July 16, 2013 | by JAN HOFMEYR
The recent protests in Brazil show that GDP growth alone does not suffice for sustainable development. The emerging economies must invest in better governance capacities to foster inclusive growth and social justice.
Since the acronym was coined by Goldman Sachs’ Jim O’Neill in 2001, the story of the BRICs (later to become BRICS) has almost exclusively been relayed in gross domestic product (GDP) terms. It has been one that emphasized size and scale where magnitude and margins propelled markets.
By now the statistics are all too familiar: In 2013, Brazil, Russia, India, China and South Africa together contributed 25 per cent to global GDP, conducted 15 per cent of global trade, and hosted 40 per cent of the world’s population. By 2016, China is expected to overtake the United States as the world’s largest economy in purchasing power parity terms.
The turbo-charged growth in these countries not only made many fabulously wealthy, it also catapulted millions out of poverty into the middle class. In Brazil, for example, Lula’s Bolsa Familia reduced the incidence of poverty by 27% since its inception. The rapid extension of government grants and pensions in South Africa also lifted millions out of poverty. And most remarkably, in China 680 million people escaped the ranks of the poor between 1981 and 2010; a decline in poverty rates from 84% to 10%.
Despite incremental gains in poverty reduction, the scale remains substantial
These achievements were the direct result of superlative growth rates. Yet much more needs to be done. In Brazil around 21% of the population still live on less than $2 a day, in South Africa it is around 34%. And proportions may sometimes deceive when they are not contrasted against the real numbers. In South Africa, for example, the 4% decline in the incidence of poverty from 34% to 30% between 1993 and 2008, still translates into an 8 million increase in the overall poverty headcount during this period.
Of equal concern has been the exponential growth in income inequality. Although not uncommon in contexts where rapid growth occurs from a relatively low base, consistent economic expansion is required to even out its effects over time. Current estimates of the Gini coefficients (a measure of inequality where 1 represents absolute inequality and 0 absolute equality) of China, Russia and India stand at 0.47, 0.39, and 0.44 respectively. Brazil, once regarded as the most unequal economy in the emerging world, offers the only exception to the rule. Through successful social policy interventions the country’s government brought down its coefficient from 0.61 in 1990 to the present 0.54. Today, this title belongs to South Africa with its 0.63.
The fight against inequality may, however, become increasingly complex in years to come. Sustained growth at the rates that these countries have enjoyed until recently has come under threat. Although the BRICS economies showed great resilience during the global crisis, they have struggled to regain their pre-recession luster. From a high of 7.5% in 2010, GDP growth in Brazil dropped to 0.9% in 2012; in Russia it declined from 8.5% in 2007 to 3.5% in 2012; in India from 9.7% in 2010 to 5% in 2012; and in South Africa from 5.6% in 2006 to 2.7% in 2012. While China achieved 7.8 per cent last year, it is almost half of the 14.2% it achieved five years earlier in 2007.
If economic growth is the only salvation, the BRICS are in for some trying times
This drop in growth will have profound implications. Brazil, South Africa and India all continue to have considerable backlogs in terms of their power generation capacity and road and rail infrastructure. Brazil and South Africa also have to factor in high expenditure to cater for extensive welfare systems that to some extent guarantee social stability. Together with Russia these two countries are also still highly reliant on resource exports to large economies in the west and, of course, China. China, for its part, will struggle to profit from exports of manufactured goods as it did in the past.
If we assume that steep upward growth trajectories will be the only source of their salvation, then the BRICS economies may be in for more trying times up ahead. Some of them may have to interrogate the sustainability of the development models that have given them so much mileage up until now.
Take the example of South Africa, where the ruling ANC has resolved to eradicate what it calls a ‘triple complex’ of poverty, inequality and unemployment. Its primary focus has fallen on the latter, given that its high unemployment rate underpins stubbornly high levels of poverty and inequality. In 2012, the country released its first long-term national development plan, Vision 2030. In its estimation South Africa will have to grow at an average of 5.4% per annum from 2012 until 2030 to reduce its unemployment figure to 6%.
Yet, given the abovementioned global conditions and the fact the country could only manage average growth of 2.9% in the three years subsequent to the recession (0.9% during the first quarter of 2013), the model will either have to be revised or that targets will have to be adjusted. Lower growth has, however, meant lower tax revenues, bigger deficits, and thus sharply rising debt servicing costs, which could crowd out the scope for these critical investments.
Brazil and India in particular face very similar types of challenges. At the fifth BRICS summit Summit in Durban, South Africa, in March this year, some of the outcomes suggest an initial response that will involve a pooling of resources, greater cooperation on global governance, strengthening of trade relations and technology transfer, and the far-reaching agreement on the setting up of a BRICS Development Bank.
General elections in three BRICS countries in 2014 will be vital for domestic policy choices
But if the era of size and scale is indeed over, then the BRICS countries will have to focus on the substance and quality of domestic growth. Emphasis needs to be placed on resource efficiency, targeting improved spending and a tougher stance on corruption, but more critically also policies that promote inclusive development and greater social equality.
Whether this materializes will largely depend on two important management criteria, according to the latest BRICS study of the Bertelsmann Foundation’s Sustainable Governance Indicators: steering capability and policy implementation capacity. Both entail the capacity to act decisively with as little internal resistance as possible. The prospect of general elections in three of the five BRICS in 2014, India, South Africa, and Brazil will have a definite influence on policy choices. In all three public discontent with deteriorating economic circumstances may force the hands of politicians to promise more populist, but ultimately unaffordable policies.
India’s general elections will be polarizing and hotly contested. Current projections point to two possible coalition scenarios, neither of which will be able to implement policy without having to make important concessions that will have a bearing on their impact. While the ANC is certain to win the South African general elections once again with an outright majority, the strongest threat to policy stagnation will come from powerful unions inside its influential alliance partner, the Congress of South African Trade Unions, who strongly oppose the newly released National Development Plan. Massive protests this June in the streets of Sao Paolo and Rio de Janeiro against rising living costs will also signal warning signs to the Roussef government in Brazil, which until recently was regarded as a shoe-in at next year’s polls.
China (leadership elections in 2013) and Russia (general elections in 2011 and presidential elections in 2012) may be able to manage the policy process from a less cumbersome and more consolidated position. What remains to be seen is whether their quasi-inclusive institutions will be able to contain increases in public discontent with material pressures, without state force, should it come to bare.