As the celebratory editorials note, it is now 20 years since Goldman Sachs’ Jim O’Neill propounded the concept of the BRICs (Brazil, Russia, India and China) and proclaimed that the four emerging market economies would outgrow massively the major Western states and become a dominant factor in the world economy. The idea was naively optimistic, a product of the globalist 1990s when to those of O’Neill’s persuasion the world seemed to have settled into a unitedly social democrat future. That was the problem – the elements of socialism in the BRICs’ economies and in the world as a whole substantially damaged the BRICs’ prospects – and ours also.
The BRICs’ economic trajectories since 2001 have differed far more than O’Neill predicted they would. China and India have grown rapidly more or less in accordance with his prediction, but neither country has evolved into a Western liberal democracy, and China cannot remotely be called a free market economy.
Brazil, conversely, has done very badly since O’Neill wrote, largely because it has been subjected to the corrupt socialism of Luiz Inacio Lula da Silva and his even more corrupt successor, which bloated the public sector and has left the country barely richer than it was in 2001. The election in October 2018 of the populist Jair Bolsonaro was an encouraging sign that the Brazilian electorate had woken up to its true interests, but regrettably the effect of Covid-19 on Brazil’s economy has been severe and has meant that the loathsome Lula or one of his minions is only too likely to return to power at the next election set for October 2022. It will be a great pity if this happens, but whatever the future holds Brazil’s trajectory reflects neither O’Neill’s beliefs nor his predictions.
Russia is a more difficult case. O’Neill would claim that it has veered wildly from the trajectory it was on in 2001. Actually, even by the time he wrote, Vladimir Putin was in power (bad) but had passed a 13% “flat tax” income tax (very good indeed). Since that date, Russia has trashed civil liberties, become effectively a dictatorship and at the top succumbed to epic levels of corruption (which had been equally present in 2001, just more dispersed among various oligarchs rather than concentrated in friends of the administration). Its growth however has been quite satisfactory, better than that of the West, albeit from a very low base, and it is not currently socialist, operating under a kind of klepto-capitalism that is probably most akin to Benito Mussolini’s Italy, a state much admired at the time.
Russia is also a technological leader – its new floating nuclear power station in the Arctic, completed in about five years, is a human advance of which Western countries appear utterly incapable. Given that Russians have always had brutal and corrupt governments, whether or not they have had semi-free elections, it is reasonable to claim that there is something in the national character that favors such outcomes. Russia was never going to be a gigantic economy while its population is only around 150 million; to that extent the initial BRIC prediction was nonsense, but of the four BRIC countries it remains perhaps the closest to the BRIC ideal, albeit achieved by methods of which O’Neill and Goldman Sachs deeply disapprove.
The fifth country that joined the BRICs in 2009, to the universal applause of the bien-pensant West, is South Africa. Economically, that country’s BRIC membership has been an abject failure. For most of the time since 2009, it was run by Jacob Zuma, a mixture of corruption and incompetence so pungent as to give emerging markets as a whole a bad name, discouraging foreign direct and portfolio investment in the entire asset class. Since 2018 however, South Africa has been run by Cyril Ramaphosa, who has pulled the country up at least marginally. The problem is that the decay in the economy is so advanced that there is every chance that Ramaphosa will soon be replaced by the young Julius Malema, whose politics I have described in this column as being those of the 1917 Petrograd Workers Soviet. It thus seems unlikely that South Africa, still effectively a one-party state, although subject to splits in its ruling ANC, will be providing any economic vigor to the BRICs group anytime soon.
To return to India and China, neither has been an example of the suitably woke ESG-driven “Washington Consensus” (social democrat) market reforms that O’Neill supports. In 2001, India was well-run, with the admirable Atal Bihari Vajpayee of the BJP making major reforms of that country’s overpowering bureaucracy and running for re-election in 2004 on the platform of “India Shining.” Regrettably, the ungrateful Indian electorate voted him out and returned the socialist Congress Party to power for ten years of slow growth and considerable corruption (albeit not on the scale of Jacob Zuma’s South Africa.) Since 2014, Narendra Modi has retuned the BJP to power, but he has been considerably less reformist than Vajpayee, as well as adding new state controls and bureaucracy and a religious preference for Hindus. India has not done badly overall, but it is still a very long way from the kind of economic dominance that O’Neill envisaged.
There is however another form of economic dominance, that India has come to exemplify, and it derives from the over-careless immigration policies followed by the West in the last two decades. Indians are now heading up the Harvard Business School and several of the largest tech companies, (Microsoft, Alphabet, Adobe, and now Twitter, for example) thus increasing their market penetration of global business in a personal if not in a national capacity. It is unsurprising that Indians have tended to end up at the head of the largest bureaucracies in the fields where they have expertise; India’s own economy has run on the basis of state-led bureaucracy, with a dominant “permit raj” ever since independence in 1947.
One can thus expect that Indian dominance of the bureaucracies they have captured will be maintained over the long-term and that the bureaucracies will grow larger and more bureaucratic under Indian management, with promotions bearing more resemblance to a caste system than a meritocracy. Conversely, to the extent those bureaucracies are subjected to competitive forces, they will be excessively slow-moving, over time finding their dominance eaten away by more nimble competitors. With U.S. “funny money” monetary policies, however, ossified bureaucracies are protected from competition as innovation slows to a crawl; accordingly Indian management may hold what it has gained and even expand further into the new emerging woke dinosaurs that seem the dominant form of U.S. “capitalism” today.
China has followed a different trajectory. Despite its huge population the Chinese are generally far too aggressive to be satisfied with mere giant bureaucracies. Instead, they have stolen Western intellectual property mercilessly, sending the offspring of reliable Party leaders to Western universities to acquire contacts and trade secrets, as well as making “unequal treaties” with Western companies wishing to enter their market. It is now clear that in China, every large company can be considered an arm of the state and is run with considerable Party direction. By their “Belt and Road” initiative, China has also succeeded in gaining control of critical infrastructure in many Third World countries, and in some cases, gaining de facto control of their governments also.
The Chinese strategy is in some respects similar to that of Kaiser Wilhelm II’s Germany; it appears at first glance to be genuine free-market competition, but on inspection is nothing of the kind, with far more central control than in Wilhelmine Germany. As in Wilhelmine Germany, that strategy has led to remarkable technological and military strength, controlled largely on a centralized basis. In the United States, the “military-industrial complex” was a figure of speech, whose importance shrank after President Dwight Eisenhower coined the phrased in his Farewell Address of 17 January 1961. In China, it is a reality, and the system combines the strengths of Soviet Russia, the Eisenhower-era U.S. defense sector and Wilhelmine Germany to become a truly daunting geopolitical adversary. Its weakness is that its economy, being socialist, tends to over-invest in boondoggles, so that for example the banks have trillions of dollars of bad loans against unoccupied real estate.
O’Neill’s naïve 90s end-of-history view of the destinies of the BRIC economies has been far from reality, even if some of the BRICs have shown considerable growth. Today’s world is a much darker place, and the 90s dream of universal world-wide prosperity seems much further away. Since that dream at least is desirable we can get back towards it, but only with economic and political policies that bear little resemblance to those of Goldman Sachs’ 2001 imaginings.
(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)