The rapid economic growth of the BRIC — Brazil, Russia, India and China — has helped create the global commodity boom and strengthened its trade ties with low income countries (LIC), International Monetary Fund has said.
The value of LIC-BRIC trade has grown six-fold over the past decade, a policy paper of IMF, dated January 12 but made public on Friday, stated.
As bilateral trade has expanded, financial flows from BRIC to LICs — both in the form of foreign direct investment and development financing — have also increased rapidly.
During the same period, LIC economies have grown at an annual average rate of 4.7 per cent, it said.
While improved macro-economic management has been critical to this strong economic performance, the more favorable external environment — the emergence of BRIC was an important contributing factor, IMF noted.
The IMF policy paper states the bilateral trade, which grew exponentially over the past decade, is the “backbone of LIC-BRIC relations.”
“These expanding trade flows have had a significant positive impact on LICs’ overall trade performance,” it added.
Economic expansion in BRIC nations and the strong economic complementarity between the two groups of countries have underpinned the rapid growth and high intensity of bilateral trade, the paper said.
“Many LICs in general have a strong comparative advantage in commodities while most BRICs are competitive producers of manufactured goods.”
BRIC demand for commodities resulted in a significant improvement in LICs’ terms of trade.
There is potential to further increase LIC-BRIC trade by lowering tariff and non-tariff barriers on both sides, reducing tariff escalation, extending preferential access for LIC exports, and making rules of origin more liberal in the existing preference schemes, IMF said.
The paper stated starting from a low base, BRIC’s FDI inflows to LICs have grown rapidly. Initial investment, mostly by state-owned companies, has often been destined for natural resource industries.
Over time, however, investment appears to be spreading to agriculture, manufacturing, and service industries.
Many ‘non resource-rich’ countries have also attracted significant investment.
Moreover, private companies, particularly small and medium-sized ones from BRICs, have become active investors, with the potential to form industrial clusters in some LICs as seen in East Asia, it said.
A key challenge for LIC policymakers is to ensure BRIC FDI inflows, as well as FDI from other sources, continue to boost local firms’ links with the global economy and help enhance domestic resource mobilisation, the paper stated.
“Thus continued improvement in the investment climate is important, as are policies to encourage joint ventures and local employment,” it added.