BRICs and Beyond - Goldman Sachs

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Russia: A Smooth Political Transition Russia and the BRICs Projections Our well-known BRICs projections imply a rosy long-term future for Russia’s economy. Not only could it be the largest economy in Europe before the middle of this century but, alone among the BRICs, Russia has a real chance of catching up with living standards of the current G7, increasing its per capita GDP eleven-fold in constant Dollar terms between 2006 and 2050. We believe this is possible despite the dramatic projected population decline (from 142mn people to 109mn in 2050) and despite a steady decline in the average annual real GDP growth rate from 4.3% in 2006-2015 to 1.5% between 2045 and 2050. The BRICs dream is not even a ‘best case’ scenario—in fact, Russia’s recent performance has been considerably better than projected in the original BRICs papers. But it does assume that the necessary conditions for long-run growth are in place, conditions that we have tried to capture in our Growth Environment Scores (GES). Russia scores well above the emerging market mean on education, government deficit and external debt; marginally above average on openness and life expectancy; lower but still above average on technology (phones, PCs and internet access per capita); and somewhat below average on inflation, which is now in the high single digits. By far Russia’s worst scores relative to the mean are in political and institutional variables: the rule of law, corruption and political stability. We estimate that if Russia were to move to the ‘best in class’ among emerging markets on its overall GES score, its growth rate would be 200bp per year higher than today. If it were to move to the ‘best in class’ on all the variables except for the political and institutional ones, it would gain only 136bp, forgoing 64bp per year in additional growth, an amount that over time would compound into a substantial difference. The GES scores highlight the benefits for growth that the country is likely to enjoy thanks to the key achievements of Putin’s government: restoring the country to solvency, improving macroeconomic management and imposing institutional stability after the chaotic 1990s. But they also make clear that, over the long term, Russia’s highly centralised political framework is unlikely to be a recipe for the kind of sustained growth that would make the BRICs dream a reality. % annual BRICs projections Actual and GS forecasts GDP grow th 2006-2050 2006-2010 2006 2007 (F) 2008 (F) Brazil 3.7 3.7 3.7 4.5 4.2 Russia 3.0 5.5 6.7 7.5 8.0 India 6.0 7.4 9.4 8.7 8.0 China 4.8 9.3 11.1 12.3 10.9 Fiscal Year for India. Index 10 9 8 7 6 5 4 3 2 1 0 Inflation Government Deficit Russia's Growth Environment Scores 2006 GES 2005 GES 2006 Mean (Developing) 2005 Mean (Developing) External Debt Investment Openness Edu cation Life Expectancy Political Stab ility Rule of Law Corruption PCs Pho nes Internet 2006 US$ 120,000 100,000 80,000 60,000 40,000 20,000 0 'Rich' club Source: Goldman Sachs BRICs model Per Capita GDP in 2050 Upper mid. income gp. Lower mid. income gp. Low inc. gp. Bang ladesh United States Korea United Kingdom Russia Canada France Germany Japan Mexico Italy Brazil China Turkey South Africa Vietnam Iran Indonesia India Egypt Philippines Nigeria Pakistan 37
Russia: A Smooth Political Transition over the next five years. What is striking about Putin’s approval rating is its sheer resilience: even at its low point in 2000, 60% of the population still said they approved of his performance. A serious shock to household incomes also looks highly unlikely. Under Putin, Russia’s fiscal and monetary policies have been oriented towards creating huge financial ramparts to guard the economy—and the political regime—from external shocks. The Central Bank’s $434bn in reserves could be deployed to prevent a sudden currency devaluation or to bail out failing banks, while the high tax rate on the oil sector means that the economy barely notices even large moves in the oil price, with the up-side (and potentially the down-side) largely absorbed by the government’s $141bn (11% of GDP) stabilisation fund. That fund could be drawn down to maintain social spending for an extended period in the event of a downturn in commodity prices. Over the longer term, we see a greater danger not from so much from external shocks as from evolutionary change. On the one hand, a lack of structural reform could lead to a gradual deceleration in the growth rate and a steady rise in popular dissatisfaction. On the other, higher living standards and a greater sense of economic security are likely to lead to eventual demands for greater political freedoms and pluralism, and less tolerance for the daily petty bureaucratic indignities of authoritarianism. We see neither of those processes as posing a threat to the regime in the next five years. Risks of cohabitation We are also not seriously concerned about the second danger, of either a significant open conflict between Putin and his successor or a Byzantine palace coup by the next President. This is true although the print media will inevitably play up any policy differences that come to the surface and there is likely to be some sniping between members of the President’s and Putin’s teams. ■ As we have argued above, Putin is likely to choose the successor from within his inner circle, someone who owes his or her career at the top ranks to Putin and someone who will be surrounded at least at first by other Putin loyalists. Unless Putin were to start to behave extremely erratically, we see no reason why his disparate and frequently feuding allies would unite to depose him. ■ Second, in our view, the entire political class will continue to recognise Putin as the ultimate authority, not least because, by signalling that he may return to the presidency in 2012, he has made clear that any effort to undermine his position would be a high-risk undertaking. ■ Third, it is unrealistic to expect the next President to have anything like the political authority of Putin. It was Putin, after all, who presided over the dramatic economic recovery and political stabilisation of the last eight years—achievements that will be hard enough for the next President to sustain, let alone outdo. Putin’s shoes are simply too large to fill—especially if he himself still plans to occupy them. ■ Fourth, control of the television news channels would be essential in any political rivalry in high politics, and we expect Putin to ensure that his close allies continue to monitor and influence news content after the elections. Given that Kremlin control over the television channels is conducted on an informal basis, we would expect the media to take their lead from the de facto rather than de jure political hierarchy. Putin’s aides already exert tight if informal control over the content of the television news. 38
Page 1 and 2: BRICS AND BEYOND
Page 3 and 4: For questions about our research on
Page 5 and 6: CONTENTS Page Section Three: The Ne
Page 7 and 8: BRICS AND BEYOND This book looks be
Page 10: CHAPTER ONE INDIA’S RISING GROWTH
Page 13 and 14: India’s Rising Growth Potential T
Page 15 and 16: India’s Rising Growth Potential G
Page 17 and 18: India’s Rising Growth Potential W
Page 19 and 20: India’s Rising Growth Potential R
Page 21 and 22: India’s Rising Growth Potential G
Page 23 and 24: India’s Rising Growth Potential a
Page 25 and 26: India’s Rising Growth Potential I
Page 28: CHAPTER TWO RUSSIA: A SMOOTH POLITI
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Page 46: CHAPTER THREE WILL CHINA GROW OLD B
Page 49 and 50: Will China Grow Old Before Getting
Page 60: CHAPTER FOUR CHINA’S INVESTMENT S
Page 63 and 64: China’s Investment Strength Is Su
Page 76 and 77: The ‘B’ in BRICs: Unlocking Bra
Page 86: CHAPTER SIX YOU REAP WHAT YOU SOW:
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You Reap What You Sow: Our 2006 Gro
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Why the BRICs Dream Won’t Be Gree
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Why the BRICs Dream Won’t Be Gree
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CHAPTER EIGHT WHY THE BRICS DREAM S
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Why the BRICs Dream Should Be Green
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Why the BRICs Dream Should Be Green
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Building the BRICs: Infrastructure
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Building the BRICs: Infrastructure
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CHAPTER TEN WOMEN HOLD UP HALF THE
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Women Hold Up Half the Sky % 35 30
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Women Hold Up Half the Sky % 70 60
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CHAPTER ELEVEN THE N-11: MORE THAN
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The N-11: More Than an Acronym The
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The N-11: More Than an Acronym ! Gr
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The N-11: More Than an Acronym Dive
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The N-11: More Than an Acronym Our
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The N-11: More Than an Acronym GDP
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The N-11: More Than an Acronym ...a
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The N-11: More Than an Acronym Thes
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The N-11: More Than an Acronym Are
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The N-11: More Than an Acronym Nor
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The N-11: More Than an Acronym APPE
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Current Answers (and Questions) Abo
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CHAPTER THIRTEEN BEYOND THE BRICS:
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Beyond the BRICS: A Look at the ‘
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Beyond the BRICS: A Look at the ‘
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The GCC Dream: Between the BRICs an
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SECTION THREE THE NEW GLOBAL MARKET
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Bonding the BRICs: The Ascent of Ch
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Bonding the BRICs: A Big Chance for
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CHAPTER SEVENTEEN IS WALL STREET DO
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Is Wall Street Doomed? ! Much of th
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Is Wall Street Doomed? Look at a Ma
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Is Wall Street Doomed? 50 45 40 35
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CHAPTER EIGHTEEN SOVEREIGN WEALTH F
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Sovereign Wealth Funds Highlight th
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Globalisation and Disinflation: Can
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BRICs and Global Commodities Market
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BRICs and Global Commodities Market
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CHAPTER TWENTYONE FOOD, GLORIOUS FO
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Food, Glorious Food: Agricultural C
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Food, Glorious Food: Agricultural C
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