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Brick gets pricked
The fifth BRICS Summit was held in March 2013 at Durban and concluded the first cycle. In this background, it is worth looking at how the BRICS nations will perform. If you thought that the BRIC (Brazil, Russia, India and China) will dominate the world, think again.
FOR PROOF, TURN to Ruchir Sharma. In his book, Breakout Nations, Sharma says that he believes that it may not be in the DNA of these countries to sustain growth and to meet the high expectation and the average growth rates of their income class. Here is a low down on what he has to say:


Brazil is the very opposite of China. Its interest rates are too high and its currency too expensive. Brazil hurriedly invested in constructing a welfare state rather than the roads and wireless networks of a modern industrial economy. The 1988 constitution guarantees free health care and university education and today the minimum wage is so high that it applies to every third worker. It’s sometimes said that supporting a welfare state is a rich man’s disease, but Brazil has a full-blown case without a rich man’s income. The low investment rates are incredibly low. For one it breeds inefficiency. For another, if a nation’s supply chain is built on aging factories supply cannot keep up with demand, and prices will rise.


Russia’s financial crisis of 2008 revealed that it lacks the institutional strength and political will to implement serious reforms.  Its failure to throw out its leader who has outlived his usefulness sticks out as a sore thumb.  Russian companies are not serious international players even in signature national products like vodka. A missing link in the economy is banking.  Russia has no truly modern banks.  The system is dominated by one big bank and very few Russians invest at home, so it’s tough to get loans of any kind.  The mortgage market is virtually non-existent, representing about 3 per cent of GDP.  Most Russians pay cash to buy a house.  Russians borrow so little that the total value of loans, as a share of GDP, is incredibly small.


Indians think that India’s population is now an unbridled asset. The argument is that India is a young nation. That by 2020 while the average Chinese will be 37 years old and the average European 49, the average Indian will be only 29. The assumption is that India will employ all of them because of its strong educational system and good links to the global economy.  While that’s right, India is already showing signs of a failed nation, including early-onset of overconfidence.

In India state governments matter because they control more than 50 per cent of government spending. With Indians first seeing themselves as citizens of a state than that of India, they are turning to regional parties. Voter turnout is significantly higher for regional elections than for national elections. As central power fades, India is again starting to look like a commonwealth of states with distinct identities and waning national consciousness.


China boomed by building roads, by developing telecom networks and by putting underemployed peasants to work in factories.  But today it has pumped too much money in real estate (in 2010 about 800 million square feet of real estate was sold in China, more than in the rest of the world combined) that things are becoming unaffordable.  Developers are building “ghost cities” – sky-high apartments that remain vacant because they are beyond the wallet of the Chinese worker. Chinese CEOs and big domestic inventors don’t share the outsider’s gung-ho optimism over China.

So are we to say that Ruchir has had a finger to tomorrow? Far from it. But given his wealth of experience as a globetrotter investor, it is good to hear him out. What lessons we wish to draw from it is of-course our choice.

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