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are antithetical to a free market. Consequently, liberalizing an economic system requires a Antitrust legislation outlaws
government to legislate antitrust laws that encourage the development of industries with as monopolies in order to
promote free competition
many competing businesses as the market can sustain. In such industries, prices are kept in the market place.
low by the forces of competition. By enforcing antitrust laws, governments can prevent
monopolies from exploiting consumers and restraining market growth.

Meet the BRICs

he opening case for this chapter highlighted the accelerating success of emerging

T economies.79 The focus of attention is now squarely on the vanguard of emerging

economies, the so-called BRICs: Brazil, Russia, India, and China. The BRIC countries,
although much larger in scale and scope than other emerging markets, represent trends that CASE
are developing throughout the world. Many presume that where the BRICs go, both good and
bad, others will follow. As we look at the emergence of the BRICs, we discuss the implications
for the economic environment as well as for company activity. Then, to close, we’ll identify
trends that threaten to crumble the BRICs and how their leadership is responding.

Changing of the Guard

First off, it’s critical to remind oneself where the BRIC countries were just 20 or so years ago.
Brazil was an economic basket case suffering hyperinflation, Russia was in lockdown behind
the Iron Curtain, India was a socialist country that had kicked out IBM and Coca-Cola, and
China was recovering from the bedlam of the Cultural Revolution. Presently, at current trends
and with reasonable projections, over the next few decades Brazil, Russia, India, and China will
become large, powerful players in the world economy. (See Figure 4.8.)
Originally, some thought it would take until 2050 before the BRICs bypassed today’s rich
countries. The global meltdown, however, fast-forwards the schedule; whereas China, India,

GDP FIGURE 4.8 The Largest

(2003 US$bn) Economies in the World:
50000 2050
Current projections see the
45000 economic order of the world
changing dramatically over the next
40000 generation. By mid-century, China
will likely claim the top rank,
35000 followed by the United States
and India.
30000 Source: Dominic Wilson and Roopa
Purushothaman, “Global Economics
Paper No. 99: Dreaming with BRICs:
25000 The Path to 2050” (Goldman Sachs,
2005), at www.gs.com (accessed
20000 October 15, 2007).

15000

10000

5000

0
China

United States

India

Japan

Brazil

Russia

United Kingdom

Germany

France

Italy
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170 PART 2 Comparative Environmental Frameworks

and Brazil (the so called BIC set) are growing, the economies of Germany, Japan, the United
Kingdom, and the United States are shrinking. Unquestionably, growth will resume for the latter.
Still, it will likely fall short of that in the emerging markets, given their aging workforces and
falling productivity rates. In the meantime, the speed of the BRICs’ economic recovery has
led some to see the global economic crisis as a pivotal milestone in the distribution of eco-
nomic power.
So, again, thinking of where the BRIC countries were 20 or so years ago and then project-
ing the same trend line out 20 years from today makes for, depending upon your perspective,
an astonishing or worrisome outcome. Certainly the current economic crisis makes any time
line for the changing of the guard speculative. It does, not, however change unfolding trends
that will culminate in the BRICs housing more than 40 percent of the world’s population,
holding a combined PPP-adjusted GDP of nearly $18 trillion, and completing the comeback
of the emerging economies. Moreover, the current crisis suggests that the most disruptive
phase of the transition will take place over the next decade.

Changing Markets
The BRICs, like many Bottom of the Pyramid markets, are on the verge of rapid market growth.
Historically, consumer demand takes off when GNI per capita income is between U.S. $3,000
and $10,000. The first economy to hit those levels was Russia; China, India, and Brazil are
steadily heading there—and if adjusted for purchasing power, only India has yet to cross this
threshold.
All of the BRICs, save Russia, have rapidly growing middle classes whose demand
aspirations are changing quickly. Analysts predict that the middle class will expand from
50 million to 583 million people by 2025. More immediately, between 2005 and 2015, over
800 million people in the BRICs will cross the annual income threshold of U.S. $3,000. Entry
into the middle class, besides permitting more consumption, often moves people from buy-
ing generic necessities to branded goods. By 2025, approximately 200 million people in the
BRICs will have annual incomes above $15,000.
And as income grows, so too does demand for what once were inaccessible luxuries. For
example, there are only two cars for every 100 people in China, as opposed to 50 cars per
100 Americans. By 2040, China’s car ownership will likely rise to 29 cars per 100 people. The
total number of cars in China and India combined could rise from around 40 million today to
750 million by 2040, thereby accounting for more than half of all cars on the world’s roads.
The recent introduction of low-price autos like Tata’s Nano—a small, affordable, rear-
engined, four-passenger car aimed primarily at the Indian market and costing U.S. $2,100—
may prove estimates conservative. Matching car ownership rates in the United States, for
example, would move the upper bound from 750 million to north of a billion cars. Similar
trends in virtually every product class, on the face of it, suggest market potentials last seen at
the start of the Industrial Revolution.

Big Plans but Big Problems

Notwithstanding the spectacular performance and potential of the BRICs, many are skep-
tical. In principle, observers note the endemic problem of recency bias, which is the
delusion that current trends will continue into the future. History shows great mistakes
made by companies, executives, investors, and officials who extrapolated the present into
the future. Inevitably, economic growth rates slow down, given an increasing base.
Moreover, advantages such as cheap labor or low-cost capital wane as growing demand
increases marginal price pressures. And always on the horizon is a black-swan event—a
large-impact, hard-to-predict, and rare event beyond the realm of normal expectations that
resets the game—such as the collapse of the Soviet Union, the emergence of the Internet,
and the global financial crisis.
Despite high-octane economic growth, the BRICs face futures of widespread poverty and
distorted income distributions. By 2025, the income per capita in today’s richer countries will
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CHAPTER 4 The Economic Environments Facing Businesses 171

exceed U.S. $35,000 for more than a billion people. In contrast, perhaps 2 to 4 percent of the
nearly 3 billion folks in the BRIC economies will hit that threshold. Longer term, income per
capita in the United States is projected to reach $80,000 by 2050, while China will likely be
just over $31,000, Brazil about $26,600, and India just $17,400. With the possible exception
of Russia, hundreds of millions of people in the BRICs will be far poorer on average than indi-
viduals in Germany, France, Japan, Italy, Canada, and the United States. Consequently, for
the first time in history, the largest economies in the world will no longer be the richest when
measured by GNI per capita.
Each of the BRICs struggles with its own particular problems. Today, Russia is probably
the most vulnerable of the set. Russia is dependent on various commodity exports, most
notably oil, for revenue. Amid the global economic crisis, oil fell from U.S. $147 per barrel in
July 2008 to below U.S. $40 in March 2009. This dropped Russia into a deep recession, with
GDP shrinking almost 10 percent in the first half of 2009. Additionally, Russia is considered
far riskier by foreign investors because of escalating tensions with the West and its failure to
create a legal and political infrastructure that respects the rule of law. Long term, besides its
aging and declining population, Russia’s uncertain government, environmental degradation,
and crumbling infrastructure confound growth projections. Some caution replacing the BRIC
notion with that of the BICs.
Brazil’s economic potential has been anticipated for decades, but it has struggled to
achieve expectations due to problems in income equality, productivity, and education. India,
in addition to other pressing economic and political challenges, has immense infrastructure
shortfalls and hundreds of millions of extremely poor people. China’s particular interpretation
of the rule of law, rights of citizens, environmental sustainability, and principles of democracy
poses problems. Too, China faces a steadily closing window of opportunity; by 2020, China
will have the largest number of both old and very old people on earth.
Finally, so-called green constraints shadow the bright futures of all. The emergence of the
BRICs sorely challenges the sustainability of the global environment. Global warming, dimin-
ishing raw materials, and escalating pollution suggest that there is a finite limit to how much
the BRICs can develop before exceeding the capacity of the global economy to supply them
and of the environment to support them. More worrisome, notes the Worldwatch Institute, is
the fact that if China and India, to say nothing about Russia and Brazil, were to consume
resources and produce pollution at the current U.S. per capita level, we would require two
planet Earths just to sustain their two economies.

Mixing Mortar
Leaders of these countries have not been idly sitting by, watching these threats ruin their future.
Overlapping ambitions and agendas have led the BRICs to develop bilateral and multilateral
cooperation. India and China, the world’s two most populous countries, formed a strategic
partnership to end a border dispute and boost trade. The agreement eased decades of mutual
distrust between the two as a result of a 1962 border war. “India and China can together
reshape the world order,” Indian Prime Minister Manmohan Singh proclaimed at a ceremony
for his Chinese counterpart, Premier Wen Jiabao, at India’s presidential palace.
Similarly, indications show a strengthening of ties between Russia and China. Bilateral
China-Russia trade was $58 billion in 2008, up from $20 billion in 2005, and on its way to
$70 billion by 2010. Both countries are leading members of the Shanghai Cooperation
Council, one of the most influential economic centers in the world. In many people’s eyes,
Russia, by rolling back democracy and reviving its imperialist past, is now more politically
aligned with the one-party state of China. Spearheading these efforts was Prime Minister
Putin of Russia, with his goal to build “a new world economic architecture” that would reflect
the rising power of emerging economies and the decline of the old heavyweights like the
United States, Japan, and leading European countries.
The global credit crisis has accelerated these trends. Steadily, the BRIC leaders have
been forming alliances that amplify their political, legal, economic, and strategic influence.
They have increasingly tried to bypass the U.S. dollar as the means to settle international
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172 PART 2 Comparative Environmental Frameworks

Joining Forces 왗
Here we see, moving left to
right, Presidents Luiz Inacio
Lula da Silva of Brazil, Dmitry
Medvedev of Russia, Hu Jintao
of China and Indian Prime
Minister Manmohan Singh
clasping hands during a group
picture shoot in Yekaterinburg
at the summer 2009 BRIC
leaders summit. Leaders from
the world’s top emerging
economic powers met for their
first summit to plot a strategy
to increase their clout amid
the global crisis.
Source: Philippe Lopez/Getty Images,
Inc.

transactions. The dollar, ever since the Bretton Woods Agreement of 1944, has functioned as
the world’s reserve currency; as such, it is widely held by governments and institutions
around the world and is used to finance international transactions, including trade and the
payment of debts.
Beginning in the spring of 2009, however, China and Brazil agreed to no longer use the
U.S. dollar in doing business, instead adopting a yen-cruzeiro currency-swap agreement.
China was involved in similar negotiations with Russia, again looking to eliminate the U.S.
dollar as the basis for bilateral trade. To cap matters, the leaders of Brazil, Russia, India, and
China met in Russia in June 2009 at the first ever BRIC Summit to discuss, among other
issues, the role of the dollar in the global financial system and, some suspected, to champion
a new supranational currency. In the backdrop was a sense, expressed by Prime Minister
Putin, that “The world is changing before our very eyes. Countries that seemed hopelessly
backward only yesterday are becoming the world’s fastest-growing economies today.”
Emerging economies, led by the BRICs, no longer wanted simply to be part of the world’s
outdated architecture—instead, they wanted to go forward into a brave new world largely
unencumbered by the past.

The Road Ahead

Inevitably, many speculate that the BRICs might turn into bricks in their march to miracle
economies. Granted, their governments have developed economically sensible policies,
opened trade and domestic markets, and begun building institutions that support economic
freedom. Still, Russia’s struggle shows how quickly conditions in one economy can fall out of
sync. Would the same hold for the others, people wondered, as they struggled to transition
from command-controlled economies to freer markets?
This chapter noted the importance of four preconditions of consistent growth—namely
sound macroeconomic policies; political institutions committed to transparency, fairness,
and the rule of law; openness to trade and capital; and strong education systems. By and
large, the BRICs, along with other emerging markets, meet the general spirit of some of these
standards. None, however, meets all. The fact that they continued to prosper as their rich-
country counterparts struggle suggested that either conventional understanding of markets
is flawed or the BRICs still face high hurdles in reforming their economies.
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CHAPTER 4 The Economic Environments Facing Businesses 173

In summary, the emergence of the BRICs signals that the next generation of economic
development of the global economy will be a thrilling ride. Even if the BRICs come close to
reaching their apparent potential, their success will redefine the structure of economic envi-
ronments, patterns of growth, and dynamics of economic activity. 䊏

QUESTIONS
1. Map the likely evolution of the BRICs. What indicators might companies monitor to guide their
investments and actions?
2. What are the implications of the emergence of the BRICs for careers and companies in your
country?
3. Do you think recency bias has led to overestimating the potential of the BRICs? How would you,
as a manager for a company assessing these markets, try to control this bias?
4. How might managers interpret the potential for their product in a market that is, in absolute eco-
nomic terms, large but, on a per capita basis, characterized by a majority of poor to very poor
consumers?
5. In the event that the BRICs fail to meet projected performance, what would be some of the impli-
cations for international business?
6. Compare and contrast the merits of GNI per capita versus the idea of purchasing power parity,
human development, and green economics as indicators of economic potential in Brazil, Russia,
China, and India.

SUMMARY
• The economic environment of a country shapes its attractive-
ness to foreign investors.
• Managers assess economic environments and forecast market
trends to make better investment choices, operating deci-
sions, and competitive strategies.
• Managers use several indicators to assess an economic envi-
ronment; meaningful indicators include growth rates, income
distribution, inflation, unemployment, wages, productivity,
debt, and the balance of payments.
• Managers improve economic analysis by identifying mean-
ingful indicators and then understanding how they interact
with each other.
• The benefits of doing business in a country are directly influ-
enced by the size of the market (GNI, GNP, GDP), the present
income of consumers (GNI, GNP, or GDP per capita adjusted
for purchasing power parity), and the likely future wealth of
consumers (in terms of income distribution, human develop-
ment, and sustainability).
• Green measures of economic performance take into consider-
ation the ecological welfare of the world in the belief that sus-
tainable development requires managers to heed the idea that
economic activity must ultimately “meet the needs of the
present without compromising the ability of future genera-
tions to meet their own needs.”
• The Bottom of the Pyramid refers to the billions of people liv-
ing on less than a few dollars per day yet whom some see as
the next market frontier of the global economy.
• The type of economic system is a strong predictor of a coun-
try’s present economic performance and future economic
prospects.
• The economic system determines who owns and controls fac-
tors of production and, by extension, the price and quantity
of goods and services.
• Economic freedom is the absence of government coercion or
constraint on the production, distribution, or consumption of
goods and services beyond the extent necessary for citizens to
protect and maintain liberty itself.
• In a market economy, the goods and services that a country
produces, and the quantity in which they are produced, are
not planned. Rather, price and quantity, conveyed via the
invisible hand, determine supply and demand.
• In a command economy, the government plans what goods
and services a country produces, the quantity in which they
are produced, and the price at which they are sold.
• A mixed economy includes some elements of market and
command economies. Market forces as well as the govern-
ment play a significant role in directing the investment activ-
ities of public and private enterprise and the consumption
behavior of individuals.
• Economic freedom is the degree to which governments inter-
vene in the economic environment. Free countries tend to
have higher economic growth, higher standards of living,
and more macroeconomic stability than do less-free or
repressed countries.