Five Surprises Ahead
Jim O’Neill – the man who coined the BRIC acronym, along with the grand idea behind it – recently resigned as chairman of the Asset Management Division at Goldman Sachs. He is hardly a fan of inert thinking. In this interview, he warns his colleagues (investors and economists) that if one resorts to stereotypes in trying to gauge the new non-Western world, this choice is fraught with perils.
Why you don’t like the term ʹemerging marketsʹ? Is it incorrect now?
I think one has to make a distinction between some countries that, although even with a low GDP per capita, are so big in terms of overall GDP, that to call them traditional emerging markets underplays their economic influence on the world. In this regard, I believe that any emerging economy that has already become more than 1% of global GDP should not be thought of as a traditional emerging economy. Currently, there are 8 such countries: each of the 4 BRIC nations, plus Korea, Mexico, Indonesia and Turkey – 4 of our so-called ʹNext 11ʹ group. These 8 countries collectively are 25% of global GDP, so the same size, if not slightly bigger, than the US, and therefore they are collectively having a bigger impact on the U.S. Note that South Africa is not close to this, being only around ½% of world GDP. In coming decades, a number of other large populated emerging economies are likely to cross the 1% of global GDP threshold, especially most of the other so-called ʹNext 11ʹ as I have called them, and possibly a couple outside of that group including Poland, Argentina, South Africa, Thailand and Malaysia.
Those who are skeptical about the developing world explain that the main problem of this world was, is, and will be, a failure to sustain growth. And there is no doubt that you could argue.
I think this is a very jaundiced, Western, backward-looking view. China alone in 2011 created the economic equivalent of another Greece every 12 and a half weeks, or another Spain nearly just in that year! The four BRIC countries’ dollar GDP rose by $2.26 trillion, more than the size of Italy! This decade, even with somewhat softer overall Chinese and BRIC GDP growth, the world will grow by around 4%. China on its own this decade will contribute as much to the world economy as the US and Europe put together, something around $8 trillion in real terms, which will probably be between $10 to $15 trillion in nominal terms. I can understand that many observers find it difficult to understand, especially from my generation, as we are so used to a world where the U.S. is so dominant for us all economically, and of course they are not a democracy where our Western values have all been brought up to believe in these values. It is an even bigger problem for people in understanding Russia. But the people in their societies are, broadly speaking, happy with their style of leadership, so long as it delivers increasing growth, and especially wealth.
Now all this said, the growth rate of the BRIC nations will slow this decade as they won’t be able to sustain the growth rates of the past decade, but anyone who expected them to do so has probably not thought carefully about such matters. It is very unlikely that they could sustain such growth. But even with softer growth, their impact on the world is getting bigger and world growth will be stronger this decade as a result, possibly growing by around 4.1% compared to 3.4% the past 30 years.
By 2050, each of THE BRIC countries, especially Russia, is quite likely to be as wealthy as most of the G7 economies, and Brazil won΄t be far behind. For China and India it will take quite a bit longer simply because each has more than ONE billion people
The world awaits the transition from quantity to quality in China. But why is 2013 so important in this process?
Because it will be the first full year in which we probably see clear evidence of this happening with private consumption leading the strength of the economy. Just as for most other economies, responding and adjusting to the challenges of the 2008-2009 global recession was very demanding and for China, who before the crisis had a very export-geared economy, and needed to adjust their model, we now need to start seeing results, otherwise they will struggle to grow at the rate their economy needs to sustain their aspirations, and/or would remain highly vulnerable to the influences of the rest of the world. I often reflect back to 08-09 and think that, in some ways, it was perhaps quite helpful in forcing Chinese policymakers to realise that their cheap, low value-added export model was not sustainable, and that their own destiny depended on their own economy. In 2009-2010, the economy recovered sharply, but this was primarily due to massive increases in state-driven investment, which created its own set of issues including more environmental damage, excessive use of resources, which in turn contributed to inflation pressures, which also in turn contributed to growing inequality. The latest Five-year Plan, the 12th one, issued around 18 months ago, recognised all these dilemmas and made a fresh commitment to a better ʹqualityʹ of growth in which consumption played a bigger role in growth. There are some signs that this is starting to occur, but we will not really be able to be confident about this transformation until 2013.
Are you bullish on all five BRICS countries? A lot of pundits used to criticize Brazil, Russia, India and South Africa and praise only China, which is also becoming less interesting for them because of the expected slowdown.
Every one of the BRICS countries has its own challenges, and while I am bullish on most of them, one has to remember that their progress is never going to be in a straight line. For the year 2013, I expect all five to positively surprise. For the decade as a whole, I think China, Russia will both easily do well, but I am a bit concerned about each of Brazil, India and South Africa. They all need to reform more to do as well as in the last decade. South Africa is very lucky to be regarded in the same status as the rest, given it is so small, and they need to start doing things to really change their outlook and justify it. I have often read, sometimes to the irritation of South African policymakers, that it is economically hard to justify the inclusion of South Africa, because it is much smaller than the other BRIC countries. It is about 1/5th the size of India or Russia, and there are many other emerging economies that have as much justification, if not more than them. This would include any of Korea, Indonesia, Turkey, Mexico and even Poland and Colombia.
For the year 2013, I expect all five countries to positively surprise. For the decade as a whole, I think China, Russia will both easily do well, but I am a bit concerned about each of Brazil, India and South Africa. They all need to reform more to do as well as in the last decade
Of course, South Africa was probably included due to its historic trade ties with some of the BRIC countries, its associated role as a major commodity producer, and the fact that it is the most developed of the sub-Saharan African economies. In this regard, some consider it as a sort of gateway to the rest of Southern Africa, but this is not something South Africa should take for granted, as some of the other African large populated economies don’t think this is warranted. So, South Africa has to do more to warrant this position both in terms of its domestic economic performance and its international leadership.
Returning to discussing all the BRICS economies, China is the one that shows the clearest positive evidence that it is adjusting to the challenges around the world, and growing with what we have assumed for this decade. In fact, it is currently growing more than we have assumed, even though it has “slowed”. Peculiarly, Russia – often the least liked – is also growing in line with our expectations of the decade. Both India and Brazil have struggled in 2012 and they need to do more in terms of supply-side reforms, especially perhaps India, to reach the targets we have set for them.
Observers usually cite Indonesia, Nigeria, the Philippines, and Sri Lanka, as examples of new high-growth markets. Do you see anything noteworthy beyond this group as well as Next 11 or MIST? Can any developing country overcome the curse of moderate growth in the next decade?
I am quite excited about most of the Next 11 countries, I see some very encouraging signs in many of them. I am especially enthusiastic about the Phillipines, Indonesia, Turkey, Nigeria, and Mexico, and I think there are some quite exciting changes going on in Egypt. Of course, Korea is so strong and is a Next 11 country, but in reality we should treat it as an equivalent to one of the most developed countries, as its GDP per capita is now close to that of a G7 country. I often think that South Korea is perhaps the most interesting large populated country of my lifetime because it has transformed itself to be a reasonably high-income country from one that had as low an income as many African countries 40 years ago. This is an exceptional achievement and I often tell many policymakers from other large populated emerging economies that they should study Korea carefully and see what they can learn. Their strength of education and use of technology would appear to be two strengths in particular that others could mimic or pursue to help their own advancement.
South Korea has transformed itself to be a reasonably high-income country from one that had as low an income as many African countries 40 years ago. This is an exceptional achievement and I often tell many policymakers from other large populated emerging economies that they should study Korea carefully and see what they can learn
How long will it take for BRICS countries to transit to developed market status? Is 15-20 years not enough?
In Brazil and Russia’s case, perhaps 25-50 years is enough as they already have wealth around $15,000 per head. By 2050, each of these countries, especially Russia, is quite likely to be as wealthy as most of the G7 economies, and Brazil won΄t be far behind. For China and India it will take quite a bit longer, simply because each has more than one billion people. So, while they will be driving the world economy, they still won’t get a developed status in the next 20 years! This oddity will make the world a very peculiar place, or at least for the intellectual leaders from the West, as they are used to thinking of the biggest economy, i.e. the U.S., as also being the wealthiest, which will almost definitely not be the case by 2050. This being said, to some extent it is a state of mind, as the U.S. is not the wealthiest country in the world: smaller populated countries such as Luxembourg and Switzerland have enjoyed that position for many years.
Is it possible for any of them to regress in the current economic and political conditions?
India has not made a lot of progress on their development since the BRIC concept came into being 11 years ago, but it has not really regressed. The others have all shown strong progress, of differing degrees, but of course could regress quite easily if political leaders chose to do the wrong things.
Our future is often described by such straightforward expressions as a ΄new economic order΄ or ΄post-Western world΄. How do you feel about such simplifications?
I think it is extremely difficult to simply categorise the world in these brackets and neat little boxes. As I have already said, by 2050, the world’s biggest economies almost certainly won’t be the wealthiest. The four BRIC countries in fact are on track to become bigger than the G7 by 2035 but with the possible exception of Russia, none of them are going to be close to being as wealthy as the G7. China will have already become as big as the U.S. some years before that, perhaps 2025-27, but its wealth will be at least four times smaller, which is quite a material difference. This means, in terms of global governance, we are going to have immence challenges constructing a peaceful and useful system of global leadership where the biggest realise their global commitment despite being much less wealthy than others. It won’t be an easy task as it will involve reversing much of the post-Second World War forms of global governance.
I get invited to visit the BRIC countries frequently and I am given a fabulous reception by them... occasionally I tease them that they have to actually do things to become as big and successful as we have suggested and not just ASSUME!
What is your personal, non-economic, non-investment experience with BRICS countries?
I get invited to visit the BRIC countries frequently and I am given a fabulous reception by them. It is especially true in Brazil and Russia where I am often treated with particular warmth, as they seem to think that my creation of the BRIC acronym literally gave their country recognition that helped change its position in the world. It is also the same with China and India, but less than the other two, especially with India. I sometimes get the impression that the Indian elite simply think that I recognised something that should have been obvious to all, and occasionally I tease them that they have to actually do things to become as big and successful as we have suggested and not just assume!
In terms of travel, I love to travel anyhow and especially to these countries, so I can see and hear anecdotes about their amazing development. Like most people, it is difficult to not regard Brazil as especially special given the diversity of their people and the openness that goes with it. I sometimes think that Brazilians have an advantage in this complex world as they are so open-minded and used to dealing with people of different colour and backgrounds, which is not the case for many of the rest of us, whether they are BRIC or otherwise. And of course, they love football which I am obsessed about! I am trying to organise my life so I can find myself in Brazil on ΄urgent business΄ for four weeks in the summer of 2014. I love to go to all the BRIC countries, as I said. St. Petersburg in summer for the ΄white nights΄ is something quite special, and an occasional visit to Moscow is always interesting. I would love to, one day, travel east to their Japanese and Chinese borders via train. India, I have not travelled extensively, but I love going to Mumbai, in many ways it is the craziest and most interesting city I know, and it is such an experience. China, I would also love to travel around more on their trains. Perhaps one day I shall persuade Michael Palin to join me on a “train journey across the BRIC countries”.
And how comfortable do you feel yourself staying there for a long time?
I could quite easily stay in Rio for a very long time! I could also happily be walking in the lower Himalayas of India for a long time too! I am not sure the rest would lure me away from the UK and watching Manchester United!
The growth rate of the BRIC nations will slow this decade as they won΄t be able to sustain the growth rates of the past decade. But even with softer growth, their impact on the world is getting bigger and world growth will be stronger this decade
For many Europeans and Americans, who are used to the idea that in a few decades the global economy will be dominated by different countries, the future still looks pretty abstract. If in 2013 you had to explain to students from your hometown of Manchester, the world in which they will be living in 2030, what would you tell them?
It is very interesting that you ask these two questions together, as I often speak to students today, although not ones just from Manchester. Many students seem to be less frightened about this possible future world than people from my generation. In fact, their enthusiasm to host me is so transparent that it affects me, and I often leave a student campus – whether it be a school or a university – with a real spring in my step, and think of all the positives for mankind when I see their reaction and listen to their questions. Most of them presumably see all of such a world as a great opportunity. It is quite different compared to people of my generation who tend to be more set in their ways, and see the rise of China, India and the other growth market economies as some sort of threat and challenge to us, and for them personally. It is understandable I suppose, because when we get older it is more difficult to adapt to change, but I prefer the student response!
I guess the other thing I cannot resist in saying is that if the Manchester students also happen to be Manchester United supporters, then they will already know that Manchester United are perhaps the world’s best and most desirable BRIC ΄content΄ play as the team’s popularity around the world knows no limits seemingly, certainly something I observe when I travel around and the response I get as soon as I say that I am from Manchester!