Cracks in the BRICS

With the debt crisis in Europe pulling international investment capital back to the home countries where cash flow shortages are putting new demands on available funds, the global investment community has retracted what had been obvious growth-oriented investments in the so-called BRIC nations (Brazil, Russia, India and China… and if you want to add an “S,” South Africa), growth tigers with either strong raw material assets or massive manufacturing capacity (or both). Consumer demand has fallen for manufactures and service skills as increasingly large segments of the global economy are experiencing continuing high unemployment and contracting discretionary income.

Additionally, each of these nations has its own set of individual problems that is putting a damper on their economic projections. China has experienced a real estate bubble, rising labor costs, a decline in net exports and a stock market that reflects the malaise. India’s ineffectual coalition government is unable to push much needed reforms to attract declining foreign investment and new job creation in heavier industries needed for growth and is facing increasing global competition for “soft” Internet-linked logistics and service industries overseas. Brazil finds itself without either a sufficiently educated class of managers and professionals or the available capital to take advantage of the growth inherent in her vast and newly discovered off-shore oil fields. Political instability and an internal struggle between the incumbent regime and wealthy oligarchs has put a damper on free investment in Russia, and South Africa’s mineral rich resources suffer much the same fate as Brazil in the lack of capital and talent to expand to meet its obvious potential.

But at least Russia, Brazil, and South Africa have the underlying values inherent in their vast holdings of exportable natural resources. India and China, which base their wealth on value-added services or manufacturing, do not enjoy remotely the same level value of such abundant raw materials in the calculation of their perceived overall global worth. In the next few days, I will deal with more details on India and China, but today, the focus is on the new moniker for perceived global value, which unfortunately does not include these latter two giants in the equation.

In the word of stressed and indebted-beyond-reason economies, we have the PIIGS – Portugal, Ireland, Italy, Greece & Spain. And up to now, in the search for the “new” wealth centers we’ve had the BRICS (noted above), but there is an increasing contingency of economic experts who believe that the notion of the BRICS’ underlying value proposition is no longer relevant if they don’t have the underlying natural wealth. Instead, these economists are focusing on commodities-rich nations who are able to take advantage of their wealth of raw materials, the so-called CARBS nations: Canada (oil & gas), Australia (iron ore and coal), Russia (oil and gas), Brazil (oil, gas and agricultural products) and South Africa (minerals and precious metals).

Why these choices? “There are three main types of economies - providers of commodities, labor or consumption. CARBS markets are providers of commodities and Citi[group] specifically refers to CARBS as countries that ‘combine very large commodity assets with high stock market liquidity’... With 29% of global landmass and only 6% of the world’s population the[se] countries become significant exporters. Commodity exporters like Saudi Arabia and Mexico are not part of the CARBS because they lack equity market liquidity.” BusinessInsider.com, November 11^th.

In terms of exports, here are the hard CARBS numbers according to BusinessInsider.com: Canada - Commodities as % of exports: 74%, Commodities as % of GDP, 17%, Australia - Commodities as % of exports: 60%, Commodities as % of GDP: 8%, Russia - Commodities as % of exports: 92%, Commodities as % of GDP: 23%, Brazil - Commodities as % of exports: 47%, Commodities as % of GDP: 15%, and South Africa - Commodities as % of exports: 64%, Commodities as % of GDP: 10%. In short, they have vast quantities of exportable raw materials that are in high demand, are able to implement such exports, and a marketplace that allows them to monetize efficiently and generate the kind of asset values that create long-term, sustainable wealth.

In a world desperate to determine where the future of economic growth may be, new trends, new analyses and watching previous assumptions fail will constantly generate new centers of the perceived future of global value. For us in the United States, we are innovators, often sitting on the edge of the new-next technology, but with our refusal to support our educational system and fund much-needed new research, all sitting in a valley of crumbling and innovation-impairing infrastructure, how much longer will we be able make that claim? With around a mere 2% of our labor force employed in our lucrative agricultural sector, we need additional businesses that can generate global values and employ millions of American workers. For the most part, except coal and some pockets of natural gas, we’ve already extracted and consumed or exported our raw material wealth years ago. So our wealth has to be based on the excellence of our value-added skills. And exactly what are we going to do about that? Let others pass us by and waive?

I’m Peter Dekom, and getting to the top and staying on top require two completely different sets of effort in the tough world of global competition.