The so-called BRIC nations--Brazil, Russia, India and China--could be a game changer for how low-income countries build their economic futures.
The growing economic and financial reach of the BRICs has seen them become a new source of growth for low-income countries (LICs).
LIC-BRIC ties--particularly trade, investment and development financing--have surged over the past decade. And the relationship could take on even more prominence after the global financial crisis, with stronger growth in the BRICs and their demand for LIC exports helping to buffer against sluggish demand in most advanced economies.
The potential benefits from LIC-BRIC ties are enormous.
But, so too are challenges and risks that must be managed if the LIC-BRIC relationship to support durable and balanced growth in LICs. Unlocking the new sources of growth and investment financing--particularly given the massive investment needs of LICs--raises a raft of other issues, including:
- how to finance investment without taking on too much debt;
- how to attract investment without sacrificing too much fiscal revenue through costly tax incentives; and
- how to avoid resource dependency in the long run.
Most of these challenges and risks are not new, but they deserve renewed attention. In that spirit, the IMF recently sponsored a panel discussion to explore these issues, drawing on perspectives from LIC and BRIC policymakers, and development experts.
Strengthened ties have certainly boosted exports, helping to stimulate growth in LICs and contribute to their resilience during the global economic crisis. But, over the longer haul, what will matter is whether BRICs will be a positive force in making LICs more dynamic and productive through structural change--where economies shift from, say, agriculture to labor-intensive manufactures having a larger role.
So, the extent to which BRICs could be the building blocks for lasting growth in LICs may still be an open question. But, we took away from the panel discussion six essential factors that will help LICs lay the groundwork to benefit from this important relationship.
- Current LIC-BRIC ties may pose a risk to LICs becoming too reliant on raw materials--a commodity trap--but LICs can also learn from successful BRICs.
--On one hand, India and China's competitiveness in manufacturing and their large demand for natural resources may push up the relative price of commodities undermining incentives for LICs to shift into manufacturing.
--At the same time, Brazil and Russia (as well as advanced economies, such as Australia and Canada) have benefited from natural resources as a lynchpin for growth.
While it's difficult to do justice to the richness of the panel discussions, we hope it can foster an ongoing dialogue about how LICs can--particularly in building their relationships with BRICs--increase the volume and quality of investment, and associated financing, in a sustainable way.
From iMFdirect blog