Common Cents

The BRICs are coming

Ralph Murphy

(1/2013) A quick look at the world’s "emerging powers" and what they may mean to our own future.

It is at once fashionable and misleading to describe the "emerging powers" as a challenge to the traditional economic elite. Four of these countries, the BRICs, which is an acronym for Brazil, Russia, India, and China, have launched their way into the top ten world economies. They have generated strong momentum coupled with relatively low national debt to further distance themselves from the more traditional world economic powers. These four nations have emerged because of commodities such as oil, which the declining powers keep buying, further fueling the BRIC’s growth. This is particularly true in the case of Brazil and Russia.

The "BRICs" are in advanced economic development and projected to overtake the G7 economies by 2027.

The G-7 is a group of developed western nations that came together in 1976 and essentially ran the world economy through mature, domestic production and prudent import-export policies. The human and natural resources of the USA have maintained first place internationally from G-7 and other world competition. If it were a horse race, however, the national debt burden is wearing our steed down, and China's export-led growth is giving it a strong run in the stretch. Based on International Monetary Fund estimates, the US generated $15.075 trillion in 2011 compared to second place China's $7.3 trillion, but where are we headed?

China had the 8th largest economy in the world in 1995. Politically, they have managed to eclipse a communist government with a "mercantile," or export-dependent economy. The government manages to keep their currency undervalued and thereby offers inexpensive exports. With 1.35 billion people on hand to produce, production is labor-intensive and cheap. Ten percent of the population lives on 2 dollars a day.

According to CIA/Eurostat estimates, the country has a national debt to GDP (total value of goods and services produced domestically in a year) ratio of 43.5%. Sounds bad, but America's is 105.1% of earnings, and by further comparison, Japan has a staggering 208.2 % debt ratio, one largely financed by domestic savings, but still an anchor to sustainable growth.

The G7 is also aware of its slipping preeminence as Brazil passed the UK for sixth place in the world standings and appears to be "showing off" its new wealth by hosting the 2014 World Cup championship and the 2016 Summer Olympic Games. Their debt burden is at 54.4 % of GDP, which is considered manageable, and the nation has benefitted greatly from high international oil prices. This is because Brazil is first and foremost an exporting nation. Their economy has also reached the "take off" stage in such areas as mining and farming.

The Russians were something of an embarrassment economically when they shifted from an anemic, state-planned economy to a new, free market economy under Boris Yeltsin. One where the new Russian leaders tried to guess what would sell rather than let the "invisible hand of the market," as set by supply and demand, work its magic. A world where equilibriums provided optimal income given available resources. The concept of an "invisible hand of the market" was first expressed by Economics founder Adam Smith in the late18th century.

The country went to the IMF in the early ‘90s for help with domestic debt payments and to curtail high inflation. The IMF was really designed for third world countries, but it worked in Russia and is now popular as a lender to European powers facing debt crises.

Russia is now 9th in the world as an economic power, with an enviable debt to production ratio of 8.7%. They are clearly living within their means and have also benefitted greatly from the high international price of oil.

India is also a rising power with a hungry population of 1.21 billion, second to China on the world stage. To feed, clothe, and house these people takes an enormous effort given limited resources, but the nation did manage to crack the top ten in GDP, producing 1.63 Trillion in 2011. They'll have to do considerably better to provide civilized comfort for their masses. 600 million Indians lack access to flush toilets, but production is growing quickly and the nation is considered a rising power.

The decline of the G7 and emergence of what were once called downtrodden and "less developed countries" is a phenomenon of the post 1970's world. The Chinese communist economic system collapsed, which ushered in reforms that have proven dynamic and almost explosive. With a nominal GDP (inflation adjusted) rate of 738 billion produced in the mid '90s to 7.3 trillion generated last year and a national debt at 43.5 % of GDP, they're clearly the "team to beat" in the coming decades. They're also surely aware that the west can only import so much of their nation's cheap exports without severely damaging their own domestic production of similar goods. If the G7 doesn't buy, Russia, China, Brazil, and maybe even India will lose their production positions in the top ten of the world’s economies.

For now, the BRICs are coming on strong. It means cheap goods for us, and prosperity for them, but such a world is also built on the assumption that we can keep on buying. All eyes are on that western fiscal cliff and whether our elected leaders can trim or at least manage a realistic debt ceiling before it drags us into recession, or worse.

We're being hit by the BRICs, and hopefully we can take it!

Ralph Murphy is a former member of the CIA Headquarters Staff in Langley, VA.