“What 9/11 told me was that there was no way that globalization was going to be Americanization in the future – nor should it be. . . . In order for globalization to advance, it had to be accepted by more people … but not by imposing the dominant American social and philosophical beliefs and structures.”
--Jim O’Neil, describing his initial inspiration for the “BRICs” concept.
“Had you heeded O’Neill’s work and gotten invested in the stock markets of those four nations [back in 2001], you’d have made more money this past decade than by doing virtually anything else conceivable.”
-- Joshua Brown, Economic Commentator
First published in November 2001 and partly inspired by the World Trade Center attacks, Jim O’Neill’s “Building Better Global Economic BRICs” offered up a new acronym, a few predictions, and a wider discussion of global governance.
With its rather muddled title, the paper gave little indication of just how immensely influential it would become. O'Neill, as a newly appointed Goldman Sachs director, had grouped a set of rather disparate nations together based on population size and a new openness to global marketplace.
He predicted that “over the next 10 years, the weight of the BRICs and especially China in world GDP will grow” – and warned that “in line with these prospects, world policymaking forums should be re-organized” to give more voice and power to this new bloc.
Though the demographic arguments were clear, the paper was counter-intuitive at the time: Brazil was coping with hyperinflation and Russia was but a few years from its ruble debacle of 1998 and clearly heading to a less open economic regime. Most international affairs experts were far too steeped in the endemic rivalries between the Russia, China, and India to perceive any such kinship.
But despite this uncertain beginning, it is now clear that Jim O’Neill -- the son of a postman from south Manchester, white-shoe Goldman’s resident “plebeian” and avid United Fan -- articulated perhaps the most enduring vision of economic development in the 21st century thus far.
Like the Chiang Mai agreement (which brought a new-found cooperation and confidence to East Asia in the aftermath of the Thai Baht Crisis), the BRICs moniker provided a new “conceptual apparatus” by which to escape the Washington Consensus. It punctured the assuredness of Western ascendency in the process.
BRICs: an New Investment Universe
On a prosaic business level, the acronym has affected the “marketing speak” and selling practices of every major multinational. IBM now breaks out BRICs revenue growth in their annual reports. It is now its own investment sector: the three major BRIC-specific ETFs –BKF, EEB, BIK-- now have enormous assets and daily volume, despite being down year-to-date and even underperforming the S&P 500 (SPY).
The BRICs discourse has lent enormous investor popularity to EEM, as well as ETFs specific to Brazil, India, Russia, and China. And as interest developed, there was recognition that much of the money was going into only a select number of mega-cap names. For example, BIK dedicates nearly 10% of its portfolio to Gazprom, with the five largest stocks making up nearly a third of all assets.
Goldman's November 2009 report, "The BRICs Nifty Fifty," helped popularize this large cap focus but, more recently, buyers have poured into BRIC small caps through select country venues (despite this year's weakness).
BRF, a Brazil small cap play, has nearly $1 billion in assets, while HAO, targeting small cap China, has passed the $350 million mark. Adding these two with SCIN and RSJX, some US investors have cooked up their own make-shift exposure to the asset class, though Guggenheim is planning a specific vehicle --a small /midcap BRIC ETF-- for later this year.
Expect new ETFs to further populate this investment ecology.
A "Post-Western" Globalization
On a geopolitical level, the BRIC term lent a strange self-consciousness to the interactions of these four (rather disparate) nations as well as a new confidence to their leaders. Its axiom of a “post-Western" globalization dovetailed well with Lula’s North-South rhetoric against the existing “financial architecture” and Putin’s push to re-assert Russian strength. For India and China, the axiom harkened back to that pre-Vasco de Gama epoch when world trade was distinctly “Asia-centric.”
O’Neill recognized all these countries had large populations, underdeveloped economies and governments ready to embrace the global market place. With an economist’s eye, he saw the demographic realities behind GDP growth. And as a former FX analyst with an enthusiasm for globalization, he probably saw how all four had left behind autarkic economic policies (whether “import substitution” or outright statist regimes) that had effectively choked off decades of consumer demand.
So what were O’Neill’s original BRIC predictions exactly?
Employing four distinct scenarios based on different methods of applying GDP paths, O’Neill saw the relative weight of the BRICs rising from 8% of world GDP in 2001 to 14.2% by 2011. With each scenario, the increasing weight is led by China.
This was his primary forecast. In his “Next 10 years” section he makes several others:
- On a PPP basis, China will be larger than Germany in 10 years.
- Of the four nations, China will have strongest growth, with Russia and India outpacing the G7, and Brazil experiencing weak “G7-style” growth.
- Brazil will “close in on” Italy in terms of GDP in 10 years.
- The EU would have increased its membership to 25 by 2007, up from 12 in 2001.
Looking at each of these predictions separately, it is clear that O’Neill was far more right than wrong, and actually conservative in his approach:
- The BRICs now amount to more than 14% of world GDP and are slated to grow to 21.6% by 2010 (Last year, the four BRICs contributed 31% of all global output expansion).
- Brazil has surpassed Italy in nominal GDP; by PPP measure, it has surpassed even France.
- The EU had 27 members by 2007.
Looking at perhaps his most defining prediction, about China, we now see --10 years on-- that the PRC has surpassed not only Germany but even Japan. China’s share of world GDP rose to more than 13% in 2010.
More specifically, O’Neill had projected that, in nominal dollar terms, China’s GDP would increase at 8.1% a year. In fact, the mainland’s annual GDP growth from 2000-2010 was 17.3%.
So the economic reality far surpassed his rather measured first forecast. His later 2003 estimation that China would surpass the US in PPP terms by 2041 was revised five years later to 2027. And earlier this year, the conservative IMF placed the handoff –in PPP terms—at 2015.
Where was he wrong?
To quibble: O’Neill was wrong about Bulgaria and Romania, giving them only 5% and 0% likelihood of EU entry by 2007. They were both made members that year.
He was incorrect about Brazil’s growth rate. It has experienced far stronger growth than the G-7, while Russia was been the laggard of the group over the past five years.
Though he was most muted in his expectations for Brazil back in 2001, it is that country’s incredible decade of ascendency was perhaps the most unexpected and gave more credence to his BRICs concept. China and India’s trajectories were clearer in 2001; Brazil’s was not.
In a recent interview, O’Neill said he prefers Russia to Brazil for present investment. And looking at Rio’s inflation and consumer lending problems, this certainly makes sense from a short-term valuation basis. Like many money managers, he seems to be resetting his expectations for the BRICs.
But from a longer-term perspective, Brazil may surprise. China’s choking inflation and its possible bank problems --due to bad loans due from its wasteful ’08 stimulus program-- might make Brazil look like the better bet for sustainable growth and a less disrupted GDP trajectory over the next decade.
Its hosting of both the World Cup and Olympic games will likely keep the infrastructural build-out humming for the next five years. And its energy independence, water resources, and widened political process might give it further measure of “societal resilience” some of the other BRICs lack.
Dreaming of a G-9:
Following the white paper’s economic predictions, O’Neill went onto what might be described as the second leg of his argument and one that gives a secondary meaning to his title (i.e. building a better global forum--the “bricks” of governance). On page 8, he declares:
It would seem sensible with this environment set to emerge, coupled with the dramatic events of Sept. 11 this year, that it might be an appropriate time for policymakers to ‘regroup.’
Implicit in this suggestion is that policymakers must respond pro-actively to this growing “resentment” to Western dominance by including these new players of hefty world population and GDP growth.
O’Neill called for policymakers to reduce European membership by a number of seats and then add BRIC nations to create a new “G-9.”
Though this advice was not specifically heeded, the general tenor of the suggestion was. The G-33 has been trimmed to a "G-20." This G-20 has grown in stature since the financial crisis and the 2008 Washington Summit. On September 25, 2009, G-20 leaders announced that the group would replace the G8 as the main economic council of wealthy nations.
Despite criticisms of its transparency, the forum represents about 85% of the world GNP, and thus a more complete representation of world economic energies.
The danger now is whether the body becomes "ineffectual" as late '08's impressive international cooperation gives way to partisanship. Last year, French President Nicolas Sarkozy suggested a permanent secretariat of the G-20, with Seoul and Paris as the possible headquarters sites. China and Brazil supported the establishment of a secretariat, while Japan and Italy opposed such an innovation.
The policy struggles between the G-7 or BRICs (or E-7) will either be constructively ameliorated or lead to blockages. The G-7 was composed entirely of advanced democracies, united as geo-political allies, with floating currencies. The G-20, on the other hand, includes authoritarian regimes like Saudi Arabia and many countries that don't float their currencies.
Does this change the processes and nature of global cooperation? Multilateralism is easier said than done. Without overarching shared values, it can be intractable. A few later developments have proven such.
China as Spoiler / the “BRIC meme” as a global governance disruptor:
O’Neill is quite glowing in the white paper about those moments of active policy coordination by the G7 –specifically around FX management during the mid 80s with the Louvre Accord and later the “reverse-Plaza Accord” of 1995. But it is clear that China’s extended recalcitrance on the issue of its low peg has more or less subverted that ever-balancing game of finesse, harming the very nature of the West’s flexible currency regime as it has been orchestrated since the early 70s.
Not only the US and Germany, but even Brazil and Indonesia have voiced concerns about the disinflationary forces that China perpetuates with its peg. It is hollowing out industry in Malaysia and Thailand, and keeping textile jobs that would have long since moved to Vietnam and Kenya under normal circumstances.
One of the more typical misunderstandings about Beijing is that if it just received “a seat at the table,” it would act as a responsible, progressive player. But as its actions on carbon emissions, intellectual property, and cyber-espionage make clear, China is comfortable playing the spoiler and pushing its own narrow advantage. Obama administration officials speak wryly of emerging powers “cross-dressing” as developed countries with the G-20 only to invoke long-standing “developing country” grievances in other forums. China has been adamant about not adding a new permanent UN security member to the existing five, though its fellow BRICs India and Brazil both push for entry.
Ironically, O’Neill’s own rhetoric has fostered a self-conscious sense among the BRICs that they might not need the developed world. The four nations have their own forum, regularly denounce the present currency regime, and have since fostered their own intra-BRIC trade regimes that occur without the dollar. China’s effort to include South Africa as a fifth BRIC at the summit forum has been viewed as an effort to pull Africa more broadly into an anti-western trajectory. These geopolitical engagements would not have occurred without the “BRIC meme” buzzing throughout the discourse of policymakers worldwide.
Despite being occasionally derided as a Goldman Sachs marketing scheme, Jim O’Neill’s BRIC research deserves well-warranted praise. His economic predictions have been spot-on, but more importantly he has affected policy at the highest level.
With just three or four well-penned white papers, he has altered the fate of nations.
Disclosure: I am long BRF, BKF, EEM, SPY.