BRIC Countries in Comparative Perspective Kristalina Georgieva Country Director, Russian Federation St. Petersburg, 2006

Outline n n

Importance of the BRIC countries for the World economy BRIC countries today ¨ ¨ ¨ ¨ ¨ ¨

n n

Demographic indicators General economic indicators Fiscal indicators Institutional indicators Business environment Innovation and competitiveness

Short and long-term outlook Conclusions

Why are the BRIC countries important? §In 2005 the emerging economies overcome developed economies by their share in the World GDP calculated at purchasing power parity. §The BRIC countries were the main driving force for GDP growth of the emerging economies. §Fast growing economies with the biggest source of labor; §They are changing the consumption and production pattern in the world economy; §As their influence on the global economy grows so do the risks for the sustainable world development; §Their role in the global policy is increasing as well the geopolitical importance for their regions and the world.

Demographic indicators: size and growth of population These countries exhibit considerable variability with respect to population and population growth. Only Russia is experiencing an absolute population decline, which is expected to increase in future years as the population ages. Average population growth: 2000-2004 (annual %)

Population: 2004 (millions)

China

China

India

India

Brazil

Brazil

Russia

Russia 0

200

400

600

800

1000

1200

1400

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

Source: World Development Indicators

Demographic indicators: age structure Russia has a significantly older population than the other 3 countries. Age structure of the population: 2004 35

Population ages 0-14, % of total

30

Population ages 65 and above, % of total

25

20

15

10

5

a Ru ss i

na Ch i

l Br az i

In di a

0

Source: World Development Indicators

Russia is the only country where until recently life expectancy was not correlated positively with strong growth in incomes Gross National Income per Capita and Life Expectancy

G NI pc Atla s m eth od c urren t US $

L ife e xp ec tan c y a t birth 68

40 00 35 00

US$

25 00 66 20 00 15 00

65

10 00 5 00

64 1 99 8

19 99

20 00

2 00 1

200 2

20 03

2 00 4

years

67

30 00

General economic indicators: GDP volume and GDP growth Most of these countries have been experiencing significant economic growth in recent years, particularly a number of those countries with relatively low GNI per capita. Average GDP growth: 2000-2005 (annual %)

GDP: 2005 (bln USD)

GDP per capita: 2005 (USD)

China

China

Russia

Russia

Brazil

Brazil

India

India

China

Brazil

Russia

India

0

1

2

3

4

5

6

7

8

9

0

200

400

600

800

1,000 1,200 1,400 1,600 1,800 2,000 2,200

0

1,000

2,000

3,000

4,000

5,000

Source: World Development Indicators, World Economic Outlook

General economic indicators: current account and gross foreign reserves With the exception of India, BRIC countries exhibited current account surpluses in 2005. Russia’s current account is particularly strong due to high oil prices. China has accumulated foreign reserves that dwarf those of any other of these countries. Current account balance: 2005 (% of GDP)

Gross foreign reserves: 2005 (bln USD)

Russia

Russia

China

China

Brazil

Brazil

India

India

-3

-1

1

3

5

7

9

11

0

50 100 150 200 250 300 350 400 450 500 550 600 650 700 750 800

Source: World Economic Outlook

General economic indicators: inflation and unemployment BRIC countries have achieved unemployment rates of close to or less than 10 per cent of the active population. But many of these countries still have significant disguised unemployment as surplus labor in the countryside or budgetary sphere. Average CPI inflation: 2000-2005

Unemployment: 2004 (ILO definition, %) Brazil (2003) 30

Russia 20

Brazil

10

China

0

India

India

China Russia

0

5

10

15

Source: World Development Indicators, World Economic Outlook, ILO

General economic indicators: investments and FDI flows With respect to levels of investment and the attraction of FDI, China’s performance dwarfs that of other large client countries. Investment rates in Brazil and Russia appear to be rather low. Share of investment in GDP: 2005 (%)

FDI inflows: 2005 (% of GDP)

China

China

India

India

Brazil

Brazil

Russia

Russia

15

20

25

30

35

40

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Investment = gross fixed capital formation Source: World Development Indicators, World Economic Outlook

General economic indicators: gross and net FDI In per capita terms, inflows of FDI in 2005 favor Russia. Russia exhibits substantial fixed capital investment abroad. Gross FDI per capita: 2005 (USD, from BoP)

Gross FDI inflows and net FDI: 2005 (bln USD, from BoP)

60 55 50 45 40 35 30 25 20 15 10 5 0

Russia

Brazil

China

i Ch

na

a Br

zi

l

Net FDI

Source: World Economic Outlook

In

di

a

s Ru

Gross FDI

s ia

India

0

20

40

60

80

100

Fiscal indicators: central government fiscal balance With the exception of Russia, BRIC countries operated with budget deficits in 2005. Fiscal imbalances were particularly severe in India. Adding the regional budget deficits would bring India’s deficit to over 7 percent of GDP. Central government fiscal balance: 2005 (% of GDP)

Russia

China

Brazil

India

-5

-3

Source: Rosstat, World Economic Outlook

-1

1

3

5

7

Fiscal indicators: government expenditures With the exception of Brazil, central government expenditures for these countries fall in the range of 15-20 percent of GDP Central government expenditure and net lending: 2005 (% of GDP) 30

25

20

15

10

a di In

Source: World Economic Outlook

ia ss u R

a in h C

il az r B

Institutional indicators: banking sector Outstanding domestic credit at end-2004 was an order of magnitude higher in China than in any other of these four countries. Financial markets are relatively poorly developed in Russia.

Private sector and domestic banking sector development: 2004 180

Net domestic credit to private sector, % GDP, e-o-y Domestic credit provided by banking sector, % of GDP

160 140 120 100 80 60 40 20

Ru ss ia

In di a

Br az il

Ch in a

0

Source: World Development Indicators * Estimate

Business environment Ease of Doing Business Starting a business Dealing with Licenses Getting Credit Protecting Investors Enforcing Contracts Closing a Business

Brazil

China

India

Russia

121 115

93 128

134 88

96 33

139

153

155

163

83

101

65

159

60

83

33

60

120

63

173

25

135

75

133

81

Source - Doing Business in 2007: Protecting Investors

Russia: positive changes in the business environment, 2002-2005 Percent of firms indicating a problem: Telecommunications Contract violations Access to financing Title or leasing of land Customs and trade regulations Uncertainty about regulatory policies Macroeconomic instability Access to land Tax rates Tax administration Organised crime/mafia 0.00

0.10

0.20

0.30 2005

0.40

0.50

0.60

2002

Source: EBRD-World Bank Business Environment and Enterprise Performance Survey (BEEPS)

Russia: negative changes in the business environment, 2002-2005 Percent of firms indicating a problem: Labour regulations Corruption Skills and education of workers Functioning of the judiciary Electricity Street crime, theft and disorder Business licensing and permits Anti-competitive practices of others Cost of financing Transportation 0.00

0.05

0.10

0.15

0.20

2005

0.25

0.30

0.35

0.40

0.45

2002

Source: EBRD-World Bank Business Environment and Enterprise Performance Survey (BEEPS)

Russia: the investment climate is worse for firms that operate in a competitive environment 0.5

Competitive firms

0.4

Monopolistic Firms

0.3 0.2 0.1 0

IC gap

-0.1 -0.2 -0.3 -0.4 How severe are each -0.5 of the following for Governance Labor the operation of your business?

Taxes

Admin Barriers

Finance

Land Infrastructure

At the firm level, private R&D expenditures in Russia are low relative to the BIC countries. Share of R&D in companies’ sales 6 5 4 3 2 1 0 Russia

India

Brazil

China

Russia’s productivity in manufacturing is lower than in BIC countries, although labor costs are higher than in China and India, suggesting relative problems in industrial competitiveness Sales per worker

Annual total compensation

14

6

12

5

10

4

8 3 6 2

4 2

1

0

0 Russia

India

China

Brazil

Source: ICA surveys

Russia: recent data indicate slowing growth, especially in tradable sectors of the economy

GDP Agriculture, hunting, forestry Extraction of mineral resources Manufacturing Electricity, gas, water production and distribution Construction Retail and wholesale trade, repair and maintenance of vehicles, white goods and personal effects Transport andcommunication Finance Immovable property operations, leasing and services provision

2003

2004

2005

7.3 5.5 10.8 9.5

7.2 2.9 7.2 6.6

6.4 1.1 1.8 4.4

1.6 13

0.9 10.1

2.2 9.7

13.2 7.2 9.6

11.2 10.5 4.5

12.3 6.1 6.5

3.0

3.1

9.6

Short term outlook: GDP growth rate projections

Short term outlook: fiscal balance and inflation

Cons government fiscal balance projection

India Brazil China Russia

2005 -7.7 -3.1 -0.7 7.6

2006 -7.2 -2.5 -1.1 8.4

2007 -6.8 -1.8 -1.2 8

CPI Inflation projection (average) India Brazil * China Russia

2005 4.2 5.7 3.8 12.6

2006 4.8 4.5 3.4 10

2007 4.3 4.5 3.5 8

* - year end inflation

Source: OECD Economic Outlook, World Bank staff estimates

Long term outlook: The rise of the BRICs GDP (2005 US$bn)

100,000

BRICs Have a Larger US$ GDP Than the G6 in Less Than 40 Years

90,000

BRICs

80,000

G6

70,000 60,000 50,000

The Largest Economies Will Not Be the Richest 2005 US$bn

GDP and GDP per capita in 2050

100,000

60,000 By 2045 BRICs overtake the G6 2025: BRICs economies over half as large as the G6

2005 US$

US$ GDP

90,000

US$ GDP per capita

50,000

80,000 70,000

40,000

60,000 50,000

30,000

40,000

40,000

20,000

30,000 20,000

30,000 20,000

10,000

10,000

10,000 ly Ita

U K Fr an ce

y an

si a

er m

R

us

il

n

az Br

ia

S

pa Ja

In d

U

hi

GS BRICs Model Projections.

G

GS BRICs Model Projections

C

2005 2010 2015 2020 2025 2030 2035 2040 2045 2050

0 na

0

0

Source: Goldman Sachs

Conclusions (1) n

n n

n

In the short term, strong overall macroeconomic fundamentals sustained in China, India and Russia and improvements reached in Brazil. This will continue to attract substantial flows of foreign investment, further boosting potentials for the future output growth. Risks related to global economic imbalances will continue to weight on the outlook for BRIC countries and especially Brazil. Country specific risks and challenges include: ¨ Russia - sustained upward pressure on the exchange rate and inflation; potential fiscal easing, further aggravation of competitiveness in manufacturing industries. ¨ China - potential for increased protectionism at Chinese exports. ¨ India - high level of off-budget subsidies for petroleum products. ¨ Brazil - expansionary fiscal policy. Presidential election in October 2006 (in Brazil) and in March 2008 (in Russia) may add uncertainty to the outlook for these countries.

Conclusions (2) n

The BRICs are likely to maintain their comparative advantages in the long term. This will help to ensure relatively high growth rates and therefore increasing share of these economies in the world market.

n

But the sustainability of high growth will depend on the several crucial factors: ¨ sound and stable macroeconomic and development policies; ¨ development of strong and capable institutions (including political); ¨ human development (improved healthcare and education); ¨ increasing degree of openness.

Conclusion (3) n n

n

The main comparative advantages of Russia are related to macroeconomic stability and rich natural resources To diversify away from its growing dependence on natural resources and to maintain its comparative advantage, the Russian economy will need to boost the productivity and international competitiveness of its manufacturing sector. Russia can do this by: ¨

creating incentives for greater firm-level innovation, ¨ by improving the skill base of its labor force, ¨ by creating a stable policy environment that is conducive to competition.

Conclusion (4) Although improved in recent years, the Russian investment climate is still characterized by significant instability, as well as a tendency to punish its most dynamic and innovative firms. Creating better investment climate and promoting environment for fair competition is crucial for competitiveness and innovation in Russia.

§ Countries successful in creating an innovation economy are characterized by a high level of competition and competitive pressures. ICA data confirm the importance of competition for innovation in Russia.

§ This problem is related to key areas of structural reform in Russia: administrative reform, fiscal federalism, local self-government, competition policy, administrative barriers to business, land reform.