Two BRICs: India vs. Brazil
by Rebecca Wilder
I started research on India to further explore economic prospects after reading and (excellent) FT article on necessary labor reform. In doing so, I now see a (possibly) much flatter economic growth trajectory for Brazil. Here is an excerpt from the article (last paragraph):
Over the years, numerous academic studies and official reports, including the Second National Labour Commission Report (2002), have recommended major reforms of India’s labour laws. The problem is absence of political will. Until that will can be mustered, the expansion of decent non-agricultural jobs will continue to fall far short of burgeoning supply (the “demographic dividend”), condemning many millions to insecure and ill-paid, informal urban employment (or even unemployment) and mounting underemployment and distress in rural India.
The data on the Indian labor market is patchy at best; that is, if you want something a little more descriptive than an annual unemployment rate. But how does India compare to its peers? The BRICs, for example (Brazil, Russia, India, and China). What I found is, that India is setting itself up pretty well to grow quickly – a finding that is consistent with the India-part of the overall BRIC theme (link to Goldman Sachs paper):
The results are startling. If things go right, in less than 40 years, the BRICs economies together could be larger than theG6inUSdollar terms.By2025 they could account for over half the size of the G6. Currently they are worth less than 15%. Of the current G6, only the US and Japan may be among the six largest economies in US dollar terms in 2050.
In fact, the BRIC data, side-by-side, paints a darker picture for Brazil’s growth trajectory than that for India. Let’s see why.
India, China, and Russia increased their respective investment shares of GDP over the latest decade- Brazil, too, but at a much slower rate. India (as I discussed in a previous post) has done this mostly through reducing barriers to inward foreign-direct investment.
However, more domestic saving is likely needed in India despite the falling of its consumption share (right graph) over the same 10-year period. India gets a bigger bang for each investment buck spent, so save more and supplement the inward FDI.
In stark contrast is Brazil, an economy that is clearly saving at a much lower rate than its peers. The consumption is a large 63.1% of GDP, essentially unchanged over the latest decade. And for a developing economy, the investment share is remarkably low in levels, 16.4% of GDP in 2008 (compared to India’s 32.2% share).
In all, the saving and investment story adds up to a level of productive capital stock. Without investment, there is no capital stock growth. And without capital stock growth, there is little productive GDP growth.
Note: the capital stock is constructed as investment plus non-depreciated capital.
The chart above illustrates the capital stock per worker (CW) for Brazil, India, and China. Clearly, Brazil’s productive capacity per worker is the lowest – with CW being quickly outpaced by India, and especially, China. India’s CW is on a respectable trajectory, but even an incremental increase in the rate of investment (i.e., the capital stock) could have profound effects on productivity and growth. Here is what the FT says:
Why is China the “workshop of the world” when Indian labour is even cheaper and her entrepreneurs admired worldwide? There are many reasons, including (until recently) the anti-foreign-trade policies and small-scale industry reservation policies, noted earlier, as well as poor infrastructure in power, roads, water and ports. Perhaps even more important are the restrictive labour laws and certain other regulations, which encourage Indian manufacturing units to “stay small”, thereby forgoing the classic industrial economies of scale and scope.
With labor reform and ongoing policy focused on domestic investment, India’s economy is on a path that should turn up quickly. This is Solow’s premise: low income countries invest in productive capacity, and the growth rates can be quite startling given the base effects (i.e., starting from a relatively low production level).
To be sure, there are risks. Currently India’s average income is low compared to its peers, based on years of questionable policy. Among the BRIC countries, India’s welfare measure (per-capita income) is the lowest, and that ranking is not expected to change by 2014 (see chart from a previous post, using data from the IMF World Economic Outlook in October 2009).
Brazil, on the other hand, is not setting itself up for sustained growth. The country is now enjoying the economic benefits of policy reform and open capital markets, an economic adolescent if you will. The next step in Brazil’s development is clearly to adopt policies that grow saving and investment.
Rebecca Wilder crossposted at Newsneconomics
How does literacy in Brazil compare to that in India? What centers of technology are there in Brazil? India is a leader in software. Is there a modern technology in which Brazil is a world leader?
Isn’t the caste system of India a huge ‘elephant in the room’?
The Chinese situation is a repeat of the ‘Japanese model’. A low yuan creates large profits for the corporations at the expense of the workers, that in turns allow for a higher rate of investment. On the flip side, you have problem with inflation. As pretty much every single Chinese dynasty is brought down by inflation, so it is a hugely sensitive subject.
No offense, but i’m extremely skeptical that economists know much about economic growth and how to acheive it. Their record in projecting winners and losers certainly isn’t anything to write home about. In particular, the idea that there are significant economies of scale beyond some relatively low limit strikes me as dubious. I suspect that in most industries there is an optimum size where efficiencies from centralized purchasing, financial controls, and policy making are offset by inflexibility and internal communication problems.
But I certainly do agree that China, India (and Indonesia) are probably going to become major economic powers. When/if China’s per capita GDP reaches that of a not too dismal Latin American backwater (think Uruguay or Panama) their total GDP is going pass that of the US There are simply a lot more of them than there are of us.
Note also that social mobility may be an important factor in growth. In Western Europe, the English speaking countries, Japan and China a child blessed with extraordinary skills stands a good chance of being able to rise to whatever social level the skills will support. (Which is not to say that a dimwitted scion of a wealthy family will necessarily sink to the level that their skills would justify). I believe that’s not so true of India and Latin America.
Finally,note that per capita GDP in Brazil is twice that of China and four times that of India. They don’t need to climb as much or as fast becasue they have a decade or two head start.. (But one hopes they will climb).
VtC,
Your suspicion that there is an optimum size for given types of factories has, in fact, been the subject of industrial engineering research for decades. One finding along the way is that plants of a given type do tend to cluster around given sizes. However, if there is a firm size that is an efficient response to regulatory structure, and that size is common across all industries, there is a very high likelihood that it will be inefficiently small in engineering terms in at least some industries. Now, there are lots of reasons one might want to limit firm size, some of which serve democracy and freedom, but economic efficiency isn’t one of them.
Rebecca,
Just a language quibble –
“And without capital stock growth, there is little productive GDP growth.”
That’s either “productivity growth” or “GDP growth”. “Productive GDP growth” is kinda ambiguous.
Well in Brazil it’s racism, disguised. If you know the country you know that people’s economic status closely matches their whiteness. The pure whites at the top, the pure blacks at the bottom. Gradations in between tend to follow “the darker the poorer” model.
***Now, there are lots of reasons one might want to limit firm size, some of which serve democracy and freedom, but economic efficiency isn’t one of them.***
Not saying you’re wrong, but that wouldn’t seem to follow from your argument. As I read it, you are merely saying that there are different optimum sizes for different areas of concern. Sure, that’s reasonable. How does that lead to the conclusion that there is no size beyond which greater growth is counterproductive when summed over all areas of concern?
India: Where are the jobs?
“Second, if one takes a longer view of employment trends in India, the most striking fact is the slow shift in the composition of the labour force from agriculture to non-agriculture, especially in comparison to other developing countries. Thus, between 1960 and 2006, the share of agriculture in the total labour force fell from 75 per cent to 42 or 43 per cent in China and Indonesia and from 84 per cent to 42 per cent in Thailand (see table). In India the decline was much smaller, from 73 per cent to 56 per cent. And this was despite a rapid fall in agriculture’s share in GDP, from 50 per cent in 1960 to 18 per cent in 2006.”
This paragraph from the FT article seems to make a very large assumption. Only 10% of India’s workforce is employed in the industrialized sector and these workers earn too little to consume the products they produce. So if a smaller percentage of the population relied on “low productivity agriculture”, where does the demand come from. Or, put another way, how many Chinas can the world afford? I suppose, we could put all of our out of work carpenters to work building more storage units and then busy ourselves taking advantage of all of that “demographic dividend”; but is the Goldman Sachs and Wal-Mart plan the only option?
After reading this post and its links I was reminded of what I have known all of my life. It is not just what I know but what all agricultural people learn early in life. We do not put it quite this way but since this is an econo-blog I might best explain thus: we learned to hide as much of our bounty as possible, we began doing this since just after bands of non-agricultural people first began finding ways of not doing their share of the work (always?). That was of course a long time ago and the raids have mostly ceased but only to be replaced with taxes and manipulations of the laws of supply and demand so we have learned to rely heavily on barter.
Barter though causes economists to reach misleading conclusions. In India for example, the World Bank’s standard for poverty of $2 per day might seem to suggest that the rural population lives in poverty when in fact it is the urban poor, many of whom actually earn more than $2 per day, who are living in poverty. But of course it is impossible to account for incomes of the rural poor because of their reliance on barter. But what does offer some understanding is simply a visual comparison. This may not fit neatly in the economic models, but if economists would just walk through a third world ghetto, then walk through a few rural communities, they should see that the health of urban poor is inferior to that of rural poor. Then perhaps the economics of development might begin to make sense. But the continued policies recommended by the likes of those at firms such as Goldman Sachs are lacking on nearly every level, except of course the level that benefits them and their investors.
Another factor is that China, Brazil and Russia have (like the US, Canada and Austraila). vast thinly populated (as in who would want to live there?) hinterlands whose natural resources probably have not been fully exploited. This puts them is considerable contrast to Europe, Japan, and India.
While it is true that natural resources have often tended in the past to be a dedicedly mixed blessing for those blessed (or cursed) with them, it seems to me that the next few decades are likely to put great economic strains on developing countries forced to import natural resources. Billions of people trying to quadruple or more their standards of living are going to need a lot of energy, steel, cement, water and food.
k, your statement:
“Now, there are lots of reasons one might want to limit firm size, some of which serve democracy and freedom, but economic efficiency isn’t one of them.”
What about the restraints of shipping and energy costs? And negative externalities, and the military costs required to “protect” energy resources? Do you oppose localized commerce as an option to the “demographic dividend” plan?
Codger,
I suspect that the paradox of plenty that you referenced is a thing of the past. The AAA fraud fiasco has set in motion a dynamic that leads to one of two choices. If the value of the dollar goes down it involves every nation holding dollar assets in a worldwide effort to pay down the debt caused by Wall St. Some of these nations were encouraged to hold dollar assets as criteria for credit rating by the IMF. So this choice not only diminishes the US image but also that of the IMF. The second choice, or policies that strengthen the dollar, put the cost of interest at a level that leads to higher taxes. Given the state of our Democracy it is not hard to figure out who will end up paying for a sizable portion of Wall St’s blunder, ie., most of humanity.
It is necessary to do some reading between the lines here, but, nearly all of the Asian and ASEAN nations have signed into an emergency fund that eliminates their need for the IMF. The Chinese and the ASEANS have also completed a long awaited trade agreement that eliminates thousands of tariffs. A similar but smaller effort is also underway in Latin America. So reading between the lines may be an overstatement, it doesn’t take much scrutiny, but, surprisingly, our leaders and pundits seem calm about these developments. But, they were also calm about the housing bubble. And the paradox of plenty has never been a popular subject in this country. I suppose the viscous cycle of trade dependencies will be broken without most of the citizens of the developed nations ever having known about their existence.
The Brazilians produce a lot of commercial planes.
But one thing they excel at… today, right now, you can drive your tri-flex fuel vehicle into a fuel station in Sao Paulo and, depending on which is less expensive, fill up with either gasoline, ethanol, or natural gas. Let me repeat – you can buy vehicles from the dealer that can run on three different fuels.
I was there twenty five years or so ago when they started rolling cars that ran on ethanol – the government owned a fleet of gas stations, and simply started selling ethanol.
yes, your right, India a world leader in software. No comparision is possible on that basis of expertise in different arenas with Brazil.
Business News This Week
TRANSPORTATION & DEFENSE – Civil Aviation
ENERGY – Nuclear Reactors – Brazil has the only “electromagnetic cushion” floating one
ENERGY – Biofuels
AGRICULTURE – Agrrindustry / Rual Extension
HEALTH RESEARCH – Infectious Diseases
ENERGY & MINING – Deep sea mining (oil and gas)
ENERGY – Oil Industry (in many areas)
SERVICES – Mega Opens Show Bizz (as strage it seems Brazil exports thi service originated in Rio, Recife, and Bahia carnivals(
ENERGY & ENGENEERING – Hydroelectric Energy (includind planning, developing, and building the whole infrastructure chain)
HEALTH RESEARCH – Steem Cells (among others)
ENERGY – Biofuel powered termoelectrcity (pioneer ans unique)
among others…
Efforts by Latin America have fizzled up to now. If china’s economy doesn’t also go boom sometime in the next few years perhaps they have a shot.
It is good to see someone is paying atention..
in bric countries which one will be favourable for toys market and why .
if someonw know please tell me so that i can start work on them
why would you say that? In most of the countries the white people are richer and the black people are poorer, that’s just how it happpened, bad luck for black people, a lots of things happened, nevertheless brazil is not creating any difficult for black people, just like countries in europe or america, black people in brazil already come for poor families and raising yourself from a poor familie into wealthiness isn’t easy regardless of whether you’re white or black, so the white people who were already rich (or might’ve had a better education or perhaps a little more of money) had more opportunities to continue rich or to get richer. Stop with that nonsense, in brazil everyone speaks the same language, the accent changes geographically but at the country has the same rules for everyone, unfortunately enough brazil full of taxes and encouraging everyone to go to university, it does have a fucked up university system (vestibular is a cancer in brazil) it has little to do with colors, just with change in status-quo. In brazil is more difficult for poor people to get rich, or for rich people to get poor… that’s just how it goes, there are problems in brazil, but it has little to do with racism. The only reason why more people more opportunities in america while being black is because of funds and other institutions that help poor people by providing good education and/or by recognizing people, it is true that being poor makes it hard to people to get anywhere, that is the problem of brazil, not the fact that they are black, but because they’re poor. hope I made my point, and that may be the same for many other countries.
Not only literacy in Brazil is superior compared to India, but research, structure for academic accomplishments and a modern middle class and stock market. Technology? Bio-fuels, agriculture research, air jets, bio-molecular DNA research, oil exploration tech….I guess I am missing a couple but….
I don’t think is a matter of racism. It’s a matter of the consequence of the portuguese colonization. It is about economics. In Brazil there is NOT problems with the collor of your skin. Actually Brazil is the model for the whole globe on that arena.
Toy Market? Imho, its Brazil.
1 – larger fertility rates than Russia and China. That means more children.
2 – while its fertility rate is much lower than India, the population in Brazil is much wealthier than in India (if you take GDP Per Capita Nominal, Brazil is twice as rich comparing to India as USA is to Brazil)
3 – Brazilians tend to spoil their children. If you can take similar income levels and compare, Brazilians probably give more toys to their children than americans. There are some blogs from american expats talking about how absurdly expensive are the “social events” a children birthday party is in Brazil.
Now, talking about major league bullshit, we have to hold the candle for researches who’ve never left there offices (or bedrooms perhaps) and what to talk about statistics or write “scientific” papers.
According to the UN Literacy Rate, Report 2009, here is how the two countries compare:
Brazil – 98th
India – 149th
The list comprised of 180 countries.
I’m Brazilian and lived three years in India. I love India by the way, that’s not the point. But if somebody wants to say something relevant and honest and empirically based, they should know their suject matter properly.
“What centers of technology are there in Brazil? India is a leader in software….” Somebody shouts above. Is that how literacy is measured? What about thousands of people shitting on the streets and along the highways (well, let’s call it highways)?
How do the two countries compare?
INDIA: 4 Institutes of Technology among the World’s Top 1000 Universities. Tuition fees vary between 800-2100 Euros, about 50,000,00 – 130,000,00 INR.
BRAZIL: 23 Universities among the World’s Top 1000 Universities. All of which are public institutions, i.e., no registration or tuition fees.
BRAZIL HAVE NO NUCLEAR WEAPON !
IT IS OUT OF FUTURE SUPERPOWER !
I must say that Brazil and India are great countries, talking about people and natural area but both share the same huge problems: Corruption, violence, and a terrible educational system, honestly I think the only way they can make things better is improoving the educational system, once they do that, they will become maybe the best countries of the world, of course in a long term way
i think the best country in the world is where you can live as freely as you can. Lead a good quality of life without threats, pacific and progress… There is no country in the world where you can have that…. we are all for a few years in this world…. this is the real dream. please note that competing to each other will lead to self-destruction…. Let all those who want to go very up go !!! they will fall as hardly as they have gone up… do you think you are protected if you live in rich countries…do you believe to that ? we must not forget the small and poor countries because if we forget them and enjoy to live in the rich country, believe me, we will be born to a poor country to bear the consequences…. i am telling you we pay whatever we think or do…
we can come back to live in Ethiopia and suffer the consequences…please stop comparing, criticizing because nature is always watching us and might throw us in the middle of a very poor environment in the next life…..we never know… instead all forums should be used to make effort of helping each other…. Even if China or USA will go up …very up they cannot forget the poor because…their citizens risk to be born again in poor countries… I am telling you again please do not make laugh of smaller countries and poor countries as many media and people do…do not compare because this world is a playground, nothing is done at random and we can fall very very down…be it from China or US or any other rich country… it is a matter of time…. you see all the natural disasters increasing day by day ? why ? because payment time has already started….
Could anybody please suggest which is the most suitable among India and Brazil to establish manufacturing and R&D facilities of a japanese electronic product company, to explore the emerging markets of BRIC nations considering economic, political, social, legal and environmental drivers, giving brief factual analysis?
Guys, i am hearing loads of stuff about India’s caste system. I am indian and i would love to tell you guys that the caste system is over in india. It was abolished in 1947 after we gained independence. Sure some rural villages still experience this but the effect is way too small to make in difference. Also india’s education has also boosted up- 70% of the males are now educated and about 60% females, that’s a long way far from 30% in the 20th century. India has a population of 1.3 billion people, it is way harder to control and we have to give some credit to the government for maintaing it.
I must say that with the population of a billion, India is still growing in economy and education. What important is with the population of millions it is easy to eradicate issues much faster than to those with the population of billions. Let us say we reduce the population and make it equal to the population of Brazil or Russia, India will become economic giant in a very few years. There are lots of issues that India is facing and it will take time to resolve the issues. India is not a country with the population of a few thousands or millions.