The BRICS’ Painful Adjustment

　　In recent years, the bank accounts of India,Brazil and South Africa have been on a path of constant deterioration. These countriesrely on short-term foreign capital to holdtheir current account deficits. And with growingexpectation of a U.S. liquidity contraction,the direction of global capital flow hasreversed. The three countries’ currenciesare depreciating on a large scale. Since May,the Indian Rupee’s exchange rate against thedollar hit a series of record lows, exhibiting atrend of currency crises with a depreciationscale over 20 percent.

　　The Brazilian Real depreciated to its lowestpoint in the last four years, with a peakdepreciation scale of 18 percent. The SouthAfrican Rand and Ruble’s highest depreciationrate respectively reached 14 percentand 7 percent. Capital flight from India andBrazil once triggered a twin slump in thestock and bond markets, creating a string offinancial turbulence. Moreover, poor tradeand investment conditions in these countriescaused a sharp decline in their economicgrowth rates, erasing hopes for an economicrecovery in the short term. According tostatistics released by the IMF in July, thegrowth rates of China, India, Brazil, Russiaand South Africa in 2012 were 7.8 percent,3.2 percent, 0.9 percent, 3.4 percent and 2.5percent respectively, decreasing 1.5, 3.1, 1.8,0.9 and 1.0 percentage points from the yearbefore. India’s economic growth rate hasfallen far below its annual average in recentyears. Brazil lost its status as the world’s sixthbiggest economy to Britain.Now in 2013, the declining trend amongBRICS economies is even clearer. In thesecond quarter, Russia’s economy grew just1.2 percent over the same period in 2012– its worst performance since 2009. Russiahas lowered its economic growth expectationstwice in the past four months, from theoriginal 3.6 percent to 1.8 percent.

　　Deep troubles

　　Having been drunk with the unprecedentedprosperity brought by high-speedeconomic growth, BRICS countries hadno incentive to conduct economic andsocial reforms during the past 10 years.They neglected, or didn’t pay enoughattention to problems coexisting witheconomic development, which causedthe economic growth dynamic to vanish.BRICS economies are in need of transformationand upgrading. Besides reduceddemand from developed countries andincreasing global trade protectionism, slidingcompetitiveness and insufficient domesticdemand are even more crucial to BRICSeconomies’ rapidly decreasing economicgrowth.

　　The economic growth dynamic of BRICScountries does not yet stem from technologicalinnovation and efficiency. In otherwords, their industrial added value is nothigh enough. Currently, the industrial addedvalue rate of China is less than 30 percent,and stands at about 20 percent in India – farbelow that of the United States’ figure ofover 45 percent. Statistics from HSBC showthat China, India and Brazil all received fewerprocessing industry orders in July. In addition,BRICS countries’ domestic demand is nothigh enough. In 2012, domestic consumption’srate of contribution was 51.8 percent inChina, and 55 to 65 percent in India and Russia,which were far below the global averageof 70 percent. The average rate in developedcountries is as high as almost 80 percent.

　　The BRICS must find ways to break theirdomestic development bottleneck. China’sbanking sector leverage is too high; housingprices are stuck at a high level; and its manufacturingcapacity is already in excess. Brazilianenterprises bear heavy tax burdens. Indiahas an unbalanced industrial structure, highinflation, high budget deficit, and high publicdebt. Moreover, poor governmental managementleads to corruption and poor businessenvironment. Banks are reluctant to loan toenterprises or consumers due to the country’spoor macroeconomic environment. Russia,Brazil and India are all woefully inadequate interms of key infrastructural investment. Russiahasn’t extended its road network since 1994.Not until 2018, when Russia hosts the FIFAWorld Cup, will there be a highway betweenMoscow and St. Petersburg.

　　The World Economic Forum released a2013-14 global economic competitivenessreport on September 4. India ranked 60th ofthe total 148 economies under investigation,which was its worst score in recent years, withthe report noting that the country’s infrastructuralfacilities, like transportation, informationtechnology and energy production, are toobehind to fulfill its economic developmentpotential.

　　BRICS’development advantages

　　BRICS economies on the whole performadequately while maintaining strong riskresistance.

　　They have strong economicpower, solid foreign exchange reserves andmodified financial systems, which translateto more policy choices and better abilityto defend against financial impacts suchas in the Asian financial crisis in the 1990s.

　　Currently, BRICS countries’ capital flow ishealthier than in the 1990s. Moreover, theyadopt floating exchange rates to providea buffer against capital flow reversion.

　　For example, China has a high foreignexchange reserve of $3.5 trillion. TheChinese economy hasn’t been affected toomuch by financial turbulence in emergingmarkets. Its stock market and foreignexchange market operate smoothly, andits economic growth is stable. China’s GDPis now about 40 percent of the total ofemerging economies.

　　With a wide market and tremendouspotential domestic demand, the BRICS stillpossess development advantages. The hugedomestic market affords a flexible status in theslow global economic recovery. In the future,their education, social welfare investment andinfrastructure construction will powerfullystimulate domestic demand. Russia, with itsvast land territory, will undergo a new round ofexploitation in its Far East regions. And lastly,as a leader of regional economic cooperationin Africa, South Africa will benefit from itsgrowing market and development dynamicdriven by its emerging middle class.

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