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Portfolio > Economy & Markets > Economic Trends

Bicycle Economies

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The term BRIC was invented by Goldman Sachs economist Jim O’Neill. It was an easy-to-memorize acronym based on the names of four large developing countries: Brazil, Russia, India and China. According to O’Neill, those four — although not necessarily in that order — would provide most economic growth in the 21st century and become the economic powerhouses of the future.

Goldman Sachs, even after converting to a bank holding company last year, remains an investment bank. Its business is to sell stocks. The BRIC story was a great marketing ploy to put investors into emerging markets. Very much like those fancy names real estate agents come up with for formerly depressed urban neighborhoods in order to attract middle-class home buyers — something like New York City’s famed TriBeCa, which originally stood for the Triangle Below Canal Street.

But international bureaucracies have a tendency to mushroom. No sooner did the BRIC term gain currency than officials from the four countries set up joint commissions and began holding high-level conferences to discuss their bright economic future. The fact that they had fairly little in common was no impediment to such activities.

Crisis Boon

But the current economic crisis has been a godsend for the BRICs — or at least three of them. While rich industrial nations, most notably the United States, saw their economies tank, China and India avoided a recession and continued to post only slightly slower, but still spectacular, growth rates right through the downturn. Brazil did suffer a short-lived recession, but its economy turned around quickly. O’Neill appears to have been right, after all.

Russia has been the exception. In a decade when high oil prices generated huge inflows of petrodollars, it failed to diversify away from natural resources, especially oil and gas, while its state-owned conglomerates became even less efficient. Russia has suffered disastrously from the economic slump. Its GDP is forecast to shrink by 7.5 percent this year, despite a bounce in oil prices in the fourth quarter. By early 2009, Russia’s finance minister Alexey Kudrin was pleading with the international community not to kick his country off the prestigious BRIC list.

It may be too late. Some economists are ready to replace Russia with Indonesia on the list of leading emerging economies. The world’s most populous Muslim-majority nation, Indonesia also began as an oil exporter (it used to belong to OPEC but suspended its membership in January 2009) and commodity producer. However, it has undergone considerable changes since the 1997 Asian financial crisis, including greater democracy and economic reforms. The Economist Intelligence Unit forecasts that Indonesia’s economy will grow by over 4 percent this year and next.

Appropriate Name

So, if Russia is removed from the BRICs and is replaced by Indonesia, what should this prestigious up-and-coming economic club be called? Shouldn’t it become the BICIs?

In a way, this could prove to be a more appropriate name. The old BRICs did stand up against the crisis, but not like a real brick wall. Russia quickly became a breach you could drive a truck through: Import demand fell sharply and its motor vehicles market, which briefly emerged in 2008 as Europe’s largest, shrank by around 50 percent.

The remaining BRICs did provide some help to the world economy, but it has been a mixed blessing. Demand from China supported international commodity prices, notably the price of oil and most metals. This was hardly a great help to the rest of the world during an economic slump. In the U.S., motorists have already started to see higher gasoline prices once more. Meanwhile, Chinese authorities are not letting the yuan appreciate against the U.S. dollar, a move that would have resulted in fewer Chinese exports to the rest of the world and greater imports from other countries.

In Latin languages, including Brazil’s Portuguese, the word bici is short for a bicycle. And “bicycle economy” is a term often applied to Asian Tigers, notably South Korea, Taiwan and others on the Pacific Rim. This refers to the fact that they either roll forward at a breakneck speed or, the moment they stop, start to topple over.

Brazil and Indonesia are classic examples of bicycle economies. In recent decades, they have gone through several boom-bust cycles, many quite severe. India may be growing more steadily as a result of economic reforms, cautiously implemented over the past two decades. It has great potential, and in some industries, such as software, it now plays an important role on its own. However, its international weight, manufacturing prowess and ability to act as a banker to the rest of the world are nowhere near China’s.

Whether the BRICs or BICIs will play an important role in the global economy really depends on China.

China’s Rise — and Rise

When China burst upon the global economic scene in the early 1990s and began posting growth rates averaging around 8 percent per year, many economists expected it to follow the typical pattern of regional economic development. It was pursuing an export-led economic model, using cheap labor and centralized industrial policy to build up manufacturing capacity and undercut competitors. It would go through dramatic swings, economists predicted, as well as gradual democratization, resulting in potentially severe social upheavals.

Such forecasts proved wrong. China continued to grow, through thick and thin, slowing only slightly during the Asian financial crisis in the late 1990s and the global slowdown in the early 2000s. Its currency withstood speculative attacks, and its financial bubbles burst and then inflated again without undermining the real economy. Moreover, while social dislocations did occur, and tens of millions of peasants moved to the cities and booming eastern maritime provinces, the corrupt and repressive political system remained solid. Calls for greater democracy were muted, at best.

The same happened in the current crisis. Tens of millions lost their jobs and many had to go back to their villages. Yet, social unrest has been kept under wraps.

Perhaps China reflects a fundamentally new development model. It may keep growing rapidly and relentlessly under the wise tutelage of its Communist leaders, gradually moving from labor-intensive, low-tech industries to more sophisticated technologies and from reliance on exports to potentially enormous domestic demand. It may stop polluting and shift to clean technologies. It may alleviate heavy dependence on foreign oil and raw materials by forging close ties with commodity producers. And it may do so seamlessly, without suffering a transitional crisis.

That’s a tall order, of course. Two issues should be raised in this regard. First, Communist leaders in Beijing, highly praised recently, are the same people, functioning in the same political system that used to implement Mao Zedong’s disastrous economic policies in the 1960s and 1970s. And, second, even the U.S. could not transition to the status of a world power without suffering a Depression along the way.

China still has much catching-up to do, and it remains to be seen whether it can transition smoothly to slower growth. Last year, the U.S., with about one-third of China’s population, provided $10.1 trillion in consumer demand. China provided about one-fifth as much. Even if the yuan is undervalued, and doubles in value against the greenback, Chinese consumption will remain less than half of U.S. levels. Moreover, a more expensive domestic currency will result in reduced exports and more imports.

China is an outsized country with a long history. Its history is distinctive, but it shows that the country is subject to the same social and economic cycles that impact other nations. The only difference is that China’s cycles tend to take longer and to be more dramatic — which is certain to provide small comfort for the rest of the world.


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