Historically, emerging economies characterised by a high degree of trade and/or financial openness were strongly affected by developments in advanced economies. Recent developments suggest that traditional one-way interaction is making way for a more complex and intensifying two-way interaction – or interdependence, if you will. The economic relationship between the G-3 and the BRIC countries (Brazil, Russia, India and China) is, by and large, a complementary one.
Economists – and not just dependistas – tend to look at emerging economies as being economically and financially dependent on advanced economies. Due to their smaller size, greater financial dependence and, not infrequently, greater reliance on commodity exports, the price of which used to be highly correlated with DM growth, the EM used to catch the proverbial cold whenever the DM sneezed. With the exception of extreme events (e.g. the oil shocks of the 1970s), the EM were, generally speaking, very sensitive to the economic and financial developments in the DM, while the reverse was not true. In short, the EM-DM relationship was largely a one-way street.
With the growing weight of the EM in the global economy, this largely one-way interaction has been mutating into greater two-way interaction. The EM are growing significantly faster than their DM peers. The OECD projects that the EM will account for nearly 60% of global output by 2030. The “catching up” has been nothing if not impressive over the past decade and a half. Take the BRICs, for instance. By 2015, they will account for more than 60% of combined G-3 (Germany, Japan, US) GDP, up from less than 10% in 1990. (This of course explains the creation of the G-20.) China is set to become the world’s largest economy before the middle of the next decade.
Recent EM economic performance also suggests that it may be time to re-think DM-EM relations. First, EM growth, perhaps for the first time ever, has been “leading” the global economic recovery. True, the EM failed to “decouple” during 2008/09, but they have, in the aggregate, recovered more quickly and more vigorously than most DM. Second, significant EM growth, combined with their greater economic weight, has been strongly felt in global commodity markets and trade-dependent economies, both emerging and developed, over the past few years. Third, greater financial openness and/or stronger current account positions are turning the EM into international investors in their own right. Fourth, solid fundamentals in most major EM and greater monetary and fiscal space provide the EM with greater flexibility to respond to potential future shocks than most DM. All of this will lead the EM, and especially the BRICs, to play a bigger role – economically, financially and politically.
The BRIC countries are becoming increasingly important to the G-3 countries. China and India, for instance, maintained strong growth rates throughout the crisis, registering average real GDP growth in 2009 of 9.3% and 7.4%, respectively. This has helped underpin, for instance, Germany’s unexpectedly strong recovery. More generally, the BRICs already account for 10-20% of G-3 exports. As a share of GDP, Germany is more exposed to the BRICs than Japan and the US, with exports accounting for 3% of GDP (or USD 100 bn), compared with 2.5% of GDP (USD 115 bn) in Japan and less than 1% of GDP in the US (USD 125 bn). Not surprisingly, China is the most important and fastest-growing export market for all G-3 members. In terms of G-3 outward FDI, the BRICs are less important than with regards to trade – at least as regards stocks.
German and US FDI in the BRICs account for 4-6% of their total OFDI (outward FDI). Only Japan’s FDI exceeds 10% of its total outward FDI, the bulk of which is, not surprisingly, accounted for by China. Once again, as a share of GDP, Germany has the largest OFDI in the BRICs among the G-3. It is not difficult to see the basic complementarity between slowly growing, capital-rich, high-tech G-3 economies and fast-growing, (relatively) low-tech, capital-poor BRIC economies. It is not difficult to see how geography has an impact on the distribution of G-3 trade and investment in the BRICs. For instance, Germany’s resource dependence and specialisation in high-tech capital goods create a good fit with Russia’s natural resource wealth, dependence on manufacturing and especially capital goods imports and the Russian government’s professed desire to modernise the economy.
China’s demand for technology and Japan’s quest to access new markets given the relative maturity of its own domestic markets create a similarly favourable, but perhaps somewhat lesser fit given the potentially intensifying resource competition and continued political rivalry. Economically, Sino-German relations look like an unambiguous win-win combination. So does the Japanese-Russian combination, which continues to be burdened by a long-standing territorial dispute, however.
Last but not least, it is worth noting that the US has thus far taken relatively little advantage of the “rise of the BRICs”. This is largely, not exclusively, due to its overall lower degree of trade openness and a smaller stock of outward FDI as a share of GDP. Whether measured as a share of GDP or as a share of total exports or outward FDI, however, the US has some “catching up” to do. After all, the weight of the BRICs in the global economy will continue to grow and trade and investment are the most direct ways in which to take advantage of it.