How BRICs economies have fared over 20 years, and what's next

Jim O'Neill wasn't trying to change the way investors and executives looked at the world twenty years ago. He just wanted to prove he was up to his new job.

Then 44 years old and the just-named chief economist of Goldman Sachs Group Inc., O'Neill was keen to be seen less of what he called a "dirty economist" pally with traders and on top of every market and central bank move. He hoped to become someone viewed as boasting the intellectual heft to lead Goldman's team of economists alone, having previously shared the role.

With the 9/11 attacks already shaking up the American-centric view of how the global economy worked, he launched a project built around a simple premise: the economic heft of Brazil, Russia, India and China was set to grow massively. The result was Global Economic Paper Number 66: "Building Better Global Economic BRICs," published on Nov. 30, 2001.

The central thesis: The global economy would in the following decades be driven by the growth of these emerging markets which had large populations to harness. It argued global policymaking forums such as the Group of Seven should be re-organized to incorporate BRIC representatives.

It took a second note from Goldman in 2003 before the idea really took off. It stretched the vision to 2050 and detailed how China's economy could become as large as the US's by 2039 with India subsequently passing Japan to become the third-biggest economy.

Two decades on and the BRICs are displaying a mixed performance, as O'Neill himself acknowledges. China soared in strength and India climbed, though both face headwinds in the pandemic era. Russia and Brazil, however, stumbled after good starts.

"I got China very right, and Brazil and Russia very right in the first decade, but the second decade for Brazil and Russia has been close to a disaster," says O'Neill.

It was after the 2003 paper that O'Neill remembers financial titans such as Blackstone Inc. Co-Founder Stephen Schwarzman began calling Hank Paulson, then Goldman's chief executive officer, to rave about the vision. One chart from the latest paper was downloaded from Goldman's website ten times more often than any other document, he says.

O'Neill found himself propelled from the trading floor and into executive suites and Davos-style gatherings.

The early 2000s worked out well for O'Neill's vision. By 2005, it was clear the BRICs grouping would meet O'Neill's projections sooner than he expected.

Buoyed by that success, in December 2005 O'Neill released a new paper looking at the Next Eleven—a grouping of developing economies, which as the name suggests were seen as the next in line for economic lift off. While the Next 11 never really gathered momentum as a concept, the BRICs continued to take off.

China was notching double digit growth rates, with India not too far behind, and record commodity exports and current account surpluses were boosting Brazil. But the gloss was coming off Russia's performance amid concerns over stalling reforms and rising inflation under President Vladimir Putin.

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By the late 2000s, what started as an economic analysis had morphed into summits of the group's political leaders keen for a rival forum to Western-dominated multilateral outfits, with South Africa added to the mix. A new lender, now called the New Development Bank, was created.

When the 2008 collapse of Lehman Brothers sparked the global financial crisis, the BRICs initially proved more resilient than their developed peers, marking what would end up being a high point for their combined relative performance on the global economic stage.

The BRICs more than doubled their share of the global economy from 8% in 2000 to 19% in 2011, according to Bloomberg Economics.

But the going has been tougher since.

Brazil started to slow due to consumer debt and weak business confidence. Oil price volatility weighed on Russia. India was rattled by the 2013 Taper Tantrum, when the Federal Reserve signaled a winding back of its bond buying program. By August 2013, Brazil and India had been lumped into the Fragile Five grouping, coined by Morgan Stanley, to capture the economies vulnerable to investor outflows (joined by Indonesia, South Africa and Turkey). China continued to power ahead, fueled by a massive borrowing binge that Beijing's policy makers are still grappling with the legacy of even today.

Political tensions have also flared up, with Putin turning inward, scandals in Brazil and reform stumbles in India. A botched currency devaluation from China in 2015 rattled global markets and saw it backtrack on some of its market opening plans.

Some remain unimpressed with the whole concept. The BRIC term "is one of the most misleading terms used in the vernacular of finance in recent years as the four countries are much more different than they are similar," said Stephen Jen, who runs Eurizon SLJ Capital, a hedge fund and advisory firm in London.

He calculates that in the years from 2006 to about 2014, the average growth of emerging economies excluding China was 4.0%, a rate which slumped to 1.8% in the years between 2015 and 2019.

Franklin Templeton Investments and Schroder Investment Management launched BRIC-themed funds TEMBRAC and SCHBREA in October 2005, with HSBC Holdings Plc and Goldman Sachs following soon after with their own HSBBRIC and GBRAX. By 2007, Invesco Ltd. and BlackRock Inc. had launched exchange-traded funds built around those developing nations as well with EEB and BKF.

None of those investment vehicles quite lived up to the hype of the early years, though. Goldman folded its money-losing BRIC fund in 2015, merging it with a broader emerging-market portfolio. Invesco's ETF was shuttered last year in a wave of closures. The funds that remain have lagged the performance of MSCI Inc.'s developing-nation stock index.

An investment into Templeton's BRIC fund upon its inception would net a total return of roughly 130% today in dollar terms, compared with 220% and 440% for portfolios that tracked the emerging-market benchmark and the S&P 500 Index respectively, according to data compiled by Bloomberg.

"BRICs was a great concept initially to talk about where you'd see some of the biggest economic growth, but it was a terrible investment thesis," said Hari Hariharan, the chief executive officer of New York-based NWI Management.

So where are we today and what's next?

The coronavirus hasn't helped. All were ravaged by the pandemic. China's aggressive zero-cases approach helped the economy roar back from its initial slump, though growth is slowing again as consumers remain cautious and the government acts to cool the property sector and rein in industries from technology to online education. Inflation surges have already prompted Brazil and Russia to lead the world in tightening monetary policy.

The kind of emerging market optimism that spurred the BRIC call 20 years ago has given way to a bleaker assessment of prospects now. Ziad Daoud, chief emerging markets economist at Bloomberg Economics, argues slipping governance, challenging geopolitics and weaker growth drivers mean the focus has shifted from "opportunities to risks." Inspired by O'Neill, he has created the "BEASTS"—Brazil, Egypt, Argentina, South Africa and Turkey—which he sees as most vulnerable due to the combination of lower reserves, weaker current account balances and higher external debt.

The International Monetary Fund reckons emerging markets will grow 5.1% this year compared to 4.5% in advanced economies and the 6.6% of 2003 to 2012. Inflation is also proving heady at an estimated 5.5% this year. More worryingly, the IMF says the pandemic's scars will last longer. It predicts total output in the advanced world to exceed its pre-crisis growth path by 2024, but the emerging world outside of China will still be undershooting by 5.5%.

Still, Bloomberg Economics forecasts emerging markets share of the world economy will keep rising to almost 60% in 2050, with India and Indonesia among the drivers. China's contribution to growth is expected to be dragged by an aging population, high debt and diminished space for easy productivity gains, but even still it remains on track to replace the US as the Number One economy by the mid-2030s, with India climbing to third.

Two decades on from the acronym that made his name, O'Neill's reputation is secure. In 2010, he was made chairman of Goldman Sachs's asset management arm. He also wrote a book and sat on the board of his beloved Manchester United. Then came elevation to the UK's House of Lords and a role as a minister in its Treasury, where he sought ways to boost the economy of northern England. He even chaired a review of antimicrobial resistance before becoming chairman of the Royal Institute of International Affairs.

As for the BRICs, O'Neill thinks there is still more they can do to reverse their disappointing second decade and play a greater role in global governance. One idea is for India and China is to strengthen their bilateral trading links. Another is to do more to tackle their vulnerabilities to infectious diseases.

"We are now in a much more multipolar economic order," said Oliver Stuenkel of the School of International Relations at Fundação Getulio Vargas and author of 'The BRICS and the Future of Global Order.' "That may not be because of BRICS, but the grouping symbolizes the profound change we have seen in the global economy over the past 20 years."

Disclaimer: This article first appeared on Bloomberg, and is published by special syndication arrangement.