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BRIC Countries in Comparative Perspective
Kristalina GeorgievaCountry Director, Russian Federation
St. Petersburg, 2006
Outline
n Importance of the BRIC countries for the World economyn BRIC countries today
¨ Demographic indicators¨ General economic indicators¨ Fiscal indicators¨ Institutional indicators¨ Business environment¨ Innovation and competitiveness
n Short and long-term outlookn Conclusions
Why are the BRIC countries important?
§In 2005 the emerging economies overcome developed economies by their share in the World GDP calculated at purchasing power parity.§The BRIC countries were the main driving force for GDP growth of the emerging economies. §Fast growing economies with the biggest source of labor; §They are changing the consumption and production pattern in the world economy;§As their influence on the global economy grows so do the risks for the sustainable world development;§Their role in the global policy is increasing as well the geopolitical importance for their regions and the world.
Demographic indicators: size and growth of population
Population: 2004 (millions)Average population growth:2000-2004 (annual %)
Source: World Development Indicators
These countries exhibit considerable variability with respect to population and population growth. Only Russia is experiencing an absolute population decline, which is expected to increase in future years as the population ages.
0 200 400 600 800 1000 1200 1400
Russia
Brazil
India
China
-1.0 -0.5 0.0 0.5 1.0 1.5 2.0
Russia
Brazil
India
China
Demographic indicators: age structure
Age structure of the population: 2004
Source: World Development Indicators
Russia has a significantly older population than the other 3 countries.
0
5
10
15
20
25
30
35
India
Brazil
China
Russia
Population ages 0-14, % oftotal
Population ages 65 andabove, % of total
Russia is the only country where until recently life expectancy was not correlated positively with strong growth in incomes
Gross National Income per Capita and Life Expectancy
500
1000
1500
2000
2500
3000
3500
4000
1998 1999 2000 2001 2002 2003 2004
US$
64
65
66
67
68
year
s
GNI pc Atlas m ethod current US$ Life expec tancy at birth
General economic indicators: GDP volume and GDP growth
0 1 2 3 4 5 6 7 8 9
Brazil
India
Russia
China
0 200 400 600 800 1,000 1,200 1,400 1,600 1,800 2,000 2,200
Russia
India
Brazil
China
Average GDP growth: 2000-2005 (annual %) GDP: 2005 (bln USD)
Source: World Development Indicators, World Economic Outlook
Most of these countries have been experiencing significant economic growth in recent years, particularly a number of those countries with relatively low GNI per capita.
GDP per capita: 2005 (USD)
0 1,000 2,000 3,000 4,000 5,000
India
China
Brazil
Russia
General economic indicators: current account and gross foreign reserves
Current account balance:2005 (% of GDP)
Gross foreign reserves:2005 (bln USD)
Source: World Economic Outlook
With the exception of India, BRIC countries exhibited current account surpluses in 2005. Russia’scurrent account is particularly strong due to high oil prices. China has accumulated foreign reserves that dwarf those of any other of these countries.
0 50 100 150 200 250 300 350 400 450 500 550 600 650 700 750 800
India
Brazil
China
Russia
-3 -1 1 3 5 7 9 11
India
Brazil
China
Russia
General economic indicators: inflation and unemployment
Average CPI inflation:2000-2005
Unemployment:2004 (ILO definition, %)
Source: World Development Indicators, World Economic Outlook, ILO
BRIC countries have achieved unemployment rates of close to or less than 10 per cent of the active population. But many of these countries still have significant disguised unemployment as surplus labor in the countryside or budgetary sphere.
0
10
20
30Brazil (2003)
India
Russia
China
0 5 10 15
China
India
Brazil
Russia
General economic indicators: investments and FDI flows
Share of investment in GDP: 2005 (%) FDI inflows: 2005 (% of GDP)
Source: World Development Indicators, World Economic Outlook
With respect to levels of investment and the attraction of FDI, China’s performancedwarfs that of other large client countries. Investment rates in Brazil and Russiaappear to be rather low.
Investment = gross fixed capital formation
15 20 25 30 35 40
Russia
Brazil
India
China
0.0 0.5 1.0 1.5 2.0 2.5 3.0
Russia
Brazil
India
China
General economic indicators: gross and net FDI
Gross FDI inflows and net FDI: 2005 (bln USD, from BoP) Gross FDI per capita: 2005 (USD, from BoP)
Source: World Economic Outlook
In per capita terms, inflows of FDI in 2005 favor Russia. Russia exhibits substantial fixed capital investmentabroad.
05
1015202530354045505560
ChinaBraz
ilInd
iaRussi
a
Net FDI Gross FDI0 20 40 60 80 100
India
China
Brazil
Russia
-5 -3 -1 1 3 5 7
India
Brazil
China
Russia
Fiscal indicators: central government fiscal balance
Central government fiscal balance: 2005 (% of GDP)
Source: Rosstat, World Economic Outlook
With the exception of Russia, BRIC countries operated with budget deficits in 2005. Fiscal imbalances were particularly severe in India. Adding the regional budget deficits would bring India’s deficit to over 7 percent of GDP.
Fiscal indicators: government expenditures
Central government expenditure and net lending: 2005 (% of GDP)
Source: World Economic Outlook
With the exception of Brazil, central government expenditures for these countries fall in the range of 15-20 percent of GDP
10
15
20
25
30
India
Russia
China
Brazil
Institutional indicators: banking sector
Private sector and domestic banking sector development: 2004
Source: World Development Indicators
* Estimate
Outstanding domestic credit at end-2004 was an order of magnitude higher in China than in any other of these four countries. Financial markets are relatively poorly developed in Russia.
0
20
40
60
80
100
120
140
160
180
China
Brazil
India
Russia
Net domestic credit to private sector, % GDP, e-o-yDomestic credit provided by banking sector, % of GDP
Business environment
Brazil China India RussiaEase of Doing Business 121 93 134 96Starting a business 115 128 88 33Dealing with Licenses 139 153 155 163Getting Credit 83 101 65 159Protecting Investors 60 83 33 60Enforcing Contracts 120 63 173 25Closing a Business 135 75 133 81
Source - Doing Business in 2007: Protecting Investors
Russia: positive changes in the business environment, 2002-2005
Percent of firms indicating a problem:
Source: EBRD-World Bank Business Environment and Enterprise Performance Survey (BEEPS)
0.00 0.10 0.20 0.30 0.40 0.50 0.60
Organised crime/mafia
Tax administration
Tax rates
Access to land
Macroeconomic instability
Uncertainty about regulatory policies
Customs and trade regulations
Title or leasing of land
Access to financing
Contract violations
Telecommunications
2005 2002
Russia: negative changes in the business environment, 2002-2005Percent of firms indicating a problem:
Source: EBRD-World Bank Business Environment and Enterprise Performance Survey (BEEPS)
0.00 0.05 0.10 0.15 0.20 0.25 0.30 0.35 0.40 0.45
Transportation
Cost of financing
Anti-competitive practices of others
Business licensing and permits
Street crime, theft and disorder
Electricity
Functioning of the judiciary
Skills and education of workers
Corruption
Labour regulations
2005 2002
Russia: the investment climate is worse for firms that operate in a competitive environment
-0.5
-0.4
-0.3
-0.2
-0.1
0
0.1
0.2
0.3
0.4
0.5
Governance Labor Taxes AdminBarriers
Finance Land Infrastructure
Competitive firms
Monopolistic Firms
IC gap
How severe are each of the following for the operation of your business?
At the firm level, private R&D expenditures in Russia are low relative to the BIC countries.
Share of R&D in companies’ sales
0
1
2
3
4
5
6
Russia India Brazil China
Russia’s productivity in manufacturing is lower than in BIC countries, although labor costs are higher than in China and India, suggesting relative problems in industrial competitiveness
0
2
4
6
8
10
12
14
Russia India China Brazil0
1
2
3
4
5
6
Sales per worker
Annual total compensation
Source: ICA surveys
Russia: recent data indicate slowing growth, especially in tradable sectors of the economy
2003 2004 2005
GDP 7.3 7.2 6.4Agriculture, hunting, forestry 5.5 2.9 1.1Extraction of mineral resources 10.8 7.2 1.8Manufacturing 9.5 6.6 4.4Electricity, gas, water production and distribution 1.6 0.9 2.2Construction 13 10.1 9.7Retail and wholesale trade, repair and maintenance of vehicles, white goods and personal effects 13.2 11.2 12.3Transport and communication 7.2 10.5 6.1Finance 9.6 4.5 6.5Immovable property operations, leasing and services provision 3.0 3.1 9.6
Short term outlook: GDP growth rate projections
Short term outlook:fiscal balance and inflation
Cons government fiscal balance projection CPI Inflation projection (average)
2005 2006 2007India -7.7 -7.2 -6.8Brazil -3.1 -2.5 -1.8China -0.7 -1.1 -1.2Russia 7.6 8.4 8
2005 2006 2007India 4.2 4.8 4.3Brazil 5.7 4.5 4.5China 3.8 3.4 3.5Russia 12.6 10 8
*
* - year end inflation
Source: OECD Economic Outlook, World Bank staff estimates
Long term outlook: The rise of the BRICs
Source: Goldman Sachs
BRICs Have a Larger US$ GDP Than the G6 in Less Than 40 Years
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
100,000
2005 2010 2015 2020 2025 2030 2035 2040 2045 2050
GDP (2005 US$bn)
BRICsG6
2025: BRICs economies over half as large as
the G6
By 2045 BRICs overtake the G6
GS BRICs Model Projections
GDP and GDP per capita in 2050
0
10,000
20,000
30,000
40,000
50,000
60,000
China
USIndia
Japa
nBra
zil
Russia
Germany UK
Franc
eIta
ly
2005 US$bn
010,00020,00030,00040,00050,00060,00070,00080,00090,000100,000
US$ GDP
US$ GDP per capita
2005 US$
GS BRICs Model Projections.
The Largest Economies Will Not Be the Richest
Conclusions (1)
n In the short term, strong overall macroeconomic fundamentals sustained in China, India and Russia and improvements reached in Brazil. This will continue to attract substantial flows of foreign investment, further boosting potentials for the future output growth.
n Risks related to global economic imbalances will continue to weight on the outlook for BRIC countries and especially Brazil.
n Country specific risks and challenges include: ¨ Russia - sustained upward pressure on the exchange rate and inflation;
potential fiscal easing, further aggravation of competitiveness in manufacturing industries.
¨ China - potential for increased protectionism at Chinese exports. ¨ India - high level of off-budget subsidies for petroleum products. ¨ Brazil - expansionary fiscal policy.
n Presidential election in October 2006 (in Brazil) and in March 2008 (in Russia) may add uncertainty to the outlook for these countries.
Conclusions (2)
n The BRICs are likely to maintain their comparative advantages in the long term. This will help to ensure relatively high growth rates and therefore increasing share of these economies in the world market.
n But the sustainability of high growth will depend on the several crucial factors:¨ sound and stable macroeconomic and development
policies;¨ development of strong and capable institutions (including
political);¨ human development (improved healthcare and education);¨ increasing degree of openness.
Conclusion (3)
n The main comparative advantages of Russia are related to macroeconomic stability and rich natural resources
n To diversify away from its growing dependence on natural resources and to maintain its comparative advantage, the Russian economy will need to boost the productivity and international competitiveness of its manufacturing sector.
n Russia can do this by:¨ creating incentives for greater firm-level innovation, ¨ by improving the skill base of its labor force, ¨ by creating a stable policy environment that is conducive to
competition.
Conclusion (4)Although improved in recent years, the Russian investment climate is still characterized by significant instability, as well as a tendency to punish its most dynamic and innovative firms.
Creating better investment climate and promoting environment for fair competition is crucial for competitiveness and innovation in Russia.
§ Countries successful in creating an innovation economy are characterized by a high level of competition and competitive pressures. ICA data confirm the importance of competition for innovation in Russia.
§ This problem is related to key areas of structural reform in Russia: administrative reform, fiscal federalism, local self-government, competition policy, administrative barriers to business, land reform.
