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Thursday, 1 December 2011

BRICS: A Structural Shift

By: Enock Koola, Analyst

The UN climate summit taking place this week in Durban, South Africa is a sign of the times. Over a decade ago, the rapid rise of the BRICS economies was predicted by some economists including Jim O’Neil; the man responsible for the BRIC acronym in 2001. During 2001, when the term was first coined, many politicians disbelieved a trending of economic power towards the emerging economies would ever happen nor threaten Western dominance in technology, manufacturing and research; therefore dictating global economic policies. However, there has been a structural shift from the Western economies to emerging countries.



Last year, BRICS accounted for over 25% of global GDP. The world economic outlook report by IMF predicted the economies of Brazil, Russia, India, China and South Africa (a new inclusion to BRICS in 2010) to grow at an annual growth rate of 4.5%, 4.8%, 8.2%, 9.6% and 3.5% respectively in 2011 and 4.1%, 4.5%, 7.8%, 9.5%, and 3.8% respectively in 2012. The advanced economies are predicted to grow at a rate of 2.4% in 2011 and 2.6% in 2012. This significant difference in growth rates denotes a change in economic prowess from the western economies to the emerging BRICS economies. Goldman Sachs research team predicts that in 2012, the BRIC countries (excluding South Africa) will be among the top ten largest economies in the world measured by US Dollar denominated GDP surpassing Western economies such as Canada, Italy and Spain.


The paradigm has been further accelerated by the global financial crises. As Western economies experienced slow economic growth due to the sub-prime mortgage crisis and the sovereign debt crisis that surrounded the Euro zone, BRICS experienced moderate to strong growth which according to Bartlett (2008) was due to three factors: strong growth of local purchasing power and domestic demand, expansion of “South-South” trade, including growing trade between the BRICS countries themselves and other emerging markets and continued inflows of foreign direct investments. Furthermore IMF states that BRIC (excluding South Africa) are among the ten largest accumulators of international reserve assets accounting for 42% of the worlds total. China holds the largest stake that stands in excess of 3.2 trillion USD. Russia holds 472.5 billion USD with India & Brazil holding 274 billion USD and 350.6 billion USD respectively.


The BRICS countries, have collectively begun to discover their voice in global economic policy and regulation. Their influence was evident recently when Christine Lagarde had to travel to China, India and Brazil to seek support for her candidacy as IMF chief. Many felt that was a sign of the emergence of a new super power group and a change in politics, as we know it. After being appointed as successor to Dominique Strauss Khan, Ms Lagarde decided to appoint the first Chinese deputy-managing director in the IMF. This newly created post clearly recognized the growing importance of China and gave China and BRICS economies a superior voice and larger participation in global affairs. Everything from politics to economy to technology is fast shifting to the BRICS economies as the Western countries are finding it hard to compete and sustain their global status.


At the recent G20 summit in Cannes, where the hot topic was the never-ending European Sovereign Debt Crisis, BRICS economies were urged to take a lead and participate in the rescue of the euro. Prior to the summit, European ministers had travelled to China to seek support for their measures hoping to get a portion of China’s foreign exchange reserve. The BRICS have been moderately cautious with developments in the Euro, agreeing to help but only through the IMF. In exchange for helping the Euro, the BRICS have demanded a greater say and reform within the world’s largest lending organisation (IMF). Though the summit failed to appease investors’ concerns, it is clear that China and the remaining BRICS countries have a pivotal role to play in helping the Western European countries avoid a double dip recession.


BRICS robust economic performance has spurred growth in their technology sector, as research by Gryczk (2010) confirmed. Gryczk added that BRICS were in fact gaining on importance in international trade of high-tech products and knowledge-intensive business services, even becoming more effective competitors to the post-industrial economies in so-called creative industries.


As a testament to BRICS growing importance in global technology and innovation, an Alibaba-led group is said to be preparing for a Yahoo bid. The irony of an American tech giant being bid for by a Chinese startup the American giant invested (and still owns 40% stake) 1 billion USD in 2005 is not lost on us. Preparation for such a climate is the motivation behind the place4BRICS initiative - a London based network of technology entrepreneurs and investors (Venture Capital and Private Equity) that are from, involved or interested in opportunities in BRICS countries. BRICS stands for Brazil, Russia, India, China and South Africa. It fills a void in the London tech networking scene and provides a home for the BRICS community and like-minded people to connect, share expertise, learn and through established links, find modes of executing their ideas across these countries.


While the future of our global weather or follow-through on agreements reached at the UN Climate Change Conference are uncertain, not many can deny that BRICS countries' contribution to the global economy is on the rise. A structural shift of power is expected to ensue in the coming decades and further establish BRICS and emerging market economies.

1 comment:

  1. I always think that holding conferences and summits such as what the UN is doing, will orient and enlighten its member countries about the different trends in business in the world economy. In turn, these member countries could apply what they've learned in the forum and, could later on or more likely, help them improve their nation's economy.

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