Are the BRICS starting to crumble?

The original concept behind the BRIC acronym (which represents Brazil, Russia, India and China) was to identify the countries with the greatest growth potential in the first half of the 21^st century, based on features such as population, demography, growth rates and the embracing of globalization. The theory was that China would become the most important global exporter of manufactured goods (which is the case today), India the most significant exporter of services (which did not transpire) and Russia and Brazil would dominate as exporters of raw materials.

The five members of the BRICS, with South Africa having joined in 2010, now account for 3 billion people, with a combined GDP of nearly $14 trillion and around $4 trillion of foreign exchange reserves. Each country is effectively a sub-regional leader.

When the West sank into a recession in the wake of the 2008 financial crisis, the world looked to the BRICs to provide the global economy with renewed dynamism. Their markets continued to post strong growth, helping to prevent the world economy from tumbling into an even deeper downturn. As the US and Europe struggled to muster a sustained recovery, the expectation was that the giants of the developing world were destined to take their place at the top of global economic and political affairs.

However, whereas China’s growth rate reached a high of 14% just a few years ago, it topped out at just 8% in 2013. In the same year, India’s economic expansion fell from a one-time high of 10% to less than 5%, and in Brazil growth went from a high of 6% to less than 3%. Such values are still higher than those experienced in the OECD countries, but they are no longer as impressive as originally expected and the smart money is now on the once battered advanced nations returning to prominence. While stock markets in the US and Japan have soared, those in the developing world have slipped.

Yet the issues that the BRICS face are not limited to a decline in growth. One challenge that remains shockingly common is a lack of inclusive growth leading to extreme levels of income and asset inequality. It´s telling that all of the BRICS have experienced a construction and real estate boom in recent years that is now in the process of winding down. That is a particularly galling development, given the continued shortage of adequate social housing in these countries. Inequality has reached a level of being not only morally reprehensible, but also socially and economically dysfunctional, generating crime, insecurity and rising political tensions that can pose a threat to stability.

Another worrying aspect of the BRICS’ economic performance comes from analysing the nature of their global value chains (GVCs). A value chain is made up of the full sequence of activities and services that take a product from conception to market and beyond. Increasingly, these activities are spread over several countries.

Today, more than half of all manufactured imports are “intermediate” goods (parts, components, semi-finished products) and an equivalent value of exports is made up of products traded in the context of global value chains. In a recent paper, the United Nations Conference on Trade and Development (UNCTAD) revealed that, of the total global value created under global value chains, 67% accrue to OECD countries – while the share of the BRICS countries is only 25%. UNCTAD concludes that a higher participation in global value chains may lead to a rise in exports-to-GDP ratios, but may not lead to a rise in incomes and employment if unaccompanied by rising domestic value-added content in exports.

It may be too early to write off the BRICS and their potential as global powerhouses, but it is clear that their development model requires adjustment. Some of the BRICS need to move part of their production from low-level manufacturing and commodities to value-added products and services in order to generate better-paying jobs. This requires investment in human capital and education, as well as research and development. Others, such as Brazil, urgently require a comprehensive set of reforms to eliminate red tape and make their economies more competitive. What all of the BRICS need to do is look at policies for sustainably achieving inclusive growth.

This, of course, is no easy task in a global economy that is still on life support.

Author: Leo Schlesinger is chief executive officer of Masisa Mexico, a World Economic Forum Young Global Leader and vice chairman of the Forum’s Global Agenda Council on Biodiversity and Natural Capital.

Image: A traffic policeman walks past a signage decoration for a BRICS Summit in Sanya, China’s Hainan province, April 13, 2011. REUTERS/Jason Lee