Emergence of BRIC Economies

Introduction

The world economy today is very different from how it was 50 years ago and it is likely that there will be just as much change in the next 50 years. (Purushothaman and Wilson, 2003:3). The large developing economies are now growing at great speed and if they keep on doing so over the next decades they might have great influence on the world economy (Purushothaman and Wilson, 2003:3).

As history has shown countries start to grow at a slower rate when they become more developed. Japan and Germany are examples of this; both of them grew rapidly in the 1960s and 1970s and their economy was blooming but in the 1980s and 1990s their growth went down to moderate (Purushothaman and Wilson, 2003:6). Since developed countries are becoming a smaller portion of the world’s economy, the change in expenditure could bring new chances for international companies and investment in the right emerging markets might be a very successful strategic choice (Purushothaman and Wilson, 2003:2).

Emerging markets are developing countries with a fast growing economy which is, to a big extent, due to economic liberalisation (Eden, Hoskisson, Lau and Wright, 2000:249). The countries leading this growth are the BRICs, which stands for Brazil, Russia, India and China (Purushothaman and Wilson, 2003:3). Goldman Sachs calculations have shown that if China’s GDP continues to grow at 8% per year, then in 2030 its economy will be three times bigger than the US, in terms of US dollars (Purushothaman and Wilson, 2003:6). They also suggest that by 2041 BRICs GDP might exceed the GDP of the G6 (G7 without Canada) (O’Neill, Purushothaman, Stupnytska and Wilson, 2005:3).

The G7 is a group of the seven greatest developed countries who came together after the international monetary crisis in 1973; they meet in an informal way and discuss economic and political matters. The group consists of the US, the UK, Germany, France, Japan, Italy and Canada (O’Neill, 2001). They are sometimes referred as G6 which are the G7 minus Canada.

The purpose of this essay is to critically analyse the emergence of the BRIC economies and look into the implications for organisations in these countries.

In order to reach the purpose of the essay I used secondary data from academic literature and journals.

Rice of the BRICs

Times are changing and fast growing countries of the Third World are entering as the emerging markets in the economy today (O’Leary, 2008:32). The BRICs are representatives of these countries, having things in common which makes them stand out, such as, belonging to the seven biggest countries with respect to geometry and eight countries with the world’s greatest population, which is demonstrated in the fact that together they hold more than 40% of the population in the world. They are also among the ten largest economies viewed from GDP purchasing power parity as well as being amongst the fourteen largest economies in respect to nominal GDP (Bharadwaj, 2006:52).

Together they are able to provide raw materials and energy for the rest of the world as well as being a great place for companies to manufacture their goods and outsourced service such as IT. With China and India’s prevailing in manufacturing and service while Brazil and Russia having more than enough of material such as ore, iron and agricultural products amongst other as well as gas and oil (Kobayashi-Hillary, 2008: 2, 3).

Jim O´Neil an economist for Goldman Sachs came up with the acronym in 2003 when he published his predictions about the BRICs becoming the biggest economies in 2050 in US dollar terms, and therefore being greater than the G6 (O’Leary, 2008:32). The BRICs might already be producing half of the aggregate G6 GDP in 2025 but in 2003 they were producing around 15%. By these predictions just the US and Japan might be amongst the six greatest economies in 2050 along with the BRICs. In order for Goldman Sachs’ predictions to come true the countries need to preserve regulations and keep development going which supports growth (Purushothaman and Wilson, 2003:2).

Brazil

Out of the BRIC, Brazil is the one that is the most developed and is growing slower than the other BRIC counties. The country’s wealth has gone up by economic stability and government support to people who live in poverty. It has the greatest level of people owning homes with in the BRIC countries and its former image of bad living standards seems to be history (O’Leary, 2008:35). It also has fairly stable political environment and expected lifetime, usage of technology are also considered quite good (O’Neill, Purushothaman, Stupnytska and Wilson, 2005:10). They are thought behind both China and Russia in computer ownership (O’Leary, 2008:35).Investment on the other hand is lacking as well as availability to trade. These among level of education and government deficit are aspects that need to be worked on and improved (O’Neill, Purushothaman, Stupnytska and Wilson, 2005:10).

Consumption has grown considerably with around 20 to 30 million persons joining or spending more in the marketplace. This can be related to the fact that the middle class has grown over the last few years and was in 2008 around 35% of the nation residents.

Russia

After Vladimir Putin became president in the year 2000 economic reformations were made and corruption went down, making it less dangerous and a bit easier for foreign managers to operate in Russia (O’Leary, 2008:38). Corruption is though still very widespread there and their normal business actions are likely to be viewed as corruption in other places (O’Leary, 2008:40). Stability in the political environment is lacking and inflation and investment rates could be better (O’Neill, Purushothaman, Stupnytska and Wilson, 2005:10).

Russia’s economic growth lies mostly in oil which is greatly affected by global pricing. Value for oil have been going up which boosts their economy, and in 2008 Russia gave home to 53 billionaires and 88 thousand millionaires lived in Moscow with a big proportion of the money coming from oligarch (O’Leary, 2008:38-39). Its external indebtedness is low and availability to trade is good as well as their educational system and expected lifetime (O’Neill, Purushothaman, Stupnytska and Wilson, 2005:10). Wages have duplicated since 2003 and a middle class is forming, although poverty is still the reality for 20% of the population. Spending has gone up and in 2006 it went up by 27% in US dollar terms (O’Leary, 2008:38-39).

Technological usage has also gone up in recent years and more than 60 % of the nation currently uses cellular phones in comparison with 5.1 % in 2001. People have as well been investing in computers and more than 30 % now own one and 20 % of the inhabitants use the internet (O’Leary, 2008:39-40).

India

Great reformation has occurred in India last twenty years when 90 % of the population was under poverty level, while now on the other hand it has gone down to around 50 %. Currently India even succeeds the US in the quantity of millionaires living there. The reformation came about after India changed from Socialist ideas to once more like western countries such as being open to free market. One important aspect of this change is that 50% of the nation is 25 years old and younger. Peoples mind sets have converted to being optimistic and people that used to have dreams now have hopes. This along with the fact that India emphasises on education has made the gap between the rich and the poor smaller and out of the BRICs, India has most potential to have an established middle class. McKinsey’s predictions are that India’s middle class will be as high as 583 million in 2025 compared to around 50 million now (O’Leary, 2008:40,41).

Although India has a wide variety of languages English is rooted into their culture after being colonised, this along with its great IT business gives them an advantage over the others in some business circumstances for foreigners (O’Leary, 2008:41). There are though still some difficulties which can be linked to the Socialist history such as great control over investment coming from abroad, limitative wholesale environment and strong unions (O’Leary, 2008:43).

China

China with its enormous populations had in 2008, 163 cities giving home to one million or more inhabitants while comparing with Western Europe and US that together only had 36 cities with the same amount of inhabitants. China’s increased demand from 2008 has been the main driver for economic growth in the world, it overcame America’s demand for the first time and its GDP was the third highest in the world (O’Leary, 2008:43).

China’s economic conditions are quite good in terms of economic stability, investment, availability to trade and labour (O’Neill, Purushothaman, Stupnytska and Wilson, 2005:10). Although China’s inhabitants are still somewhat behind in usage of computers China currently export most amounts of products in Information and Communication Technology worldwide. In the last 10 years it has, along with India, experienced a 20% rise in exports each year (Berr, 2009: vii).

Financial crisis

The financial crisis in 2008 did not affect the BRICs very much; their economic growth did slow down but because of good foreign exchange reserves and high domestic demand they were able to survive the crisis and keep on growing (Eghbal, 2008). Russia was en exception of this and faced a 7.9% economy contraction in 2009 which was more in semblance to the downfall in developed countries then with the BRICs. As China’s economy rise by 9.1% at the same time illustrates. This caused some discussion about removing Russia from the group which would have made it a BIC instead, but since Russia’s economy started to grow again in 2010 nothing was done and the countries still go under the name BRICs (Freeman, 2010).

Comparison with the G7

If the BRIC countries are compared to the G7 there are some obvious differences that can be seen (Bharadwaj, 2006:52).

Among these are the freedom of rights, the G7 countries for example all have democracy and the right to free press, elections and speech. Although India, Brazil and Russia also have democracy they are very far from having the freedom that the G7 countries obtain, this is also the case with China which is a communist state. This political environment can have damaging effect on the countries future and the population in the world (Bharadwaj, 2006:53).

The Human Development Index (HDI) also shows notable contrasts between the G7 countries and the BRICs. The index estimates countries social economic status, which includes variables such as: inability to read and write, poverty, expected lifetime and earnings (Bharadwaj, 2006:53). HDI analyses 169 countries and currently values range from 0.14 to 0.938. All the G7 countries have HDI values over 0.849 and are defined as having “Very High Human Development” while compared to the BRICs, Russia has the highest value of 0.719 and is in the group of “High Human Development” along with Brazil but and China and India are in a group defined as having “Medium Human Development” where India has the lowest value of the BRICs of 0.519. India has though risen by 1.6% per year from 1980 which is higher than the South Asia regional average (Human Development Index, 2010). The BRIC countries should emphasize on making the variables, mentioned here above, better as well as working on their freedom of rights. That would help them develop as well as providing better living standards for the population in these countries and the world as a hole since together they account for more than 40% of the world’s population (Bharadwaj, 2006:53).

Business environment in the BRIC countries

Since the BRIC are becoming a greater force in the world economy they can involve important chances for international companies to invest in, start up a company or a joint venture (Hunter, 2006: xiii). It can though be difficult to enter these markets with a business since the environment is complicated (BERR, 2009: vii). The World Bank along with The International Finance Corporation put China in 79th place out of 183 countries in relations to how easy it is to do business in country, with 1st place being the easiest. China is ranked significantly higher than the other BRIC countries but they are close to each other in the ranking, Russia is no. 123, Brazil no. 127 and India no. 134. When compared to 2010, Brazil, India and Russia have gone down a few places in the ranking which suggest that it is slightly harder to do business in those countries now, while China has improved by one place. All of the G7 countries are in places 26 and above except for Italy which is ranked no. 80 one place lower than China. The valuation is made from business regulations within countries (IFC and WB, 2011:4). A reason for the low ranking can be explained partly by some of the internal issues mentioned here below.

Internal issues

In order for the BRICs to be able to seize their full potential in the future they need to face internal weaknesses and other implications (Bharadwaj, 2006:52).

One of Brazil’s biggest problems is the great deal of political corruption in the country, as well as being in the middle of the world’s greatest socialistic governments, such as Venezuela and Bolivia (Bharadwaj, 2006:53).

Along with corruption, Russia’s problems lie in its fight against oligarchs, uncomfortable relations with former Soviet republics and political views and actions originated from communism that are still in force (Bharadwaj, 2006:53).

India has confrontations within their country because of their caste system, the variety of religion, ethnicity and languages. They also have conflicts with Pakistan and the militancy in Kashmir which disturbs their government from more important issues (Bharadwaj, 2006:53).

China’s problems involve their suppression of political objectors, insufficient fundamental freedom and their retention to change their exchange rate and/or let it free float (Bharadwaj, 2006:53). China and India also face great corruption which needs to be addressed (CIA, 2011: a, b).

Opportunities

Successful foreign companies have shown that in order to do well in the business environment in China and India it is essential to emphasise on the long run and to know the market well before entering it as well as focus on local products and logistics. Both countries are growing fast and have great opportunities and potentials, they are for example taking over the market of high skill and value added goods from the US (BERR, 2009: vii).

Another example is the success of exporting companies in the BRIC countries. Where BRICs share of the world exports rose significantly from the years of 1996 to 2008, from 9% up to 17%, which accounts for almost the same amount the rest of low and middle income countries are exporting together. This involves great opportunities both for local and foreign companies as well as investors (Hanson, 2010:9).

An example of this is the automobile industry, where the BRICs are contributing a great deal and they manufactured 15% of the world’s production in 2008. Furthermore, Price Water House Coopers forecast that in 2015 China will produce 14% of the world’s automobile output, Brazil and India 5 % of it and Russia 4 % which would mean that the BRICs together account for 28% of the world’s production (McClellan, 2008:34,35).

And to illustrate the magnitude of foreign direct investment (FDI) in the BRIC countries, then it was more than 30 % of all FDI in developing countries in 2006 (Wan, 2010:168).

Conclusion

Comparison between the four countries forming the BRIC show, that their biggest similarities are the size of their countries, their populations and their economies. These are the factors that triggered the focus and interest in these countries to begin with, and are the reason for their growth. There are though as well similarities between them that are not so positive such as the great corruption which prevails in these countries and lack of free speech, press and elections. These are things that developed countries do not face such as the G7 countries which are put in the category of countries with very high human development whereas the BRICs have either high human development or medium human development.

The corruption and somewhat unsteady business environment make it challenging to do business in the BRIC countries and the World Bank and the International Finance Corporation rank Brazil, Russia and India in places ranging from 123 to 134 in relation to the ease of doing business in the countries. China is ranked no. 79, which makes it easiest to do business there out of the BRICs, according to the WB and IFC. Not even to mention the G7 which are all, except for one, no. 26 or higher, making it very easy to do business in them.

Despite this the BRIC economies are growing at great rates and foreign direct investment is coming into the countries. Their exportation has risen as well and was in 2008 17% of the world exports.

As has been illustrated in this essay the BRICs opportunities to grow and become the largest economies in 2050, is definitely a possibility and the fact that they overcame the financial crisis also gives evidence that. But they need to aim for less corruption and improving the economic conditions in order to reach this goal.