Thursday, January 7, 2010

Two BRICs: India vs. Brazil

I started research on India to further explore economic prospects after reading and (excellent) FT article on necessary labor reform. In doing so, I now see a (possibly) much flatter economic growth trajectory for Brazil. Here is an excerpt from the article (last paragraph):
Over the years, numerous academic studies and official reports, including the Second National Labour Commission Report (2002), have recommended major reforms of India’s labour laws. The problem is absence of political will. Until that will can be mustered, the expansion of decent non-agricultural jobs will continue to fall far short of burgeoning supply (the “demographic dividend”), condemning many millions to insecure and ill-paid, informal urban employment (or even unemployment) and mounting underemployment and distress in rural India.
The data on the Indian labor market is patchy at best; that is, if you want something a little more descriptive than an annual unemployment rate. But how does India compare to its peers? The BRICs, for example (Brazil, Russia, India, and China). What I found is, that India is setting itself up pretty well to grow quickly - a finding that is consistent with the India-part of the overall BRIC theme (link to Goldman Sachs paper):
The results are startling. If things go right, in less than 40 years, the BRICs economies together could be larger than theG6inUSdollar terms.By2025 they could account for over half the size of the G6. Currently they are worth less than 15%. Of the current G6, only the US and Japan may be among the six largest economies in US dollar terms in 2050.
In fact, the BRIC data, side-by-side, paints a darker picture for Brazil's growth trajectory than that for India. Let's see why.

India, China, and Russia increased their respective investment shares of GDP over the latest decade- Brazil, too, but at a much slower rate. India (as I discussed in a previous post) has done this mostly through reducing barriers to inward foreign-direct investment.

However, more domestic saving is likely needed in India despite the falling of its consumption share (right graph) over the same 10-year period. India gets a bigger bang for each investment buck spent, so save more and supplement the inward FDI.

In stark contrast is Brazil, an economy that is clearly saving at a much lower rate than its peers. The consumption is a large 63.1% of GDP, essentially unchanged over the latest decade. And for a developing economy, the investment share is remarkably low in levels, 16.4% of GDP in 2008 (compared to India's 32.2% share).

In all, the saving and investment story adds up to a level of productive capital stock. Without investment, there is no capital stock growth. And without capital stock growth, there is little productive GDP growth.

Note: the capital stock is constructed as investment plus non-depreciated capital.

The chart above illustrates the capital stock per worker (CW) for Brazil, India, and China. Clearly, Brazil's productive capacity per worker is the lowest - with CW being quickly outpaced by India, and especially, China. India's CW is on a respectable trajectory, but even an incremental increase in the rate of investment (i.e., the capital stock) could have profound effects on productivity and growth. Here is what the FT says:
Why is China the “workshop of the world” when Indian labour is even cheaper and her entrepreneurs admired worldwide? There are many reasons, including (until recently) the anti-foreign-trade policies and small-scale industry reservation policies, noted earlier, as well as poor infrastructure in power, roads, water and ports. Perhaps even more important are the restrictive labour laws and certain other regulations, which encourage Indian manufacturing units to “stay small”, thereby forgoing the classic industrial economies of scale and scope.
With labor reform and ongoing policy focused on domestic investment, India's economy is on a path that should turn up quickly. This is Solow's premise: low income countries invest in productive capacity, and the growth rates can be quite startling given the base effects (i.e., starting from a relatively low production level).

To be sure, there are risks. Currently India's average income is low compared to its peers, based on years of questionable policy. Among the BRIC countries, India's welfare measure (per-capita income) is the lowest, and that ranking is not expected to change by 2014 (see chart from a previous post, using data from the IMF World Economic Outlook in October 2009).

Brazil, on the other hand, is not setting itself up for sustained growth. The country is now enjoying the economic benefits of policy reform and open capital markets, an economic adolescent if you will. The next step in Brazil's development is clearly to adopt policies that grow saving and investment.

Rebecca Wilder


  1. do you track interest rate differentials & the carry trade?

  2. None of that will matter much if they can't get the oil they need.

  3. Hi Flow5,

    Are you referring to a US-Brazil carry? I know that the 2-yr is 3.5 (around there) oversubscribed - it's definitely going on in the US. I wouldn't mind borrowing at libor and then buying India.


  4. Unfortunately, like all anglo-judeo 'analysts', Rebecca does not understand Brasil.

    Brasil has in the last 5 years successfully come out of a hi-inflation era. Hi-inflation did not encourage personal savings. It will take a few more years (3 - 5) for a savings culture to become ingrained in the population.

    Also, given Brasil's political & economic stability, it's high return on Capital & it's broadly diversified economy & trade flows, investment in Capital stock is being fed/drawn from many other non-traditional sources of Capital.

    This may come as a surprise to most Brasil 'x-purts', but when taking the country's hi bank reserve ratios & foreign exchange reserves into account, she is actually a Capital surplus country.

    Unlike India or China, Brasil is an auto sufficient country in all aspects - food, water, energy, natural resources, human capital & industry. The economy is not dependent on exports, so confusing higher domestic levels of consumption vs a vs China/India can leads 1 to the wrong conclusions.

    The Brasilian Govt., BNDES, Central Bank, etc. are fully aware that investments in productive stock has to be increased (follow recent speeches by Mr. Coutinho/BNDES, etc.)

    I'm curious to know how you Rebecca classify the ongoing massive investments in Dams, Energy extraction/refinement (Petrobras capex budget for next 5 years - $172 billion), Agribusiness, Infrastructure, etc. presently occurring in Brasil.

    Remember, China has a massive overcapacity overhang & India has very poor infrastructure, grinding poverty plus intractable social & economic problems.

    How many times have you Rebecca been to Brasil & how much time have you spent outside a hotel/office conference room when there? Brasil's legal & econonic framework is based on a gaulist/germanic model. It DOES WORK well, once anglo-judeo types ike you invest the time to study & analyse the Brasilian System & the reasons behind it's various laws.

    You will then realize that the anglo-judeo neo-liberal economic model has absolutely no room within the Brasilian economic/political space & reality.

    Finally, this is very superficial 3rd rate analysis, gleaned from various data points & extrapolated senselessly. In other words, alot of misinformation.

  5. Hello Derek,

    As per your comment, Brazil (in English, of course) has a lot of potential. And to be sure, its open capital markets and robust policy reform have produced an economy that investors can’t get enough of.

    But I am more critical of saving that turns into investment, and that trajectory is likely being inhibited by massive government spending. Government spending is 38% of GDP as of 2008, essentially unchanged (and higher) since 2003 – that is a very worrisome trend. And with the state-sponsored infrastructure spending on its way (World Cup, Olympics, stimulus measures), I do wonder how the massive government is NOT going to crowd out private investment.

    You are right, I did focus on just a few productivity-determined data points. To be sure, the financial system and consumer credit is new, and like you say “will take a few more years (3 - 5) for a savings culture to become ingrained in the population.” But, as you suggest, a pattern of saving has not been established

    It is hard to argue that a low capital-share is welfare-increasing at all. Perhaps you are right – borders will remain relatively closed (trade has its income benefits), and the economy will not turn to “neo-liberal economic model” (not exactly sure what that means). But in my (and many other economists’) view, that would be a growth mistake.


  6. India started openning engineering colleges rampantly ( like about 20,000 if I am right) each politician owns a engineering college and this was meant to immigrate people overseas to fill computer jobs, this strategy payed off untill 2006. Also they inflated the labour cost by increasing the realestate prices, because most companies that operate are western companies or those that serve western business, this trick is not known to the outsider. First they gave tasters for low price and then they inflated the wages to fill coffers. But the quality of the workforce is near to zero, productivity is less and attrition is rampant as inflation takes the toll. India is grossly mismanaged inside , there is no one to question.

  7. Interesting point, if true. Silicon Valley seemed to "lap up" every one they could get there for a while. No mention of poor quality. aj

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