14/10/2010 - 00:00

Cracks starting to emerge in BRIC wall

14/10/2010 - 00:00

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It seems the BRICs aren’t in as strong a position as many would have hoped.

BRICK walls are something we think of as solid structures that are hard to knock down; but is it the same with BRIC walls?

For the first time since a clever chap at the investment bank, Goldman Sachs, coined the acronym BRIC from the initials of four fast-growing countries (Brazil, Russia, India and China) there are doubts emerging about their economic strength, and outlook.

To say this is a worry is an understatement because the BRIC countries are supposed to be the world’s economic drivers, picking up the slack left by the recession-hit former leaders Japan, Europe and the US.

Brazil, Russia, India and China were seen as the BRIC wall of certainty because of their large populations led by governments determined to catch up to the living standards of the Western world.

Well, that was the plan. The problem is that the common thread holding the global economy together, the US dollar, is crumbling in value as part of a US revival strategy designed to kick-start its own economy.

Right now the key question to all this is: what’s a dollar worth – a question that can be expanded infinitely ... what’s anything worth?

Understand that and you also understand why investors are retreating to the certainty of gold, which has been a constant store of wealth for the past 5,000 years.

But, since we started the spectacular currency re-adjustment process that has driven the US dollar down and gold up, enormous pressures have been placed on the global economy, including Australia, where manufacturing jobs, and export industries such as tourism and education are being threatened.

It’s a far worse situation in the BRIC nations, where governments are resorting to expensive and futile defence measures such as intervening in the market to stop their currencies from rising against the US dollar, a trend which is jeopardising all-important job creation.

The difference between Australia and the BRIC countries is that we have a small population, a small manufacturing base, the advantage of isolation, and we have learned from past experience how to muddle our way through currency crises.

First to go

BACK to the BRICs, where it is easy to see that the odd man out right from the start was the R – Russia.

A basket case with nuclear weapons is one way of describing what remains of the old Soviet Union, a country which has failed to get much right in the past 200 years.

For the purpose of analysing the BRICs, the non-performance of Russia reduces the acronym to that of a well-known brand of ballpoint pen, BIC.

The next country to reveal that it is struggling to overcome centuries of mismanagement is India. Despite predictions that it will one day rival China as an economic powerhouse, India has just demonstrated that it can’t even organise a sporting carnival.

Sad as the failure of the Commonwealth Games have been to sports fans, the real message to the rest of the world is that corruption riddles every level of the country. Investors who were wary last year are in no doubt now; India is not a good place to do business.

That leaves Brazil and China; surely they are the certainties in a BRIC wall that has just become a BC wall.

Surprise packet

BRAZIL is the first surprise in this analysis. It has been performing brilliantly but, like so many emerging economies, its spectacular growth has been built on cheap exports and a low currency.

From virtually nowhere Brazil has emerged as the world’s eighth biggest economy growing at 7 per cent a year with a young population approaching 200 million.

That growth rate is being threatened by currency changes, which have led to government intervention to try and cut the value of Brazilian currency. The real problem is that China is not doing the same thing because its currency is pegged against the US dollar.

In other words, as the US dollar falls so does the China’s currency, compounding the pressure on Brazil because Chinese exports are undercutting locally made goods.

The BRIC wall is now down to one letter – C for China.

Then there was one

COLLECTIVE wisdom is that China faces no threats to its high-speed growth, because if it did then everyone is in trouble, including Australia, which relies heavily on demand from that country for minerals and food exports.

However, there is an argument that says that China has already caught a disease known as ‘Japan Syndrome’.

In a recent edition of the US magazine, Foreign Policy, it was claimed that China’s economy is built on the Japanese model of cheap labour producing low-priced exports under the protection of a low-value currency.

The export engine works well until the country succeeds, the currency rises, and exports become more expensive, leading to what is known in Japan as ‘the lost decade’ of no-growth.

For the past 20 years China has mimicked Japan in almost every aspect, including a failure to develop a properly balanced economy, which encourages internal demand as well as exports.

“China is teetering on the verge of its own lost decade”, is the pointed summation of the Foreign Policy report.

Australia’s role

WHICH brings us back to the questionable strength of the BRIC wall on which so much depends, and what this means for Australia.

Hopefully, the answer to the Australia question is ‘not much’, because while changing currency values are altering the way the world works we are simply too small to try and do anything, and lack a large manufacturing industry, or population, which requires defending.

In other words, we will not try to be part of a trade or currency war against China and we will not lecture the Chinese on why they must cut the value of their currency against the US dollar.

We will simply become an ever-more-reliable trade partner as other countries become less reliable and more difficult to deal with –

hopefully.

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“America is the only nation in history which, miraculously, has gone directly from barbarism to degeneration without the usual intervention of civilisation.”

Georges Clemenceau

 

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