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Unit 4 BRIC

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  1. 1. 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
  2. 2. Why they matter? <ul><li>Economic Weight – 4 biggest economies outside the OECD. – GNP /capita varies widely – Russia $15K, India $3K. </li></ul><ul><li>Only developing countries with annual GDPs of over $1tr. </li></ul><ul><li>Got through the recession reasonably well (except Russia) – without them world output would have fallen by even more that it did. </li></ul><ul><li>China now the worlds largest exporter. </li></ul><ul><li>They are increasing their trade with each other. </li></ul><ul><li>All four are among the 10 largest accumulators of foreign reserves (40% of total) </li></ul><ul><li>China $2.4tr – second largest net creditor after Japan. </li></ul><ul><li>If BRICs would set aside 1/6 of their reserves they could create a fund the size of the IMF. </li></ul>
  3. 3. Why they matter <ul><li>Their large foreign assets provided cushions against the great recession – becoming financial as well as economic powers. </li></ul><ul><li>Their deficits are mostly modest and stable (India is partial exception) – world banks offer BRIC funds. Top 2 world banks are Chinese. </li></ul><ul><li>Their sound macro performance is giving them a reputation. </li></ul><ul><li>They share large domestic markets with substantial numbers of poor people </li></ul><ul><li>They have opened up to the world economy without the full market liberalisation of the ‘Washington Consensus’. </li></ul>
  4. 4. A new world order <ul><li>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. </li></ul><ul><li>The system can no longer be run by a few rich economies. </li></ul><ul><li>How do large emerging economies who are integral to the financial and trading system take some responsibility for maintaining it? </li></ul>
  5. 5. Why they matter <ul><li>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 . </li></ul><ul><li>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. </li></ul><ul><li>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. </li></ul><ul><li>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. </li></ul>
  6. 6. Rivalry <ul><li>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. </li></ul><ul><li>Coherent Grouping ? </li></ul><ul><li>Difference in GNP/capita </li></ul><ul><li>Difference in openness of economies (exports) </li></ul><ul><li>RC running large current account surpluses, BI running small deficits </li></ul><ul><li>Thus very different approaches to economic management. China suppressing domestic demand and encouraging exports – BI suffering from China’s currency undervaluation. </li></ul>
  7. 7. Future Composition <ul><li>Russia looking like an odd man out – population is falling – working age population will fall by 17m by 2030 – other countries increasing. </li></ul><ul><li>Should South Africa/Mexico/Indonesia join? </li></ul>
  8. 8. China <ul><li>August 2010 </li></ul><ul><li>Chinese moving into even the farthest parts of Africa. In rural Lesotho petrol stations, supermarkets, ironmongers etc all Chinese owned. </li></ul><ul><li>Young entrepreneurs </li></ul><ul><li>But also Chinese Government paying for infrastructure like parliament buildings (built by Chinese companies). </li></ul><ul><li>Chinese Diaspora to Africa could by up to 1m. </li></ul>
  9. 9. China Environment <ul><li>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. </li></ul><ul><li>Introduced algae eating carp – died. </li></ul><ul><li>Algae barriers in the water, sewerage works. </li></ul><ul><li>Spending on green technology has risen in China but less care on environmental protection. </li></ul><ul><li>Local officials fixated on the need to boost GDP, indiscriminate lending by state owned banks. </li></ul><ul><li>Funds poured into new infrastructure and buildings boosting some of the most polluting industries. </li></ul><ul><li>43% of state monitored rivers have been classed as unsuitable for human contact. </li></ul><ul><li>A stimulus encouraged car buying spree increased congestion and smog. </li></ul><ul><li>Record levels of steel and coke production. 70% of China’s energy comes from coal. </li></ul><ul><li>Diminishing share of grade 1 (excellent) air quality days since Beijing Olympics. </li></ul>
  10. 10. China Economy – blueprint for future <ul><li>Mar 2011 – 5 year plan </li></ul><ul><li>Growth target of 7% a year for 2011-5. But past experience shows it can often go much above that. </li></ul><ul><li>Need to balance development – too reliant on investment, swallowing natural resources and too little consumer spending. </li></ul><ul><li>Need to address unequal distribution of income between rural/urban, rich/poor, profits/wages, coast/inland </li></ul><ul><li>Have failed to make services a bigger part of the economy. State sector dominated. Need to deregulate. Transport, power, municipal utilities. </li></ul><ul><li>But this happening in the context of slowing down the economy – achieving more sustainable growth rates… </li></ul>
  11. 11. Brazil - Employment <ul><li>Mar 2011 </li></ul><ul><li>Labour laws are costly – hard to fire – even laziness or bankruptcy is not just cause. </li></ul><ul><li>Inflexible time periods for annual leave. </li></ul><ul><li>Courts rarely side with employers. </li></ul><ul><li>High payroll taxes. </li></ul><ul><li>Brazil has two big weaknesses – high job turnover and low productivity growth. </li></ul><ul><li>High redundancy rates because labour laws do not allow negotiating of terms and conditions. </li></ul><ul><li>Generous severance packages encourage employees to move frequently. </li></ul>
  12. 12. Brazil – Economy <ul><li>Mar 2011 </li></ul><ul><li>Grew at 7.5% in 2010. Overtook Italy as 7 th biggest economy. </li></ul><ul><li>Government worried about overheating – budget cutting and raising interest rates. Aim to ease growth to 4.5 – 5%. </li></ul><ul><li>If take ppp into consideration Brazil is the 5 th largest economy in the world. </li></ul><ul><li>BUT using ppp is useful for comparing leaving standards – using GDP in current dollars shows an economy’s international clout. </li></ul><ul><li>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 </li></ul>