May 192008

By Dr Iram KhanECONOMISTS tend to divide the world in terms of economic development or growth potential. We have a group of G-7 countries, which are the most industrialised and the richest. Also, there is a group of OECD countries as well as a cluster of emerging economies.

There is, however, another set of countries which have been further differentiated from the emerging economies and called BRICs. Goldman Sachs, an international consulting group, in its 2003 paper coined this acronym. BRICs stands for Brazil, Russia, India and China.

Because of their development potential, recent growth trajectories and equally, if not more importantly, geographic and demographic size, these are the countries which, it is suggested, have the capacity to make a global impact and be a major force in the world economy. If everything goes smoothly, and there is no economic miracle either, then the authors project China could become the largest economy in the world by 2041, India the third largest by 2035, and the combined BRICs GDP could exceed that of G-6 (G-7 minus Canada) by 2041.In its December 2005 paper, the same consulting group extended this concept even further and discussed the probability of the ‘Next Eleven’ economies catching up with and becoming like BRICs. Pakistan is also included in this group of the famous Next Eleven, bracketed with countries like Bangladesh, Egypt, Indonesia, Iran, Mexico, Nigeria, the Philippines, South Korea, Turkey and Vietnam.

Before examining Pakistan’s potential to be a tour de force in the global economy, it would be appropriate to look at the factors that have been taken into account to declare a country a potential BRICs. The first and foremost, to our surprise, is demographic profile. According to the authors, without a sizable population, even economic miracles like Hong Kong and Singapore cannot have a global impact in spite of their high levels of income and living standards.

The authors also developed a Growth Environment Score (GES) to rank each of 170 countries for their performance under closely inter-linked performance categories. Stable macroeconomic policies ensure low inflation, tight monetary policy and reduction in fiscal deficit.Openness to trade and foreign investment is a prerequisite for rapid economic development, and one of the many important signs of healthy macroeconomic conditions. This provides greater access to better investment rates, modern technology, larger markets and greater employment opportunities. There is also a positive correlation between openness and profits, productivity and output at the micro level.

Another factor that constitutes part of GES is technological capabilities. These relate to penetration of PCs, phones and the Internet. These signify the presence of an educated workforce as well as their linkage with the global world.

Quality of human capital is also a core determinant of the GES. There is hardly any doubt now regarding a close and statistically strong association between education and economic growth. According to one estimate, one additional year of schooling leads to 0.3 per cent faster annual growth over a 30-year period.

Political stability and rule of law depend on institutions which include legal systems, functioning markets, health and education systems, financial institutions and government bureaucracy. Their quality is crucial to the promotion of trade and investment in the country. Institutional capacity is needed to introduce efficiency in the system and execute stable macroeconomic policies in the country.

Though all the BRICs countries (Brazil, Russia, India and China) score differently on these criteria, as a whole they come in the top half of the rankings for developing countries and above the developing country mean. China ranks most high (16th), followed by Russia (44th), while Brazil and India are further behind at 58th and 60th respectively. Had this been the only criteria, some other countries such as South Korea would have been part of BRICs, but it is their bigger size that lends them greater weight.

The GES individual scores highlight where there is room for improvement. Brazil scores relatively well on measures of political stability, life expectancy and technology adoption, but quite poorly on investment, education levels, openness to trade and government deficit. Historically, the performance of Brazil on the macroeconomic front has been pretty poor and it seems to carry this baggage along.Russia also scores well in terms of education, fiscal position, external debt position, openness to trade, technology adoption and life expectancy, but is placed at less than an ideal position in terms of political measures (political stability, corruption), investment rates and inflation.

India scores relatively well in terms of rule of law, external debt and inflation, but quite poorly in terms of levels of secondary education, technology adoption and fiscal position. It, along with Brazil, also lags behind in terms of the openness of its economy.China ranks well above the mean on macroeconomic stability, investment, openness to trade and human capital. Its rankings on technology adoption are more mixed (PC usage is still quite low) and corruption measures are also a little worse than the mean.

The GES scores are likely to be based on data provided by individual countries (for example World Bank Indicators) and surveys which are based on individual perceptions of businessmen working in those countries. The latter are likely to be subjective and biased. However, there is still some general truth in the analysis which merits our attention.

The writer is a Visiting Fulbright Scholar from Islamabad, currently based in the University of Florida.
Source: Daily Dawn, 19/5/2008

 Posted by at 11:23 pm

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