After a decade of infatuation, investors have suddenly turned their backs on emerging markets. In the BRIC countries—Brazil, Russia, India, and China—growth rates have quickly fallen and current account balances have deteriorated. The surprise is not that the romance is over but that it could have lasted for so long.
From 2000 to 2008 the world went through one of the greatest commodity and credit booms of all times. Genesis warns that after seven years of plenty, "seven years of famine will come...and the famine will ravage the land." Perhaps the combined commodity and credit cycle, from which the BRIC countries have benefited more than their due, is divinely appointed.
The boom was prolonged for half a decade by quantitative easing in mature economies, flooding them with cheap financing. During their years of plenty, the BRICs did not have to make hard choices. Today, their entrenched elites seem neither inclined to nor able to do so. Their lives have been too good.
Now the booms are over. Brazil and Russia have been hit by the leveling out of commodity prices, which are expected to decline for several years. Those two countries may also be caught in the "middle-income" trap. Recent research has also found that countries tend to experience a sharp growth slowdown when GDP per capita reaches about $15,000.
While the BRICs have accumulated large foreign reserves, they did not take advantage of the good years to improve the underlying state of their economies. China's banks are overleveraged and India suffers from most economic ailments. Its inflation is too high; its budget deficit, public debt, and current account deficit are too large. Governance is mediocre at best, reflecting substantial corruption and poor business environments.
The World Bank compiles its ease of doing business index for 185 countries. The BRICs do even worse by this measure, with China ranking 91, Russia 112, Brazil 130, and India 132. Russia has set the long-term goal of rising 100 steps but so far has done little to accomplish it. China, meanwhile, is lobbying the World Bank to abolish this index.
One can see the hubris of the boom in the construction of white elephants; Olympic Games tell it all. In 2008 Beijing beat all prior games with an expenditure of $40 billion. Russia is expending $51 billion on the 2014 Sochi Winter Olympics compared with $6 billion spent on Vancouver's in 2010. Brazil's recent protests were, in part, about the cost of the 2014 football World Cup and 2016 Olympics.
When it comes to vital infrastructure investment, however, Brazil, India, and Russia invest too little, leading to multiple bottlenecks. Russia has not expanded its paved road network since 1994. Only in 2018 is a highway finally expected to connect Moscow to St. Petersburg—and only then because it will be Russia's turn hosting the World Cup.
Worse, the current BRIC thinking goes in the wrong direction. All have large state sectors and are relatively protectionist. Because of their recent economic successes and the western financial crisis, their policymakers increasingly see state capitalism as the solution, and private enterprise and free markets as problems. Especially in Russia and Brazil, influential circles call for a greater role of the state, although the corrupt state is their key problem.
Last month Igor Rudensky, the United Russia parliamentarian who chairs the State Duma's committee on economic policy, even stated: "The leading role and the commanding heights in the economy should belong to state corporations.... We have to preserve all the positive from [the Soviet] historical experience." Back to the future!
Even if the BRIC political leaders were to face up to reality, their giant state corporations rule the roost. They hold an iron grip over energy, transport, and banking. But the BRICs do not rule the world. Because of them the West has played down the World Trade Organization, instead seeking regional trade agreements among like-minded countries such as the Transatlantic Trade and Investment Partnership between the United States and Europe and the Trans-Pacific Partnership with most states but China around the Pacific Rim.
The BRICs party is over. Their ability to get going again rests on their ability to carry through reforms in grim times for which they lacked the courage in a boom.