Building with BRICS

BRICS countries contain nearly half the world’s population; China and India both have over one billion citizens each and represent around 23% of world GDP. Clearly, they continue to represent exciting investment opportunities, but what about the impact they will have on the rest of the world?

BRICS is the acronym for the combined emerging economies of Brazil, Russia, India, China and South Africa. Initially coined BRIC by Goldman Sachs in 2003 (without South Africa), these emerging economies were predicted by their analysts to be among the world’s leading economies by 2050. Jim O’Neill, the analyst that devised the acronym, proposed that China and India would be the fastest growing and lead the world in providing manufactured goods and services, while Brazil and Russia would be the dominant suppliers of raw materials. In the intervening years, China and India have mainly surpassed expectations in their annual GDP growth, however Russia and Brazil have suffered with recession and in the case of Brazil, political unrest.

Initially conceived to be a tool to assist investors looking for exciting growth prospects, BRICS have taken on a life of their own. It’s a strange example of ‘if you build it, they will come’; a prominent financial figure developed an idea that grouped four very different countries, linked only by their potential for rapid growth, which has led to an alliance of these nations. The BRICs themselves were responsible for inviting South Africa to join them in 2011. Although, unlike for instance the EU, these countries don’t have political alliances or a trading association, leaders of BRICS countries have regular summits to discuss and lobby for shared goals (including enhancing their representation on the world stage and pursuing the democratization of international governance) and an ‘open world economy’.

These countries contain nearly half the world’s population; China and India both have over one billion citizens each and represent around 23% of the world GDP. Clearly, they continue to represent exciting investment opportunities, but what about the impact they will have on the rest of the world?

The pros and cons of globalisation are intrinsically linked with the ones that impact our relationships with BRICS. Globalisation has meant that countries; their economies and cultures, have increased interconnectedness. It often benefits some of the richest countries who can capitalise on cheap labour in developing nations and sell for high prices in leading economies, but also benefits some of the poorest countries in that they can access leading markets and sell cheap goods.

This, and global shift have led to a huge amount of companies manufacturing their goods in emerging and developing countries like BRICS. India, one of the world’s largest manufacturers of goods, provide cheap and efficient labour. Countries like Russia and Brazil (along with many other South American countries) are extremely rich in natural resources. Many developed nations with minimum wage laws, health and safety regulations and other considerations have moved to manufacture their products in countries like India to decrease the price of manufacturing their goods. Labour market deregulation and cheap local resources mean that companies can get things done at a smaller expense and a lot more efficiently than if the factory was in a developed nation. The flip side of this coin is the oft reported and seemingly never decreasing sweat shops. The harsh reality of being able to buy three dresses, four t-shirts and a pair of trousers for less than £20, is that somewhere down the line, people and the environment are suffering the consequences.

Global shift also affects the jobs available in developed (and developing) nations, including the UK. Manufacturing goods abroad for less money, makes businesses a larger profit and allows companies to grow, which in turn, allows their countries to have higher economic growth. However, this same growth also removes jobs, mainly secondary, but also primary, from the population. Although most primary sector employment has dwindled in the UK due to depleted resources and mechanisation, cheap imports mean that it is often more cost efficient to import resources than get them ourselves. The secondary sector industry is one of manufacturing, and only around 10% of UK workers currently work in this sector. This is also a result of mechanisation, however the trend of businesses to relocate manufacturing to cheaper and de-regulated nations has also played a part. This sector has shrunk by 600,000 people in the last decade leaving only fewer than three million workers employed in the manufacturing sector.

A risk with manufacturing products abroad is that it opens the possibility of copying or outright theft, especially in the pharmaceutical and technology industries. This has already been seen in India and China.

The impact of cheap goods and increased globalisation can be seen in many areas and industries. Benefits to developing nations include increased employment opportunities, investment in communities, and improved infrastructure. One of the biggest impactors on the western world from BRICS nations in recent years is steel from China.

China accounts for 60% of the BRICS’ total GDP and it is the second largest economy in the world. Their doubledigit economic growth over the last few decades led to increased domestic demand for steel, and the government invested heavily in this area.

When their recent slow-down in growth left the steel industry with a lot of material and a shrinking domestic market, they understandably looked abroad. This has put the steelmakers of other nations, including the UK, under pressure and has led to job losses. China is unlikely to do anything about this, as reductions in production would lead to job losses and unrest for their own people (although many unregulated ‘illegal’ manufacturers have been shut down). This has led to trade tariffs being introduced by the USA to increase the cost of foreign steel for US based companies. This in turn means that China is looking increasingly to the EU for buyers, already a strong trading partner that will be very reluctant to risk a trade war by introducing tariffs. The UK industry is now being hit from two sides, cheap Chinese steel is being imported and outpricing UK products at home, and the US is much more reluctant to buy highquality and high-value UK steel products in light of the new tariffs.

THE INCREASING GLOBAL DOMINANCE OF A SINGLE BRICS NATION IS ALREADY HAVING A MASSIVE IMPACT ON WORLD TRADE AS WELL AS AFFECTING LOCAL COMMUNITIES.

It’s clear that the idea of making things quickly and cheaply which has fuelled western economic growth and created big profits for businesses, can also cause problems. We hear a lot about this on the global scale, but it has a huge impact on communities. Scunthorpe is one such community. The collapse of British Steel as of May 2019, has propelled the matter into the public spotlight as they seek investment to save many thousands of jobs, over 4,000 of which are in Scunthorpe. This downturn isn’t just due to cheap Chinese imports, Brexit uncertainties being also cited, but it is certainly a factor.Scunthorpe is already a struggling area, with above average unemployment and poverty, so the increasing global dominance of a single BRICS nation is already having a massive impact on world trade as well as affecting local communities.

Ultimately, your politics and stake in different industries will impact what you think about BRICS. They are gaining a greater slice of global wealth which can only be fair after western monopoly for so long. Manufacturing in these nations has led to lower prices for western consumers, and jobs for those in developing nations. We have lost manufacturing jobs in the UK, but employment is still at an historic low and more skilled jobs in the quaternary sector are emerging.

Increasing investment in BRICS nations is leading to improved well-being for their people in some areas, and improved access to information is making the governments of these nations consider the environmental impact of their actions. China now spends more on renewable energy that any other nation, and Beijing is a world leader in wind and solar power. The New Development Bank (NDB) was launched by BRICS countries in 2015 with $50bn of initial capital, and the NDB president V Kamath promised that the projects to be approved would be ‘mainly infrastructure and green energy initiatives’ which has been borne out, with their 2019 meeting focusing on sustainable development.

As the US is pulling back from green initiatives, and other nations are struggling to put the environment before their bottom line, this is welcome news. It is perhaps to these emerging global leaders that we will look for innovation, development and green technology in the future.

Laura Watkins