The so-called BRIC nations—Brazil, Russia, India and China—could be a game changer for how low-income countries build their economic futures. The growing economic and financial reach of the BRICs has seen them become a new source of growth for low-income countries (LICs).
LIC-BRIC ties—particularly trade, investment and development financing—have surged over the past decade. And the relationship could take on even more prominence after the global financial crisis, with stronger growth in the BRICs and their demand for LIC exports helping to buffer against sluggish demand in most advanced economies.
The potential benefits from LIC-BRIC ties are enormous.
But, so too are challenges and risks that must be managed if the LIC-BRIC relationship to support durable and balanced growth in LICs. Unlocking the new sources of growth and investment financing—particularly given the massive investment needs of LICs—raises a raft of other issues, including:
- how to finance investment without taking on too much debt;
- how to attract investment without sacrificing too much fiscal revenue through costly tax incentives; and
- how to avoid resource dependency in the long run.
Most of these challenges and risks are not new, but they deserve renewed attention. In that spirit, the IMF recently sponsored a panel discussion to explore these issues, drawing on perspectives from LIC and BRIC policymakers, and development experts.
Strengthened ties have certainly boosted exports, helping to stimulate growth in LICs and contribute to their resilience during the global economic crisis. But, over the longer haul, what will matter is whether BRICs will be a positive force in making LICs more dynamic and productive through structural change—where economies shift from, say, agriculture to labor-intensive manufactures having a larger role.
So, the extent to which BRICs could be the building blocks for lasting growth in LICs may still be an open question. But, we took away from the panel discussion six essential factors that will help LICs lay the groundwork to benefit from this important relationship.
- Current LIC-BRIC ties may pose a risk to LICs becoming too reliant on raw materials—a commodity trap—but LICs can also learn from successful BRICs.
- On one hand, India and China’s competitiveness in manufacturing and their large demand for natural resources may push up the relative price of commodities undermining incentives for LICs to shift into manufacturing.
- At the same time, Brazil and Russia (as well as advanced economies, such as Australia and Canada) have benefited from natural resources as a lynchpin for growth.
- Boosting manufacturing is central to stimulating growth. Here too there are mixed views as to whether or not BRIC development financing has helped transfer technology and improved labor skills particularly in manufacturing. Greater provision of trade preferences (including beyond commodities) could help ensure that the relationship is mutually beneficial and de-bunk the notion that BRICs are simply “looting” the LICs for their natural resources.
- Concessional financing can provide a good jump start, but commercial financing will be vital to sustained growth. BRIC development financing is complementary to traditional donor support, but can also have important knock-on effects. China’s experience points to two possible advantages: commercially-oriented development financing is less constrained by the size of the flows, and provides incentives for competition, efficiency and permanent interest in ensuring that the project remains viable.
- LICs can learn from the BRICs in how they balance these various challenges. Countries need a coherent strategy for scaling up infrastructure and development that maximizes their growth potential. China, for instance, has had tremendous success in coherent investment planning, constantly reassessing infrastructure gaps and reorienting resources.
- Multilateral institutions and donors can play an important role in complementing the LIC-BRIC relationship, through: analysis and policy advice to support macroeconomic stability and debt sustainability; and capacity building and facilitating improvements in the investment environment to boost LICs’ absorptive capacity.
- Greater transparency of BRIC financing, particularly development financing, is needed. Perhaps the biggest gap is the lack of official data on development financing by China—it would be helpful for China to publish this data.
While it’s difficult to do justice to the richness of the panel discussions, we hope it can foster an ongoing dialogue about how LICs can—particularly in building their relationships with BRICs—increase the volume and quality of investment, and associated financing, in a sustainable way.
This post originally appeared at iMFdirect and is reproduced here with permission.