THE BEAR'S
LAIR BRICs
lose their shine By Martin
Hutchinson
Brazil's 2011 growth was
announced this week at 2.7%, or only 1.6% per
capita, and prospects for 2012 don't look too good
either. Russia has just re-elected as president
Vladimir Vladimirovich Putin, whose apparent
flat-tax supply-side economics of 2001 has
degenerated into crony capitalism enforced by
nuclear weaponry.
Indian growth is also
slowing; the good news is that the Congress party
was decisively defeated in Uttar Pradesh, the bad
news is that the victor was a leftist party whose
last (2002-07) term in office was known as the
"gunda raj" - criminal rule.
Only China
powers ahead, but the problem there may simply be
that we don't know what's really going on. The
BRICs, it seems, have become not building blocks
of world economic growth, but
deadweights to its
continuance. In all cases, the principal obstacle
is government.
In Russia, the pernicious
role played by government is obvious. After all,
the country has the world's greatest reserves of
natural resources, and a population of only 140
million. It also has among the world's best
education systems, with a heavy concentration on
engineering and technology. Given a passable
government and a free-market system, it ought
indeed to be among the world's most prosperous
countries.
Russia's boosters claim that
Russia is the third-fastest growing economy in the
world. But since Russian growth is only expected
to be 3.2% in 2012, their definition of the word
"world" is a little suspect, presumably only
including the wealthy countries. The Economist
ranks Russia 18th of the 58 countries it surveys,
based on projected 2012 growth rate. That looks
reasonably impressive, until you realize that this
modest growth is being achieved in a period of
sharply rising prices of oil, Russia's largest
export. After all, one of the countries that beats
Russia, at 4.2% growth, is Venezuela, and few
people outside Hugo Chavez' immediate family would
claim that country was economically well run.
Russia's main problem is its state budget,
which depends crucially on oil revenues and hence
on the oil price. Before 2008, this was balanced
at an oil price of around $90 per barrel, already
up from a break-even of $30 per barrel earlier in
the decade. Now, since president-elect Vladimir
Putin announced US$260 billion of spending
programs during the election campaign, plus a
defense program totaling $763 billion, the oil
price needed for balancing next year's budget is
likely to be around $140 a barrel, rising
continually thereafter. Needless to say, the rest
of the world would be tipped into recession by any
oil price that made Russian budget managers happy.
Russia needs to diversify from energy into
high-skill industries, but at present it's going
the other way; energy exports have risen since 200
from 45% to 69% of exports, while equipment and
machinery exports have declined.
Russia
also suffers badly from its corruption, ranking an
appalling 143rd on Transparency International's
2011 Corruption Perceptions Index, level with such
stalwarts as Nigeria and Belarus and well below
Syria and Nicaragua.
While India and China
manage economic growth with fairly high corruption
levels, Russia is currently well beyond the levels
compatible with prosperity (except for the
oligarchs extorting from the system). Russians
themselves are voting, if not with their feet then
with their roubles. Capital flight from Russia
totaled $38 billion in the fourth quarter of 2011,
and there is no sign of it slowing.
Brazil's traditional reputation was "the
country of the future - and always will be". Its
inclusion in Jim O'Neill's BRIC acronym in 2001
looked eccentric to investors aware of its
mediocre track record, propensity to inflation and
perilous debt position. Yet under Luiz Inacio Lula
da Silva after 2002 its growth accelerated, fueled
by continually rising commodity prices, while
Lula's "Bolsa Familia" program of cash subsidies
to poor families lessened its extreme inequality.
Nevertheless Brazil's traditional flaws of
an overblown state sector and an inability to
budget soundly remained. A recent study by Fitch
Ratings examined the pension systems of Brazilian
states and municipalities, and discovered that
pension spending had increased from 15.5% of total
state spending to 33.2% between 2005 and 2010.
With state employees entitled to retire at any
time after accumulating 30 years service, Brazil's
transition to Western demographic patterns is made
impossibly expensive.
Brazil's current
growth rate of 2.7% is barely enough to improve
living standards measurably. However, on the
positive side for Brazil's politicians, 2011's
growth was enough to push its economy above
sclerotic Britain in global league tables, a
matter for much rejoicing in the better Brasilia
nightclubs.
Even after years of rapid
growth, Brazil still has a huge public sector
deficit, reported officially as 2.6% of gross
domestic product, but in reality far more.
(Brazilian politicians have discovered they can
finance boondoggles better, without the
international rating agencies noticing, through
the development bank BNDES and through
state-controlled companies, above all the oil
company Petrobras and the iron-ore company Vale.
Both those companies are internationally listed,
with substantial minority holdings, but since
shareholders are both capitalist and foreign,
their rights are not high on the Brazilian
government's priority list.)
Meanwhile
Brazil's consumer prices were 6.2 % above the
previous year in January, so the central bank's
sharp 0.75 % cut in interest rates last week is
risky, while politicians' talk of further spending
"stimulus" is more so.
In India, the
economy has been running for the past eight years
on the momentum built up by the BJP government of
Atal Bihari Vajpayee in 1998-2004. After a
stunning act of ingratitude by the Indian
electorate in 2004 which returned Congress to
power, government spending has expanded faster
than the economy while the necessary reforms,
opening up the economy and reducing the influence
of the "permit raj," have been totally neglected.
Year after year, Western media
commentators are seduced by the gentle charm of
the centrist Prime Minister Manmohan Singh, who
produces plan after plan of cautious reform, but
in reality the plans are never implemented and the
Indian economy becomes more and more dominated by
politically connected business oligarchs.
As in Russia, India's economic system is
dominated by a very small cadre of crony
capitalists - its 55 billionaires account for no
less than 20% of the country's gross domestic
product. The country had appeared to be opening up
to genuine capitalism in 2003-4, but that opening
has now reversed.
A case in point was the
infamous 2008 telecom auction, in which 122
licenses for 3G telecom systems were awarded,
bringing $20 billion into the Indian Treasury,
only for the country's Supreme Court to invalidate
all 122 licenses four years later. Not
surprisingly, India ranks a dismal 134th out of
183 countries on the World Bank's "Ease of Doing
Business" survey.
At this point, India's
growth is slowing, its inflation is in double
digits and foreign investment has declined, as
promised liberalizations in such fields as retail
are shelved.
Leaving aside China, the
other three of the four BRIC countries no longer
seem attractive places to invest, or countries
that will dominate the global economy by 2030, as
was promised. In all three cases, the problem is
political. A cronyist and anti-market government
has been in power during the years of growth (in
Russia and Brazil caused by the resources boom, in
India caused by the previous government's
liberalization) and has proceeded to waste the
fruits of growth on public sector expansion.
In all three countries, the electorate has
validated its poor government's nefarious
activities - by re-electing the Congress party in
India in 2009, by electing Lula's chosen Workers
Party successor in 2010 and by re-electing Putin
in 2012.
None of the three countries
offers significant chances of pro-market change
any time soon - Putin in Russia seems likely to be
in power until 2024 and Brazil's Dilma Rousseff
until 2018, while in India the Uttar Pradesh
election result suggests that if the Indian
electorate rejects Congress, it will go for a
leftist alternative, spurning free-marketers.
Jim O'Neill remains convinced that the
BRIC countries remain the growth stories of the
future. In reality he, along with Federal Reserve
chairman Ben Bernanke, bears much of the
responsibility for their relapse into slow growth
and socialism. His BRIC proselytizing attracted
legions of foolish foreign investors, such as the
worldwide rush of dozy telecoms companies into
India's 2008 spectrum auction.
Meanwhile
Bernanke's easy-money policies (and those of his
predecessor Alan Greenspan) created a huge flood
of footloose foreign capital, which headed
straight for O'Neill's BRICS, while pumping up
commodities prices, thus giving the Russian and
Brazilian economies an altogether unhealthy influx
of foreign exchange from trade as well as capital.
In such circumstances, the quality of
economic policy becomes irrelevant. All but the
very worst regimes (yes, that's you, Hugo Chavez
and Mahmoud Ahmadinejad) are able to create an
entirely spurious aura of success, which they can
reinforce by throwing public money at the poorer
sections of the electorate.
As a result,
their voters, not economically sophisticated (and
led further astray by the more foolish elements in
the Western media), create a one-party monopoly.
Of course, eventually the spending spree comes to
an end and the countries concerned relapse into
poverty, having wasted the finest opportunity they
will ever see to pull themselves out of it.
In the 22nd century, public choice theory
scholars will examine these cases, dissect the
errors made, and read each other learned papers
about how it could all have been better managed.
But the intellectual achievements of a few hundred
scholars a century from now will be of little
comfort to today's Russians, Brazilians and
Indians, whose lives will have been blighted by
the malfeasance of governments democratically
installed and maintained by an electorate blinded
by false economic signals.
Martin
Hutchinson is the author of Great
Conservatives (Academica Press, 2005) - details
can be found on the website
www.greatconservatives.com - and co-author with
Professor Kevin Dowd of Alchemists of Loss
(Wiley, 2010). Both are now available on
Amazon.com, Great Conservatives only in a
Kindle edition, Alchemists of Loss in both
Kindle and print editions.
(Republished
with permission from PrudentBear.com.
Copyright 2005-12 David W Tice &
Associates.)
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