TIME brics

The BRICS Don’t Like the Dollar-Dominated World Economy, but They’re Stuck With It

World For Money
Thomas Trutschel—Photothek/Getty Images

The latest summit of the world’s leading emerging markets took more steps toward replacing the U.S.-led global financial system. But change will come very, very slowly

When the BRICS get together for their annual summit — as they did last week in Brazil — they always make a lot of noise about changing the way the global economy works. They have good reason to be frustrated. The BRICS (Brazil, Russia, India, China and South Africa) are gaining in economic power and crave the political clout to match, but standing in the way is a global financial system organized by the West and dominated by the U.S. They’re forced to conduct their international business in the unstable U.S. dollar, making their economies swing back and forth with the winds of policy crafted in Washington, D.C., and New York City. The West has ceded influence in institutions like the World Bank and the International Monetary Fund (IMF) only grudgingly. To them, today’s financial system is out of touch with the changing times, and ill-suited to support the world’s up-and-coming economic titans.

So in their summit, from July 14 to 16, the five BRICS announced two major initiatives aimed squarely at increasing their power in global finance. They announced the launch of the New Development Bank, headquartered in Shanghai, that will offer financing for development projects in the emerging world. The bank will act as an alternative to the Washington, D.C.—based World Bank. The BRICS also formed what they’re calling a Contingent Reserve Arrangement, a series of currency agreements which can be utilized to help them smooth over financial imbalances with the rest of the world. That’s something the IMF does now.

Clearly, the idea is to create institutions and processes to supplement — and perhaps eventually supplant — the functions of those managed by U.S. and Europe. And they would be resources that they could control on their own, without the annoying conditions that the World Bank and the IMF always slap on their loans and assistance. Carlos Caicedo, a Latin America analyst at consulting firm IHS, noted, for instance, that the New Development Bank “has the potential to match the role of multilateral development banks, while offering the BRICS a tool to counterbalance Western influence in international finance.”

In theory at least, the BRICS possess the financial muscle to make that happen. Four of the BRICS — China, India, Brazil and Russia — are now ranked among the world’s 10 largest economies. (South Africa, not a member of the original constellation of BRICs as conceived by Goldman Sachs, comes in a distant 33rd.) Yet the reality is more problematic. The BRICS at this point are simply not committing the resources necessary to make anything but a dent in global finance.

Research firm Capital Economics estimates that the New Development Bank, with initial capital approved at only $100 billion, could offer loans of $5 billion to $10 billion a year over the next decade. Though that’s not an insignificant amount, it’s far lower than the $32 billion the World Bank made available last year. The situation is the same with the currency swaps. Set at a total size of $100 billion, the funds available would be a fraction of those the IMF can muster.

That’s assuming these initiatives ever get off the ground. This sixth BRICS summit is the first to produce anything beyond mere rhetoric, and it remains to be seen if they can cooperate on these or any other concrete projects. Despite their common distaste for the U.S.-led global economy and desire for development, the BRICS share as many differences as similarities. They have vastly diverse levels of development and types of political systems, and the bilateral relations between some of them are strained. India and China, for instance, routinely spar over disputed territory, while Brazil sees China as much as an economic competitor as partner.

Beyond that, all of the BRICS have serious economic problems to deal with at home. The new government in India led by Prime Minister Narendra Modi will be hard pressed to implement the reforms necessary to jumpstart the country’s stalled economic miracle. Growth in Brazil, South Africa and Russia has been even more sluggish. China’s growth has held up, but it suffers from rising debt, risky shadow banking and excess capacity. And now Moscow has to contend with sanctions imposed by the U.S. and Europe over its aggressive policy toward Ukraine. It may soon face even greater isolation as the world probes its connections to the separatists in Ukraine, who reportedly downed Malaysian Airlines Flight 17 with the loss of nearly 300 lives.

Meanwhile, whether they like it or not, the BRICS will be stuck operating by the rules of the U.S.-led world economy for the foreseeable future. There is simply no other currency out there that can replace the U.S. dollar as the No. 1 choice for international financial transactions. China has dreams of promoting its own currency, the yuan, as an alternative, and has made some progress. But the yuan can’t truly rival the dollar until China undertakes some fundamental financial reforms — liberalizing the trade of the yuan and capital flows in and out of the country. That’s far-off. And until then, China’s massive reserve of dollars forces it to continually invest in dollar assets. Even as Beijing bickers with the U.S. over cyberspying and regional territorial disputes, it has been loading up on U.S. Treasury securities — buying at the fastest pace on record so far this year.

Still, the steps taken during this latest BRICS summit point to what may be the future of the global economy. Though their initiatives may be small and tentative now, they signal an intent to remake the global financial system in their own interest as they continue to grow in economic power. Perhaps one day it’ll be the U.S. that does the complaining.

TIME India

More Children Are Going to School in India, but They’re Learning Less

INDIA-EDUCATION-TUITION
An Indian teacher assists underprivileged children during their lessons at Palodia village of Gandhinagar district, some 25 kms from Ahmedabad on November 21, 2013. Sam Panthaky—AFP/Getty Images

India's woeful state schools are in stark contrast to the country's lofty goals of becoming a nation of call centers and technology parks

The fifth-grade boys and girls at school in Sultanpur — a village about 40 km from the Indian capital, New Delhi — are laboring over their lessons on a Friday morning. Eleven-year-old Kiran alternates between chewing her pencil and copying the English text that was the morning’s task. She writes down the sentences, arduously capitalizing the first letter of every word. The children have not yet grasped the basics of English grammar, the teacher explains. But they should have – at least three grades earlier.

“I cannot read English very well,” Kiran mumbles, keeping her eyes firmly fixed on the ground. She adds as an afterthought, “I know my tables till 20 in Hindi though.”

As a new World Bank study has found, there’s a literacy problem in Indian schools, and not just in English. A third of all grade-three students can’t read at all in their native language. Roughly half of all grade-five students cannot manage a grade-two text, which is also too difficult for a quarter of all seventh-grade pupils.

This decline in standards, experts say, is paradoxically because of the rush to build schools and bring back children to the education fold. India managed to bring down the number of out-of-school children from 32 million in 2001 to 1.4 million in 2011 as part of a program to make elementary education universal. The landmark Right to Education Act of 2009 guarantees every child in India between the ages of 6 and 14 free education at a neighborhood school.

And yet, amid this headlong drive, little attention has been paid to what children are learning in classrooms or how well. Absenteeism (the World Bank study pegs average attendance to be at least 15% to 30% lower than enrollment rates) and misconduct (recently, about 20,000 teachers were found to have forged their degrees in the eastern Indian state of Bihar) are big contributors to poor standards of education. “India will have to invest more, starting with pre-service teacher education and professional development of teachers,” says Poonam Batra, a professor in the education department at the University of Delhi and a member of the Justice Verma commission, which has suggested sweeping reforms in the education sector.

All this is in stark contrast to India’s lofty goals of becoming a nation of call centers and technology parks, and to the image it enjoys overseas as a powerhouse of learning, turning out English-speaking engineering and science graduates by the tens of thousands. Despite the fact that private schools, promising world-class education in English, have been mushrooming in the country over the past few years, standards of English are also on the wane. “The average Indian adult cannot yet write business letters in English or speak spontaneously at a business meeting in English,” Minh N. Tran, director of research and academic partnerships at Education First, tells TIME.

Enrollment in private schools in rural India increased from 19% in 2006 to 29% in 2013. In urban India it was about 58% in 2005 and likely to be much higher now. But it is in the state sector that the real battle must be fought. “Countries that have done well economically have had robust state schools and teacher-education systems,” says Batra.

New Delhi has raised government spending on education from 3.3% of GDP in 2004–05 to 4% in 2011–12 (China spends about the same, but Brazil and Russia are well ahead). But facilities remain woeful. In Indian state schools, children have to sit on the floor until they reach grade six. “My feet goes off to sleep sometimes, and I lose track of the class,” says Kiran. “A desk and a chair would be very nice.” For most Indian children, the battles are that basic.

MONEY Emerging Markets

Why Stocks in Brazil, Russia, and China are Still Sinking Like a BRIC

With the exception of India, the emerging market's biggest economies are struggling to get back into gear.

Last month’s elections in India kindled hope for reform in the world’s biggest democracy and provided the nation’s stock market with a nice bump.

One thing it couldn’t do is rescue the so-called BRIC funds, which are foreign stock portfolios that target the emerging market’s most influential economies — Brazil, Russia, India, and China. The term “BRIC” was coined in 2001, by then-Goldman Sachs economist Jim O’Neill. During the last decade, when emerging markets rallied, the BRIC story captured investors’ imaginations.

Goldman Sachs, Franklin Templeton, iShares and others rolled out BRIC funds. At their peak in 2010, these investments held more than $4 billion.

But since then performance has tanked.

^SSBR Chart

^SSBR data by YCharts

Over the past five years the Goldman Sachs BRIC Fund GOLDMAN SACHS TST BRIC FD CL A GBRAX 0.5742% version ranks in the 92nd percentile among emerging markets funds, Templeton BRIC TEMPLETON GLOBAL I BRIC FD CL A TABRX 1.0406% ranks in the 99th and the iShares MSCI BRIC ISHARES INC MCSI BRIC ETF BKF 0.8757% , an ETF, ranks in the 100th. Today investors have just $1.4 billion invested in BRIC funds, according to Morningstar. (The companies didn’t respond to calls for comment by press time.)

What happened?

The story is largely tied to China, which makes up roughly half the market value of BRIC stocks. The world’s second largest economy is no longer growing at a double-digit annual clip. And as a result of financial-crisis-era stimulus, has been dealing with inflation, a housing bubble and declining manufacturing.

Source: MSCI

 

Meanwhile Brazil’s once promising middle-class consumers seem over-extended (casting a cloud over its lavish World Cup spending.)

And as for Russia, well, there was Vladimir Putin’s annexation of Crimea and threats against Ukraine. Enough said.

The lesson for investors isn’t to abandon emerging markets altogether. As a group, these economies will continue to gain ground on the developing world. But the emerging markets themselves are evolving and maturing. No longer can you get away by betting simply on the biggest players.

Investors, in fact, might fare better in a more diversified emerging markets index fund, like Vanguard Emerging Markets Index Fund VANGUARD EMERGING MARKETS STOCK IDX INV VEIEX -0.04% with exposure to many more emerging economies than just these four. It sounds counterintuitive, but investing in a fund that mixes in smaller (and possibly less economically stable) countries like Indonesia or Thailand might reduce the overall volatility of a foreign stock portfolio that focuses just on the big four BRICs.

Plus, companies in those markets are apt to grow just as fast if not faster than their Chinese or Brazilian counterparts.

TIME Thailand

Thailand Is Doing a Great Job of Screwing Up Its Potential

Thailand Politics
An antigovernment demonstrator cries before she leaves a protest site after soldiers staged a coup in Bangkok on Thursday, May 22, 2014. Sakchai Lalit—ASSOCIATED PRESS

And it's not alone. The coup in Thailand, and turmoil elsewhere, shows how developing nations are currently excelling at one thing: being their own worst enemies

For more than a half year now, Thailand has been gripped by chaos. Protesters from both sides of the political spectrum — the antigovernment Yellow Shirts and progovernment Red Shirts — have clogged the streets of Bangkok. The country’s highest court ousted the still widely popular Prime Minister, Yingluck Shinawatra. And, on Thursday, the military took control of the government.

The past six months of factional violence have seen some 28 deaths and 700 injuries. But there have been even wider casualties of another sort. The turmoil is sapping the nation’s economic strength, and everyone is hurting.

Months of uncertainty and effectively no functioning government have taken a toll on Thailand’s economy. GDP in the first quarter contracted by 2.1%. Investment, consumption and government spending were all down. Some $15 billion of fresh investment projects are on hold. Foreign tourists, a key source of jobs and income for many Thais, are being scared off.

Without a return to political stability, the situation may not improve. Research firm Capital Economics slashed its GDP forecast for 2014 to a mere 1% this week. Though the military’s intervention could prevent further violence, the outlook for Thailand’s political situation remains anything but clear.

“The military’s seizure of power does nothing for Thailand’s reputation among global investors or, indeed, tourists,” lamented Mark Williams, Capital’s chief Asia economist.

Thailand is representative of an alarming trend: politics are undermining the economic prospects of some promising emerging nations. Only a couple of years ago, the developing world seemed set to swamp the developed one. While the U.S. and Europe suffered through the fallout from the 2008 financial crisis, emerging economies like China, India, Brazil and Indonesia surged from strength to strength. But not anymore. The performance of the emerging world has tapered off. The IMF recently downgraded its forecast for growth in developing economies to 4.9% in 2014.

There are many reasons behind the slowdown. After years of rapid expansion, some economies have developed serious flaws that are dragging them down. In China, for instance, a distorted financial sector, rising debt and excess capacity are all weighing on growth. But politics are making matters much worse. Vietnam’s government has been left pleading this week with foreign companies to maintain their operations in the country after many factories were damaged in anti-China riots, sparked by a territorial dispute in the South China Sea. Without such foreign investment, Hanoi will have a harder time creating jobs and raising incomes. Russia’s aggressive designs on Ukraine have forced the U.S. and Europe to slap sanctions on the country, threatening to scare off much-needed investment in an economy already struggling with feeble growth. In Egypt, constant political upheaval since the start of the Arab Spring in 2011 has undermined growth, gutted the important tourism sector and left the government dependent on foreign aid.

The causes of all this upheaval are many, and in some cases, quite honorable — such as the quest of Egyptians for their proper democratic rights. Yet ultimately the fallout is the same. Businessmen won’t invest in startups or factories that spur growth and create jobs without security, confidence and clear policy direction. A paralyzed government like Thailand’s can’t provide any of that, while the significant geopolitical risk created by a regime like Russia’s often convinces executives to place their capital elsewhere.

For the poor, this is bad news. There has always been a link between good governance and accelerated development in the emerging world. Periods of exceptionally high economic growth in less-developed nations are often associated with periods of political stability and sound macroeconomic management. Sadly, too often that stability has been enforced by coercion — as in China. As the 25th anniversary of the crackdown on protesters in Tiananmen Square approaches in June, Beijing’s leaders still believe economic reform can only be achieved under an unreformed political system. Yet democracies have proved that they, too, can deliver the economic goods. India, Indonesia and, increasingly, the Philippines have shown that when democratic leaders display political will, build consensus and implement smart policies, they can generate growth rates that match the best produced by the toughest dictatorships.

The point is that the governments that have successfully raised incomes tend to put economics ahead of politics. But both democrats and autocrats are guilty of doing the opposite these days. Putin clearly possesses the power to implement much-needed reforms, but he’s chosen to pursue the foreign adventures that could undermine the economy rather than the foreign investment that could bolster the nation’s growth. The sad story of India over the past three years has been a government led by economic reformers that got too caught up in coalition politics and too divided on the direction of policy to press ahead with key reforms.

This week brought some hope that at least some political gridlock can be broken. The landslide election in India of a coalition led by the Bharatiya Janata Party has raised expectations that incoming Prime Minister Narendra Modi will be able to press through badly needed liberalization and restart India’s economic miracle. But such hopes can be dashed in a flash. In Bangkok, there had been optimism that the military would broker a settlement between the opposing Yellow and Red Shirts — then the coup squashed that hope.

The danger to the developing world is that its leaders will continue to place their narrow interests over the greater goal of economic progress. Improving the welfare of the common man is hard enough. Politicians shouldn’t spend their time making it even harder.

TIME Emerging Markets

Forget the BRICs; Meet the PINEs

University student interns monitor trading at the Philippine Stock Exchange in Manila's Makati financial district
University interns monitor trading at the Philippine Stock Exchange in the financial district of Makati, Philippines, on Feb. 7, 2014 Erik de Castro—Reuters

While many emerging markets are taking a beating, a fantastic growth story in the developing world is widening and drawing in new countries

Emerging markets are taking a beating these days, most of all the famous BRIC economies ­— Brazil, Russia, India and China. These four once seemed poised to dominate a post-American world. Not anymore. Brazil and India are posting growth rates that are only a fraction of what they were a couple of years ago. Russia’s prospects, already hampered by an overbearing state, are unlikely to improve as its aggressive moves into Ukraine could force Europe and the U.S. to impose economic sanctions. Even mighty China, while still notching admirable growth, must confront rising debt and a distorted financial system. The supremacy of the emerging world suddenly seems very far off.

But look past these headline grabbers, and you’ll find other emerging economies continuing to show economic strength. So for now, forget the BRICs; take a look at the PINEs. The PINE economies are the Philippines, Indonesia, Nigeria and Ethiopia. I have to confess I made up this acronym, and I fear it isn’t quite as catchy as BRIC. But I’m trying to make a point here. What the PINEs represent is something very important for the future of the global economy and quest to alleviate poverty. The PINEs are all performing very well right now, and that shows that the advance of emerging economies is far from over. In fact, the fantastic growth story in the developing world is widening and deepening, drawing in countries and regions that had previously been left out.

Take, for instance, the Philippines. When most of East Asia emerged from colonial rule after World War II, the Philippines was considered one of the new countries with the greatest potential for development. Sadly, things didn’t turn out that way. As much of the rest of East Asia zoomed ahead on its economic miracle, the Philippines got left behind. Millions of Filipinos were forced to search for jobs around the world, creating a diaspora from Hong Kong to Dubai. Now, though, the Philippines has become one of the region’s best performers. Even after getting smashed by Typhoon Haiyan last year, GDP still surged by 7.2%, and the IMF expects the country to post similar rates over the next several years.

(MORE: The BRICs Have Hit a Wall)

Indonesia has staged a comeback as well. Though the Southeast Asian giant had been a strong performer in the past (during the early 1990s, for instance), political upheaval and regional conflicts scared off investors, especially after its 1997 financial crisis. But now Indonesia has returned to the ranks of the world’s most desirable emerging economies, thanks to a stable democracy and a burgeoning consumer market. Foreign direct investment increased a hefty 17% last year. Though the stampede from emerging markets after the U.S. Federal Reserve signaled it would scale back its stimulus efforts pummeled the country’s currency, and growth dipped a bit last year, the economy is still forecast to growth at about 6% annually over the next several years.

The strong performances of Nigeria and Ethiopia are even more exciting. Africa generally stood on the sidelines while Asia and other parts of the developing world experienced giant gains in welfare over the past half-century, but now, finally, the continent seems to be joining the party. Nigeria is the largest country in sub-Saharan Africa and has long been seen as a potential economic heavyweight, and now that a more stable government is implementing some much needed reform, investors are flocking into the nation. Ethiopia may be even more exciting. Once synonymous with poverty, peace and strong economic management have turned the nation around. The International Monetary Fund sees growth in the 7% range in the coming years for both countries, and there’s even talk of a group of “lion economies” rising up in the same way the “tigers” of Asia did in the late 20th century.

There are, of course, risks that these countries will falter, if politics or corruption gets in the way. And though the advance of the PINEs may not have the same global impact as the BRICs —­ China and India are so big they’re in a class by themselves —­ the PINEs still represent a major opportunity for international companies to invest, expand and find new customers. The PINEs, after all, have a combined population of about 600 million people. So don’t be too quick to dismiss the emerging-markets story. The meek may yet inherit the world.

MORE: Viewpoint: How Elections Could Impact Five Emerging Economies

TIME global economy

Global Investors Got High on Emerging Markets: Now for the Comedown

Pedestrians walk past a Citibank branch in Mumbai Dhiraj Singh / Bloomberg / Getty Images

The world is now paying the price for irrational exuberance over developing economies

You’d think that the world’s investors would be in good spirits right now. The U.S. economy finally appears to be recovering. Japan may be stirring back to life. Both the IMF and World Bank recently upgraded their projections for global growth. But as we get started on 2014, financial markets are in turmoil. Emerging markets from Argentina to Turkey to South Africa are seeing their currencies get slammed as investors flee. The jitters ricocheted to the U.S. last week, pummeling stocks in New York City. What in the world is going on?

Call it coming down off an emerging-markets high. During the Great Recession, when the U.S. and Europe became crushed under debt, joblessness and recession, the developing world appeared to be the future of the global economy. Growth in countries like China, India, Brazil and Indonesia shrugged off the woes of the West and supported the world economy through this toughest of times. Money flowed generously into many of these markets as a result, especially since anxious central banks in the U.S., Europe and Japan flooded their economies with liberal amounts of cash to prevent an even worse downturn. What’s happening now is that global investors are starting to realize the developing world has its own issues, and that it hasn’t detached itself from the West’s problems either. Simply, we’re waking up to the fact that many of the most promising emerging markets are facing difficulties that dim their prospects. The bubble of exuberance that has surrounded the developing world is bursting.

Take a look at China. Though its GDP growth, at 7.7% in 2013, is nothing to sniff at, it is far cry from the double-digit expansion that had been so common, and many economists believe growth will slow further. That’s because its current, investment-obsessed growth model is sputtering and the leadership in Beijing is embarking on a major reform effort to build a new foundation for future success. In fact, a good part of the strong performance China experienced during the downturn was due to a massive surge of credit that has left China burdened with lofty levels of debt. That expansion fueled consumption of everything from iron ore to Prada handbags, but it wasn’t sustainable. Now that Beijing is trying to cool things down, countries that export a lot to China, like Brazil, could see a knock-on effect to their growth as well. Despite warnings from many economists that this was coming, investors only now seem to be adjusting their thinking to a world with a slower China, and that’s affecting their sentiments towards other emerging economies.

(MORE: China’s Economy Is Slowing, and We Should All Be Thankful)

Investors are also coming to realize that many developing nations are facing political pressures that are dragging on growth. India, plagued by political gridlock and distracted by upcoming elections, has allowed the free-market reform that has been driving growth to stall. In Thailand, an ongoing political contest between the ruling party and its opponents is weighing heavily on the economy.

Still other problems have been exacerbated by the global downturn itself. All the cheap dollars spilled out by the U.S. Federal Reserve in its efforts to stimulate the American economy has made it easy for countries like Turkey and India to finance consumption and, in essence, live beyond their means. The fear is that as the Fed scales back that largesse, these countries will have a harder time getting cheap money, and that will drag on their economies. Some companies in emerging markets like Indonesia built up significant amounts of dollar debt that now could become more expensive to service. Those jitters are causing some investors to get out of some of these markets before matters get worse. Perhaps these fears will prove unfounded, but since the cash-creating programs of the world’s major central banks are so unprecedented, the impact of winding them down is uncertain as well.

This isn’t to say that all emerging markets are disasters. The IMF expects Nigeria to grow at a very China-like 7.4% this year, while the Philippines remains surprisingly buoyant. “The real lesson from recent events is that the need for investors to discriminate between individual [emerging markets] has never been greater,” noted research firm Capital Economics in a recent note. Still, while we detox, expect a bumpy ride.

MORE: The BRICs Have Hit a Wall

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