In their Oct. 26 plan to resolve the Continent's debt crisis, European leaders pledged to increase the size of the euro zone's bailout fund from €440 billion ($604 billion) to €1 trillion. The money won't come entirely from Europeans themselves. Responding to Western requests, Chinese officials are considering whether to contribute some of their $3.2 trillion in foreign currency reserves to the European Financial Stability Facility or possibly a new bailout mechanism set up by the International Monetary Fund. China also has signaled interest in investing in Greek infrastructure and buying up some of Athens's debt. As Theodoros Pangalos, Greece's Deputy Prime Minister, told reporters, “The Chinese deal in real things, in merchandise. And they will help the real economy in Greece.”
Beleaguered world leaders, corporate executives, and ordinary investors are looking to emerging powers—Brazil, Russia, India, and China (the so-called BRIC nations), and others like South Africa and Indonesia—to help revive the global economy. While the West is struggling, the rest are booming: Indonesia's economy grew by 6.1 percent last year; Turkey expanded by 9.2 percent; India grew by 8.5 percent. At an October meeting of Group of 20 finance ministers, Brazil and other new powers proposed increasing their contributions to the IMF so that it would have more money to aid Europe and other indebted regions. Turkey has used its resources to promote liberalization in the Arab world. And Brazil and Russia, like China, are weighing the prospect of purchasing sizable quantities of European nations' sovereign debt.
Despite such bold plans, however, the emerging giants are far from prepared to deliver on them. Notwithstanding their frequent shows of solidarity, the BRICs and their brethren have about as much unity as the cast of The Bachelor. Their economies have not produced the kind of innovation and competitiveness critical to long-term global growth. Western nations have amassed debt recklessly, but the new powers are about to confront massive economic problems of their own—challenges that could bring them down before they can realize their promise. If they can rebalance their economies and bury some of the disputes that divide them, the BRICs have the potential to continue to raise living standards in the developing world. Just don't count on them to come to the West's rescue.
The emerging giants frequently promote their models of development as panaceas for slow growth. Beijing has invited officials from countries such as Vietnam and Thailand to participate in training programs that emphasize the superiority of China's economic model over the West's. Russian Prime Minister Vladimir Putin has proposed a new “Eurasian Union” that would allow Moscow to exert influence over struggling former Soviet states such as Belarus. For its part, Brazil presents itself as an economic model to left-leaning Latin nations such as Peru and Ecuador that have grown tired of the Washington Consensus.
That the BRICs will supplant the U.S. and Europe as the engines of the global economy appears all but inevitable. In his new book, Eclipse, former IMF assistant director for research Arvind Subramanian argues that by 2030 China will be as dominant in global economics as the U.S. was in the mid-20th century. He also predicts that emerging economies will grow by around 5.6 percent annually over the next two decades.
But that doesn't mean they will bring the rest of the world with them. Economic leadership requires building unity and coalitions, but the emerging giants are drawing further apart. Indian officials say their relationship with China has seldom been worse: The two nations are jostling over borders and naval supremacy in the South China Sea, and Delhi recently put new missile batteries near the Chinese border. The Stockholm International Peace Research Institute reports that arms spending in Southeast Asia has more than doubled in the past five years, as countries such as Indonesia and Vietnam seek to counter China's growing military might. Meanwhile, nearly every BRIC country chafes at Beijing's undervalued currency. Developing nations—not the U.S.—have filed the most complaints against China in the World Trade Organization.
The fissures among the emerging powers have worked against their collective interests. Earlier this year they lobbied for the IMF to choose one of their own as the fund's new leader, but their disunity—the BRICs could not settle on one candidate—was a factor in French Finance Minister Christine Lagarde's getting the job. And while some like India want to expand the U.N. Security Council, other BRIC nations such as Russia, which already has a seat, refuse to go along.
Even if they were able to settle their arguments, the BRICs would remain ill-suited to seize the global economic lead. The emerging giants oppose nearly any type of action that smacks of meddling in another country's business. They are less likely to adhere to the global commons—the idea that solutions that are good for the world, and not merely for one nation's narrow interests, will ultimately benefit everyone. China's offers to help bail out indebted euro zone economies have come with demands that European nations drop claims against China for unfair trade policies. By contrast, Japan has on multiple occasions bailed out highly indebted Asian economies without insisting it receive specific benefits in return.
When it comes to their own economies, few of the BRICs are becoming more innovative or more open. Beijing-based banker Carl E. Walter, co-author of Red Capitalism: The Fragile Financial Foundation of China's Extraordinary Rise, estimates that three-quarters of the biggest Chinese companies today are controlled by the government, up from about half 10 years ago. In India, the government still essentially dictates major business sectors, including retail and infrastructure. The World Bank ranks India 132nd in the world in ease of doing business; Brazil is 126th; and Russia ranks 120th, behind such economic giants as Albania and Samoa.
As a result, the BRICs have produced only a handful of globally competitive companies that rely on innovation. Most of the leading tycoons in the developing world, such as Mexico's Carlos Slim and Indonesia's Aburizal Bakrie, have made their fortunes by dominating closed sectors of the economy in which they have monopolies or incestuous government connections. Even India, lauded for its multinational IT companies, does not rank in the top 15 nations in global patent applications, according to the World Intellectual Property Organization. Outside of a tiny handful of universities, India's education system is too weak to produce the innovators who will help it climb the list.
In the coming decade, nearly every emerging giant will have similar flaws exposed. They may well struggle even to retain the gains they have made. Despite sizable government incentives, consumer spending in Indonesia, China, and other emerging economies remains stagnant, as inflation cuts into wages and a lack of trust in government and the future encourages people to save, not spend, their salaries. India, Brazil, and other new powers confront rising labor and energy costs, as well as inflation. Goldman Sachs (GS) forecasts that Brazil's annual growth will shrink by half in 2012, while economist Michael Pettis of the Carnegie Endowment for International Peace predicts China may grow by as little as 3 percent annually during the next few years, a severe downturn. Such a weakening in the BRIC economies would depress consumer demand, further slowing the global economy. And with their publics poorer, the BRICs would have to devote nearly all their energy to righting their own ships, leaving them little capacity to look beyond their borders.
With so much cash on hand, China and other emerging powers may, in the short run, be able to stabilize investor confidence in the weaker euro zone nations. What they can't do anytime soon is provide the long-term leadership that the world needs. That's why it is even more important for the U.S. and Europe to get their own houses in order by rebuilding their infrastructures, ignoring the temptation for ever-greater austerity, and rebalancing their economies away from housing and consumer credit. By showing a commitment to reform, the West can regain the leverage it needs to push for measures that can get the world economy moving again, such as free trade, fair currency trading, and investments in innovation.
The alternatives are sobering. In the late 1970s, like today, the world economy lacked a guiding hand. The U.S. had turned inward after the Vietnam War and was consumed with its own stagflating economy. The Soviet Union was in the early stages of economic collapse. Rising powers at that time, such as Japan, were unwilling or unable to step in. Growth languished for years; today the '70s are known as much as a lost economic decade as an era of sin and disco.
In the 1930s, Britain and other European nations, then still the leaders of the international economy, were so exhausted by World War I and the Depression that they could do little to right global growth. The isolationist U.S. also refused to take action. A global economic crisis fostered increasingly belligerent political movements in Europe and Asia. We know how that decade ended, too.
Kurlantzick is Fellow for Southeast Asia at the Council on Foreign Relations.
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