Business

Monday June 22, 2009

Brick by brick New economic group flexing its muscle

Between the Lines - A weekly column by C.S Ta


THERE used to be just two economic groupings of nations – developed countries and developing countries.

Many of the developed countries are clustered into the Organisation of Economic Co-operation and Development (OECD) while the rest were developing countries for South-South Cooperation.

The 30-member OECD comprises mainly western countries, with Japan and South Korea being the only two Asian members.

In recent years, BRIC has been described as a new economic group. These are the countries of Brazil, Russia, India and China.

Their leaders met for their first major summit in Russia last week. That seemed to affirm the term coin-ed by US banking group Goldman Sachs to describe the emerging markets with the most exciting growth.

From left: Brazilian President Luiz Inacio Lula da Silva, Russian President Dmitry Medvedev, Chinese President Hu Jintao and Indian Prime Minister Manmohan Singh at the BRIC meeting in Russia –AP

It’s not a surprise that the BRIC countries embrace the catchy term as it calls attention to their high economic growth rates.

With high growth rates, living standards will improve in BRIC but their per capita incomes are well south of that in the OECD countries. Per capita income levels and the size of an economy take many years, often a generation or two, to catch up with that of wealthier countries.

In our time, Malaysia is ahead of the Philippines which sends some of its women to work as maids here.

In the 1960s, the Philippines was said to have the largest economy in Asia, after Japan – it took 40 years for a transition that turned it into one of the region’s poorest.

Looking far into the future, Goldman Sachs said in a report that by 2050, BRIC combined will form the world’s biggest economic group, surpassing the US and Europe.

The BRIC economies will be constructed to a certain size over a long time, literally brick by brick, but kids today may see that result by the time they are adults.

Going by Goldman Sachs’ forecast, by 2050, China’s economy alone will be larger than that of the US while India’s will be larger than that of its former colonial master, the UK.

That should obviously be the case as China is far larger than the US in its population size and the same is true of India and the UK.

China’s per capita will still be below that of the US even when the size of their economies reach parity because of China’s large population.

Economic size and living standards are two different aspects - most people prefer the living standards in Finland, a much smaller economy than that of China.

Corrupt or incompentent governments in Asia have for many decades – several centuries in the case of China – caused standards of living to stagnate or even deteriorate.

With more capable and transparent governments, the BRIC countries should gradually gain equality in terms of economic size while at the same time improve standards of living.

In terms of size, they have come a long way. China, for instance, displaced the US as the biggest trading partner of Japan in 2007, and this year, even faraway Brazil found its biggest export market has shifted from the US to China.

The BRIC countries are also among the world’s biggest holders of US treasury securities. It is not surprising, therefore, that in last week’s summit, the BRIC leaders flexed their new-found financial muscle to call for greater representation in the World Bank, and a bigger say on issues on the global financial system.

These countries have become stronger than before following the severe recession in the OECD countries which now need to borrow even more heavily than before.

Gradually, there could also be a psychological shift. Just as Asians became more confident after Japan defeated the UK in Asia in the Second World War, the myth that westerners are superior should perish with the crisis.

As Datuk Seri Nazir Razak, CEO of CIMB group, put it at a forum in Bangkok recently, Asians are still “overawed by western banks and bankers.”

While there are good western bankers, there are equally innovative Asian bankers who also maintain a level of prudence.

This is the time when Asians need not feel they are less smart than their western counterparts.

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