The BRICS economies are in the midst of a midlife crisis as a combination of factors including the failure to implement second-generation structural reforms and their move towards a growth-regime based on state capitalism, says American economist Nouriel Roubini.
“Are the BRICS (Brazil, Russia, India, China and, its most recent member, South Africa) in the midst of a midlife crisis? Based on recent data, this would appear to be the case,” said Mr. Roubini, who anticipated the collapse of the US housing market and the global recession which started in 2008.
The economist said in the World Economic Forum blog that China grew at a rate of over 10 per cent for 30 years but its growth rate has now slowed to around 7 per cent, and it may fall further.
Talking about India, he said the country grew rapidly earlier this decade but its growth rate slumped to 5 per cent in 2013 and may only modestly pick up this year.
The other BRICS are even “worse“: in 2013 growth was 2.5 per cent in Brazil, 1.3 per cent in Russia and 1.9 per cent in South Africa, Mr. Roubini said, adding that this year things will not be much better.
“Three of the five BRICS (Brazil, India and South Africa) are now part of what investors consider the Fragile Five emerging market economies (the other two being Turkey and Indonesia).
“These fragile emerging markets share weaknesses, such as large current account deficits, large fiscal deficits, falling growth, rising inflation and political and policy uncertainty, and they all face parliamentary or presidential elections this year,” he said.
Listing out major reasons behind the problems affecting BRICS, Mr. Roubini — professor of economics and international business at New York University —— stated the countries failed to implement second-generation structural reforms that are more micro-based and boost productivity growth.
“As a result, their potential growth rate has fallen.”
Secondly, not only did these economies fail to implement market oriented reforms, they moved towards a growth regime based on state capitalism, wherein there is an excessive role of state-owned entities in the economy, he added.
Third, the commodity super-cycle is probably over — for a variety of reasons — and this hurts the BRICS that are commodity exporters: Russia, Brazil and South Africa.
“Given the slowdown of China, after years of high prices, commodity prices may fall further, hurting the growth of the commodity oriented BRICS,” said Mr. Roubini, well known for his bubble warnings and doom scenarios.
Fourth, in the boom years for BRICS and for emerging markets, macro policies became too loose, leading to overheating.
“Deterioration of macro policies was serious in Brazil, India and South Africa but even in China credit fuelled investment has led to a surge in public debt that will burden the official and shadow-banking system,” he said.
Ageing population
The fifth reason, which ails the BRICS economies (specifically China and Russia), according to Mr. Roubini, is the absence of demographic dividend as the population is ageing for a number of reasons. Lower population growth is associated with lower potential growth, he observed.
Sixth, many BRICS may end up in the middle-income trap, failing to progress to a higher trajectory, Mr. Roubini said.
“Solid institutions, good governance and appropriate macro policies, mobilisation of savings, capital and labour inputs can lift an economy from a low per-capita income to middle-income status, but transitioning into a developed market is much more difficult,” Mr.Roubini said.
The economist, however, believes there are reasons for being optimistic about prospects of BRICS for future growth.
“First, they are all large economies with large populations and markets, and three out of five still benefit from a demographic dividend.
“Second, in spite of the delays in the last decade, most may eventually shed a model of state capitalism and implement structural reforms that increase potential growth” he said.
Mr. Roubini stated that thirdly the macro weaknesses that some of them faced are solvable.
Besides, some secular forces are still in BRICS favour such as urbanisation, industrialisation and the catch up from low per capita income, among others, he added.
