Monday, June 22, 2009

Integrating BRICs

Ben Aris in Berlin
June 16, 2009

In the middle of June, the four fastest growing countries in the world will come together for the first ever BRIC summit. Leaders from Brazil, Russia, India and China will meet in the Russian city of Yekaterinburg to create a formal organisation where they can pool their resources and coordinate their relations with the old world powers. The first formal meeting of the BRIC foreign ministers took place in Yekaterinburg in 2008, but this meeting will attended by presidents and prime ministers, and significantly ups the ante.

The BRICs are rising and, if anything, this crisis has been a coming of age for the four biggest emerging markets in the world. Until now, the BRICs have largely been economic stories where investors could make a bundle if they were willing to swim in their treacherous corporate governance currents. However, the G20 meeting earlier this year in London marked their entry into the top tier of international politics and now they are clubbing together. "The growth of the BRICs is fundamentally changing the patterns of economic and political international relations," says Jim O'Neill, chief economist at Goldman Sachs, who coined the acronym in 2001. "This will become increasingly evident over the next few years - as the economies of the US and Europe struggle to recover, those of the BRICs will prove to be more robust, and will be instrumental in pulling the world out of recession."

The BRIC countries have been bloodied along with everyone else by the current global crisis, but the boon from the global recession is that BRIC countries will continue their fast growth and should overtake the developed world in size 10 years earlier than expected. When O'Neill coined the term in 2001, he estimated that the aggregate size of the BRICs would be bigger than the combined economies of the industrialized nation by 2040; now he thinks they will overtake the developed world in 2027.

The US made up some 21% of global GDP in 2008 and so a slowdown there causes problems for everyone. China, India and Russia between them account for a bit less than half the world's population, but their respective shares of global GDP were 9%, 6% and 2.5% respectively in 2008. Combined, the BRICs still rank behind the US in terms of economic power – but not by much and not for long. By 2025, India's economy will be 60% of that of the US and China's will be 50% larger, while Russia could overtake Germany in terms of economic size as soon as next year to become the largest market in Europe, according to Goldman Sachs.

But size isn't everything. Consulting company Maplecroft has just produced the Emerging Powers Integration Index (EPII), which tries to go beyond the usual comparisons of GDP growth or trade and assesses just how dependant the rest of the world already is on the BRICs.

Integration with BRICs

Maplecroft is a risk, responsibility and reputation specialist (and O'Neill is an investor in the company). It produced a series of six indices and maps covering the integration of Brazil, Russia, India, China and South Africa with the global economy that are composites of data on world trade, foreign direct investment (FDI), portfolio investment and migration set against more than 150 countries. The resulting map is painted shades of red where dark red is "extremely integrated with the BRICs" down to the light pink of "low level of integration."

The first thing that the map shows is how the integration process is still in its early days. The list of countries most integrated with the BRICs is topped by: Angola, Congo, Yemen, Singapore, Kazakhstan, Kyrgyzstan, Mongolia, DR Congo, Malaysia and Liberia. This is not exactly a "Who's Who" of global power brokers, however, the map also shows that the integration with the BRICs is already on the radar for many developed countries.

Maplecroft's Rebecca Jackson, who put the map together, says that the importance of each of the BRIC countries has already moved beyond its borders and they already dominate their respective regions. Russia is already a key player in emerging Europe and Central Asia and, unsurprisingly, those countries that lie in the nexus between Russia and China – namely Kazakhstan and Mongolia – are extremely integrated with their two BRIC neighbours. However, going the other way, most of Central Europe, right through to Germany, are also highly integrated with Russia. Trade relations are an obvious dependence, but less well acknowledged is that for the last decade or so Russia has been a net exporter of capital, investing far more in the countries of the "near abroad" than is invested in it by international companies. And, more recently, Russia has been investing further afield – the deal to buy Germany's Opel carmaker being the most recent example. Like it or not, Russia is already a significant player in the European economy.

Asia is already tightly integrated around China, with Singapore, Mongolia, Malaysia, Thailand and Vietnam listed among China's 20 most integrated countries. Australia is also "highly integrated" again because of Chinese exports. All these countries have been roped into the Chinese production machine, assembling component parts of manufactured goods, which are then exported to the US and Europe.

But the map also shows that integration has already moved on from them being simply big in their own neighbourhoods. With its rich mineral resources and recognisable problems, Africa has been the first port for both China and Russia after they leave their backyard. Congo, Sudan and Angola are especially advanced where both Russia and China have made big investments. "Resource rich countries and export destinations. Countries all across the globe are being drawn into economic relationships with the BRICs, particularly China and India. The index shows that integration among the BRICs themselves is as yet a smaller trend but an emerging one," says Jackson.

One of the more surprising features of the map is the fact that the US and UK both have the red of "medium" integration with the BRICs, but the countries of China, India and Brazil are the light pink of "low" integration. "Actually, the USA is ranked as 61st most integrated, while Russia is ranked 79th most integrated," says Jackson. "That the USA is reasonably integrated reflects various factors. One important one will be the fact that the USA imports a lot from China (and it comprises a significant proportion of USA's total imports), while it exports a smaller amount to China. Similarly, Russia imports quite a lot from China."

What this suggests is that the BRIC countries – bar Russia - are already catering to a truly global market, while the developed markets are already a lot more dependent on the low-cost imports and strong growth from the BRICs than they would care to admit to. The exception is Russia, which of all the BRICs is the most dependent on the others. Part of the reason for this is its proximity to China and the almost perfect complimentary balance the two countries enjoy. "Russia-China have the best synergy on the planet," says Kingsmill Bond of Russian investment bank Troika Dialog. "China needs Russia's resources and Russia needs China's capital. China provides a growing market, financial resources and macroeconomic stability. Russia can provide oil, gas and coal that are needed for the next stage of Chinese industrialization. Stagnation in the West and the pullback of Western banks is overcoming Russian reluctance to increase its ties to China at the same time as China is looking for an alternative home for its foreign currency reserves and for raw materials for its next stage of growth."