Are the Brics really global economic ?locomotives?, or will they just dissipate their energies through policy dissonance? That is the biggest issue facing the world economy today. Meanwhile, all signs seem to indicate that the Bric would like to exit the rut and re-attain their earlier, much higher, growth trajectories. The size of their stimulus packages says it all.
China?s, at $586 billion, is the largest, and the two-year programme calls for spending on housing, roads, railways and airports. Also on the cards are tax deductions for business investments in new equipment, and subsidies for farmers. Equaling 16% of GDP, the $586 billion plan dwarfs the American $168 billion stimulus (around 1% of US GDP).
Indeed, the then president-elect Obama even went on record to declare that he favoured a larger fiscal boost for the US; his aides followed that up by saying that the figure could top $600 billion. The new administration is expected to unleash a new fiscal plan in February 2009 that focuses on infrastructure and job creation.
Returning to the Bric, however, Brasilia plans a 10-year outlay of $152 billion to house poor families; not only will that help low-income Brazilians, it will also create construction jobs. Yet, there are differences in the likely intensity of the impact: $152 billion spent over 10 years would be far more thinly spread out than India?s proposed $4 billion expenditure until the end of the current fiscal (that is, March 31, 2009).
Brasilia also admits that growth looks like being between 1-1.5% less (that is, 5 or 5.5%)?although 4%, too, seems achievable. Meanwhile, the Real may continue to depreciate, thanks to crashing commodity prices, lowered export off-take and capital flight. It is cold comfort that every such loss in value will also make for greater export competitiveness.
Russia, meanwhile, has been relying more on tax cuts than on any other subvention?which is how it managed a $20 billion relief package for the economy. But this worst performing from amongst the Bric economies is decelerating perceptibly, has a declining index of industrial production (IIP), and was recently downgraded by Standard & Poors. It has been also plagued by wars, crashing crude prices and capital flight. Stock prices fell by no less than 69% last year.
Stock prices fell in China also (by over 62%), whilst IIP and input intensities followed suit. (November energy use in the factory sector was at a 3-year low). No wonder the IMF has revised down its 2008-end projections of Chinese growth?from 8.5% to 5%. (Strikingly, projected 2009 growth rankings declared by multilateral bodies like the IMF have put India at the top with 7%, followed by China with 5%?followed by Brazil, with 4%.)
So the total outlays of Chinese consumers are growing fast and Bric analysts like Goldman Sachs? Jim O?Neill say that, demand-wise, the four countries are much better prepared for the global economic crisis than they had been for the turmoils of a decade ago. Thus, Bric retail sales jumped by 22% last October while US consumer purchases actually dropped for the first time in seven years.
According to Jim O?Neill of Goldman Sachs, ?The Chinese shopper alone has been contributing more to global GDP growth than has the American consumer since October 2007.? Even forecasters at Merrill Lynch & Co share his enthusiasm. ?Can Brics help stabilise the global economy?? Merrill?s global economics team asked in an October report. ?We think so,? was the answer.
That is so because today?s banking systems are stronger, while international trade too has expanded.
And the most important datum is that Bric governments have accumulated some of the world?s largest financial reserves. (As of early November, the four in combination held up to 41% of total global foreign exchange reserves.)
Even the massive, 4 trillion yuan ($586 billion) stimulus plan unveiled by Beijing on November 9, 2008, signaled its intent to spur domestic consumption to help gather in the slack that had been unrolled by developed economies. In fact, Sao Paulo?s newly assertive role got its fullest expression in a speech made just a few days prior to November 9 by president Lula: ?The crisis revealed weakness in risk management, regulation and supervision in the financial sectors of some advanced economies.? It was said that it also showed the resilience of the Bric economies.
It had been along similar lines that president Hu Jintao had spoken at a Washington, DC Summit on November 15. He contended that ?Steady and relatively fast growth in China is in itself an important contribution to international financial stability.?
But the most crucial difference between 2008 and earlier is that, in 1997 or 1998, few looked up for economic leadership to the Bric economies. Instead, it was the US that the world looked up to when currency devaluations or excessive debt threw Asia, or Russia, into crisis. But not any longer.
And the year 2009 holds even greater challenges as the world lives through the effects of the financial crisis. Said IMF chief Dominique Strauss-Kahn in a recent radio interview?the organisation was going to slash the economic growth forecasts that were due this month.
The World Bank has already done so by pegging its forecast lower. It stands at 0.9% for 2009?and the weakest outlook is for high-income (OECD) economies like the US, Japan and the European Union. The latter?s economy is even expected to contract by 0.1%, overall.
Developing economies are, on the other hand, expected to register aggregate growth of 4.5%.
In sum, it will be the Bric?s locomotive role that provides the motive force for remaining economies?all the more since they, and others of their ilk, have hair-trigger marginal propensities to consume. Accordingly, they are the ones who will valourise capital and investments in the foreseeable future.
That they will be forced to do so within their own shores is nothing new: even the New Deal period of the 1930s saw the passage of America?s infamous Hawley-Smoot Legislation?something that effectively stopped all progress towards free trade. So, today?s Bric economies?and the Next 11 (N 11)?are doing far more for the world economy. They are not only ready to accumulate forex and absorb imports?they will even await the quid pro quo.
?Writer is a fellow at the Maulana Abul Kalam Azad Institute of Asian Studies
