24 July 2011

BRICS: A False Economic Dawn?

The economies of the western world are struggling to emerge from an ongoing crisis of their own governments' making. Big global investors have placed much of their hopes on the BRICS nations: Brazil, Russia, India, China, and (sometimes) South Africa. All of the BRICS face serious problems, both domestically and regionally. Is it wise to base one's investment hopes on countries which are facing so much turmoil of all kinds?
Poverty is a dangerous problem for any country to have, as it not only prevents people from maximizing their potential, but it also represents a dangerous store of resentment and potential political instability. Poverty is a significant issue in Brazil and India, as roughly one-quarter of those populations live below their country's poverty lines.

Unequal distribution of wealth is a similar problem, and perhaps even more problematic from an investment statement as a voting populace may look towards politicians that promise to address this inefficiencies with business-unfriendly practices (as has happened in Venezuela). Brazil scores very high on lists of inequality (as measured by the Gini coefficient), and China is quite high as well (many people do not realize how poor the Chinese living in the countryside are). In comparison, Russia and India are much closer to the standards of the Western world in terms of income distribution.

Where there are poor people and histories of authoritarian governments, there is often corruption as well. By its very nature, corruption does not usually leave a clear paper trail, so measuring it is difficult. Transparency International's Corruption Perceptions Index may not be a perfect methodology, but its insights are interesting all the same.

Brazil's ranking of 69 is too low to be seen as good, but it is the best among the BRICs - Russia scores the worst at a very low 154, while China and India come in at 78 and 87, respectively. In Russia, is not uncommon for organized criminals to own key companies (or control entire industries) right alongside government officials, while Chinese officials are often paid to look the other way when it comes to violation of laws and standards, securing contracts, or obtaining privileged access to capital or resources.

Rule of Law
The idea of the rule of law is closely related to corruption, but it in this case it refers to the clear and consistent application of laws and regulations to all parties in a country. In Russia, for instance, it is commonplace for countries that are "friendly" with government officials to get preferential treatment and for government officials to punish uncooperative companies through pseudolegal means. Although the worst excesses of Russia's erratic application of rules and laws seem reserved for internal matters (the infamous Yukos case, for instance), many Western companies like BP have run afoul of shifting rules and arbitrary enforcements.

Though not the same as rule of law, excessive rules and law can also be a significant problem. India is a good example of the inconsistencies and frustrations to be found in emerging investing. While India has a well-developed democracy, it also has a crippling bureaucracy, byzantine rules and regulations, and a depressing level of corruption (though a promising trend of improvement here). All in all, then, it is not hard to start a very small business in India, but trying to establish a large scale enterprise can be especially difficult.

While Brazil, India and China are thought of as emerging countries forever putting up new buildings and public projects, Russia has the opposite perception - a country that has seen its physical and intellectual infrastructure hollowed out by the collapse of the Soviet system and the inconsistencies of government policy since then. Much of Russia's infrastructure is frankly not in the best of shape and this makes transporting goods and conducting business more challenging. Along similar lines, while Russia used to turn out large numbers of talented engineers, the university system has fallen into disrepair and disrepute and Russia is often challenged to find the motivated and talented people it needs to compete in advanced industries.

India also suffers from a very large population, quite a lot of poverty (one-quarter of its people living below the country's own poverty line), and a relatively poor infrastructure. Access to clean water and sanitation is still problematic in some rural areas, and the traffic jams and overcrowded railways are legendary. _SFGate
Sick as a BRIC

Understanding Third World Corruption: India

Headwinds for Emerging Markets

Next crisis to arise in BRICS

The Al Fin blog has devoted a lot of space to the underlying problems of China and Russia. But readers should take a good look at the article on Indian corruption linked above. Brazil is a special case, since it enjoys proximity and relatively good relations with North American markets and business. But the underlying weaknesses of Brazil should encourage caution in prospective investors. South Africa would be more properly seen as a nation being readied for a downward trajectory -- similar to Zimbabwe's -- rather than a nation of great promise.

You cannot blame big investors and analysts for trying to find economic promise somewhere in the world. That is what they do. But you cannot believe very much of what they tell you either, when being sold investments. If the governments of Europe, North America, and Oceania have killed the goose that lays the golden eggs, by chasing after energy starvation, carbon hysteria, and a false dream of perpetual affluence and security without work, how stupid is it for those same countries to expect nations which are essentially still members of the third world to bail them out of their self-made quagmires?

The king troublemaker is the US, of course. Obama's quest for infinite government debt -- underwritten by overseas investors -- is a folly of unprecedented proportions. Obama's desire to flood the US with uneducated, impoverished, poorly assimilable immigrants from the third world -- to boost his political power and that of his cronies -- is another great folly. Obama's ongoing agenda of energy starvation and the continued suppression of a wide array of potential energy sources, is another sign of an underlying destructiveness inside the US President which is disturbing. Has the US ever suffered from such an administrative agenda of apparent national suicide as this one?

The BRICS have promise so long as they are being pulled up from the outside by stronger economies which need BRICS exports. If the world's superpower and the other great markets of the global economy sink themselves via bad government, it will be no use looking to the BRICS for long term economic redemption.

More: Brazil -- Nowhere to go but down?

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Blogger mopc said...

Comparing poverty in Brazil and India is very complicated given that Brazil has an income about 5 times higher than India, and 4 times lower than the USA, which means comparing Brazil to the USA is slightly less of a stretch. So the fact that both have a similar percentage of their pop living under their respective poverty lines mean very little, Mexico for instance has a lower percentage of its pop under its poverty line than the USA.

Tuesday, 26 July, 2011  
Blogger al fin said...

Unfortunately, one can learn very little about actual living circumstances by looking at the "poverty line." Instead, one must look at specific details. Sociologists, academics, journalists, and political activists are too lazy to do this.

The "poverty line" is an arbitrary construction determined for political purposes. Comparing "population below poverty line" between nations is futile, like resisting the Borg.

Wednesday, 27 July, 2011  
Blogger gtg723y said...

I would like to argue with your point that America is the king troublemaker. I would suggest Europe as the king trouble maker and some American's willing participants. I choose to find hope in the fact that my state is about to bring a new nuclear reactor online.

Monday, 01 August, 2011  

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