BRICS Essay

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TABLE OF CONTENTS

Introduction………………………………………………………………………………………..3

What are the BRICS economies?.........................................................................................3

China………………………………………………………………………………………………4

China’s Economy Overview……………………………………………………………....4

China GDP Facts………………………………………………………………………….6

What explains China’s long-term high growth rates?.........................................................6

China’s Costs of Growth………………………………………………………………….7

What is ahead for China?....................................................................................................7

Brazil……………………………………………………………………....……………………...8

History of Brazil’s Economic Growth…………………………………………....………8

Business Firms and Market Capitalization……………...……………………………....10

Agriculture………………………………………………………………………………11

Tourism………………………………………………………………………………….12

Challenges…………………………………………………………………………….....13

Openness to Trade…………………………………………………………………...….13

Investment and savings are lower………………………………………………………14

India………………………………………………………………………………………….…14

An Overview of India……………………………………………………………..……14

The why and how of India’s Economic Growth….........................................................15

Challenges: What lies ahead for India…....................................................................…20

Conclusion….........................................................................................................................….22

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INTRODUCTION

In this paper we will analyze the economic growth of the BRICS Economies. Due to the extent

of the information we will focus our analysis in China, Brazil and India as we consider these

countries as a good sample to understand the common factors for growth in the BRICS. We will

provide an overview of each economy, the drivers for such high growth rates, the costs of growth

and the challenges ahead for each economy. At the end of this analysis we will identify key

similarities between their drivers of growth and predict what will happen in the future with the

BRICS economies.

What are the BRICS countries?

The BRICS is a group of countries that will contribute significantly to Global GDP growth in the

21st century. The term was created by the British economist and retiring chairman of Goldman

Sachs Asset Management, Jim O’Neill. In his famous paper "The World Needs Better Economic

BRICs", written in 2001, he emphasizes how real GDP growth of BRIC economies will exceed

that of the G7. He also states that over the next 10 years, the weight of the BRICs and especially

China in world GDP will grow, raising important issues about the global economic impact of

fiscal and monetary policy in the BRICs (O’Neill, 2001). Table #1 is provided as a reference

point to compare how the BRICS economies are ranked in the world in terms of GDP per capita

on a purchasing power parity basis.

Table #1: GDP per Capita (PPP) by country

Rank Country GDP per Capita (PPP)

1 Qatar 145,894

10 United States 53,001

- Hong Kong 52,984

46 Russia 24,298

76 Brazil 14,987

- World 14,307

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85 South Africa 12,507

89 China 11,868

126 India 5,450

Source of data: World Bank 2013

CHINA

China’s Economy Overview

With a population of approximately 1.4 billion, China recently became the second largest

economy and is increasingly playing an important and influential role in the global economy. In

order to understand their exceptional economic growth it is important to analyze the drivers that

have lead to that growth in such a short period of time. (World Bank, 2015)

In the past, Chinese agriculture was concentrated in very few families. This created significant

inefficiencies due to the bad use of the land. In 1978, after Mao’s death, China economy turned

to market-oriented reforms to recuperate the falling economy. The market reforms started with

the de-collectivization of agriculture, following up with opening up of the country to foreign

investment, and permission for entrepreneurs to start businesses. However, most industry

remained state-owned (Brandt, 2008).

The second stage of the reforms occurred in the late 1980s and 1990s. These reforms involved

the privatization and contracting out of much state-owned industry and the lifting of price

controls, protectionist policies, and regulations, although state monopolies in sectors such as

banking and petroleum remained. These reforms were a strong starting point that made great

contributions to GDP in the following decades.

In China, Gross Domestic Product is divided by three sectors: Primary, Secondary and Tertiary.

The Primary Industry includes Farming, Forestry, Animal Husbandry, and Fishery and accounts

for around 9 percent of GDP. The Secondary sector, which includes Industry (40 percent of

GDP) and Construction (9 percent of GDP) is the most important. The Tertiary sector accounts

for the remaining 44 percent of total output and consist of Wholesale and Retail Trades;

Transport, Storage, and Post; Financial Intermediation; Real Estate; Hotel and Catering Services

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and Others. (Trading Economics, 2015)

Graph #1: China’s GDP per Capita (PPP)

The GDP per capita PPP is obtained by dividing the country’s gross domestic product, adjusted

by purchasing power parity (how many hamburgers can people buy), by the total population.

The data is expressed in dollar amounts ($).

Graph #1 shows the significant increase China has experienced in terms of GDP per capita on a

purchasing basis over the last two decades. It is hard to believe that in 1990 GDP per capita

(PPP) was just $1,554. As the market reforms were being applied, China started experiencing a

substantial economic growth (See Graph #2). The last numbers from the World Bank revealed

that China’s GDP per Capita (PPP) in 2013 was $10,756, and is forecasted to grow to $11,524 by

2014. Even though China’s gross GDP is the second largest in the world, when the income gets

distributed to its population the average standards of living for a normal citizen are very low. In

fact, China has a lower GDP per capita (PPP) than the world’s average ($14,402), according to

the World Bank latest data (2013 numbers).

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Graph #2: China’s Annual GDP growth rate

Source of data: World Development Indicators

China GDP Facts

According to data collected by the World Development Indicators:

● GDP growth rates of 10% on average over the last three decades.

● GDP growth rate has slowed to 7.7% in both 2012 and 2013 and is estimated to be 7.4%

in 2014.

What explains China’s long-term high growth rates?

There are many reasons behind China’s growth rates. One important driver of growth has been

capital investment that has made the country more productive. New machines, better technology

and infrastructure have helped raise output (Hu and Kan, 1997). However, increases in capital

stock are subject to the law of diminishing returns so this variable can only explain growth in the

short term.

The reason why China has been keeping up such high growth rates is productivity. The reforms

introduced profit incentives and reduced government intervention, which helped raise economic

efficiency. The reforms also gave room for private ownership of production, and these small

businesses created new jobs, developed consumer products, engaged in foreign trade, paid taxes

(Hu and Kan, 1997).

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Another factor that contributed was the open-door policy with foreign investment, which has

connected China to global markets. These investments have helped built factories, create jobs

and improve technology. Finally, the economic liberation has marked a transition from an

agricultural-based economy into a manufacturing economy that has become the largest exporter

in the world.

China’s Costs of Growth

Every economic decision involves a trade-off. China is no exception to this rule. They have had

some costs for their high growth rates in such a short period of time. Due to the rapid

industrialization and population concentration in large cities China has created large amounts of

environmental pollution. This has become a major problem and has reduced the well being of

those who live in these cities. Environmental pollution is not counted in GDP, so the data shown

above can be misleading with regards to the well being of the citizens who live in these

contaminated environments.

Another cost for their growth has been the rise of inequality between inland-coastland regions.

The main reason behind this is a widening income gap between coastal and inland provinces. In

the initial phases of the market reforms, the regions with coast were able to take advantage of

their favorable locations to engage in trade, while their counterparts had to focus on less

profitable activities.

Finally, China has focused their growth on low cost manufacturing which requires large amounts

of low-skilled workers. One of the main drivers of growth in this economy is based labor-

intensive practice. For this reason they have been target of criticism by many Human Rights

movements for their unethical business practices, specifically the working conditions in their

factories.

What is ahead for China?

Even though the economic growth has lifted 500 million Chinese from the poverty line (World

Bank, 2015), their policymakers still have some challenges ahead to maintain sustainable levels

of growth. A fundamental reason to explain such high levels of growth in the past 30 years is that

poor economies can grow really fast as they are catching up to developed economies. The

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explanation for this is because any investment in capital produces large increases in total output.

However, once economies get larger in size their growth starts to slow down because of

diminishing marginal returns on capital. This is one of the biggest challenges that China’s

policymakers are going to be facing in the following years.

Another crucial challenge has to do with the human capital. Currently, China has 793,307,655

workers in their labor force, according to the World Bank data for 2014, making them the

country with the largest labor force in the world. However, most of its labor force is comprised

of low-skilled workers. They have been able to grow so rapidly due to their large pool of workers

working in the manufacturing sector, but if they want to keep growing they need to invest in

human capital to increase the level of skills of their labor force and thus increase the average

productivity per worker. In other words, in order to grow sustainably they need to focus on

quality factors such as education. This will help them transition from an industrial economy,

focused on exports, to a services economy.

To achieve this transition and improve their labor force productivity, China is spending 25% of

fiscal expenditure on education (Riley, 2014). Another important measure that has contributed to

a more educated labor force has been the 1986 “Compulsory Education Law of the People’s

Republic of China”, an implementation of a mandatory 9-year education program for every

children in China. This has been a very successful program because it has contributed with a

98% enrollment rate in primary schools (China Education Center, 2015).

BRAZIL

History of Brazil’s Economic Growth

First of all, it is crucial to acknowledge and analyze the history of the Brazilian economy and

how it has affected and influenced its people, the country as a whole, as well as the perception of

the world towards this particular nation. Going way back in history, Brazil experienced some

initial and key structural transformations in the 1930s. Brazil was taking its first steps into

converting itself into a more modern and industrialized economy. After World War II, the nation

experienced a socio-economic transformation. One of the major effects that were caused by this

alteration was that a large portion of Brazilian citizens decided to reside in the cities, not in small

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towns like they used to. They pursued new opportunities. In 1940, only 30% of Brazilian

population resided in towns and cities. But by the year 1991, an increasing 75% of the population

resided in cities. Certainly, this had a significant influence in the Brazilian economy, and now the

country had two of the world’s largest and most important metropolitan centers which were: Sao

Paulo and Rio de Janeiro. Additionally, the industrial sector is another main and beneficiary

factor that played an essential role in this cause, being successful in producing a wide range of

products for the domestic market and for export as well, including consumer goods, intermediate

goods, and capital goods.

Nonetheless, as Brazil starting seeing a wide range of opportunities, industrialization and

developments in the economy; the nation experienced a severe inflation that lasted about ten

years (1980s-1990s). It is believed and evident that the fiscal deficits were a major component of

inflation, despite all the political difficulties such as corruption, the deficits had a quite role in

this chaos. An aspect that influenced negatively the inflation was indexation. Meaning that every

buyer or seller was aware of the recent inflation rates and still would factor that index into their

prices, causing the inflation rates to increase over time. Various economic initiatives were

created and implemented, however the outcome was not the one Brazilian authorities were

expecting. In 1994 the Plano Real was introduced. At that time, President Cardoso successfully

managed to privatize many state owned companies such as, banks, steel plants, many prestigious

companies or organizations. Petrobras, one of the most prestigious and wealthiest companies of

Brazil was broken down from its monopoly. This caused some changes in the civil service and in

the social security of the private sector. Regarding monetary reform, this plan sought to break

these inflationary expectations by pegging the Real (the new currency) to the U.S. dollar. In the

initial months of this plan, domestic as well as international investors had the ability to predict a

positive outcome in pouring massive amounts of capital in Brazil. This caused the Real to

increase in value against the dollar (US$100=R$87), which helped importers and harmed

exporters. For a period of time, Brazil lived with an overvalued currency, which obviously

created some secondary problems such as increasing internal debt and closing of several industry

sectors, however in spite of these problems it helped increase competition and keep inflation in

low rates.

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Graph #3: Brazil’s record of GDP per capita PPP

The graph located above expresses how the economy of Brazil has seen its major changes from

the 1990s to roughly the present. The graph is composed or examined every five years, therefore

as noticed, there exists some low levels of GDP per capita PPP in the years in which the inflation

rates were increasingly high. After this, with the creation of the Real Plan, the country starts

experiencing economic development at a more constant level (2000-2010). Brazil is a country

that is in constant growth, it has its years were economy experiences a downfall, but overall it is

constantly increasing.

Business Firms and Market Capitalization

As expressed by the graph, it is clear that Brazil has been a country in constant economic growth

since early years. Although it has had several decreases for various years which have influenced

the nation negatively, it has managed to continue expanding and becoming one of the largest and

most prominent economies. One of the key factors that continue to influence Brazil’s economy

positively are the business firms and market capitalization. Seven Brazilian companies were

nominated by the 2011 CNN Money/Fortune ranking of the world’s largest five hundred

corporations. As mentioned before, Petrobras is a semi-public; Brazilian multinational energy

organization has revenues of over 146.1 billion dollars. This company was successfully ranked

number thirty-four in the Global 500 ranking and stood out as the largest company in South

America by market capitalization. Company size is a basic determinant of asset allocation. This

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and several other Brazilian companies fall into the category of large cap, which is $10 billion

plus and includes the companies with the largest market capitalization.

Graph #4: Brazil’s record of Market Capitalization (1998-2012)

Above is an accurate graph that measures Brazil’s market capitalization since 1988 to 2012. This

graph is measured in USD. In the early years, market capitalization was quite low but as Brazil

started transforming into a more industrialized and developed country, companies started seeing

growth. In the years of about 2006-2009 Brazil suffered a severe decrease in market

capitalization, nevertheless, as of now they have managed to increase it and maintain it in high

figures. The results were accomplished by multiplying the share price by the number of shares

outstanding of a certain company or organization.

Agriculture

A country like Brazil that has a lot of natural resources is able to use them to produce goods and

services cheaper comparing it to a country that has to import natural resources which is more

costly. Agriculture is a factor that has helped Brazil with its economic growth. Lately, there has

been a lot of media and communication focus to urban Brazil, causing the people to ignore the

importance of Brazil’s enormous agricultural sector. Throughout history Brazil’s agriculture has

been an aspect that is always present when economic growth is being discussed and analyzed.

Moreover, in a relatively short span of nearly forty years, Brazil managed to go from a net

importer of food to one of the world’s most leading exporters of agricultural products. Brazil

ranks third among the world’s major agricultural exporters. Because of the abundant agriculture

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and oil resources that Brazil owns, it is ranked second worldwide for bioethanol production. The

agriculture has contributed significantly and also has benefited from macroeconomic and

structural reforms, with the goal of improving economic stability, reduce inflation, and trade

expansion. Another important factor to consider is Growth Acceleration Program (PAC) which

was launched in 2007 by the Lula da Silva administration. These economic policies as well as

investments in infrastructure should trigger improvements in agriculture, making the economic

growth to bolster. Currently, in Brazil, five commodities (soybean, sugar, meat, corn, and milk)

account for 68% of the total national agricultural production value, soybean and related products

making up 38.7% of Brazilian agribusiness exports.

Tourism

Brazil is a country that has increasingly become more and more attractive to tourists. It is

important to mention that Brazil hosted the FIFA World Cup in 2014 and will be hosting the

Olympics in Rio in 2016. Being host of such major events can bring numerous contributions to

the Brazilian economy. By hosting well-known events, Brazil is accepting to promote their

country as well as all the precious touristic areas. It is a method to improve the country’s tourism

sector. This part of the economy is very important, it expands and opens opportunities of all

kinds, and for instance, the vendor who is selling bikinis on the beach would most likely want to

extend the sales to foreigners, so he or she would put some effort in trying to learn some English

or any other language in order for the sales to be successful. By this method millions of jobs are

generated during the country’s preparation as well as in the events itself. The construction

industry would be majorly benefited by these activities, since they are the ones in charge of the

preparation for the events that requires construction services such as venues, restoration of ports,

airports, roads, etc. Even when the events are over, these renovations of infrastructure will be

useful for Brazilian citizens as well. For instance, new soccer stadiums will be useful when the

event is over for local soccer clubs. Also, refurbished roads, airports, and ports for future use.

The tourism sector in Brazil is optimistic and confident that the economy is growing and will

continue growing. 80 large companies in the tourism sector gained 58 billion BRL and employed

115,000 people in Brazil, in 2012.

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What sector of the economy will benefit most from hosting the World Cup & Olympics?

Tourism: 52% Construction: 26% Infrastructure: 14% Foreign Investment: 8%

Challenges

From the BRICS, Brazil is the one country that has seen a slower growth in the economy. This

fact implies that more has to be done in order for this nation to start seeing a constant and stable

economic growth as for the years that are ahead. It is believed that the Lula da Silva

administration made some progress. Macro stabilization played a crucial role and one of its

primary objectives was to control aggregate demand in the economy. The result of this implied

stabilization is predicted that will show improvement and growth over the next years. However,

that is not the complete solution for a stable growth in the economy. Stabilization will be

insufficient to raise, and most importantly sustain Brazil’s growth rate.

Openness to Trade

Compared to the other BRICS economies, Brazil is a country that is less open to trade. Recent

studies show that Brazil is falling behind when it comes to international trade. Brazil was

recorded below average indicators of trade openness. Brazil scored between 2.0 and 3.0. One of

the main causes of this restriction of international trade is that Brazil’s economy has restrictive

trade policy regimes, with generally higher than average tariff levels.

Graph #5: Brazil’s Balance of Trade (USD million)

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In graph #5 the balance of Brazil’s trade is demonstrated. From 2001-2012, Brazil was clearly

benefiting from trade and this sector of the economy was generating significant surpluses for

economic growth. These years in which Brazil was successful, was due to high export of mining

and agricultural products. In early 2013 the country started experiencing trade deficits and

moments later for the first time since 2000, the country registered first annual trade deficit, and

this is expressed in the graph by seeing the significant decrease (2013 and so on).

Investment and savings are lower

In Brazil, savings and investment ratios are around 20% of GDP, while China and other Asian

countries are around 35% - 40% in GDP. Brazil is a country that has deeper and more fiscal

adjustments. This influences some factors, for instance, public and foreign debt are high. This is

one of the most important challenges that the country should focus on. Investment has decreased

in Brazil and this is a factor that affects negatively economic growth of the country.

INDIA

An Overview of India

Before the boom in its economy, India was one of the poorest and less productive countries in

the world. Before their independence in 1947, India’s economy depended mainly on agriculture.

The United Kingdom managed all of India’s economic policies. During the 1700s, India was

responsible for 20% of the total world output. Their focus on the agriculture industry maintained

a low skilled set of workers living in the rural areas of India and a barely industrialized sub-

continent. “The 1872 census revealed that 91.3% of the population of the region constituting

present-day India resided in villages, and urbanization generally remained sluggish until the

1920s, due to the lack of industrialization and absence of adequate transportation” (Kumar

2005). At the end of colonial rule, India inherited one of the poorest economies with one of the

lowest degrees of industrialization and a largely illiterate and unskilled labor force. British

colonialism had a negative impact on India because of the dismal state of its economy in the

aftermaths of the 1947 Indian independence (Kumar 2005). After gaining independence, the

Indian government shifted towards a set of protectionist and highly regulated policies like import

substitution industrialization (Roy 2006). These inward-looking and state interventionist policies

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shackled the economy and severely restricted trade and economic freedom. The result was

decades of low growth in comparison to other developing economies, also known as the Hindu

Growth Rate (Panagariya 2004). The effects of the Hindu Growth Rate were nullified after 1991

during India’s liberalization period. Since then, India begun has grown steadily above the world

average of 2.9% growth in gross domestic product (GDP). The following sections will focus on

the key changes and policies that led India to increase its productivity and elevate their annual

growth rate. These sections will also focus on the challenges that await India in their attempt

generate inclusive growth and provide better living standards for the average population.

The why and how of India’s Economic Growth

After decades of a polarized and restricted economy, the Indian government started a process of

liberalization of the economy in 1991.

Graph #6: India GDP Annual Growth Rate

SOURCE: Ministry of Statistics and Program Implementation (MOSPI)

The growth rate of India has been surpassing the global average growth rate of 2.9% in GDP for

the last two decades. These growth rates have been the product of a liberalization process started

in 1991 by the Indian government. In general, the economic reforms following 1991 removed

price controls, reduced corporate taxes and promoted the creation of small-scale industries in

large numbers. Reforms also managed to reduce tariffs and interest rates and bring an end to

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many public monopolies. The end of monopolies brought a direct increase in foreign direct

investment for most sectors of the Indian economy. Productivity growth has been the key driver

behind the jump in GDP growth. It contributed nearly half of overall growth since 2003,

compared with a contribution of roughly one-quarter during the 1980s and 1990s. The economic

reforms have been divided into six major factors that have increased the productivity of the

Indian economy.

India Increases Its Openness

As part of the plan to liberalize the Indian economy, the government had to open its borders to a

greater extent to facilitate trade and bring foreign direct investment. “As part of its liberalization

policy, the government began to reduce the number of products subject to export controls in

1989–90” (Paringaya 2004). The opening up of India meant its reintegration into the global

economy and was evidenced in the average growth of India’s exports and imports of goods and

services (see Table #2).

Table #2: Growth of Exports and Imports of India (1980-200)

SOURCE: World Bank (2002)

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Table #3: Indicators of Trade Openness for India

SOURCE: World Bank (2002)

SOURCE: World Bank (2002)

According to table #3, the ratio of total exports of goods and services to GDP in India nearly

doubled between 1990 and 2000, rising from 7.3 percent to 14 percent. The gradual opening of

the economy introduced a competitive dynamic, which forced the private sector to restructure

during the initial stages of India’s economic liberalization (Wilson and Purushothaman 2003).

Trade and foreign direct investment restructured the private sector because they provided access

to imported inputs, new technology and larger markets. Internal and external competition created

a need to improve efficiency as critical to survive in a global economy. Efficiency was improved

by increasing the presence of Indians in higher education institutions in order to satisfy the

demand for high-skilled workers. Before 1985, India harbored only 6,000 colleges with about 4.5

million students (Carnoy et al. 2014). By 2009, there were more than 32,000 colleges and 17

million students enrolled. The Indian government was responsible for triplicating the number of

enrolled students through their cost-sharing policies. This improvement of skills and increase in

demand for higher education levels had a positive effect on the restructuring phase. After the

restructuring phase started in the late 1990s, the private sector emerged leaner, fitter and more

productive.

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Rise of the Financial Sector

The rigidity of the Indian system in terms of the easiness to move money around the economy

was once a factor that decreased the desire for foreign investment. The rise of the financial sector

was another factor that led to financial deepening. Increased financial intermediation improved

resource allocation by effectively channeling savings into investment and raising productivity

(Poddar and Yi 2007). One of the key features of financial deepening is that it accelerates

economic growth through the expansion of access to those who do not have adequate finance

themselves. “Typically, in an underdeveloped financial system, it is the incumbents who have

better access to financial services through relationship banking. Moreover, incumbents also

finance their growth through internal resource generation. Thus, in an underdeveloped financial

system, growth is constrained to the expansion potential of incumbents”. (Shaw 1973). The more

liquid money is available in the economy, the more opportunities exist for foreign direct

investment and continued growth. India’s financial sector is still relatively small compared with

the size of its economy, as well as with those of its East Asian neighbors and should continue its

financial deepening in order to contribute more to the rise in productivity.

Back Office of the World

In the past decades, India has evolved into the place to go for the IT industry. The IT industry

has had a similar effect to the ones caused by openness. The introduction of a competitive

dynamic has increased the incentives to spend on higher-level skills. It has provided powerful

incentives for students to invest in IT skills. “This has created a pool of technology-skilled labor

that firms in other industries can tap into” (Poddar and Yi 2007). This has also occurred at an

organizational level. Domestic firms have been affected by the demonstration effect in which

they’ve improved their own technology by spending. The IT industry increased productivity by

creating incentives for the attainment of higher-level of skills and technology.

The Golden Quadrilateral

Similar to China, India’s investment in physical capital has contributed to the growth of the

economy. In the last 50 years, the government has built just 334 miles of four-lane roads. The

Golden Quadrilateral consists 3,625 miles of four- and six-lane highways connecting the major

cities of India and running through 13 states and 17 other cities (Poddar and Yi 2007). More

importantly, the highways will open up the closed worlds of India’s villages. They will facilitate

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increased rural-urban migration and bring foreign direct investment in real estate. The next sub-

section will go into further detail on the role of migration as a factor of economic growth in

India.

The Great Migration

India has 10 of the 30 fastest growing cities in the world. The shift from rural to urban industries

has increased the overall productivity of India’s economy.

Graph #7: Share of Employment, contribution to GDP and TFP Growth

As seen in Graph #7, agriculture has the greatest share of total employment but fails to contribute

significantly to GDP growth and has a negative contribution to the total factor productivity (TFP)

growth. The building of highways will not only lower costs for companies but also enable rural-

urban migration, the development of cities and the process of moving land from agriculture to

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industry and services. These in turn attract more investment through agglomeration effects, and

thus sustain growth. The internal migration, from rural to urban, has brought a greater share of

employment to the industry and services market (Poddar and Yi 2007). Deteriorating agricultural

productivity, caste barriers and unemployment in villages push rural inhabitants out, while better

opportunities in cities, very high growth in the construction industry and demonstration effects

from other migrants pull rural workers into urban centers. Internal migration and the spread of

productivity will be facilitated with the Golden Quadrilateral.

Challenges: What lies ahead for India

The last decades have treated India’s economy fairly well. They have record high growth levels.

Their GDP growth will decrease the closer they get to the economic level of the developed

nation like the G7. India must face several challenges on the road to development.

Inclusive Growth

The Kuznet’s Curve explains what happens to a nation when it undergoes industrialization. In

this case, India’s economy shifted to the cities and created internal migration because farmers

were looking for better-paying jobs. This caused a significant rural-urban inequality gap

(Galbraith 2007). With the rise of India’s industries and services, the owners of firms will be

profiting, while laborers from those industries will see their incomes increase at a much slower

rate and agricultural workers would possible see their incomes decrease.

Human Capital: Education and R&D

Even though we previously mentioned that enrollment in higher education institutions increased,

the increase is not enough to bring an inclusive growth and an increase in productivity and skills

for everyone. As economies grow rapidly, they may face shortages of skilled workers, meaning

that more years of schooling are a prerequisite for the next stage of economic development

(Wilson and Purushothaman 2003). In 2000, the working-age population’s average number of

years of schooling was about 5.1 in India. Goldman Sachs has predicted an increase in average

years of schooling from 5.8 in 2006 to 7.3 by 2020. The literacy rate for India is of a 74%

(UNICEF 2013). The literacy rate and the average years of schooling are key factors that must

be treated. As soon as India catches up with the developed economy, the only way to grow will

be by improving productivity through technology (R&D) and education. India should increase

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governmental expenditure in education because a shortfall in education will be a key constraint

for inclusive growth (Poddar and Yi 2007). Finally, higher investment towards R&D activities

and academic institutions will promote further the positive circle from higher economic growth

to even better research performance and improved human capital and vice versa.

The Land Factor: Productivity of the remaining land

The Great Migration has left large sectors of land used for agriculture unused and unproductive.

India will need investments in agriculture to boost productivity, especially in rural connectivity

and storage to improve the yield of remaining agricultural land (Poddar and Yi 2007).

Urbanization and the Environment

The rate at which India has urbanized has brought forth many ecological problems. Air pollution,

poor management of waste, growing water scarcity, falling groundwater tables, water pollution,

preservation and quality of forests, biodiversity loss, and land/soil degradation are some of the

major environmental issues India faces today. Negative externalities like urbanization and the

environment affect the living standards of the living population and thus must be addressed by

the Indian government.

System

Throughout history, India has been characterized for a closed and rigid system. Even after they

opened up to the global economy, it takes 26 days to start a business in India. The G7 average 7

days to start a business (World Bank 2014). Furthermore, it takes around a year to terminate a

job or a contract. The rigidities in the system difficult the creation of business and the hiring of

employees. Also, India’s government is inefficient, corrupt and highly bureaucratic (Bell 2011).

Foreign investors will be even more attracted to India as soon as these problems are resolved.

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CONCLUSIONS

Key Similarities Among the BRICS Economies

Drivers For Growth

The first driver for growth these economies have in common is how capital accumulation has

allowed them to catch up to the rest of the industrialized economies. By investing in capital

goods, these countries have been able to grow really fast. This input in production increases

productivity in a relative short period of time when compared to education which can take almost

a generation for the effects to be tangible. However, as mentioned before it is subject of the law

of diminishing returns of capital which states that capital investment increases productivity but

each time it will have less effects in productivity, until a point where investing in capital will

have no significant effect because the economy is maxed out.

The second driver for growth these economies have in common is that they have shifted to a

market-oriented economy. In other words, the deregulation of the economy has opened them to

global markets allowing them to engage in trade with other economies. In fact, net exports

account for a good portion of GDP in these economies as shown in the graph below. Engaging in

trade was a big reason these countries were able to grow at such high rates because it allowed

them to use their labor forces to produce more and sell to the world.

Graph #8: Net Exports over GDP Ratio for China, Brazil and India

Source of data: World Development Indicators 2013 (World Bank)

23

Challenges

The BRICS economies analyzed in this paper have similar challenges. Inclusive growth has been

a key similarity in their challenges. The Kuznets Curve has effectively predicted their rise in

income inequality due to the rapid growth these countries have experienced. Graph #9 shows the

lack of a proper distribution of wealth over China, Brazil and India. Furthermore, the BRICS

must improve their education in order to reach the next stage of their development. Once these

economies become developed countries, their level of education will be the only way to keep

growing beyond this stage.

Graph #9: Gini Coefficients in China, Brazil and India

Predictions

Each of the countries analyzed in this paper are in the process of being part of the largest and

most influential economies of the world. Goldman Sachs predicted that China and India would

become the first and third largest economies of the world, as well as Brazil and Russia reaching

the fifth and sixth positions. This prediction graph is very useful in several ways since it shows a

ranking of the countries from 2007. For instance, China is ranked as the fifth largest economy in

the 2007 graph.

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Graph #10: Expected GDP for the BRICS

Graph #11: Expected GDP per Capita for the BRICS

China, India and Brazil will see a considerable growth to their GDP per capita in PP terms. Still,

they will be far behind the G7 economies in this area and must focus on inclusive growth to

increase it as stated before.

25

Graph #12: The BRICS overtaking the G6 in GDP

At the time this paper is being written, China is the second largest economy and India is the

seventh largest economy by nominal GDP. Both of these economies will keep growing at higher

rates than the US. Based on the graph, by 2050 China is going to be the largest economy and

India will escalate to the third position in the ranking by real GDP (see Graph 12). However, we

think India’s growth has been more sustainable because it has focused on improvements in

technology, which will keep having positive effects on the productivity of this economy. On the

other hand, China is going to have a tougher outlook and more difficulties when it comes to

sustainable growth. The main reason is China’s growth has come from low-value goods that are

produced by its low-skilled labor force. If China expects to keep growing in the following years

they will have to invest in high tech similarly to what India has done.

26

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