It has become fashionable in the last few years to express enthusiasm for emerging market investment by focusing on the “BRIC” economies (Brazil, Russia, India, China), a term first coined in a 2003 paper by Goldman Sachs, which looked for the potential economic superpowers of 2050. This is a dumb idea for two reasons: there are other emerging markets that are at least as attractive as these four, and at least two out of the four BRICs show no significant signs of emerging into anything very interesting by 2050.
China is probably the most likely BRIC to emerge into an economic superpower by 2050, and even with China the chance is no more than about 50-50, though the country’s 1.3 billion people make the country important in any event. Of course, if China’s current economic growth rate continued to 2050, or even slowed somewhat, it would be an economic behemoth. One statistic illustrates this, that Chinese automobile sales are expected to run about 7 million in 2006 – 40% of U.S. sales and 10% of the world’s total, up from 3.2 million in 2002. Project that forward, and China surpasses U.S automobile sales of 16-17 million by 2015, let alone 2050.
Nevertheless, there are number of reasons to suppose that China’s growth cannot be projected in a straight line:
* First, the Chinese banking system is a morass of bad debts, probably now nearing $1 trillion – which problem will have to be sorted out before Chinese domestic savings are truly secure and the economy free to grow further.
* Second, the country needs to undergo a political transition before becoming truly wealthy – the contradictions between lack of political freedom and the need to secure property rights are becoming ever more acute. Moreover, like Vladimir Putin’s Russia but to a lesser extent, the current Chinese regime regards economic development as a weapon of international strategy rather than an end in itself, and hence may dissipate the country’s new-found wealth in ill-advised military and diplomatic adventurism.
* Third, as Thailand showed recently, rapid development tends to concentrate in big cities, causing massive rural unrest. Indeed, Chinese inequality in general has been steadily increasing, from a point in 1978 where it was undoubtedly too low to permit rapid growth to a level now where it is becoming too high. The examples of Latin America and South Africa suggest that a Gini (inequality) coefficient over 50 may be incompatible with rapid growth. China’s is fast approaching that level; around 48-49 and adding a point a year.
* Finally, China’s economy is so large that it can only grow by huge displacement of economic activity in the West. Each year of development increases China’s capabilities, increases the businesses in which it has comparative advantage, and decreases the businesses in which Western jobs are secure. At some point, this is likely to lead to a vicious trade war.
For all these reasons, there’s almost certain to be one or more huge discontinuities between China’s present position of poverty and rapid growth and its hoped-for destiny of wealth. During these discontinuities, Western investment is likely to be held hostage by the Chinese authorities to ensure that the West does not adopt draconian trade barriers. Thus with growth uncertain, the Chinese stock exchanges dominated by state-controlled companies and property rights not firmly established, investment in China is by no means a sure thing.
Like China, India has enjoyed rapid growth in the last few years, and is thought likely to be one of the dominant economies of 2050. Unlike China, it is already a democracy, and so has no political transition to endure. However its current government, while led by the economically sober Manmohan Singh, is dominated numerically by the anti-capitalist elements in the Congress Party and the left. While considerable economic growth momentum remains from the reformist BJP government of Atul Bihari Vajpayee, which lost the election to Congress in 2004, Congress’s refusal to reform further and love of subsidies (for fuel, for example) and public spending in general has caused the public sector deficit, central and state, to spiral to almost 10% of India’s Gross Domestic Product. This is a disgraceful performance in a period of record Indian economic growth and suggests that when things get tough, a government funding crisis is almost unavoidable.
Meanwhile, Indian domestic consumption has been fueled by a record credit boom, resulting in a rapidly increasing balance of payments deficit. Thus when the present period of excessive international liquidity comes to an end, India will be faced with a currency crisis and a budget crisis, in other words the two problems which had held the countries’ economic growth down for decades, and which Vajpayee had gone far to solve. Don’t be fooled by the favorable publicity Manmohan Singh gets from the international media, and the friendly attitude of the George W. Bush administration; the current Indian government is economically clueless and the Indian stock markets’ current sky high level (over four times the level of 2002-03) is due for a sharp correction.
India will only achieve its rightful destiny of prosperity if its electorate has the sense to find a pro-market, competent government. In view of the fact that the electorate, at a time of booming well-grounded prosperity, threw out Vajpayee — India’s best ruler since Lord Curzon (Viceroy, 1899-1905) or maybe even since the Emperor Akbar (1556-1605) — the prospects must be doubtful.
Russia’s chances of transition to one of the major pillars of the world economy by 2050 must be rated as negligible. For one thing, the country’s population is declining, as the miserable Russian male population subsides into alcoholism and forgets to reproduce. Putin’s solution to this appears to be the re-conquest of neighboring countries, acquiring their populations, their natural resources and their higher propensity to reproduce. However any such re-conquest will damage Russia’s relations with the West – even Hitler found the diplomatic atmosphere chilling somewhat after Czechoslovakia – and make them duly wary of over-dependence on Russian oil and gas, its principal exports.
Hence while Russia may be geographically enormous by 2050, including possibly a number of Middle Eastern oil producers, it is unlikely to be wealthy, except in armaments. Since Russia has no respect for private property, and won’t let you buy shares in Kalashnikov, with its unique brand identity and world quality sales force in the form of the former KGB, it’s unlikely to provide investors with growth opportunities. (Mikhail Kalashnikov, now 86, is not however entirely dead to the joys of capitalism; since 2004 he has marketed a vodka under the Kalashnikov brand.)
Finally, we have Brazil, now as always rated a growth opportunity for the future, the same position it has occupied since approximately 1500. One’s confidence in Brazil’s future is not increased by the London Times’ reminder Saturday that in 1912, there was general worldwide conviction that the future belonged to Argentina (the Lei Roque Saenz Pena, passed that year, enfranchised the rootless immigrant ghettoes of Buenos Aires and over time ended that dream.)
Brazil’s annual productivity growth in the last 15 years has been 1.0%, not bad by Latin American standards but hardly suggesting rapid economic emergence. It has the advantage of natural resources, but it has always had that advantage; its disadvantage is rapid population growth, which may already have reached the point at which new jobs cannot be created at a rate sufficient to absorb the entering workforce. Add to that problem a Gini coefficient of around 60, among the highest in the world, and you have a polity that appears unlikely to solve its problems in the next couple of decades. Absent such a solution, Brazil in 2050 will be populous but poor, as it is today.
The above discussion suggests that the four BRIC countries are by no means certain to enjoy the rapid economic growth that would lead them to an assured 2050 destiny as economic superpowers. China and India have a reasonable chance of such emergence, but are far from certain to achieve it while in Brazil and Russia such emergence is very unlikely indeed without a complete change of the country’s current economic policy and indeed political structure.
However the main problem with the BRIC concept is not the countries concerned (which are after all just the four largest “emerging market” economies if you don’t count South Korea) but the idea of limiting investment to only the largest emerging economies, and then publicizing the limitation in the hope that other emerging market investors will follow your lead. In a period of excessive world liquidity such as the present, this simply produces a bubble of overvaluation, as a tsunami of speculative money overwhelms these fairly illiquid securities markets. It’s a recipe for almost certain long term loss.
Until emerging economies have reached the level of Taiwan, Singapore and South Korea, with wealthy societies and substantial investment pools of their own, they will be subject to wild swings in and out of fashion, combined with periodic currency, fiscal and banking crises. They are thus risky, and the main investment criterion (apart from a government that appears to have at least some handle on how to develop the economy – avoid Venezuela and Argentina, therefore) should be that they be cheap and overlooked by large international speculators.
Small markets are much more likely to provide such opportunities than large ones, since the speculator pools have little interest in markets they can’t get in and out of in size. In Eastern Europe, Croatia, Georgia and Bulgaria (which has had only about a 10% run-up since EU membership was confirmed – Romania is up about 30%.) In Latin America Colombia and maybe Chile – quality of government is vital to avoid loss there. In Africa there may well be possibilities (South Africa isn’t one of them) though markets there remain extremely small and illiquid. In Asia Pakistan, Malaysia, Thailand (down substantially on the political crisis) and Vietnam all appear potentially more interesting than India or China currently.
Having said that, the present, with world liquidity very high, isn’t the best time to invest in emerging markets. Nevertheless I made good money in Croatia in high-liquidity 1999, when the local market was, contrary to almost every other exchange in the world, in deep depression on political uncertainty and NATO bombing the neighbors. So the golden rule is: the more obscure and unfashionable the emerging markets opportunity, the better it is likely to be. You’ll have your ups and downs, but you’re almost certain to outperform the BRIC-lovers.
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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.)