Are the BRICS Countries Becoming the BRICK Countries?

December 2012 | Statistics

In 2011, the unofficial union of the BRIC countries joined together with the Republic of South Africa. But analyses done by many economists and social indicators are showing that besides its rich reserves of natural resources, South Africa has nothing else to merit its entry in the bloc. In our opinion here at the World Economic Journal, in the world of developing countries, a worthy country to include in the ranks is another “bloc” country, such as Kazakhstan.

Since 2001, the world has been familiar with the abbreviation for the BRIC countries, coined by Goldman Sachs analyst Jim O’Neill, which united four rapidly developing countries: Brazil, Russia, India, and China. They take up more than 25% of the habitable surface area on the planet altogether, and 40% of the world’s population live in them. The BRIC countries are already producing a significant portion of the world’s GDP as well, and by 2050, the collective sum of the economies of those four countries may even overtake that of the G7 countries. If the question is what the next country to join the BRIC “club” should be, then, in our opinion, a suitable candidate would be the country of Kazakhstan.

On one hand, the economy of the Asian country is two times smaller than the economy of South Africa, but on the other hand, it is growing more dynamically. In 2011, the growth of Kazakhstan’s national GDP amounted to 7.5%, and using that indicator, it ranks 23th in the world, while in comparison, the economy of South Africa grew by 3.1% in the same time frame, putting the country at 119th globally. And over the last ten years, the dynamics of Kazakhstan’s GDP have always been positive (even during the crisis of 2009), and, as a rule, it has been better than even Brazil and Russia. The Republic of South Africa’s growth, in comparison, has been much more modest.

Paying the Balance
For dynamic development, it is necessary to have sufficient financial resources, and to achieve this, the authorities usually have two options: either borrow from or convince potential investors. When it comes down to the volume of debt, though, the situation becomes more ambiguous. The amount of government debt that Kazakhstan owes is just $23 billion, or 12.4% of their GDP. Compared to other countries in the BRICS countries, only Russia has a lower debt-to-GDP ratio (8.3% of its GDP), and in South Africa, that same ratio is 34%. Then again, the volume of foreign debt in Kazakhstan is higher than in South Africa: in absolute terms, Kazakhstan owes $123 billion, as opposed to South Africa’s $46 billion. Compared to GDP, the ratio is 66% and 11%, respectively.

If we were to talk about public debt per capita, then among the BRICS countries, the largest indicator points to Brazil, which owes nearly $7 thousand per citizen. In China, Russia, and India, the numbers per capita reach $2.4 thousand, $1.1 thousand, and $700, respectively. Comparatively, that number in South Africa is $2.7 thousand, and in Kazakhstan, it is $1.3 thousand – almost twice as small.

All of the BRICS countries and Kazakhstan are increasing their international reserves to ensure the reserve strength of their economy.  One of the major goals in accumulating reserves like this is for a country to cover its debts. Above everyone else, China succeeded in this the most: its reserves are higher than both its national debt and its external debt. The rest of the countries of the world can only envy the Chinese in their success and “save their pennies for a rainy day”. As a result of 2011, South Africa had enough reserves to theoretically extinguish their external debts entirely, and Kazakhstan has enough to cover its debt.

International Reserves

For investors as well, judging by the volumes of Foreign Direct Investment in 2011, Kazakhstan is more interesting than South Africa. The general inflow of FDI into the Kazakh economy more than doubled, and increased by 6.7 times per capita. “Official Astana”, over the last year, helped create several entrepreneurships in the best possible conditions, ensuring stability and clear rules in the country’s market, which is very important to potential investors.

If we also consider the foreign trade levels in both South Africa and Kazakhstan, then we can note that the latter is developing more dynamically. In 2011, the volume of Kazakh exports grew by 46%, as compared to 22% in South Africa. Throughout Kazakhstan, the trading turnover increased by 41% and the balance closed with a surplus as well. In South Africa, trading growth is moving slower, and the balance, despite the fact that it is positive, teeters on the brink of zero.

Trade

One important feature of Kazakhstan is that, in comparison to South Africa, it has close economic ties with two countries in the BRIC block. Its ties with Russia are the customs union and the Common Economic Space. Its relationship with China is quickly developing at the same time – it is already ahead of Russia in terms of turnover volume with Kazakhstan. In 2006, China jointly built the “Atasu-Alashanku” pipeline, which is where China get its Kazakh oil, with the resources from the base controls of the Chinese gas company, CNPC. Some other major projects, which were built with participation from the east, included the creation of the giant petrochemical complex in the Atreyu suburb and the reconstruction of the Shymkent refinery. In Astan, there is a transport corridor between Western China and Europe, a part of which may become the «Zhezkazgan – Beineu» railroad.

The level of development of informational-communication technology also speaks in Kazakhstan’s benefit: looking at the volume of telephone lines for every 100 people, Kazakhstan is much closer to the leader of the BRICS countries – specifically, Russia, with India and South Africa lagging not far behind. The ratio of mobile connection subscribers in the population in Kazakhstan and South Africa are approximately the same, but the number of users who have Internet access in the Asian country is twice as large. Kazakhstan, in this regard, is not inferior to Russia by a lot again, which is ranked first among the BRICS countries.

Natural Resources

South Africa is one of the leading countries in the world for mining and the production of raw minerals. And, by the looks of it, this is one of the main criteria when it comes to qualifying a country as part of the BRICS block. The latest estimates show that of the world’s natural resources, the African country has 95% of its metals in the platinum group, 37% of its chromite, 26% of its vanadium, 22% of its manganese, 20% of its rutile, 14% of its iron ore, 12% of its gold, and 10% of its ilmenite.

But Kazakhstan is no less rich in useful minerals (see table). First of all, it has raw energy (which South Africa cannot boast an abundance of). For this reason, the economy of Kazakhstan, in many ways, is reminiscent of Russia’s. It suffers from an excess dependence on a commodity that is entirely controlled by the global market: three-quarters of its exports comes from mineral products, and another 13% from metals. The contribution of oil in industrial production alone, according to the latest data, is more than 50%. And almost half of the primary sector consists of foreign direct investments. In connection with the slowdown of the economy, Europe and China are not adding to the Kazakh industry. At the end of October, the Ministry of Economic Development and Trade forecasted the GDP growth for 2012 to be 5.4%.

The importance of diversification can be recognized at the very highest level, but any realistic progress in this direction over the past year was very slim. In comparison, the raw material energy supporting the economy has a foothold in the world and is capable of making Kazakhstan one of the top five oil-producing countries. And this deal is not far from the future: the pilot/production phase of a new project may start as soon as March of next year. According to estimates, the extraction of oil in the country can practically double over the next decade.

However, the dependence on natural resources is not necessarily seen as a bad thing. Just as with the situation in Russia, Kazakhstan incomes accumulated with significant reserves in the first half and the middle of the 2000s – more specifically, they accumulated in the National Fund. And last, the domination strategy of certain company branches with a significant share of government capital (or even the government itself) shows the character of Kazakhstan is akin not just to Russia, but to China as well.

Resume

So most of the economic indicators and the social development of the Republic of South Africa fall short of Kazakhstan. Undoubtedly, South Africa has more human resources. But in today’s world, it is also important to pay attention to the quality of life in a population, the level of education, and so on – and based on all these indicators, South Africa loses significantly to Kazakhstan. South Africa was accepted into the BRICS bloc because of its abundant natural resources, but it is possible that right now, with everyone paying more attention to every aspect of an economy’s development, that is not enough. Besides, the way we see it, Kazakhstan is similarly abundant in natural resources. In addition, the quality of life in the population is continuing to improve, and the unemployment level is decreasing. Kazakhstan’s economic policy allows it to continue to occupy many positions in the list of world rankings. And all this, without a doubt, speaks to the fact that, if it were to be part of the BRIC countries, Kazakhstan would bring the group up to a decent level as compared to right now, with the fifth country being South Africa.

Joerg Bongartz, Head of the Deutsche Banke in Russia:
“The term ’BRICS’ is a shiny marketing creation that emerged many years ago. The countries that were included in the bloc had many things in common – a rapidly growing economy, good potential, and enormous resources. When discussing options for changing the bloc, then those are essential criteria. It seems to me that right now, the situation in every country has changed quite a lot – there are no general trends, you need to look at each individual economy. Excluding South Africa and adding Kazakhstan, theoretically, is possible. Kazakhstan has some economic situations that are similar to Russia – for example, oil and gas, which is similarly dependent on the global attitude. But I will be careful in making that comparison, because I also see a couple of factors that distinguish the situation in Kazakhstan from the situation in the BRICS countries – the development of the financial sector, for example. In Kazakhstan, the economy is much more narrow and specializes, primarily, in the oil and gas industries, and the private sector is much less visible in Kazakhstan, on top of that. Therefore, I think that it is best to leave the bloc the way it is, so as to attract the most investors. Although, at the same time, when the main concern is large investments, then of course, investors view every country individually.”

Lucas Lautert Dezordi, Dr Head of the Department of Economics at Universidade Positivo (Curitiba, Brazil):
“The level of government gross debt in these two countries (Kazakhstan and South Africa) is not too high. For example, the ratio of debt to GDP in 2011 in Kazakhstan and South Africa was about 10.5% and 38.8%, respectively. With the pace of GDP growth at 3%, South Africa can calmly manage its level of debt. And with its level of investments (19.7% of the national GDP), the country continues to have potential for GDP growth over the span of the next six years. I don’t think that Kazakhstan can replace South Africa in the BRICS countries, because the industries in South Africa are more powerful than in Kazakhstan. In addition to that, one of the weaknesses of the Kazakh economy is its powerful growth – there is a large dependence on oil and gas. Kazakhstan is one of the main suppliers of these goods and the prices for them depend on the situation of the global market. That means that the high tempo of growth comes with anxious expectations for inflation – in the period from 2000 to 2011, the inflation of consumption grew by 164.6%. Another deciding factor is the link between the low level of agriculture in Kazakhstan. At this point in time, South Africa would have an economic advantage, purely based on the industry and high quality of service.”

Madeline Koch, Managing Director of BRICS Information center, Toronto, Canada:
“The background behind the BRICS countries as an informal political entity has only the cooperation of the five countries as its framework. Three formations of the block were traced, which have only a slight influence on the level of production in the global economy – but the countries in the bloc were not chosen according to their level of GDP. At the time, the five leaders of these countries focused more on setting the mechanisms of cooperation between themselves than determining the conditions for the expansion of the BRICS countries.”

Tom Wheeler, Research Associate South African Institute of International Affairs:
“The main difference between Kazakhstan and South Africa is oil. Kazakhstan has large reserves of oil in its Western region and in parts of the Caspian coast, which the country owns. On the other hand, South Africa is a region rich with natural resources, but with limited reserves of oil and gas. Kazakhstan is ranked ninth in terms of land area in the world, which is more than double than South Africa in that regard, but its population is only 15 million, as compared to South Africa’s 51 million.  Except in a few city centers, such as Alma-Ata, Astana, and the new oil cities to the west of the country, the Kazakhstani territory is, for the most part, empty. That is the second important distinction between Kazakhstan and South Africa, which has large urban conglomerations. I was one of those who doubted that South Africa could become a part of the BRICS bloc. Despite the fact that South Africa has the largest, most developed, and diversified economy in all of Africa, it just doesn’t match the levels of China, Russia, Brazil, and India in terms of population, land area, or even the level of production. I would say that there are several possible choices, maybe more worthy candidates that can be defined by Jim O’Neill, the creator of the original acronym – including Indonesia, Turkey, and some other such developing countries.”

Eran Dosymbekov, Managing Partner for Kazakhstan and Central Asia, Ernst & Young:
FDI inflows into Kazakhstan have recorded strong results over the past decade. Kazakhstan’s success in attracting FDI can be attributed to successful structural and regulatory reforms, political and macroeconomic stability, vast natural resources, as well as willingness of the country to develop non-extractive sectors of growth.

According to 2012 Ernst & Young’s Kazakhstan attractiveness survey, there is a significant perception gap between existing and prospective investors. Among investors already established in Kazakhstan, 85% see it as the most attractive destination among the CIS countries. However, among investors not established in the country, only 18% share this view, while 39% do not have sufficient awareness of the attractiveness of Kazakhstan in particular and CIS countries in general.

Kazakhstan’s attractiveness profile mainly relies on its cost-competitiveness and macroeconomic stability. At the same time respondents point out challenges with labor skills level, transport and logistics infrastructure, transparency and stability of legal and regulatory environment – the set of challenges similar to many emerging economies.

To unlock economic and human capital potential and reach new levels of competitiveness, the country needs to continue to enhance its business environment and to capitalize on its competitive advantages, which include a sound macroeconomic outlook, strong relations with major trade partners, enhanced market opportunities with Eurasian Economic Union and unique location at the crossroads between China, Europe, the Middle East and Russia.

Text: Ekaterina Novikova