Global economics

mxglor

Unit8.pdf

Home >Business & Finance homework help >Economics homework help >Global economics

www.euruni.edu

BCO22 GLOBAL ECONOMICS

Prof. Nelson H. S. Ferreira [email protected] orcid.org/0000-0003-2637-3211

Unit 8 - Emerging Economies

u‘BRICS’ uOther emerging powers uEmerging cooperation, new initiatives: One Belt, One Road

BRICs

“BRIC is an acronym for the combined economies of Brazil, Russia, India and China. The economies of these four nations are collectively called "BRIC," "the BRIC countries," "the BRIC economies" or the "Big Four." The countries currently represent about 25% of the world's land mass and 40% of its population. Economist Jim O'Neill, chairman of Goldman Sachs Asset Management, introduced the acronym in his 2001 paper, "Building Better Global Economic BRICs." The paper drew attention to the importance of BRIC and the growth of these emerging market economies”.

“O'Neill's paper theorized that India and China will grow to become the world's leading suppliers of manufactured goods and services, respectively, and Brazil and Russia will become dominant raw materials suppliers. In addition, O'Neill surmised that by 2050, the combined economies of BRIC would surpass those of the world's current wealthiest countries.”

“It should be noted that O'Neill grouped these nations together because they have the potential to form an influential economic bloc, not because they represent a political alliance or a formal trading association. The nations, however, have met at an international relations summit annually since 2009. The first two conferences were referred to as the 2009 BRIC Summit and 2010 BRIC Summit. In 2010, South Africa was officially admitted as a BRIC nation following an invitation from China and the other BRIC nations, making the current acronym BRICS, for Brazil, Russia, India, China and South Africa. As a result, since 2011, the annual conference has been referred to as the BRICS summit.”

Source: https://www.investopedia.com/ask/answers/13/what-is-bric-nation.asp

https://www.investopedia.com/terms/r/rawmaterials.asp

https://www.investopedia.com/terms/b/brics.asp

Who are the BRIC?

“These four countries have been highlighted as promising influential economies in the 21st century because of their comparatively big population and young demographic structure together with their increased productivity and rapid economic growth until recently. During 2015, several questions have raised about the power of the BRICS and investors are shifting their portfolio to include other emerging economies that are performing better than the BRICS. India is the only BRICS country that is still showing higher growth rates than average. Since the BRIC designation these countries have increased their cooperation in trade, investment, infrastructure development and other possibilities to keep enhancing their economic growth and power.”

Have a look on the video ‘Brazil, Russia, India and China (BRIC)’

https://www.investopedia.com/terms/b/bric.asp

Who are the BRIC?

Together the BRIC: 1. comprise more than 2.8 billion people (40% of the world’s population). 2. account for more than 25% of the global GDP. 3. cover more than 25% of the world’s land area over 3 continents. To sum up: • “BRIC is an acronym for the economic bloc of countries consisting of Brazil, Russia,

India, and China.

• In 2010, South Africa joined the BRIC group. • Economists believe these four nations will become dominant suppliers of

manufactured goods, services, and raw material by 2050 due to low labor and production costs.

• Critics argue that the nations' raw materials are limitless and the growth models ignore the finite nature of fossil fuels, uranium, and other critical and heavily used resources.”

Source: https://www.investopedia.com/ask/answers/13/what-is-bric-nation.asp

Population

Who are the BRICs? 7

In 2010 the four BRIC countries invited South Africa to joint the group given its similar economic growth and powerful international role. Hence, the acronym became BRICS.

BRICs Map:

Second Line BRICs

In 2011, the four most promising countries from the Next 11 group were: Mexico, Indonesia, Nigeria and Turkey, making up 73% of all Next 11 GDP. As a result the acronym MINT was created to designate these promising countries.

9Differentiating between BRICs - Brazil

What sector do you think that employs more people in Brazil?

Agriculture Industry Services

10Differentiating between BRICs - Brazil

World’s seventh largest economy by nominal GDP

u Labor force by sector, 2013: Agriculture: 20%

Industry: 14% Services: 66%

GDP by sector, 2013: Agriculture: 5.5%, technologically advanced but at the expense of the environment and the Amazon. Land reform program to provide suitable

living and working conditions to the 1 million families who live in areas allotted by the government. Industry: 27.5%

Services: 67%

Differentiating between

BRICs - Brazil

During 2015 Brazil’s economic growth has slowed down since it was substantially based on the commodity bubble. That collapsed and Brazil’s purchasing power dropped.

The country has experienced political and social crises due to the raising unemployment, inflation and the big political corruption scandals. As a result the international financial institutions have given a lower rating to the country and several international investments have left Brazil to go to more promising economies.

However, China is seeing this situation as an opportunity to buy Brazilian assets that before were “out of their budget” and is planning to invest in the region.

Differentiating between BRICs - Brazil

Brazil exports most of its soybeans and iron ore to

china.

In may 2017 , china and brazil launched a joint investment fund to increase agribusiness productive capacity in brazil.

The fund has an initial sum of $20 billion and will reportedly

go to finance investment projects in brazil that are of interest to both countries.

Differentiating between BRICs - Russia

High-income mixed economy, from 1991 to 1998 there was a transition to a market economy. Now energy and defense publicly owned, industry and agriculture highly privatized.

Sixth largest in the world in PPP

After long negotiations and changes Russia joined the WTO in 2011. Russia is considered the country with more protectionist regulations in place (2013).

Substantial corruption

Relies on energy revenues to drive growth.

14Differentiating between BRICs - Russia

What sector do you think that employs more people in Russia?

Agriculture Industry Services

15Differentiating between BRICs - Russia

6. Trade surplus and strong exchange with China.

7. Overall low foreign investment

u Labor force by occupation same as GDP by sector, 2013: Agriculture: 4.4%, partially industrialized Industry: 37.6% Services: 58%

16Differentiating between BRICs - Russia

During 2015 Russia’s economic growth has slowed down mainly due to the substantial price reduction of oil (from $115/bbl on June 2014 to $39/bbl on September 2015) and natural gas from ($4.5/mmBTU on June 2014 to $2.3/mmBTU on September 2015) and the strong reliance on the energy sector to drive the economy.

Furthermore, Russia international political arena is difficult and the country is experiencing sanctions from western countries and responding with food embargos that don’t enhance cooperation.

As a result the international financial institutions have given a lower rating to the country and several international investments have left to go to more promising economies.

17Differentiating between BRICs - Russia

Furthermore, Russia’s corruption is also limiting social development and it is polarizing economic classes.

Diversity and the Russian economy and politics do not mix.

For years the Russian government has protected large state owned companies at the expense of small and medium enterprises (SMEs) ignorant of the fact thatS MEs are the foundation of a diversified economy.

Any successful economy manages to find a balance between the large and SMEs and it’s the continuous competition that keeps both efficient and productive.

18Differentiating between BRICs - Russia

In the EU SMEs contribute 40% to their respective economies in contrast toRussia’s 15%.

Russia’s private sector is struggling at the expense of promoting strong public image of its state-owned companies, the private sector recorded a 300,000 job loss to a 1million gain of state owned companies in 2012.

Such lack of diversity is bound to keep Russia’s flailing economy at the bottom until reforms are considered.

19Differentiating between BRICs - Russia

Russia’s lack of perspective on the importance of SMEs is a concerning factor to economic diversity and growth.

Having state owned companies dominating in every sector leaves no room for local competition, which is very healthy for any flourishing economy.

When state owned companies feel a pinch of competition from SMEs, they go tothe Kremlin to request some form of oppressive measures against the SMEs so they continue to own majority of the markets and revenue.

20Differentiating between BRICs - India

1. World’s tenth largest economy by nominal GDP 2. Third largest economy in the world in PPP 3. 1947-1991: mixed economy centrally planned 4. 1991 fiscal crisis made India adopt free-market strategies and

opened up to international trade 5. Most foreign direct investment goes into telecommunication,

information technology and auto components, chemicals, apparels, pharmaceuticals and jewelry.

6. Large young population 7. Major country with rural to urban migration seeking for

opportunities

Differentiating between BRICs - India

What sector do you think that has more labor force in India?

Agriculture Industry Services

Differentiating between BRICs - India

Labor force by occupation 2012:

Agriculture: 49% Industry: 20% Services: 31%

GDP by sector:

Agriculture: 13.7%, it is the second world agricultural producer. • Low productivity, given agricultural

subsidies the hamper productivity- enhancing investment. Overregulation increase agricultural costs too and the land holdings are very small on average (less than 1 hectare). Just 39% of cultivable land was irrigated in 2010.

Industry: 21.5% Services: 64.8%

Differentiating between

BRICs - India

India is the only BRICS country that in 2015 and 2016

experienced above average economic growth and that is

gaining new foreign direct investment from Japan and other

countries because it shows potential growth.

Has largely benefited from being a net importer of crude and

other commodities whose prices have fallen and also has the

advantage of being less susceptible to the market volatility

as it is less dependent on exports for its growth.

India’s main exports go to the US and United Arab Emirates

(UAE). Not that much trade with China if we don’t count

Hong Kong.

However, most of India’s imports come from China and have

raised over the past 10 years.

Differentiating between BRICs -

China

What sector do you think that has more labor force in China?

Agriculture Industry Services

25Differentiating between BRICs - China

1. Socialist market economy, 250% of GDP debt related to the state-owned enterprises

2. World’s second largest economy by nominal GDP

3. World’s largest economy by purchasing power parity

4. Labor force occupation 2008:

Agriculture: 36.7% is the world’ largest producer and consumer of agricultural products. There is still a relative lack of agricultural machinery.

Industry: 28.7%

Services: 34.6%

Unemployment: 4.1%

Differentiating between BRICs -

China

5. Fastest growing major economy, average growth rate 10% over the past 30 years (until 2015).

6. 1980s agricultural reform, 7. 1990s industrial sector reform that

welcomed foreign investors for the first time.

8. In last 90s the banking reform started converging towards a capitalist economy. However, some key commodities prices are still set by the government and make no sense given the current market situation.

9. This processes moved China from clothing and footwear production to the production of computers, automobiles and pharmaceuticals.

27Differentiating between BRICs - China

To keep the economy growing China has relied during the last four decades on real estate investment and infrastructure development run by partially state- owned companies.

In 2015 the Government realized that they have to change their growing strategy since real estate is not working anymore and the spread of Ghost cities is raising red flags.

China's real estate bubble, ghost cities -

https://www.youtube.com/watch?v=uxjwhk1ktNw

28Differentiating between BRICs - China

Part of the housing investment was intended to reduce the growing inequalities and to promote the structural change of being an export driven economy to a one relying on domestic consumption.

Substantial environment deterioration, especially air and water pollution and soil erosion has notably been reducing the amount of arable land and many people died because of air pollution.

China is investing in reducing pollution in main cities and changing legislations so that companies pollute less.

Differentiating between BRICs -

China

China reassigns 60,000 soldiers to plant trees in bid to fight pollution.

The area to be planted by the end of the year is roughly the size of Ireland (to plant at least 84,000 square kilometres (32,400 square miles) of trees).

China abandoned its current system under which polluters are charged locally in favour of the nation wide environmental protection levy – designed to reduce air, soil and water contamination – from January 1 2018.

Differentiating between BRICs - China

The new regime will see firms that cause pollution taxed under a uniform set of national rules rather tan the fees being collected at the local level.

China enacted two new environmental protection laws at the start of 2018:

• to formalize the emissions discharge fee into a tax collected from industrial polluters,

• to combat water pollution more effectively.

From January 2018, large chemical and energy firms could end uppaying four times more than previously for causing pollution.

Population 31

Population growth Enacted in 1979 by China’s Communist Party, the controversial “One Child Policy” was primarily meant to slow the country’s rapid population growth, while capping the growing drain on China’s limited resources.

Since early 2016, families have been allowed to have two children – but even with this change in place, China still has a self-inflicted demographic challenge on its hands.

China is not only skewing older and more male – it is also losing its strong base of younger workers that could potentially support the rest of the population.

Population growth 33

uA recent estimate published in Scientific American pegged China’s shortage of women at 62 million, creating a situation where there’ll be millions of men who are unable to marry.

uThis gender imbalance exacerbates an already existing shortfall at the younger end of China’s population spectrum – and the end result will be a rapidly falling ratio of workers to retirees in the Chinese economy.

34Differentiating between BRICs – South Africa

1. 1994 first multi-racial elections and apartheid end.

2. 2000 stronger strategies to attract foreign investment, to privatize and relax labor laws.

3. Income poverty has declined since then but inequality has increased moving the Gini coefficient from 0.66 to 0.7 between 1993 to 2008.

4. Unemployment 25% -35%, inadequate education and poor health in general.

5. Poverty is a major problem

6. Poverty and crime are limiting the possibilities of foreign investment

7. Comparatively slow economic growth from 2000-2009, 2.2% and world growth was 3.1%

8. Public debt 43.3% of GDP

Differentiating between BRICs – South Africa

Labor force by occupation 2007:

Agriculture: 9% Industry: 26% Services: 65%

GDP by sector 2011:

Agriculture: 2.5%, difficult growth due to increased competition and crime (farm attacks). Not fully modernized. Land reform in process in order to give land to black people that is now in hands of white people. Industry: 31.6% Services: 65.9%

36Differentiating between BRICs – South Africa

South Africa needs China investment and Chinese buyers for its raw materials. China is its biggest export market, accounting for around $12 billion. That beats South Africa's No. 2 partner, the U.S., with around $7 billion in exports, both based on 2015 figures.

South Africa economic growth during 2015 was slow and new signs of corruption, extreme racism and social turmoil are changing investors decisions towards other regions.

Cape Town is running out of water due to dry weather and not a proper resource planning made by the city management. The forecast says that in April, 2018 Cape Town will not longer have any drinking water supply.

Differentiating between BRICs

The more inequality the lower is the IHDI compared to the HDI. China India Brazil Russia South Africa

Population (billion, 2014) 1.370 1.267 0.202 0.141 0.05252 Population Growth (2005-2013) 4.0% 10.0% 7.1% 0.3% 10.1% GDP (trillion current US$, 2013) 9.240 1.877 2.246 2.097 0.351 GDP per capita (trillion current US$, 2013) 6,745 1,481 11,119 14,872 6,676 HDI value (2013) 0.719 0.586 0.744 0.778 0.658

Life expectancy at birth, (years, 2013) 75.3 66.4 73.9 68 56.9 Mean years of schooling (2012) 7.5 4.4 7.2 11.7 9.9 GNI per capita (2011 PPP, US$) 11,477 5,150 14,275 22,617 11788

HDI% Change (2000-2013) 1.52% 1.49% 0.67% 0.64% 0.36% Coefficient of human inequality (IHDI) (2013) N/A 0.586 0.542 0.685 N/A Land (sq mi) 3,600,927 1,147,949 3,265,056 6,592,812 471,400 IBRD/IDA Operations Approved (billion US$, 2014) 1.615 5.109 2.019 0.11 3.75 CO2 emissions (metric tons per capita, 2010) 6.2 1.7 2.2 12.2 9

Source: World Bank and United Nations

Differentiating between BRICs

Key highlights:

1. China and India have more than 25% of the population working at the agricultural sector.

2. Russia, Brazil and South Africa highly rely on the service sector.

3. Russia main economic driver is the energy sector

4. South Africa low HD keeps hindering the high unemployment rate (25%-35%)

5. Rapid economic growth is hindering the environment and population health of all the BRICS

Differentiating between BRICs 46

The result of the rapid economic growth and demographics of China and India are expected to give rise to a large middle class. This new demand is expected to keep enhancing the economic growth of the BRICs.

Source: Goldman Sachs

BRICS co-creation

The New Development Bank (NDB) is a multilateral development bank established by the BRICS states in 2015. India was the proponent of it in 2012.

The headquarters are in Shanghai, China. Initial funding $50billion (10bln each).

According to the agreement:

"the Bank shall support public or private projects through loans, guarantees, equity participation and other financial instruments.”

The bank's primary focus of lending will be infrastructure and sustained development projects (specially renewable energy), with authorized lending of up to $34 bln annually.

BRICS co-creation

The initial subscribed capital of the bank was equally distributed among the founding members.

The voting power of each member will be equal to the number of its subscribed shares in the capital stock of the bank.

BRICs and the catch-up effect 49

“Catch up effect, alternatively called the theory of convergence, states that poor or developing economies grow faster compared to economies with a higher per capita income and gradually reach similar high levels of per capita income. Thus, all economies, over time, may converge in terms of income per head.

u The catch-up effect briefly stated implies that the poorer nations grow much faster because of higher possibilities of growth and over time catch up with the richer countries in terms of per capita income such that the divide between the two gets minimized.

u This theory of convergence of incomes is based on the logic of better opportunities of growth available for developing economies like access to technological know how from the developed world and increasing returns to capital, etc.

u Empirical evidence suggests that while some developing economies have been able to effectively tap the available advantages to grow faster and catch up with robust economies, this has not been true for a large part of the developing world. The limitations of the theory are based on grounds of social, institutional or political differences, which simultaneously influence growth.”

Source: https://economictimes.indiatimes.com/definition/catch-up-effect

“The catch-up effect (or convergence theory) suggests that poorer countries will experience a higher rate of economic growth and, over time, get closer to the income levels of the developed world.” 50

“In other words, there will be a reduction in the gap between the rich and the poor because low-income countries have more opportunities to experience a rapid rate of growth.”