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George Magnus, expert on emerging markets and former senior economic adviser, UBS Investment Bank, London and Author of ‘Uprising’, speaks to The BRICS Post at SPIEF 2013 in St Petersburg.
Question: You have argued that emerging economies will stall on a development plateau until they switch to more advanced economic models. What are these “smart economic models”?
Magnus: If you think about what has happened in Russia since the 1990’s, China since 1995-97 and India since 2000 – the economics of ‘catching up’ is about using labour, using it more efficiently, so the physical bid of getting high growth is what we are celebrating – but that’s looking backwards.
Looking forward, my belief is that these models will not work anymore, because you’ve done a lot of things over the past 20 years, you cannot do them again. So you have to think about how growth sustains itself in the future. And that’s really about trying to get more out of training, skill, education, institutions, innovations, technology, all things that are really difficult.
I’m not saying it’s easy to grow from income per head $2,000 to $12,000. It’s quite difficult – things have to go right. That’s what I mean by ‘smart growth’ – you can’t rely on the same things that you used in the past.
Question: What do you think holds the BRICS together?
Magnus: That was a very clever marketing ploy by Goldman Sachs coining the BRICS acronym. And obviously in English the word ‘brick’ means very solid and robust. The BRICS though are quite different from each other.
India is a relatively low income state, but with sophisticated medical technology, software etc. Brazil and Russia are basically oil exporters, energy and primary product exporters. China is a middle-income manufacturing country. And South Africa is a raw-material producer too. Economics is their strongest unifying factor, I would say.
And of course demographically – they are all very different – Russia has a declining and ageing population, China is a rapidly aging country, India and Brazil are what we call ‘demographic darlings’ – they should be able to give us huge potential in the future if they can create jobs, tackle lower income inequality and raise their investment rates. Actually Brazil is a unique country for middle income – with very, very low savings and over-leveraged banks.
All of the BRICS countries are so different and there is no single agenda – this is what they all need to do.
Question: Why do we hear so much about the BRICS as drivers of global economic recovery?
Magnus: What holds them together is that they are not Western economies. When Jim O’Neill coined the term, it was the very beginning of China’s take-off after the 2000’s. But I think what holds them together now is obviously the financial crisis of 2008-09.
And the Western model of finance now looks mishandled, abused, flawed – nobody wants that kind of laissez-faire financial model which put the west into the worst financial crisis in over 60 years.
The emerging markets generally find good reason to align together as they are a rising economic force. And because the relative position of Europe and the US is declining to some degree.
Question: What about the idea of the Brics Bank?
Magnus: The creation of the Brics Bank is a natural development – “you won’t let us in, we’ll do it ourselves”. So we will see.
The BDB is not capitalised, it’s too early, it doesn’t have a landing programme. In English, we say – “From a small acorn you get big oak trees”. So maybe this will be a small acorn and in the future it will become a more substantive organisation to rival the IMF. I wish though that the Europeans and the Americans give ground – because the existing institutions are good enough – they have experience, infrastructure, people and money.
Question: But existing financial institutions also have problems…
Magnus: They do, but they don’t want to give up representation.