brics: challenges and opportunities

THE BRICS ECONOMIES: DISSIMILARITIES

AND COMMONALITIES

Roberto Castello Branco 1 João Victor Issler 1

Bruno Ricardo Delalibera 1

1FGV/EPGE and FGV Growth & Development

June 2015

THE BRICS: NOT JUST A FAD

I Large size

I China and the quest for global power

I High growth potential

I The dynamics of structural transformation

I From acronym to a formal group

2 / 14

THE CHINESE PREEMINENCE

I The fastest growing economy and the largest among theBRICS

I A heavy weight in the world economy

I #2 GDPI #1 exporter, #2 importer, #2 FDI recipientI #1 stock of international reserves, #2 largest exporter of

capitalI #1 manufacturer, #1 consumer of metals and energyI #1 producer of S&E graduates, #2 R&D investor, #2

producer of scienti�c papers

I But still well behind in the convergence path

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THE CHINESE QUEST FOR GLOBAL

POWER

I Creation of new multilateral �nancial institutionsI NDB, SILK ROAD, AIIB

I Becoming a global investor

I FDI out�ows of US$ 580 billion � 2005/14I Japan x China: approaches to access natural resources

I Pursuing the status of global currency for the CNYI Bilateral currency swap agreementsI Gradual liberalization of capital mobilityI HKG as a major RMB o�shore market � Dim Sum bondsI SH-HKG connect

4 / 14

CHINA'S INITIATIVES IN GLOBAL

FINANCE: POTENTIAL ECONOMIC BENEFITS

I Extraction of seigniorage, low-cost debt issuance denominatedin the domestic currency, prestige

I Closer integration with global �nancial markets

I Diversi�cation of the foreign asset portfolio

I Diversi�cation of household asset portfolio away from realestate assets

I Exploitation of comparative advantages in infrastructurebuilding and standardized capital goods

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COMMONALITIES AND DISSIMILARITIES

I The BRICS share many of the typical commonalities ofemerging market economies

I Simultaneously, heterogeneity stands out as a key feature

I Dissimilarities involve many dimensions, including the responseto the growth slowdown of the last four years

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DISSIMILARITIES: DEMAND AND SUPPLY

STRUCTURE

I Brazil resembles the economic structure of a mature developedeconomy

I Its economy has been consumption-driven (84.9% of GDP)contrasting with China, where consumption's share is too low(48.2%)

I China has been investment-driven: investment to GDP ratio of49%, very high even by Asian standards, matched only bySingapore in the 80's

I Brazil's saving rate has been low enough to �nance itsinvestment/GDP ratio (18

I India: adopting a di�erent growth model, but investment toGDP ratio (33%) follows the experience of other fast growingAsian economies

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DISSIMILARITIES: DEMAND AND SUPPLY

STRUCTURE

I China: an industrial economy (44% of GDP), manufacturingaccounts for 32% of aggregate supply

I Manufacturing share of GDP is lower than 20% in the otherBRICS, in line with EMs average

I Brazil and South Africa: large service sectors, approximately70% of GDP, large room to boost aggregate TFP

I Services in China: 43.2% of GDP

I High-skilled labor only 15.5%, lower than Brazil (23.3%) andIndia (25.0%), and much lower than Korea (51.4%)

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DISSIMILARITIES:INTERNATIONAL TRADE

I Brazil is one of the world's most closed economies: goods andservices trade �ow only 28% of GDP. Not a player in theglobal supply chain

I Other BRICS are open to trade, average trade to GDP ratio of51%

I Brazil, Russia and South Africa large commodity exporters

I China and India large commodity importers

I China: large exporter of manufactures (94%).

I India: large exporter of services (35%).

I China: #1 destination for Brazilian, Russian and SouthAfrican exports and #2 for Indian exports

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DISSIMILARITIES: URBANIZATION

I Brazil: very urban, 85% of the population living in the cities

I China (54%) and India (32%) still face a long transition tourbanization

I This requires substantial investment in education, housing andinfrastructure. On the other hand, there is a signi�cantexpected TFP payo� through labor reallocation and di�usionof ideas

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DISSIMILARITIES: DEMOGRAPHIC

TRANSITION

I India and South Africa have very young populations:demographic dividend is expected to last through 2040.

I China and Brazil are facing the prospects of an increasingdependency ratio very soon

I The Russian population, the oldest among the BRICS, hasalready started to decline, which adds another growthchallenge

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STELLAR GROWTH RATES ARE GONE

I Chinese credit�fueled investment growth model has exhausted.TFP growth slowed down and total credit/GDP climbed to282% in 2014 from 158% in 2007

I Credit�fueled consumption growth employed by Brazil, Indiaand South Africa are also exhausted

I Brazil faces serious macroeconomic disequilibrium and TFP isstagnated

I India: the poorest of the BRICS � per capita GDP 8% of theUS, 69% of population living below the poverty line. Reformsstalled over the last ten years

I Russia: reversal of the privatizations of the 90's,institutionalized rent-seeking and the empire building mentalityis back

I South Africa: strong union activism, rigid labor and productmarkets, supply bottlenecks, legacies of the apartheid regime

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CHINA'S REFORM AGENDA:

DELEVERAGING AND BETTER RESOURCE

ALLOCATION

I Anti�corruption campaign

I Fiscal reform of the provinces

I Restructuring of the SOE's

I Financial reform

I Lifting barriers to labor mobility

I Unblocking services activities to the private sector

I Deregulation

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INDIA'S REFORM AGENDA: FIGHTING

POVERTY AND MISALLOCATION OF RESOURCES

I Anti-corruption campaign

I Aadhaar project

I Financial reform

I Elimination of subsidies

I Liberalization of the energy industry

I Investment in infrastructure

I Deregulation

I Relaxation of barriers to FDI in�ows

I Strengthening of intellectual property protection

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BRICS: Testing for Commonalities using CommonFeatures

Bruno Delalibera (FGV), Roberto Castello Branco (FGV), Joao V.Issler (FGV)

June, 2015

B. Delalibera, R. Castello Branco, J.V. Issler BRICS: Testing for Commonalities June, 2015 1 / 16

Common Features – Basic Ideas

1 Series y1t has property A.

2 Series y2t has property A.

3 There exists a linear combination of them, y1t − αy2t , that does nothave property A.

4 Cointegration is the most well-known example of common features.

5 Serial correlation-common features (SCCF) or common cycles are alsowell-known: stationary series y1t and y2t both have serial correlation(are predictable), but there exists y1t − αy2t which is white noise(unpredictable).


Common Features – Basic Ideas

Engle and Kozicki (1993) main example.

1 No cointegration for log-levels of GDP for the U.S. and Canada.Instantaneous growth rates of GDP for the U.S. and Canada haveserial correlation and there is a linear combination of growth ratesthat is white noise. Cycles in U.S. and Canadian GDP growth aresynchronized.

2 This is our main finding between the growth rates of GDP for BRICScountries (also for Industrial Production).

3 Factor models and latent features:(∆ ln yUSt

∆ ln yCANt

)=

(λ1

)ft +

(εUSt

εCANt

), or,

∆ ln yUSt − λ∆ ln yCANt = εUSt − λεCANt ,(1 −λ

)is the cofeature vector, eliminating the SCCF.


Common GDP Cycles – BRICS (no India)


Common Growth Cycles – BRICS (no India)


Common Features – VAR and VECM

Vahid and Engle (1993): VAR for yt , an n-vector of I (1) log GDP (or logIndustrial Production):

yt = Γ1yt−1 + . . . + Γpyt−p + εt . (1)

VECM:

∆ yt = Γ∗1 ∆ yt−1 + . . . + Γ∗p−1 ∆ yt−p+1 + γα′ yt−1 + εt . (2)

Normalized cofeature vectors:

α =

[Is

α∗(n−s)×s

]Quasi-structural model (restricted VECM):

[Is α∗′

0(n−s)×s

In−s

]∆ yt =

[0

s×(np+r )

Γ∗∗1 . . . Γ∗∗p−1 γ∗

] ∆ yt−1

...∆ yt−p+1

α′yt−1

+ vt . (3)


A GMM Test for Common Cycles

GMM approach: exploits the following moment restriction and testH0 :existence of s linearly independent SCCF:

0 = E

[Is α∗′

0(n−s)×s

In−s

]∆ yt−

[0

s×(np+r )

Γ∗∗1 . . . Γ∗∗p−1 γ∗

] ∆ yt−1

...∆ yt−p+1

α′yt−1

⊗ Zt−1

,

where the elements of Zt−1 are the instruments comprising past series:α′yt−1, ∆ yt−1, ∆ yt−2, · · · , ∆ yt−p+1. The test for common cycles is anover-identifying restriction test – the J test proposed by Hansen (1982).This test is robust to HSK of unknown form if it uses a White-correctionin its several forms.


Common-Cycle Tests (GDP)

GDP

Country Brazil China Russia South Africa

Brazil -China 0.70 -Russia 0.50 0.48 -South Africa 0.37 0.62 0.17 -

Table: Real GDP: P-Values of Common-cycle tests – GMM based


Common Cycles in Industrial Production


Common-Cycle Tests (Ind. Production)

Industrial Production

Country Brazil China India Russia South Africa

Brazil -China 0.050 -India 0.022 0.066 -Russia 0.410 0.180 0.015 -South Africa 0.390 0.062 0.012 0.030 -

Table: Industrial Production: P-Values of Common-cycle tests – GMM based


Common-Cycle Tests (Exports)

Exports



Table: Exports: P-Values in Common-cycle tests – GMM based


Common-Cycle Tests (Imports)

Imports



Table: Imports: P-Values in Common-cycle tests – GMM based


Common-Cycle Tests (BRICS and US)

BRICS and US

Country Industrial Production GDP

Brazil 0.09 0.22China 0.54 0.69India 0.62 -Russia 0.21 0.14South Africa 0.48 0.23

Table: BRICS and US: P-Values of Common-cycle tests – GMM based


Common-Cycle Tests (BRICS and Euro)

BRICS and Euro zone

Country Industrial Production GDP

Brazil 0.057 0.293China 0.050 0.420India 0.011 -Russia 0.021 0.270South Africa 0.024 0.210

Table: BRICS and Euro zone: P-Values of Common-cycle tests – GMM based


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