the bric phenomenon myth or reality of the future
News Posted On: 23 July 2010
Ruban Selvanayagam, of the Brazil Real Estate / Land Investment Guide, takes a modern look at relative strength and weaknesses of the BRIC economies.
Since 2001 – when Goldman Sachs introduced the term ‘BRIC’ (Brazil, Russia, India and China as collective global wealth leaders by 2032) – many real estate and land investors began debating whether these countries could really be the next global hotspots. The fundamental statistics are encouraging: the BRICs have a total of 40 percent of the world’s population; 40 percent of the world’s gold and hard currency and 25 percent of the world’s land mass. Yet, the question still remains: are the issues that face these counties far too ingrained so as to prevent their positioning as prominent future economies and lead what has been referred to as a ‘new world order’?
Brazil
After an extended period of sitting in the shadows, Latin America’s largest country presents a number of economic characteristics which are confirming its ability to grow as a global superpower. Examples include possessing one of the highest international reserves in the globe today; a capability of being a self-sufficient economy due to its huge stockpiles of natural resources; rising trade and competitiveness, particularly with regards to its agricultural industry (the OECD agricultural outlook report expects the country’s output to expand by 40 percent to 2019); leading energy industries (namely biofuels, wind and hydroelectricity); vast petroleum discoveries; housing and social programmes; lowly leveraged debt markets; low unemployment and an ever-rising middle class to name a few. Such factors, along with a stable political system that is increasingly present on the world stage, are assisting the country’s attractiveness from the international investors’ viewpoint. However, as a result of these economic changes, the country’s currency (the Real) has witnessed significant gains in recent years, which has acted as a curb to foreign inflows – particularly at a time where many developed country currencies remain weak. From a general perspective, concerns remain as to the country’s infrastructural ability to keep up with its rapid growth as well as with regards to other issues such as its complicated legal system and ease of doing business (the World Bank’s 2010 ‘Doing Business’ report placed Brazil 129th out of 183 countries).
Russia
Since the collapse of the Soviet Union and the severe financial crisis in the late 1990s, the country has made great strides in terms of its position as a global market economy – although investors remain weary as to its dubious property rights and the heavy public sector influence on private sector decisions. Like Brazil, the country is blessed with an abundance of resources including natural gas, oil, coal and metals. According to a 2010 report published by Merrill Lynch, Russia has been the slowest out of the BRIC countries to accumulate wealth and it is the least robust but it is resource rich and the abundance of commodities is expected to boost growth in the future. The country also underperformed the Morgan Stanley Capital International index with analysts pointing to high taxes on the large companies which are used to subsidise other parts of the economy and not attract shareholders. Morgan Stanley has also recently pointed to the fact that the country is the least transparent out of all of the BRICs. Indeed, Russia is also the lowest recipient of FDI out of all of the BRICs although a recent report by Ernst & Young pointed to an increasing amount of interest to its industrial sector and rising middle class. Somewhat conversely, several economic thought leaders have outlined their disagreement with Russia being part of the group – pointing to the fact that it has several factors that are superior to the other countries, such as an overall higher GDP per capita and significantly better comparative social standards.
India
As currently the eleventh largest world economy, the country is widely predicted to move up the ranks in coming years. Its strengths lie in a very robust services sector (which dominates the country’s GDP) as well as having prominent industrial and agricultural sectors (the OECD Agricultural Outlook 2010 Report stated the country’s output is expected to expand by 21 percent leading to 2019). Like its BRIC counterparts, the country is witnessing an ever-rising middle class (currently standing at over 350 million and the proportion of its population with over US$ 1m of investable assets grew by over 50 per cent in 2009) which is, in turn, increasing its purchasing power parity. However, whilst trade liberalisation has allowed the country to engage in an increased amount of major global trade agreements, the country’s balance of payments still remains negative – an issue that was exacerbated during global economic downturn (the EU and United States constitute over 60 percent of exports). India’s performance has nevertheless remained relatively healthy and it is witnessing a relatively stronger recovery compared to most developed economies. Indeed, the last decade has seen a number of multinationals outsourcing to the country largely due to cheaper labour costs and other overheads (HSBC, for example, have over 27,000 employees in the country serving their international client base). Jim O’Neill, originator of the term ‘BRIC’, recently stated that his belief is that India would have the strongest GDP growth out of the four countries over the next 10 years. The most recent revision of the Golden Sachs BRIC report predicted that, between 2007 and 2020, India’s GDP per capita will quadruple and that its economy will surpass that of the United States by 2043. The report also stated that the country will remain low-income for some years to come, outlining a range of fundamental factors that need to be achieved including improved governance and diplomacy (particularly with regards to its relationship with Pakistan and issues over the ownership of the Kashmir district); higher educational achievement at all levels; controlled inflation; better fiscal policy as well as improved agricultural production methods, infrastructure and environmental policy. Whilst, the economic growth for 2010 is predicted to be the second highest after China at 8.5 percent, concern has recently be highlighted with regards to the country’s double digit inflation levels – which are being controlled by proactive rate rises and are expected to drop by the end of the year.
China
As having the third largest global economy after the US and Japan, China’s rising influence is becoming ever-apparent on the world stage. Since the late 1970s, when a number of key economic reforms were initiated, the country has witnessed a steady solid level of growth – complemented by rising foreign trade levels, historically low levels of unemployment and rising dominance throughout Asia. The country’s wealth, as with all of the BRICs, has therefore continued to increase with statistics from the World Bank pointing to a decrease of poverty by over 50 percent between 1981 and 2005 (the number of people with over US$ 1 million in investable assets increased by 31 percent in 2009). The massive and unprecedented urbanisation that is currently occurring in the country, whilst viewed as important in terms of the building the nation’s wealth, is also a very important factor to note, particularly for real estate investors. The urban population currently stands at 40 percent and is predicted to at least double within the next three decades. The authorities are therefore going full steam ahead with the development of ‘super-cities’ filled with high-rise apartment buildings; high-speed and intricate transport networks; modern business complexes; shopping centres; hospitals and schools. However, such growth has resulted in risks of overheating (particularly in the housing market) which, in recent months, has resulted in a tightening of monetary policy. Other issues of concern include the environmental damage that has been caused as a result of the country’s growth and the lacklustre controls over business regulation, presenting a risk to consumer safety. As at 2010, China has a total of 54 companies in the Fortune 500 (with three in the top 10) – most are state owned and, whilst benefitting from a lower level of competition, are routinely abused for the purposes of political gain. The bureaucratic and democratically restrictive nature of the Chinese government has also become a major concern and; whilst a changing face in terms of growth and a more market-orientated economy is more likely to be apparent; it is highly likely that such practices will remain.
Conclusions
Since the inception of term ‘BRIC’ into the world economy, the four nations have been working together to develop common interests – examples include increased representation; calling for greater voting shares at International Monetary Fund meetings; developing trade agreements; seeking alternatives to the US dollar; strategies on climate change and accords between the countries development banks (particularly with regards to infrastructure, energy, sustainability and technology sectors). The journey, however, has and will not be plain sailing – and notable differences have already emerged. Brazil and India, for example, have disagreed over the freeing up of agricultural trade as a result of the Asian country wanting to protect its farmers; the currently highly militarised divide between China and India has also been a long issue of contention between the two countries and issues over access to Russia’s great resources have provoked negotiation difficulties (particularly between China and India).
The spread of the global influence of the BRICs cannot be understated, and whilst difficulties and challenges are certainly to be expected, these so-called ‘emerging’ nations look set to be a global economic force to be reckoned with – within which will operate exciting real estate markets.
The Brazil Real Estate and Land Investment guide offer an entirely FREE support system based on fundamental investment principles and not speculation in one of the world’s fastest growing economies. Please head straight to the website for access to reports, state guides, up-to-date statistics, strategies, interviews, articles, weekly broadcasts and more: http://www.brazilinvestmentguide.com/
Ruban Selvanayagam, Property Investor / Developer (UK & Brazil)
Linked In Profile: http://br.linkedin.com/in/rubanselva
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