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The sandwiched nations

Is the slowdown in BRICS economies a temporary problem or the first stage of a more general loss of economic momentum?
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First Published: Tue, Jul 09 2013. 06 33 PM IST
A file photo of BRICS leaders in Durban. Photo: AFP
A file photo of BRICS leaders in Durban. Photo: AFP
Updated: Tue, Jul 09 2013. 06 34 PM IST
The five countries that make up the BRICS group—Brazil, Russia, India, China and South Africa—are in the midst of a severe economic slowdown. They are currently growing between 4 and 6 percentage points below the peak levels touched in 2007, the last year of the global boom that ended with the near-implosion of the Western financial system.
A previous instalment of this column had compared the current economic data of the BRICS countries with select Asian countries such as Indonesia, Thailand, Malaysia and the Philippines (BRICS run into trouble, Mint, 11 June). The Asian countries are now growing close to their 2007 levels and have far better fundamentals in terms of inflation, current accounts and fiscal balances. China has been an exception to the rule, but its recent bout of troubles could be a harbinger of a more painful slowdown.
A question worth considering is whether the slowdown in BRICS economies is a temporary problem or the first stage of a more general loss of economic momentum. It is always hard to tell, though economic history tells us that very few countries manage to sustain dynamic economies over several decades. Some describe this problem as the middle-income trap. Economic historian Barry Eichengreen showed in a recent research that growth slowdowns have on average begun when GDP per capita was $16,540 in 2005 constant US dollars at purchasing power parity. BRICS economies are way below this mark.
Development economist Dani Rodrik has in a recent paper argued that it will be more difficult in the future to sustain rapid economic growth in the developing world. “Developing countries will face stronger headwinds in the decades ahead, both because the global economy is likely to be significantly less buoyant than in recent decades and because technological changes are rendering manufacturing more capital and skill intensive,” he writes.
What is particularly interesting in his paper is the elegant conceptual framework that Rodrik has put forth to explain sustained economic growth. He identifies two sets of factors at play. The first is what Rodrik calls structural transformation, or the process by which developing countries see the transfer of workers from low-productivity to high-productivity activities. This has traditionally meant a shift of people from farm to factory, or rapid industrialization, a fact that has underlined every episode of economic progress since the Industrial Revolution.
The second set of factors is what Rodrik terms the fundamentals, or advances in the quality of human capital and institutions. “Long-term growth ultimately depends on the accumulation of these capabilities—everything from education and health to improved regulatory frameworks and better governance,” he explained in a recent blog post. The returns on investments in these fundamental capabilities are paltry at first, but asymmetrically kick in at a later stage of development when a range of such capabilities have been developed.
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Structural transformations are important in the early stage of growth acceleration but they cannot sustain growth beyond a certain point until the institutional capabilities have been developed. Rodrik encapsulates his central idea in a simple 2X2 matrix, which has been reproduced (with small variations) in this column. The matrix elegantly illustrates the four growth outcomes any country will experience depending on its structural transformation and institutional depth.
Now, consider this question: in which box do the BRICS countries (and especially India) fit in? Have we seen episodic growth or sustained growth? It is hard to dismiss three decades of growth as merely episodic, but it is also true that India needs to raise its growth rate for another three decades if it is to emerge out of mass poverty. It then faces the double challenge of pushing ahead with reforms that aid the structural transformation of the economy as well as take a hard look at issues such as health, education, governance and regulation to prevent growth from tapering off before the population starts ageing rapidly.
What happened in Brazil since 1950 is worth remembering. Brazil was one of the stars of development economics from 1950 to 1980, growing at an average rate of 7% over those years. But it made the cardinal mistake of taking its rapid economic growth for granted. It went in for populist spending programmes, wrecked its public finances and failed to reform its economy. The result was almost no growth as well as a bout of hyperinflation. The 20 years after 1980 are considered to be lost decades in Brazil’s economic history. The country made a comeback only in the new century, and is now in trouble once more.
India may not necessarily replicate the Brazilian experience but the parallels are striking. Not enough has been done to either aid the structural transformation of the economy or to improve governance. Rapid economic growth was taken for granted, as is obvious from various official statements even after the onset of the global recession. This is unlikely to be the end of the India story—but it is good to be aware of the policy mistakes since 2004.
Niranjan Rajadhyaksha is executive editor of Mint. Your comments are welcome at cafeeconomics@livemint.com. To read Niranjan Rajadhyaksha’s previous columns, go to www.livemint.com/cafeeconomics-
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First Published: Tue, Jul 09 2013. 06 33 PM IST
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