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In early September, 2017, the leaders of the five BRICS countries—Brazil, Russia, India, China, and South Africa—met for their ninth annual summit in the old port city of Xiamen. The BRICS began life as the BRICs (minus South Africa), an investment category cooked up by emerging markets analyst Jim O’Neill in 2001. As it evolved into an actual political bloc, China insisted on the inclusion of South Africa to provide geographical balance. Since 2010 the leaders of the BRICs, and since 2012 the BRICS, have met every year to celebrate their economic success and growing power in the world.

And irony. “Keenly aware of the negative impact of corruption on sustainable development, we support the efforts to enhance BRICS anti-corruption cooperation,” the five opined in their closing declaration at Xiamen. But to be fair, BRICS statements on feel-good topics like corruption, environmental protection, and the like are just platitudes, and everyone knows that. The real issue is economic development.

When it comes to economics, corruption is not the only thing that the BRICS have in common. All five are middle-income countries with declining poverty rates but persistently high levels of income inequality. They are all making big investments to modernize their physical and human infrastructure and have the government capacity to follow through on these investments. And each of the BRICS is the dominant economic power in its respective region.

Of course, they differ dramatically in size. China is the whale, South Africa the minnow of the BRICS. China’s economy is more than twice as large as those of the other four countries put together. But as in biology, size really isn’t that important in economics. Look beneath the surface, and the big difference is structure.

 

Four fishes, one whale

South Africa may be much smaller than Brazil, Russia, and India, but all four are similar in economic structure. They have large domestic markets that are only loosely connected to those of their neighbors. They import mainly global consumer goods and export relatively simple products: agricultural and mineral commodities or (in the case of India) labor-intensive business services. In short, they are old-fashioned developing countries, trading their specialized products into the world market in exchange for the general necessities of modern life.

China is an altogether different economic species. Since 1980 China, once an autarchic economic isolate, has come to be deeply embedded at the heart of global manufacturing networks. This integration isn’t so much global as regional. The Asia-Pacific region is crisscrossed by a dense network of industrial supply chains for all kinds of manufactured products. Japan, South Korea, and Taiwan are among China’s top trading partners, and in fact five of the top six sources of foreign investment into China are Asian countries (the sixth is the United States). China’s post-1980 economic growth was jump-started by outsourcing from Hong Kong, and East Asian economic integration has continually deepened ever since.

Europe and North America host similar integrated production networks, but most of these networks are encapsulated under a single, unified economic governance regime: the European Union for Europe and (in effect) the United States for North America. Each of these also has a wider framework for regional economic governance, respectively the European Economic Area (EEA) and the North American Free Trade Agreement (NAFTA). East Asia is, by comparison, the Wild West of economic governance.

The result is much more intense competition among East Asian countries for opportunities to move up the value chains of regional production networks than is possible between states of the United States or countries of the European Union. China has been the main beneficiary, clawing its way up East Asian value chains as it progresses from cheap assembly work to the hosting of sophisticated design hubs.

China as a whole is still far below Japan in the Asia-Pacific economic pecking order, but China is a big country, and parts of China are becoming quite sophisticated. Shanghai and Shenzhen are rapidly closing in on Seoul and Taipei. Regional China may always lag behind the developed countries at the top of the global economy, but China’s east coast cities already display many of the trappings of “developed” economies, despite lagging on social indicators. The East Asian economy isn’t big enough to support all of China at a developed-country standard of living, but substantial areas of China can enjoy high incomes through integration into regional production networks.

 

The BRIS challenge

The other four BRICS do not share such opportunities for integration and upgrading. The unfortunately acronymed “BRIS” countries are economically cut off from their surrounding regions, and even if they were to seek greater economic integration they would find little advantage in doing so. Brazil cannot hope to climb up South American value chains because there are no South American value chains to climb. Russia is already at the economic center of the moribund post-Soviet Eurasian Economic Union. India and South Africa border some of the poorest countries in the world.

Unlike China, the four BRIS countries receive no substantial foreign investment from their neighbors. Unable to benefit from value chain spillovers, they can only grow through good domestic governance. And this is precisely where all five BRICS fail. Offshore pockets of true development may emerge in China, piggybacking on the good governance of neighboring countries, but the great BRIS metropolises lack such advantages. Sao Paulo, Moscow, Mumbai, and Johannesburg are never likely to match Shanghai and Shenzhen because they are not closely connected to first-world cities like Seoul and Taipei.

All of the BRICS should work to improve economic governance by reducing corruption, expanding fiscal capacity, and improving the rule of law. China, to some extent, doesn’t have to. The others have no choice. But that doesn’t mean that they will succeed. It just means that they are doomed to languish in the middle-income trap.

Salvatore Babones

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