globalization and the evolving international economic order

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Four Snapshots: India, China, Brazil, and Russia

Globalization and the Evolving International Economic Order

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BRIC Country Overview

BRIC COUNTRY OVERVIEW

0.0 BRIC Country Overview

1.0 Brazil

2.0 Russia

3.0 India

4.0 China

5.0 Shared BRIC Challenges

6.0 Shared BRIC Opportunities

7.0 Discussion

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0.0 BRIC Overview

4BRIC Consulting, Goldman Sachs Global Economics Paper No. 99

Introduction: BRIC Country Overview

Rise of the BRICs By 2050, BRIC countries expected to account for over 40% of

the world’s population, and 60% of global GDP

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1.0 Brazil

Global Marketplace Trends Challenges for the Future

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Brazil: Global Marketplace

Global Marketplace: The uneasy emergence of an economic leader in Latin America

One of the fastest growing economies in the last century Development driven by trade of natural resources such as coffee and sugar

But over-reliance on agricultural commodity exports resulted in a development marked by boom and bust Political instability caused by fluctuating market prices political violence

Since 1985, Brazil has been developing a representative democracy In 1994, Fernando Henrique Cardoso elected president Cardoso believes economic development dependent upon investment,

technology transfer, and market access provided industrialized nations Succeeded in stopping hyper-inflation, but resulted in swelled debt and high

unemployment

Yale Global Online

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Global Marketplace: A Refreshed Administration and Strategy

In 2002, 53 million Brazilians elected former shoeshine boy and leader of the New Unionism movement to chart new course through globalization

Luiz Inacio “Lula” da Silva established outward-oriented development strategy to grow the economy Expanded exports of mineral, agricultural, semi-industrialized and high

value-added manufactured goods Targeted traditional markets (US & EU) and new markets in Latin America,

Southern Africa, China, India, and Middle East Established income-support programs to combat social

exclusion and poverty Brought a quarter of Brazil’s 190m people into the consumer market for the

first time

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Global Marketplace: A Refreshed Administration and Strategy

Results Export earnings grew from $43.5 billion in 1994 to $90 billion by 2000 2008 estimates put exports over $190 billion From 2006 to 2007, per capita GDP increased from $4,930 to $6,600

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Brazil: Trends

Trends Focus on equitable development has resulted in significant poverty reduction

Middle class now comprises 52% of population “Long famous for its unequal distribution of wealth, Brazil has shrunk its income gap by six percentage points since

2001”

Brazilian economy becoming less dependent on exports Brazil becoming a leader in the effort to bring developing nations into the era of globalization

Established the IBSA development initiative to promote cooperation among the developing nations of the southern hemisphere

A global leader in renewable fuels World’s second largest producer of ethanol, and the largest exporter 90% of Brazilian vehicles can be fueled by ethanol

The Globalist, Brazil: Navigating the Straits of Globalization; The Economist (May 2009)

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Brazil: Challenges for the Future

Challenges for the Future Overburdened and ineffective judicial system

Supreme Court received 100,781 cases in 2008 69% of Brazilians believe judges lack impartiality High risk of broken contracts and lack of reliable legal recourse discourages foreign

investment

The Globalist, Brazil: Navigating the Straits of Globalization; The Economist (May 2009)

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2.0 Russia Global Marketplace Challenges for the Future

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Russia: Global Marketplace

Global Marketplace: An “easy case” for globalization After the collapse of the USSR in 1991, a sense of historical inevitability that Russia

would rapidly become a prosperous democratic state World community supported a plan of rapid economic reforms referred to as “shock

therapy” But beginning in 1992, Russia became plagued by hyperinflation, political conflict, and

desperate poverty Poverty increases ten-fold from Soviet era

Infant mortality 4 times that of US

The Globalist, Brazil: Navigating the Straits of Globalization.

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Global Marketplace: “Less shock, more therapy” By end of 1992, world community remains hopeful as Russian

people rapidly disillusioned Perception grows that Russia is being “lectured” by other

countries and is quickly losing its superpower status Propensity to offer guidance to Russia quickly became a sore point in the

U.S.-Russian relationship

The Globalist, Brazil: Navigating the Straits of Globalization.

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Global Marketplace: Why did Russia not transition smoothly into the global system?

Undue emphasis on economics over politics Domestic pressures for change not as strong as in other countries Short-term consequences of “shock therapy” undermine public perceptions of linkage between reform and

prosperity Disregard of cultural values

Russians did not adopt “western lifestyles” as a standard by which to judge their own Russia can still benefit from a globalized world without undertaking painful reform

Diversified global firms willing to take risks in Russian energy sector because of high potential for profit Russia’s nuclear arsenal renders it “too big to fail,” attracting foreign assistance despite lack of democratic

reform

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Global Marketplace Consolidation of federal power

Immediately after inauguration, Putin begins weakening challengers of Kremlin’s power Regional governors, “Oligarchs”, NGO’s, Environmental groups

Justice system used to attack political opponents of the regime

Strengthening of ties with former Soviet allies such as North Korea while exploiting differences between Washington and European capitals for political leverage Continued provision of nuclear and other sensitive technologies to Iran

Continued popular skepticism of the west 85% of Russians believe the US is trying to dominate the world This makes widespread pressure for economic or political reform unlikely

Use of vast oil and natural gas reserves to exert geopolitical pressure Regional instability: Georgia incursion

http://www.nixoncenter.org/publications/articles/Russia%20and%20globalization.htm


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Russia: Challenges for the Future

Challenges for the Future Labor shortages and poorly developed infrastructure WTO membership and long-term growth of the manufacturing sector

“Economic miracle” of Russian economic growth driven by natural resource exports, but manufacturing sector not competitive on global scale

WTO accession will have long-term benefits, but will hurt the majority of domestic manufacturers which cannot compete with foreign companies

Reconciling ambitions as a major power with reality of current situation "With real democracy in Ukraine, more and more Russians would view the Putin regime as an

anachronism."(Zbigniew Brzezinski, former U.S. national security advisor, December 2004)

The Globalist, Nixon Center, The Economist, Yale Global Online

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3.0 India Global Marketplace Key Advantages Trends Elections of 2009 Challenges for the Future

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India: Global Marketplace

Global Marketplace: The PC Revolution Seeds of Indian Software industry sown in late 70s and early 80s

Early software training in India centered in universities Sense that power of software would be unleashed in years to come

American technology firms enter Indian market and use local programmers for domestic products Firms quickly realize Indian software is low-cost and high-quality, begin

using Indian programmers for other markets

Indian industry gains exposure to international programming, marketing, customer care

Yale Global Online

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India: Global Marketplace

Global Marketplace: Globalization Forces of globalization set the stage for rapid rise of Indian

economy Sourcing capital from where it is cheapest

Sourcing talent from where is it best available

Producing where it is most cost effective

Selling where markets are, without constraints of national borders

Confluence of internal changes and external forces of globalization allow India to leverage the power of English-speaking technical talent to produce powerful software for the global market

Yale Global Online

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India: Key Advantages

Key Advantages

1.15 billion people

2nd largest labor force: 516.3m people

60% employed in agriculture

28% in services

12% in industry

Approximately 2.5 million college graduates per year

Every year India graduates nearly 350,000 engineers, twice the number of the US

Those with graduate degrees and above have risen from 20.5 million in 1991 to 48.7 million in 2004

Enrollments at grad-plus level rose from 6.6 million in 1995 to 9.84 million in 2004, with proportion of those doing engineering going from 6% to 11.2%

World Bank Group: India Data Profile

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India: Trends

Trends Number of people in absolute poverty has declined sharply

Exports have boomed

Foreign exchange reserves are ample for the first time in history Fifth highest globally in 2008

Newfound economic dynamism has shifted the balance of leaders’ priorities from geopolitical goals to mutual economic interests [not sure of meaning]

Tense relations with Pakistan after Mumbai terror attacks

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India: Elections of 2009

Elections of 2009 May 16th parliamentary elections result in stable majority for

Congress party Congress and electoral allies win 261 of 543 seats

Best result of any party since 1991 Party platform featured education reform, poverty reduction,

electrical capacity increase, and agricultural development Election seen as a sign of the compatibility of democracy and

development, and a validation of “equitable globalization” The “challenge of rising expectations”

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India: Elections of 2009

Elections of 2009 Congress can no longer blame stagnation on political foes Expectations of continued high support for impoverished do not

account for economic downturn Government’s budget deficit may exceed 11% of GDP in 2009

Many “necessary” reforms are politically unpopular Curbing fuel and fertilizer subsidies Repealing overly-protective labor laws Lifting cap on foreign direct investment

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India: Challenges for the Future

Challenges for the Future Improving governance

Indian bureaucracy notoriously prone to “leakage” Governance problems overarch all others

Improving basic educational achievement India is still 40% illiterate Can take up to 4 years to fill teacher vacancy

Improving infrastructure and electrical capacity in cities Strain on urban services will rise dramatically as urban population rises from

30% to 60% by 2050 Indian companies lose an average of 7% of income due to power outages To reach growth goal of 9% per year, India will need to add 25,000MW of

electrical capacity per year

Expanding technology industry High tech sector still accounts for only one quarter of one percent of the labor

force

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4.0 China Global Marketplace Key Advantages Trends Challenges for the Future

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China: Global Marketplace

Global Marketplace: Unleashing the “Caged Tiger” As recently as the late 1970s, China was the world’s most

important opponent of globalization Though it was a latecomer, China has been extremely aggressive in its

engagement in the globalized system

As a result, China achieved an average GDP growth rate of 9.6% between 1976 to 2004 No large country in human history has experienced such rapid

improvements in living standards and working conditions

China’s successes are associated with liberalization and globalization In 2004, international trade accounted for 70% of China’s GDP, as compared

with 24% for Japan

RAND Corporation, China and Globalization, Yale Global Online, Goldman Sachs

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Global Marketplace: How did China do it? China focused not only on opening economy, but also on

institutionalizing globalization Adopted Western concept of “rule of law” Established competition as a centrally important economic practice Adopted English as de facto second language for educated population

Assimilation of best practices from across the globe Sends missions throughout the world seeking best technology and corporate

management techniques Elite youth sent abroad for education Incorporates foreign brands into local culture


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Global Marketplace: A Painful Transition State enterprise employment declined from 110 million in 1995 to 66

million in 2005 Manufacturing jobs declined from 54 million in 1994 to under 30 million today

Urban-rural income gap is getting wider

Environmental cost of industrialization 70% of Chinese energy from coal One new coal-burning plant brought online every week on average China has 20 of the world’s 30 most polluted cities


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China: Key Advantages

Key Advantages Broad expansion of educational achievement

Great success in promoting primary, secondary, and university education within urban and rural populations

One-child policy results in greater parental and national investment on a per-child basis

Rapid economic growth 4th largest economy (behind US, Japan, Germany) Economy grew by 11.9% in 2007 More than 200 million people lifted out of poverty, with 10% of population below poverty

line

Resilience to global economic downturn High savings rate creates economic buffer Vast untapped potential in domestic consumer goods market may be China’s “secret

weapon”

RAND Corporation, China and Globalization; WSJ; Goldman Sachs

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China: Trends

Trends China has been a source of economic growth and stability in the

region Demonstrated to India advantages of more open economy Stimulated neighbors’ trade and foreign investment rather than depriving them Revived Japan’s economy

Complex and symbiotic relationship with US China’s growth driven largely by demand in US market Inexpensive products substantially improve living standards of poorer Americans China top creditor of US (holds nearly $1 trillion in US bonds) Security of US debt a growing international issue, but China has vested interest in

stability of US economy

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China: Challenges for the Future

Challenges for the Future Recognition as a global power requires adherence to international

norms Environmental quality Human rights Currency manipulation Intellectual property rights

Continued reform of state-run enterprises Banking system worst in the world, but reforming State control resulted in high proportion of non-performing loans

Demographic shifts threaten sustained growth Rapidly-aging work-force due to one-child policy Every generation, 300 million move to the cities Eventual result will be high non-working/working ratio in cities

Navigating a complex relationship with US and world Value of US debt depends upon Cooperation on nontraditional threats such as terrorism and disease

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5.0 Shared BRIC Challenges

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Shared Challenges

Shared Challenges The face of poverty in 20th century was rural children. The face of

poverty in the 21st century will be the urban elderly. Making the global system more accommodating to diverse cultures

and values Globalization vulnerable to backlash from countries or social groups that cannot find

a satisfactory place in the global system Could create coalition of these groups

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6.0 Shared BRIC Opportunities

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Shared Opportunities

Shared Opportunities “Inclusive growth” critical for sustained globalization

(politically) in developing countries, because potential lies in bringing up all

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7.0 Discussion

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Discussion

Discussion Should more economic power necessarily translate

into more political power?

Should Brazil and India be on the UNSC? Does more representation allow us to more efficiently address intractable problems?

How can the US ensure its continued relevance and importance in the changing game of globalization?

globalization and the evolving international economic order

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