Hartmut Elsenhans - Brics or Bust?: Escaping the Middle-Income Trap

BRICS OR BUST?

Escaping the Middle-Income Trap

HARTMUT ELSENHANS AND SALVATORE BABONES

stanford briefs

An Imprint of Stanford University Press

Stanford, California

Stanford University Press

Stanford, California

2017 by the Board of Trustees of the Leland Stanford Junior University.

All rights reserved.

No part of this book may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying and recording, or in any information storage or retrieval system without the prior written permission of Stanford University Press.

Printed in the United States of America on acid-free, archival-quality paper

Library of Congress Cataloging-in-Publication Data

Names: Elsenhans, Hartmut, 1941 author. | Babones, Salvatore J., author.

Title: BRICS or bust? : escaping the middle-income trap / Hartmut Elsenhans and Salvatore Babones.

Description: Stanford, California : Stanford Briefs, an imprint of Stanford University Press, 2017. | Includes bibliographical references.

Identifiers: LCCN 2017022244 (print) | LCCN 2017026896 (ebook) | ISBN 9780804799898 (pbk. : alk. paper) | ISBN 9781503604919 (ebook)

Subjects: LCSH: BRIC countriesEconomic conditions. | BRIC countriesEconomic policy.

Classification: LCC HC59.7 (ebook) | LCC HC59.7 .E455 2017 (print) | DDC 330.9172/4dc23

LC record available at https://lccn.loc.gov/2017022244

Typeset by Classic Typography in 10/13 Adobe Garamond

CONTENTS

PREFACE AND ACKNOWLEDGMENTS

From a sheer human standpoint, the BRICS countries are among the most important in the world, accounting for 40 percent of the worlds population and standing symbolically for the hopes and dreams of many more. Through good policy choices they can avoid or escape the middle-income trap, and we hope that they will. This book offers them, and countries like them, a clear path to prosperity. We sincerely hope that they will chose it.

That this book exists is a practical testament to the importance of students in the intellectual development of their professors. We were first introduced to each other in August 2014 by a former student of Hartmuts. Daniel Kremers of the German Institute for Japanese Studies had attended one of Salvatores lectures, where he spoke of Hartmut and described him as mind blowing and entertaining. Two and a half years later, Salvatore must concur. We can only hope that this book is mind blowing and entertaining as well. For this would be a good sign that it will have an impact in the world!

We will keep our acknowledgments to a minimum. But we must thank our editor at Stanford University Press, Margo Beth Fleming, for believing in this project enough to suffer us through several long delays. We are also grateful to her for providing detailed editorial feedback that greatly improved the final text. We would also like to thank Professors Samuel Cohn, Robert Holton, and Ray Kiely for their comments and advice. Finally, we are grateful to the copy editor, Jeff Wyneken, who produced the final, polished typescript, for his careful reading.

Hartmut Elsenhans, Leipzig

Salvatore Babones, Sydney

April 20, 2017

INTRODUCTION

The rise and fall of Brazil, Russia, India, and China, the so-called BRIC nations, is the great geoeconomic story of the twenty-first century. In the early 2000s, these countries were tipped to redraw the economic map of the world. With a combined population of nearly three billion, they constituted roughly 40 percent of the worlds people. Throughout the first decade of the new millennium, they were among the fastest-growing countries in the world, sailing through the 20089 global financial crisis in a way that made them the envy of the world. When the long-standing G-7 group of developed countries proved unable to meet the challenges posed by the crisis, the wider G-20including all four BRIC economiesrose to the occasion. At a time when developed countries were talking austerity, the BRIC countries opened the taps on government spending. The crisis did not turn into the second Great Depression (though it looked as though it might in early 2009). For this, surely some of the credit goes to the swift action taken by the BRICs to stimulate domestic demand.

Fast-forward a few years and the BRICs seem a spent force. Brazil is facing a political crisis of momentous proportions as it deals with its second year of recession. Russias economy is also stagnating under the combined pressures of low oil prices, Western sanctions, and incessant military action. India, much poorer than the other BRICs, is the lone economic bright spotbut clouds are gathering and even the Reserve Bank of India believes that its growth is unsustainable. And then theres China. In theory, China is the engine of the global economy, continuing to grow at more than 6 percent per year despite the fact that it is now a middle-income country and the worlds second-largest economy. In practice, there are grave doubts about the veracity of Chinas economic statistics. In late January 2016, after a run of bad economic news, China removed the director of its National Bureau of Statistics for violating party discipline. Chinas economic statistics improved dramatically immediately following the appointment of a new director in early March.

The role of the BRIC countries in the global economy may at times be overstated, but there is no denying their importanceboth as economies and as examples. In the popular imagination, the BRICs have made the transition from acronym to model. China in particular has become the articulation of the global economy: neither the consumer nor the producer of last resort but the place where demand and supply meet to cater to the worlds needs and desires. China is the great crossroads, the focal point of the worlds manufacturing supply chains, a position it occupied before Europes industrial revolution and has come to occupy again. Brazil and Russia have long been middle-income countries and have experienced many episodes of rising hopes followed by long-term stagnation. Besides, both are primarily resource-based economies, not models of industrial upgrading. India is growing rapidly but is still a very poor country, more a BRIC of the future than a BRIC of today.

If the BRICs do not provide a single, exportable growth model that can be copied by other developing countries, their experiences can at least teach lessons that can be learned, point to pitfalls that can be avoided, and offer hope that better economies (and better societies) are within reach for countries that are sufficiently well governed to pursue them. In a recent book review in Foreign Affairs, political scientist Nicolas van de Walle wrote of a particular country that Greedy national elites have always preferred to appropriate public resources for their private use rather than grow the national economy or govern effectively. No economic policy can solve the problem of greedy national elites. But even development-minded elites lack disinterested guidance as to what specific policies could help their countries rise out of the middle income levels of the global economy. If national elites are to be expected to make real personal sacrifices today for the future good of their countries, they should at least be given good reasons to believe that their sacrifices will not be in vain. The BRIC examples are not promising in this regard. But their experiences do light some paths forward.

Economists and other social scientists have assembled quite a lot of evidence about how poor countries can reach middle-income status. Most of the required interventions involve the removal of supply-side bottlenecks: a modern economy requires a literate workforce, the liberation of women, basic transportation networks, decent public health, and the provision of a minimum level of law and order. As first China and now India have demonstrated, the introduction of market forces can liberate economies that were previously held down by bad central planning, but as Russia and Brazil have demonstrated, market forces do not necessarily produce better outcomes than can be achieved by even mediocre central planning. Supply-side good governance is surely a good thing in itself, but it takes only moderately competent levels of public administration to raise an economy from poor to middle income levels of productivity. Just look at Mexico, which has been stuck in the middle of the middle-income range for as long as economic statistics have been kept.