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Unit 4 BRIC

Unit 4 BRIC

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    • The BRICs Their importance as a trading group? Copenhagen Summit Obama had to negotiate with all four together about new climate change treaty – Europeans weren’t even in the room. Starting to meet annually since 2006 – government officials, banks, think tanks. Term coined by Glodman Sachs analyst Jim O’Neill 2001
    • Why they matter?
      • Economic Weight – 4 biggest economies outside the OECD. – GNP /capita varies widely – Russia $15K, India $3K.
      • Only developing countries with annual GDPs of over $1tr.
      • Got through the recession reasonably well (except Russia) – without them world output would have fallen by even more that it did.
      • China now the worlds largest exporter.
      • They are increasing their trade with each other.
      • All four are among the 10 largest accumulators of foreign reserves (40% of total)
      • China $2.4tr – second largest net creditor after Japan.
      • If BRICs would set aside 1/6 of their reserves they could create a fund the size of the IMF.
    • Why they matter
      • Their large foreign assets provided cushions against the great recession – becoming financial as well as economic powers.
      • Their deficits are mostly modest and stable (India is partial exception) – world banks offer BRIC funds. Top 2 world banks are Chinese.
      • Their sound macro performance is giving them a reputation.
      • They share large domestic markets with substantial numbers of poor people
      • They have opened up to the world economy without the full market liberalisation of the ‘Washington Consensus’.
    • A new world order
      • Post financial crisis – some have compared to the late 1940s – in that the post war/crisis period was so different that the pre war/crisis period that new institutions needed to be formed.
      • The system can no longer be run by a few rich economies.
      • How do large emerging economies who are integral to the financial and trading system take some responsibility for maintaining it?
    • Why they matter
      • Because the worlds most important country thinks they do. America within the G20 – pushed for BRICs to be part of it and for the club to be the chief forum for dealing with international economic issues .
      • BRICs get advantage – they can pursue national objectives under the umbrella of a larger group. BRI can also soften the impact of China’s rise and avoid a G2 – America and China.
      • Could damage the global economic system by undermining the role of the IMF and WB, abandon attempts to expand free trade or ignore aid conditions to the 3 rd World.
      • BUT – not as coherent as name suggests – still intergroup rivalry and differing agendas – India’s rivalry with China – India fear of being ‘strangled by a string of pearls’ of Pakistan, Nepal and Sri Lanka backed by China.
    • Rivalry
      • Competing with one another in third countries e.g. in the delivery of cheap credit and FDI to Africa, and in purchasing exports from poor countries. Like US / USSR rivalry for influence in Global South.
      • Coherent Grouping ?
      • Difference in GNP/capita
      • Difference in openness of economies (exports)
      • RC running large current account surpluses, BI running small deficits
      • Thus very different approaches to economic management. China suppressing domestic demand and encouraging exports – BI suffering from China’s currency undervaluation.
    • Future Composition
      • Russia looking like an odd man out – population is falling – working age population will fall by 17m by 2030 – other countries increasing.
      • Should South Africa/Mexico/Indonesia join?
    • China
      • August 2010
      • Chinese moving into even the farthest parts of Africa. In rural Lesotho petrol stations, supermarkets, ironmongers etc all Chinese owned.
      • Young entrepreneurs
      • But also Chinese Government paying for infrastructure like parliament buildings (built by Chinese companies).
      • Chinese Diaspora to Africa could by up to 1m.
    • China Environment
      • Tai Lake – China’s 3 rd largest freshwater body – sits in one of the most highly developed areas of the country, producing 10% of GDP – hard to keep clean.
      • Introduced algae eating carp – died.
      • Algae barriers in the water, sewerage works.
      • Spending on green technology has risen in China but less care on environmental protection.
      • Local officials fixated on the need to boost GDP, indiscriminate lending by state owned banks.
      • Funds poured into new infrastructure and buildings boosting some of the most polluting industries.
      • 43% of state monitored rivers have been classed as unsuitable for human contact.
      • A stimulus encouraged car buying spree increased congestion and smog.
      • Record levels of steel and coke production. 70% of China’s energy comes from coal.
      • Diminishing share of grade 1 (excellent) air quality days since Beijing Olympics.
    • China Economy – blueprint for future
      • Mar 2011 – 5 year plan
      • Growth target of 7% a year for 2011-5. But past experience shows it can often go much above that.
      • Need to balance development – too reliant on investment, swallowing natural resources and too little consumer spending.
      • Need to address unequal distribution of income between rural/urban, rich/poor, profits/wages, coast/inland
      • Have failed to make services a bigger part of the economy. State sector dominated. Need to deregulate. Transport, power, municipal utilities.
      • But this happening in the context of slowing down the economy – achieving more sustainable growth rates…
    • Brazil - Employment
      • Mar 2011
      • Labour laws are costly – hard to fire – even laziness or bankruptcy is not just cause.
      • Inflexible time periods for annual leave.
      • Courts rarely side with employers.
      • High payroll taxes.
      • Brazil has two big weaknesses – high job turnover and low productivity growth.
      • High redundancy rates because labour laws do not allow negotiating of terms and conditions.
      • Generous severance packages encourage employees to move frequently.
    • Brazil – Economy
      • Mar 2011
      • Grew at 7.5% in 2010. Overtook Italy as 7 th biggest economy.
      • Government worried about overheating – budget cutting and raising interest rates. Aim to ease growth to 4.5 – 5%.
      • If take ppp into consideration Brazil is the 5 th largest economy in the world.
      • BUT using ppp is useful for comparing leaving standards – using GDP in current dollars shows an economy’s international clout.
      • Even with modest 4.5% growth – greater than France or Britain – and interest rates and commodity export prices rising – no sign of currency (real) weakening – that would give it higher GDP figures as measured in current Dollars. It might well break into the top 5 in 2011/2