BRICs and Mortar—Building Growth in Low-Income Countries

IMF Blog, May 9, 2011

Source details

Title: BRICs and Mortar—Building Growth in Low-Income Countries
Authors: Dominique Desruelle, Catherine Pattillo
Date: May 9, 2011
Versions in 中文, Português, Español, Русский
Core proposition: The so-called BRIC nations—Brazil, Russia, India and China—could be a game changer for how low-income countries (LICs) build their economic futures by becoming a new source of growth through trade, investment and development financing.

LIC-BRIC ties—particularly trade, investment and development financing—have surged over the past decade.
Stronger growth in the BRICs and their demand for LIC exports can help buffer LICs against sluggish demand in most advanced economies following the global financial crisis.
Strengthened ties have boosted exports, contributed to growth in LICs, and aided LIC resilience during the global economic crisis.

The potential benefits from LIC-BRIC ties are described as enormous for LIC growth and diversification.
BRIC development financing can be complementary to traditional donor support and may provide commercially-oriented financing that:
- Is less constrained by the size of the flows.
- Provides incentives for competition, efficiency and permanent interest in ensuring project viability.
Successful BRIC experiences (e.g., China’s coherent investment planning and continual reassessment of infrastructure gaps) offer lessons for LICs on scaling up infrastructure and development coherently.

Key risks to be managed:
- Financing investment without taking on too much debt.
- Attracting investment without sacrificing too much fiscal revenue through costly tax incentives.
- Avoiding resource dependency in the long run (commodity trap).
Current LIC-BRIC ties may push LICs toward overreliance on raw materials because India and China’s competitiveness in manufacturing and large demand for natural resources may raise commodity prices and undermine incentives to shift into manufacturing.
Uncertainty about whether BRIC development financing has effectively transferred technology and improved labor skills, particularly in manufacturing.
Greater transparency of BRIC financing, particularly development financing by China, is needed; the lack of official data on development financing by China is highlighted as a significant gap.

LIC policy priorities:
- Develop a coherent strategy for scaling up infrastructure and development that maximizes growth potential.
- Balance tradeoffs among financing sources, fiscal incentives, and debt sustainability.
- Strengthen absorptive capacity to make larger investment flows effective.
Role for multilateral institutions and donors:
- Provide analysis and policy advice to support macroeconomic stability and debt sustainability.
- Offer capacity building and facilitate improvements in the investment environment to boost LIC absorptive capacity.
Trade policy:
- Greater provision of trade preferences (including beyond commodities) could help ensure mutual benefits and counter narratives that BRICs are merely extracting resources.

The IMF-sponsored panel drew on perspectives from LIC and BRIC policymakers and development experts to explore issues around LIC-BRIC ties.
The panel discussion identified six essential factors that will help LICs lay the groundwork to benefit from the LIC-BRIC relationship (the source notes these six factors without enumerating them in this overview).
The authors hope the panel can foster ongoing dialogue on how LICs can increase the volume and quality of investment and associated financing in a sustainable way.

Source: BRICs and Mortar—Building Growth in Low-Income Countries, Dominique Desruelle and Catherine Pattillo, May 9, 2011.

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