Bricks and mortar in the BRICs

October 6, 2020 1:30 PM
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REUTERS/Stringer

The major industrial democracies in the Group of Seven (G7) bloc have had the fiscal and monetary resources to undertake major COVID-19 economic rescue programs.[1] For six months they have helped businesses stay open while providing income assistance to families in need. By contrast, most developing countries are burdened by deficits and cannot borrow readily to finance such programs. Often, they also lack delivery capacity. Instead, many are following the pattern of Brazil, China, India, and Russia (BRICs) and spending on bricks and mortar rather than business and income support.

The four BRICs are at different stages in the recovery. China is expected to be the only Group of Twenty (G20) economy to record growth in 2020. The International Monetary Fund (IMF) forecasts a recovery of 6 percent for India and 4.1 percent for Russia in 2021. Brazil lacks a recovery, and its economy is expected to shrink by 9.1 percent in 2020 and remain stagnant in 2021.

In developing recovery plans, China, India, and Russia are akin to France, Germany, and Italy among the G7 economies—with articulated priorities for post-COVID-19 recovery. Brazil resembles the United States, with a number of separate initiatives that are yet to culminate in a recovery plan.

Similarities in Recovery Paths

The BRICs’ approach to recovery relies largely on stimulating investment through large-scale infrastructure projects. On the one hand, this direction makes sense, as governments can decide how many kilometers of railway or roads to build and do so through emergency procurement procedures. On the other hand, building infrastructure represents a one-sector view of supply-side recovery. It will not be able to replace the decline in tourism receipts or the fall in exporting industries.

As examples of infrastructure projects, China is building 4,000km of railway in 2020-21, of which half is for high-speed trains. Russia has announced a program for upgrading the Trans-Siberian railway, a dozen Siberian airports, and three Black Sea ports by 2024. Brazil and India plan to finance infrastructure investments by attracting foreign direct investment (FDI) and generating additional revenues from privatizing state-owned companies. Brazil is targeting several billions in FDI over 2021 to 2024. The government has announced plans to privatize nine companies, including the postal service Correios and the telecommunications company Telebrás. India also has a list of companies to put up for sale. New incentive schemes for FDI in civil aviation, solar energy, electricity storage, and healthcare are being promoted, which could result in revenues from concession fees and leases of government land.

The BRICs have also embraced demand-boosting measures with a focus on income support for the poor. The reason is simple. Most white-collar workers have kept their jobs by working from home during the pandemic. These workers have also benefited from credit-easing policies for both households and businesses. However, income growth has stalled or turned negative among low-income earners as the pandemic took a toll on jobs in services sectors like hospitality, transportation, construction, and retail, and especially among informal businesses. The latter is a significant issue in both Brazil and India, where urban informality is above 40 and 60 percent, respectively. In all BRICs job prospects of migrant workers, most often working in the informal sector, have markedly worsened during the pandemic as they are not covered by social safety nets and can experience sudden poverty.

All BRICs have initiated measures for more flexible movement across companies and sectors. China has issued ordinances for municipal and central administrations to hire young people with experience in the private sector. India is investing in electronic platforms to make welfare payments for internal migrants portable. Russia is digitizing employment files so workers can move across regions with minimal administrative hassle.

Similarities with Large European Economies

The BRICs seem to have followed the examples of France and Germany, particularly their tax deferrals and temporary tax cuts. Such measures are used in the BRICs to provide liquidity to businesses. China reduced the value-added tax (VAT) for small businesses by two percentage points upto the end of 2020. Tax carry-forwards were extended from five to eight years. In India, corporate income tax filings have been deferred by six months. A 25 percent reduction in tax rates for specified nonsalary payments to employees, as well as a 25 percent cut for specified receipts for small businesses, was introduced for one year, to March 2021. Taxes were also reduced on payments for transactions like rent, professional fees, and commissions in the transportation and hospitality sectors. In Russia, the payroll tax was reduced from 30 to 15 percent for all businesses until the end of 2020. Self-employed people were refunded their 2019 income tax. The corporate income tax for all businesses was deferred for six months too.

A second similarity with continental European recovery plans is that India and Russia are investing heavily in digitization for the benefit of businesses. In India, the government is converting all customs, building, and transportation sector certificates and filings into electronic ones—both as a health precaution and as a way to reduce the cost of doing business. In Russia, customs manifests and professional certification documents will be turned electronic. China has already gone through the process of making customs and tax forms electronic and has announced a major investment into digitizing rural land records.

A New Tool for Favoring Domestic Companies

The BRICs are using procurement law changes as a new tool to favor domestic companies over foreign competitors. In China, the Beijing provincial government issued a notice that the procurement entity discount 10 percent of the price of the product/service/work granted by domestic enterprises. Again, this discount provides an advantage to local over foreign suppliers. In India, an amendment to the procurement law from May 2020 bars foreign competitors from bidding for procurement contracts below $26 million. In Russia, new procurement rules from June 2020 give priority to domestic car and truck producers. In particular, only domestic manufacturers can submit bids for emergency vehicles such as ambulances. Domestic producers also receive subsidies on production of car parts, giving them an advantage over foreign producers when competing on price.

G7 recovery plans do not include such bending of procurement rules, as it runs afoul of EU internal market rules and the World Trade Organization’s plurilateral agreement on procurement rules (the Agreement on Government Procurement or GPA). Neither of the four BRICs is presently a party to the GPA, though in May 2020 Brazil announced its intention to join the agreement.

Note

1. The G7 countries are the United States, Canada, Britain, Germany, France, Italy, and Japan.

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Simeon Djankov Senior Research Staff

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