Hitting a BRIC wall – A low growth trap

Emerging markets can be grouped into various categories such as the BRICS, which comprises of Brazil, Russia, India, China and South Africa. The BRICS have recently experienced slowing economic growth rates. The global financial crisis may form part of the reason why these economies are growing so slowly, but one also needs to look at other factors that influence their growth rates. These factors can be grouped into three categories which describe the criteria expressed in terms of variables that measured economic performance. These categories are the following:

  • Markets and information dissemination efficiency (inflation, corruption, and democratic procedures).
  • Macroeconomic efficiency (Effective macroeconomic procedures and international openness).
  • Institutional efficiency (Infrastructure, the rule of law and the stability of government).

In the past China experienced double digit growth rates. They were known as the leader of economic growth. However, their economy has become vulnerable to weakening external demand amongst other factors, which has resulted in slowing growth rates.

There may be a way forward for China to achieve relatively high rates of economic growth. Their current plan is to become more consumption driven. However, before they can achieve this they need to remove barriers such as low wages and poor working conditions. These changing labour market conditions suggest that they will no longer be able to supply cheap exports.

According to the Global Competitiveness Index it is difficult to do business in China owing to factors such as insecure property rights. China needs to improve their business environment in order to reduce transaction costs. This may help the country to achieve quality growth instead of quantity growth.

India experienced relatively high levels of economic growth rates (7.8%) at one stage due to reforms that had been introduced by Manmohan Singh. However, the international economic crisis, economic policy blunders and a dysfunctional government are leading India into a trap of slow growth (known as the Hindu rate of growth – 3.5%).

South Africa’s economic growth rates have only been an average of 3.2% since 1994. The main challenges continue to be poverty, unemployment, inequality and corruption. The high unemployment rate of 25% is a clear indicator of institutional failure. This reflects a failing education system. Redistribution of wealth continues to dominate government’s actions at the expense of needed infrastructure. For example, South Africa introduced institutions favouring the political elite such as BEE.

Strains in the political economy of South Africa have resulted in significant economic costs such as corruption, persistent distrust of the private sector and imbalances in policy decisions. There have also been numerous service delivery protests and wage disputes which is an example of the culture of violence in South Africa. From the above mentioned, it seems that South Africa is heading for a low level growth trap.

The BRICS may all be heading for a low growth trap if they continue to neglect their political and economic environments. China continues to be the leader of economic growth but at lower rates. There may be hope for South Africa to escape a low growth trap with the implementation of the National Development Plan.

In order for emerging markets to escape from the low growth trap, they require good economics and politics since inclusive economic and political systems do matter for economic growth. It seems that for emerging markets to secure sustained economic growth, they will need to implement meaningful economic and institutional reforms.

riskbusters4

J.M. Shrimpton

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