BRICs and PIIGS

In the world economy, some countries appear to have promising futures (the BRICs), while others are facing serious problems (the PIIGS). Here are their stories.

The BRICs

The term "BRICs," which was coined in 2001, refers to the countries of Brazil, Russia, India, and China. The economies of these four countries will account for half of the world’s consumption growth in 2010. It is estimated that the BRIC economies will equal the size of the U.S. economy by 2020, and will exceed the collective economic might of the G7 countries by 2030. During the last decade, the GDP of the BRIC countries rose from US$2.5 trillion to nearly US$9 trillion. China accounted for about half this gain, and China's economy alone is expected to equal the U.S.'s by 2027. Overall, the growth of the BRIC economies is important, because it will create demand for goods produced in the developed countries.

Brazil is a typical BRIC economy, and it seems finally on the verge of fulfilling its long-standing potential. In the 1990s, it was hampered by runaway inflation and a large debt, so no one took it seriously on the world stage. But Brazil solved those problems and is now the world's 10th largest economy (and it will likely be the fourth largest by 2050). Its leading exports are iron ore, coffee, sugar, steel, and beef. It has also discovered a big new oil field off its east coast. There are still problems to be solved (corruption, crime, poor infrastructure, and restrictive government policies), but the future looks bright.

One interesting development is a debate about whether the BRIC concept is a reality or simply Wall Street hype. Some skeptics argue that while the grouping makes for a nice acronym, it doesn't make sense to lump these four countries together. For example, critics don't feel that Russia really belongs in the BRIC group for a variety of reasons: it is overly reliant on energy for its revenues, its corporations are highly leveraged, it has an aging and declining population, it has an authoritarian government, and investors are concerned that businesses could be expropriated. They argue that it would be more reasonable to include countries like Mexico, South Korea, Turkey, and Indonesia. For example, Indonesia's per capita income is double that of India, it has a 90 percent literacy rate, and it is energy independent. It is also the world's fourth-most populous country, with 230 million people.

Supporters of the BRIC concept argue that the grouping makes sense because the four countries have three things in common: (1) they all have large land areas, (2) they all have large populations, and (3) they are all experiencing rapid economic growth. The other countries that some people want to add to the list are either resource poor or have much smaller populations or land areas.

Regardless of the debate, BRIC representatives have begun meeting together. They first met in Russia in 2009, and again in Brazil in 2010. At their meetings, the representatives talked about ways to increase BRIC clout in the world economy and in the global financial system. This is not surprising, since the four countries own 40 percent of the world's currency reserves. They all agreed that they wanted to unseat the U.S. dollar as the world's reserve currency. The 2010 meeting was interesting, because China, the powerhouse of the BRIC group, is increasing its exports to countries in Brazil's back yard (the Mercosur trade bloc). For example, in the first 8 months of 2009, China's exports to Argentina, Uruguay and Paraguay increased by 7.3 percent, but Brazil's exports to those countries decreased by 18 percent. While Brazil has the biggest economy in Latin America (US$1.6 trillion), China is Brazil's biggest competitor and a threat to Brazil's expansion plans. One indicator of tension is Brazil's imposition of anti-dumping measures against Chinese tires and stereo speakers.

The 20th century was owned by the U.S., but the 21st century may belong to developing nations like those in the BRIC group. Stock markets in emerging countries have outperformed the S & P index in 8 of the last 10 years (they gained 98 percent, while the S & P gained only 23 percent). The stock markets in the BRIC countries (the MSCI BRIC Index) have achieved a 10.8 percent annual gain over the last decade compared to just 1.6 percent for the MSCI World Index. The stock markets of developing countries have, however, been volatile. Russia’s Micex stock index fell 74 percent in one five-month period in 2009, but since then the index has increased by 175 percent. Russian stocks are still cheap, trading at just eight times earnings, compared to 14 times earnings for the other BRIC countries. During the first four months of 2010, Russia's stock market was the best BRIC performer, gaining 11.4 percent (Brazil was up 3.6 percent, India 2 percent, and China was down 3.5 percent). Russia's economy is expected to grow between four and six percent in 2010, compared to 7 percent for India, 9.5 percent for China, 6 percent for Brazil, and 2.6 percent for Canada.

The PIIGS

The term "PIIGS" refers to the countries of Portugal, Italy, Ireland, Greece, and Spain. All of these countries are experiencing problems with high debt levels because their governments have been spending far more money than they have been taking in as revenue. At the moment, most of the attention is being directed at Greece, which has been living beyond its means for many years. When it joined the eurozone, its annual budget deficit was 7 percent of GDP, and that level was more than twice the upper limit that was allowed for eurozone members. The situation has worsened since then, and by 2010, Greece's deficit was 13.6 percent of GDP. That's more than four times the level allowed for eurozone countries. It is also estimated that Greece's total debt (the sum of all its annual deficits) will rise to 125 percent of GDP in 2010.

The crisis came to a head when the Greek government realized that it didn't have enough money to keep making the interest payments on its huge debt (nearly 25 percent of government revenues go toward paying interest on the debt payments, which are about $2 billion per month). In order to get investors to buy government bonds, the Greek government has had to pay very high interest rates. The yield on Greek bonds is more than 7 percent, which is four percentage points higher than yields on other European bonds and reflective of the risk that investors perceive. If Greece had not adopted the euro, it could solve many of its problems by devaluing its currency. That would reduce domestic prices (so consumers would buy more) and it would also increase exports (because Greek products would be cheaper in other countries). But unless Greece withdraws from the eurozone, devaluation is not an option.

So, what can Greece do to resolve its financial mess? One obvious strategy is to borrow money from other eurozone countries, but those countries have refused to loan Greece money without guarantees that Greece will increase taxes and reduce its spending. Germany has been the toughest on Greece, arguing that since Greece got itself into this mess by spending too much money, that tough measures must be applied by the Greek government to resolve the problem. But other European governments have argued that unless they help Greece, they may be in trouble before too long (some of them also have lots of debt). Both Fitch and Moody's downgraded Greece's bonds in 2010 (Moody's downgraded the bonds to junk status).

Greece will have to introduce severe austerity measures to lower its deficit-to-GDP ratio to the required level. Unfortunately, the public sector in Greece is very large and accounts for about 40 percent of GDP. Cutting salaries of government workers will therefore be necessary to lower the deficit. But that move will obviously be highly unpopular. In fact, riots protesting the proposed austerity measures have occurred on several occasions during the past few months (most recently on May 5, 2010 when several people were killed).

Some experts argue that the best way to resolve the problem is to have the International Monetary Fund (IMF) loan money to Greece in stages. The IMF would impose criteria that Greece would have meet before each new batch of money was provided. Others have proposed a common Eurobond, which would replace the bonds of individual eurozone countries. This would spread the risk over several countries, but it would allow governments that spend too much to get a free ride on the backs of governments that are fiscally responsible. A much better idea is for all governments to create fiscal cushions when times are good. Then, when the bad times come, they will have money to cope. But governments don't seem to have the discipline to do this.

The outcome of the crisis remains in doubt. On May 2, 2010, an agreement was announced for loans totaling EUR110 billion, but some experts estimate that it will take EUR200 billion to solve the problems in Greece. That is a lot less than the US$787 billion stimulus package provided by the U.S. government, but Greece's economy is tiny compared to the U.S. (about equal to the GDP of the state of Michigan). On May 3-6, 2010, stock markets around the world fell sharply, indicating continuing concern about where the crisis was heading. This happened in spite of the Greek parliament passing austerity measures on May 6.

The uncertainty about Greece has caused investors to fear that other countries with high debt levels (for example, Portugal, Spain, Italy, and Ireland) might develop the same kinds of problems that Greece has encountered. If this "contagion" happens, the value of the euro will plunge and the entire world economy might be affected. Some observers are even predicting the demise of the euro. They point out that the eurozone is an economic union, not a political one, and no common currency that is not both a political and economic union has ever survived.

Ireland is another one of the PIIGS that is in bad shape. In 2008, its GDP fell by 7.1 percent, and its deficit-to-GDP ratio was 11.7 in 2009. That is almost as high as Greece's ratio. Most Irish banks are barely functioning because they made bad real estate loans. But, unlike Greece, the government of Ireland is acting decisively to resolve its problems. The Irish government now owns a big chunk of both the Bank of Ireland and Allied Irish Banks, and it owns 100 percent of the Anglo Irish Bank (which lost EUR12.7 billion during 2009-2010). A new bank will be launched that will take over the bad debts of the other banks, and that will free the other banks to resume lending again. But, of course, the taxpayers are the ones who are going to foot the bill for the new bank. The government has also raised taxes and cut wages and public spending. There have been no riots in Ireland.

Questions for Discussion

1. In your own words, explain why the PIIGS are in trouble.
2. Should people in other countries be concerned about Greece's financial problems?
3. Consider the following statement: All this hype about a major debt crisis supposedly looming for the world is overblown. While it is true that many governments have spent more money than they have received in revenue, that doesn't mean that there is a crisis. As long as governments make agreements to loan each other money, everything will work out. Do you agree or disagree with this statement? Defend your answer.

Sources: "Greek Parliament Passes Austerity Bill," BNN, May 6, 2010, www.bnn.ca/news/17476.html; Brian Milner, "How the Greek Crisis Began, and Where It's Heading," The Globe and Mail, May 3, 2010, p. B2; John Greenwood, "Greek Debt Cut to Junk, Reviving Crisis; Move Roils Markets," National Post, April 28, 2010, p. A1; Kevin Carmichael, "Greece Sets Stage for Emergency Bailout by IMF, Europe," The Globe and Mail, April 16, 2010, p. B3; "Brazil vs. China," National Post, April 16, 2010, p. FP3; Eric Reguly, "EU Makes EUR30-Billion Greek Rescue Promise," The Globe and Mail, April 12, 2010, p. B1; Michael Nairne, "A Primer on Emerging Markets," National Post, April 10, 2010, p. FP10; Eric Reguly, "Ireland: One PIIGS Club Member Seeking Eviction," The Globe and Mail, April 1, 2010, p. B2; Paulo Prada, "For Brazil, It's Finally Tomorrow," The Wall Street Journal, March 29, 2010, p. R1; Karen Mazurkewich, "Some Russia to Love; BRIC Nations; Not Just Tagging Along, Now It's Showing Strength," National Post, March 6, 2010, p. FP8; Nouriel Roubini, "Teaching Greece and Other PIIGS to Fly," The Globe and Mail, February 16, 2010, p. A23; John Greenwood, "Greece 'Canary in Coal Mine,'" National Post, February 12, 2010, p. FP1; "BRIC Were Last Decade's Biggest Winners; Russia Recovering," National Post, January 7, 2010, p. FP3; Jonathan Ratner and David Pett, "The BRIC Countries Have Owned the 21st Centuryâ€"So Far," National Post, December 26, 2009, p. FP7; Eric Reguly, "Bailing out PIIGS Just Encourages Bad Behaviour," The Globe and Mail, December 24, 2010, p. B2; Paul Brent, "A Few BRICs Short of a Load?," Canadian Business, November 23, 2009, p. 21; Nouriel Roubini, "BRICkbats for the Bear," The Globe and Mail, October 19, 2009, p. A17; Barbara Shecter, "Emerging Countries Take Spending Lead; Growth Forecasts Imply that by 2010, Brazil, Russia, India, and China Will Contribute Almost Half of Global Consumption Growth," National Post, August 7, 2009, p. FP1; Richard Blackwell, "Fast-Growing BRIC Nations Have Little in Common," The Globe and Mail, June 16, 2009, p. B5; Brian Milner, "Emerging Powers and their Overvalued Stocks," The Globe and Mail, June 13, 2009, p. B1; Shirley Won, "BRIC May Cure Any Resource Sector Ills," The Globe and Mail, November 22, 2007, p. B17.