## _011211

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### Overview
- The emergence of BRICs—Brazil, Russia, India, and China—is reshaping low-income countries’ (LICs) international economic relations.
- Industrial countries remain LICs’ dominant development partners, but LIC–BRIC ties have increased rapidly over the past decade and BRICs have become new growth drivers for LICs.
- Trade with BRICs is already close to half of the value of combined trade with the European Union and the United States, and larger than with other emerging market economies.
- BRIC FDI and development financing are making a significant impact in some key areas despite relatively small volumes compared with those from advanced countries.
- Detailed bilateral analysis is needed because neither BRICs nor LICs are homogeneous and relations vary considerably across countries.

### Major findings on LIC–BRIC linkages
- BRICs’ rise has coincided with a six-fold increase in the value of LIC–BRIC trade over the past decade.
- LIC economies grew at an annual average rate of 4.7 percent during the same period.
- Between 2000 and 2009:
  - Total LIC exports to BRICs grew at an annual rate of almost 25 percent, rising from US$15 billion to US$61 billion.
  - Total LIC–BRIC trade reached close to US$170 billion.
- BRICs’ share of LIC exports:
  - About 20 percent in 2009.
  - 12½ percent in 2000.
  - 7¾ percent in 1995.
- BRICs accounted for 60 percent of LICs’ trade with other emerging market economies (EMEs) in 2009.
- China accounted for 15 percent of LICs’ total imports in 2009.
- LICs’ share of world exports increased from 1.6 to 2.6 percent between 2000 and 2009.
- A simple decomposition indicates BRICs accounted for about a quarter of the increase in LICs’ total exports during the last decade (a contribution comparable to that of the United States).
- Trade intensity (average of 2005–08):
  - BRICs’ share in LICs’ total exports was about 70 percent higher than the share of BRICs in world exports — a “trade intensity” of 1.7.
  - For fuel exporters the trade intensity was 2.4.
- Composition of LIC trade with BRICs:
  - LIC exports to BRICs concentrated in resource-based commodities (fuel, ores, metals), except to Russia where composition is less concentrated in primary commodities.
  - LIC imports from BRICs dominated by manufactured goods; for China, machinery and transport equipment account for over 40 percent of total LIC imports from China.

### Trade linkages — implications and policy options
- Drivers:
  - Rapid BRIC expansion and strong economic complementarity (LICs’ commodity comparative advantage; BRICs’ competitiveness in manufactures) underpin rapid growth in bilateral trade.
- Benefits:
  - BRIC demand for commodities improved LICs’ terms of trade.
  - Competitively priced manufactured imports from BRICs benefit consumers and producers using intermediate inputs.
- Risks:
  - Current pattern could accentuate a commodity trap detrimental to long-term growth and raise Dutch disease concerns.
- Options to increase LIC–BRIC trade:
  - Lower tariff and nontariff barriers on both sides.
  - Reduce tariff escalation.
  - Extend preferential access for LIC exports.
  - Make rules of origin more liberal in existing preference schemes.
- Trade policy caveat:
  - Import restrictions against BRIC imports have short-term costs (raise prices of consumer and capital goods; reduce incentives for local industries to be internationally competitive). The long-term solution is strengthening domestic productive capacity: improving infrastructure, investment climate, access to capital, skills, and technology.

### Foreign Direct Investment (FDI) — scale, patterns, and policy challenges
- BRIC outward FDI trends:
  - Total BRIC FDI rose from less than US$10 billion a year in the late 1990s to about US$147 billion in 2008, then declined to US$100 billion in 2009.
  - BRICs’ share in global outbound FDI increased from 1–2 percent to 4–5 percent over 1998–2007.
- BRIC FDI in LICs:
  - FDI flows from BRICs to LICs reached about US$2.2 billion in 2009, about 2–3 percent of total FDI flows from BRICs.
  - Sub-Saharan Africa LICs received about US$0.9 billion of that total.
  - Growth of the stock of Chinese FDI increased 20-fold in seven years from 2003 to 2009.
- Geographic and sectoral heterogeneity:
  - Indian FDI in Africa concentrated in Mauritius; Brazilian FDI in Bolivia, Angola, Liberia (energy/mineral industries); Chinese FDI geographically diversified—manufacturing in Asian LICs, natural resources in SSA by volume, with recent diversification into services and manufacturing.
- China–SSA specifics:
  - Chinese FDI to LICs rose from 5.7 percent of its total outbound FDI in 2003 to nearly 10 percent in 2009.
  - Chinese FDI to SSA rose from about US$70 million in 2003 to about US$5½ billion in 2008, then declined to US$1.1 billion in 2009.
  - Despite rapid growth, Chinese FDI remained a small fraction of total FDI to SSA (about 4½ percent of global flows to SSA in 2007).
- Impact on recipient economies (selected indicators and examples):
  - Zambia: Chinese FDI reached US$214 million (1½ percent of GDP) in 2008 (UNCTAD data); projects include a US$200 million copper smelter and a planned multi-facility economic zone with expected total project cost over US$800 million.
  - Mauritius: stock of Indian FDI at end-2005 US$1.5 billion (22 percent of GDP).
  - Mongolia: FDI from China reached over 4½ percent of GDP in 2008.
- Policy challenges for LICs to amplify FDI benefits:
  - Ensure BRIC FDI boosts local firms’ links to global economy and enhances domestic resource mobilization.
  - Improve investment climate, encourage joint ventures and local employment, be forward-looking on skill supply.
  - Carefully consider fiscal costs of FDI incentives and ensure public resources focus on highest development priorities.
  - Avoid excessive local content/employment requirements that could deter FDI.

### Development financing — magnitude, patterns, and cautions
- Magnitude and concessionality:
  - Total BRIC loan commitments amounted to about US$26 billion in 2000–08, compared to about US$296 billion from OECD ODA during the same period.
  - In 2007, BRIC concessional financing (grants and concessional loans) was about 3 percent of total concessional resources provided to LICs—nearly US$4 billion compared to about US$90 billion from OECD donors.
- Sectoral concentration and packaged finance:
  - BRIC development financing concentrated in infrastructure; Chinese grants largely for social infrastructure, loans for productive infrastructure; India similar on a smaller scale; Russia mainly budget support.
  - Packaging: BRIC financing often comes in packages combining grants, loans, and lines of credit linked to FDI and procurement (example: “Angola Model” and the DRC SICOMINES package).
- Advantages and risks of packaged financing:
  - Advantages: can tackle inter-related constraints (infrastructure enables production; production repays infrastructure loans; social projects reduce poverty and bolster project attractiveness); competitive construction sectors can provide value for money.
  - Risks: opacity, lack of competitive bidding, contingent liabilities, difficulty in assessing public finance and debt sustainability for complex packages.
- Empirical patterns:
  - LICs with higher income and lower CPIA scores tend to receive larger loan commitments.
  - Geographic proximity increases financing flows from BRICs.
  - Degree of concessionality is negatively correlated with amount of financing; larger amounts tend to be less concessional.
  - Countries with better institutional indicators receive greater concessionality.
  - Countries that export more to BRICs tend to get less concessional financing terms.
- Recommendations for LICs:
  - Use BRIC financing for high-return projects with rigorous cost-benefit and debt-sustainability analysis.
  - Assess debt implications including maintenance and contingent fiscal risks.
  - Improve transparency on financing amounts and terms; ensure competitive bidding and strengthen governance and institutional capacity.
  - Seek to maximize local employment, human capital development, and local linkages from BRIC-financed projects.

### Growth spillovers — quantitative findings and channels
- Modeling approach:
  - Dynamic multivariate multi-country autoregression model and a GVAR framework used to quantify spillovers from BRICs to LICs.
- Magnitudes of estimated total impact:
  - The total impact of a 1 percentage point increase in BRICs’ demand and productivity leads to a 0.7 percentage point increase in LICs’ output over 3 years and a 1.2 percentage point increase over 5 years.
  - Pre-2007 magnitudes: 0.5 percentage point over 3 years and 0.6 percentage point over 5 years for a 1 percentage point increase.
- Channels of transmission:
  - Trade channel accounts for around 60 percent of the impact and is the most significant and persistent channel, especially strong for African LICs.
  - Direct productivity changes represent around 13 percent of the combined impact; FDI matters but has a more modest impact relative to trade and productivity channels.
- Indirect/global channels:
  - Indirect channels (BRIC demand and productivity through impacts on global variables) account for around 29 percent of the total impact.
  - Roughly one third of changes in world oil prices can be attributed to shocks originating in BRICs (average, 10 years ahead, as estimated).
  - Indirect spillovers through world oil and other commodity prices are largest in the short run; effects through global demand and interest rates generally small or negligible.
- Crisis-era cushioning:
  - BRICs’ contribution to LIC growth increased during the global financial crisis; before the crisis BRICs accounted for some one-fifth to a third of LIC growth variations, and this share increased during the crisis.
  - Counterfactual simulation: LIC growth would have been 0.3 percentage point to 1.1 percentage points lower during the crisis if BRICs’ GDP growth had declined at the same pace as advanced economies.

### Global rebalancing (GTAP) illustrative results
- GTAP comparative-static simulation (illustrative, not a forecast) eliminating major current account imbalances by 2015 finds for LICs:
  - Real exchange rate impacts limited; even Asian LICs would experience only moderate depreciation.
  - Trade account balance improvements ranging from 0.8 percent of GDP in Central Asia and Europe (CAEU) to 2.8 percent in LAC.
  - Exports to most major markets expand considerably except to the United States.
  - Manufactured products would account for 80 percent of the total LIC export expansion under the scenario.
  - Medium-term output impacts limited in the comparative-statics scenario; dynamic effects could be larger.

### Long-run perspective and diversification opportunities
- Over time, BRICs are likely to devote more resources to non-tradable sectors and upgrade exports to higher value-added products, which should:
  - Raise prices of manufactured products.
  - Create increased opportunities for LICs to export labor-intensive manufactures and diversify economies.
- Historical and conditional evidence:
  - Some LICs have successfully diversified into manufactured exports as they grew (examples cited in source).
  - Success depends on initial endowments, domestic policies, use of resource revenues to build productive capacity (infrastructure, human capital), and external environment.
- Textiles and clothing example:
  - Historical relocation: Japan → NIEs → China; in the 1990s several Asian LICs (Bangladesh, Vietnam, Cambodia) increased textiles and clothing exports often with FDI from neighboring countries.
  - China’s share in textiles and apparel measured against its total exports is declining, and accelerating wage increases in coastal China suggest potential space for LIC labor-intensive exporters.

### Key numeric indicators and decomposition (select exact figures)
- BRICs in the Global Economy (1991–2015; percent of world total; period averages):
  - Population (BRICs): 44.7, 43.6, 42.8, 41.8 (periods 1991–94, 2000–04, 2005–09, 2015 WEO projections).
  - GDP at market exchange rates (BRICs): 5.8, 8.5, 13.1, 21.6 (same period breakdown).
  - Exports (BRICs): 4.2, 7.9, 12.4, 20.1.
  - Imports (BRICs): 4.0, 7.0, 10.5, 18.8.
- Constant Market Share (CMS) aggregate results 2000–2008:
  - Change in exports: US$205.9 (in billions).
  - Average annual growth rate (percent): 25.4.
  - Decomposition (percentage points): Global trade effect 61.4; Commodity composition effect 18.1; Market distribution effect 5.7; Competitiveness effect 14.8.
- Trade-policy numeric:
  - Simple average of import tariff rates LIC exporters face in BRICs in 2008: 13 percent versus 4 percent in the U.S. and the EU.
- BRIC financing and concessionality:
  - Total BRIC loan commitments 2000–08: about US$26 billion; OECD ODA same period about US$296 billion.
  - BRIC concessional financing in 2007: nearly US$4 billion; OECD concessional financing about US$90 billion.
- BRIC FDI totals:
  - Total BRIC FDI about US$147 billion in 2008; US$100 billion in 2009.
  - FDI flows from BRICs to LICs about US$2.2 billion in 2009 (2–3 percent of total BRIC FDI).
- Spillover magnitudes:
  - A 1 percentage point increase in BRICs’ demand and productivity → 0.7 percentage point increase in LICs’ output over 3 years and 1.2 percentage point over 5 years (total effect).
  - Trade channel accounts for around 60 percent of the impact; indirect channels account for around 29 percent.

### Key policy implications and reform priorities for LICs
- Strengthen domestic productive capacity:
  - Improve infrastructure, business environment, access to finance, skills, and technology to avoid commodity traps and Dutch disease effects.
- Ensure FDI supports domestic linkages and revenue mobilization:
  - Promote joint ventures, local employment and training; evaluate fiscal costs of incentives carefully.
- Use BRIC development financing prudently:
  - Select high-return projects; conduct rigorous cost-benefit and debt-sustainability analysis; budget for operation and maintenance; assess contingent fiscal risks.
- Enhance transparency and governance:
  - Greater dissemination of information on financing amounts and terms; ensure competitive procurement; strengthen institutional capacity to manage complex packaged deals.
- Pursue trade-policy assistance and standards:
  - Seek reductions in tariff and nontariff barriers, reduced tariff escalation, extended preferences and more liberal rules of origin, and assistance to meet technical standards—especially for agriculture and manufacturing.
- Maintain domestic reform momentum:
  - No-strings-attached financing from BRICs does not substitute for sound macroeconomic policies, structural reforms, and governance improvements necessary for sustained growth.

*IMF staff paper: Executive Summary and selected chapter content from _011211.*

### Executive Summary ......................................................................................................

### Executive Summary

### Overview
- The emergence of BRICs—Brazil, Russia, India, and China—is reshaping low-income countries’ (LICs) international economic relations.
- While industrial countries remain LICs’ dominant development partners, LIC-BRIC ties have increased so rapidly over the past decade that BRICs have become new growth drivers for LICs.
- Trade with BRICs is already close to half of the value of combined trade with the European Union and the United States, and larger than with other emerging market economies.
- BRIC FDI and development financing are making a significant impact in some key areas despite their relatively small volumes compared with those from advanced countries.
- BRICs have brought new dynamics in LICs’ economic relations with the rest of the world, complementing as well as competing with OECD partners.
- Neither BRICs nor LICs are homogeneous and relations at a bilateral level vary considerably; detailed bilateral analysis is needed for country-level policy formulation.

### Trade Linkages
- Bilateral trade, which grew exponentially over the past decade, is the backbone of LIC-BRIC relations.
- Rapid economic expansion in BRICs and strong economic complementarity underpin rapid growth and high intensity of bilateral trade: many LICs have a strong comparative advantage in commodities while most BRICs are competitive producers of manufactured goods.
- BRIC demand for commodities resulted in a significant improvement in LICs’ terms of trade.
- Potential to further increase LIC-BRIC trade by:
  - lowering tariff and nontariff barriers on both sides,
  - reducing tariff escalation,
  - extending preferential access for LIC exports,
  - making rules of origin more liberal in existing preference schemes.
- Concern: the current pattern of LIC-BRIC trade could accentuate a commodity trap that would be detrimental to long-term growth.
  - Appropriate responses are NOT to limit commodity exports or erect import barriers.
  - The ultimate solution is strengthening domestic productive capacity through:
    - improving infrastructure,
    - creating a conducive investment climate,
    - facilitating private sector access to capital, skills, technology, and markets.

### Foreign Direct Investment (FDI)
- BRIC foreign direct investment holds the potential to boost productivity of LIC industries.
- Starting from a low base, BRIC FDI inflows to LICs have grown rapidly.
- Initial investment, often by state-owned companies, has frequently targeted natural resource industries; over time investment appears to be spreading to agriculture, manufacturing, and service industries (e.g., telecommunications).
- Many non resource-rich countries have also attracted significant investment.
- Private companies, particularly small and medium-sized ones from BRICs, have become active investors with potential to form industrial clusters (as seen in East Asia).
- Policy challenges for LICs:
  - Ensure BRIC FDI and other FDI continue to boost local firms’ links to the global economy and enhance domestic resource mobilization.
  - Continue improving the investment climate and encourage joint ventures and local employment.
  - Be forward-looking on skill supply; local content and employment requirements can only be temporary measures.
  - Ensure new activities financed by FDI, particularly new resource extraction, contribute to domestic revenue mobilization and financing of priority public spending.
  - Carefully consider fiscal costs of any policy incentives for FDI to ensure public resources are devoted to highest development priorities.

### Development Financing
- Development financing provided by BRICs can help LICs alleviate some key bottlenecks to domestic economic activity.
- Despite relatively small volumes compared to financing by OECD DAC members, BRIC financing is highly significant in some areas and countries.
- In infrastructure financing—a key BRIC focus—it is now comparable to that from OECD DAC donors and is expected to contribute significantly to electricity generation capacity and the construction of roads and railways in many LICs.
- To maximize benefits, BRIC financing should be used for high-return projects and its debt implications carefully assessed:
  - Concentration in infrastructure is broadly in line with LIC investment priorities.
  - Each project must be analyzed to ensure sufficiently high returns, particularly since financing terms may not be concessional.
  - In assessing debt sustainability, the growth effect of projects should be adequately considered.
  - Packaged financing using natural resources as collateral—grants for social projects, FDI for industries, and loans for infrastructure—can generate synergies and overcome inter-temporal financing constraints.
  - Complex financing packages present challenges and require careful, comprehensive cost-benefit analysis.
  - Potential contingent fiscal risks should be assessed and limited; associated spending on operation and maintenance must be adequately budgeted.
  - Greater dissemination of information on financing amounts and terms would help analysis.
  - Enhancing transparency and clarity on financing flows, ensuring competitive bidding in projects, and fully assessing the macroeconomic impact of financing benefit both LICs and BRICs.
  - Strengthening governance and institutional capacity in LICs is critical.

### Growth Spillovers
- Model estimates suggest the main channels of spillovers from BRICs to LICs include trade, productivity increases, and FDI.
- These spillovers are generally significant and persistent, with trade being the most powerful channel.
- Spillovers are most evident in Asian and African LICs, whose trade ties with BRICs are among the strongest.
- Given the prominence of commodities in LIC-BRIC trade, resource-rich countries have seen the largest spillover effects from BRICs.
- Indirect spillovers occur through BRICs’ impact on world commodity markets via import demand and productivity innovations.
- The positive growth spillovers from BRICs have helped cushion LICs from the impact of the recent global financial crisis.

### Turning to the Future / Long-Run Perspective
- Over time, prices of manufactured products are likely to rise as BRICs devote more resources to non-tradable sectors and upgrade their exports to higher value-added products.
- LICs could have increased opportunities to export labor-intensive manufactures and, more generally, to diversify their economies.
- The challenge for LICs is to lay the groundwork to seize opportunities from a possible new phase of global relocation of labor-intensive manufacturing activities.

### Conclusions / Policy Implications (summarized)
- BRICs are new growth drivers for LICs through trade, FDI, and development financing.
- Policy priorities for LICs include:
  - Strengthening domestic productive capacity (infrastructure, investment climate, skills, access to finance and technology).
  - Ensuring FDI supports domestic linkages and revenue mobilization while weighing fiscal costs of incentives.
  - Using BRIC development financing for high-return projects with rigorous cost-benefit and debt-sustainability analysis.
  - Enhancing transparency, competitive procurement, governance, and institutional capacity to manage complex financing and investment packages.
- Detailed bilateral analysis remains essential because LIC-BRIC relations vary considerably across countries.

*IMF staff paper: Executive Summary*

### 1.      The emergence of BRICs—Brazil, Russia, India, and China—has changed the

### The emergence of BRICs—Brazil, Russia, India, and China—has changed the

### Major findings on LIC–BRIC linkages
- BRICs’ rise has coincided with a six-fold increase in the value of LIC-BRIC trade over the past decade.
- LIC economies grew at an annual average rate of 4.7 percent during the same period.
- Between 2000 and 2009:
  - Total LIC exports to BRICs grew at an annual rate of almost 25 percent, rising from US$15 billion to US$61 billion.
  - Total LIC–BRIC trade reached close to US$170 billion.
- BRICs’ share of LIC exports:
  - About 20 percent in 2009.
  - 12½ percent in 2000.
  - 7¾ percent in 1995.
- BRICs accounted for 60 percent of LICs’ trade with other emerging market economies (EMEs) in 2009.
- China accounted for 15 percent of LICs’ total imports in 2009.
- LICs’ share of world exports increased from 1.6 to 2.6 percent between 2000 and 2009.
- A simple decomposition indicates BRICs accounted for about a quarter of the increase in LICs’ total exports during the last decade (a contribution comparable to that of the United States).
- Trade intensity (average of 2005–08):
  - BRICs’ share in LICs’ total exports was about 70 percent higher than the share of BRICs in world exports — a “trade intensity” of 1.7.
  - For fuel exporters the trade intensity was 2.4.
- Composition of LIC trade with BRICs:
  - LIC exports to BRICs are concentrated in resource-based commodities (fuel, ores, metals), except to Russia where composition is less concentrated in primary commodities.
  - LIC imports from BRICs are dominated by manufactured goods. For China, machinery and transport equipment account for over 40 percent of total LIC imports from China.
- Complementarity and gravity-model evidence:
  - Export complementarity is generally higher between LICs and China or India than between LICs and the United States or the European Union.
  - Gravity-model analysis confirms high LIC–BRIC trade complementarity matters for LIC exports; LIC imports from China and India are even higher than can be explained by standard gravity variables and complementarity alone (the effect for Russia and Brazil is less robust). This may reflect complementarities from BRICs’ FDI and development financing.

### Important numeric indicators from Table 1 (BRICs in the Global Economy, 1991–2015; in percent of world total; period average)
- Population (1991–94, 2000–04, 2005–09, 2015 WEO projections):
  - BRICs: 44.7, 43.6, 42.8, 41.8
  - Other EMEs: 23.1, 23.2, 23.6, 23.9
  - United States: 4.8, 4.7, 4.6, 4.5
  - Euro Area: 5.6, 5.1, 4.9, 4.6
- GDP (at market exchange rates):
  - BRICs: 5.8, 8.5, 13.1, 21.6
  - Other EMEs: 10.6, 10.8, 13.3, 15.4
  - United States: 26.2, 30.6, 25.6, 22.0
  - Euro Area: 24.8, 21.3, 22.0, 16.6
- Exports:
  - BRICs: 4.2, 7.9, 12.4, 20.1
  - Other EMEs: 13.0, 15.8, 18.6, 18.3
  - United States: 13.3, 12.0, 9.7, 9.6
  - Euro Area: 34.7, 30.9, 29.1, 23.0
- Imports:
  - BRICs: 4.0, 7.0, 10.5, 18.8
  - Other EMEs: 14.4, 14.8, 17.2, 18.0
  - United States: 14.6, 17.1, 14.1, 12.3
  - Euro Area: 34.0, 29.5, 28.5, 21.9

### Data caveats and measurement weaknesses (Box 1)
- FDI and development financing data are particularly challenging to assemble reliably; survey of IMF LIC desk officers was used to supplement official sources.
  - The survey covers 34 LICs and spans 2000–2009.
- Data on BRIC financing are largely based on the IMF survey and the World Bank’s Global Development Finance database.
  - World Bank debt database information on loan commitments is based on recipient country data, includes 49 LICs, and spans 2000–2008.
- Limitations and sources used:
  - OECD data used for OECD commitments comparison.
  - UNCTAD is commonly used for FDI flows and stocks, but there are large discrepancies between changes in stocks and flows and large gaps in reported data (except for China).
  - Chinese FDI data supplemented with Ministry of Commerce, SAFE, and National Bureau of Statistics’ Statistical Bulletin of China’s Outward Foreign Direct Investment; first two provide data only on FDI in LICs’ nonfinancial sectors.
- Three main problems in tracking FDI in individual countries:
  - Headline FDI numbers in press often cover intentions over several years and may be reversed or modified.
  - Financing packages make it difficult to disentangle FDI from bilateral aid and suppliers’ contracts.
  - Large amounts of reported FDI flows go to offshore financial centers and may be subsequently re-routed to LICs.

### Key policy implications and challenges
- Benefits to LICs from increased LIC–BRIC trade:
  - Higher exports translate directly into stronger GDP growth.
  - Stronger world demand for primary commodities incentivizes development of new natural-resource production in LICs, promising further production gains.
  - Competitively priced manufactured imports from BRICs benefit consumers of final and intermediate goods and can lower costs for producers using these inputs.
- Short- to medium-term outlook:
  - With sluggish growth in industrial countries in the short run, external demand for LIC exports is expected to be driven increasingly by growth in BRICs and other EMEs.
  - LICs’ terms of trade could become more dependent on BRIC growth.
  - BRICs are better placed than many industrial countries (facing fiscal consolidation) to continue increasing development financing.
- Risks and challenges:
  - The prominence of commodities in LIC exports to BRICs heightens concerns about specialization patterns and medium-to-long-term growth prospects.
  - Possible Dutch disease effects: commodity export booms can exert upward pressure on real exchange rates and make manufactured exports uncompetitive.
  - Risk of being trapped in low value-added production structures if demand from China and India mainly targets unprocessed goods (unlike advanced economies where demand often requires value-added and production standards).
  - Competitively priced BRIC manufactures could exert pressures on import-competing producers and on LIC exports to third markets.

### Study scope and structure
- Purpose: deepen understanding of BRICs’ role in LIC development and discuss how to address ensuing challenges.
- Focus: LICs’ relations with BRICs because of BRICs’ rapidly growing trade and financial relations with LICs; China, India, and Brazil are among the largest emerging-market sources of FDI and development finance to LICs; BRICs together symbolize evolving LIC–EME relationships over the past decade.
- Organization:
  - Sections II, III, IV examine trade relations, BRIC FDI, and BRIC development financing in LICs respectively.
  - Section V quantifies spillover effects of BRICs on LIC growth by bringing together linkage channels.
  - Section VI considers medium- and long-run evolution of BRICs and implications for LICs, including prospects for expansion of labor-intensive manufactures.
  - Section VII concludes.
- Note on definitions: In this paper LICs include all countries eligible to use the Fund’s concessional financing facilities as of January 2010. The LIC samples used in each section vary depending on data availability.

*Italic: IMF staff paper (selected chapter content).*

### 14.      A long-term solution lies in strengthening the competitiveness of LIC non-

### _011211 - 14.      A long-term solution lies in strengthening the competitiveness of LIC non-

### Strengthening LIC competitiveness vs. trade protection
- Long-term solution: strengthen competitiveness of LIC non-resource-related sectors rather than trade protection.
- Import restrictions against BRIC imports have short-term costs and limited long-term benefits:
  - Raises prices of consumer and capital goods.
  - Reduces incentives for local industries to be competitive internationally.
- Recommended focus: relax demand- and supply-side constraints on LIC production through:
  - Continued improvement in the business environment.
  - Infrastructure investment.
  - Human capital investment.
  - Policy reforms.

### Role of trade policy in supporting LIC trade diversification
- Advanced economies and emerging market countries could contribute by:
  - Further reductions in tariff and nontariff barriers where they remain high and disincentivize export.
  - Reducing tariff escalation that discourages exports of higher value-added products from LICs.
  - Extending existing trade preferences (including from BRICs) to more products and making rules of origin more liberal.
  - Reforming agricultural policies both unilaterally and through the Doha Round to help increase agricultural exports of many LICs.
  - Assisting LICs to meet technical standards, especially in agriculture and manufacturing.
- Supporting numeric observations and constraints:
  - Import tariff rates that LIC exporters face in BRICs are generally higher: a simple average of 13 percent in 2008 versus 4 percent in the U.S. and the EU.
  - Both BRICs and advanced economies have substantially higher agricultural than industrial tariffs (Brazil is an exception).
  - Tariff escalation constrains export of higher value-added processed goods (examples: coffee, knitwear and footwear).

### BRIC outward FDI: overall trends
- Rapid growth in outward FDI by BRICs, particularly since the mid-2000s:
  - Total BRIC FDI rose from less than US$10 billion a year in the late 1990s to about US$147 billion in 2008, then declined to US$100 billion in 2009.
  - BRICs’ share in global outbound FDI increased from 1–2 percent to 4–5 percent over the period 1998–2007.
- Sources: UNCTAD FDI database; IMF staff estimates.

### BRIC FDI in LICs: scale and distribution
- LICs as beneficiaries:
  - FDI flows from BRICs to LICs reached about US$2.2 billion in 2009, about 2–3 percent of total FDI flows from BRICs.
  - Sub-Saharan Africa (SSA) LICs received about US$0.9 billion of that total.
- Chinese FDI stock growth highlighted:
  - Growth of the stock of Chinese FDI increased 20-fold in seven years from 2003 to 2009 (Table 2).
- Heterogeneity in BRIC investment patterns:
  - Indian FDI in Africa concentrated in Mauritius; Asian investments largely in neighboring countries (Bhutan, Sri Lanka, Nepal) and mainly in manufacturing and services.
  - Brazilian FDI concentrated in Bolivia, Angola, and Liberia, mostly in energy and mineral industries.
  - Chinese FDI geographically diversified; in Asian LICs mostly manufacturing, in SSA largely natural resources in volume terms, with recent diversification.

### Chinese FDI to LICs and Sub-Saharan Africa (SSA)
- Increasing importance of Chinese FDI to LICs:
  - Chinese FDI to LICs rose from 5.7 percent of its total outbound FDI in 2003 to nearly 10 percent in 2009.
  - Asia and SSA account for more than 90 percent of Chinese FDI to LICs.
  - Pakistan (classified as LIC until early 2010) was the top recipient during 2003–09; excluding Pakistan, SSA countries account for 60–70 percent of Chinese FDI in LICs.
- Growth in Chinese FDI flows to SSA:
  - Chinese FDI to SSA rose from about US$70 million in 2003 to about US$5½ billion in 2008, then declined to US$1.1 billion in 2009.
  - The 2008 surge was driven largely by South Africa (e.g., China Industrial and Commercial Bank acquiring a 20 percent stake in Standard Bank).
  - Despite rapid growth, Chinese FDI remained a small fraction of total FDI to SSA (about 4½ percent of global flows to SSA in 2007).
- Sectoral allocation and actors:
  - Natural resource and infrastructure sectors attract the largest shares by volume, but Chinese FDI also spans manufacturing and services.
  - Large state-owned firms tend to focus on resources and infrastructure; private firms concentrate in manufacturing and services.
  - Financing mechanisms vary: private financing, loans from China EXIM Bank or other state-owned banks, and private equity (e.g., China-Africa Development Fund).
- Chinese FDI firm composition and patterns:
  - China EXIM Bank estimated that of the 800 Chinese companies operating in Africa in 2006, approximately 85 percent were privately owned and mostly SMEs.
  - Private firms often begin as traders and move to local investment to tap markets; they tend to source parts and equipment from China and other countries (notably South Africa).
  - Industrial parks and special economic zones are being promoted to create industry clusters and increase local sourcing (example: Zambia’s Chambishi multi-facility economic zone).

### Case evidence and linkages to local economies
- Zambia case highlights:
  - Chinese FDI in Zambia reached US$214 million (1½ percent of GDP) in 2008 (UNCTAD data, likely underestimated).
  - FDI focused on mining and related sectors (copper, nickel); China Non-Ferrous Company Africa invested US$150 million during 1998–03.
  - Chambishi multi-facility economic zone planned involvement: over 60 Chinese companies, anchored by a US$200 million copper smelter; total project cost expected to be over US$800 million.
  - Over 200 registered private Chinese businesses in Zambia across manufacturing, construction, telecommunications, and retail.
- Employment and local linkages:
  - Construction sector: Chinese firms often bring in their own workers and rely little on local labor (though this is not unique to Chinese firms).
  - Manufacturing sector: constraints on local employment include skill mismatch and language barriers; where Chinese firms commit to local operations, majority of employment is drawn from local labor—especially in labor-intensive manufacturing.
  - Chinese projects in Zambia in 2007 (Table 6): manufacturing projects (82 companies, investment pledges US$825 million, employment 306,011), mining (94 companies, US$947 million, employment 1,066), services (37 companies, US$371 million, employment 21,126), agriculture (23 companies, US$101 million, employment 1,093), construction (30 companies, US$303 million, employment 71,625), timber (30 companies).
- Box 3: Chinese involvement in natural resources in Africa (2001–2007)
  - Chinese firms involved in 81 projects in at least 25 SSA countries during 2003–2007.
  - 40 percent of projects in oil, 55 percent in mining, 5 percent in natural gas.
  - In value terms, more than 70 percent of cumulative commitments (~US$10 billion) were in the oil sector.
  - Oil projects typically involve acquisition of exploration/drilling rights or purchase of oil blocks/production-sharing contracts; many projects initiated under bilateral agreements and run by CNPC, Sinopec, CNOOC.
  - Mining projects frequently involve joint ventures or equity purchases; both state-owned and private Chinese firms active.

### Impacts of BRIC (including Chinese) FDI on LICs
- Tangible effects (difficult to quantify):
  - Helped tap natural resources in many LICs, contributing to rapid growth in oil and mining industries, increases in production, exports, and processing capacity.
  - In some cases, BRIC investment strengthened LIC bargaining power to negotiate more favorable contracts with foreign firms.
  - BRIC financing has helped increase manufacturing capacity in some LICs (example: Ghana—agro-processing and garment manufacturing).
  - Even in resource-rich countries there is growing emphasis on increasing value added in upstream and downstream industries (examples: building refining capacity in Nigeria; processing copper into electric wires in Zambia).
- Observations on scale relative to recipient economies:
  - Mauritius: stock of Indian FDI at end-2005 was US$1.5 billion (22 percent of GDP), diversified across manufacturing, finance, tourism, and other services.
  - Nigeria and Zambia: Chinese amounts over US$100 million per year have been normal in recent years; in Zambia this represented 1–1½ percent of GDP.
  - Mongolia: FDI from China reached over 4½ percent of GDP in 2008.

*Italic source attribution: IMF staff summary of chapter content from the provided PDF excerpt.*

### 27.      The key challenge for LICs is to amplify these positive effects of BRIC FDI by

### _011211 - 27.      The key challenge for LICs is to amplify these positive effects of BRIC FDI by

### Amplifying benefits of BRIC FDI
- Key objectives for LICs:
  - Continue to attract more inflows of FDI.
  - Ensure natural resource extraction contributes to strengthening domestic revenue mobilization.
  - Foster greater linkages with local economies.
- Policy levers to foster FDI:
  - Improve business environment, focusing on: availability of adequate and reliable infrastructure; rule of law; reduction of red tape and corruption (Dabla-Norris et al., 2010).
  - Reduce high trade barriers, especially important for FDI seeking intermediate inputs and regional exports.
  - Avoid discrimination against domestic firms in policies aimed at attracting FDI.
  - Carefully evaluate policy incentives for FDI against fiscal costs; consider regional policy coordination to limit incentive competition.
  - Deeper regional integration to make small LIC economies more attractive to FDI, notably via regional projects in power and transport.
- Labor and linkage policies:
  - Encourage investors to hire and train more local workers while facilitating firms’ access to necessary skills (upgrade education programs, rationalize labor market regulations).
  - Facilitate linkages to local firms by encouraging joint ventures, improving internal transport systems, and ensuring equal access to industrial clustering by local firms (Broadman, 2006).
  - Avoid excessive local employment and input requirements that could deter FDI or undermine firm efficiency.

### BRIC development financing: stylized facts
- Historical framing:
  - BRICs have long-standing development programs dating to the 1950s and 1960s; Brazil, China, India view themselves as “development partners,” emphasizing mutual benefits and focusing on promoting commercial activities without policy conditions.
- Magnitude and comparisons:
  - Total BRIC loan commitments amounted to about US$26 billion in 2000–08, compared to about US$296 billion from OECD ODA during the same period.
  - In 2007, BRIC concessional financing (grants and concessional loans) was about 3 percent of total concessional resources provided to LICs—nearly US$4 billion compared to about US$90 billion of total concessional financing from OECD donors.
- Other forms of support:
  - BRICs have provided technical assistance, research support and training, especially in agriculture and health; China built 14 turn-key agricultural aid projects in Africa between 2003 and 2008 (Brautigam, 2010).
- Sectoral concentration:
  - BRIC development financing has been concentrated in infrastructure.
  - Chinese financing: grants largely for social infrastructure (stadiums, market squares, government complexes); loans for productive infrastructure (hydropower, water generation, roads/railways).
  - India: similar allocation pattern to China but on a smaller scale; mostly agricultural and infrastructure (electricity, hydropower, railways).
  - Russia: concessional financing largely in the form of budget support.
- Packaged financing:
  - BRIC financing, particularly from China, often complements FDI and comes as a “package” combining grants, loans, and lines of credit across multiple years and sectors.
  - Example: the “Angola Model” — Chinese financing builds infrastructure, Chinese firms are contracted and source from China, Chinese firms acquire rights to FDI projects (e.g., mining), invest in these projects.
  - Complexity of multi-sector packages can make assessment of public finance and debt sustainability impacts difficult.

### Packaged investment in natural resources and related infrastructure (Box 4 highlights)
- Rationale and advantages:
  - Lack of appropriate infrastructure is a key reason natural resources in SSA remain underexploited.
  - Packages can tackle inter-related constraints: infrastructure enables production, production repays infrastructure loans, social projects reduce poverty and bolster project attractiveness.
  - Competitive construction sectors (e.g., China) can provide value for money and signal long-term engagement.
- Risks and cautions:
  - Risks include lack of competitive bidding, opacity in deals, and potential contingent liabilities.
  - Case example: April 2008 DRC agreement with Chinese consortium involving a US$3.2 billion mining project and US$6 billion public infrastructure projects; complexity made economic and public finance assessment difficult.
  - Amended agreement (October 2009): removed public guarantee on mining loan and excluded second phase of public infrastructure projects; resulted in a joint venture (SICOMINES) planning to invest US$3.2 billion in mining and a series of public infrastructure projects estimated at US$3 billion over the period 2009-14 (schools, hospitals, roads, railways); government guarantee limited to financing of infrastructure projects; net operating profits from mining project to be used to repay public infrastructure loans.

### Empirical patterns in BRIC financing allocation and concessionality
- Allocation determinants:
  - Preliminary empirical analysis: LICs with higher income and lower Country Policy and Institution Assessments (CPIA) scores tend to receive larger loan commitments—suggesting BRIC financing may not be need-based.
  - Geographic proximity increases financing flows from BRICs.
  - Landlocked, resource-scarce countries tend to receive less financing than resource-rich and coastal resource-scarce countries.
- Concessionality patterns:
  - Degree of concessionality is negatively correlated with the amount of financing (larger amounts tend to be less concessional).
  - Countries with better institutional indicators (planning capacity, degree of transparency, higher CPIA scores) receive greater concessionality.
  - Countries that export more to BRICs tend to get less concessional financing terms—possible interpretation: BRICs offer better terms to new markets where trade volumes are low to gain market access.
  - Presence of a Fund-supported program is associated with greater concessionality of BRIC financing, albeit with lower loan amounts.

### Impact of BRIC financing: findings
- Infrastructure and productivity:
  - BRIC financing has contributed to alleviating infrastructure bottlenecks in many LICs.
  - Reported results include a 35 percent improvement in electricity supply in Africa (including 6,000 megawatts of hydropower), a 10 percent increase in rail capacity, and reduced prices for telephone services (Foster et al., 2009; Sebastian 2008; Onjala, 2008).
  - At least 35 countries in SSA have benefited from, or are actively discussing, Chinese infrastructure financing (Doemeland et al., 2010).
  - Literature surveys (Agénor et al. (2006), Straub (2008)) find a positive relationship between infrastructure stock and economic growth, with largest impacts from telecommunications, roads and electricity networks.
- Trade and regional linkages:
  - BRIC financing has helped boost LIC exports through facilitation of trade.
  - BRIC financing can strengthen regional trade linkages (e.g., rehabilitation of the Benguela railway line; rail and port facilities in Liberia facilitating iron ore exports in Liberia and Guinea).
- Complementarity with traditional aid:
  - BRIC assistance has largely been complementary to aid from traditional donors due to different sectoral concentrations.

### Challenges, risks, and policy recommendations
- Ensure high-return project selection:
  - Align BRIC-financed projects with national development priorities.
  - Employ feasibility studies, transparent and competitive bidding, sound implementation and maintenance arrangements.
- Safeguard debt sustainability:
  - Assess macroeconomic implications of total project financing, including risk and public finance implications (including maintenance costs and contingent liabilities).
  - Consider entire financing package when evaluating concessionality and debt risk.
  - Development partners could assist LICs in analyzing complex financing packages.
- Increase transparency:
  - Improve data availability and transparency on size and terms of BRIC financing flows, structure and conditions of packaged deals, and costs of concessions for natural resources.
  - Greater transparency enables better project assessment and implementation.
- Deepen linkages with domestic economy:
  - Seek to maximize local employment, human capital development, and competitiveness of domestic industries linked to BRIC-financed projects.
- Strengthen governance:
  - Reduce scope for resource misallocation; governance is critical, especially for natural resource exporters.
- Maintain momentum of domestic reforms:
  - No-strings-attached financing does not substitute for sound macroeconomic policies and structural reforms necessary for sustained growth and stability.

*Source: IMF staff analysis in the content unit provided.*

### 37.      The rapidly growing trade and financial ties between LICs and BRICs,

### The rapidly growing trade and financial ties between LICs and BRICs

### Spillovers and overall impact on LIC growth
- Economic developments in BRICs exert significant spillovers on LICs growth through direct channels (changes in import demand, productivity, FDI, and exchange rates in BRICs) and indirect channels (BRIC demand and productivity impacting world oil and commodity prices, global demand, and global financial conditions).
- A dynamic multivariate multi-country autoregression model is used to investigate the extent of spillovers from BRICs to LICs.
- Magnitudes of the estimated total impact:
  - The total impact of a 1 percentage point increase in BRICs’ demand and productivity leads (through both direct and indirect channels) to 0.7 percentage point increase in LICs’ output over 3 years and 1.2 percentage point over 5 years.
  - Pre-2007 magnitudes: a 1 percentage point increase in BRICs’ demand and productivity would change LICs’ output by about 0.5 percentage point over 3 years and 0.6 percentage point over 5 years.
  - Comparative reference: A 1 percentage point increase in advanced economy’s demand and productivity is associated with 0.9 and 1 percentage point increase in LIC output over 3 and 5 years respectively (note: based on a different methodology).

### Contribution during the global financial crisis
- BRICs’ contribution to LIC growth increased during the global financial crisis.
- Before the crisis, BRICs accounted for some one-fifth to a third of LIC growth variations (see Table 7); this share increased in all LIC regions during the crisis.
- Simulation: LIC growth would have been 0.3 percentage point to 1.1 percentage points lower during the crisis if BRICs’ GDP growth had declined at the same pace as advanced economies (counterfactual scenario).

### Channels of transmission
- Trade channel:
  - The trade channel accounts for around 60 percent of the impact of BRICs on LIC growth.
  - It is the most significant and persistent channel of transmission for all regions; the response in African LICs is particularly strong.
- Productivity and FDI:
  - The direct impact of BRICs’ productivity changes represents around 13 percent of the combined impact of the various channels; the growth impact on Asian LICs is the strongest.
  - The FDI channel matters but its impact on LIC growth is more modest compared with other spillover channels.

### Indirect/global channels (via global variables)
- BRICs’ demand and productivity growth influence global variables; estimated contributions (average, in percent, 10 years ahead):
  - Roughly one third of changes in world oil prices can be attributed to shocks originating in BRICs.
  - Indirect channels (demand and productivity through their impacts on global variables) account for around 29 percent of the total impact of BRICs on LIC growth.
- Among indirect spillovers from BRICs to LICs:
  - Those operating through world oil and other commodity prices are the largest in the short run.
  - Those through global demand and interest rates are generally small or negligible.
- Table 8 highlights BRIC contributions to global variables (examples preserved from source):
  - To 10 percent change in Global Demand: 20.4 (total contribution of BRICs) and of which: 2.3, 18.1, 79.6 (as presented in source table formatting).
  - To 10 percent change in World Oil Prices: 33.5 (total contribution of BRICs) and of which: 14.2, 19.3, 66.5.
  - To 10 percent change in Other Global Commodity Prices: 17.6 (total contribution of BRICs) and of which: 6.2, 11.4, 82.4.
  - To 10 percent change in US Fed Rates: 8.1 (total contribution of BRICs) and of which: 2.7, 5.4, 91.9.
  - (Source: IMF staff estimates.)

### Role in cushioning LICs during the crisis
- LICs’ strong ties with BRICs, particularly through trade, helped cushion LICs’ growth decline during the crisis because BRICs’ growth declined by less than advanced economies, providing stronger demand for LIC exports.
- Counterfactual simulation indicates LIC growth would have been 0.3 percentage point to 1.1 percentage points lower during the crisis if BRICs’ GDP growth had declined at the same pace as advanced economies.

### Global rebalancing scenario: illustrative general equilibrium results
- A GTAP general equilibrium model simulates a purely illustrative scenario in which current account imbalances in major countries (or regions) are eliminated by 2015; the scenario is illustrative, not a forecast.
- Main model findings for LICs:
  - Real exchange rates: Impact on LICs’ real exchange rates is limited; even Asian LICs would experience only a moderate depreciation.
  - Trade balances: Global rebalancing would generally improve trade account balances in all LIC regions, with improvements ranging from 0.8 percent of GDP in Central Asia and Europe (CAEU) to 2.8 percent in LAC.
  - Exports and composition:
    - Exports to most major markets expand considerably, except to the United States where a contraction in overall imports reduces demand for some products.
    - Strong export growth in Asian LICs reflects closer trade ties with China and specialization in labor-intensive manufactured goods.
    - Manufactured products would account for 80 percent of the total LIC export expansion under the scenario.
  - Output impacts: The comparative-statics scenario implies only limited medium-term output impacts in LICs, but dynamic effects could be larger.
  - Possible broader effects: Fund staff analysis suggests collaborative G20 policy actions could lift global GDP growth by up to 2½ percentage points over the medium term; faster growth in G20 countries would increase demand for LIC exports and manufactured-export growth could generate technology and skill spillovers for LICs.

### Long-run perspective: BRIC structural change and implications for LIC diversification
- Industrial upgrading in BRICs, particularly China, is likely to continue as income and technological sophistication increase.
- Debate on LIC opportunities:
  - Skeptical view: BRICs may continue as exporters of labor-intensive products for a long time, making it difficult for LICs to diversify into manufacturing (examples cited: Collier (2007); Goldstein et al. (2007)).
  - Counterexamples: History shows poor resource-rich countries have diversified into manufactured exports as they grew (examples: Malaysia, Indonesia, Chile).
  - Success factors: Pace of diversification depends on initial endowments, domestic policies, use of resource revenues to build productive capacity (infrastructure, human capital), and the external environment.
- Textiles and clothing example:
  - Historical pattern: Japan → newly industrialized Asian economies → China; in the 1990s several Asian LICs (Bangladesh, Vietnam, Cambodia) increased textiles and clothing exports often with FDI from neighboring countries.
  - If BRIC FDI inflows to LICs continue and diversify, the Asian LICs’ experience might be replicated more widely.
- China’s trajectory:
  - Measured by its share in the world market, China is not yet moving out of textiles and clothing, but as a share of China’s total exports, textiles and apparels are clearly on the decline.
  - Evidence suggests growth of labor-intensive exports is likely to slow in China due to accelerating wage increases in coastal China and tightening supply of unskilled labor; moving manufacturing inland may slow wage increases but is only a medium-term solution.
  - Given China’s large share in the world market for labor-intensive manufactures, its upgrading to higher value-added products should leave room for LICs and other latecomers, including India.

*Source: IMF staff estimates.*

### 50.      To increase manufactured exports, LICs do not have to wait for China and other

### _011211 - 50.      To increase manufactured exports, LICs do not have to wait for China and other

### Conclusions: evolving LIC–BRIC relations
- Economic relations between LICs and BRICs have strengthened remarkably over the past decade.
- BRICs’ increasing weight in the world economy and improved LIC economic performance have driven mutually beneficial cooperation.
- Unique characteristics of LIC–BRIC relations create specific dynamics and challenges; both BRICs and LICs have roles to play in realizing potential benefits.
- The long-term impact of these dynamics is still unfolding and could be far-reaching.

### BRIC engagement with LICs — scope and complementarities
- Engagement is broad-based: trade, FDI, and development financing—these three areas are complementary and reinforce each other.
- Trade:
  - The emergence of BRICs has boosted LICs’ exports and improved their terms of trade.
  - Rapid BRIC growth generated huge demand for primary commodities and raised their world prices.
  - LIC imports of manufactured goods from BRICs have surged, benefiting LIC consumers and intermediate users.
  - Bilateral trade expansion is driven by growth and resource endowment complementarity.
  - Trade barriers remain relatively high in both sets of countries; further reforms could increase bilateral trade.
- FDI:
  - BRIC FDI is improving productive capacity in LICs—tapping natural resources and strengthening manufacturing.
  - BRIC FDI is spreading beyond resources to agriculture, manufacturing, and services (telecommunications in particular).
  - Private sector participation, including SMEs, is increasing in investment projects, potentially broadening LIC production and export bases.
- Development financing:
  - BRIC development financing has helped many LICs alleviate infrastructure bottlenecks and reduce poverty.
  - Although small in volume compared with OECD financing, BRIC financing enabled substantial increases in power generation and transport networks in many LICs.
  - BRIC specialization in infrastructure financing is generally complementary to OECD aid, which increasingly shifted to social spending.
  - BRIC financing is often packaged with trade and investment at the project level; if well leveraged, it could increase development impact and offset potential Dutch disease effects of commodity booms.
- Growth spillovers:
  - Closer LIC–BRIC ties have helped sustain LIC growth, notably during the global financial crisis when strong BRIC growth dampened LIC downturns.
  - Spillovers operate mostly through direct channels: trade (BRIC demand), FDI, and productivity increases—with trade the most powerful transmitter.
  - Indirect channels (notably world commodity prices) are also significant.
  - As LIC–BRIC ties strengthen, LIC policymakers need greater attention to BRIC economic developments, which can amplify or dampen LIC cycles depending on synchronization with traditional partners.

### Challenges highlighted for LICs
- Many challenges are longstanding but intensified by BRICs’ growing role; some stem from BRICs’ “package” financing and differ from interactions with other donors.
- Avoiding resource dependency in the long run:
  - Improved terms of trade delivered large gains to consumers and producers of primary commodities but exerted pressure on import-competing manufacturers.
  - Concerns exist that LICs could fall into a commodity trap, harming long-term growth.
  - The recommended response is not retreat from commodity exports or increased trade protection, but using resource revenues effectively and increasing domestic manufacturing efficiency.
- Attracting more FDI and maximizing benefits:
  - Low saving rates and lack of technology and skills in most LICs mean more FDI is needed to strengthen productive capacity and competitiveness.
  - Fiscal incentives for FDI should be based on careful cost-benefit analysis within development priorities.
  - Continued efforts are needed to improve the business environment, upgrade labor skills, foster technology transfer, and integrate FDI firms into local economies.
- Making greater use of development financing without jeopardizing debt sustainability:
  - BRIC development financing is generally less concessional than ODA and more concentrated in country distribution.
  - Packaging of financing and tied procurement can make debt implications hard to assess; limited public information exacerbates this, pointing to a need for greater transparency.
  - LIC governments must ensure BRIC financing generates sufficient social returns and government revenues to avoid unsustainable debt.
  - This requires well-developed processes for project selection, execution, and evaluation; development partners, including BRICs, can help strengthen LIC capacity.
  - Increased availability of unconditional financing from BRICs should not distract LIC policymakers from improving governance.

### Policy direction and reform priorities for LICs
- Embrace policy reforms to meet the challenges and reap long-term benefits of global integration.
- Structural outlook:
  - Over time, prices of manufactured products, particularly labor-intensive ones, are likely to rise as BRICs devote more resources to non-tradable sectors and upgrade exports to higher value-added products.
  - Global rebalancing could accelerate this process, creating earlier-than-expected opportunities for LICs to export labor-intensive manufactures and diversify economies.
- Key reform imperatives:
  - Accelerate reforms to build export capacity and increase domestic manufacturing efficiency.
  - Improve governance, transparency, and public project evaluation to manage development financing and debt risks.
  - Strengthen human capital and business environment to attract and integrate FDI.
  - Use resource revenues prudently to avoid long-term resource dependency and support diversification.

### Appendix I — Constant Market Share (CMS) analysis: key findings and statistics (2000–2008)
- CMS decomposes export growth into four components: Global market growth, Commodity composition, Market distribution, Competitiveness (residual).
- Methodology notes:
  - Exercise used one-digit SITC (revision 1) data, identifying individual BRICs, the EU, the US, and the rest of the world as separate markets.
- Aggregate results 2000–2008:
  - Change in exports: In billions of US dollars 205.9
  - Average annual growth rate (percent) 25.4
  - Due to:
    - Global trade effect 61.4
    - Commodity composition effect 18.1
    - Market distribution effect 5.7
    - Competitiveness effect 14.8
- Interpretation:
  - About 60 percent of the increase in LIC exports between 2000 and 2008 is driven by the increase in global trade.
  - Close to 25 percent of the increase is attributable to concentration on commodities with above-average demand growth (e.g., fuels, metals, agricultural products) and rapidly growing markets such as the BRICs.
  - Export demand by China, India and Russia grew at twice the world average since 2000.
  - About 15 percent of export expansion is due to improved competitiveness; the residual may capture exchange rate developments, export price inflation, changes in terms of trade, and changes in quality or efficiency of export marketing/financing.
- Sectoral and regional heterogeneity:
  - More than two-thirds of LIC exports consist of primary commodities (agricultural and fuel/mineral goods), driven by LICs in Africa and MCA where fuel shares increased markedly since 1995.
  - Asian LICs: manufacturing (including machinery) dominated exports, reaching about two-thirds of total exports in 2008.
  - LAC LICs: manufacturing share about one-third; primary commodities about 58 percent.
  - BRIC import demand from LICs:
    - Dominated by fuel commodities in China and India—and to a lesser extent Brazil.
    - Agricultural commodities feature prominently in Russia’s and India’s imports.
    - Import composition is more diversified for Asian LICs, with higher manufacturing shares in India’s and Russia’s imports.

*Italic: Source — IMF staff chapter/section from the provided content unit.*

### Appendix II. Gravity Model Analysis of LIC-BRIC Trade

### Appendix II. Gravity Model Analysis of LIC-BRIC Trade

### Methodology
- A gravity model relates bilateral trade to GDP and population (or GDP per capita), distance, and country-specific factors (common language, border, colonizer).
- Model augmented to include policy-specific variables: membership in the WTO, free trade agreements, or other preferential access schemes.
- Specification (parsimonious adaptation of Rose (2004) and Carrere et al. (2010)) estimated with OLS and year fixed effects where indicated.
- Dependent variables: Log Real Exports and Log Real Imports.
- Dataset: 71 LIC reporter countries and 153 partner countries for 1980–2008, yielding a panel of 10,863 country pairs; subset for 1995–2008 used for robustness and to detect recent changes.

### Complementarity index
- Export complementarity index S(ab, c) = {∑i Minimum [Xi (ac), Xi (bc)]}x100 measures similarity of export pattern of country ‘a’ and imports of country ‘b’ to market ‘c’ (Finger and Kreinin (1979) formulation).
- Complementarity is included as Log_Complementarity in regressions.

### Key estimation results — core gravity variables (selected coefficient magnitudes preserved exactly as reported)
- Log GDP reporter: 0.92, 1.08, 1.08, 1.08, 1.11, 1.11 (export equations); 0.59, 0.73, 0.73, 0.73, 0.73, 0.73 (import equations).
- Log GDP partner: 0.81, 0.84, 0.83, 0.84, 0.85, 0.84 (exports); 0.82, 0.90, 0.90, 0.84, 0.92, 0.85 (imports).
- Log GDP per capita reporter: 0.19, 0.00, -0.003, -0.001, -0.01, -0.01 (exports); 0.01, 0.06, 0.06, 0.05, 0.09, 0.08 (imports).
- Log GDP per capita partner: 0.02, 0.07, 0.07, 0.07, 0.03, 0.06 (exports); 0.11, 0.12, 0.12, 0.21, 0.09, 0.18 (imports).
- Log Distance: -1.29, -1.42, -1.41, -1.41, -1.44, -1.45 (exports); -1.19, -1.36, -1.35, -1.37, -1.34, -1.36 (imports).
- Border (binary): 1.34, 1.24, 1.26, 1.28, 1.39, 1.39 (exports); 0.89, 0.87, 0.87, 0.81, 1.01, 0.97 (imports).
- Language (binary): 0.69, 0.87, 0.87, 0.85, 0.82, 0.79 (exports); 0.51, 0.56, 0.57, 0.59, 0.58, 0.59 (imports).
- Year Dummy (2001-08): -0.63, -0.47, -0.47, -0.39, -0.39, 0.15 (exports); 0.19, 0.18, 0.23, 0.23 (imports).
- Constant C: -4.64, -6.58, -6.42, -6.45, -7.49, -7.19 (exports); -2.64, -2.97, -2.95, -1.82, -3.65, -2.45 (imports).

### Complementarity effect
- Log_Complementarity coefficients: 0.13, 0.13, 0.13, 0.13, 0.13, 0.04 (exports); 0.04, 0.04, 0.04, 0.04, 0.05 (imports).
- Interpretation reported: A 10 percent increase in complementarity between the structure of LIC exports and that of partner imports leads to a 1.3 percent increase in bilateral exports. Trade complementarity impacts LIC imports positively, albeit modestly.

### WTO and preferential access scheme effects
- Dum_WTO coefficients: -0.21, -0.21, 0.07, 0.11, -0.05, -0.03 (exports); 0.13, 0.18 (imports) — results mixed across samples and specifications.
- Findings summarized:
  - For full sample, WTO dummy is negative and statistically significant for LIC exports.
  - WTO impact is positive only in the shorter sample and statistically significant only for imports.
  - Dum_EBA (Everything-But-Arms with EU) coefficients (exports): 1.67, 1.62, 1.71, 1.73 — positive and significant.
  - Dum_AGOA (AGOA with U.S.) coefficients (exports): -0.01, -0.07, -0.01, -0.001 — very small and statistically insignificant.

### BRIC-specific partner effects
- Dum_China (exports): 0.20, 0.51, 0.59, 1.59, 1.66 (reported across equations); significance varies with period — positive and increasingly significant in recent period specifications.
- Dum_India (exports): 0.21, 0.60, 0.87, 1.14 — positive and increasingly significant in recent period specifications.
- Dum_Brazil (exports): -1.53, -1.36, 0.10, 0.13 — effects less robust.
- Dum_Russia (exports): -0.06, 0.28, 0.11, 0.31 — effects less robust.
- Summary: Positive impact on LIC exports and imports from relations with China and India, especially since 1995. Effects for Russia and Brazil less robust.

### Model fit and sample
- R2 values reported: exports ~0.38–0.43; imports ~0.46–0.54 depending on equation and period.
- Number of observations: exports equations reported 73,599; 35,034; 35,034; 35,034; 27,215; 27,215 (varies by equation and sample). Imports equations reported 77,642; 38,572; 38,572; 38,572; 29,703; 29,703.
- Number of country pairs: varying values reported (e.g., 6,494; 4,260; 4,260; 4,260; 4,016; 4,016 for exports; analogous counts for imports).

### Data sources and visualization
- Sources: COMTRADE database, IMF staff estimates.
- Figure A2.1: Heat Map of Complementarity Index for LICs with Partners, Average, 2005–08 (partners listed: EU, USA, China, India, Brazil, Russia).

### Appendix IV — Dynamic Panel Analysis (summary of determinants of BRIC financing and concessionality)
- Dataset: Annual BRIC financing flows to LICs during 2000–08 pooled across 49 LICs (World Bank debt database; IMF survey data supplement).
- Variable list includes: BRIC Financing (Loan), ODA Flows, Degree of Concessionality, Income (GDP per capita relative to mean), Infant Mortality, Reserves, Trade Openness, Imports, Exports, Resource-Rich, Resource-Scarce Landlocked, Resource-Scarce Coastal, Regional Dummies (Asia, AFR, WHD), Size of Government (Gcons), Fund Program (Prog), CPIA, Government Effectiveness (KK), Planning (Plan), Transparency (Transp).
- Determinants of loan commitments (empirical summary):
  - Income and size of government have a positive and significant impact on loan commitments.
  - CPIA has a negative impact on BRIC financing.
  - Quantitative magnitudes reported in text:
    - "A 100 percent increase in a country’s income per capita relative to the mean income per capita is associated with a 0.1 percent to 0.2 percent increase in BRIC financing."
    - "A 100 percent increase in government consumption-to-GDP ratio is associated with a 1.2 percent to 1.6 percent increase in BRIC financing."
    - "A 100 percent increase in a country’s CPIA index implies a 0.3 percent decrease in BRIC financing."
- Determinants of degree of concessionality (empirical summary):
  - LICs’ exports to BRICs, government size, and BRIC loan commitments have negative and significant impact on concessionality.
  - Institutional variables (CPIA, transparency, planning) have positive and significant effect on concessionality.
  - Text reports: "A one percent increase in the exports-to-GDP ratio to BRICs is associated with a 2.3 percent to" (text ends as in source).

### Caveats and robustness
- Results should be interpreted with caution due to changing composition of the BRICs and data weaknesses.
- Preferential agreement effects may be inadequately captured by dummy variables; alternative measures (preference margins) may yield different sectoral effects.

*Sources: COMTRADE database, IMF staff estimates.*

### 2.7 percent decrease in the degree of concessionality. A one percent increase in government

### 2.7 percent decrease in the degree of concessionality. A one percent increase in government

### Determinants of BRIC financing and concessionality (Panel VAR results)
- A one percent increase in government consumption as a share of GDP is associated with a 0.8–1.3 percent decrease in the degree of concessionality.
- A one percent increase in the loan commitment is associated with a 10 percent decrease in the degree of concessionality.
- A one percent increase in the CPIA index is associated with a 0.3 percent increase in BRIC financing (models 1–2).
- A one percent increase in the planning index implies a 0.13 percent increase in financing (model 3).
- A similar positive association is obtained for the transparency index (model 4).
- Control variables that matter include population, IMF programs, geography, and complementarities with traditional donors.
- Caveats noted: limited sample size, omitted variables, heterogeneity across LICs, unexamined strategic political interest variables, and potential differences across individual BRICs and between concessional and nonconcessional loans.

### Key coefficient excerpts from Table A4.3 (preserved numeric entries)
- Loan (1 year lag): 0.089 (0.052)**, -10.150 (3.354)***, 0.092 (0.053)**, -9.825 (3.364)**, 0.088 (0.053)*, -9.565 (3.383)***, 0.089 (0.053)*, -9.564 (3.390)***.
- Concessionality (1 year lag): 0.000 (0.000), 0.076 (0.027)***, 0.000 (0.000), 0.075 (0.027)***, -0.0005 (0.000), 0.083 (0.027)***, -0.0005 (0.000), 0.0842 (0.027)***.
- GDP p.c ratio (1 year lag): 0.002 (0.001)**, -0.072 (0.058), 0.002 (0.001)**, -0.061 (0.058), 0.001 (0.001)*, -0.014 (0.061), 0.001 (0.001)*, -0.010 (0.062).
- ODA: 0.002 (0.000), 0.501 (0.019)**, 0.003 (0.005), 0.655 (0.304)**, 0.003 (0.005), 0.465 (0.310)*, 0.003 (0.005), 0.482 (0.312)*.
- IMF Program (incl. PSI): -0.001 (0.002), 0.225 (0.108)***, -0.001 (0.002), 0.230 (0.108)**, -0.003 (0.002)*, 0.287 (0.102)***, -0.003 (0.002)*, 0.291 (0.102)***.
- Asia: 0.009 (0.003)***(0.180), 0.009 (0.003)***(0.181), 0.008 (0.003)***(0.183), 0.008 (0.003)***(0.183).
- Size of Government (1 year lag): 0.016 (0.009)*, -1.279 (0.580)**, 0.015 (0.009)**, -1.449 (0.572)***, 0.012 (0.009)*, -0.758 (0.569)*, 0.012 (0.009)*, -0.767 (0.569)*.
- CPIA: -0.003 (0.002)**, 0.277 (0.096)***, -0.003 (0.001)**, 0.301 (0.096)***.
- Planning Index: -0.001 (0.001), 0.131 (0.053)***.
- Transparency Index: -0.001 (0.001), 0.139 (0.061)***.
- Exports to BRICs (1 year lag): -0.021 (0.020), -2.339 (1.280)**, -0.017 (0.020), -2.511 (1.278)**, -0.016 (0.020), -2.659 (1.273)**.
- Imports from BRICs (1 year lag): 0.004 (0.010), 0.327 (0.641).
- Trend: 0.001 (0.000)**, 0.007 (0.021); 0.000 (0.000)**, -0.001 (0.022); 0.001 (0.000)**, 0.005 (0.021); 0.001 (0.000)**, 0.005 (0.021).
- Dummy Variable (=1, if loan committed): 0.013 (0.002)***, 3.185 (0.100)***; 0.012 (0.002)***, 3.169 (0.100)***; 0.012 (0.002)***, 3.217 (0.100)***; 0.012 (0.002)***, 3.223 (0.100)***.
- Number of Observations: 379 (repeated entries).
- Adjusted R-squared: 0.20, 0.75, 0.20, 0.75, 0.20, 0.75, 0.19, 0.75.
- Sum Sq. Resids: 0.07297, 7.73, 0.07300, 0.22, 0.07299, 5.70, 0.07300, 0.25.
- S.E. Equation: 0.01, 0.90 (repeated entries).

### Variance decompositions (Tables A4.4 and A4.5) — key points and exact shares
- Loan commitments: in the period immediately following a shock, the loan commitments variable explains about 53 percent of its own shocks and has strong persistence.
- Contributions to loan commitments variance (noted as large and lasting): Size of government 13 percent; Fund program 14 percent; CPIA 8 percent.
- Degree of concessionality: in the period immediately following a shock, concessionality explains about 65 percent of its own shocks and has a large and lasting effect.
- Loan commitments and Fund program variables together explain about 27 percent of the variance of concessionality.
- CPIA, size of government, and ODA flows together make a small contribution totaling about 8 percent.
- Selected decomposition table entries (period 1 shares shown in source):
  - Loan model (Period 1): Own Factors 0.0058, CPIA 8.71, Government Size 4.32, Exports 2.20, Concession-ality 0.05, Loan 6.21, Program 3.82, ODA 2.22, Other 2.7.
  - Concessionality model (Period 1): Own Factors 0.0102, CPIA 2.2, Government Size 2.2, Exports 0.21, Loan 4.76, Concession-ality 4.91, Program 2.33, ODA 3.1, Other 0.4.
  - (Tables report period-by-period values up to Period 100 with specific numeric entries shown in the source.)

### Global VAR (GVAR) analysis: rationale and modeling strategy
- Rationale:
  - GVAR addresses international spillovers and residual interdependencies that factor models may leave unexplained.
  - GVAR introduces observed country-specific foreign variables in individual country models to handle pervasive dependencies flexibly.
- Modeling strategy:
  - Constructed GVAR with (i) individual LIC-specific domestic variables, (ii) BRIC sources of spillover variables (productivity, trade, FDI, exchange rate), and (iii) global factor variables (world oil prices, world commodity prices, world demand, and US Fed rates).
  - Direct impact estimation: generalized impulse response function (GIRF) of identified shocks to LIC fundamentals (GDP, trade, inflation, real exchange rates).
  - Indirect impact estimation: two-step approach — estimate GIRF responses of LICs to global factors; estimate SVAR to identify shocks from BRICs to global factors; combine to obtain indirect impacts (note: indirect estimates are indicative and not associated with a standard error because they are obtained from two different estimates).
  - Total effect = direct effect + indirect effect.
- Crisis analysis:
  - Generalized variance decomposition estimated for GVAR in-sample (1972–2009, including the global financial crisis dummy) and out-of-sample (1972–2007, excluding the crisis).
  - Enables calculation of relative contributions to LIC output changes from (i) domestic variables, (ii) BRIC source spillover variables, and (iii) global factor variables, and comparison to gauge BRICs' role during the crisis.

### Data, scope, and variables used in GVAR estimation
- Sample: 29 countries (Sub-Saharan Africa 12, Asia 10, Middle East and Europe 4, Latin America 3), annual data 1970–2009.
- Data sources: IMF World Economic Outlook, International Financial Statistics, UNCTAD, and OECD databases.
- Individual LIC variables included:
  1. Growth: log of real GDP, PPP-based, 2000=100.
  2. Trade: log of trade (sum of imports and exports) volume with BRICs.
  3. FDI: FDI from BRICs proxied by time-varying share of FDI from BRICs to LICs multiplied by total FDI received by each country (formula as given in source).
  4. Inflation: change in log of the consumer price index (CPI, 2000=100).
- Country-specific foreign variables for BRICs:
  5. BRICs aggregate GDP per capita (log)—proxy for productivity—weighted average (PPP-based), 2000=100.
  6. BRICs aggregate demand (log), weighted average of import volumes (PPP-based), 2000=100.
  7. BRICs real effective exchange rate index (log), 2000=100.
- Identified global factors:
  8. International crude oil price (US$ per barrel).
  9. World commodity price index (2000=100).
  10. US Federal Reserve interest rate (percent), and an alternative variable.
  11. World total imports volume (log), excluding BRIC imports, 2000=100.

### Alternative VAR for AEs shocks and counterfactual scenario
- Alternative VAR to estimate impact of AEs productivity and demand shocks on LIC growth:
  - Five endogenous variables: AE real GDP per capita growth rate; change in volume of AE imports from LICs; BRIC real GDP per capita growth rate; percent changes in international oil prices; LIC real GDP growth rate.
  - Sample period: 1972–2009. All variables follow an I(0) process. Optimal lag = 2. VAR passed stability test.
- Counterfactual scenario based on lower BRIC growth:
  - BRICs growth held up at 6.3 percent in 2008–09 during the global financial crisis, compared to advanced economies where growth declined to about 1.5 percent on average in 2008–09.
  - Counterfactual: BRICs growth slows as much as advanced economies during the crisis. Approach: difference in BRICs growth under the counterfactual multiplied by the coefficient on partner country growth from a panel growth regression; the result is subtracted from baseline growth forecast for LICs.
  - Limitation: approach considers only the impact of slower BRIC growth and does not account for possible associated changes (commodity prices, interest rates, capital flows).

### Responses of LICs to BRIC shocks and country indicators
- Figure A5.2: generalized impulse responses of Real GDP Growth to identified (+1 s.e.) shocks to BRICs' trade, FDI, technology, and real effective exchange rate; plotted across years 1–10 with growth axis ticks shown as -0.02, 0.03, 0.08, 0.13, 0.18 (percent).
- Table A5.1 (selected entries, exact numeric indicators preserved):
  - Angola: Oil Exporters FDI Inflows 11.5, Trade with BRIC 22.4, Real GDP Growth 11.8.
  - Burkina Faso: 10.4, 9.3, 5.2.
  - Cameroon: 0.5, 6.4, 3.6.
  - Congo, Republic of: 11.2, 20.8, 4.1.
  - Cote D'Ivoire: 0.4, 5.6, -0.3.
  - Ethiopia: 0.8, 17.2, 7.1.
  - Ghana: 0.6, 13.5, 5.2.
  - Kenya: 0.1, 0.0, 4.0.
  - Nigeria: 11.2, 16.0, 9.3.
  - Senegal: 0.1, 10.2, 4.2.
  - Tanzania: 0.7, 15.0, 6.8.
  - Uganda: 0.7, 9.1, 7.3.
  - Zambia: 11.4, 5.3, 5.0.
  - Bangladesh: 0.2, 16.9, 5.8.
  - Cambodia: 1.1, 7.4, 9.6.
  - Mongolia: 11.6, 58.4, 6.6.
  - Myanmar: 0.5, 24.7, 12.9.
  - Nepal: 0.0, 57.6, 3.8.
  - Pakistan: 0.4, 9.6, 5.1.
  - Sri Lanka: 0.3, 16.3, 5.1.
  - Vanuatu: 1.4, 7.7, 2.8.
  - Vietnam: 1.0, 14.4, 7.6.
  - Yemen, Republic of: 1.0, 42.9, 4.2.
  - Azerbaijan: 12.9, 14.0, 15.0.
  - Kyrgyz Republic: 0.9, 3.8, 4.5.
  - Sudan: 11.5, 41.7, 7.5.
  - Uzbekistan: 10.2, 30.6, 6.0.
  - Bolivia: 0.6, 30.5, 3.4.
  - Papua New Guinea: 10.2, 6.0, 1.8.
  - St. Lucia: 3.5, 18.4, 1.9.
  - (Table notes: 1/ Unweighted average in 2000–07. 2/ Inward FDI flows to GDP ratio (in percent). 3/ LIC's trade with BRICs to its total trade in percent. Sources: IMF WEO; OECD; IMF staff estimates.)

### GTAP model for global rebalancing (Appendix VI)
- Model description:
  - GTAP is a comparative-static global general equilibrium model based on neoclassical trade theory.
  - Features: firms maximize profits; constant returns to scale; perfect competition; each industry produces a single commodity using intermediate inputs and a primary factor composite (CES of land, unskilled labor, skilled labor, capital, natural resources).
  - Intermediate inputs are CES blends of home products and imports (Armington approach).
  - Households maximize utility with a non-homothetic constant difference in elasticity (CDE) function; public consumption claims a fixed proportion of national income unless determined otherwise.
  - All regions contribute savings to a global savings pool managed by a global bank; capital is mobile across regions for investment allocation but capital stock is not mobile across regions (perfectly mobile within a region).
- Simulation strategy:
  - Benchmark projection for 2015 based on IMF WEO (April 2010) forecasts for GDP and current accounts, World Bank for factors of production, and United Nations for population, using GTAP database version 7.
  - Counterfactual experiments: eliminate trade balances of individual countries/regions to create scenarios of more balanced global economy via changes in saving-investment balance in capital account.
  - All simulations use standard GTAP elasticity values from the model's free-download version.
  - Aggregation: 10-region, 10-sector model chosen; LIC regions separately identified to evaluate impacts on LICs.

*Source: IMF staff analysis and tables as provided in the content unit.*

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*Source: _011211 - References*

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