Brazil’s 2011 growth was announced this week at 2.7%, or only 1.6% per capita, and prospects for 2012 don’t look too good either. Russia has just re-elected Vladimir Vladimirovich Putin, whose apparent flat-tax supply-side economics of 2001 has degenerated into crony capitalism enforced by nuclear weaponry. Indian growth is also slowing; the good news is that the Congress Party was decisively defeated in Uttar Pradesh, the bad news is that the victor was a leftist party whose last (2002-07) term in office was known as the “gunda raj” – criminal rule. Only China powers ahead, but the problem there may simply be that we don’t know what’s really going on. The BRICs, it seems, have become not building blocks of world economic growth, but deadweights to its continuance. In all cases, the principal obstacle is government.
In Russia, the pernicious role played by government is obvious. After all, the country has the world’s greatest reserves of natural resources, and a population of only 140 million. It also has among the world’s best education systems, with a heavy concentration on engineering and technology. Given a passable government and a free market system, it ought indeed to be among the world’s most prosperous countries.
Russia’s boosters claim that Russia is the third fastest growing economy in the world. But since Russian growth is only expected to be 3.2% in 2012, their definition of the word “world” is a little suspect, presumably only including the wealthy countries. The Economist ranks Russia 18th of the 58 countries it surveys, based on projected 2012 growth rate. That looks reasonably impressive, until you realize that this modest growth is being achieved in a period of sharply rising prices of oil, Russia’s largest export. After all, one of the countries that beats Russia, at 4.2% growth, is Venezuela, and few people outside Hugo Chavez’ immediate family would claim that country was economically well run.
Russia’s main problem is its state budget, which depends crucially on oil revenues and hence on the oil price. Before 2008, this was balanced at an oil price of around $90 per barrel, already up from a break-even of $30 per barrel earlier in the decade. Now, since Putin announced $260 billion of spending programs during the election campaign, plus a defense program totaling $763 billion, the oil price needed for balancing next year’s budget is likely to be around $140 a barrel, rising continually thereafter. Needless to say, the rest of the world would be tipped into recession by any oil price that made Russian budget managers happy.
Russia needs to diversify from energy into high-skill industries, but at present it’s going the other way; energy exports have risen since 200 from 45% to 69% of exports, while equipment and machinery exports have declined.
Russia also suffers badly from its corruption, ranking an appalling 143rd on Transparency International’s 2011 Corruption Perceptions Index, level with such stalwarts as Nigeria and Belarus and well below Syria and Nicaragua. While India and China manage economic growth with fairly high corruption levels, Russia is currently well beyond the levels compatible with prosperity (except for the oligarchs extorting from the system.) Russians themselves are voting, if not with their feet then with their roubles. Capital flight from Russia totaled $38 billion in the fourth quarter of 2011, and there is no sign of it slowing.
Brazil’s traditional reputation was as “the country of the future – and always will be.” Its inclusion in Jim O’Neill’s BRIC acronym in 2001 looked eccentric to investors aware of its mediocre track record, propensity to inflation and perilous debt position. Yet under Luiz Inacio Lula da Silva after 2002 its growth accelerated, fueled by continually rising commodity prices, while Lula’s “Bolsa Familia” program of cash subsidies to poor families lessened its extreme inequality.
Nevertheless Brazil’s traditional flaws of an overblown state sector and an inability to budget soundly remained. A recent study by Fitch Ratings examined the pension systems of Brazilian states and municipalities, and discovered that pension spending had increased from 15.5 percent of total state spending to 33.2 percent between 2005 and 2010. With state employees entitled to retire at any time after accumulating 30 years service, Brazil’s transition to Western demographic patterns is made impossibly expensive.
Brazil’s current growth rate of 2.7% is barely enough to improve living standards measurably. However, on the positive side for Brazil’s politicians, 2011’s growth was enough to push its economy above sclerotic Britain in global league tables, a matter for much rejoicing in the better Brasilia night-clubs.
Even after years of rapid growth, Brazil still has a huge public sector deficit, reported officially as 2.6% of GDP, but in reality far more. (Brazilian politicians have discovered they can finance boondoggles better, without the international rating agencies noticing, through the development bank BNDES and through state controlled companies, above all the oil company Petrobras and the iron ore company Vale. Both those companies are internationally listed, with substantial minority holdings, but since shareholders are both capitalist and foreign, their rights are not high on the Brazilian government’s priority list.)
Meanwhile Brazil’s consumer prices were 6.2 percent above the previous year in January, so the central bank’s sharp 0.75 percent cut in interest rates last week is risky, while politicians’ talk of further spending “stimulus” is more so.
In India, the economy has been running for the last eight years on the momentum built up by the BJP government of Atal Bihari Vajpayee in 1998-2004. After a stunning act of ingratitude by the Indian electorate in 2004 which returned Congress to power, government spending has expanded faster than the economy while the necessary reforms, opening up the economy and reducing the influence of the “permit raj” have been totally neglected. Year after year, Western media commentators are seduced by the gentle charm of the centrist prime minister Manmohan Singh, who produces plan after plan of cautious reform, but in reality the plans are never implemented and the Indian economy becomes more and more dominated by politically connected business oligarchs.
As in Russia, India’s economic system is dominated by a very small cadre of crony capitalists – its 55 billionaires account for no less than 20% of the country’s Gross Domestic Product. The country had appeared to be opening up to genuine capitalism in 2003-4, but that opening has now reversed. A case in point was the infamous 2008 telecom auction, in which 122 licenses for 3G telecom systems were awarded, bringing $20 billion into the Indian Treasury, only for the country’s Supreme Court to invalidate all 122 licenses four years later. Not surprisingly, India ranks a dismal 134th out of 183 countries on the World Bank’s “Ease of Doing Business” survey.
At this point, India’s growth is slowing, its inflation is in double digits and foreign investment has declined, as promised liberalizations in such fields as retail are shelved.
Leaving aside China, the other three of the four BRIC countries no longer seem attractive places to invest, or countries that will dominate the global economy by 2030, as was promised. In all three cases, the problem is political. A cronyist and anti-market government has been in power during the years of growth (in Russia and Brazil caused by the resources boom, in India caused by the previous government’s liberalization) and has proceeded to waste the fruits of growth on public sector expansion.
In all three countries, the electorate has validated its poor government’s nefarious activities – by re-electing the Congress party in India in 2009, by electing Lula’s chosen Workers Party successor in 2010 and by re-electing Putin in 2012. None of the three countries offers significant chances of pro-market change anytime soon – Putin in Russia seems likely to be in power until 2024 and Brazil’s Dilma Rousseff until 2018, while in India the Uttar Pradesh election result suggests that if the Indian electorate rejects Congress, it will go for a leftist alternative, spurning free-marketers.
Jim O’Neill remains convinced that the BRIC countries remain the growth stories of the future. In reality he, along with Ben Bernanke, bears much of the responsibility for their relapse into slow growth and socialism. His BRIC proselytizing attracted legions of foolish foreign investors, such as the worldwide rush of dozy telecoms companies into India’s 2008 spectrum auction. Meanwhile Bernanke’s easy money policies (and those of his predecessor Alan Greenspan) created a huge flood of footloose foreign capital, which headed straight for O’Neill’s BRICS, while pumping up commodities prices, thus giving the Russian and Brazilian economies an altogether unhealthy influx of foreign exchange from trade as well as capital.
In such circumstances, the quality of economic policy becomes irrelevant. All but the very worst regimes (yes, that’s you, Hugo Chavez and Mahmoud Ahmadinejad) are able to create an entirely spurious aura of success, which they can reinforce by throwing public money at the poorer sections of the electorate. As a result their voters, not economically sophisticated (and led further astray by the more foolish elements in the Western media) create a one-party monopoly. Of course, eventually the spending spree comes to an end and the countries concerned relapse into poverty, having wasted the finest opportunity they will ever see to pull themselves out of it.
In the 22nd century, public choice theory scholars will examine these cases, dissect the errors made, and read each other learned papers about how it could all have been better managed. But the intellectual achievements of a few hundred scholars a century from now will be of little comfort to today’s Russians, Brazilians and Indians, whose lives will have been blighted by the malfeasance of governments democratically installed and maintained by an electorate blinded by false economic signals.
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(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.)