On Chindia and Brics

There follows a comment by me on the third world development from the 27 November issue of Fund Strategy.

First we had Brics, now we have Chindia. The first term, coined by Jim O’Neill of Goldman Sachs in 2001, has become widely accepted as an acronym to cover Brazil, Russia, India and China. Chindia was coined by Jairam Ramesh, an Indian politician and economist, and now is the basis for several funds.

As a shorthand way of indicating the countries included have huge populations while remaining relatively poor, such terms are fine. But there are many important differences between them. Brazil, unlike the others, is not growing particularly fast. Russia, unlike the others, is heavily dependent on one commodity – oil – and related products. India, despite its rapid growth, has appalling infrastructure and a weak industrial base. China stands out as by far the largest and most rapidly growing economy.

In other ways, too, the discussion of these countries is often distorted. A typical fund manager presentation on any of these countries starts by noting their huge populations. It then raises the spectre of such relatively poor countries moving towards Western levels of consumption. “Just imagine if every family in China buys a food processor,” runs the argument. “The share price of the Shanghai Acme Food Processor Company is bound to rocket.”

Such discussions are back-to-front. The primary determinant of consumption is production. In other words, it is necessary to work out how the barriers to raising production can be overcome before considering how much consumption can rise. The only reason China can consume so much more than in the past is because its output has risen rapidly.

Admittedly the level of production does not put an absolute limit on consumption in the short term. Up to a point it is possible for countries to borrow overseas to help subsidise their current consumption. It is also possible, as in China today, for individuals to save heavily rather than go all out to consume.

Despite these modifications, the fundamental point remains that production determines the level of consumption over the long term. Therefore, a consideration of such factors as the level of investment and the ambition of the governing class are crucial in assessing development prospects. If the level of production rises, consumption levels are likely to follow. Stagnant output, in contrast, means that the consumption story will fail. The simplistic story of the Brics and Chindia told by many financial institutions misses out the key elements in the development process.