BRICS or Bust?
Escaping the Middle-Income Trap
Hartmut Elsenhans and Salvatore Babones

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Contents and Abstracts
Introduction
chapter abstract

The rise and fall of Brazil, Russia, India, and China (the BRICs), later expanded to South Africa at the behest of China, is the great geoeconomic story of our time. The BRICs account for around 40 percent of the world's population and drove most of its economic growth in the first decade of the twenty-first century. The BRICS, however, are not a homogeneous group. China and (to a lesser extent) India have performed much better than the others, Russia and South Africa less well, with Brazil falling in between. When the global financial crisis hit in 2007–9, the BRICs were among the few countries in the G-20 that responded appropriately, with government spending programs that partially offset the austerity policies of the developed West. Whether or not they will continue to grow depends on their future policy choices.

1 The BRICS Trajectories: Economic, Political, and Social
chapter abstract

The BRICS share the statistical facts that they all have middling levels of GDP per capita but all experienced very rapid economic growth in the first decade of the twenty-first century. All of the BRICS also have high levels of income inequality. This high inequality may not cause a problem for their economies, but it does undermine good social policy, and in the end social variables may be more important for growth than economic ones. The BRICS have relatively effective government institutions (and, contrary to popular perception, relatively typical levels of corruption) but high inequality means that policy interests of the BRICS elites clash with those of their societies. Ultimately, it may be the BRICS societies, more than their economies, that are stuck in a middle-income trap.

2 The Role of the State in Economic Development
chapter abstract

The rise of the BRICS has occurred during a period when state-led economic development is out of fashion; yet in all of the BRICS countries the state is deeply involved, especially in China. This gives the BRICS the opportunity to push through the middle-income trap. Policies that are optimal for a country may, however, not be optimal for its ruling class. The winning policy of redistributing income in the process of economic growth is rarely chosen, and when it is, it is politically unstable. By creating internal markets constituted by larger mass incomes, investment opportunities increase, profits can grow, rents can be used productively, rent seeking will ultimately decrease, and local technological development can be promoted. But the policy leap of faith necessary to escape the middle-income trap has rarely been made intentionally by a government in the self-conscious pursuit of economic growth.

3 Mass Demand as the Basis of Growth
chapter abstract

The orientation of the local industrial sector to relatively simple products that are regularly produced in large quantities creates economies of scale that can be used both to bolster export competitiveness and to support the development of local investment goods production. Rising mass incomes are crucial for this and can be driven by exports growth, social programs, and state support for strategic industries. The more successful among the BRICS have many programs for reducing poverty. The reliance on mass consumption is the essential unifying element which drives capital accumulation, technical improvement, and the successful opening to the global market. A rich economy cannot be built with only poor people. Workers' compensation is not a passive factor in development. The empowerment of labor is what drives forward development within a well-institutionalized capitalist economy.

4 Selective Links to the World Market
chapter abstract

Developing countries benefit from external markets and foreign direct investment to promote export growth and technology transfer. Success in expanding and upgrading manufactured exports has been impressive in China and India but much less so for the other BRICS. Export success, however, is not primarily the result of foreign direct investments. The policies necessary for catch-up depend essentially on the long-term commitment of the governments of developing countries to use rents productively. They can do this by keeping their currencies undervalued and channeling the resultant export and investment gains into the development of domestic technologies and learning-by-doing. Undervalued currencies keep real wages high at the same time as they keep the foreign currency costs of labor low. Empowered workers can provide political support for these pro-growth policies.

Conclusion
chapter abstract

The middle-income trap is not an inevitable destiny. It is a trap that can be avoided or, once sprung, escaped. The middle-income trap can be overcome by policies that create employment through increasing mass consumption. National political elites have the power to implement these policies. For too long economists have provided intellectual cover for elites to believe that economic growth is achieved through low wages and beggar-thy-workers policies. Higher labor costs are certainly costs of production, but profit is ultimately the result of investment spending, and investment is always a response to increasing mass demand. The promotion of mass consumption triggers additional investment in a virtuous circle that ultimately leads to higher profits for elites as well as rising incomes for the masses.