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Ruchir Sharma, the head of emerging markets and global macro at Morgan Stanley Investment Management, is not particularly enamoured of the BRICs. He has written extensively in Foreign Affairs about the “Broken BRICs” and he recently wrote a book Breakout Nations: In Pursuit of the Next Economic Miracles that was excerpted by Foreign Policy. Sharma’s case, essentially, is that the BRICs are economic has-beens who will inevitably lose ground to a rejuvenated United States. His indictment of the BRICs, in shortened form, is as follows:
“China has simply grown too comfortably middle class, and far too dependent on building new roads and factories, to continue growing at a double digit pace. Russia’s extreme reliance on oil and gas has produced a class of petro tycoons who have turned Moscow into a capital of decadence reminiscent of the last days of Ancient Rome. Brazil is so afraid of a return to the economic volatility of the 1980s and 90s that it has focused almost exclusively on protecting people from economic pain, producing one of the weakest growth records among big emerging markets. India, once hyped as the next China, has given way to gloom as growth slowed in the last year, but its real prospects are very difficult to assess, because it is fragmenting into a collection of state economies.”
To the extent that Sharma is pushing back against a straightforward extrapolation of linear trends (“China grew at 10% during the 2000’s, so it will grow at 10% forever!”) his case is valuable. In my writing on Russian demography, I have consistently argued that linear projection is extremely problematic and that analysts must constantly incorporate new data and new observations into their analyses lest their theories become badly out of step with reality. This happened with theories of endless Russian depopulation and decline, and it has arguably happened with theories of the immediate and problem-free rise of the BRICs.
Sharma, however, seems to be arguing against a straw man, an argument that not even the most enthusiastic boosters of the BRICs were actually making. I don’t know of any noteworthy figure, even among the “declinist” school against which Sharma rails, who suggested that history would forever proceed exactly as it did during the 2000’s and that the BRICs meteoric rise of that decade would continue indefinitely. Indeed if you listen to the pronouncements of BRIC ministers, particularly ministers of finance and trade, they do not usually strike one as arrogant and conceited, but as modest and focused on solving problems, which there is no shortage of.
The case for the growing importance of the BRICs is a far more subtle one than the case that Sharma attempts to disprove. As always, injecting a bit of data into the discussion is helpful. Below is a chart showing what has happened to the purchasing-power-parity adjusted GDPs of the United States and the BRICs since 2000 and to their overall shares of the world economy. To create the charts I used World Bank data for 2000-2011, consensus growth figures for 2012, and conservative forecasts, based closely off of IMF projections, for 2013. The extent to which the United States has already been overtaken by the BRICs is nothing short of stunning:
In the excerpt from his book, and in his wider writings about emerging markets, Sharma writes about the prospect of the BRICs passing the United States as some sort of impossible dream: something that might happen in the future if certain trends continue and if the four countries that make up the grouping continue to have “good luck”. But, as I think the charts make clear, the BRICs have already supplanted the United States in terms of the size of their economies, and all reasonable forecasts are that they will continue to do so for the foreseeable future. To a large extent, Sharma is fighting a battle that the United States has already lost.
And, looking forward, it’s hard to see how the United States could hope to recoup the massive amount of ground that it has already lost to the BRICs. Even the most pessimistic short and medium-term growth forecasts for China and India have them at around five per cent for the next decade, while most forecasts are more optimistic. While this is a clear deceleration from the stratospheric rates they enjoyed during the 2000’s, and while Sharma harps on this deceleration as sign of impending doom, it’s worth remembering that five per cent growth is a lot faster than what the United States is now capable of. For comparison’s sake, 2000 was the last year that the US’ GDP grew by four per cent or more (the next best performance was 2004’s 3.5 per cent but, in retrospect, that was in the midst of a totally crazy and unsustainable real estate bubble).
Viewed over the long term, the slowdown in American GDP growth is remarkable:
America’s GDP growth has been slowing for several decades across a wide variety of external situations and under both Democratic and Republican presidents. Additionally, the recovery from the 2008-09 economic crisis, which itself was much sharper than previous recessions, has been far slower than in past experience. If projections hold, American GDP growth will be right around the two per cent mark for the entire period 2011-13: decent when compared to Europe, but remarkably lousy when compared with the BRICs.
Here’s another way to think of it. In the period 2000-2012, the United States outperformed the WORST performer among the BRICs only three times: Brazil in 2003 and 2012, and Russia in 2009. In every other year during that more than decade-long stretch, the United States performed worse than all of the BRICs.
It’s bit of a cliché to say that past performance is the best predictor of future performance, but when you take a historical view of the United States economy it’s impossible to miss the story of its steadily declining growth. It’s possible that this decades long trend, which has persisted despite a broad range of macroeconomic and trade policies and in a bewildering array of external environments, could, as Sharma suggests, suddenly be reversed by the use of cheap shale gas. Cheaper energy, after all, is better than more expensive energy, and cheap domestic energy is the best possibility of all.
However, “solving” the problems of the American economy with cheaper energy would only be possible if those problems were actually being caused by expensive energy. Otherwise it’s one concern among many, and the amelioration of a minor inconvenience not a major disaster. As a cursory look at any graph of oil prices will show you, there is very little, if any, causal relationship between commodity prices and American economic growth: there were years where energy was cheap but growth was weak, years when energy was expensive and growth was robust, and years where both were middling.
Access to plentiful energy clearly isn’t going to hurt the American economy, and I expect its overall impact will be moderately simulative. But the roots of American economic decline, including the steady withering of the middle class, the concentration of wealth in ever-smaller circles, the growth in student loans, and an over-reliance on consumer debt, are much deeper than high prices for natural gas, and cannot be “treated” by fracking any more than an aggressive tumor can be “treated” with antibiotics. Instead, fixing the problems that are limiting American growth will require compromise, reasonableness, and foresight, precisely the values that are totally lacking from Congress. Instead, what seems likely is that the US will bounce around from one self-inflicted crisis to the other just as it had been since Obama was elected.
The United States will clearly remain an extremely wealthy and powerful country and it will “decline” in a relative, not an absolute sense. But relative decline is decline nonetheless, and by this standard the United States is noteworthy because of the massive decline in its share of World GDP that has already happened. There are some emerging market triumphalists who have gone a bit over the top in their promotion of the BRICs and who have underestimated the difficulties inherent in running such enormous countries. However, when you weigh all of the evidence, when you look at data about GDP growth, it’s hard to believe that the United States is poised for success, and it’s very easy to see how the problems that have plagued it for the past 13 years will continue to haunt it.