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are antithetical to a free market. Consequently, liberalizing an economic system requires a government to legislate antitrust laws that encourage e ncourage the development of industries with as many competing businesses as the market can sustain. In such industries, prices are kept low by the forces of competition. By enforcing antitrust laws, governments can prevent monopolies from exploiting consumers and restraining market growth.
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Antitrust legislation outlaws monopolies in order to promote free competition in the market market place.
Meet the BRICs he opening case for this chapter highlighted the accelerating success of emerging economies.79 The focus of attention is now squarely on the vanguard of emerging economies, the so-called BRICs: Brazil, Russia, India, and China. The BRIC countries, although much larger in scale and scope than other emerging markets, represent trends that are developing throughout the world. Many presume that where the BRICs go, both good and bad, others will follow. As we look at the emergence of the BRICs, we discuss the implications for the economic environment as well as for company activity. Then, to close, we’ll identify trends that threaten to crumble the BRICs and how their leadership is responding.
T
CASE
Changing of the Guard First off, it’s critical to remind oneself where the BRIC countries were just 20 or so years ago. Brazil was an economic basket case suffering hyperinflation, Russia was in lockdown behind the Iron Curtain, India was a socialist country that had kicked out IBM and Coca-Cola, and China was recovering from the bedlam of the Cultural Revolution. Presently, at current trends and with reasonable projections, over the next few decades Brazil, Russia, India, and China will become large, powerful players in the world economy. (See Figure 4.8.) Originally,, some thought it would take until 2050 before t he BRICs bypassed today’s rich Originally countries. The global meltdown, however however,, fast-forwards the schedule; whereas C hina, India,
FIGURE FIGU RE 4.8 4.8 Th The e Larg Larges estt Economies in the World: 2050
GDP (2003 US$bn) 50000
Current projections see the economic order of the world changing dramatically over the next generation. By mid-century, China will likely claim the top rank, followed by the United States and India.
45000 40000 35000 30000
Source: Dominic Wilson and Roopa
Purushothaman, “Global Economics Paper No. 99: Dreaming with BRICs: The Path to 2050” (Goldman Sachs, 2005), at www.gs.com www.gs.com (accessed October 15, 2007).
25000 20000 15000 10000 5000 0 a n i h C
s e t a t S d e t i n U
a i d n I
n a p a J
l i z a r B
a i s s u R
m o d g n i K d e t i n U
y n a m r e G
e c n a r F
y l a t I
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and Brazil (the so called BIC set) are growing, the economies of Germany, Japan, the United Kingdom, and the United States are shrinking. Unquestionably, growth will resume for the latter. Still, it will likely fall short of that in the emerging markets, given their aging workforces and falling productivity rates. In the meantime, the speed of the BRICs’ economic recovery has led some to see the global economic crisis as a pivotal milestone in the distribution of economic power. So, again, thinking of where the BRIC countries were 20 or so years ago and then projecting the same trend line out 20 years from today makes for, depending upon your perspective, an astonishing or worrisome outcome. Certainly the current economic crisis makes any time line for the changing of the guard speculative. It does, not, however change unfolding trends that will culminate in the BRICs housing more than 40 percent of the world’s population, holding a combined PPP-adjusted GDP of nearly $18 trillion, and completing the comeback of the emerging economies. Moreover, the current crisis suggests that the most disruptive phase of the transition will take place over the next decade.
Changing Markets The BRICs, like many Bottom of the Pyramid markets, are on the verge of rapid market growth. Historically, consumer demand takes off when GNI per capita income is between U.S. $3,000 and $10,000. The first economy to hit those levels was Russia; China, India, and Brazil are steadily heading there—and if adjusted for purchasing power, only India has yet to cross this threshold. All of the BRICs, save Russia, have rapidly growing middle classes whose demand aspirations are changing quickly. Analysts predict that the middle class will expand from 50 million to 583 million people by 2025. More immediately, between 2005 and 2015, over 800 million people in the BRICs will cross the annual income threshold of U.S. $3,000. Entry into the middle class, besides permitting more consumption, often moves people from buying generic necessities to branded goods. By 2025, approximately 200 million people in the BRICs will have annual incomes above $15,000. And as income grows, so too does demand for what once were inaccessible luxuries. For example, there are only two cars for every 100 people in China, as opposed to 50 cars per 100 Americans. By 2040, China’s car ownership will likely rise to 29 cars per 100 people. The total number of cars in China and India combined could rise from around 40 million today to 750 million by 2040, thereby accounting for more than half of all cars on the world’s roads. The recent introduction of low-price autos like Tata’s Nano—a small, affordable, rearengined, four-passenger car aimed primarily at the Indian market and costing U.S. $2,100— may prove estimates conservative. Matching car ownership rates in the United States, for example, would move the upper bound from 750 million to north of a billion cars. Similar trends in virtually every product class, on the face of it, suggest market potentials last seen at the start of the Industrial Revolution.
Big Plans but Big Problems Notwithstanding the spectacular performance and potential of the BRICs, many are skeptical. In principle, observers note the endemic problem of recency bias, which is the delusion that current trends will continue into the future. History shows great mistakes made by companies, executives, investors, and officials who extrapolated the present into the future. Inevitably, economic growth rates slow down, given an increasing base. Moreover, advantages such as cheap labor or low-cost capital wane as growing demand increases marginal price pressures. And always on the horizon is a black-swan event—a large-impact, hard-to-predict, and rare event beyond the realm of normal expectations that resets the game—such as the collapse of the Soviet Union, the emergence of the Internet, and the global financial crisis. Despite high-octane economic growth, the BRICs face futures of widespread poverty and distorted income distributions. By 2025, the income per capita in today’s richer countries will
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exceed U.S. $35,000 for more than a billion people. In contrast, perhaps 2 to 4 percent of the nearly 3 billion folks in the BRIC economies will hit that threshold. Longer term, income per capita in the United States is projected to reach $80,000 by 2050, while China will likely be just over $31,000, Brazil about $26,600, and India just $17,400. With the possible exception of Russia, hundreds of millions of people in the BRICs will be far poorer on average than individuals in Germany, France, Japan, Italy, Canada, and the United States. Consequently, for the first time in history, the largest economies in the world will no longer be the richest when measured by GNI per capita. Each of the BRICs struggles with its own particular problems. Today, Russia is probably the most vulnerable of the set. Russia is dependent on various commodity exports, most notably oil, for revenue. Amid the global economic crisis, oil fell from U.S. $147 per barrel in July 2008 to below U.S. $40 in March 2009. This dropped Russia into a deep recession, with GDP shrinking almost 10 percent in the first half of 2009. Additionally, Russia is considered far riskier by foreign investors because of escalating tensions with the West and its failure to create a legal and political infrastructure that respects the rule of law. Long term, besides its aging and declining population, Russia’s uncertain government, environmental degradation, and crumbling infrastructure confound growth projections. Some caution replacing the BRIC notion with that of the BICs. Brazil’s economic potential has been anticipated for decades, but it has struggled to achieve expectations due to problems in income equality, productivity, and education. India, in addition to other pressing economic and political challenges, has immense infrastructure shortfalls and hundreds of millions of extremely poor people. China’s particular interpretation of the rule of law, rights of citizens, environmental sustainability, and principles of democracy poses problems. Too, China faces a steadily closing window of opportunity; by 2020, China will have the largest number of both old and very old people on earth. Finally, so-called green constraints shadow the bright futures of all. The emergence of the BRICs sorely challenges the sustainability of the global environment. Global warming, diminishing raw materials, and escalating pollution suggest that there is a finite limit to how much the BRICs can develop before exceeding the capacity of the global economy to supply them and of the environment to support them. More worrisome, notes the Worldwatch Institute, is the fact that if China and India, to say nothing about Russia and Brazil, were to consume resources and produce pollution at the current U.S. per capita level, we would require two planet Earths just to sustain their two economies.
Mixing Mortar Leaders of these countries have not been idly sitting by, watching these threats ruin their future. Overlapping ambitions and agendas have led the BRICs to develop bilateral and multilateral cooperation. India and China, the world’s two most populous countries, formed a strategic partnership to end a border dispute and boost trade. The agreement eased decades of mutual distrust between the two as a result of a 1962 border war. “India and China can together reshape the world order,” Indian Prime Minister Manmohan Singh proclaimed at a ceremony for his Chinese counterpart, Premier Wen Jiabao, at India’s presidential palace. Similarly, indications show a strengthening of ties between Russia and China. Bilateral China-Russia trade was $58 billion in 2008, up from $20 billion in 2005, and on its way to $70 billion by 2010. Both countries are leading members of the Shanghai Cooperation Council, one of the most influential economic centers in the world. In many people’s eyes, Russia, by rolling back democracy and reviving its imperialist past, is now more politically aligned with the one-party state of China. Spearheading these efforts was Prime Minister Putin of Russia, with his goal to build “a new world economic architecture” that would reflect the rising power of emerging economies and the decline of the old heavyweights like the United States, Japan, and leading European countries. The global credit crisis has accelerated these trends. Steadily, the BRIC leaders have been forming alliances that amplify their political, legal, economic, and strategic influence. They have increasingly tried to bypass the U.S. dollar as the means to settle international
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Here we see, moving left to right, Presidents Luiz Inacio Lula da Silva of Brazil, Dmitry Medvedev of Russia, Hu Jintao of China and Indian Prime Minister Manmohan Singh clasping hands during a group picture shoot in Yekaterinburg at the summer 2009 BRIC leaders summit. Leaders from the world’s top emerging economic powers met for their first summit to plot a strategy to increase their clout amid the global crisis. Source: Philippe Lopez/Getty Images,
Inc.
transactions. The dollar, ever since the Bretton Woods Agreement of 1944, has function ed as the world’s reserve currency; as such, it is widely held by governments and institutions around the world and is used to finance international transactions, including trade and the payment of debts. Beginning in the spring of 2009, however, China and Brazil agreed to no longer use the U.S. dollar in doing business, instead adopting a yen-cruzeiro currency-swap agreement. China was involved in similar negotiations with Russia, again looking to eliminate the U.S. dollar as the basis for bilateral trade. To cap matters, the leaders of Brazil, Russia, India, and China met in Russia in June 2009 at the first ever BRIC Summit to discuss, among other issues, the role of the dollar in the global financial system and, some suspected, to champion a new supranational currency. In the backdrop was a sense, expressed by Prime Minister Putin, that “The world is changing before our very eyes. Countries that seemed hopelessly backward only yesterday are becoming the world’s fastest-growing economies today.” Emerging economies, led by the BRICs, no longer wanted simply to be part of the world’s outdated architecture—instead, they wanted to go forward into a brave new world largely unencumbered by the past. The Road Ahead Inevitably, many speculate that the BRICs might turn into bricks in their march to miracle economies. Granted, their governments have developed economically sensible policies, opened trade and domestic markets, and begun building institutions that support economic freedom. Still, Russia’s struggle shows how quickly conditions in one economy can fall out of sync. Would the same hold for the others, people wondered, as they struggled to transition from command-controlled economies to freer markets? This chapter noted the importance of four preconditions of consistent growth—namely sound macroeconomic policies; political institutions committed to transparency, fairness, and the rule of law; openness to trade and capital; and strong education systems. By and large, the BRICs, along with ot her emerging markets, meet the general spirit of some of these standards. None, however, meets all. The fact that they continued to prosper as their richcountry counterparts struggle suggested that either conventional understanding of markets is flawed or the BRICs still face high hurdles in reforming their economies.
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In summary, the emergence of the BRICs signals that the next generation of economic development of the global economy will be a thrilling ride. Even if the BRICs come close to reaching their apparent potential, their success will redefine the structure of economic environments, patterns of growth, and dynamics of economic activity. QUESTIONS 1.
Map the likely evolution of the BRICs. What indicators might companies monitor to guide their investments and actions?
2.
What are the implications of the emergence of the BRICs for careers and companies in your country?
3.
Do you think recency bias has led to overestimating the potential of the BRICs? How would you, as a manager for a company assessing these markets, try to control this bias?
4.
How might managers interpret the potential for their product in a market that is, in absolute economic terms, large but, on a per capita basis, characterized by a majority of poor to very poor consumers?
5.
In the event that the BRICs fail to meet projected performance, what would be some of the implications for international business?
6.
Compare and contrast the merits of GNI per capita versus the idea of purchasing power parity, human development, and green economics as indicators of economic potential in Brazil, Russia, China, and India.
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The economic environment of a country shapes its attractiveness to foreign investors. Managers assess economic environments and forecast market trends to make better investment choices, operating decisions, and competitive strategies. Managers use several indicators to assess an economic environment; meaningful indicators include growth rates, income distribution, inflation, unemployment, wages, productivity, debt, and the balance of payments. Managers improve economic analysis by identifying meaningful indicators and then understanding how they interact with each other. The benefits of doing business in a country are directly influenced by the size of the market (GNI, GNP, GDP), the present income of consumers (GNI, GNP, or GDP per capita adjusted for purchasing power parity), and the likely future wealth of consumers (in terms of income distribution, human development, and sustainability). Green measures of economic performance take into consideration the ecological welfare of the world in the belief that sustainable development requires managers to heed the idea that economic activity must ultimately “meet the needs of the present without compromising the ability of future generations to meet their own needs.” The Bottom of the Pyramid refers to the billions of people living on less than a few dollars per day yet whom some see as the next market frontier of the global economy.
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The type of economic system is a strong predictor of a country’s present economic performance and future economic prospects. The economic system determines who owns and controls factors of production and, by extension, the price and quantity of goods and services. Economic freedom is the absence of government coercion or constraint on the production, distribution, or consumption of goods and services beyond the extent necessary for citizens to protect and maintain liberty itself. In a market economy, the goods and services that a country produces, and the quantity in which they are produced, are not planned. Rather, price and quantity, conveyed via the invisible hand, determine supply and demand. In a command economy, the government plans what goods and services a country produces, the quantity in which they are produced, and the price at which they are sold. A mixed economy includes some elements of market and command economies. Market forces as well as the government play a significant role in directing the investment activities of public and private enterprise and the consumption behavior of individuals. Economic freedom is the degree to which governments intervene in the economic environment. Free countries tend to have higher economic growth, higher standards of living, and more macroeconomic stability than do less-free or repressed countries.
