Rebacca Wilder: Two BRICs – India vs. Brazil

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This post is a guest contribution by Rebecca Wilder*, author of the of the News N Economics blog.

I started research on India to further explore economic prospects after reading and (excellent) FT article on necessary labor reform. In doing so, I now see a (possibly) much flatter economic growth trajectory for Brazil. Here is an excerpt from the article (last paragraph):

Over the years, numerous academic studies and official reports, including the Second National Labour Commission Report (2002), have recommended major reforms of India’s labour laws. The problem is absence of political will. Until that will can be mustered, the expansion of decent non-agricultural jobs will continue to fall far short of burgeoning supply (the “demographic dividend”), condemning many millions to insecure and ill-paid, informal urban employment (or even unemployment) and mounting underemployment and distress in rural India.

The data on the Indian labor market is patchy at best; that is, if you want something a little more descriptive than an annual unemployment rate. But how does India compare to its peers? The BRICs, for example (Brazil, Russia, India, and China). What I found is, that India is setting itself up pretty well to grow quickly – a finding that is consistent with the India-part of the overall BRIC theme (link to Goldman Sachs paper):

The results are startling. If things go right, in less than 40 years, the BRICs economies together could be larger than theG6inUSdollar terms.By2025 they could account for over half the size of the G6. Currently they are worth less than 15%. Of the current G6, only the US and Japan may be among the six largest economies in US dollar terms in 2050.

In fact, the BRIC data, side-by-side, paints a darker picture for Brazil’s growth trajectory than that for India. Let’s see why.

India, China, and Russia increased their respective investment shares of GDP over the latest decade- Brazil, too, but at a much slower rate. India (as I discussed in a previous post) has done this mostly through reducing barriers to inward foreign-direct investment.



However, more domestic saving is likely needed in India despite the falling of its consumption share (right graph) over the same 10-year period. India gets a bigger bang for each investment buck spent, so save more and supplement the inward FDI.

In stark contrast is Brazil, an economy that is clearly saving at a much lower rate than its peers. The consumption is a large 63.1% of GDP, essentially unchanged over the latest decade. And for a developing economy, the investment share is remarkably low in levels, 16.4% of GDP in 2008 (compared to India’s 32.2% share).

In all, the saving and investment story adds up to a level of productive capital stock. Without investment, there is no capital stock growth. And without capital stock growth, there is little productive GDP growth.


The chart above illustrates the capital stock per worker (CW) for Brazil, India, and China. Clearly, Brazil’s productive capacity per worker is the lowest – with CW being quickly outpaced by India, and especially, China. India’s CW is on a respectable trajectory, but even an incremental increase in the rate of investment (i.e., the capital stock) could have profound effects on productivity and growth. Here is what the FT says:

Why is China the “workshop of the world” when Indian labour is even cheaper and her entrepreneurs admired worldwide? There are many reasons, including (until recently) the anti-foreign-trade policies and small-scale industry reservation policies, noted earlier, as well as poor infrastructure in power, roads, water and ports. Perhaps even more important are the restrictive labour laws and certain other regulations, which encourage Indian manufacturing units to “stay small”, thereby forgoing the classic industrial economies of scale and scope.

With labor reform and ongoing policy focused on domestic investment, India’s economy is on a path that should turn up quickly. This is Solow’s premise: low income countries invest in productive capacity, and the growth rates can be quite startling given the base effects (i.e., starting from a relatively low production level).

To be sure, there are risks. Currently India’s average income is low compared to its peers, based on years of questionable policy. Among the BRIC countries, India’s welfare measure (per-capita income) is the lowest, and that ranking is not expected to change by 2014 (see chart from a previous post, using data from the IMF World Economic Outlook in October 2009).

Brazil, on the other hand, is not setting itself up for sustained growth. The country is now enjoying the economic benefits of policy reform and open capital markets, an economic adolescent if you will. The next step in Brazil’s development is clearly to adopt policies that grow saving and investment.

Source: Rebecca Wilder, News N Economics, January 7, 2010.

* Rebecca Wilder is an economist in the financial industry. She was previously an assistant professor and holds a doctorate in economics.

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3 comments to Rebacca Wilder: Two BRICs – India vs. Brazil

  • Ron Glandt

    This is a good article but I wonder about the fact that some of the statistics are from 2008 and investment in Brazil is currently increasing rapidly.

  • Jim Kelly

    The conclusions drawn concerning capital per worker may be correct, but you can’t get there based on the chart. The chart data has been normalized to 1980 so it only reflects relative growth from that point. If Brazil started from a higher level in 1980 the chart would only indicate catch-up in China & India.

  • derek

    Unfortunately, like all anglo-judeo ‘analysts’, Rebecca really does not understand Brasil.

    Brasil in the last few years just came out of a 20 year high inflation cycle. Inflation does not encourage personal savings. A savings culture will take a little while more to become ingrained in the population, but this will happen over the next 5 years.

    Also, given Brasil’s political & economic status, it’s high return on Capital & it’s relatively ‘developed’ economy status, investment in Capital stock is being drawn from many other sources.

    The Brasilian Govt., BNDES & Central Bank are well aware that investment in productive stock has to be increased (follow recent speeches by Mr. Coutinho/BENDES, etc.).

    I’m curious to know how Rebecca classifies the massive investments in Dams, Energy extraction & refinement (Petrobras’ capital budget of $172 billion over the next 5 years), Agribusiness, Infrastructure, etc. that are currently occurring in Brasil.

    Finally, how many times has Rebecca actually been to Brasil & how much time has she spent there?

    This is very superficial 3rd rate analysis, gleaned from various data points & extrapolated senselessly. In other words alot of misinformation.

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