POLICY PERSPECTIVE
Meeting The BRIC's Generational Challenges
Vinod Thomas, Director-General and Senior Vice-President, Independent Evaluation Group, World Bank 3/1/2011 4:35:19 AM
All across the developing world, generating economic growth has assumed top billing as a priority of policy makers and politicians. The rapidly growing BRIC countries (Brazil, Russia, India and China) are no exception to this drive for rapid advancement. China has been posting record average growth rates of about 10 percent over the past three decades. Following a decade of eight percent plus growth, India has just crossed the income per capita threshold for a middle income country, and could be on its way from a lower middle to upper middle income and high income country status over a generation.
BRIC countries are entering the new decade with strong foundation for further growth. They are expected to play a leading role in the post-crisis global economy (Table 1). The crucial question in all these instances, however, is not only whether high growth will continue this year or in the next but how a country might see transformational changes. Related is the issue concerning the kind of investments and institutional changes that promise the most payoffs in such a transition. Meanwhile, generational issues, from great income divides to climate dangers, are proving to be critical. Realizing the country’s promise calls both for attending to the challenges of today and delivering on the responsibilities that come with higher incomes.
Such an enduring perspective takes us out of the tyranny of incremental thinking, the comfort zone of economists. It can prompt transitional action and motivate leapfrogging. Brazil’s entry into ethanol and bio-fuels, when faced with the same oil price hike as others decades ago, decisively boosted the country’s prospects. China’s bold opening to global investments lifted the game in the international arena. India’s entry into the global supply chain through information technology and off shore services revolutionized corporate strategies.
Equally, the neglect of future challenges is costly. Brazil’s neglect in the 1980s of growing debt led to decades of stagnation, while its subsequent enforcement of macroeconomic discipline even or especially under the left leaning Lula administration helped in the recent turnaround. The total neglect of the market cost the Former Soviet Union productivity and well being. The heavy damage to the environment in the industrial countries, and increasingly the BRICs and middle income countries today, lies behind the climate crisis affecting all.
In both BRIC countries and elsewhere, overlooking basic education earlier on cost decades of progress. Primary school enrolment has progressed in the past two decades. But to achieve transformation to high income countries, enrollment in secondary and tertiary education as well as attainment of the quality of education and learning outcomes are crucial.
BRIC countries face enormous prospects for transitioning into an affluent society — provided it meets its immediate as well as long-standing hurdles. What then are their generational challenges?
The first, overarching area involves governance. As the BRICs move to high income status, at the national, state and provincial levels, good governance is vital. Entrenched bureaucracies and the lack of accountability can hurt service delivery, impairing the quality of life. The public financial management system needs constant upgrading, and information for decision making needs to be timely. Basic governance of day to day life needs to strengthen in numerous ways — as a country is on its way to high income status.
The key would be to inject a results orientation and strengthen institutions. The central government can benefit from a greater degree of decentralization to state local authorities. The central and state governments can commit to smart government, to results, accountability and disclosure. The link to the private sector in forging such transparency and competition could improve governance.
Second, BRIC countries need to engineer greater inclusion in its growth trajectory, helping to reduce disparities. In India, the numbers of people living under $1.25 a day (by the new international poverty estimates) is estimated to have increased from 1981 to 2005 (Chen and Ravallion 2008) despite poverty headcount index fell more than 10 percentage points both in rural and urban India in the period of 1983–2005. In China, a truly impressive gain in poverty reduction was coupled with considerable increase in inequality as measured in Gini index both in urban and rural China from a very low level (Figure 1). There are rising income disparities within urban areas and persisting urban-rural gap in poverty measures. Brazil, on the other hand, has managed to reduce the poverty headcount and Gini indexes at the same time, albeit from a very high level of inequality, thanks partly to well targeted Conditional Cash Transfer programs.
There exist also disparities across states and provinces. Addressing these disparities will involve generating a higher growth in the poorer states and segments, much as Brazil and Mexico have done more recently, and unlike in China. The poorer states have a longer distance to catch up and by the same token, present greater growth possibilities. But these opportunities will only be realized with higher investments in their preparedness, as recent trends in some of the previously lagging states such as Bihar are showing.
Third, BRIC countries need to turn the environment and climate change into high priorities in the national interest. At the global level, the frequency and intensity of hydro meteorological disasters are worsening (Figure 2). If an improved reporting is a cause for the increased numbers of flooding reported, one would expect that this would affect mainly the less severe disasters. However, the proportion of less severe flooding events reported over the total number of flooding events has remained constant over the 1985-2008 period at about 55% indicating a relatively limited impact from improved reporting.
Climate change is beginning to have an economic impact (Parry, Canziani and others 2007; World Bank 2010). China’s white paper on the climate change discusses significant potential risks including a drop in the yield of the three major crops — wheat, paddy rice and corn, the continued rise in sea level in the coastal zone, reinforcement of the drought trend in northern China and intensification of water scarcity (Information Office of the State Council of the People’s Republic of China 2008). Brazil cannot rule out that the Amazon turns mostly into cerrado. Infrastructure, designed to cope with an increasingly unpredictable climate, will likely become more expensive. India needs to consider the possibility that the monsoons might fail entirely. New crop diseases could emerge — we are seeing the rise of a wheat rust with potentially global impact.
Having a climate-smart world is feasible, and the costs for getting there will be high, but they will still be manageable if actions are taken now. Otherwise options disappear and costs increase as the world commits itself to high-carbon pathways and largely irreversible warming trajectories. In fact, there is huge scope for emission reductions that can be achieved at low or negative cost, particularly by increasing energy efficiency.
One example is the massive use of efficient light bulbs at the household level in Bangladesh as a faster, cheaper, and less polluting alternative to building fossil fuel power plants. Another is the phase out of burdensome and regressive energy subsidies as implemented in Indonesia. Brazil has made a great progress in slowing the deforestation in the Amazon, which has fallen steadily, declining from an average of 1.48 million ha per year during 2005-2007 to 1.3 million ha in 2008. Similarly, protected areas increased from 79 million ha in 2007 to 107 million in 2009. With increasing urgency to reduce GHGs and conserve biodiversity, forests worldwide have crucial significance; among them the Amazon is perhaps most precious global public goods.
Fourth, new and innovative ways of sustaining growth need to be found. Unleashing the growth potential has been the vital source of growth for BRIC countries. The key now would seem to be to go beyond traditional growth models in relying on capital formation and bring in the dynamic role not only of technology and productivity but also innovation.
Among BRIC countries, China has particularly strengthened the R&D capacity in the past decade. In 1998, China spent 0.65% of its GDP on R&D, the lowest rate among BRIC, but in 2007, the spending for R&D grew to 1.49% of China’s GDP, the highest among BRIC (Figure 3). In the same period, the number of researchers in R&D per million people in China increased almost three times from 390 to 1,071. Russia and Brazil have been maintaining the investment on R&D at about one percent of its GDP. Russia has historically had strong capacity for R&D with about 3,300 researchers in R&D per million people. While these countries are undoubtedly making progress in this area, they still have a gap to fill compared to Korea which invested 3.5 percent of its GDP for R&D and had 4,627 researchers in R&D per million people in 2007. In India, domestic R&D spending has not exceeded one percent of GDP.
In the 1960s, the application of irrigation, nitrogen fertilizer, pesticides and improved crop varieties realized productivity growth in agriculture and made the Green Revolution possible. With less than 20% increase in the amount of area cultivated, cereal production almost tripled in 40 years from 1960 to 2001 (Figure 4). Since the 1990s, India has benefited hugely from the rapid development in information and communication technologies. As the first (easy) phases reform-driven growth is exploited, new avenues for generating high growth need to be supported in agriculture, industry and services.
The growth prospects of BRIC countries over the next three decades are more favorable than that of the other countries. But increasingly, the realization of the future promise hinges on keeping an eye on the future, not only in the interest of bringing about quality outcomes, but also to ensure that growth can indeed be sustained and the nations can deliver on the possibilities as well as responsibilities that come with a high income status.
References and Additional Thinking
- Chen, S., and M. Ravallion (2008). “The Developing World is Poorer than We Thought, but No Less Successful in the Fight against Poverty”. Policy Research Working Paper 4703, Washington, D.C.: World Bank
- Henao, J., and C. Baanante (2006), “Agricultural Production and Soil Nutrient Mining in Africa: Implications for Resource Conservation and Policy Development,” Background Paper, Africa Fertilizer Summit, Abuja, Nigeria, June 9–13.
- Information Office of the State Council of the People’s Republic of China. 2008. China’s Policies and Actions on Climate Change. Beijing: China.
- International Monetary Fund. 2010. World Economic Outlook (WEO): Recovery Risk and Rebalancing. Washington, D.C.: International Monetary Fund
- Kohli, H., and A. Sood eds. 2010. India 2039: An Affluent Society in one Generation. New Delhi, India: Sage Publications India.
- Parry, ML; Canziani, O; Palutikof, JP; Hanson, C; van der Linden, P, eds. 2007. Climate Change 2007: Impacts, Adaptation and Vulnerability. Contribution of Working Group II to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change. New York, U.S.A.: Cambridge Univ Press.
- World Bank. 2007. Unleashing India’s Innovation, Washington DC: World Bank.
- 2008. Climate change impacts in drought and flood affected areas: Case studies in India. Washington DC: World Bank.
- 2009. Secondary Education in India: Universalizing Opportunity. Washington DC: World Bank.
- 2010. World Development Report 2010: Development and Climate Change. Washington, D.C.: World Bank.
- Forthcoming. Perspectives on Poverty in India: Stylized Facts from Survey Data, Washington DC: World Bank.
(Vinod Thomas is Director-General and Senior Vice-President, Independent Evaluation Group (IEG) at the World Bank Group. He was formerly Country Director for Brazil and Vice President of the World Bank, a position that he held from October 2001 to July 2005. In this capacity, he managed the Bank’s large lending and non-lending portfolio in Brazil, helped shape the dialogue with the government and the Bank’s Brazil Country Assistance Strategy, and participated in key events with the government. Prior to that, he was Vice President of the World Bank Institute (WBI), where he sharpened the Institute’s focus and quality and expanded its mandate and impact. Before heading WBI, he held positions as Chief Economist for the World Bank in the East Asia and Pacific Region. He was the staff Director for the 1991 World Development Report, entitled “The Challenge of Development” which assessed the world’s development experience. He was also Chief of Trade Policy and Principal Economist for Colombia. Vinod Thomas joined the Bank in 1976. He has a Masters and PhD in Economics from of the University of Chicago. He has taught at Vassar College and the University of Sao Paulo, Brazil. He has written numerous books, reports and journal articles.
The views expressed in the write-up are personal and do not re?ect the official policy or position of the organization.)
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