All globalizing emerging giants face significant governance challenges.
Today’s comment in the FT by John Lloyd and Alex Turkeltaub entitled “India and China are the only real Brics in the wall” tries to give a strategic view of which of the four BRIC countries are the best options for foreign investors devising a strategy for the future. Their clear message is:
“as political and business leaders devise strategies they would be well advised to focus on China and India”.
The term BRIC countries was forged by global investment bank Goldman Sachs in 2003 which identified Brazil, Russia, India and China as economies that would together overtake the economies of the six richest countries in the world by 2040.
The article’s main message is: India and China are investing in higher education and going for “intellectual capital”, while Russia and Brazil depend too much on the current commodity price boom and are not making the necessary investments in infrastructure and human capital.
Russia currently has a bad reputation for obvious very serious political reasons, and Brazil tends to get lost in the meanders of its democratic politics and corruption scandals. However, in my view, the article goes a bit too rapidly over a few issues. So, here a few remarks, if I may:
- According to the authors, China and India “are competing with the west for “intellectual capital” by seeking to build top-notch universities, investing in high, value-added and technologically intensive industries, and utilising successful diasporas to generate entrepreneurial activity…”. Yes, but India has got its basic education wrong. It might have a few Brahmin-like intellectuals involved in rich-economy standard services and high-tech activities, but it will not have resolved its problems of mass poverty and thus long-term political stability and immense potential growth prospects. According to my Pocket World in Figures, 2007 Edition edited by The Economist, adult literacy in China is 90.9%, Brazil 88.6%, Russia 99,4% and India…. a mere 61%. What do foreign investors want to do in a country with 40% illiterate people? There is not much evidence either that much is being done in India to tackle this problem.
- The article also says that in Russia and Brazil, “the infrastructures of both countries remain third world”. If China is investing massively in infrastructure, there is no evidence of a real drive to do something about infrastructure in India at all. And if Brazil’s and Russia’s infrastructure is “third world”, so what is India’s?
- The authors also argue that in the case of an important collapse in the currently high commodity prices, Russia and Brazil could plunge – both their own way – into political turmoil with negative impact on investment. Two sets of remarks here.
- First, regarding commodity prices. A fundamental shift in global demand has occurred with China’s insatiable appetite for commodities. The demand curve shifted upwards, and a dramatic and sudden downward trend in commodity prices is not likely in the near future. This leaves room for further growth in both Russia and Brazil. Of course, this implies a major danger of not undertaking the necessary structural reforms in the economy, including getting infrastructure and education right. This leads to my …
- second remark. Despite this danger, there have been notable (yet still to consolitate) improvements in Russian and Brazilian economic governance, including the set-up of a credible Stabilization Fund in Russia to manage its oil windfall that for once has not been misused or worse, stolen. Let us see what happens in the run-up to the 2008 Russian elections. Brazil has a political problem, and it knows it very well. Unable to do reforms outwardly, some moves have been done such as the set-up of a separate securities exchange with top-notch governance standards and foreign-investor friendly. Both Russia and Brazil have also in recent years proved to be able to create a stable macroeconomic environment. This is something new in their history, yet in seems that the trends is there to stay, as it has proven to bear fruits.
- Finally, on plain “political risk”. Let me rebound on this statement: “The political status quo in Russia could face a shock. In a Russia that undergoes economic stagnation, there may be dangers of a new wave of nationalism as well as a possible period of chaos”. This is obvious. Yet Russia seems to become more nationalistic right now, when its economy prospers. And what can happen in China? China is still a totalitarian communist state (it has relaxed its grip, but still stays very much under control), that, given its economic performance, does not seem to be challenged by the population. However, rising inequalities and an increased number of riots in the country-side and growing exasperation with growing corruption could also lead to an uncontrollable slide in the political situation. China is no less nationalistic. As it becomes more prosperous the risk that it ends its current low-profile policy on the international scene can actually rise. These are simple hypotheses. But they show that in terms of forging a long-term strategy for investors there might be other issues to consider…
I honestly asked myself what the point of this article was, apart from another intellectual exercise…. China and India are countries to invest in because of their sheer size and quasi unlimited growth potential, and obviously because of further reform moves that allow for further development. But if foreign investors were a bit better informed on the profit margins more adventurously-minded investors are making in Brazil, and especially in Russia, they would start devising a long-term strategy for these countries too. More fundamentally – this article shows that there are fundamental challenges in BRIC country economies and their politics, but that in terms of foreseeing the future there is still a very long way to go.