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Cover Stories Series 2013> Indian PM Visits China> Archive
UPDATED: October 28, 2013 NO. 44 OCTOBER 31, 2013
BRICS' Painful Adjustment
Amid the global economic slowdown, BRICS nations still have tools at their disposal
By Zhang Maorong

The BRICS economies are in need of transformation. Sliding competitiveness and insufficient domestic demand, in addition to falling demand from developed countries and increasing global trade protectionism, have damaged BRICS economies. The shoddy economic growth figures in recent years show that they are in urgent need of economic transformation from a type of development characterized by low-end processing industries and raw material export to another format based on high value-added production and expanding domestic demand. Due to their overreliance on oil, natural gas and mining exports, the Brazilian, Russian and South African economies are vulnerable to fluctuations in international commodity prices. Price falls will continue to affect Brazil and Russia in following years.

The economic growth pattern of BRICS countries currently lacks a sufficient level of technological innovation and efficiency. In other words, their value-added industries are not adequate. Currently, the industrial value-added output of China is less than 30 percent, and about 20 percent in India—far below that of the U.S. figure of over 45 percent. The BRICS' poor performance in global innovation reflects their shortcomings. In Brazil, labor increasingly flows to service industries from the industrial sector, as service jobs are comparatively easy and high paying. This not only inhibits the country's industrial competitiveness, but also increases inflation risks. Statistics from HSBC show that China, India and Brazil all received fewer processing orders in July. In addition, BRICS countries' domestic demand is not sufficient. In 2012, domestic consumption contributed 51.8 percent to China's GDP growth, and about 55 to 65 percent in India and Russia, which were far below the global average of 70 percent. The average rate in developed countries is actually as high as almost 80 percent.

The BRICS must find ways to adjust to new forms of development. China's banking sector is overleveraged; housing prices are stuck at a high level; and its manufacturing capacity is already in excess. Brazilian enterprises bear heavy tax burdens, which lifts production cost and thus shrinks the manufacturing industry. India has an unbalanced industrial structure, high inflation, high budget deficit, and high public debt. Moreover, poor governmental management leads to corruption and a poor business environment. Banks are reluctant to loan to enterprises or consumers due to the country's poor macroeconomic environment. Russia, Brazil and India all exhibit woefully inadequate infrastructural investment. Russia has not extended its road network since 1994. Not until 2018, when Russia hosts the FIFA World Cup, will there be a highway between Moscow and St. Petersburg. The World Economic Forum released a 2013-14 global economic competitiveness report on September 4. India ranked 60th among the 148 economies, its worst position in recent years, with the report noting that the country's infrastructural facilities, such as roads, IT networks and energy grids, are unable to match its economic development potential.

BRICS' advantages

BRICS economies on the whole perform adequately while maintaining strong safeguards against risk. They have robust economies and solid foreign exchange reserves, modified financial systems and perfected current accounts. These advantages allow for greater flexibility in policy choices and a better ability to defend against financial risks—such as the Asian financial crisis in the 1990s. Their long period of robust economic growth has freed these economies from the negative influences brought by the U.S. economic slowdown. Currently, BRICS countries' capital flow is healthier than in the 1990s. Moreover, they adopt floating exchange rates to provide a buffer against capital flow reversion. For example, China has a large foreign exchange reserve of $3.5 trillion. The financial turbulence in emerging markets has not brought a great deal of damage to the Chinese economy. Its stock market and foreign exchange market operate smoothly, and its economic growth is stable. China's GDP now accounts for about 40 percent of the total of emerging economies. A stable Chinese economy and steady exchange rate of the yuan are significant for maintaining the steadiness of BRICS economies. China's GDP is expected to see an increase of 7.5 percent this year, continuing its position as a backbone of the emerging markets.

With a wide international market and tremendous potential domestic demand, the BRICS countries still possess development advantages. The huge domestic market affords a flexible status in the slow global economic recovery. In the future, their education, social welfare investment and infrastructural construction will provide powerful stimuli for domestic demand. Russia, with its vast territory, will undergo a new round of development in its Far East regions. And lastly, as a leader of regional economic cooperation in Africa, South Africa will benefit from its growing market and emerging middle class.

The author is an associate researcher with the Institute of World Economic Studies, China Institutes of Contemporary International Relations

Email us at: liuyunyun@bjreview.com

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