Reality Check On BRIC Stories

The Brazil-Russia-India-China acronym was first coined by Goldman Sachs economist Jim O’Neill.

Ostensibly, it’s a prediction that these four countries will take over the world because of the massive increase in their population, GDP and status as creditors to the developed world.

In reality, the BRIC economies are not as rosy as we might think.

Instead of focusing on GDP as the measure of a nation’s success, the real statistic we care about is real GDP per capita on a purchasing power parity basis.

In this statistic, the BRIC countries fall down in any reasonable assessment of their economic performance.

Let’s compare the BRIC GDP per capita with countries New Zealand would like to compare itself to economically:

What this tells us is that in order for the BRIC countries to truly say they’re economic powerhouses, they’ll need to more than double their real GDP per capita on a PPP basis to even surpass little old New Zealand.

With China currently slowing down, Russia propped up by oil prices, Brazil engaging in destructive monetary policy and India struggling to export anything other than call centre services I don’t see how this is going to happen.

Particularly when a key determinant of BRIC countries growth is demand in countries like the US, Canada, the European Union, Australia and New Zealand. If there is less demand for exports, growth plummets accordingly.

Because external debt must be repaid in foreign currency, export earnings are pretty important. So what do they look like per capita for the BRIC countries plus Greece for an illustration of relative position?

Interesting. Now, putting aside how external debt actually functions i.e. lots of rollovers and reissues from time to time, if all export earnings were applied to running down external debt, how long would it take different countries to do so?

This isn’t a completely out-of-left-field thought experiment – foreign currency has to come from somewhere.

A year has 365 days so Greece would have to apply all of its export earnings for almost 20 years in order to retire external debt whereas China would have to do so for just 8.5 months.

While this though experiment relates to gross exports as opposed to net margin made by exports – which can be enormous – it’s still indicative of how paying down external debt is almost impossible.

It has to keep on being rolled over and new debt issued to pay off the old debt. Both the public and private sector in the BRIC countries and developed countries have binged on debt for far too long.

At some point, there has to be a reckoning. It will be painful, and no amount of central bank intervention or fiscal policy responses can dull the pain of a real debt crisis.


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