BRIC Countries in Comparative Perspective

Kristalina GeorgievaCountry Director, Russian Federation

World Bank, 2006

Outline

n Importance of the BRIC countries for the World economyn BRIC countries today

¨ Demographic indicators¨ General economic indicators¨ Fiscal indicators¨ Debt indicators ¨ Institutional indicators¨ Business environment

n Short and long-term outlookn Conclusions

Why are the BRIC countries important?

n Fast growing economies with the biggest source of labor; n They will soon change the consumption and production pattern in the world

economy;n As their influence on the global economy grows so do the risks for the

sustainable world development;n Their role in the global policy is increasing as well the geopolitical

importance for their regions and the world.

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.

BRIC CountriesThese 4 large countries account for more than 40% of the world’s population and almost a third of the world’s land mass.

Source: World Development Indicators

1303296345World

8916888143Russia

3529731080India

2293271296China

278459179Brazil

200420042004

Number of regions/provincesLand area, thousand sq. kmPopulation, mln people

Demographic indicators: size and growth of population

Population: 2004 (millions)Average population growth:2000-2004 (annual %)

Source: World Development Indicators

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.

0 200 400 600 800 1000 1200 1400

Russia

Brazil

India

China

-1.0 -0.5 0.0 0.5 1.0 1.5 2.0

Russia

Brazil

India

China

Demographic indicators: age structure

Age structure of the population: 2004

Source: World Development Indicators

Russia has a significantly older population than the other 3 countries.

0

5

10

15

20

25

30

35

India

Brazil

China

Russia

Population ages 0-14, % oftotal

Population ages 65 andabove, % of total

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

500

1000

1500

2000

2500

3000

3500

4000

1998 1999 2000 2001 2002 2003 2004

US$

64

65

66

67

68

year

s

GNI pc Atlas m ethod current US$ Life expec tancy at birth

General economic indicators: GDP volume and GDP growth

Average GDP growth: 2000-2005 (annual %) GDP: 2005 (bln USD)

Source: World Development Indicators, World Economic Outlook

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.

0 1 2 3 4 5 6 7 8 9

Brazil

India

Russia

China

0 200 400 600 800 1,000 1,200 1,400 1,600 1,800 2,000 2,200

Russia

India

Brazil

China

General economic indicators: GDP per capita

GDP per capita: 2005 (USD) GDP per capita, PPP 2004 (constant international 2000 $)

0 1,000 2,000 3,000 4,000 5,000

India

China

Brazil

Russia

1,000 3,000 5,000 7,000 9,000

India

China

Brazil

Russia

General economic indicators: GDP composition

Composition of GDP: 2004

Source: World Development Indicators

China has a relatively small service sector, and a relatively large share of industry in GDP. In reality, Russia may be a bit closer to China than appears in the graph due to transfer pricing schemes that shift a good share of oil profits to services (trade).

5134

2617

35

6152

78

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

China Russia India Brazil

Industry Agriculture Services

General economic indicators: current account and gross foreign reserves

Current account balance:2005 (% of GDP)

Gross foreign reserves:2005 (bln USD)

Source: World Economic Outlook

With the exception of India, BRIC countries exhibited current account surpluses in 2005. Russia’scurrent account is particularly strong due to high oil prices. China has accumulated foreign reserves that dwarf those of any other of these countries.

0 50 100 150 200 250 300 350 400 450 500 550 600 650 700 750 800

India

Brazil

China

Russia

-3 -1 1 3 5 7 9 11

India

Brazil

China

Russia

General economic indicators: inflation and unemployment

Average CPI inflation:2000-2005

Unemployment:2004 (ILO definition, %)

Source: World Development Indicators, World Economic Outlook, ILO

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.

0

10

20

30Brazil (2003)

India

Russia

China

0 5 10 15

China

India

Brazil

Russia

General economic indicators: investments and FDI flows

Share of investment in GDP: 2005 (%) FDI inflows: 2005 (% of GDP)

Source: World Development Indicators, World Economic Outlook

With respect to levels of investment and the attraction of FDI, China’s performancedwarfs that of other large client countries. Investment rates in Brazil and Russiaappear to be rather low.

Investment = gross fixed capital formation

15 20 25 30 35 40

Russia

Brazil

India

China

0.0 0.5 1.0 1.5 2.0 2.5 3.0

Russia

Brazil

India

China

General economic indicators: gross and net FDI

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

Source: World Economic Outlook

In per capita terms, inflows of FDI in 2005 favor Russia. Russia exhibits substantial fixed capital investmentabroad.

05

1015202530354045505560

ChinaBraz

ilInd

iaRussi

a

Net FDI Gross FDI0 20 40 60 80 100

India

China

Brazil

Russia

-5 -3 -1 1 3 5 7

India

Brazil

China

Russia

Fiscal indicators: central government fiscal balance

Central government fiscal balance: 2005 (% of GDP)

Source: Rosstat, World Economic Outlook

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.

Fiscal indicators: government expenditures

Central government expenditure and net lending: 2005 (% of GDP)

Source: World Economic Outlook

With the exception of Brazil, central government expenditures for these countries fall in the range of 15-20 percent of GDP

10

15

20

25

30

India

Russia

China

Brazil

Debt indicators

Public sector long term debtoutstanding and disbursed:2004 (% of GDP)

Public and publicly guaranteeddebt service: 2004 (% of GNI)

Source: World Development Indicators

Brazil is relatively burdened by government debt and debt service.

0 10 20

China

India

Brazil

Russia

0 1 2 3 4

China

India

Brazil

Russia

Institutional indicators: banking sector

Private sector and domestic banking sector development: 2004

Source: World Development Indicators

* Estimate

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.

0

20

40

60

80

100

120

140

160

180

China

Brazil

India

Russia

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

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5

India

Russia

ChinaBraz

il

Institutional indicators: corruption

Corruption perception index(10 – highly clean, 0 – highly corrupt): 2004

Source: Transparency International

90

71

59

90

Numbers in the bars indicate country’s rank.In 2004 146 countries were rankedfrom 1 (Finland) to 145 (Bangladesh, Haiti)

Brazil

India

Russia

China

Institutional indicators: investment ratings

Standard & Poor’s foreign currency sovereign investment rating: 2005

Source: Standard & Poor’s

B-

B

B+

BB-

BB

BB+

BBB-

BBB

BBB+

Inve

stm

ent g

rade

China, Russia, and India now have Standard and Poor’s sovereign investment ratings of BB+ and above.

Institutional indicators: market capitalization

Market capitalization: 2004 (% of GDP)

Source: World Development Indicators

Market capitalization in BRIC countries is less than 60 percent of GDP.

0 40

China

Russia

Brazil

India

Business environment

Brazil China India RussiaEase of Doing Business 119 91 116 79Starting a business 98 126 90 31Dealing with Licenses 115 136 124 143Getting Credit 80 113 84 148Protecting Investors 53 100 29 73Enforcing Contracts 70 47 138 62Closing a Business 141 59 118 71

Source - Doing Business in 2006: Protecting Investors

Russia: positive changes in the business environment, 2002-2005

Percent of firms indicating a problem:

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

0.00 0.10 0.20 0.30 0.40 0.50 0.60

Organised crime/mafia

Tax administration

Tax rates

Access to land

Macroeconomic instability

Uncertainty about regulatory policies

Customs and trade regulations

Title or leasing of land

Access to financing

Contract violations

Telecommunications

2005 2002

Russia: negative changes in the business environment, 2002-2005Percent of firms indicating a problem:

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

0.00 0.05 0.10 0.15 0.20 0.25 0.30 0.35 0.40 0.45

Transportation

Cost of financing

Anti-competitive practices of others

Business licensing and permits

Street crime, theft and disorder

Electricity

Functioning of the judiciary

Skills and education of workers

Corruption

Labour regulations

2005 2002

7.1

43.8

2.5

6.4 6.25.7

8.5

7.5

9.59.79.9

0

2

4

6

8

10

12

2005 2006 2007

Short term outlook: GDP growth rate projections

China

India

Russia

Brazil

Source: OECD Economic Outlook

Short term outlook:fiscal balance and inflation

Cons government fiscal balance projection Inflation projection

2005 2006 2007India -7.7 -7.2 -6.8Brazil -3.1 -2.5 -1.8China -0.7 -1.1 -1.2Russia 7.6 6.5 5

2005 2006 2007India 4.2 4.8 4.3Brazil 5.7 4.5 4.5China 3.8 3.4 3.5Russia 10.9 10.5 10

*

*

* - year end inflation

Source: OECD Economic Outlook

Long term outlook: The rise of the BRICs

Source: Goldman Sachs

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

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000

2005 2010 2015 2020 2025 2030 2035 2040 2045 2050

GDP (2005 US$bn)

BRICsG6

2025: BRICs economies over half as large as

the G6

By 2045 BRICs overtake the G6

GS BRICs Model Projections

GDP and GDP per capita in 2050

0

10,000

20,000

30,000

40,000

50,000

60,000

China

USIndia

Japa

nBra

zil

Russia

Germany UK

Franc

eIta

ly

2005 US$bn

010,00020,00030,00040,00050,00060,00070,00080,00090,000100,000

US$ GDP

US$ GDP per capita

2005 US$

GS BRICs Model Projections.

The Largest Economies Will Not Be the Richest

Conclusions (1)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.

n Risks related to global economic imbalances will continue to weight on the outlook for BRIC countries and especially Brazil.

n Country specific risks and challenges include: ¨ Russia - sustained upward pressure on the exchange rate and inflation;

potential fiscal easing.¨ China - potential for increased protectionism at Chinese exports. ¨ India - high level of off-budget subsidies for petroleum products. ¨ Brazil - expansionary fiscal policy.

n 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.