JIM O’Neill of Goldman Sachs did the world a major service when, over a decade ago, he coined the term BRICs to cover four economies (Brazil, Russia, India and China) that were moving rapidly up the world’s league table.
He drew attention to the fact that China was not emerging alone, but that an associated rise in the real price of commodities and energy would mean that commodity-based economies would benefit from the process. The past ten years have proved him to be prescient.
But now the BRICs look to have less and less in common – except that the UK exports much less to them than we ought. China is an unprecedented combination of an economic superpower and a developing economy. India will be an economic superpower in 20 years’ time, but is not one yet. Russia looks increasingly likely to remain dependent on commodities and gangster capitalism, while scaring off foreign investment. Its fortunes will be based on energy and commodity prices and it might well reach its high water mark within the next 15 years before falling back. Brazil is now a mix of an emerging economy and a commodity economy.
The BRICs group is no longer homogeneous. It also excludes economies we ought to be taking seriously – Korea, Taiwan, Indonesia, Turkey, possibly Nigeria and Mexico, as well as smaller high-growth countries like Sri Lanka that could provide exciting, if niche, opportunities for investors. We need a more sophisticated classification.
That is why I have coined three new categories: sunrise economies that are likely to be consistently fast-growing over the coming years; sunset economies that are likely to slip down the world’s economic league table; and serendipity economies that are lucky to have the primary resources the world wants to buy, but whose fortunes will depend on the market prices of their prime commodity exports.
Sunrise economies like China and India, but also a wide range of others like those mentioned above, are forecast to grow relatively rapidly over the next 30 to 40 years. Some, like China, will probably grow more slowly than at present as their labour force growth tails off and becomes negative. Others will keep growth momentum for longer – there is a good chance that Indian GDP could overtake Chinese GDP around 2050. By then its population will be 40 to 50 per cent higher.
Sunset economies like the US, most of Europe and the UK are likely to grow more slowly (if at all), and will fall down the economic league table. How badly we do will depend on whether we enter the cycle of misery where diminishing competitiveness means that wages at the bottom start to overlap with levels of welfare payments. Once this happens, unemployment rates rise sharply (as is happening in Southern Europe), welfare bills become unaffordable or tax rates rise. This further damages competitiveness and accelerates the process.
Finally, serendipity economies are those in the right place at the right time, like Russia, Brazil, Canada, Australia and, of course, Middle Eastern economies like Saudi Arabia. They largely rely on natural resources and their future will depend on the likely movement in the relevant commodity prices. Our view is that minerals will be in generally short supply for most of the next 50 years, food for 20 to 30 years depending on how genetic modification works out, but energy could even cease to be scarce in 20 years’ time.
If this is the case, Saudi Arabia and Russia may be not too far away from reaching their high water mark and may even be smaller than they are today by 2050. Obviously, the key determinant for a serendipity economy is how it uses its luck. Canada is reinvesting its success in making itself an attractive economy in which to invest. while Russia is doing the opposite. And the Australian government, with its failed attempt to introduce massive mining supertaxes under the Kevin Rudd government, was too greedy. The result is that mining firms are now very cautious about investing, and are requiring international guarantees before spending money.
These new categories: sunrise, sunset and serendipity are a much better basis for analysis than the BRICs category. It has done well, but has served its time.
Douglas McWilliams’s sixth lecture as Gresham professor of commerce, The Winning and Losing Economies, will be held in the Museum of London, 150 London Wall, London EC2Y 5HN, at 6.30pm Thursday 21 March. McWilliams is also executive chairman of the Centre for Economic and Business Research.