POLICY, POLITICS & CULTURE
© DAMIR MARUSIC
TELEPHOTOS
The very structural characteristics that launched the economic successes of Brazil, Russia, India, and China are now holding them back.
Published on April 20, 2014
Once the darlings of the global economy and the brightest hope for economic growth robust enough to lift most if not all boats around the world, the four major emerging-market countries—Brazil, Russia, India and China—have lately fallen from grace. They withstood the global financial meltdown of 2008 far better than the rich countries of Europe and North America, but growth rates in all four countries have declined in the past several years. Goldman Sachs, the company that first coined the term “BRICs” in 2001, issued an analysis at the end of last year whose title summed up its conclusion: “Emerging Markets: As the Tide Goes Out.”
Tides also come in, of course, so the important question about the BRICs is whether their poor performance of the past few years stems from cyclical, transient causes or is due to longer-term, more deeply rooted forces that presage stagnation or even decline. This matters for political as well as economic reasons. The rise of the BRICs, and of other emerging-market countries, has been thought in some quarters likely to lead to a shift in their favor in the global balance of power, with profound consequences for all countries, including the United States.
Whether or not the BRICs realize their potential for economic growth, that potential exceeds that of the world’s wealthiest countries because of what some economists call convergence. Rich countries already have in abundance what produces growth: the most advanced technology and techniques of production. For them, further growth requires inventing new techniques and technologies, a slow, unpredictable process. The BRICs, by contrast, can expand their economies simply by incorporating the technologies and techniques the rich have already invented. Incorporation is a much easier and faster way than invention to mobilize existing but underutilized economic resources—hence the buoyant optimism of recent years. All things being equal, the BRICs should lead the world in growth until they, too, reach the technological frontier.
All other things are not, however, equal. That is the reason for the outgoing tide and the uncertainty over the BRICs’ long-term economic prospects, and the political consequences of their growth rates. While certainty about their economic future is not possible, the range of uncertainty can be narrowed with a single observation: The extent to which the BRICs fulfill their considerable economic potential in the years ahead will depend, as do all economic matters, on politics.
Specifically, the economic growth rate for the four BRICs will depend on how well each copes with a feature of its politics that once served to spur economic advance but now hinders it. For Brazil that feature is the political tradition known as populism. For Russia it is the distorting impact of its large reserves of energy. For India and China it is their political systems: democratic and authoritarian, respectively.
BRAZIL: THE PERILS OF POPULISM
In Brazil, as elsewhere in Latin America, populism has involved a large economic role for the government, which sought to enhance public welfare by providing financial benefits to many Brazilians, including direct transfers and well-paying jobs in state-managed firms. Brazilian populism’s economic record in the years after World War II was eminently respectable. From 1950 to 1975 the country grew at 7 percent per year. Over the next 25 years, however, per capita income hardly grew at all. A major reason was Brazil’s continuing and sometimes ruinously high inflation, the result of its populist economic policies. Loans and subsidies to state-owned enterprises, the growing payrolls of government workers, and generous programs of government-provided benefits were expensive. They produced large deficits, which the government funded either by borrowing, thereby creating steep levels of debt, or by printing money—and sometimes both. As a result, the price level rose sharply.
With the economy teetering on the brink of hyperinflation in 1993, then-Minister of Finance Fernando Henrique Cardoso introduced a plan that succeeded in breaking the inflationary spiral by the summer of 1994. Cardoso was subsequently twice elected Brazil’s President, in 1994 and 1998, and he used his tenure to dismantle part of the structure of economic populism. His two-term successor, Luis Inácio Lula da Silva, continued much of Cardoso’s economic strategy despite the ideological differences between the two men.
Even with low inflation, Brazil has grown more slowly than the other BRICs. The main reason, which stands as the chief obstacle to its high growth in the future, is the significant residue of populism that has remained. The country has retained many of the commitments to public expenditure that accumulated over the course of the 20th century, the fulfillment of which made inflation a chronic problem. The government is still obligated to pay generous social welfare benefits; pensions, for example, account for an unusually high 13 percent of GDP. It continues to be responsible for the wages of the many employees of its own bureaucracies and the workers in enterprises that public authorities still own and operate. These wages tend to rise rapidly.
Because of these demands on the public treasury, budget deficits have persisted. The Brazilian government has funded the deficits more extensively through taxation than it did in the past. This has helped to curb inflation, but high taxes and high public spending crowd out private investment, which is a major source of economic growth. Moreover, Brazil’s public spending does less than it might to foster growth because populism channels government money to uses that fail to promote growth. The pension benefits, pork-barrel projects, generous public-sector wages, and income-supplement programs mostly support private spending. For growth, however, Brazil also needs public investment—in roads, ports, power plants, and, above all, in education. The shortcomings of its educational system, in particular, cloud the country’s long-term economic future.
That future depends on the outcome of the country’s ongoing political struggle over economic policy. On one side of this struggle, pressing for ever-greater public expenditure, stand the forces of populism, with their deep historical roots, their powerful constituencies, and in some cases—efforts to reduce Brazil’s poverty, for example—their strong moral claims. Opposing them are those favoring fiscal prudence and productive public investment. They have global economic history, including the past two decades of Brazilian economic history, on their side, but much less political support throughout the country.
Added to these conflicting forces, a new development is bound to play a large role in determining Brazil’s economic destiny: large, offshore reserves of oil. Oil revenues, if used wisely, can augment the rate of long-term economic growth. But such revenues are not always used wisely, as the experience of Brazil’s fellow BRIC, Russia, vividly demonstrates.
RUSSIA’S RESOURCE CURSE
In 2012 energy (natural gas as well as oil) accounted for around 30 percent of Russia’s GDP and approximately two-thirds of its exports. The total value of energy exports, just $29 billion in 1990, climbed to $76 billion in 1999 and $350 billion in 2007. Half the country’s economic growth came not from anything Russians made or did but simply from the rise in the international price of oil. By one estimate a $10-per-barrel rise in the price of oil boosted Russia’s GDP by about 2 percent.1
Yet energy reserves have economic drawbacks as well. They can do for economies what steroids do for athletes, enhancing performance in the short term but having deleterious effects in the long run. Energy riches can produce pathologies common enough that a term for those that suffer from them has come into common usage: petro-states. Studies have shown that petro-states have sometimes actually grown more slowly than countries without energy resources. The presence of large energy reserves can retard long-term economic growth in four ways, all of them pertinent to Russia.
Demand for its energy has pushed up the value of the Russian currency, injuring import-competing and exporting industries—a syndrome known as the “Dutch disease.” Energy wealth has also increased the size of the Russian government, which diverts money from more productive purposes. Oil revenues support a bloated bureaucracy and a variety of often unproductive government programs. Perhaps most damagingly, because the energy sector alone supplies the revenues that the government needs, oil wealth relieves pressure to devise and implement policies that promote the development of a robust and broad-based economy. Like other petro-states, Russia has lagged in building the infrastructure and the institutions—legal and financial systems, for example—needed to stimulate productive employment. These countries can get rich without working, and so do not learn to work.
Energy wealth inhibits economic growth in yet another indirect but important way: It discourages the development of democracy. The windfall from oil creates a formidable temptation for rulers to hold on to power indefinitely in order to keep a large share of the wealth for themselves. That is what has happened in Russia. Vladimir Putin has made Russia less democratic, restricting liberties and limiting the Russian public’s control over its government. Oil wealth gives Putin not only the incentive but also the means to retain power: He, and others in his position, can bribe the populace with generous welfare benefits in exchange for political passivity. Where they cannot purchase acquiescence, they can fund effective instruments of repression. Putin has done both.
The absence of democracy in energy-rich countries, including Russia, inhibits genuine and broad-based growth because rulers have little incentive to take steps, or spend money, to promote it. They get rich from the proceeds of the country’s energy sales, and besides, economic growth might foster political activity that would threaten their monopoly of power. Those outside the ruling circle do have such an incentive, but without channels of political participation they lack the power to press the rulers to undertake growth-promoting policies.
What could lift Russia’s oil curse? It could happen through a decline in the global price of energy, because of new discoveries of fossil fuel, new and different sources of energy, and the widespread diffusion of the techniques of conservation combined with a reduction in Russia’s energy production. Some of these developments are already taking place.
Falling energy income might put Russia on a more promising economic course by removing the basis for the political support the Putin regime has enjoyed. It might ultimately lead to the replacement of the current regime with one more democratically oriented and more committed to growth-promoting policies. Still, democracy by itself does not guarantee optimal economic performance, as the experience of another BRIC country, India, demonstrates.
INDIA’S DILEMMA
India has maintained democratic government, with one brief exception, since its independence from Great Britain in 1947. Democracy is one of the country’s proudest and most important achievements, and has in fact made a major contribution to the economic progress that it has achieved. Like populism for Brazil and energy for Russia, however, democracy, as practiced in India today, blocks economic progress.
With its various ethnic groups, religions, rigid social categories known as castes, and 17 major languages, India has the diversity of the entire European Union—but with twice as many people. Given this diversity and the conflicts to which it has inevitably given rise, without democracy, with its emphasis on compromise, the peaceful resolution of disputes, and the rights of minorities, a united India within its 21st-century borders would not exist. India qualifies as an economic under-achiever, however. Two features of the Indian economy in particular have kept it from reaching its potential. Both features have roots in India’s version of democratic government.
The first of these is the economy’s unusual, lopsided configuration. Every modern economy has three sectors: agriculture, industry, and services. As countries become richer, workers move from one sector to another, and almost always in a particular order: from the farm to the factory to the office. India is different. Despite economic growth and the decline of agriculture’s share in its total output due to expansion in other sectors, its agricultural workforce has declined only modestly. Its industrial sector has grown relatively slowly, contributing only 27 percent of the country’s GDP in 2008, with 17 percent coming from manufacturing. Services in India, especially the country’s thriving high-tech sector, have, by contrast, expanded rapidly, but because this sector provides relatively few jobs, its growth has done relatively little to reduce poverty. Only a robust industrial sector with growing manufacturing industries can do that, but Indian manufacturing suffers from a shortage of the industries, and therefore the jobs, that require unskilled labor.
The second feature of India’s economy that keeps it from its full potential is the shortage of economically critical assets government ordinarily provides: roads, bridges, ports, and adequate schools, as well as reliable supplies of electricity and clean water. Poor infrastructure constrains the Indian industrial sector. The shortcomings of Indian education also hold back the country’s economy, including its manufacturing sector. Even many unskilled factory jobs require rudimentary literacy, and as jobs become more complex, higher levels of education are needed to perform them. Many villages have only part-time teachers for their young children; some have none at all.
These obstacles to growth have their roots in India’s democracy. In India, as in other democratic countries, people are free to organize themselves not only on the basis of a common identity—race, religion, ethnicity—but also according to common economic interests. Such groups work politically to bring benefits to their members, but the benefits can come at the expense of the general welfare. India, like other democracies, is susceptible to the formation of these “distributional coalitions”, which tend over time to grow in power and number, to the detriment of a country’s economic well-being.2 Powerful minorities have helped to create India’s two major economic problems—a stymied manufacturing sector and inadequate infrastructure and education—by imposing some policies and blocking others, in both cases harming the interests of the country as a whole.
Regulations and laws governing employment make it all but impossible to fire workers. This discourages hiring them in the first place and keeps firms from entering industries that require large workforces. The largest and most efficient Indian companies tend to avoid such industries, which are precisely the ones that could, if established on a large scale, lift millions of Indians out of poverty. Similarly, laws restricting the use of land make it difficult in many places to build facilities such as factories and hotels that could employ large numbers of people.
Unions and other interest groups promote and defend the laws, regulations and restrictions that block employment-generating initiatives. Minorities also inhibit the building of the infrastructure and the development of the educational system that India needs by using the political process to divert resources to themselves, thus making them unavailable for building roads or paying teachers. Subsidies of various kinds, all of them the legislative achievements of interest groups, account for 2.4 percent of the country’s GDP. The Indian bureaucracy is itself a large, powerful, and voracious interest group. Its salaries consume resources that would be better devoted to more productive uses. Spending according to the whims of special interests leads to budget deficits; borrowing to finance these deficits drains yet more money from infrastructure and education.
India has two methods, both consistent with democracy, of dealing with politically imposed obstacles to economic growth: removing them and bypassing them. The country’s political system badly needs reform, and the impetus for political reform around the world often comes from the middle class: propertied, salaried people who see government as an impersonal enforcer of the law and a neutral arbiter of disputes rather than as a source of funds and favors. Such a social stratum is growing in India, though it is still a minority of the total population. The victory of the new reformist political party Aam Aadmi (“common man”) in the December 2013 elections in the national capital region signaled its rising strength.
Even without serious political reform, Indians have found a way to bypass the government’s chronic failure to provide adequate infrastructure and education: privatization. This has involved not only returning to private enterprise tasks that they usually perform in other countries—the production of steel and cement and the management of hotels, for example—but also opening to private participation activities customarily undertaken by the government. Rather than reforming the government, such privatization circumvents it.
India’s greatest success with privatization involves communications. The government monopoly in charge of telephone landlines performed poorly. Few Indians were connected to the national system. Once private cellphone companies were permitted to operate, however, access to telephone service mushroomed. In 1991 the country had only 5.1 million phones in aggregate; by November 2006, an average of 5.2 million new telephones were going into serviceeach month. At that point India had 153.3 million of them. By May 2012 there were 960 million telephone subscribers, 929 million of whom used mobile phones, in a population of 1.2 billion.
How far and how quickly reform and privatization proceed will do much to set the rate of Indian economic growth. That, in turn, will determine how rapidly, if at all, India catches up with the country against which it often measures itself—the final member of the BRICs and the largest, fastest-growing, and economically most important one: China. As with the other BRICs, a particular feature of Chinese public life that has enhanced its economic performance in the past threatens to constrain it in the future. As in the case of India, China’s asset-turned-liability is its political system.
THE LIMITATIONS OF AUTOCRACY
Descriptions of China’s economic performance invariably feature superlatives, and rightly so. The country has sustained the highest annual economic growth rate of any major country— almost 10 percent—for three decades, which is the best performance in recorded history. In so doing it has lifted more than 500 million people out of poverty. It has become the world’s largest exporter, the world’s largest emitter of greenhouse gases, the world’s largest market for automobiles and the country with the largest store of hard-currency reserves. It has also become the world’s second-largest economy and is on course to replace the United States as the global leader in total annual output. Every country’s economy will be affected by how well China’s performs in future.
China’s autocratic government has not only presided over the country’s three-decade run of resounding economic success; it has contributed to that success. It has excelled in installing infrastructure. It has managed to give virtually all its citizens a basic education. It has conducted, on the whole, prudent macroeconomic policies. It coped well with the economic crisis of 2008–09. When the recession struck, the regime responded quickly, implementing in November 2008 a stimulus package equal to 14 percent of GDP. This cushioned the impact of the massive global downturn on China.
Its autocratic character probably helped the regime to carry out its growth-friendly policies. The fact that Chinese authorities do not have to respect the civil liberties or the political opinions of those they govern made it easier to devote resources to building roads, schools, and power plants, and to respond quickly to economic shocks.
Whatever the economic advantages China has derived from its autocratic political system, however, it has become a wasting asset. Autocracy will retard efforts to do the four key things China must do to succeed: achieve high productivity; add more value to the products that are made in the country; rely less on exports and more on domestic consumption; and maintain a stable political framework. Only a political system that is more democratic—as democracy is properly understood—can deliver these outcomes.
Democracy is a hybrid political form, the product of the merger of two distinct political traditions. One is popular sovereignty—rule by the people through freely elected representatives—which makes the government accountable to the governed. The other is liberty, more commonly called freedom, which includes economic liberty in the form of private property as well as religious liberty and the political liberties embodied in the American Bill of Rights. Whatever they may be called in different democratic political cultures, these liberties are protected in all functioning democracies by the rule of law.
Each of these two traditions is relevant to China’s economic agenda. Higher productivity, adding more value to what the country produces, and shifting from selling to foreigners to selling to Chinese will require more liberty. Higher domestic consumption will also require wider popular participation in the governance of the country, as will the more purely political task of keeping the country stable enough for productive economic activity to take place.
The greatest potential for enhancing productivity lies in the financial sector. China allocates resources inefficiently because the government directs investment through its control of the country’s major banks. It would do better to entrust this task to private, profit-seeking organizations and individuals—private banks and investors—who would do it more effectively. For this purpose China needs more economic liberty—that is, better-defined and more secure property rights, which are crucial for many of a market economy’s functions, including the allocation of capital.
To maintain a high rate of economic growth, China will also have to rely less on the kind of unskilled manufacturing that has played a major role in its economy for three decades. It will have to move to more lucrative stages in the production process, such as inventing, designing, financing, packaging, and marketing rather than simply assembling products. This involves participating in the cutting-edge industries of the 21st century—biotechnology, for example—which rely on scientific discovery and technological innovation.
Here, too, economic liberty matters. As important as secure property rights are for improving the financial system, they are also a prerequisite for innovation. Inventors and entrepreneurs spend time and risk their money in search of new processes and devices, and to found new companies, when they are confident of reaping the financial rewards if they succeed. They cannot have such confidence in China, where businesses must have government approval and give government officials a share of their profits in order to operate.
The Chinese government will have to permit greater liberty in other ways in order to ensure economic growth. The more ingenuity and creativity a job requires, the greater the freedom there must be to do it well.The more ingenuity and creativity a job requires, the greater the freedom there must be to do it well. Factory workers assembling computers need nimble hands and a basic level of literacy, but not broad latitude to experiment and to meet and discuss their work with colleagues. Designers and inventors do. Scientific advances require institutions (in the West, most of them are universities) in which freedom of inquiry is taken for granted.
Along with increasing productivity and contributing more to the overall value of what it makes, China must reduce its reliance on exports to continue its rate of economic growth. Growth will then require greater domestic consumption, and to raise it the country can usefully make two changes, each involving one of democracy’s component parts. One change is to establish rural property rights—to extend, that is, this form of liberty to those living outside China’s cities. Farmers usually cannot get unrestricted title to the land they work, which means they cannot use it as collateral for borrowing, as do most farmers all over the world. A much-discussed official document issued in November 2013 promised steps in that direction. The other change is the expansion of the social safety net. The more generous social welfare programs become, the greater China’s domestic consumption will be and the less the Chinese people will feel they must save. In Western countries, public pressure, the result of democracy’s other defining feature, popular sovereignty, led to the programs of social protection that all now enjoy. To be sure, Chinese authorities are already committed to spending more on health care. But if the Chinese people do gain a measure of political power they are likely to use it to press for increased government spending on social welfare programs.
For China to shift its economic policies and modify its institutions to sustain a high rate of growth assumes the maintenance of the stable political framework that all markets—global, national, and local—require. In the Chinese case, stability cannot be assumed. Economic growth, with its particular Chinese characteristics, has created discontent, public expressions of which have become larger and increasingly frequent, with some demonstrations involving as many as 10,000 people.
A more accountable government is needed to contain and ultimately reduce the rising level of publicly expressed discontent, which, if not checked, has the potential to shake the political foundations of China’s economic growth. Accountability comes about through transparency in the conduct of public business, for which a free press is crucial. Accountability also comes about through the power of the people to replace their rulers peacefully through free elections: that is, through the popular sovereignty that is one of democracy’s two constituent elements. Accountable government is particularly relevant to dealing with the two problems that have given rise to China’s popular protests: pollution and corruption.
China’s environmental problems stem ultimately from the country’s lack of political accountability. The national government has promulgated laws and regulations to prevent environmental abuse, but local authorities frequently disregard them. These officials allow factories to continue to discharge toxic material into the air and water because to stop them would in many cases forfeit economic growth and thus jobs, tax revenues, and bribes. The absence of accountability in government lies at the heart of corruption as well, and anger at officials who abuse their positions for personal gain has inspired many of China’s protests. As with pollution, China’s rulers have sought to combat corruption with Communist-style, party-led campaigns, which consist of slogans, exhortations, and a few token punishments to give the impression of seriousness. This approach has done little to solve the problem, even in its recently stepped-up mode. As with pollution, reducing corruption requires generating public pressure on officials who abuse their power. A free press that can bring abuses to light is one source of pressure. Another is vesting the public with the power to remove corrupt officials through free elections.
Will the Chinese political system become more democratic? Most Communist Party officials will oppose both features of democracy—liberty and popular sovereignty—because the more there is of each, the less they will have of what they value most: power. On the other hand, for three decades the party has been willing to do whatever seemed necessary to secure growth, including relinquishing some of its own prerogatives. If it concludes that only more democratic governance can deliver the growth that will preserve its leadership, then China is likely to become more democratic, with wider liberties available, especially in economic matters, and a greater measure of public participation in public life. Because other countries have come to depend so heavily on Chinese economic growth, the whole world, not only the people of China, has a stake in Chinese democracy. And because the potential contribution of the other three BRICs to global growth is so large, the whole world has a stake as well in the containment of Brazilian populism, the lifting of Russia’s energy curse, and the reform of Indian democracy.
1See Philip Hanson, “The Sustainability of Russia’s Energy Power: Implications for the Russian Economy”, UCL Center for the Study of Economic and Social Change in Europe, Economics Working Paper No. 84 (December 2007).
2“Distributional coalitions” is Mancur Olson’s concept, described in The Rise and Decline of Nations: Economic Growth, Stagflation, and Social Rigidities (Yale University Press, 1982).
Michael Mandelbaum is the Christian A. Herter Professor of American Foreign Policy at The Johns Hopkins University’s School of Advanced International Studies. This essay is adapted from his new book The Road to Global Prosperity, published by Simon & Schuster.
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