BEWARE OF BRICS !

Published in abridged format in the Financial Mail, end December 2012.

South Africa’s accession to the Brics grouping of nations is seen as one of the highlights of post apartheid diplomacy. Brics  is an acronym for Brazil, Russia, India, China and South Africa. In fact however, South Africa seems to have little to gain in the longer run from the Brics nations, or from diverting resources and time away from our traditional trading partners the UK, the EU and the US in favour of Brics, or indeed in choosing Brics rather than some other groupings of developing nations now out there.

Yes we need to diversify our international markets, but we must at all times measure our national interest in doing so.

Membership of Brics allows South Africa to box far above its weight on the international stage, as well as providing an outlet for anti western sentiments amongst the ANC elites. But a closer analysis reveals a much sadder story, with South Africa within Brics playing a cat’s-paw role for China, at that country’s beck and call.

 The imbalances and contradictions of our membership are glaring. South Africa’s entire economy is only as big as China’s sixth largest province. South Africa’s economy is one quarter of the size of the weakest of the Brics economies, Russia. As for our population it is a minnow compared with the vest consumer markets of the Leviathans of India and China.

Some diplomats say that China favoured South Africa’s inclusion in Brics because it can rely on South Africa to take China’s side in Africa trade. Just ask the Dalai Lama. Brics may just be a convenient synonym for those few ANC leaders still embarrassed enough by Chinese human rights and democratic record not just to say South Africa-Chinese trade. Because that is what Brics means in practice for SA-Brics trading relations.

Brics does have one major advantage – to use its combined weight to counterbalance trade pressures and demands from the West. On the other hand, for reasons that will become obvious, Brics does not constitute a formal economic bloc. As a new centre for the world economy to rival the EU and the US – forget it.

The Brics economies are all deemed to be at a similar stage of economic development although South Africa is more of a symbolic add- on than a major player in the alliance. Many see it as opposed to the western dominated G7 (Japan, US. UK. Germany. France. Italy. Canada). Brics is seen as evidence of the rising ability of developing nations to become a major player in the global economy, exceeding that of the West. And yes, this is in fact what is happening. But it is not confined to Brics. The G20 group of economies (of which the Brics countries are a part), are set to overtake the size of the combined G7 economies by 2050.

Brics countries comprise 40% of the world’s population. What’s not to like? The size of the Brics middle class by 2025 will be about 200 million people. China is already the world’s second largest economy after the US. It could overtake the US as early as 2040. Brazil is the world’s sixth largest economy.

You have to take these countries seriously as individual states.

But as a group there is little that actually binds the Brics together as a coherent whole. This is something that South Africa needs to bear in mind.

The only economy of the five that is still growing at a rapid rate is China. It is not always in the other Brics countries interests that this is so.

 Also their economies are differently structured. Russia and China are essentially state run economies, and some in the ANC Alliance would like to emulate this. But Brazil and India are much closer to the free market system.

The currencies of the Brics are much more volatile than the USD. Brazil’s real has declined by 15% against the USD this year. Several Brics countries have used their boom times money for social welfare rather than growth – Brazil and Russia (and South Africa) being some examples. These means that in these countries growth is hindered by inadequate infrastructure – like South Africa. Brazil’s economic growth rate fell from 7.5% in 2010 to 2.7% in 2011.

India is crippled by crony capitalism. Only China invested in infrastructure – but China has no national pension scheme. ? Uncertainty over India’s economic policies and poor governance have recently led Fitch Ratings to downgrade India to its lowest investment grade ratings, echoed by Standard and Poor. So beware of straight line growth projections. India is facing an economic crisis with factory output shrinking 3-5% by March 2012.

Then there is the matter of longer term social stability, applying especially to Russia and China. Russian democracy under Putin is increasingly hollowed out and its population is becoming restive.

The Chinese economy is bigger than that of all the other Brics put together. But the question as to how long China can continue to suppress the desire for democracy on the part of its booming middle class, and whether or not that transition can be made via some sort of Arab Spring or a Syrian style revolt, remains a moot one.

China’s GDP has shrunk from a stunning 10% pa to 8.9% this year. China has to keep double digit growth to prevent popular unrest in a country with only a vestigial social welfare system.

China faces the additional problem of the consequence of social engineering, where the population will grow old before it grows rich, and the problems of excess young men due to infanticide of girl children widely practiced in that country.

Nor is intra -Brics trade that high. For China, trade with Russia is at a paltry 2%. Frictions between China and India will also grow, including serious border disputes already violated by China in the past. There are also conflicts between the two over water resources.

Finally, the Brics countries are heavily dependent on US and European consumption for growth.

There are also other groupings attracting more investor interest now than the Brics nations. Chief amongst them are the more informally linked, but just as fast growing MIST countries – Mexico, Indonesia, South Korea and Turkey. It is also possible that Nigeria (but not South Africa –our population is too small) could join their ranks soon. MIST is already attracting FDI away from Brics as more market -friendly, socially stable and business-friendly.

Some investors prefer the CIVETS: Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa.

The truth is that the average wealth per person in the G7 countries will continue to far outpace that of the Brics economies into the foreseeable future. The G7 countries still maintain their lead in growth in per capita income. The thing is not to confuse overall size (where China will win, with 1.2 billion people) with per capita wealth where the west is still far ahead and likely to remain so for the rest of this century.

But if you are a futurist looking at the changing global economy, remember this; that Hong Kong and Singapore will soon be among the world’s top five most influential economies. In sum, for those in South Africa who see Brics as the solution, it may be time to think again.

By Dr Gavin Lewis, DA MPL, Gauteng.