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Brics’ New World Order Is Now on Hold

Debt, demographic woes among challenges facing top 5 developing countries; a global crisis in the offing?

Ian Talley

The Wall Street Journal Jan. 19, 2016

Five years ago, the world’s largest developing countries were taking the world by storm as their surging economic growth fueled Western fears of a new world order.

But instead of propelling the global economy into calmer waters, the so-called Brics—Brazil, Russia, India, China and South Africa—now risk capsizing it.

Weak global consumption, plunging commodity prices and a host of other economic and political problems have pushed two of the countries—Russia and Brazil—into recession and fueled the biggest investor exodus out of emerging markets in more than two decades, with investors pulling a net $500 billion out over the past year.

Their economic future is now uncertain. And their efforts to form a bloc challenging the collective power of the Group of Seven largest industrial economies have largely been viewed with healthy dose of skepticism, doubt catalyzed now by an increasingly grim outlook for the group.

“The expectation of a Brics new world order was a bit overblown,” said Hung Tran, executive managing director of the Institute for International Finance, a global trade group for financial institutions. To the extent mature economies are accelerating and emerging markets slowing down, “the momentum supporting stronger weight and roles in economic coordination has peaked.”

Just a few years ago, few expected such a fall from grace. China was growing at an average rate of more than 10% a year, peaking at over 14% in 2007. India averaged 8%; Russia 5%; and Brazil and South Africa around 4%. To put that in perspective, the G-7 economies expanded at an average rate of less than 1.4% over the same time frame.

But hindsight suggests observers and investors should have been wary of the Brics story. Such commodity- and export-dependent emerging economies have long been prone to booms and busts, their fate rising and falling with the tide of global demand. Their collective contribution to global growth has fallen from a peak of nearly 50% in 2013 to only 36% now.

Since 2011, three major factors that fueled the stellar Brics growth have all reversed. Commodity prices—which surged by roughly 80% between 1999-2011—have fallen back to levels not seen for more than a decade. The growth rate of world trade has fallen from around 7% annually in the six years before the crisis to close to 2% now. And growth in China—the behemoth and main driver the group—has dropped precipitously. The world’s second largest economy is now at risk of stalling as authorities try to transform the country’s export- and credit-gassed economy into a more sustainable model relying on domestic consumption.

But those aren’t the only headwinds buffeting the Brics. They also face deep debt problems, political turmoil and major demographic challenges.

“Global financial conditions are tightening, and emerging and developing markets are especially sensitive to the effects, given other current woes.” said IMF chief economist Maurice Obstfeld.

Most of the countries gorged on cheap debt amid an unprecedented easy-money era, borrowing more than currently projected growth rates warrant. Total debt in emerging markets hit a record 200% of gross domestic product—about $58 trillion—with the biggest increase in the corporate sector.

That is spawning a legion of financial complications. Currency volatility is pushing balance sheets into the red as a stronger dollar makes it more expensive to pay back trillions in dollar-denominated debt with local-currency income. As factories fall idle, real estate lies fallow and other assets underperform, companies are being forced to default.

The large debt burdens are likely to stymie the lending needed to spur growth and raise borrowing costs, particularly as failing firms create trouble for the financiers that provide the lifeblood for economies. And as the Federal Reserve raises interest rates that’s adding upward pressure on borrowing costs.

Politics is also creating obstacles to growth. Russia’s oil-fueled economy, already hit by falling crude prices, has also been battered by Western-led sanctions for its Ukraine interventions. Brazil’s ruling government is on the verge of collapse under an expanding corruption scandal, jeopardizing the rollout of promised economic restructuring. And many outside economists question whether China’s Communist Party will be able to overcome the local dragons of corruption, vested interests and financial turmoil as Beijing attempts to revamp its economy.

The Brics countries also face a demographic challenge: Labor force growth is waning, or in China’s case, shrinking. That is downgrading their capacity to expand.

To overcome their mounting challenges, the International Monetary Fund and the World Bank warn that authorities must take urgent action to overhaul their economies to make them more productive and competitive. The recipes are different for each country but include allowing greater private-sector investment, labor-market reforms, stronger protections for intellectual-property rights and bolstering the judiciary systems. Brazil and South Africa, for example, must address critical infrastructure bottlenecks constricting growth in commerce. Russia and China need to foster greater market competition and privatize inefficient state-owned firms.

But few economists are optimistic, and most are at least worried about prospects for the Brics. The World Bank estimates the potential growth rate for Brics has fallen to under 4% from nearly 6% just a few years ago.

One key indication of the inability of emerging markets to transform their economies can be found in the World Bank’s annual “Doing Business” rankings, which gauge the business climate in countries around the globe. With the exception of South Africa, the Brics countries have moved little in lists. India, for example, was 130th out of 189 countries this year, improving only four spots from 2007.

At the same time, India also shows the potential for structural reforms. Prime Minister Narendra Modi delivered early in his administration on some of his promises to cultivate a better business climate and strengthen the government’s balance sheets. Investors were encouraged, Indian markets stabilized and the country now records the fastest growth rate among the Brics. The question now is whether New Delhi can carry out the slew of other policies the government has vowed to undertake.

Efforts to overhaul their economies will become particularly important, however, given that commodity prices are expected to stay weak for a long period and there’s little sign of a surge in demand coming from advanced economies in the near future.

All of those factors are why the World Bank and others warn that the Brics and other emerging markets may be just beginning an era of weak growth.

Given the souring Brics outlook, that economic disarray is feeding worries of global disorder instead of new world order. “The bigger concern now is that as their growth slows, and even contracts, they seem pretty defensive and even paranoid,” said Matthew Goodman, a former economics director at the U.S. National Security Council now at the Center for Strategic and International Studies.

Mr. Goodman points to escalating tensions over cybersecurity and potential regional conflagrations in the south China seas and along Russia’s border. “Are they now going to fall into a defensive crouch and create problems for the system of rules that have worked pretty well for the world so far?”