BRIC Wall

There has been some commentary on my blogging which leads me to re-consider whether I should participate in this forum at all. Some of the comments lately have been anti-American, and even ad hominem. I do not market through this forum, rather I seek to learn with a fellow Harvard graduate, much in the way that I learned by taking a class on Japan as an undergraduate; better to post comments and articles, rather than to read them in isolation. I think the note below, published in the latest issue of The Economist, makes a point that I, along with many fellow Westerners and Stanford graduates, agree with: the BRICs and the N11 (next 11) are still developing countries, which have benefitted greatly from technology and other intellectual property developed in The West, America, and Silicon Valley in particular. It’s fine that Brazil has lost its inferiority complex; until Brazil (or China) can control the naval sea lanes of communication between Rio, Salvador and China, your nation really doesn’t have de facto supremacy; push comes to shove, your commerce can be shut down by a dozen American naval vessels and their strike aircraft, a fact that China is working to overturn, but they have yet to put a supercarrier to sea. Brazil abandoned its nuclear program years ago; and Lula’s attempt at Iranian diplomacy (with N11 nation, Turkey) was renounced by Dilma. In addition to carriers, and expeditionary military, your nation also needs a first rate set of world diplomats if you want to be taken seriously on the world stage. Selling China what it needs in raw materials is fine to bid your assets higher than they were 5 years ago, but it mainly is making the richest in Brazil richer (and, the poorest, a bit less poor); but to advance your civilization, you would need to invest some of that capital into military capabilities that give credibility to diplomatic capabilities, which, at this time, your nation lacks the intellectual talent to deploy.

BRIC wall
Growth tends to slow when GDP per head reaches a certain threshold. China is getting close
Apr 14th 2011 | from the print edition

THE economic crisis may have been debilitating for the rich world but for emerging markets it has been closer to a triumph. In 2010 China overtook a limping Japan as the world’s second-largest economy. It looks sets to catch America within a decade or two. India and Brazil are growing rapidly. The past few years have reinforced the suspicion of many that the story of the century will be the inexorable rise of emerging economies. If projections of future growth look rosy for emerging markets, however, history counsels caution. The post-war period is rich in examples of blistering catch-up growth. But at some point growth starts to disappoint. Gaining ground on the leaders is far easier than overtaking them.

Rapid growth is initially easy because the leader has already trodden a clear path. Developing countries can borrow existing technologies from countries that have already become rich. Advanced economies may be stuck with obsolete infrastructure; laggards can skip right to the shiniest and best. Labour productivity soars as poor economies shift workers from agriculture to a growing manufacturing sector. And rapid income growth among young workers boosts savings and fuels investment.

But the more an emerging economy resembles the leaders, the harder it is to sustain the pace. As the stock of borrowable ideas runs low, the developing economy must begin innovating for itself. The supply of cheap agricultural labour dries up and a rising number of workers take jobs in the service sector, where productivity improvements are more difficult to achieve. The moment of convergence with the leaders, which once seemed within easy reach, retreats into the future. Growth rates may slow, as they did in the case of western Europe and the Asian tigers, or they may falter, as in Latin America in the 1990s.

The world’s reliance on emerging markets as engines of growth lends urgency to the question of just when this “middle-income trap” is sprung. In a new paper* Barry Eichengreen of the University of California, Berkeley, Donghyun Park of the Asian Development Bank and Kwanho Shin of Korea University examine the economic record since 1957 in an attempt to identify potential warning-signs. The authors focus on countries whose GDP per head on a purchasing-power-parity (PPP) basis grew by more than 3.5% a year for seven years, and then suffered a sharp slowdown in which growth dipped by two percentage points or more. They ignore slowdowns that occur when GDP per head is still below $10,000 on a PPP basis, limiting the sample to countries enjoying sustained catch-up growth. What emerges is an estimate of a critical threshold: on average, growth slowdowns occur when per-head GDP reaches around $16,740 at PPP. The average growth rate then drops from 5.6% a year to 2.1%.

This estimate passes the smell test of history (see chart). In the 1970s growth rates in western Europe and Japan cooled off at approximately the $16,740 threshold. Singapore’s early-1980s slowdown matches the model, as does the experience of South Korea and Taiwan in the late 1990s. As these examples indicate, a deceleration need not precipitate disaster. Growth often continues and may accelerate again; the authors identify a number of cases in which a slowdown proceeds in steps. Japan’s initial boom lost steam in the early 1970s, but its economy continued to grow faster than other rich nations until its 1990s blow-up.

In the right circumstances the good times may be prolonged, allowing an economy to reach a higher income level before the inevitable slowdown. When America passed the threshold it was the world leader and was able to keep growing rapidly so long as its own innovative prowess allowed. Britain’s experience indicates economic liberalisation or a fortunate turn of the business cycle may also prevent the threshold from binding at once.

Openness to trade appears to be a potent stimulant: the authors attribute the outperformance of Hong Kong and Singapore to this effect. Lifting consumption to just over 60% of GDP is useful, as is a low and stable rate of inflation. Neither financial openness nor changes of political regime seem to matter much, but a large ratio of workers to dependents reduces the odds of a slowdown. An undervalued exchange rate, on the other hand, appears to contribute to a higher probability of a slowdown. The reason for this is not clear but the authors suggest that undervaluation could lead countries to neglect their innovative capacity, or may contribute to imbalances that choke off a boom.

Middle Kingdom, middle income

The authors are careful to say that there is no iron law of slowdowns. Even so, their analysis is unlikely to cheer the leadership in Beijing. China’s torrid growth puts it on course to hit the $16,740 GDP-per-head threshold by 2015, well ahead of the likes of Brazil and India. Given the Chinese economy’s long list of risk factors—including an older population, low levels of consumption and a substantially undervalued currency—the authors suggest that the odds of a slowdown are over 70%.

It is hazardous to extend any analysis to a country as unique as China. The authors acknowledge that rapid development could shift inland, where millions of workers have yet to move into manufacturing, while the coastal cities nurture an ability to innovate. The IMF forecasts real GDP growth rates above 9% through to 2016; a slowdown to 7-8% does not sound that scary. But past experience indicates that slowdowns are frequently accompanied by crises. In East Asia in the late 1990s it became clear that investments which made sense at growth rates of 7%, say, did not at expansion rates of 5%. Political systems may prove similarly vulnerable: it has been many years since China has to deal with an annual growth rate below 7%. Structural reforms can help to cushion the effects of a slowdown. It would be wise for China to pursue such reforms during fat years rather than the leaner ones that will, eventually, come.

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About Janar Wasito

Janar Wasito is the manager of Magis Capital in San Diego, CA. He is a graduate of Harvard and Stanford Law School, and a former Marine Officer.
This entry was posted in Article review, Brazil, Culture, Politics. Bookmark the permalink.

10 Responses to BRIC Wall

  1. Robert Dwek says:

    A fascinating rant, Janar.

    I as a Brit in Brazil have been focusing on many themes which would put me in the party pooper camp when it comes to “booming BRIC Brazil”.
    http://digitalmarketingbrasil.blogspot.com/

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  2. Robert Dwek says:

    Although when I look for these anti-American etc. comments against you i can’t find them. There have only been a few comments in total on all your postings. Please elaborate.

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    • Janar Wasito says:

      You know, it’s simply not worth it to elaborate. If you can’t find any, then I’m content to say it’s a non issue. My point simply is this project is not worth enough to me to get involved in anything beyond putting up some articles from The Economist, with an introductory note on a regular basis. Mainly, my interest in this project is to learn, via a distance learning type of format, from some fellow alums about another country/ culture, and leave it at that. As my fellow blogger would say, pax.

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      • You are correct. Perhaps you should not participate in this forum as you are quite possibly eroding its integrity with your paranoia.

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      • Janar Wasito says:

        Sir, that’s a fine suggestion.

        I am talking about this comment (April 16): “Ahh yes, the “famous” The Economist. I Wonder when “westerners” will understand that they are a bunch of clowns who enjoy and believe their own propaganda. in dire straits, financially only? How about also “culturally”. Ah nevermind”

        In any case, I will not be posting on this blog any more. It’s simply not worth being put in a position to defend the West whom this person labels “a bunch of clowns.” I will reserve my communications for private emails with people from my alumni networks.

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  3. Pingback: BRIC Wall | Brazil Global | Brasil: Economia Global

  4. Pingback: BRIC Wall (via Brazil Global) « Expat American Living in Brazil

  5. Robert Dwek says:

    Janar, sorry but your comments about being harassed are not backed up by evidence and thus look very odd. I wonder what caused this unprompted outburst ? Pax indeed.

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    • Janar Wasito says:

      I am talking about this comment (April 16): “Ahh yes, the “famous” The Economist. I Wonder when “westerners” will understand that they are a bunch of clowns who enjoy and believe their own propaganda. in dire straits, financially only? How about also “culturally”. Ah nevermind”

      In any case, I will not be posting on this blog any more. It’s simply not worth being put in a position to defend the West whom this person labels “a bunch of clowns.” I will reserve my communications for private emails with people from my alumni networks.

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  6. Janar:

    Regarding your statement ” … I seek to learn with a fellow Harvard graduate, much in the way that I learned by taking a class on Japan as an undergraduate”, I think that’s why everyone reads postings on this site. I know it is the case for me.

    If one’s objective is to learn about BRIC countries, presumably one also wants to learn about the views of people from those countries and the basis of such views. In this context, the comment …

    “Ahh yes, the “famous” The Economist. I Wonder when “westerners” will understand that they are a bunch of clowns who enjoy and believe their own propaganda. in dire straits, financially only? How about also “culturally”. Ah nevermind”

    … is interesting; primarily because *this is a common view of “Americans” outside the First World*. Is this common view “wrong”? Of course we think it is: We are Americans. 🙂

    I personally have learned a lot about the US, and the way the rest of the world views the US, by engaging in open, friendly discussions with people who say things just like this to me. In particular, I have come to understand the Arab view of Americans quite well, and I can now see things from their perspective quite well (and it’s not at all crazy; it’s a very reasonable cultural perspective). I’ve also come to understand how the US causes problems for people in other countries (e.g., my personal belief is that QE1 and QE2 are actually making life more difficult for my beloved housekeeper, Maria).

    In the end, I believe Americans have the responsibility to understand well the perspectives of the rest of the world, even if those perspectives are framed in language that we politically-correct Americans find too aggressive and personal. Why should the rest of the world spare Americans’ feelings? I’m not sure that the rest of the world owes us any big thanks for what we do. Ultimately, if we Americans are the great people we believe we are, we can certainly stand up and face our critics–even our personal critics–with courage. And then, hopefully, understand them and arrive at a better joint understanding of each other.

    Or, if one prefers a more aggressive approach, if “Peace is produced by war” then shouldn’t we have an open war of ideas and see which ones win? I, for one, have no problems vigorously defending my ideas. I’ve learned a lot this way; usually through trying to defend indefensible ideas.

    Cheers, MMc

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