The Independent Market Observer

A Requiem for the BRICs

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Sep 11, 2015 2:08:50 PM

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BRICsThere’s an undeniable focus on the U.S. in my research and writing. In part, of course, this is sheer parochialism—you write what you know and what your readers seem to be most interested in. But my focus is also driven by a conviction that the U.S. is still the most influential economic and political actor in the world. I have stood by this belief for the past couple of decades and see no reason to change now.

The reason I bring this up is that we are starting to see the beginnings of a new cycle. The countries that had been picked to assume leadership in the next century—that is to say, now—are running into inevitable problems and consequences resulting from the growth that led them to be picked as the next leaders in the first place. The countries I’m referring to are the BRICs: Brazil, Russia, India, and China. 

I don’t deny the very real progress three of these countries have made over the past several decades, or the progress they will continue to make, but conditions have changed—which will affect how we see the future. The best example is China, so let’s start there.

China: Economic revenge

The problem with China is not the growth but the assumption that the growth would continue for reasons that transcended economics: superior cultural values, a more efficient and effective government, lower capital costs from a superior financial system, and so forth, all of which were put forth in direct contrast to what was deemed a markedly inferior system in the U.S. Instead, economics is taking its revenge.

One of the advantages of getting older is that you get to recognize certain rhymes in history. I can remember, not that long ago, an Asian country that was dominant in manufacturing and driven by superior cultural values, a wise and efficient government, and a long-term planning perspective that allowed it to invest, manufacture, and eventually acquire U.S. assets, including Pebble Beach and Rockefeller Center. I’m talking, of course, about Japan in the late 1980s. We know what happened after that.

What is interesting is why it happened. After decades of fast growth, Japan ultimately overinvested, borrowed too much, relied on selling to other countries, and eventually got old. Financial imbalances built up to an unsustainable level, requiring an adjustment, but for cultural reasons, companies were allowed to continue operating to avoid mass unemployment. Once growth started to slow, the laws of economics started to bite, and reality set back in.

This should all sound very familiar in the context of China. Japan has not gone away; it still has many world-class companies that dominate their industries. But neither has it taken over the world. Growth inevitably slows as countries catch up with their more developed counterparts. Japan’s system was based on fast growth—and it couldn’t handle it when it slowed. China is not going away; it will continue to be a major part of the global economy. But it won’t be taking over the world any time soon either.

Russia and Brazil: Little demand for commodities

For the rest of the BRICs, the same applies. Their growth—certainly Russia’s and Brazil’s—was largely dependent on China’s need for commodities, and their growth has declined in tandem. Unless and until some massive new source of commodities demand appears, these countries will not see the same levels of growth. Russia, with its dependence on oil, looks to have no way out, but Brazil, with a substantial internal economy, seems to be better positioned.

India: The exception

Driven at least partially by more effective low-wage competition with China, India looks poised to continue to grow. But it, like the other three countries that comprise the BRICs, certainly won’t be growing the way it did during the last century.

This story, in various forms, covers pretty much all of the globe. When it was first told, the U.S. was dealing with its own problems, many of which have moderated even if they have not gone away, and other countries were in their growth phases. Now, the situation appears to have reversed. The U.S. appears poised to continue to wax as the rest of the world wanes, at least for a while.

This cycle won’t last forever either, of course, but for the moment, the U.S. is the place to be. I intend to continue focusing on it for just that reason.

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