The recent visit of President Vladimir Putin of Russia to the Kingdom in February this year, is one more concrete manifestation of the evolving economic strategic alliance that Saudi Arabia is having with the so-called “BRIC” economies of Brazil, Russia, India and China.
King Abdullah’s visits to China and India last year were in the same vein, and it is not farfetched that, at some future date, there will be reciprocal high level visits with Brazil. The Kingdom, like many other developing economies, are placing their economic bets that the BRIC economies hold the key to building global economic growth in the near future, as the more advanced economies show signs of faltering and creeping inflationary pressures. The economic well being of a large part of the globe in 2007, it seems, is tied to the future of these BRIC economies. It this justified?
Several important factors took place during 2006 which seem to shape the events unfolding during 2007. The most important of these was the start of the long-expected decline in the US dollar, a beginning of a return to higher interest rates, and India and Russia joining China as the fastest-growing economies.
Looking at these events, the fall in the dollar’s value has yet to have any impact on the large US current account deficit, but a correction will certainly take place at some stage and meanwhile the dollar remains vulnerable causing uncertainties to central banks holding it, including those of the OPEC oil producers.
The rise in interest rates to positive levels — interest rates higher than the level of inflation — has yet to slow the world economy, and even the large rise in oil prices witnessed during 2006 did not have a serious negative impact on world economic growth. The argument now runs that even if the advanced economies falter in 2007, global economic growth will be supported by events in China, India and Russia — the three fastest growing of the four BRIC’s, as Brazil’s economic growth is less significant than the others at the moment.
The forecasts for 2007, is that the US economy will grow by about 2 percent during 2007, and that both France and the UK are projected to grow slightly more than 2006, but that the overall Group of 7 (G-7) economies will grow by 2.1 percent, compared with 2.8 percent in 2006. By contrast, the projections for the BRIC economies are staggering — an average of 8.9 percent for 2007 compared with 8.5 percent in 2.6, but with wide BRIC growth variations. China leads the way at nearly 10 percent, India at 8 percent, Russia at around 7 percent, and even Brazil at a respectable 3-4 percent compared with the G-7 forecast. What does this mean for the world? In economic terms, the next business cycles, world growth or recessions are being shaped by the BRIC’s, but the underlying question remains — to what extent does the growth of the BRIC’s depend on the growth of the US and others of the G-7?
This is not an academic exercise, as all major economic powers, including the Kingdom which is now the major supplier of oil to China, are watching to see to what extent a US slowdown affects China. The principal Chinese exports are still to the US, and the outcome will be a litmus test for those that are aligning their economic future to the BRIC economies. By all account and evidence from past economic history, the developing nations seemed to have been a source of economic instability rather than one of benign economic stability. There were the Latin American debt crises, Asian currency crises and Russian defaults that seemed to shatter confidence in doing business with these regions.
That was in the past. Some would argue that the G-7 was not entirely blameless either in what happened during these past events. For the developed world, emerging markets sometimes acted as a useful safety valve for their own economic cycles, especially rising inflationary pressures. Cynically one could argue that it was far better for the emerging Asian or Latin American markets to collapse, driving global commodity prices down and the dollar up, than for the US or the G-7 countries to fall into recession. Developing countries recession meant lower imported inflation. Have things changed now, and has the BRIC’s economic growth over the past few years made them less susceptible to shocks than before ?
Again there are those that would argue that things are indeed changing for the BRIC’s and other major developing nations. Structural economic and political changes have taken place over the past few years that seem to auger well. These include China’s relations with the outside world, and a more open economy, along with India’s and Russia’s internal economic transformation towards a more free market economy. The information technology revolution has helped, as well as the heightened flows of capital into the best performing emerging markets in term of their openness, transparency and investment friendly regulations.
All this was lacking, or not so pronounced during the earlier mentioned emerging markets crises. Policy makers in the developing markets have also been keen advocates of price control and have adopted sophisticated monetary tools to control inflationary trends. Successful ones have issued debt in their own currencies rather than in dollars, thereby reducing their own vulnerability to unexpected currency moves. The recent rebound of the Chinese stock market helped to calm the rest of the world’s bourses, just to put into perspective the growing importance of China.
Napoleon is attributed to have once said that, “forethought we may have, undoubtedly, but not foresight.” How true. If we have to go on by what happened in the past, countries like Saudi Arabia should not be creating new BRIC alliances. But foresight is rare, for who would have dreamt of China’s economic growth taking place, if the Chinese had listened to “expert” advice in 1997 during the Asian currency crises that they must devalue their currency otherwise they too faced a meltdown? They did nothing and the results are evident today. China is now being pressed to revalue its currency or face dire consequences. The truth is that they will do what is best for them and sometimes it is better to ignore the best of advice. The BRIC economies are here to stay and shape the future of both the developing economies and the developed markets.
(Dr. Mohamed A. Ramady is visiting associate professor, finance and economics, at King Fahd University of Petroleum and Minerals, Dhahran.)