The Massive Economic Potential - Term Paper Example

Rise of the BRIC Nations Full of Introduction In an increasingly globalized world, developing nations are learning that workingtogether on common goals and principles can fuel growth everywhere. One economic bloc that has recently made shockwaves in the global economy is BRIC, which is made up of Brazil, Russia, India, and China. This acronym was first conceived back in 2001 by Goldman Sachs’ chief economist, Jim O’Neill (Kowitt, 2009). The events of 9/11 set of a chain of events that led to O’Neill writing a paper in November of that year about the massive economic potential that these four countries had in a period of uncertainty and globalization. Part of the reasoning behind why O’Neill chose these four countries is due to the fact that each BRIC member has a large population (Kowitt, 2009). Roughly 4 out of 10 people globally live in a BRIC member nation, and up to 50 percent of the combined population of the BRIC nations are under the age of 30 (Young, 2006). Of course, this does not automatically translate to great economic success, but it does provide a large labor market that can be exploited to help grow an economy at fast rates. O’Neill has mentioned that the BRIC nations do not have to be aligned politically or form a trading bloc similar to that of the European Union, but he only suggests that these four nations work together from an economics point of view to become the dominant supplies of manufactured goods and services, which will help fuel economic growth worldwide (Investopedia, 2012). This paper will look at the current economic situation of each of the four BRIC member nations, discuss the recent introduction of South Africa into the organization, highlight objectives and goals derived from the annual BRIC summit, and provide some challenges may prevent the group from reaching its full economic potential. Overview of Brazilian Economy Population (2010) 190.7 m. Total Area (2010) 3.288 million sq. mi. or 8.515 million sq. km. Largest Cities Sao Paulo (11.2 m), Rio de Janeiro (6.3 m), Brasilia (2.6 m - capital) Language Portugese GDP (2011) US$2.518 trillion (6th largest in world) GDP Growth Rate (1961-2010) 4.5% GDP per Capita (2010) US$11,210 Life Expectancy (2011) 73.5 years (Source: http://www.globalsherpa.org/brazil-brasil) In terms of population and total area, Brazil is ranked as the fifth largest country in the world (Global Sherpa Brazil, 2012). This has in some part helped to fuel the local economy, which has picked up over recent years. In 2011, Brazil surpassed Great Britain as the sixth largest economy in the world (Global Sherpa Brazil, 2012). Business in Brazil has experienced a boom over the last decade, with thirty-six Brazilian companies making it onto the 2011 Forbes list of 2000 of the world’s biggest firms (Global Sherpa Brazil, 2012). This great economic expansion has had a trickle down effect to Brazilian consumers, who have seen their incomes grow considerably as a result of the upturn in the economy. However, Brazilians are famous for having large spending habits and not depositing savings. Credit Suisse Research carried out a survey titled Emerging Consumer Survey 2011, which found that Brazilian spend more of their incomes on luxury goods than other BRIC nations (Global Sherpa Brazil, 2012). What is more worrying is the fact that more than half of Brazilians respondents reported that they do not put aside any savings. While consumer spending is helping to fuel the Brazilian economy at present, the long-term outlook appears bleak if Brazilians don’t increase their savings. The short-term forecast for the Brazilian economy looks positive, with a number of global sporting events due to be hosted in Brazil over the next few years. In 2013, the FIFA Confederations Cup is due to be hosted across six Brazilian cities, while in 2014 the FIFA World Cup will be played in 12 cities. In addition to this, Rio de Janeiro was awarded the world’s pinnacle sporting event, the 2016 Summer Olympics. In order for all these events to be successfully staged, large investment in infrastructure, such as airports, hotels, and roads, will be required. As a result, the manufacturing industry in Brazil is set to thrive over the next four years. Overview of Russian Economy Population (2012) 142.5 m. Total Area (2012) 17.098 million sq. km. Largest Cities Moscow (10.5 m - capital), Saint Petersburg (4.6 m) Language Russian GDP (2011) US$1.85 trillion (9th largest in world) GDP Growth Rate (2011) 4.3% GDP per Capita (2011) US$17,000 Life Expectancy (2012) 66.5 years (Source: https://www.cia.gov/library/publications/the-world-factbook/geos/rs.html) Russia was a result of the fall of Communist-backed Soviet Union in the early 1990s. After a long period of a centrally-planned economy, Russia opened itself up to the world. The 1990s were a great time of economic growth in Russia, although this is largely due to the fact that the country was closed for so long. One competitive advantage that Russia has over the rest of the world is that it is now the world’s leading oil producer, overtaking Saudi Arabia in 2011 (The World Factbook, 2012). Although Russia large land mass is mostly unlivable for many, Russia has the world’s largest natural gas reserves. Gas has helped to grow the Russia economy ever since the country was opened up to the rest of the world in the early 1990s. The Russian-owned company Gazprom currently has access to 70 percent of Russian gas reserves and 18 percent of the global share (Gazprom, 2012). In addition to natural gas, Russia is the world’s third-largest exporter of steel and aluminum (The World Factbook, 2012). However, one downside to Russia being primarily an exporter is that global commodity prices can fluctuate very rapidly. For this reason, in 2007 the Russian government set out a goal to rely less on natural resources on more on the technology sector (The World Factbook, 2012). During the initial phase of the global financial crisis in 2008, Russia experienced greater shocks to the economy than other countries due to its reliance on oil. If the Russian economy is to expand over the next decade, a greater emphasis will need to be placed on other industries to help Russia diversify its exports. Overview of Indian Economy Population (2010) 1,200 m. Total Area (2012) 1.269 million sq. mi. or 3.287 million sq. km. Largest Cities New Delhi (capital), Mumbai, Bangalore, Kolkata, Delhi Language Hindi and English GDP (2011) US$1.67 trillion (11th largest in world) GDP Growth Rate 6.0 % (1980-2009) 8.2% (forecast 2011-2015) GDP per Capita (2009) US$3,270 Life Expectancy (2012) 63.7 years (Source: http://www.globalsherpa.org/india) India is not only the world’s largest democracy, but it also has one of the oldest civilizations in the world (Global Sherpa India, 2012). Despite India’s large size, the country has long been viewed as poor due to its poor living standards. Life expectancy has improved by more than 150% between 1960 and 2008, rising from 42.4 years to 63.7 years (Global Sherpa India, 2012). In addition to an increase in quality of life, India’s largely rural population has moved into the cities, creating vast metropolitan areas that are ripe for investment. These mega-cities, such as New Delhi, Bangalore, and Kolkata, have spurred India’s rapid economic growth over the past few decades. The McKinsey Global Institute estimates that by the year 2030, India will have 68 cities that have a population of at least one million people (Global Sherpa India, 2012). One potential obstacle to India’s economic growth in future years is a deeply-rooted caste system that prevents income equality across India. People from the lowest caste, the so-called “untouchables,” only have the opportunity to perform manual labor jobs, which only offer little pay (Global Sherpa India, 2012). For India’s economy to thrive over the next decade, income inequality is one area that needs to be looked at. Perhaps one advantage that India has over other BRIC nations is that English is established as an official language. This helps to open up opportunities to the global market that other BRIC countries would not be able to pursue. The reason for English being so widely spoken among the Indian population comes from India becoming a British colony in 1858 (Global Sherpa India, 2012). India achieved independence from Great Britain in 1947, but the country was exposed to almost a century of British culture, which has helped India become such a strong democracy today. Overview of Chinese Economy Population (2010) 1,350 m. Total Area (2012) 3.7 million sq. mi. or 9.6 million sq. km. Largest Cities Beijing (capital), Shanghai, Guangzhou, Shenzhen, Tianjin Language Mandarin and Cantonese GDP (2011) US$6.98 trillion (2nd largest in world) GDP Growth Rate 10.0 % (1980-2009) 9.5% (forecast 2011-2015) GDP per Capita (2009) US$6,628 Life Expectancy (2012) 73.5 years (Source: http://www.globalsherpa.org/china) China is the largest country in the world in terms of population. This is despite the fact that a one child per family policy has been in place for much of the last few decades. Just as in the case of Russia, China was held back during the mid-20th century by its Communist policies. Although China’s political system is still Communist, the economy is now more market-based. Years of rapid economic growth culminated in China overtaking Japan as the world’s second largest economy during 2010 (Global Sherpa China, 2012). Similar to India, China’s economic growth has been helped by people flocking from the countryside in the western part of the country to the large cities on the east coast. Even more impressive is the fact that by 2025, the McKinsey Global Institute forecasts that more than 70 percent of Chinese people will live in cities greater than one million people (Global Sherpa China, 2012). China is the country of choice for many global corporations that are looking to outsource work in order to save costs. Although the median wage has been rising significantly over the past few years, the cost of labor in China remains relatively low. One drawback, however, to conducting business in China is dealing with a centrally controlled government that is extremely corrupt. The Communist Party of China (CPC) still holds great influence over every sector of society, and bribery is commonplace among government officials. Introduction of South Africa to BRIC South Africa long held the view that it should be included among the BRIC nations because of its growing economy and the fact that it is situated in Africa, where there is no other BRIC member. When Jim O’Neill came up with the concept of BRIC, he initially ruled out South Africa for the fact that its population (50 million people) was too small and its economy ($285 billion in 2009) less than one-fourth the size of BRIC smallest economy, Russia (Globa Sherpa BRIC Countries, 2012). Despite these reservations, South Africa lobbied hard to be included in the group. Finally, at the second BRIC summit in 2010, South Africa was admitted to the group, which then changed its name to BRICS; S stands for South Africa (Qobo, 2012). Although South Africa is recognized as the weakest performing nation within BRICS, economic growth over the last few years and advances in areas such as technology, health, and education have helped the nation gain recognition for being a key strategic area for business over the next few decades. Relevance of BRIC Summits Although the first annual BRIC summit was not held until 2009, the foreign ministers of the BRIC nations had been meeting on a regular basis in New York during the United Nations General Assembly (Ministry of External Affairs, Government of India, 2012). Since the first BRIC summit in Yekaterinburg, Russia in 2009, the summit has been held in Brasilia, Brazil in 2010, Sanya, China in 2011, and New Delhi, India in 2012 (Ministry of External Affairs, Government of India, 2012). South Africa did not attend the first two BRIC summits as they had yet to join. The leaders and government representatives of the BRICS member nations discuss issues such as international terrorism, climate change, food and energy security, and the global financial crisis. As well as the annual BRICS Summit, there are also separate meetings that involve the finance ministers, national security advisors, agriculture ministers, trade ministers, health ministers, and science and technology officials (Ministry of External Affairs, Government of India, 2012). The purpose of these specialized meetings is to build cooperation between all BRICS member nations and encourage the removal of trade barriers. Challenges to Growth of BRICS One topic that concerns all BRICS member countries is how the eurozone crisis affects the global economy. China and India have invested heavily in the euro, so any repercussions would be felt among the BRICS nations; both these countries’ banks hold about 25% and 20% in eurozone bonds, respectively (Saran & Sharan, 2011). In addition to finance, China is now the European Union’s largest trading partner and has taken on the debt of many European countries (Saran & Sharan, 2011). China cannot do this all alone, however, and needs the support of other BRICS members. At the 2011 BRICS Summit in Sanya, China, the leaders of all five member countries agreed that the global financial crisis had shown that the current world financial system is outdated and needs overhauling (Saran & Sharan, 2011). Due to the weakening of established world economics, the future growth of BRICS will have a significant impact on global finance. In addition to the financial arena, exports of BRICS countries rely upon European markets and also the United States to keep demand high. There may also be a need to diversity the customer base away from European economies that are struggling to recover from the prolonged recession. The co-chairman of the foreign trade committee of the Federation of Indian Chambers of Commerce and Industry, Rakesh Shah, says that Indian exporters whose customers largely derive from Europe have seen a decline in demand. Between May 2011 and May 2012, Indian exports had decreased 3%; this is troubling when the export target set by the Indian government was between 15% and 20% growth (Pidd & Stewart, 2012). Decreasing exports to the eurozone is not just a problem for India; it also affects Russia exporting gas, China exporting textiles, and Brazil exporting coffee and sugar. BRICS member nations will need to pursue strategies to overcome these potential problems, and it will only occur if every member country works together through partnerships and mutual understanding. Conclusion With the decline of the traditional global powers since the end of World War II, the emergence of BRIC will determine where the global economy will go over the next few decades. The reason why O’Neill identified the original four member countries of BRICS was due to the opportunities that globalization provides to emerging economies. The biggest component of this is the fact that every BRIC member has a large population, which is an indicator of future growth. Currently, BRIC makes up around 15% of worldwide GDP, and this is expected to grow as these economies cooperate more in terms of trade and investment (Kowitt, 2009). What cannot be denied is that the economic performance of BRIC within the next couple of decades will go a long way to restructuring the balance of the global economy, and with it political and economic power. References Gazprom. (2012). About Gazprom. Retrieved from Gazprom.com: http://www.gazprom.com/about/ Globa Sherpa BRIC Countries. (2012). 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Retrieved from CNN Money: http://money.cnn.com/2009/06/17/news/economy/goldman_sachs_jim_oneill_interview.fortune/index.htm Ministry of External Affairs, Government of India. (2012). Fourth BRICS Summit. Retrieved from BRICS India: http://bricsindia.in/index.html Pidd, H., & Stewart, H. (2012, June 24). Bric nations rocked by aftershocks of eurozone crisis. Retrieved from The Guardian / The Observer: http://www.guardian.co.uk/business/2012/jun/24/bric-nations-hit-by-eurozone-crisis Qobo, M. (2012, April 17). The BRIC Pitfalls and South Africas Place in the World. Retrieved from South African Institute of International Affairs: http://www.saiia.org.za/great-powers-africa-opinion/the-bric-pitfalls-and-south-africa-s-place-in-the-world.html Saran, S., & Sharan, V. (2011, November 9). BRICS and Eurozone Crisis. Retrieved from Observer Research Foundation: http://www.orfonline.com/cms/sites/orfonline/modules/analysis/AnalysisDetail.html?cmaid=26531&mmacmaid=26532 The World Factbook. (2012, September 11). Russia. Retrieved from CIA.gov: https://www.cia.gov/library/publications/the-world-factbook/geos/rs.html Young, V. (2006, November 17). Macquarie launches Australias first BRIC funds. Retrieved from Investor Daily: http://www.investordaily.com/cps/rde/xchg/id/style/801.htm?rdeCOQ=SID-3F579BCE-819F182C&rdeCOQ=SID-0A3D9632-3AB4022A Read More