India

Eurasia Group founder and emerging markets guru Ian Bremmer has come around to the view that the BRICS construct is nothing more than a bunch of countries “united by a catchy acronym” and little else. His op-ed piece in last Friday’s New York Times  notes that Brazil, Russia, India, and China “have formalized their club and extended their reach by inviting South Africa to join” – a development that occurred in December of 2010 and asks, “But do their meetings and joint statements really allow them to punch above their individual weight? What do these countries share beyond a common interest in bolstering their global clout?” Several hundred words later he concludes that these five countries “will sometimes use their collective weight to obstruct U.S. and European plans. But the BRICs have too little in common abroad and too much at stake at home to play a single coherent role on the global stage.” Has he been reading my blog? [click to continue…]

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The global bank HSBC, in its Business Without Borders newsletter,  tells us that while the past decade was all about the BRIC countries – Brazil, Russia, India, China – we are now in the decade of what it has dubbed the CIVETS, which stands for Colombia, Indonesia, Vietnam, Egypt, Turkey, and South Africa, a set of countries “whose rising middle class, young populations and rapid growth rates make the BRICs look dull in comparison.” I have previously made the point – that BRIC, while a useful shorthand for a set of big emerging economies, makes no sense as an actual group, even as BRIC summits have taken place (in which South Africa was invited to join, adding the “s” to make up BRICS) and BRICS investment funds have been established. There is little, if anything in the way of common features or shared interests to unite the BRICs countries. Russia and China are authoritarian states, while Brazil and India are noisy democracies. Brazil and South Africa, both big agricultural exporters seeking freer trade, have little in common with India, which protects its farmers with high tariff barriers. Russia, whose economy is based largely on energy exports, has little in common with China, a net oil importer. China, with over 1.3 billion people, is more than 25 times bigger than South Africa, population 50 million.  But the BRICS are a model of solidarity when compared to the CIVETS.

Organizing the CIVETS into a coherent group could be as difficult as, well, herding cats. Not inappropriate, since the word civet is also used to refer imprecisely to a number of cat-like creatures of different genii and species. The more fundamental problem is that CIVETS by necessity excludes certain countries that should merit inclusion but which don’t fit the linguistic straitjacket. According to the HSBC article, “the six countries in the group are posting growth rates higher than 5% — with the exception of Egypt and South Africa – and are trending upwards.  Lacking the size and heft of the BRICs, these upstarts nevertheless offer a more dynamic population base, with the average age being 27, soaring domestic consumption and more diverse opportunities for businesses seeking international expansion.” So why is Thailand (population 69 million, forecast 2012 GDP growth of more than 6.0 percent, median age 34) excluded? Egypt’s poor economic performance can be considered temporary fallout from the Arab Spring upheavals, but what about South Africa, which in the nearly 18 years since the advent of majority rule has chalked up an average annual GDP growth of 3.3 percent? For that matter, why exclude Bangladesh (150 million people, median age 23, GDP growth averaging 6.0 to 8.0 percent)? Or Nigeria (140 million people, average 6.9 percent GDP growth since 2005, median age 19)?

One problem with the CIVETS designation, which almost guarantees that it will never catch on, is that it’s hard to add new countries or eliminate laggards from the group without ruining the catchy acronym. This is why over a year ago I suggested replacing BRICS, CIVETS, and other similar groupings with a more flexible term, which allows for countries to be added or taken out as they fall behind or graduate, namely, BEEs, for Big Emerging Economies. The real standouts in that group could be called Killer BEEs. I’m still waiting for it to catch on.

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In spite of our recent and ongoing misadventures in Iraq and Afghanistan, the United States seems to be stumbling towards war with Iran. President Obama has stated that a nuclear-armed Iran is unacceptable and that he is prepared to use force to prevent it. In part to prevent Israel from launching an immediate attack on Iran, he has offered assurances that we will act, if necessary, once all other options are exhausted. It would be hard for the President to back down from such pronouncements once it becomes clear that Iran is moving forward with its nuclear program, since it would reveal his strong language as so much empty bluster. [click to continue…]

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Even in the midst of an ongoing Euro-zone crisis with no obvious solution in view, investors have no trouble distinguishing between one European country and another, as the yield spread between German and Greek government debt (currently 860 basis points, or 8.6 percentage points) clearly demonstrates. Why, then, are investors so amazingly dense by comparison when it comes to emerging markets? Why do they – willfully, it seems – refuse to recognize that there are huge differences between, say, Chile and Venezuela, which lumping them together into an emerging markets basket or a Latin America basket can only obscure?

Ten days ago, while the Egyptian democracy movement was still gathering steam and uncertainty abounded as to the political fate not only of Egypt but of the entire Arab world, the Financial Times reported that investors had pulled more than $7 billion out of emerging markets equity funds during the preceding week. This was the biggest withdrawal in over three years, which the FT attributed to “turmoil in the Middle East and rising food inflation [which] raised fears of economic instability.” Egypt, it said, may have been the catalyst, “but the fund outflows also reflected deeper unease about economic overheating in China, India, Brazil, and other big emerging economies.” The article went on to quote several fund managers who said that developed markets now represent greater value than emerging ones and as proof pointed out that nearly all of the $7bn lost to emerging markets had been reinvested into funds focused on the United States, Europe, and Japan. Though the magnitude of emerging market outflows and developed market inflows during the week of January 31 was the biggest so far, it was the fifth consecutive week in which investors had fled emerging markets for the relative safety of the big developed markets. Apart from political turmoil, investors apparently were spooked by rising inflation in emerging markets. The proof? Indonesia, Brazil, India, and South Korea have all raised interest rates this year. [click to continue…]

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I will give Jim O’Neill, the Goldman Sachs banker who in 2001 coined the term “BRICs”, the benefit of the doubt. I suspect he meant to create a simple shorthand to refer to the big emerging economies likely to matter most over the next 10 years or so, which at the time seemed to be Brazil, Russia, India, and China. But as often happens, the thing took on a life of its own and became reified to the extent that a year or two ago there was talk of convening a BRICs summit, and in 2007 iShares, the fund management company, set up an exchange-traded BRICs fund (BKF), which has returned an impressive -3.11% annually since its inception.  A fund that includes Russia, a huge energy exporter and China, soon to become the world’s largest oil importer, may provide some diversification benefits but probably not the kind of outsized returns investors tend to seek from emerging markets.

I have argued on this blog and elsewhere that the notion of the BRICs – Brazil, Russia, India, China – as a group never had a coherent meaning, especially since Russia, whose economy is nearly as dependent on oil and gas as Nigeria’s and whose governance is arguably more dysfunctional than Nigeria’s, and which is suffering catastrophic population decline, has little in common with the other three. The recent kangaroo court judgment and sentence against former oligarch Mikhail Khodorkovsky only confirms this. Even though the Russian stock market grew by a dynamic 22.5% in 2010 and is predicted by none other than Jim O’Neill to be the star performer of 2011, the longer-term trend points clearly in the opposite direction.

Still, there may be some use for a term that distinguishes big, important, and growing emerging economies, but the term needs to become more elastic as new countries qualify and others fall by the wayside. New candidates for BRIC membership continue to surface, as much as they wreak havoc with the catchy acronym. Indonesia, for certain; with over 250 million people, GDP growth of around 6% and a stock market that rose 44% last year it can hardly be ignored. The next candidate in my view is Turkey. With a population of nearly 78 million – likely to grow to 100 million by 2030 – GDP growth of 6.8% in 2010, a dynamic stock market (25.8% return in 2010), and a growing cadre of domestic companies that are expanding their footprint throughout the Middle East and Central Asia, Turkey is growing in importance as a regional political and economic power, and it also serves as a bridge between Europe and the Middle East and Central Asia. An article in today’s New York Times highlights Turkey’s political and commercial prominence in Iraq, where it is building power plants, pipelines, hotels, and a stadium, but this is only part of the story. Ever since the breakup of the Soviet Union, Turkish diplomats and companies have made a concerted effort to bring the former Soviet republics in the Caucasus and Central Asia, many of which speak Turkic languages, into Turkey’s commercial and political orbit. Turkish construction firms are prominent on big building sites all over the region, while the markets are full of Turkish medicines and consumer products. The Arab countries of the region, nervous about Iran’s power and its unpredictability, see Turkey as a potential counterweight. The relationship is not perfect – Arabs retain a historical memory of their struggle against Ottoman rule – and Turkey has its own problems, many of which are rooted with an internal struggle between the political heirs of Mustafa Kemal (Atatürk) and his transformation of Turkey into a modern, secular society following World War I, and the  Islamists, represented by the government of Recep Tayyip Erdogan and his Justice and Development party, who promote greater religious expression in public life. But Turkey, which has still not abandoned its long quest for full membership of the European Union, and which already enjoys free access to the EU market, seems certain to become an even more prominent player in the region and even globally. [click to continue…]

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