’MURICA.

No, the BRICs Aren’t Overtaking America

Despite 15 years of hype, developing countries still have a long way to go to claim the 21st century as theirs.

12.13.15 5:01 AM ET

As the great Chinese great economic catch-up loses steam and growth slows, the retreating tide reveals just how far Brazil, Russia, India, China, and South Africa—the BRICs—are from overtaking the United States and its Western allies. For 20 years, benefiting from very low income levels and a huge labour market combing with a willingness to embrace Western investment, China has sustained double-digit growth. Now, as the labour pool dries up and labour costs rise that growth has slowed from 12 percent, to 10 percent and now 7 percent, and probably in reality only 4 percent. Lower Chinese growth does not just mean that the day of clearly overtaking the United States is postponed. It also means that the three BRICs—Russia, Brazil, and South Africa—who trail in China’s wake and depend upon selling their commodities and raw materials to the Chinese market, have begun to shrink as well.

Russia, most startlingly, has fallen from being just over a $2 trillion economy in 2013 to a $1.2 trillion economy in 2015 (by contrast, Texas had a GDP of just over $1.72 trillion in 2015). Equally, Brazil has fallen from being just under a $2.4 trillion economy in 2013 to slightly larger than Texas in 2015 at $1.8 trillion in 2015. South Africa’s much smaller economy will also contract in 2015. Only India, much more disconnected from the Chinese economy, seems to be able sustain significant growth levels.

The immense underlying strength of the U.S., from deep and liquid pools of capital, energy resources, and huge stable continental markets, gives America advantages that no other state, BRIC or not, can match. As some BRICs shrink and other flail the world will move into its second American century.

The world looked a very different place in June 2009 in Yekaterinburg, Russia, during the first BRIC Summit.

After the disasters of the occupation of Iraq, compounded by the collapse of Lehman Brothers in September 2008, American global leadership was slipping away. Washington and its allies looked incompetent over its handling of the Middle East, not to mention corrupt, greedy, and hypocritical over the financial crisis. The scorn in Moscow, Beijing, and Delhi was deafening… “What is so good about ‘open’ markets,” it was said, “if they are rigged by the bankers?” “Was the Washington consensus little more than a charter for Western bankers to loot the planet?” “You say we are corrupt, but what about New York and London?”

As America and its allies spent hundreds of billions of dollars rescuing their banks and printing money to keep their economies afloat, the BRICs, led by China, were going to lead the emerging countries in rebalancing the world order. Straight-line trajectories of Chinese growth foretold a China that would not only be larger than the U.S., but then go on to comfortably put a distance between it and the U.S. Relying on Chinese growth, countries such as Brazil and Russia saw huge demand and rising prices for their commodities into the ever-distant future.

Alexei Miller, the CEO of Russia’s state-owned gas giant Gazprom, predicted that the market capitalization of his company—then around $350 billion—would be the first business to achieve a trillion dollar market cap. (Gazprom’s current market cap is approximately $50 billion.)

These ambitions were not all delusion or smoke and mirrors. When British economist Jim O’Neill coined the term BRICs in 2001, he had recognized something that was very real. Globalization has begun to unlock economic growth in many developing countries. The potential of the four original BRICs (South Africa was added later) was significant. They all were large countries, with large populations, low levels of income (in 2001) and significant resources was immense. These four countries when O’Neill produced his paper naming them the BRICs were driving 60 percent of global economic growth.

While real value was being unlocked, tens of million being lifted out of poverty, and China was transformed, there was also a real danger of overstating what the BRICs could deliver. Some hype was inevitable, however; Western failures in Iraq and the financial crisis reinforced a narrative of emerging markets going from strength to strength and inevitable Western decline.

There were two major difficulties with this hype. The first was the addiction, particularly in respect of China, of taking a straight-line projection of Chinese growth. Two decades of double-digit growth is an immense achievement but it does not mean that it is likely to go on forever. The main drivers of that growth were the deep pools of labour now exhausted (the working-age population has now peaked in China in 2014 and is now on a declining path); low labour costs, which in large parts of urban China are, with transport costs, rivaling U.S. labour costs; and huge infusions of foreign and domestic capital (the latter from very high Chinese savings rates). All were unsustainable.

The second problem with BRIC hype was that lack of connection between the economic growth of China as the driver of the BRIC economic engine, and the dependence of Brazil and Russia, particularly on Chinese-driven high prices for their commodities. Once China slowed, those two BRICs would shrink (unless they diversified their economies, but they instead decided to take the easier option of riding the Chinese wave).

The Chinese Communist Party leadership now has an immense economic challenge on its hands. By 2034 it will have 87 million fewer people of working age, and 149 million more dependents. The population by then will be falling rather than rising. In the meantime, the existing cheap labour pool and the high capital investment, low technology model of economic development is becoming exhausted.

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The way forward is to move up the value chain. Intellectual property needs to be protected to encourage innovation, which requires entrenching substantial rule-of-law principles into Chinese soil. Innovation also requires the free flow of ideas, free speech and free thinking. The 21st century conundrum question for China is to ask how far is the Party willing to sacrifice control and grant freedom in order to gain prosperity?

To the comfortably cynical American, surely the so-far capable and competent Communist Party leadership will deal with their problems. The current slowish growth is only a pause on the Chinese upward curve to global leadership. America, by contrast, is finished. Congress is crazy and dysfunctional and Trump is leading the Republican presidential pack.

It is far too easy to underrate America’s future. After dealing with the Kaiser, the Great Depression, the Nazis, Imperial Japan, the Soviet Union, and OPEC in the 20th century, as well as launching Marshall Aid, the Civil Rights movement and the Great Society and the Reagan Recovery, these current problems are not exactly overwhelming for the republic. Unless the current American generation is so signally different from its forefathers, America can deal with these problems.

One major difficulty for the America and the whole of the West is that with the modern media you see pretty much everything in the West, warts and all. This actually is a feature of the vigor of the West, but within Western countries and outside the West, the exposing of corruption, venality, and dysfunctionality in bright media lights gives the appearance of weakness, and that appearance of weakness underpins a narrative of Western decline.

But that appearance is false. America is not declining. The U.S. with immigration and high native birth rates will be approximately 400 million by 2050. By then, the U.S. population will be increasing each year, as the Chinese population is decreasing. A growing population with high GDP per capita will be unreachable for China and any other country. Safe within its own continent, with its huge landmass, immense natural resources, the greatest universities and research centers on earth, America has the means, resources and ultimately the will to ensure a second American century.