Transition time for the BRICs

IHS Quarterly sat down with Nariman Behravesh, IHS Chief Economist, to discuss the outlook for the big four emerging economies: Brazil, Russia, India and China. As economic growth has slowed for these nations, the responses required to adapt are quite different.

China, India, Brazil, and Russia have all enjoyed very rapid growth in the last decade for three primary reasons.

All three of these forces have slowed down. Those very strong tailwinds, which had been pushing the economies of these emerging markets, just are not there anymore.

During the boom years, these economies did not put in place a lot of the structural reforms that would enable them to adapt to a slower pace of growth-for example, getting rid of some of the inefficient state-owned enterprises and removing subsidies. Now that the economic tide has fallen in the global economy, these countries are sitting on rocks.

China: a new plan for reform

China is trying to reorient itself, but that process takes time. The country enjoyed the hyperglobalization boom and, partly because of its own policies, had a huge increase in the level of credit. You see this today in the elevated level of debt the country is carrying. Chinese leaders know they cannot go on like this, so there has been some attempt to pull back on liquidity. They are also attempting to build up their domestic economy, so they are not so dependent on exports.

The Third Communist Party Plenum, in November 2013, made it clear that they want to go down the road of reform. [Reforms include allowing market forces to allocate resources and leveling the playing field for private enterprises and foreign investors alike.] They will probably do it, because China has a way of doing what it says it is going to do, but it is not always easy and it may take longer than the leadership would like it to take.

One of the risks China faces is that it will not move fast enough down the road of reform. The powerful entrenched business interests that are so focused on exports do not want to give up that power. The other big risk is that China's population is aging rapidly, so they have to deal with that at the same time.

India: stubbornly slow to act

India has some serious challenges. It has a debt bubble, especially in the corporate sector, so it has to deal with that. And India has a serious deficit and debt problem, which China does not have. It has an inflation problem, too, which China does not have. So their policy response has to be different. They have to be tightening at a time when China does not need to tighten.

The biggest disappointment in India recently has been that they understand-at least some of the politicians understand-that they have to reform the economy. But they are not acting.

India has to open up the economy to competition. For example, they have to let in companies such as Walmart that can make their retail sector much more efficient. Whatever you think of Walmart, the point is, it is a very efficient retailer, whereas India's retailers are very inefficient. But there are road blocks everywhere to this type of competition. And there has been investor disappointment in India's unwillingness to open the Indian economy up to competition.

Still, our view is that India will get its act together to implement some structural reforms.

Brazil: tackle the dysfunction

Brazil has grown very rapidly until recently. While it enjoyed the ride, [the government] got complacent and did not do much to reform the economy.

The issues within Brazil are huge inefficiencies and very high costs. There is a phrase people use about Brazil: the "Brazil Cost." Some of it is high wages, relative to productivity. Some of it is high taxation. Brazil has a very dysfunctional political fiscal system and very high taxes. The bureaucracy is onerous; at least half the government workforce essentially does not work. A country cannot develop under those circumstances.

As with so many of the emerging economies, Brazil has to allow more competition, become much more efficient, and get costs down.

Russia: no change without political change

Russia's problem is twofold. First, it has not been very encouraging to foreign investment, even though it needs the capital. Second, there is a lot of corruption in Russia, and the government has not used its oil money to diversify the economy. Russia's oligarchy has benefited hugely from the political system, and they are not about to give that up or change policies radically.

Recently, Russia became part of the World Trade Organization. Normally, when countries join the WTO, the government agrees to certain economic reforms, like reduced trade barriers. But the Russians have asked for a lot of exceptions. So yes, they have joined the WTO. But unlike China, which joined the WTO about 10 years ago, Russia has not agreed to do a lot of the things that countries normally do when they join.

So we may see some policy changes from Russia, but they will be fairly minor.

Nariman Behravesh is Chief Economist, IHS