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May - 2006 - issue > In My Opinion
The World, BRICs Dream and India
Jim O'Neill
Monday, May 1, 2006
In 2001 we called for the world to ‘Build Better Global Economic BRICs (Brazil, Russia, India and China).’ In doing so, we prompted what has become a global debate about the opportunities presented by Brazil, Russia, India and China. In the intervening five years the BRICs have emerged as central players in the world economy and global policymaking, affecting trade, capital markets, energy policy and investment decisions.

When we first wrote in 2001, we stressed these four countries’ importance to the global economy. We calculated that their share of world GDP share was set to increase significantly over the next decade. This growing importance led us to argue that the time had come for a radical reform of international economic policymaking. Writing in the aftermath of September 11, we argued that the inclusion of the BRICs in formal policymaking was key to greater international economic and political cooperation.

Specifically, we called for reform of the G7 into a new G9 that would scale back Europe’s role and incorporate Brazil, Russia, India and China.We followed this paper two years later with Dreaming With BRICs: The Path to 2050. This groundbreaking work projected long-term growth rates and suggested that the BRICs as a whole would be bigger than the G6 (the U.S., Japan, Germany, the U.K., France and Italy combined) by 2041. Our projections were not based on hopes of ‘miracle growth,’ but on a sensible model that stressed the importance of good economic policy and stable institutions.

Within the BRICs story, India has the best long-term growth potential not least due to its fantastic labor force dynamics. Since then, the case for the BRICs has become ever stronger. The BRICs have in fact grown more rapidly than we had predicted either in 2001 or in 2003, and we now expect that they will continue to exceed our projections for the next several years. The BRICs are of course benefiting from favorable global economic and financial conditions, but they have also been central contributors to this benign environment. In fact, the BRICs’ growing impact on the global economy has been felt on a wide range of issues over the past few years:

From Growth and Trade . . .
Between 2000 and 2005, the BRICs contributed roughly 28 percent of global growth and 55 percent in Purchasing Power Parity terms. More than 30 percent of total world demand in the past five years originated in the BRICs economies.

The BRICs’ share of global trade continues to climb rapidly. At close to 15 percent, it’s now double its level in 2001. Trade among the BRICs has also accelerated, with intra-BRICs trade now nearly 8 percent of their total trade, compared with 5 percent in 2000. New trading patterns have emerged, including a growing trade and investment relationship between Brazil and China.

. . . to Capital Flows . . .
The BRICs now hold more than 30 percent of world reserves, according to latest estimates. China is the dominant contributor, but Russia, India and Brazil have also accumulated substantial reserves.

Despite this reserve accumulation, real exchange rates in each country have appreciated over the last two years. BRICs’ current accounts are in healthy surplus, reflecting the group’s key role in the global supply of savings. The BRICs’ aggregate current account surplus is now nearly a quarter of a trillion dollars, or close to 6 percent of the BRICs’ GDP. The BRICs are increasingly important counterparts to the U.S. current account deficit.

The BRICs are an increasingly important destination for global FDI. Their 15 percent share of the global total is up nearly three times from 2000 levels. Even more striking is the fact that BRICs' FDI outflows have risen more than sixfold since 2000, to more than 3 percent of the global total.

. . . Markets . . .
BRICs stock markets have generally performed very strongly since 2003, with Brazilian, Russian and Indian indices all up by around 150 percent over that period. China is the one exception, where the idiosyncrasies of the local market have led to lacklustre performance. China provides a warning that the local market may not be the best investment vehicle for the local growth story. BRICs market capitalization continues to climb, currently at close to 4 percent of the global total, and Russian and Chinese equity offerings were a key feature of the global equity calendar in 2005.

The BRICs account for 18 percent of global oil demand, and their share is moving steadily higher. This dynamic still has a long way to run, with the next decade in particular the likely point of maximum pressure on energy and other natural resources.

. . . and Politics
As the BRICs' economic impact is growing, so is their political clout. Although the G8 is still formally dominated by the U.S., Europe and Japan, in practice it has begun to widen its scope. China has been invited to G8 summits for several years; the July 2005 summit included the heads of India, Brazil, Mexico and many African countries. Russia holds the G8 chair's position for the first half of 2006. The rapid growth of the BRICs since the start of the decade, in our view, only strengthens the case for a formal reform of the G8. The BRICs have also begun to exercise their political muscle in other fields, including energy security, intellectual property and agricultural policy.

India's Place in the BRICs Dream
As I discussed earlier, within the BRICs Dream, India has the greatest growth potential of the four. We estimate that if India pursues the correct policies, then India can grow on average by more than 5.5 percent per annum over the next 45 years. We estimate that by 2050, India’s GDP could be around $25 trillion, 50 times bigger than today. By 2032, India could have overtaken Japan to become the world's 3rd largest economy. It will have overtaken each of the major continental European economies sometime during the previous decade.

What is the reality about the BRICs dream? Indeed what is the reality about India’s role and potential? In December 2005, we developed a set of growth environment scores, GES as we christened it, as a way of assessing countries readiness to deliver on their growth potential. It is one thing to have big potential, it is quite another to achieve it.

Our BRICs Dreams are based on long-term demographic trends and the scope for growth driven by productivity catch up. The GES scores are designed to assess countries readiness for delivery on the productivity potential. They consist of 13 different variables including micro economic and social data, including educational standards, rule of law and corruption. We have calculated scores for 170 countries both developed and developing. China scores the highest of the BRICs, coming in 53rd Russia is next at 81st then Brazil at 95th with India just behind at 97th. India is the lowest of the BRICs, this means that India has the biggest potential but the most to deliver. Lots of things need to change especially on the micro front. For example, it is popularly assumed that India's education is the biggest advantage it has over the other BRICs. In fact, it scores the lowest, as the best education is only available to the elite.

As with anything, there are two ways of looking at India’s place in the BRICs Dream. The optimistic way to think of all the exciting changes that may lie ahead in order for India to deliver.

Here’s hoping!

Jim O’Neill is Head of Global Economic Research for Goldman Sachs. Jim oversees all the firm's economic research and the output of its team all around the world.
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