BRICs: A Look at Economies of Emerging Markets
April 26, 2008
This paper examines the current economies of Brazil, Russia, India, and China.
Investment firm Goldman Sachs has determined that these four countries will become
economic superpowers by the year 2050. The paper examines the different factors of
countries and their reasoning for becoming economic powers. Upon the conclusion,
there is a comparison to the United States historic economic development.
In 2003, Goldman Sachs examined the global economy and observed the future
capabilities of a cluster of nations, specifically Brazil, Russia, India, and China. Coined
as the “BRIC” countries, the American investment firm has hypothesized that these four
countries will become the next economic superpowers by 2050. When reexamining their
thesis again in 2007, Goldman Sachs remains firm in declaring that Brazil, Russia, India,
and China are well on their way to becoming fully developed economic powers by, at
latest, the year 2050. Many different variables such as inflation rates, government deficit,
and technology were examined in determining these four countries’ futures. Due to the
huge influx of technology in recent years, underdeveloped countries show huge potential
in growing and expanding in world markets. The BRIC countries somewhat resemble the
United States when it experienced huge amounts of growth, allowing for its rise in
Goldman Sachs has developed an index in determining which countries are
considered “developing” countries. From this index, called the Growth Environment
Score (GES), the company has grouped data into five different groups: macroeconomic
stability, macroeconomic conditions, technological capabilities, human capital, and
political conditions in order to fully explain their model (O' Neill, Wilson,
Purushothaman, & Stupnytska, 2005, p. 10). Figure 1 shows how several developing
countries score on the GES. From these five base factors, the company sees potential in
Brazil, Russia, India, and China. The actual measurable data variables are inflation,
government deficit, external debt, investment rates, openness of the economy, penetration
of personal computers, phones, the Internet, education, life expectancy, political stability,
rule of law, and corruption. While this is similar to the Cobb-Douglas production
function of Solow Growth model, which states that
Y/L = (K/L) α (E) 1-α,
the Growth Environment Score has broken down the core variables into more easily
Overall, the BRIC countries seem to have many positive factors surrounding them
since the term was coined back in 2003, and investors in the finance world are starting to
notice. In 2007, emerging stock markets in Asia returned grew 33%. An average of a
30% increase in value of currency was seen in Latin American countries (Glassman,
2008, p. 26) Figure 2 shows the performance of the financial markets of the BRIC
countries. Of the top 100 companies of “new global challengers” determined by Boston
Consulting Group, 41 are based in China, 20 in India, and 13 in Brazil. There are other
indices that look at emerging market growth besides Boston Consulting Group’s
classifications.2 American mutual fund companies have recognized this potential in
foreign countries and have created opportunities for American investors. For example,
the Fidelity Emerging Markets fund (ticker symbol FEMKX) has experienced a
prosperous run by having over twenty percent returns each year since 2003 (Glassman,
2008, p. 28). In this diversified fund of over 200 stocks, 12% belong to Brazil, 10%
belong to China, and 7% are Indian companies, mostly focusing on the energy sector. As
a whole, all four of the BRIC countries scored in the top eleven in a ranking of
The Solow Growth Model Equation is Y/L = (K/L)α (E)1-α, where Y is the Gross Domestic Product of
a national economy, K represents the total amount of capital, E is the amount of technology, and L
represents the amount of labor (DeLong & Olney, 2002/2006, p. 87).
The Fortune Global 500, a list of the publicly traded firms with the highest revenues, included 35
companies from China, Brazil, and India, an increase of about 50%, or 24 companies, since 2005.
(Glassman, 2008, p. 26)
environmental commitments for emerging countries defined by the Organization for
Economic Cooperation and Development (OECD) (Herra, 2007). In this ranking, the
OECD ranks the countries on their “efforts to build prosperity, good government, and
security,” and looks at data regarding trade, investment, migration, environment, security,
and technology (Herra, 2007). This figure is extremely important to the larger countries
like Russia and Brazil, specifically because natural resources are available in these
regions of the world. India and China, on the other hand, beat all other countries in
population, each having over one billion citizens. This could allow for the countries to
expand their GDPs simply because their labor forces have the potential of being so large
compared to other global competitors. It is also noted that the four developing countries
are among the top seven in land, top eight in population, top ten in terms of GDP
purchasing power parity and top fourteen in nominal GDP. Population in the BRIC
countries accounts for 40% of the world (Bharadwaj, 2006, p. 52). Purchasing parity
power, according to the OECD, refers to the currency conversion rates that eliminate the
difference in price levels during conversion. Countries with high purchasing parity
power show signs of having a strong economy.
As host of the 2008 Summer Olympics, much attention has become focused on
China. The country is the most populated in the world, and is showing signs of potential
economic development. Growth in China is blistering, with GDP values increasing by
11.2% in the fourth quarter in 2007 and 11.5% in the third quarter of the year. China’s
debt is a good proponent of huge GDP growth. The country’s public debt is only 17% of
its GDP, which is far below the average of developing countries ("Poles Apart," 2008, p.
82). China scores extremely well with the Growth Environment Score in macroeconomic
stability, investment, openness to trade, and human capital (O' Neill, Wilson,
Purushothaman, & Stupnytska, 2005, p. 11). However, technology is currently holding
the Chinese back from rapid expansion. Computer usage is still not up to standard
compared to other emerging markets countries. With over 1.3 billion people in the
country, the capability for Chinese production to become a very powerful factor in their
economy is present. Figure 3 shows how the Chinese economy scores in each of the
thirteen sub-categories that compile the GES, along with the other three nations.
One of the biggest concerns with the economic expansion of China is the threat of
the coupling theory. The United States economy has become soft after prosperous years
between 2004 and 2006, and many economists fear the American economy will be going
into a large recession, assuming it has not occurred already. The biggest apprehension
with the Chinese and other Asian markets is the idea that the United States markets will
bring down its Asian counterparts with it. The “decoupling” theory states that the outside
economies, particularly Asian markets, can shrug of an American recession ("An
Independent Streak," 2008, p. 72). While this idea that the Asian markets can expand
while the American ones contract seems good for foreign countries, exports and profits
will be squeezed due to the recession in the United States, thus somewhat affecting the
global economy. The good news, however, is that the Chinese are not as exposed to the
“coupling” theory because exports to the U.S. make up only 8% of the national GDP.3
Over 95% of China’s growth of 11.2% in the fourth quarter of 2007 is from domestic
demand ("The Decoupling Debate," 2008, p. 79). It has been noted that “China’s
economy would probably still expand by around 8-9% if export growth dried up. During
This number is relatively small compared to other East Asian countries. Exports account for over 20% of
the GDP of countries like Singapore, Hong Kong and Malaysia. On the other hand, India’s exports to the
United States only accounts for 2% of their GDP ("An Independent Streak," 2008, p. 12).
the 2001 American recession China’s GDP growth barely slowed.” ("An Independent
Streak," 2008, p. 72) While theoretically it looks at though the Chinese economy will be
able to decouple from the United States, recent events would say otherwise. The Chinese
stock markets seem to be extremely affected by the movements in the American markets.
The second most populated country in the world, India, is another vital piece to
the BRIC puzzle. India focuses on the services industry, with a concentration on
information technology, as well as on pharmaceutical companies (Glassman, 2008, p.
28). Since the BRIC countries were defined, India has seen a vast expansion in their
economy, growing by 9% per year since 2004 ("What's Holding India," 2008, p. 11).
India has a democratic government, and thus their rule of law, coupled with external debt
and inflation, are major drawing points for having India’s economy surge in future years
(O' Neill, Wilson, Purushothaman, & Stupnytska, 2005, p. 11). However, this was not
always the case. India suffered many years under a socialistic government, and this
burned the economy: annual GDP growth rates between 1965 and 1975 are only 2.6%,
which was close to the population growth during that time period of 2.3% ("India's
Economy: Open," 2008, p. 94). This significantly hurt the country’s standard of living,
especially because there was no room for improvement in their average household
income. Looking towards the future, India’s economy has been growing significantly,
allowing for the capability for standard of living to increase in the nation. In addition, the
low inflation is a benefit for India’s economy because it encourages investment and
One of the biggest barriers that India has to face is the lack of education of its
citizens. The country’s Human Development Index (HDI), a measurable figure of a
country’s socio-economic status looking at poverty, illiteracy, low-life expectancy, and
over-population is extremely low, earning them an HDI value of .619, ranked 128th in the
world4 (“India: Human Development”). India’s literacy rate of citizens over 15 years old
is only 61%. However, since India is considered the poorest of all the BRIC countries,
this allows for the growth potential to be the greatest as well. Another obstacle the
Indians have to overcome is the horrible gap between rich and poor. Over 75% of the
population live on USD $0.50 daily ("India's Economy: Open," 2008, p. 94). Because so
many people in the country have so little money, consumption spending and investment
are extremely minimal by a majority of Indians. India’s infrastructure is extremely
weak, and while the government is considered democratic, the size of the government is
large. Around 10 million individuals work for the state ("What's Holding India," 2008, p.
11). Having a large amount of the population work in the public sector does not help
increase output, and thus income per individual tends to diminish as well. Because the
population is growing so fast, citizen income is struggling to grow compared to other
The other two counterparts to China and India are Brazil and Russia. Both are
considered to be in the shadows of the Chinese and Indian economies, but are still
projected to become economic superpowers. Unlike China and India, the population is
not as big of a factor, but instead natural resources in Brazil and Russia are extremely
important. Brazil has had a democratic government since the 1980s and considered to be
politically stable. Another huge benefit to Brazil is the amount of technology, where the
number of computers, phones, and an individual’s capability of accessing the Internet are
all above average for developing countries (O' Neill, Wilson, Purushothaman, &
In comparison, the HDI value of the United States is .951, ranking them 12 th out of 177 countries.
Stupnytska, 2005, p. 10). The country has just become a net creditor, and their national
stock market, Bovespa, has been evaluated deemed the single most progressive index in
the MSCI by Citigroup. The Brazilian index is up 5% since October 2007.5 Brazil’s
location and climate provides for rich soil along the Amazon River, and with technology
and capital, can easily increase the amount of natural resources used to create products
for the country. Neither Brazil nor Russia truly relies on the United States as a
contributor to the growth of their economy. Only 3% of Brazil’s GDP is exports to the
U.S., and they only account for 1% of the Russian economy ("The Decoupling Debate,"
2008, p. 79). This is a good indicator that both of these foreign markets should not be
dramatically affected with the economic recession the U.S. is experiencing today.
In transition of a new president, Russia has become a very interesting country that
has much potential in becoming an economic power. The country has experienced
annual growth of real income consistently in double digits ("Briefing Russia's Economy,"
2008, p. 27). Russia scores well for the GES with political stability, technology, and
openness of trading. (O' Neill, Wilson, Purushothaman, & Stupnytska, 2005, p. 10-11)
Internally, the country is supporting construction, where the industry is growing by nearly
20% annually ("Briefing Russia's Economy," 2008, p. 28). The development of
infrastructure is extremely important in Russia because of the size and geography of the
country, and transportation costs are extremely high due to the fact that there is so much
undeveloped land east of Moscow. Also, Russia is focusing on the importance of capital
in their economy. Capital investment increased by 21% last year in Russia. The last
important piece of evidence to look at regarding Russia is the amount of foreign direct
During the same period, the Chinese stock markets have decreased on average by 20% ("Food, Fuel,
and Froth," 2008, p. 80).
investment in the country. Last year alone, the amount of foreign direct investment
doubled to $27.8 billion ("Briefing Russia's Economy," 2008, p. 29). However, this
value is only 2.2% of the country’s GDP, which is an extremely low value.
Natural resources contribute to Russia’s potential simply due to the immense size
of the nation. The country has used oil as the main drive to keep their economy afloat.
However, with the extreme volatility of the price of oil today, there is some risk
associated with having so much invested in the commodity. According to the Institute of
Economic Analysis, 31.6% of Russia’s GDP is contributed to oil and gas ("Briefing
Russia's Economy," 2008, p. 27). With the price of oil increasing enormously over the
past few months, attention has been drawn Russia’s economy because it is so affected by
the price of fuel. Because the Russian economy is not very diversified, the country’s
growth could be severely affected. If the price of oil were to fall dramatically, it could be
detrimental to the Russian economy. Another restriction Russia has developing is the
amount of corruption in the country. Law enforcement is constantly bribed by private
firms to bend the rules.
The BRIC countries are somewhat mirroring the rapid growth of the United States
economy during the Industrial Revolution. During this time period, America was gaining
inventions of machinery like the steam engine, cotton gin, and wheat shearer. While the
U.S. was entirely an agrarian nation, these inventions, which can be referred to as capital,
helped increase production in the United States. Income per person rose, and it helped
propel the U.S. to grow, both physically and economically. The BRIC countries also
started to resemble the “dot com” bubble in the late 1990s in America. The economy
expanded immensely, as seen in the domestic stock markets, as technology increased.
This increase in technology leads to an increase in efficiency and theoretically should
increase individual income as well as growth in the country. Yet, unlike any of the BRIC
countries, the United States has always had political stability and a capitalistic economy
to promote innovation and competition throughout periods of economic expansion.
When these emerging market countries develop over the next few decades, it will be
interesting to see if their political structure changes, prospers, or suffers.
The four leaders in the emerging markets group – Brazil, Russia, India, and China
– all have somewhat similar situations. All four countries have many positive factors that
contribute to their overall potential. However, all four also have a few limitations that
could bottleneck their economy and not allow for growth as predicted. Given the
appropriate figures, Goldman Sachs believed the BRICs countries to be economic
superpowers by 2050. The four nations seem to be off to a good beginning, having all
posted favorable returns to foreign investors. Hopefully, with the effects of increasing
technology promoting globalization, the growth seen in Brazil, Russia, India, and China
jumpstarts many other poor economies toward growth and prosperity.
Figure 1 Figure 2
Note: All graphs in appendix are from Goldman Sachs Global Economics Paper 134
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