The Growth Map

I thought the global economy in the coming decades would be propelled by the growth of four populous and economically ambitious countries: Brazil, Russia, India and China, and I coined the acronym BRIC from their initials to describe them.

Since then my career has been shaped in large part by that single term. Even then I had stopped thinking of these four economies as traditional emerging markets. Ten years later I am even more eager to convince the world that they, along with some other rising stars, are the growth engines of the world economy, today and in the future.

When the credit crisis erupted in September 2008, many predicted that the BRIC story was over. There were moments I worried about that too. In the immediate aftermath, BRIC equity markets fell more than those of their developed cousins, and it did seem as though global trade might suffer permanent scars. Of course, this fear turned out to be completely unfounded. In some ways, that was when the BRIC thesis really came of age. It withstood the shakings of the world’s economic foundations, and emerged more robust than ever.

My paper did not cause an immediate splash and its main points were not seen as especially profound at the time. Based on my analysis of global GDP, I wrote that four countries—Brazil, Russia, India and China—which then controlled 8 percent of the world GDP, would see their share of the world economy grow significantly in the next decade. I noted that China’s GDP was already bigger than that of Italy, which was a well-entrenched member of the G7 group of economic superpowers, and over the decade ahead it would start to overtake a number of the other G7 members. Over the next ten years, I predicted, the weight of the BRICs—and especially China—in world GDP would grow quite markedly. The world would have to pay attention.

I predicted that Brazil, given highly favorable but what then appeared to be very unlikely conditions, could by 2011 increase its GDP to “not far behind Italy.” Brazil’s GDP overtook Italy’s in 2010, making it the seventh largest economy in the world, with a GDP of around $2.1 trillion.

The other three BRICs have made similarly impressive progress. In the first two months of 2011, for example, we learned that China’s economy had overtaken Japan’s as the world’s second largest; IndiGo, a little-known low-cost Indian airline, had ordered 180 A320s, making it two-thirds the size of Europe’s long-established easyJet; and Russia had become Europe’s largest car sales market.

All four of the BRIC countries have exceeded the expectations I had of them back in 2001. Looking back, those earliest predictions, shocking to some at the time, now seem rather conservative. The aggregate GDP of the BRIC countries has close to quadrupled since 2001, from around $3 trillion to between $11 and $12 trillion. The world economy has doubled in size since 2001, and a third of that growth has come from the BRICs. Their combined GDP increase was more than twice that of the United States and it was equivalent to the creation of another new Japan plus one Germany, or five United Kingdoms, in the space of a single decade.

Some observers say the effect of the BRICs on the world economy has been exaggerated because their growth was primarily driven by exports to the developed markets, as well as the rise in commodity prices. Exports certainly played a major role for China, but since the 2008 credit crisis and the consequent fall in demand in the United States and elsewhere, that is no longer the case. For India, domestic demand has been the driver throughout the last decade, and increasingly it is the domestic consumer as well as an increase in infrastructure spending that is fueling growth in the BRIC economies. The credit-fueled growth in U.S. demand certainly played its part in their ascent, but even since 2008, and despite the ongoing U.S. struggles, the BRIC economies have continued to power ahead.

However you choose to interpret the data, the importance of the BRICs in global economic growth is beyond dispute. Personal consumption in the BRIC countries has skyrocketed. In China, between 2001 and 2010 domestic spending increased by $1.5 trillion, or roughly the size of the UK economy. The increase in the other three was about the same, perhaps slightly more. BRICs now account for probably close to 20 percent of world trade, compared to less than 10 percent in 2001. Trade between the BRICs has risen far more quickly than global trade as a whole.

Given the BRICs’ success, it should be no surprise that many other countries are now vying to be dubbed the next BRIC. Friends from Indonesia goad me whenever I see them, suggesting that BRIC should really have been BRICI. Mexican policymakers tell me it should have been BRICM. In Turkey they wish it had been BRICT.

In 2003 my Goldman Sachs colleagues Dominic Wilson and Roopa Purushothaman published a follow-up paper, “Dreaming with BRICs: The Path to 2050,” extending my earlier analysis to the middle of the century.² They wrote that, by 2035 China could overtake the United States to become the largest economy in the world, and by 2039 the combined GDP of the BRIC economies could become bigger than that of the G7.

That paper started to command the attention of many, even though most thought it fanciful at the time. But our updated research suggests that it was anything but: China’s economic output—its gross domestic product—could match that of the United States as early as 2027, and perhaps even sooner. Since 2001 China’s GDP has risen fourfold, from $1.5 trillion to $6 trillion. Economically speaking, China has created three new Chinas in the past decade. And it’s likely that the combined GDP of the four BRIC nations will exceed that of the United States sometime before 2020.

In 2005, my team at Goldman Sachs tried to determine which would be the next group of developing countries to follow in the BRICs’ wake. We came up with a group that we called the “Next Eleven,” or N-11 for short. They are Bangladesh, Egypt, Indonesia, Iran, South Korea, Mexico, Nigeria, Pakistan, the Philippines, Turkey and Vietnam. Although we thought no N-11 country was likely to grow to the size of any of the BRICs, we predicted that Mexico and South Korea had the capacity to become almost as important as the BRICs in the global economy.³

As with the BRICs, I was surprised at how quickly and widely the N-11 concept was embraced. It has become an important framework used by many, from investors to global policymakers, to interpret the changes in the global economy. Such frameworks have become more useful than ever, given the speed and magnitude of these changes. The BRICs and the N-11 don’t explain everything, but they have proved useful and enduring models to help our understanding of what is happening in the world’s economy and markets.

In early 2011 I decided that the term “emerging markets” could no longer be applied to the BRICs or to four of the N-11: Indonesia, South Korea, Mexico and Turkey. These are now countries with largely sound government debt and deficit positions, robust trading networks and huge numbers of people all moving steadily up the economic ladder. For investors to understand the scale of the opportunity here, and for policymakers to grasp what is changing in the world, they must see these countries apart from the traditional “emerging markets.” I decided that a more accurate term would be “Growth Markets.”

The popularity of such easy categorization, however, should be a warning in itself. In 1977, when I was coming to the end of my master’s degree in economics and finance, my supervisor suggested that I should consider studying for a PhD in economics. He said that a grant could be available at the University of Surrey in the Energy Economics Centre. I decided to take up the offer at what proved to be an exciting time.

It was 1979 and the revolution in Iran had just provoked a second oil crisis, so applying the monetary economics I had studied to the world of OPEC’s oil producers and their investments seemed interesting. I spent the next two years delving into theories concerning oil prices, cartels and international asset allocation. I often joke to fellow economists that perhaps the only thing I learned from my PhD was how to keep my sanity. The endless hours and days sitting alone in a computer room or the library trying to find the definitive answer to how OPEC should invest its surpluses was challenging. But the work forced me to realize that economics is a social science. There are no certainties in economics. What passes for common wisdom is often no more than a lazy consensus, overconfidence in the face of inordinate complexity.

It was common wisdom in the late 1970s and early 1980s that crude oil prices would rise far into the future. Yet by the mid-1980s oil prices had fallen. This trend continued for much of the next two decades. Consensus thinking, even among highly trained economists, misunderstood the responsiveness of supply and demand to the rise in oil prices. In the short term, oil suppliers and consumers are slow to respond to spikes in prices. But over the long term they have proved to be much more flexible than economists generally believed they would be. I will return to this subject later in the context of China’s prodigious energy demands, but I mention it now to illustrate how frequently economists are wrong. The lazy consensus is a powerful, smothering force. And attempting to identify it and challenge it is something we all should do.

Technology is driving a dramatic new phase of globalization. Our economic models struggle to keep pace with the erosion of national economic borders. There have also been extraordinary political changes of late. China and Russia closed themselves off from the rest of the world in terms of Western ideas and economic policies following the Second World War, but today 1.3 billion people in China and 140 million Russians are being allowed to live their lives in much the same manner as any Westerner, and are making many of the same consumer choices. Even under their own very different political systems, it is evident that they too crave the fruits of rising individual wealth.

Manchester United Football Club, which I have followed passionately since I was a boy, reportedly has 70 million registered subscribers to its website in China. McDonald’s has thriving restaurants throughout China and Russia. Fashionable clothing stores are on the rise in both. The French luxury goods company Louis Vuitton is seeing explosive growth in China and the other BRIC countries. Even its Western stores are now selling briskly to tourists from these nations.

Indeed, French students can now make a small personal “turn” as guest shoppers for luxury bags at Louis Vuitton’s landmark Parisian store just off the Champs-Élysées. The head of Louis Vuitton told me how this works. Chinese gangs used to pay people to go on two-day all-expenses-paid trips to Paris on the condition that they returned with four Louis Vuitton bags, which could then be sold at a markup in China. When Louis Vuitton found out, it introduced a limit of one bag per person. To get around the limit, Chinese visitors now offer likely-looking individuals on the Champs-Élysées fifty euros to purchase a bag on their behalf.

China’s deliberate decision to embrace globalization for its own gain by encouraging foreign direct investment and a greater participation in world trade has, I believe, prompted India into action. While there are many factors that lead to economic growth, I am convinced that China’s success over the past thirty years has taught India’s policymakers that it is possible for more than a billion people to experience a dramatic increase in their living standards without changing their basic social and cultural structure.

By deciding they wanted to engage more in the world economy, the BRICs also became open to the best of the West’s macroeconomic policies. Their politicians and academics suddenly wanted to learn and apply the lessons of Western growth. In Brazil, for example, the decision to target the hyperinflation that had ravaged the country’s economy for decades proved transformational. The adoption and disciplined enforcement of anti-inflationary measures helped to put the Brazil of 2000 on a very different course from the Brazil of 1960.

The ascent and continued success of Brazil, Russia, India and China has surprised many—myself included. It is a phenomenon that has begun to transform the lives of millions of people in these nations, lifting them out of poverty and revolutionizing their ambitions, and it is increasingly touching us all. The BRIC concept, the rapid advance of these economies and the rosy prospects for others like them has become the dominant story of our generation.