatisation of state-owned companies, launched major investments in infrastructure and created special economic zones to attract export-oriented FDI. India’s locational assets (notably a rapidly expanding middle class and a huge supply of well-trained, English-speaking professionals) augur favorably for a steady if unspectacular expansion of foreign investment in coming years. SUSTAINING GROWTH The ability of Brazil, Russia, India and China to sustain robust growth rates and strong FDI inflows amid a slowing global economy lends credence to Goldman Sachs’ oft-cited prediction that the BRIC group will overtake the combined income of the developed countries by mid-century. |
