China bashers like to question the
sustainability of China´s growth – since more than 30 years and repeatedly
refuted. Doubts about BRICS sustainable governance are often expressed in
Western media; they seem to reflect unease about the dissimilarity especially
of China´s development path to Western market economy models. Understanding the
complex prerequisites of sustainable development, however, requires analytical
humility, empirical rigor and open minds.
Actually, by comparison with its BRICS peers,
China seems to have adopted the most sustainable set of economic policies,
followed by Brazil. As for social policies, it is Brazil that has taken the
lead to ensure sustainable governance, while China comes in second. Concerns
about sustainability should rather focus on South Africa, but also on Russia
and India for a variety of specific policy shortfalls. These insights result
from a major research effort carried out under the auspices of the Bertelsmann Foundation Sustainable
Governance Indicators (SGI) Network, Change Ahead?
Sustainable Governance in the BRICS. While still at times based on judgment calls,
five country studies authored and calibrated each by several political
scientists, sociologists and economists both stemming from each of the
countries concerned and from abroad form the backbone to allow a much more
informed assessment about the sustainability of governance in the BRICS.
The SGI report focuses on sustainable
governance in the policy areas of economic and labor governance, as well as
social affairs governance. For the first time, this study evaluates the five
BRICS countries – Brazil, Russia, India, China and South Africa – on the basis
of Sustainable Governance Indicators (SGI) previously quantified only for OECD
countries. These indicators assess and calibrate governance (with notes from 10
for best to 0 for worst policy quality) in a variety of economic and social
areas, including:
- An economy and
employment cluster, with criteria measuring performance in the areas of
the economy, the labor market, enterprises, taxes and budgets; and
- A social affairs
cluster, with criteria measuring performance in the areas of health care,
social inclusion, families, pensions and integration.
As for the
sustainability of economic and social policies, my synthesis and evaluation of
the five SGI country studies, augmented by a review of the recent literature on
growth diagnostics and structural development economics, has produced a
comparative look at the sustainability of growth in the five BRICS (Reisen,
2013)[1].
In the past, structural features such
as high saving and investment rates or the transfer of low-productivity
resources into activities and sectors with higher productivity have mattered
more for sustainable BRICS growth. Lessons derived from development economics old and new presented in the analysis would
suggest that the ten economic and social policy SGI indicators will assume a
growing importance going forward. It is suggested that the sustainability of
growth in emerging countries increasingly will depend on how well they score on
the SGI indicators as their GDP/capita rises beyond the 10,000 $ threshold and
as their output mix, production procedures and related services approach the
world leading “ technology frontiers”.
Economic Policies
Table 1 summarizes the numerical values of
the employment and labour SGI for the BRICS and constitutes a country ranking
for the quality of governance, based on the five SGI country studies in the SGI
Economy and Employment Cluster. The table reduces the complexity of the many policy facets embedded in
the country reports. In
terms of overall governance for economic and employment policies, China is seen
as the relative BRICS leader, closely followed by Brazil. Russia performs
significantly worse than its BRICS peers.
Table 1:
Ranking BRICS Economic and Labor Governance
Scores Country
|
Economic Strategy
|
Labor
Market
|
Enterprise
Support
|
Tax Policy
|
Budget Allocation
|
Average
Score
|
Rank
|
China
|
8
|
7
|
7
|
6
|
6
|
6.8
|
1
|
Brazil
|
7
|
8
|
4
|
4
|
9
|
6.4
|
2
|
India
|
7
|
4
|
6
|
6
|
6
|
5.8
|
3
|
S Africa
|
6
|
3
|
3
|
7
|
8
|
5.6
|
4
|
Russia
|
2
|
4
|
2
|
6
|
8
|
4.4
|
5
|
Source: SGI country studies
The category Economic Strategy addresses the existence of a government’s
general strategy to support the future-oriented development of its economy
through regulatory policy, through adhering to clear-cut assignment of tasks to
institutions, refraining from unnecessary discretionary actions, frictionless
interlinkage of different institutional spheres (labor market, enterprise
policy, tax policy, and budget policy) and the coherent set-up of different
regimes such as dismissal protection, anti-monopoly institutions or income
taxation. Here the scores are satisfactorily high for four BRICS, but very low
in Russia (2/10), reflecting the absence of a noticeable long-term development
strategy.
Insufficient labour market absorption, in particular of the young-age cohort
labour market entrants, is a widespread problem in the BRICS. Weak labour
market performance in the BRICS generally has two common explanations: complex
laws to protect jobs in the formal economy, to the detriment of labour market
outsiders; and the low quality of public education (not necessarily in terms of
budget appropriations), notably in Brazil, India and South Africa. The Tunisian
origin of the ´Arab Spring´ has shown the importance of education and labour
markets to governance sustainability.
Compared to the other BRICS, however, China
has the strongest overall performance in the five country studies. China is in
first or second position for all policy areas, except for Budget where China
shares the last position together with India. A major challenge to
sustainability in China is the unsolved problem of fiscal federalism and
widespread corruption; the insufficient allocation of public funds to
provincial and local administrations has encouraged land grabs by the
authorities, deepened corruption and endangered social stability.
Brazil outperforms China in the policy areas Budget
and Labour where it gets excellent grades of 9 and 8 respectively. However,
Brazil exhibits a big performance gap in Taxes and Enterprise Policy (where the country only gets a grade of 3). This
is attributed in the SGI country study to the unsolved problem of a small tax
base with many exemptions and tax holidays, which undermines the progressivity
of income taxation; this in turn imposes high tax rates on the remaining tax
base, which hits corporate competitiveness. Competitiveness in Brazil is
further undermined by barriers to private-sector infrastructure investment and
by monopolistic barriers to market entry and little corporate contestability.
India has a fairly even performance score across
the different policy areas, although the combination of a weak tax system with
massive subsidies makes it the most fragile BRICS country in terms of public
finances. Grades range in between 6 and 7, with the notable exception of Labour
Market Policy, which appears to be the major challenge of Indian policy making,
as it is in South Africa.
The BRICS score relatively well in policy
areas that capture the more short-run oriented notions of sustainability (i.e.
the ability to withstand crisis and smooth the business cycle). The
macroeconomic foundations for sustainable governance have been created (and
defended so far) in the BRICS, first and foremost in monetary policy (not
covered by the SGI), but also in improved tax revenues and budget policies. While public debt-GDP ratios have been
exploding in the OECD, all five BRICS have at least been able to contain their
public debt as a fraction of GDP (Brazil, India) over the past decade, while public
debt ratios have been either reduced (Russia, South Africa) or remained at low
levels (China)[2]. Unlike most countries in
the Euro system, Russia, China and South Africa all would meet the original
Maastricht criteria of public debt at or below 60% of GDP.
The drop in public debt ratios has been a
boon, creating fiscal space for more active policy intervention to sustain
growth in the face of social and structural challenges. As such, lower debt and
more space for fiscal expansion augur well for sustainability in the BRICS.
However, it has been shown[3]
that high growth and raw material prices, which have been driving much of the
improved tax revenues in resource-rich countries, have grown increasingly
China-dependent. It is obvious, therefore, that much of the improved state of
developing- and emerging-country public finances will depend on growth being
sustained, especially in China, the new global growth locomotive.
Table 2: Spearman rank correlation coefficients
GDP
growth/cap
|
Economic policy
|
State
control
|
|
GDP
growth/cap
|
|||
SGI:
economic policy
|
0.74
|
||
State
control
|
0.81
|
0.25
|
|
FDI
barriers
|
1.00
|
0.66
|
0.88
|
Source: own calculation; see text.
Table 2 presents several Spearman rank correlation coefficients[4] as a
non-parametric variable of the association between the SGI for “quality of
economic policy”, GDP/capita growth during the 2000s, restrictiveness of the
FDI regime, and the degree of state control. The rank correlation coefficients,
as defined here, can move between +1 (perfect association) and 0 (no
association). The rank correlation between growth/capita and ´quality of
economic policy´ is, in a certain sense, a control variable: a perfect
association (a Spearman correlation coefficient of +1) might indicate a common
problem in indicator driven policy research when the indicators involve
considerable judgement. The valuation ex
post of the respective governance performance might be driven by the growth
performance known ex ante[5].
It is thus rather reassuring to find that the rank correlation between
growth/capita and S5 is only 0.74.
Table 2 reveals some very interesting
insights:
-
A high degree of state control
in the economy does not stand in the way of a good ranking in past growth
performance; the rank correlation between the two parameters is 0.81; but state
control and economic policy performance
are weakly (0.25) correlated (which also may reflect a judgement bias).
-
A high degree of FDI
restrictiveness perfectly matches past growth performance (the rank
correlation coefficient is 1.00), which does not imply causality, however, as
high-growth countries may feel to have more room for selectivity as FDI hosts
than do low-growth countries. Controlling FDI inflows and the quality of
economic policy have been positively associated, with a rank correlation
coefficient of 0.66.
-
A high rank correlation coefficient between the degree of FDI
restrictiveness and the degree of state control indicates a political economy
explanation: a high state involvement strengthens the vested interest of
politicians in keeping foreign investors out of the country.
State involvement in the economy has remained
so far relatively high in China and Russia. The degree of state involvement in
all BRICS was higher than in the OECD on average, although some high-growth
OECD member countries – notably Poland and Turkey – have levels of state
control similar to Brazil, South Africa and India. Note that there is little (Spearman) rank correlation between the
degree of state involvement and the SGI
indicator for the quality of economic policy. A high state involvement
apparently can go hand in hand with the worst and the best outcome for
governance quality.
Social Policies
The BRICS do considerably worse on
governance indicators in the social affairs cluster, which comprises
Health Care, Social Inclusion, Family, Pensions, and Integration. Social policy
reform is urgent in these areas for all BRICS, and failure to implement social
policy reforms will likely lead to social instability arising from extreme
social inequality (and widespread corruption).
Table 3:
Ranking BRICS Social Affairs Governance
Scores
|
Health
Care
|
Social
Inclusion
|
Family
|
Pension
|
Integration
|
Average
Score
|
Rank
|
Brazil
|
4
|
6
|
5
|
5
|
9
|
5.8
|
1
|
China
|
4
|
5
|
6
|
5
|
4
|
4.8
|
2
|
Russia
|
4
|
3
|
6
|
6
|
4
|
4.6
|
3
|
S Africa
|
4
|
4
|
4
|
5
|
4
|
4.2
|
4.5
|
India
|
3
|
4
|
4
|
3
|
7
|
4.2
|
4.5
|
Source: SGI country studies 2012
The BRICS
average scores in the Social Affairs cluster (Table 2) are roughly a full point
below those noted in the Economy and Labor cluster (Table 1). On Social Affairs,
Brazil performs best among the BRICS, ranking first or second in all social
policy areas, with an average score of 5.8. China comes in as second best
performer in terms of cumulated grades, followed by Russia. South-Africa and India perform the lowest
grades in all policy areas in the Social Affairs cluster, putting the
sustainability of their development most urgently in doubt within the BRICS
group, according to the accumulated evidence presented in the five country
studies. Even Brazil's results, as they are skewed towards integration with an
exceptional grade of 9, are worrisome if this special effect is corrected for[6].
South-Africa has very consistent albeit low results (ranging between 4 and 5),
pointing to a need for reform and improvement in all Social Affairs policy
areas. Russia's most urgent areas for
reform are Social Inclusion, followed by Health Care policy and Integration
policy. China's most urgent challenges are to be found in the area of Health
policy and Integration policy.
At least two
major problem areas common to the BRICS can identified from the SGI country
studies in the Social Affairs Cluster:
- Health Care access remains very
fragmented, in two important dimensions. The first dimension is the
traditional rural-urban divide, which also reflects the large geographic
size of the BRICS. This results in poor quality health service to the
rural areas. The second dimension, of more recent origin, is the grown
quality difference between private health care, affordable to a minority
only, and poor public health service accessible to the majority of the
population. In 2012, the public share funded on health expenditure was
much higher in the OECD average (72.2%) than in most BRICS, indicating a
two-class health system in the latter group.
·
Social Cohesion remains a distant reality in the BRICS. Unequal access to quality
health service is just one parameter; another, arguably the most important
social parameter for employment performance and competitiveness, is unequal
access to quality education. Again,
the divide between private education, affordable to the better off, and public
education is a major characteristic of the BRICS that undermines ex ante equal
opportunities and lifetime earnings potential. Figure 10 shows for the three
BRICS (Brazil, China, and Russia), for which comparable education data were
available, that only Russia improved educational attainments, as measured by
the higher share of 25-34 years age cohort compared to the elder age cohort
(55-64 years) to have attained tertiary education. In fact, that high level of
tertiary attainment reached by Russia´s youth – ca 60% of the age cohort – was
only exceeded by three OECD countries (Korea, Japan, and Canada). By contrast,
the share of tertiary attainment remained at the bottom of the league in Brazil
and China.
To allow for a
closer ranking analysis of the five BRICS as for the social sustainability of their
governance performance, it is useful to compare average of the five SGI
(judgement) social indicators with hard social statistics, notably life
expectancy (a proxy for the quality of health care), poverty headcount relative
to the national poverty line, the income Gini coefficient, and literacy rate
(all indicators of social inclusion). The results of that comparison are
presented in Table 4 below. They show how different the social development
achievements today are among the five BRICS. Life expectancy at birth now is 20
years longer in Brazil and China than in South Africa, eight years more than in
India and five years more than in Russia. During the last decade alone, that
difference in life expectancy has widened by five or six years between the four
BRICs and South Africa.
Table 4: BRICS Indicators SGI Social Affairs, Health
and Social Inclusion, late 2000s
Scores
|
Average
score Social SGI
|
Life
expectancy, years at birth
|
Poverty
headcount, % at poverty line
|
Gini income
coefficient, %
|
Literacy
rate, % age ≥ 15
|
Brazil
|
5.8
|
73.4
|
6.1
|
54.7
|
90
|
China
|
4.8
|
73.3
|
16.3
|
42.5
|
94
|
Russia
|
4.6
|
68.8
|
0.0
|
40.1
|
100
|
India
|
4.2
|
65.1
|
41.6
|
33.4
|
63
|
S Africa
|
4.2
|
52.1
|
13.8
|
63.1
|
89
|
Sources: SGI
country studies 2012; World Bank, WDI database; World Bank, PovcalNet.
Note in Table 3
the ´explosive´ co-existence of high literacy rates, growing inequality and
high shares of extremely poor people (defined as living of 38 $/month or less,
in PPP 2005 dollars). On social considerations, therefore, social governance
performance would appear least sustainable in South Africa and could give rise
to a higher frequency of socially motivated violence. In 2010, the rate of
intentional homicide per 100,000 population (source:
UNDOC) was highest in South Africa, at 32, although it had come down from
more than 50 during the 2000s; the homicide rate in the other BRICS is lowest
in China (1), followed by India (3), Russia (10) and Brazil (21).
To sum up,
economic and social governance look comparatively sustainable in Brazil and
China, quite in contrast to the sentiment expressed in the media. While India
occupies the middle ground, Russia and South Africa seem to follow the least
sustainable economic and social policies among the five BRICS. Building fair
and efficient systems of fiscal federalism, removing skills mismatches in
labour markets, and acquiring skills for changing competitive scenarios appear
from the SGI country studies as eminent common policy challenges common to all
five BRICS.
[1] Helmut
Reisen (2013), Economic Policy and
Social Affairs in the BRICS, SGI Sustainable Governance Indicators,
Bertelsmann Stiftung, Gütersloh.
[2] China has actually a net public asset position, reaching 35% of GDP
in 2012, if debt figures are corrected for gross assets held in official FX
reserves and in sovereign wealth funds.
[3] Garroway, C.,B.
Hacibedel, H. Reisen, and E. Turkisch (2012), “The Renminbi and Poor-country
Growth”, The World Economy, Vol. 35.3, March, pp.
273 – 294.
[6] Taking Integration aside, both Brazil and China are given an
average score of 5.0.
