brics essay
TRANSCRIPT
1
2
TABLE OF CONTENTS
Introduction………………………………………………………………………………………..3
What are the BRICS economies?.........................................................................................3
China………………………………………………………………………………………………4
China’s Economy Overview……………………………………………………………....4
China GDP Facts………………………………………………………………………….6
What explains China’s long-term high growth rates?.........................................................6
China’s Costs of Growth………………………………………………………………….7
What is ahead for China?....................................................................................................7
Brazil……………………………………………………………………....……………………...8
History of Brazil’s Economic Growth…………………………………………....………8
Business Firms and Market Capitalization……………...……………………………....10
Agriculture………………………………………………………………………………11
Tourism………………………………………………………………………………….12
Challenges…………………………………………………………………………….....13
Openness to Trade…………………………………………………………………...….13
Investment and savings are lower………………………………………………………14
India………………………………………………………………………………………….…14
An Overview of India……………………………………………………………..……14
The why and how of India’s Economic Growth….........................................................15
Challenges: What lies ahead for India…....................................................................…20
Conclusion….........................................................................................................................….22
3
INTRODUCTION
In this paper we will analyze the economic growth of the BRICS Economies. Due to the extent
of the information we will focus our analysis in China, Brazil and India as we consider these
countries as a good sample to understand the common factors for growth in the BRICS. We will
provide an overview of each economy, the drivers for such high growth rates, the costs of growth
and the challenges ahead for each economy. At the end of this analysis we will identify key
similarities between their drivers of growth and predict what will happen in the future with the
BRICS economies.
What are the BRICS countries?
The BRICS is a group of countries that will contribute significantly to Global GDP growth in the
21st century. The term was created by the British economist and retiring chairman of Goldman
Sachs Asset Management, Jim O’Neill. In his famous paper "The World Needs Better Economic
BRICs", written in 2001, he emphasizes how real GDP growth of BRIC economies will exceed
that of the G7. He also states that over the next 10 years, the weight of the BRICs and especially
China in world GDP will grow, raising important issues about the global economic impact of
fiscal and monetary policy in the BRICs (O’Neill, 2001). Table #1 is provided as a reference
point to compare how the BRICS economies are ranked in the world in terms of GDP per capita
on a purchasing power parity basis.
Table #1: GDP per Capita (PPP) by country
Rank Country GDP per Capita (PPP)
1 Qatar 145,894
10 United States 53,001
- Hong Kong 52,984
46 Russia 24,298
76 Brazil 14,987
- World 14,307
4
85 South Africa 12,507
89 China 11,868
126 India 5,450
Source of data: World Bank 2013
CHINA
China’s Economy Overview
With a population of approximately 1.4 billion, China recently became the second largest
economy and is increasingly playing an important and influential role in the global economy. In
order to understand their exceptional economic growth it is important to analyze the drivers that
have lead to that growth in such a short period of time. (World Bank, 2015)
In the past, Chinese agriculture was concentrated in very few families. This created significant
inefficiencies due to the bad use of the land. In 1978, after Mao’s death, China economy turned
to market-oriented reforms to recuperate the falling economy. The market reforms started with
the de-collectivization of agriculture, following up with opening up of the country to foreign
investment, and permission for entrepreneurs to start businesses. However, most industry
remained state-owned (Brandt, 2008).
The second stage of the reforms occurred in the late 1980s and 1990s. These reforms involved
the privatization and contracting out of much state-owned industry and the lifting of price
controls, protectionist policies, and regulations, although state monopolies in sectors such as
banking and petroleum remained. These reforms were a strong starting point that made great
contributions to GDP in the following decades.
In China, Gross Domestic Product is divided by three sectors: Primary, Secondary and Tertiary.
The Primary Industry includes Farming, Forestry, Animal Husbandry, and Fishery and accounts
for around 9 percent of GDP. The Secondary sector, which includes Industry (40 percent of
GDP) and Construction (9 percent of GDP) is the most important. The Tertiary sector accounts
for the remaining 44 percent of total output and consist of Wholesale and Retail Trades;
Transport, Storage, and Post; Financial Intermediation; Real Estate; Hotel and Catering Services
5
and Others. (Trading Economics, 2015)
Graph #1: China’s GDP per Capita (PPP)
The GDP per capita PPP is obtained by dividing the country’s gross domestic product, adjusted
by purchasing power parity (how many hamburgers can people buy), by the total population.
The data is expressed in dollar amounts ($).
Graph #1 shows the significant increase China has experienced in terms of GDP per capita on a
purchasing basis over the last two decades. It is hard to believe that in 1990 GDP per capita
(PPP) was just $1,554. As the market reforms were being applied, China started experiencing a
substantial economic growth (See Graph #2). The last numbers from the World Bank revealed
that China’s GDP per Capita (PPP) in 2013 was $10,756, and is forecasted to grow to $11,524 by
2014. Even though China’s gross GDP is the second largest in the world, when the income gets
distributed to its population the average standards of living for a normal citizen are very low. In
fact, China has a lower GDP per capita (PPP) than the world’s average ($14,402), according to
the World Bank latest data (2013 numbers).
6
Graph #2: China’s Annual GDP growth rate
Source of data: World Development Indicators
China GDP Facts
According to data collected by the World Development Indicators:
● GDP growth rates of 10% on average over the last three decades.
● GDP growth rate has slowed to 7.7% in both 2012 and 2013 and is estimated to be 7.4%
in 2014.
What explains China’s long-term high growth rates?
There are many reasons behind China’s growth rates. One important driver of growth has been
capital investment that has made the country more productive. New machines, better technology
and infrastructure have helped raise output (Hu and Kan, 1997). However, increases in capital
stock are subject to the law of diminishing returns so this variable can only explain growth in the
short term.
The reason why China has been keeping up such high growth rates is productivity. The reforms
introduced profit incentives and reduced government intervention, which helped raise economic
efficiency. The reforms also gave room for private ownership of production, and these small
businesses created new jobs, developed consumer products, engaged in foreign trade, paid taxes
(Hu and Kan, 1997).
7
Another factor that contributed was the open-door policy with foreign investment, which has
connected China to global markets. These investments have helped built factories, create jobs
and improve technology. Finally, the economic liberation has marked a transition from an
agricultural-based economy into a manufacturing economy that has become the largest exporter
in the world.
China’s Costs of Growth
Every economic decision involves a trade-off. China is no exception to this rule. They have had
some costs for their high growth rates in such a short period of time. Due to the rapid
industrialization and population concentration in large cities China has created large amounts of
environmental pollution. This has become a major problem and has reduced the well being of
those who live in these cities. Environmental pollution is not counted in GDP, so the data shown
above can be misleading with regards to the well being of the citizens who live in these
contaminated environments.
Another cost for their growth has been the rise of inequality between inland-coastland regions.
The main reason behind this is a widening income gap between coastal and inland provinces. In
the initial phases of the market reforms, the regions with coast were able to take advantage of
their favorable locations to engage in trade, while their counterparts had to focus on less
profitable activities.
Finally, China has focused their growth on low cost manufacturing which requires large amounts
of low-skilled workers. One of the main drivers of growth in this economy is based labor-
intensive practice. For this reason they have been target of criticism by many Human Rights
movements for their unethical business practices, specifically the working conditions in their
factories.
What is ahead for China?
Even though the economic growth has lifted 500 million Chinese from the poverty line (World
Bank, 2015), their policymakers still have some challenges ahead to maintain sustainable levels
of growth. A fundamental reason to explain such high levels of growth in the past 30 years is that
poor economies can grow really fast as they are catching up to developed economies. The
8
explanation for this is because any investment in capital produces large increases in total output.
However, once economies get larger in size their growth starts to slow down because of
diminishing marginal returns on capital. This is one of the biggest challenges that China’s
policymakers are going to be facing in the following years.
Another crucial challenge has to do with the human capital. Currently, China has 793,307,655
workers in their labor force, according to the World Bank data for 2014, making them the
country with the largest labor force in the world. However, most of its labor force is comprised
of low-skilled workers. They have been able to grow so rapidly due to their large pool of workers
working in the manufacturing sector, but if they want to keep growing they need to invest in
human capital to increase the level of skills of their labor force and thus increase the average
productivity per worker. In other words, in order to grow sustainably they need to focus on
quality factors such as education. This will help them transition from an industrial economy,
focused on exports, to a services economy.
To achieve this transition and improve their labor force productivity, China is spending 25% of
fiscal expenditure on education (Riley, 2014). Another important measure that has contributed to
a more educated labor force has been the 1986 “Compulsory Education Law of the People’s
Republic of China”, an implementation of a mandatory 9-year education program for every
children in China. This has been a very successful program because it has contributed with a
98% enrollment rate in primary schools (China Education Center, 2015).
BRAZIL
History of Brazil’s Economic Growth
First of all, it is crucial to acknowledge and analyze the history of the Brazilian economy and
how it has affected and influenced its people, the country as a whole, as well as the perception of
the world towards this particular nation. Going way back in history, Brazil experienced some
initial and key structural transformations in the 1930s. Brazil was taking its first steps into
converting itself into a more modern and industrialized economy. After World War II, the nation
experienced a socio-economic transformation. One of the major effects that were caused by this
alteration was that a large portion of Brazilian citizens decided to reside in the cities, not in small
9
towns like they used to. They pursued new opportunities. In 1940, only 30% of Brazilian
population resided in towns and cities. But by the year 1991, an increasing 75% of the population
resided in cities. Certainly, this had a significant influence in the Brazilian economy, and now the
country had two of the world’s largest and most important metropolitan centers which were: Sao
Paulo and Rio de Janeiro. Additionally, the industrial sector is another main and beneficiary
factor that played an essential role in this cause, being successful in producing a wide range of
products for the domestic market and for export as well, including consumer goods, intermediate
goods, and capital goods.
Nonetheless, as Brazil starting seeing a wide range of opportunities, industrialization and
developments in the economy; the nation experienced a severe inflation that lasted about ten
years (1980s-1990s). It is believed and evident that the fiscal deficits were a major component of
inflation, despite all the political difficulties such as corruption, the deficits had a quite role in
this chaos. An aspect that influenced negatively the inflation was indexation. Meaning that every
buyer or seller was aware of the recent inflation rates and still would factor that index into their
prices, causing the inflation rates to increase over time. Various economic initiatives were
created and implemented, however the outcome was not the one Brazilian authorities were
expecting. In 1994 the Plano Real was introduced. At that time, President Cardoso successfully
managed to privatize many state owned companies such as, banks, steel plants, many prestigious
companies or organizations. Petrobras, one of the most prestigious and wealthiest companies of
Brazil was broken down from its monopoly. This caused some changes in the civil service and in
the social security of the private sector. Regarding monetary reform, this plan sought to break
these inflationary expectations by pegging the Real (the new currency) to the U.S. dollar. In the
initial months of this plan, domestic as well as international investors had the ability to predict a
positive outcome in pouring massive amounts of capital in Brazil. This caused the Real to
increase in value against the dollar (US$100=R$87), which helped importers and harmed
exporters. For a period of time, Brazil lived with an overvalued currency, which obviously
created some secondary problems such as increasing internal debt and closing of several industry
sectors, however in spite of these problems it helped increase competition and keep inflation in
low rates.
10
Graph #3: Brazil’s record of GDP per capita PPP
The graph located above expresses how the economy of Brazil has seen its major changes from
the 1990s to roughly the present. The graph is composed or examined every five years, therefore
as noticed, there exists some low levels of GDP per capita PPP in the years in which the inflation
rates were increasingly high. After this, with the creation of the Real Plan, the country starts
experiencing economic development at a more constant level (2000-2010). Brazil is a country
that is in constant growth, it has its years were economy experiences a downfall, but overall it is
constantly increasing.
Business Firms and Market Capitalization
As expressed by the graph, it is clear that Brazil has been a country in constant economic growth
since early years. Although it has had several decreases for various years which have influenced
the nation negatively, it has managed to continue expanding and becoming one of the largest and
most prominent economies. One of the key factors that continue to influence Brazil’s economy
positively are the business firms and market capitalization. Seven Brazilian companies were
nominated by the 2011 CNN Money/Fortune ranking of the world’s largest five hundred
corporations. As mentioned before, Petrobras is a semi-public; Brazilian multinational energy
organization has revenues of over 146.1 billion dollars. This company was successfully ranked
number thirty-four in the Global 500 ranking and stood out as the largest company in South
America by market capitalization. Company size is a basic determinant of asset allocation. This
11
and several other Brazilian companies fall into the category of large cap, which is $10 billion
plus and includes the companies with the largest market capitalization.
Graph #4: Brazil’s record of Market Capitalization (1998-2012)
Above is an accurate graph that measures Brazil’s market capitalization since 1988 to 2012. This
graph is measured in USD. In the early years, market capitalization was quite low but as Brazil
started transforming into a more industrialized and developed country, companies started seeing
growth. In the years of about 2006-2009 Brazil suffered a severe decrease in market
capitalization, nevertheless, as of now they have managed to increase it and maintain it in high
figures. The results were accomplished by multiplying the share price by the number of shares
outstanding of a certain company or organization.
Agriculture
A country like Brazil that has a lot of natural resources is able to use them to produce goods and
services cheaper comparing it to a country that has to import natural resources which is more
costly. Agriculture is a factor that has helped Brazil with its economic growth. Lately, there has
been a lot of media and communication focus to urban Brazil, causing the people to ignore the
importance of Brazil’s enormous agricultural sector. Throughout history Brazil’s agriculture has
been an aspect that is always present when economic growth is being discussed and analyzed.
Moreover, in a relatively short span of nearly forty years, Brazil managed to go from a net
importer of food to one of the world’s most leading exporters of agricultural products. Brazil
ranks third among the world’s major agricultural exporters. Because of the abundant agriculture
12
and oil resources that Brazil owns, it is ranked second worldwide for bioethanol production. The
agriculture has contributed significantly and also has benefited from macroeconomic and
structural reforms, with the goal of improving economic stability, reduce inflation, and trade
expansion. Another important factor to consider is Growth Acceleration Program (PAC) which
was launched in 2007 by the Lula da Silva administration. These economic policies as well as
investments in infrastructure should trigger improvements in agriculture, making the economic
growth to bolster. Currently, in Brazil, five commodities (soybean, sugar, meat, corn, and milk)
account for 68% of the total national agricultural production value, soybean and related products
making up 38.7% of Brazilian agribusiness exports.
Tourism
Brazil is a country that has increasingly become more and more attractive to tourists. It is
important to mention that Brazil hosted the FIFA World Cup in 2014 and will be hosting the
Olympics in Rio in 2016. Being host of such major events can bring numerous contributions to
the Brazilian economy. By hosting well-known events, Brazil is accepting to promote their
country as well as all the precious touristic areas. It is a method to improve the country’s tourism
sector. This part of the economy is very important, it expands and opens opportunities of all
kinds, and for instance, the vendor who is selling bikinis on the beach would most likely want to
extend the sales to foreigners, so he or she would put some effort in trying to learn some English
or any other language in order for the sales to be successful. By this method millions of jobs are
generated during the country’s preparation as well as in the events itself. The construction
industry would be majorly benefited by these activities, since they are the ones in charge of the
preparation for the events that requires construction services such as venues, restoration of ports,
airports, roads, etc. Even when the events are over, these renovations of infrastructure will be
useful for Brazilian citizens as well. For instance, new soccer stadiums will be useful when the
event is over for local soccer clubs. Also, refurbished roads, airports, and ports for future use.
The tourism sector in Brazil is optimistic and confident that the economy is growing and will
continue growing. 80 large companies in the tourism sector gained 58 billion BRL and employed
115,000 people in Brazil, in 2012.
13
What sector of the economy will benefit most from hosting the World Cup & Olympics?
Tourism: 52% Construction: 26% Infrastructure: 14% Foreign Investment: 8%
Challenges
From the BRICS, Brazil is the one country that has seen a slower growth in the economy. This
fact implies that more has to be done in order for this nation to start seeing a constant and stable
economic growth as for the years that are ahead. It is believed that the Lula da Silva
administration made some progress. Macro stabilization played a crucial role and one of its
primary objectives was to control aggregate demand in the economy. The result of this implied
stabilization is predicted that will show improvement and growth over the next years. However,
that is not the complete solution for a stable growth in the economy. Stabilization will be
insufficient to raise, and most importantly sustain Brazil’s growth rate.
Openness to Trade
Compared to the other BRICS economies, Brazil is a country that is less open to trade. Recent
studies show that Brazil is falling behind when it comes to international trade. Brazil was
recorded below average indicators of trade openness. Brazil scored between 2.0 and 3.0. One of
the main causes of this restriction of international trade is that Brazil’s economy has restrictive
trade policy regimes, with generally higher than average tariff levels.
Graph #5: Brazil’s Balance of Trade (USD million)
14
In graph #5 the balance of Brazil’s trade is demonstrated. From 2001-2012, Brazil was clearly
benefiting from trade and this sector of the economy was generating significant surpluses for
economic growth. These years in which Brazil was successful, was due to high export of mining
and agricultural products. In early 2013 the country started experiencing trade deficits and
moments later for the first time since 2000, the country registered first annual trade deficit, and
this is expressed in the graph by seeing the significant decrease (2013 and so on).
Investment and savings are lower
In Brazil, savings and investment ratios are around 20% of GDP, while China and other Asian
countries are around 35% - 40% in GDP. Brazil is a country that has deeper and more fiscal
adjustments. This influences some factors, for instance, public and foreign debt are high. This is
one of the most important challenges that the country should focus on. Investment has decreased
in Brazil and this is a factor that affects negatively economic growth of the country.
INDIA
An Overview of India
Before the boom in its economy, India was one of the poorest and less productive countries in
the world. Before their independence in 1947, India’s economy depended mainly on agriculture.
The United Kingdom managed all of India’s economic policies. During the 1700s, India was
responsible for 20% of the total world output. Their focus on the agriculture industry maintained
a low skilled set of workers living in the rural areas of India and a barely industrialized sub-
continent. “The 1872 census revealed that 91.3% of the population of the region constituting
present-day India resided in villages, and urbanization generally remained sluggish until the
1920s, due to the lack of industrialization and absence of adequate transportation” (Kumar
2005). At the end of colonial rule, India inherited one of the poorest economies with one of the
lowest degrees of industrialization and a largely illiterate and unskilled labor force. British
colonialism had a negative impact on India because of the dismal state of its economy in the
aftermaths of the 1947 Indian independence (Kumar 2005). After gaining independence, the
Indian government shifted towards a set of protectionist and highly regulated policies like import
substitution industrialization (Roy 2006). These inward-looking and state interventionist policies
15
shackled the economy and severely restricted trade and economic freedom. The result was
decades of low growth in comparison to other developing economies, also known as the Hindu
Growth Rate (Panagariya 2004). The effects of the Hindu Growth Rate were nullified after 1991
during India’s liberalization period. Since then, India begun has grown steadily above the world
average of 2.9% growth in gross domestic product (GDP). The following sections will focus on
the key changes and policies that led India to increase its productivity and elevate their annual
growth rate. These sections will also focus on the challenges that await India in their attempt
generate inclusive growth and provide better living standards for the average population.
The why and how of India’s Economic Growth
After decades of a polarized and restricted economy, the Indian government started a process of
liberalization of the economy in 1991.
Graph #6: India GDP Annual Growth Rate
SOURCE: Ministry of Statistics and Program Implementation (MOSPI)
The growth rate of India has been surpassing the global average growth rate of 2.9% in GDP for
the last two decades. These growth rates have been the product of a liberalization process started
in 1991 by the Indian government. In general, the economic reforms following 1991 removed
price controls, reduced corporate taxes and promoted the creation of small-scale industries in
large numbers. Reforms also managed to reduce tariffs and interest rates and bring an end to
16
many public monopolies. The end of monopolies brought a direct increase in foreign direct
investment for most sectors of the Indian economy. Productivity growth has been the key driver
behind the jump in GDP growth. It contributed nearly half of overall growth since 2003,
compared with a contribution of roughly one-quarter during the 1980s and 1990s. The economic
reforms have been divided into six major factors that have increased the productivity of the
Indian economy.
India Increases Its Openness
As part of the plan to liberalize the Indian economy, the government had to open its borders to a
greater extent to facilitate trade and bring foreign direct investment. “As part of its liberalization
policy, the government began to reduce the number of products subject to export controls in
1989–90” (Paringaya 2004). The opening up of India meant its reintegration into the global
economy and was evidenced in the average growth of India’s exports and imports of goods and
services (see Table #2).
Table #2: Growth of Exports and Imports of India (1980-200)
SOURCE: World Bank (2002)
17
Table #3: Indicators of Trade Openness for India
SOURCE: World Bank (2002)
SOURCE: World Bank (2002)
According to table #3, the ratio of total exports of goods and services to GDP in India nearly
doubled between 1990 and 2000, rising from 7.3 percent to 14 percent. The gradual opening of
the economy introduced a competitive dynamic, which forced the private sector to restructure
during the initial stages of India’s economic liberalization (Wilson and Purushothaman 2003).
Trade and foreign direct investment restructured the private sector because they provided access
to imported inputs, new technology and larger markets. Internal and external competition created
a need to improve efficiency as critical to survive in a global economy. Efficiency was improved
by increasing the presence of Indians in higher education institutions in order to satisfy the
demand for high-skilled workers. Before 1985, India harbored only 6,000 colleges with about 4.5
million students (Carnoy et al. 2014). By 2009, there were more than 32,000 colleges and 17
million students enrolled. The Indian government was responsible for triplicating the number of
enrolled students through their cost-sharing policies. This improvement of skills and increase in
demand for higher education levels had a positive effect on the restructuring phase. After the
restructuring phase started in the late 1990s, the private sector emerged leaner, fitter and more
productive.
18
Rise of the Financial Sector
The rigidity of the Indian system in terms of the easiness to move money around the economy
was once a factor that decreased the desire for foreign investment. The rise of the financial sector
was another factor that led to financial deepening. Increased financial intermediation improved
resource allocation by effectively channeling savings into investment and raising productivity
(Poddar and Yi 2007). One of the key features of financial deepening is that it accelerates
economic growth through the expansion of access to those who do not have adequate finance
themselves. “Typically, in an underdeveloped financial system, it is the incumbents who have
better access to financial services through relationship banking. Moreover, incumbents also
finance their growth through internal resource generation. Thus, in an underdeveloped financial
system, growth is constrained to the expansion potential of incumbents”. (Shaw 1973). The more
liquid money is available in the economy, the more opportunities exist for foreign direct
investment and continued growth. India’s financial sector is still relatively small compared with
the size of its economy, as well as with those of its East Asian neighbors and should continue its
financial deepening in order to contribute more to the rise in productivity.
Back Office of the World
In the past decades, India has evolved into the place to go for the IT industry. The IT industry
has had a similar effect to the ones caused by openness. The introduction of a competitive
dynamic has increased the incentives to spend on higher-level skills. It has provided powerful
incentives for students to invest in IT skills. “This has created a pool of technology-skilled labor
that firms in other industries can tap into” (Poddar and Yi 2007). This has also occurred at an
organizational level. Domestic firms have been affected by the demonstration effect in which
they’ve improved their own technology by spending. The IT industry increased productivity by
creating incentives for the attainment of higher-level of skills and technology.
The Golden Quadrilateral
Similar to China, India’s investment in physical capital has contributed to the growth of the
economy. In the last 50 years, the government has built just 334 miles of four-lane roads. The
Golden Quadrilateral consists 3,625 miles of four- and six-lane highways connecting the major
cities of India and running through 13 states and 17 other cities (Poddar and Yi 2007). More
importantly, the highways will open up the closed worlds of India’s villages. They will facilitate
19
increased rural-urban migration and bring foreign direct investment in real estate. The next sub-
section will go into further detail on the role of migration as a factor of economic growth in
India.
The Great Migration
India has 10 of the 30 fastest growing cities in the world. The shift from rural to urban industries
has increased the overall productivity of India’s economy.
Graph #7: Share of Employment, contribution to GDP and TFP Growth
As seen in Graph #7, agriculture has the greatest share of total employment but fails to contribute
significantly to GDP growth and has a negative contribution to the total factor productivity (TFP)
growth. The building of highways will not only lower costs for companies but also enable rural-
urban migration, the development of cities and the process of moving land from agriculture to
20
industry and services. These in turn attract more investment through agglomeration effects, and
thus sustain growth. The internal migration, from rural to urban, has brought a greater share of
employment to the industry and services market (Poddar and Yi 2007). Deteriorating agricultural
productivity, caste barriers and unemployment in villages push rural inhabitants out, while better
opportunities in cities, very high growth in the construction industry and demonstration effects
from other migrants pull rural workers into urban centers. Internal migration and the spread of
productivity will be facilitated with the Golden Quadrilateral.
Challenges: What lies ahead for India
The last decades have treated India’s economy fairly well. They have record high growth levels.
Their GDP growth will decrease the closer they get to the economic level of the developed
nation like the G7. India must face several challenges on the road to development.
Inclusive Growth
The Kuznet’s Curve explains what happens to a nation when it undergoes industrialization. In
this case, India’s economy shifted to the cities and created internal migration because farmers
were looking for better-paying jobs. This caused a significant rural-urban inequality gap
(Galbraith 2007). With the rise of India’s industries and services, the owners of firms will be
profiting, while laborers from those industries will see their incomes increase at a much slower
rate and agricultural workers would possible see their incomes decrease.
Human Capital: Education and R&D
Even though we previously mentioned that enrollment in higher education institutions increased,
the increase is not enough to bring an inclusive growth and an increase in productivity and skills
for everyone. As economies grow rapidly, they may face shortages of skilled workers, meaning
that more years of schooling are a prerequisite for the next stage of economic development
(Wilson and Purushothaman 2003). In 2000, the working-age population’s average number of
years of schooling was about 5.1 in India. Goldman Sachs has predicted an increase in average
years of schooling from 5.8 in 2006 to 7.3 by 2020. The literacy rate for India is of a 74%
(UNICEF 2013). The literacy rate and the average years of schooling are key factors that must
be treated. As soon as India catches up with the developed economy, the only way to grow will
be by improving productivity through technology (R&D) and education. India should increase
21
governmental expenditure in education because a shortfall in education will be a key constraint
for inclusive growth (Poddar and Yi 2007). Finally, higher investment towards R&D activities
and academic institutions will promote further the positive circle from higher economic growth
to even better research performance and improved human capital and vice versa.
The Land Factor: Productivity of the remaining land
The Great Migration has left large sectors of land used for agriculture unused and unproductive.
India will need investments in agriculture to boost productivity, especially in rural connectivity
and storage to improve the yield of remaining agricultural land (Poddar and Yi 2007).
Urbanization and the Environment
The rate at which India has urbanized has brought forth many ecological problems. Air pollution,
poor management of waste, growing water scarcity, falling groundwater tables, water pollution,
preservation and quality of forests, biodiversity loss, and land/soil degradation are some of the
major environmental issues India faces today. Negative externalities like urbanization and the
environment affect the living standards of the living population and thus must be addressed by
the Indian government.
System
Throughout history, India has been characterized for a closed and rigid system. Even after they
opened up to the global economy, it takes 26 days to start a business in India. The G7 average 7
days to start a business (World Bank 2014). Furthermore, it takes around a year to terminate a
job or a contract. The rigidities in the system difficult the creation of business and the hiring of
employees. Also, India’s government is inefficient, corrupt and highly bureaucratic (Bell 2011).
Foreign investors will be even more attracted to India as soon as these problems are resolved.
22
CONCLUSIONS
Key Similarities Among the BRICS Economies
Drivers For Growth
The first driver for growth these economies have in common is how capital accumulation has
allowed them to catch up to the rest of the industrialized economies. By investing in capital
goods, these countries have been able to grow really fast. This input in production increases
productivity in a relative short period of time when compared to education which can take almost
a generation for the effects to be tangible. However, as mentioned before it is subject of the law
of diminishing returns of capital which states that capital investment increases productivity but
each time it will have less effects in productivity, until a point where investing in capital will
have no significant effect because the economy is maxed out.
The second driver for growth these economies have in common is that they have shifted to a
market-oriented economy. In other words, the deregulation of the economy has opened them to
global markets allowing them to engage in trade with other economies. In fact, net exports
account for a good portion of GDP in these economies as shown in the graph below. Engaging in
trade was a big reason these countries were able to grow at such high rates because it allowed
them to use their labor forces to produce more and sell to the world.
Graph #8: Net Exports over GDP Ratio for China, Brazil and India
Source of data: World Development Indicators 2013 (World Bank)
23
Challenges
The BRICS economies analyzed in this paper have similar challenges. Inclusive growth has been
a key similarity in their challenges. The Kuznets Curve has effectively predicted their rise in
income inequality due to the rapid growth these countries have experienced. Graph #9 shows the
lack of a proper distribution of wealth over China, Brazil and India. Furthermore, the BRICS
must improve their education in order to reach the next stage of their development. Once these
economies become developed countries, their level of education will be the only way to keep
growing beyond this stage.
Graph #9: Gini Coefficients in China, Brazil and India
Predictions
Each of the countries analyzed in this paper are in the process of being part of the largest and
most influential economies of the world. Goldman Sachs predicted that China and India would
become the first and third largest economies of the world, as well as Brazil and Russia reaching
the fifth and sixth positions. This prediction graph is very useful in several ways since it shows a
ranking of the countries from 2007. For instance, China is ranked as the fifth largest economy in
the 2007 graph.
24
Graph #10: Expected GDP for the BRICS
Graph #11: Expected GDP per Capita for the BRICS
China, India and Brazil will see a considerable growth to their GDP per capita in PP terms. Still,
they will be far behind the G7 economies in this area and must focus on inclusive growth to
increase it as stated before.
25
Graph #12: The BRICS overtaking the G6 in GDP
At the time this paper is being written, China is the second largest economy and India is the
seventh largest economy by nominal GDP. Both of these economies will keep growing at higher
rates than the US. Based on the graph, by 2050 China is going to be the largest economy and
India will escalate to the third position in the ranking by real GDP (see Graph 12). However, we
think India’s growth has been more sustainable because it has focused on improvements in
technology, which will keep having positive effects on the productivity of this economy. On the
other hand, China is going to have a tougher outlook and more difficulties when it comes to
sustainable growth. The main reason is China’s growth has come from low-value goods that are
produced by its low-skilled labor force. If China expects to keep growing in the following years
they will have to invest in high tech similarly to what India has done.
26
REFERENCES
"China Overview." World Bank. http://www.worldbank.org/en/country/china/overview . 25 Apr. 2015.
"India Literacy Rate". UNICEF. Retrieved 10 October 2013.
"TRADING ECONOMICS | 300.000 INDICATORS FROM 196 COUNTRIES." TRADING
ECONOMICS | 300.000 INDICATORS FROM 196 COUNTRIES. N.p., n.d. Web. 25
Apr. 2015. http://www.tradingeconomics.com
“Labor Force total.” World Bank. http://data.worldbank.org/indicator/SL.TLF.TOTL.IN. 25 Apr.
2015.
Bell, Holly A. "Status of the 'BRICs': An Analysis of Growth Factors." Bell, HA (2011). Status of
the 'BRICs': An Analysis of Growth Factors. International Research Journal of Finance
and Economics,(69) (2011): 19-25.
Brandt, Loren et al. (2008), "China's Great Transformation", in Brandt, Loren; Rawski, G.
Thomas, China's Great Transformation, Cambridge: Cambridge university press
Carnoy, Martin, et al. "The concept of public goods, the state, and higher education finance: a
view from the BRICs." Higher Education 68.3 (2014): 359-378.
Economics, PwC. "World in 2050. The BRICs and beyond: prospects, challenges and
opportunities." PwC Macroeconomics (2013).
Galbraith, James (7 May 2007). "Global inequality and global macroeconomics". Journal of
Policy Modeling 29 (4): 587–607.
Global Economics Paper No: 99 (n.d.): n. pag. Web.
http://www.macropolis.org/oriente/BRICS.pdf
Hu, Zuliu and Khan, Mohsin S. “Why is China growing so fast?” International Monetary Fund.
Economic Issue. No. 8 (1997)
27
Kumar, Dharma (2005). The Cambridge Economic History of India, Volume II : c. 1757–2003.
New Delhi: Orient Longman. p. 1115. ISBN 978-81-250-2710-2.
O’Neill, Jim. “Building better economics BRICS” Goldman Sachs Global Economics 66. http://www.goldmansachs.com/our-thinking/archive/archive-pdfs/build-better-brics.pdf. 25 April 2015.
Panagariya, Arvind. "lndia’s trade reform." India Policy Forum. Vol. 1. Brookings Institution
Press, 2004.
Poddar, T., and E. Yi. "India’s Rising Growth Potential’, Global Economics Paper No: 152,
Goldman Sachs." (2007).
Riley, Charles. “Inside China’s $2.2 trillion budget.” CNN Money
http://economy.money.cnn.com/2014/01/15/china-budget/. 25 April 2015
Roy, Tirthankar (2006). The Economic History of India 1857–1947. Oxford University Press. p.
385. ISBN 978-0-19-568430-8.
Tabardo, Joana. "India GDP Annual Growth Rate." Trading Economics. Trading Economics,
n.d. Web. 12 Apr. 2015.
Wilson, Dominic, and Roopa Purushothaman. Dreaming with BRICs: The path to 2050. Vol. 99.
Goldman, Sachs & Company, 2003.