I’ve always been a little dubious of the famous Goldman Sachs forecast about the future importance of the “BRICs” economies: Brazil, Russia, India, China. Steve Pearlstein’s column on high-tech business in Russia in yesterday’s WaPo made me a little more dubious.
India and China I get. Barring disaster, they’re going to be the dominant forces in the global economy by the end of the century. But do Brazil and Russia really belong in that company? Brazil is a middle-income country with a pretty big population and an economy that, after some really tough times in the 1990s, is now growing steadily at a rate slightly higher than the U.S. It’s got some globally competitive companies (aircraft maker Embraer springs immediately to mind, and I’m sure there are others) and industries (soybeans!). And if all goes according to plan it will by 2050 have an economy less than one-fifth the size of the U.S. economy, according to the folks at Goldman. That will make its economy bigger than France’s, Germany’s, or the UK’s. So that’s something, and it would be great for Brazil. But it’s nothing even remotely approaching the speed or scale that India and China are experiencing.
Then there’s Russia. It’s got a pretty big but shrinking population, and thanks to high oil prices, per capita income is up sharply, from $2,095 a year in 2000 to an estimated $8,209 this year, according to the IMF. But Russia does not appear to be laying the groundwork for a sustainable economic boom. Writes Pearlstein:
By right, it ought to have been Russia, not India, that rode the technology sector up the development curve. This is a country, after all, of nearly 100 percent literacy, with a scientific community rich in mathematicians, physicists and engineers who in the past were able to develop nuclear weapons, supersonic jets and sophisticated spy satellites, and who pioneered space travel. The telecommunications infrastructure, at least in the big cities, is remarkably advanced. And wages have been comfortably below those of Europe or the United States.
But several factors conspired to create a slow start for the Russian technology sector.
The technology know-how was trapped in bloated, inefficient state companies and bureaucracies. And although many of those firms have been privatized, they have been stubbornly slow in adopting the latest information technology to drive down costs and boost productivity. …
This litany of failure goes on for a few paragraphs. Then Pearlstein concludes:
In theory, all that’s needed is talent and investment capital, both of which are plentiful in Russia. But as long as huge rewards can be earned buying and selling natural resource assets, the most skilled and ambitious Russians are probably not going to opt for the hard work, uncertainty and long time required to build a business from scratch. …
BRICs, I fear, may be a great acronym in search of a corresponding economic reality. ICs doesn’t look or sound nearly as good, but that’s where the real action is.
Update: Ah, I think Portfolio‘s Felix Salmon and I should just spend all our days gently critiquing each other’s blog posts. It’s fun, it’s educational, and we can be assured that at least one person will read what we write. Writes he:
… what Fox misses is that the BRICs idea was never purely macroeconomic: it’s primarily an investment thesis. And what Brazil and Russia lack in terms of long-term outlook, they more than make up for in terms of investability. It has been much easier and much more lucrative in recent years to buy stocks in Russia and Brazil than it has been to try and get stock-market exposure to the relatively closed economies of China and India.
Yeah, leave it to me to gloss over the fact that Goldman Sachs is an investment bank. So Felix is right, although I’d be pretty wary of the Russian stock market going forward.
Update 2: Abnormal Returns weighs in on the topic with customary thoughfulness:
There is an old saying on Wall Street that, “Mutual funds are sold, not bought.” This phrase can easily be applied more broadly to the investment world. Few investors are in a true sense, self-starters in that they seek out novel investment ideas. Most of us are in actuality following the recommendations of one outside source or another.
The BRIC phenomenon is a perfect example of this. While there are some good common reasons why one might group the BRIC countries together, it is not altogether clear why one might need a BRIC fund, including two separate BRIC ETFs (EEB, BIK). …