Friday, 24 October 2008

The Icarus Effect

As part of a wider project, we have been reviewing recently the whole issue of the BRIC economies (Brazil, Russia, China, and India). The term BRIC was originally coined by Goldman Sachs in 2001. It was used to describe a group of nations whose development potential, if fully realised, would lead them to dominate the world economy by the year 2050. In the original formulation, to be included in the BRIC group a nation would have to experience growth in GDP of at least double that experienced by the OECD nations for a sustained period. The BRIC metaphor was quite powerful at the time. Seven years on, it is worth reviewing it to see if it remains useful.

The focus on the BRIC economies is a welcome reminder that there is a world outside of OECD. However, to focus solely upon the BRIC economies is to miss an important point. That point is what Fareed Zakaria calls the ‘Rise Of The Rest’. As an exercise if we were to make the entry criteria more stringent (growth in GDP of at least three times that of OECD), who would currently qualify for BRIC status? Conveniently, as members of OECD, Mexico, Turkey, and South Korea can be discounted. If they weren’t members of OECD, they would be BRICs. However, in addition to the four original BRICs, we might like to add Indonesia, Malaysia, Pakistan (at a push), Argentina, Venezuela, and Egypt. It would appear that there is more to the ‘BRIC Effect’ than is being experienced by the BRIC economies alone as the group of emerging nations has widened since 2001.

The development of the BRIC economies has coincided with an especially benign period of growth in the world economy. As we move into a period of weaker economic growth in the near future, the question arises of the resilience of the BRIC economies to a global downturn. The downturn is already evident in the financial markets. This year, the US stock market is down by 20.9% in dollar terms, the UK by 31.7%, the Euro area by 34.1%, and Japan by 21.4% (we like these comparative figures to be in dollar terms rather than local currency terms to capture the ‘flight to quality’). The equivalent figures for the BRIC nations are Brazil down by 28.3%, Russia down by 48.1%, India down by 45.6%, and China down by 63.7%. The BRIC financial systems have been hit harder than the OECD financial systems and one can only speculate whether, as the financial turbulence seeps into the real economy, the real economies of the BRIC nations will be affected disproportionately harder than the OECD economies.

If the BRIC economies are affected by a global economic downturn harder than the OECD economies, then the inherent flaws in each of the BRIC nations may well become more apparent. Brazil has a potential weakness in its currency. The Real now looks quite vulnerable – it fell by a fifth against the US Dollar last week. Russia is a petroeconomy that is one dimensional (energy) and vulnerable to falls in the price of energy. The Gini Coefficient in India actually rose during the years of globalisation induced rising prosperity. If that process is halted by recession, so will be the development of an Indian Middle Class. China, seemingly monolithic, may prove to be the least stable of all the BRIC nations. If growth falters in China, who will the Middle Class blame for the deterioration in their incomes and the loss of their savings? All of the BRIC nations contain elements of instability that call into question their future risk ratings.

And where does that leave us? We have a group of nations who have developed fast during a period of benign growth in the world economy. Our ‘trend blindness’ tempts us to believe that this can continue indefinitely, irrespective of global factors and the internal demographics of the BRIC nations. It has also led us to ignore ‘the rest’, who are also rising as the result of an increasing pace of globalisation. There are also a group of high income countries, such as Qatar, Saudi Arabia, Singapore, and Taiwan, who are not part of OECD, who do not have high GDP growth rates, but who do have a higher GDP per capita than the BRIC nations. We have also tended to lay aside the case against the BRIC nations in our pursuit of the case for them. As we move into a global downturn, that downside risk is likely to become more prominent. The BRIC nations have risen very high, very fast. They also have the potential to fall very far and very hard.

We call this the ‘Icarus Effect’, after the son of Daedalus, who escaped from Crete but fell to his death because he rose too far, too soon.

© The European Futures Observatory 2008


sachutney said...

What is interesting is that these countries in many sense are the ones that are driving the global economy - they are providing the cheap products, labor and energy (not so cheap). We are left with what the internal economies look like and, if the money rushes back into the OECD will the BRIC countries continue to be able to drive their own internal wealth creation?
I am not sure that they can, nor are we all convinced that they should given the environmental costs - perhaps this will lead to an opportunity (b/c of the slowing global economy) to turn their focus on creating new and more sustainable and ecological growth within their economies.
This is certainly something that is bantered about within the USA - green jobs creation - and I don't see why this can't be true for the BRIC countries.

Stephen Aguilar-Millan said...

Dear sachutney,

I think that I quite agree with you in some respects. I am currently working on an article that examines the potential greening of China, which is all about the drive to sustainability. More on that when I have written it!

With best wishes,


Saul said...

I would love to see the paper when it is done. I have read some interesting things about what China is attempting to do.
However, until the economy truly has a way of recognizing value in abundant and critical resources like fresh air, etc. it will always be battle between profits and sustainability. I fear that until we can find a way to truly value our resources in a way that eradicates the ability to profit of their consumption we are going to be fighting a loosing battle.

Stephen Aguilar-Millan said...

Dear Saul,

I will put a copy of the final draft on our web site once I have done it.

With best wishes,