Montrose Journal Winter 13
THE QUEST FOR GROWTH - THE INGREDIENTS OF SUCCESS -MICHAEL MACLAY
At a recent international gathering, delegates piled enthusiastically into a working session to hear the secrets of the BRICS’ economic success. Under a Brazilian chairman, speakers from Russia, India and South Africa talked about how they had achieved high economic growth rates – and proceeded to tell such widely divergent stories that by the time they came to China, there was just one common factor on which they all seemed to agree: a greater willingness to accept dynamic leadership from the state, an openness to ‘state capitalism,’ alongside if not in opposition to its freemarket, Washington-consensus cousin. The Chinese speaker, with a weary sigh, then destroyed this last piece of BRICS ‘logic’, muttering that unless China broke the power of its state-owned enterprises in the next phase of reform, then its own economic miracle would be over for good.
The evocation in 2001 of this new economic alignment by Jim O’Neill, then Chief Economist at Goldman Sachs, was aimed in the first instance at investors. More than ten years on, it still looks remarkably prescient. The figures he posited for the BRICs’ growth and the proportion of world GDP they would command was uncannily accurate. It is hardly surprising that identifying ‘the next BRICS’ is a staple of analyst advice and wine-bar backchat, indeed O’Neill is returning to the charge in the New Year with a BBC radio programme setting out his latest picks.
But can this be more than a parlour game or a clever trainspotting exercise? Is there any formula that others might exploit in what these very disparate countries have achieved? The growth figures we show on this page comparing the BRICS with other developing countries would suggest not, unless we are simply talking about China. And the past three years have seen each of O’Neill’s original four, joined in 2010 by South Africa, faltering – even China has had its own momentary ‘growth wobble’.
A point touched upon only lightly in O’Neill’s original paper was demography. It was O’Neill’s then colleague David Blake who did justice to this critical characteristic of the BRICS: that they contained larger populations than almost anyone else. Writing in the first edition of the Montrose Journal in 2003, Blake said: “There is something new about the globalisation which we are seeing now. For this time the Great Discovery is not a mineral or a machine or a source of food. It is people. And people make it different”.
The world economy has had peaks of what we now call globalisation in the past. Some would argue that in terms of the proportion of world GDP taken up by international trade and investment, and the absence of trade and capital restrictions, we are still catching up with 1914. But one thing that makes our world so very different from that of a century ago is the scale of global trade flows. Every day brings us an avalanche of raw materials, industrial goods and consumer products from China, India, Brazil and the developing world, in exchange for a cornucopia of sophisticated machinery, high-tech goods and luxury items that create a much more level playing field for production as well as consumption from Sao Paolo and Port Elisabeth, to Chennai and Chongqing. This comes from the sheer weight of people now playing an active role in the world economy.
So in trying to identify where next we might find BRICS-type growth figures in the years ahead, should we look to countries with growing populations like Nigeria, Egypt or Yemen? Clearly not, as the last two examples make clear without a moment’s reflection. There are a few basic conditions that states need to satisfy, and certain things that governments can do, that make growth at least more likely if not inevitable. But no-one has yet unlocked the answer to the question of making growth self-sustaining in any of our countries.
We can however define at least some of the things that emerging economies need, and some things that governments can helpfully do, if there is to be sustained economic growth:
• It helps not to have have wars and civil conflicts, which might explain why the promise of Africa is taking some time to be fulfilled
• The proceeds of growth must not be kept within a small kleptocracy that will export its wealth and fail to invest
• An educated workforce and an ambitious middle class help, as does a strong work ethic
• Maintaining constructive relationships with powerful neighbours and major powers that pay back is important - and it is often good to have a diaspora.
Prescribing the right policy mix is more difficult
• Reforming labour markets and developing the right industrial sectors helps
• Nurturing resources and gathering in technology in ways that benefit the country through the right mix of free trade and mercantilism is good
• Money must not be committed to unsustainable social programmes, particularly if they are pinned on finite funding from resources
• Getting the demography right makes a huge difference: restricting population in the short term but not putting a cap on it for the longer term; and absorbing the right mix of immigrants without being overwhelmed, can be a terrific catalyst.
Some sort of coherent reform programme, taking political activity beyond a potentially corrupt elite and encouraging the development of functioning markets, seems from our survey to be fundamental. Everyone will have their own ideas according to their political or economic orientation on how best to achieve success.
There is of course a strong school of thought arguing that what makes successful economies diverge is more interesting and maybe more critical than what unites them: China has prospered economically without making much progress towards democracy, while democratic India has not achieved the growth everyone hoped for. Each country, and each market, must be looked at on its own merits.
Yet the criteria we have identified do re-surface repeatedly in discussions of these questions, and we think they are worth bearing in mind through the essays which follow.
In recent times it seems to have been fashionable to start with the acronym and work back, so recent imagined lists have included CIVETS (Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa before its inclusion in the BRICS); MIST (Mexico, Indonesia, South Korea and Turkey) and MINT (as MIST, swapping Nigeria for South Korea). Our own list, including Myanmar, Mexico, Indonesia and Ghana, is not based on an acronym. We are not aiming to give investment advice. But we hope in the next few pages that you will find our update on the BRICS, and our survey of some interesting candidates, at least suggestive.
The writer is Executive Chairman of Montrose Associates