New Players, New Game?: The Impact of Emerging Economies on Global Governance 9789048519309

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The Hague Centrefor forStrategic Strategic Studies Studies (HCSS) T NO TNO and and TheThe H agu e Centre programme Strategy Change analyzes global trends in in a p ro gram Strategy & &Cha nge a na lyz es globa l trends dynamic world wo rld affecting affecti ng the foundations of our security, welfare welfare,and andwell²being. well-being. T he pro gram attempts to a nswer the critica l question: what The programme attempts to answer the critical question: are the licies and and strategies thatthat m ust be be developed to what arepo the policies strategies must developed effectively anticipate thes em erging cha llenges? to effectively anticipate onethese emerging challenges? S trategy & Change provides provi des both a better understanding understa nding Strategy feeds the the agenda agenda for fo r aa sustainable susta ina ble future future of society. and feeds our society.

NEW PLAYERS, NEW GAME? The Hague CENTRe foR STRATEGIc STUDIES and TNO R E port N o 2 0 1 2 • 1 1 I S B N 97 8 9 0 8 9 6 4 5 4 8 7 e - I S B N 97 8 9 0 4 8 5 1 9 3 0 9 ( pd f ) e - I S B N 978 9 0 4 8 5 1 9 3 1 6 ( e P ub ) Authors: Sijbren de Jong (project leader), Rem Korteweg, Joshua Polchar and Artur Usanov With the help of: Tessa Ax, Marno de Boer and Annemarie Poorterman

©2012 The Hague Centre for Strategic Studies and TNO. All rights reserved. No part of this report may be reproduced and/or published in any form by print, photo print, microfilm or any other means without previous written permission from the HCSS or TNO.

Graphic Design: Studio Maartje de Sonnaville, The Hague Cover design: Mulder van Meurs, Amsterdam

HCSS, Lange Voorhout 16, 2514 EE den HAAG T: +31 (o)70–3184840 e: [email protected] W: strategyandchange.nl

New players, New Game? The Impact of E merging Economies on Global Governance T he H ag ue C EN T R e fo R S T R AT E G I c S T UDI E S A N D T N O

CONTENTS

Contents

9



EX EC U TI V E SU M M ARY

1

I ntroduction

15

2

S election o f C ountries

19

3

M ain P ower Trends among the B R IC S +

23

3.1 Population

24

3.2 Economics

25

3.3 Public finances

29

3.4 Military Power

32

3.5 Technological Sophistication

34

3.6 Conclusions

38

4

B R I C S + and G lobal Economic Governance

39

4.1 Trade

39

4.2 Arms Trade

45

4.3 Protectionism

46

4.4 Reform of International Financial Institutions

48

4.5 Financial Initiatives

50

4.6 Conclusions

52

5 D iplomatic interactions of the B RIC S + and the W est

53 53

5.1 Diplomatic Connections 5.2 The BRICS+ within the United Nations Security Council

56

5.3 Non-Proliferation

60

5.4 The BRICS+ and the Global Commons: Negotiations within

62

the UNFCCC

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CONTENTS

6

C onclusion

67

7

B ibliography

73

8

A nnex : I ndividual C ountry Notes

93

8.1 Brazil

93

8.2 China

106

8.3 India

116

8.4 Indonesia

125

8.5 South Korea

141

8.6 Russia

152

8.7 South Africa

160

8.8 Turkey

172

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NE W P L AY E R S , NE W G A M E ?

EXECUTIVE SUMMARY

Executive S ummary

The first decade of the 21st century has been a period of rapid economic growth in many large emerging economies, especially China. While the U.S. and many European economies are weighed down by large sovereign debt and austerity measures that could condemn them to several years of slow growth, many emerging economies are in much better fiscal shape and have recovered quickly from the global recession. The growing economic and financial momentum of Brazil, Russia, India, China and South Africa, as well as Indonesia, Turkey and South Korea (collectively grouped as 'BRICS+' in this study), has Western decisionmakers worried. Spurred inter alia by the organization of annual summits since 2009, a central strategic concern is whether (several of) the emerging economies are likely to coalesce into an economic or political bloc that might become a counterbalance to Western influence in existing economic, financial, and political institutions and promote an alternative agenda. In essence, the emergence of such 'clubs' of countries fuels an erosion and fragmentation of global governance. Moreover, the emergence of a bipolar world with 'the West against the Rest' could potentially increase the costs of doing business, severely complicate reaching agreement on transnational problems such as climate change, challenge the promotion of Western values and human rights, lead to increased diplomatic or military tensions, and jeopardize the ongoing process of economic globalization. This study looks specifically at the following key questions: • In what ways has the rise of emerging economies affected the international power balance? • To what extent are the emerging economies cooperating strategically on economic, diplomatic, and security matters?

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EXECUTIVE SUMMARY

Main Power Trends Among the BRICS+

In economic terms, almost all countries in the BRICS+ group grew significantly faster during the 2000s than in the previous decade. Fiscal policies within the BRICS+ countries have greatly improved and the state of their public finances is in most cases better than in the EU or the U.S. The improved financial health of the BRICS+ countries gives them more freedom in selecting their own political and economic priorities (rather than following the ones imposed externally, for example by the International Monetary Fund, IMF) and becoming stewards of their own economic destiny. Military forces have been one of the beneficiaries of increased spending and in some cases the improvement in military capabilities has been rapid and substantial. However, it should be pointed out that previous economic performance of the BRICS+ economies has been quite volatile and future economic conditions might not be as favorable as they were between 2003 and 2008. Some of these countries are already showing signs of complacency and diminishing drive to implement difficult economic reforms to sustain growth. With the exception of South Korea, all of the BRICS+ countries lag significantly behind the EU in terms of their level of development and technological sophistication. BRICS+ and Global Economic Governance

The role of the BRICS+ and other large emerging economies in global trade and finance is expanding rapidly. The last decade has also seen a rapid expansion of inter-BRICS+ trade and investment, driven foremost by the breathtaking growth in China. China's role is especially prominent among Asian countries, where it is the main trading partner for many countries. Expanding inter-BRICS+ trade provides an economic foundation for increasing policy coordination on issues of global economic and financial governance. BRICS+ countries often share similar concerns over Western economic governance. One of the issues where they find common ground is reallocation of votes between the West and developing countries in the international financial institutions. Loose monetary policy, especially in the U.S., that might undermine the value of foreign currency reserves held by BRICS+, is another cause for concern in many of these countries. It is also a

10 NE W P L AY E R S , NE W G A M E ?

EXECUTIVE SUMMARY

factor in their search for alternatives to the U.S. dollar as the main reserve currency. The proposed BRICS bank and their currency initiatives demonstrate a rising ambition among the BRICS to play an increasingly large role in international economics and finance as an alternative to dominant Western regimes. Moreover, if successful, the establishment of the 'BRICS bank' will give legitimacy to smaller models of 'club-based' models of global governance and further erode the traditional multilateral institutional architecture. At the same time it seems that it is much easier for the BRICS+ to demonstrate their opposition to 'Western' economic policies and institutions than it is for them to put forward a 'positive' international agenda. So far their proposals have often been vague and limited in scope. These countries have also been quite active in introducing trade-restrictive measures in the wake of the global financial crisis of 2007-2008, despite their pledges at G20 summits. Diplomatic Interactions of the BRICS+ and the West

If coordination between BRICS+ countries does take place, one would expect disagreement with Western United Nations Security Council (UNSC) members to occur more often than not. However, most of the resolutions that are put to a vote are passed unanimously; only in a relatively small number of cases were abstentions or votes against recorded (a mere 7% of the total resolutions in the period 1997-2012). Within the BRICS+ group, abstentions on the part of Russia and/or China together with at least one other BRICS+ country were rare occurrences. Moreover, a consistent pattern among BRICS+ countries in terms of UNSC voting (a kind of BRICS+ 'geopolitical pact' so to speak) could not be discerned. It is true that China and Russia have often voted or abstained together but when they abstain they are more likely to be joined by one of the Western countries than any of the other BRICS+. Non-proliferation issues are another example where divided attitudes among the BRICS+ countries come to the fore. Here the main dividing line lies between the haves and have-nots, i.e. nuclear-weapon states and the rest. Whereas the former see the IAEA Additional Protocols as a precondition for the transfer of nuclear technology (albeit with varying degrees of firmness), Brazil, Indonesia, and many other developing countries see this as outright discrimination. In other words, we see significant divergences here among the BRICS+ themselves.

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EXECUTIVE SUMMARY

Within the area of climate change, there is stronger agreement among the emerging economies, particularly among Brazil, South Africa, India and China – commonly known as BASIC – within the United Nations Framework Convention on Climate Change (UNFCCC). On a general level, climate diplomacy should be viewed as part of a wider geopolitical game which raises the possibility for bargaining between major parties (both intraBASIC, as well as towards developed nations). However, significant differences remain. Brazil and South Africa share a general realization that binding emissions cuts will in time be inescapable. For India and China however, this notion is still very far away. This often results in vehement opposition to what they view as a 'warming up' of Brazil and South Africa to Western proposals. Nevertheless, significant overlap exists among the emerging economies with many of their goals coinciding, thus granting them formidable influence over global climate-change negotiations. Despite growing trade between the BRICS+, an analysis of their diplomatic ties to the rest of the world (measured by the number of consulates) reveals that neighboring and Western countries still feature strongly in BRICS+ foreign relations. The intensification of trade relations however may, with time, result in a shift towards closer diplomatic ties between the BRICS+. It is likely however, that this will take many years to substantially change the diplomatic balance. Nevertheless, economic coordination often precedes political coordination, and we therefore may well be witnessing the first signs of economic bloc formation. Intensify Trade Relations to Avoid further Bloc Formation in Economic Realm

Notwithstanding the fact that cooperation between the BRICS+ countries is increasing, differences between them (for example, in terms of economic structure, level of economic development, external and internal security situation, and level of democracy) remain significant. This creates substantial barriers for policy alignment and often limits BRICS+ cooperation. Most importantly, the absence of a broadly shared positive agenda is the main reason why it is highly unlikely for these countries to grow into a geo-economic, geopolitical alternative to the West within the next five to ten years.

12 NE W P L AY E R S , NE W G A M E ?

EXECUTIVE SUMMARY

This means that there is still more dividing the BRICS+ than there is uniting them. For Europe this represents an opportunity to engage with the BRICS+ through intensified trade relations. Importantly, this will not only increase European political and economic influence in these countries, but also potentially reduce the momentum of intra-BRICS+ economic integration and dampen its spillover into the political domain. Secondly, Europe should engage in a strategic-level discussion on economic governance and the future of development policy to ensure that the BRICS+ complement and do not substitute existing regimes. The question is whether Europe is up for the task.

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INTRODUCTION

1

Introduction

The first decade of the 21st century has been a period of rapid economic growth in many large emerging economies, especially China. This has brought about substantial changes in the relative power balance between the emerging economies and the West. The financial and economic crisis that started in 2007‒2008 has reinforced this global shift. While the U.S. and many European economies are weighed down by large sovereign debt and austerity measures that could condemn them to several years of slow growth, many emerging economies are in much better fiscal shape and have recovered quickly from the global recession. Some large emerging economies have even been considered potential creditors for a number of struggling countries in the Eurozone – a situation that would have been difficult to imagine several years ago. These developments have contributed to the (re-)emergence of a debate on the 'decline of the West'.1 Rapid economic growth in emerging economies has had many advantages for Western companies and consumers. For Western firms it has opened up new opportunities for expanding sales and investments. Western consumers have benefited from imports of cheaper consumer goods from these countries. For instance, Germany's strong economic performance in recent years has been closely associated with its strong exports to large emerging economies. Not surprisingly, in a period of economic downturn in Europe

1

An intense debate has emerged in scholarly and policy circles over the 'Decline of the West.' A small selection of recent works include Edward Luce, Time to Start Thinking: America in the Age of Descent; Fareed Zakaria, The Post-American World; Michael Mandelbaum, The Frugal Superpower: America's Global Leadership in a Cash-Strapped Era; Ian Bremmer; Every Nation for Itself: Winners & Losers in a G-Zero World; Walter Laqueur, After the Fall: The End of the European Dream and the Decline of a Continent; Martin Jacques, When China Rules the World: The End of the Western World and the Birth of a New Global Order.

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INTRODUCTION

there has been substantial interest on the part of governments and businesses alike to reach out to these economies. At the same time, the growing economic and financial momentum of many larger emerging economies raises serious questions for Western decisionmakers. Spurred, inter alia, by the organization of annual summits since 2009, a central strategic concern is whether (several of) the emerging economies are likely to coalesce into an economic or political bloc (be it formal or informal) that might promote alternative approaches to global economic, diplomatic or security issues and develop a counterbalance to Western influence in existing economic, financial and political institutions. Although the development of counterbalancing forces to Western preeminence is a response to be expected as emerging countries rise – and is in fact predicted by International Relations theory – the extent and pace of this transformation are unclear. In the event that this counterbalancing results in the formation of a bloc of emerging countries, including coordinated challenges to limit Western influence or the development of alternative economic-financial regimes, European interests stand to suffer. The emergence of such 'clubs' of countries fuels an erosion and fragmentation of global governance.2 Moreover, the emergence of a de facto bipolar world with 'the West against the Rest' could potentially increase the costs of doing business, severely complicate reaching agreement on transnational problems such as climate change, challenge the promotion of Western values and human rights, lead to increased diplomatic or military tensions, and jeopardize the ongoing process of economic globalization. Questions that arise from this include the following: could the BRICS annual summits (Brazil, Russia, India, China, South Africa) pave the way to a new economic or political bloc? What are the sources of influence of the emerging countries? In which international forums is collaboration between emerging economies taking place? How could bloc formation impact on economic opportunities for European firms in these emerging economies?

2

Tobias Debiel et al., eds., 'Global Trends 2013. Peace - Development - Environment.' (Development and Peace Foundation (SEF)/Institute for Development and Peace (INEF), 2012), 10–11.

16 NE W P L AY E R S , NE W G A M E ?

INTRODUCTION

To answer this and other questions, we must explore the extent of cooperation between the emerging economies when it comes to key issues of global governance and security. This study looks specifically at the following key questions: • In what ways has the rise of emerging economies affected the international power balance? • To what extent are the emerging economies cooperating strategically on economic, diplomatic, and security matters? This report summarizes the results of a study undertaken by The Hague Centre for Strategic Studies (HCSS) on behalf of TNO (Dutch Organization for Applied Scientific Research) to address some of the political, economic and security issues related to rapid growth of emerging economies. First, it describes the rationale for selecting eight large emerging economies (combined under the acronym BRICS+ in this report) for further analysis. It then provides a broad overview of the recent trends in the selected countries and their significance for the global geopolitical and geoeconomic order. Next, the report looks at the interactions between these large emerging economies and the factors that might lead this group of countries to evolve (or not) into a geo-economic and geopolitical bloc. It also provides some conclusions on the future of BRICS+. More detailed information on specific BRICS+ countries including societal challenges they face can be found in the Annex.

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18 NE W P L AY E R S , NE W G A M E ?

SELECTION OF COUNTRIES

2

Selection o f C ountries

Goldman Sachs economist Jim O'Neill coined the BRIC acronym in a paper from 2001 ('Building Better Global Economic BRICs').3 He predicted that the share of the BRIC countries (Brazil, Russia, India and China) in the world's economic pie would grow in the following decade and as such also their role in global economic governance. In a follow-up paper in 2003 Goldman Sachs predicted that by 2040 the 'BRIC' countries collectively would be economically bigger than the traditional G6 (U.S., Japan, Germany, France, UK and Italy). The BRIC acronym took on a life of its own with an associated cottage industry of economic and political analysis. Currently various entities from research centers to investment funds have 'BRIC' in their names. In 2009 the leaders of the BRIC nations held their first summit in Russia, which have since become regular events. In 2010 the leaders of the BRIC nations invited South Africa to join them and the South African President attended summits in 2011 and 2012 as a full member with the group being renamed as BRICS.4 The rationale for this is that although the South African population is relatively small (around 50 million), it is the largest economy in Africa and often the leading political actor in the African Union. In addition to summits at Heads of State level, regular gatherings take place between foreign- and finance ministers in the run-up to important meetings of international organizations (e.g. UN General Assembly, World Bank, G20, International Monetary Fund, WTO, etc.). Topics discussed include, inter alia, the global financial crisis and the reform of the financial system, food security, the Arab Spring, the Syrian crisis, the WTO Doha round, and many others.

3

Jim O'Neill, Building Better Global Economic BRICs, Global Economics (London: Goldman Sachs, November 30, 2001).

4

Wikipedia, 'BRICS,' Wikipedia, the Free Encyclopedia, n.d., http://en.wikipedia.org/ wiki/BRICS. ST R AT E GY

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SELECTION OF COUNTRIES

Many analysts have proposed other similar groupings of states that could play dominant geo-economic roles in the future, such as the MIKT (Mexico, Indonesia, South Korea, Turkey) coined by Goldman Sachs and TIMBI (Turkey, India, Mexico, Brazil, and Indonesia) by Prof. J. Goldstone.5 Within the BRICS, cooperation between more democratic India, Brazil and South Africa has often taken place under the banner of the IBSA Dialogue Forum, while less democratic (and permanent members of the United Nations Security Council, UNSC) China and Russia have collaborated within the Shanghai Cooperation Organization, which also includes several Central Asian states. In this study we opted not to focus exclusively on the 5 BRICS countries. We also wanted to look at some other large middle-income emerging economies of particular and increasing importance for the European Union (EU) and the Netherlands. This made the selection of Turkey and Indonesia quite obvious. Turkey has very close political and economic ties with the EU. It is a member of the North Atlantic Treaty Organization (NATO) and the EU Customs Union, an EU candidate country, and the second-largest country (after Russia) with which the EU shares a land border. In the 2000s it significantly improved its economic performance, regained its political confidence and became much more active internationally, especially in the Middle East, Central Asia, and Africa, where it aspires to be a model for other states in the region. Indonesia is the fourth-largest country in the world in terms of population (above Brazil and Russia) and its population is expected to continue to grow rapidly. The Indonesian economy has developed very fast in the first decade of 21st century, reinforcing its leading position in southeast Asia and its leadership of the ASEAN group of southeast Asian nations. In addition, it has important historical and economic ties with the Netherlands. The choice of South Korea might be considered less straightforward: it is already a member of the Organisation for Economic Cooperation and Development (OECD), a club of developed countries, and in terms of population it is well behind the other countries in our selection (with the

5

Jack A. Goldstone, 'Rise of the TIMBIs,' Foreign Policy, December 2, 2011, http:// www.foreignpolicy.com/articles/2011/12/02/rise_of_the_timbis.

20 NE W P L AY E R S , NE W G A M E ?

SELECTION OF COUNTRIES

exception of South Africa). At the same time, as one of the East Asian Tigers it provides an interesting example of a possible future economic (and possibly political) evolution of other developing economies. Many organizations such as Dow Jones and MSCI Barra still classify South Korea as an emerging economy.6 It has also recently deepened its ties with the EU by signing a Free Trade Agreement in late 2010. Altogether this gives us a group of eight countries that we will call 'BRICS+' in this report. Obviously this is not the only possible list of large emerging economies and some might criticize the inclusion of countries such as South Africa and Korea because of their small populations.7 Therefore it is also worth mentioning for at least some other countries the reasons for their exclusion. Mexico, a large middle-income country witnessing strong growth potential, is often mentioned. Mexico is very closely integrated economically within the North American Free Trade Agreement (NAFTA) and the United States is the destination for more than 80% of its exports. These close ties within North America make it less important economically for the EU. Politically, its relationship with the U.S. is also by far the most important for Mexico. Mexico's focus on the North American continent, dominated by the U.S., seems to limit its significance on the global or regional scale compared with other countries in our selection. Some other larger countries such as Pakistan, Nigeria and Bangladesh might be considered on the basis of demographics, yet they are still rather underdeveloped. Their low economic development limits their possible geopolitical ambitions and weight on the international scene. They are more often considered a source of problems rather than contributors to global governance. Consequently, their governments are expected to focus more on domestic or regional issues rather than on playing an active role on the global stage.

6

Wikipedia, 'Emerging Markets,' Wikipedia, the Free Encyclopedia, n.d., http:// en.wikipedia.org/wiki/Emerging_markets.

7

Antoine van Agtmael, 'Think Again: The BRICS,' Foreign Policy, November 2012, http://www.foreignpolicy.com/articles/2012/10/08/think_again_the_brics.

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22 NE W P L AY E R S , NE W G A M E ?



MAIN POWER TRENDS AMONG THE BRICS+

3 Main Power T rends among the B R IC S+

In this chapter we analyze the shifting balance of power between the BRICS+ and the West. We attempt to identify the impact of the rise of emerging economies in this respect. In this context the notion of national power comes to mind. National power can be defined as 'all of the means available to the government in its pursuit of national objectives'.8 Some authors try to quantify national power by combining several variables measuring different elements of power into one aggregate index. In practice, however, national power is context-dependent and can be evaluated only in relation to other actor(s) and the situation in which power is being exercised.9 This limits the usefulness of aggregate measures of national power in any specific situation or event. Our goal however is to evaluate medium- and long-term changes in power balances between states. In this respect the concept of national power and its constituting elements provide a useful framework for analysis. There are many possible elements of national power. However, the following five components are essential for any analysis: • Population • Economy • Public finances • Military power • Technological sophistication

8

U.S. Department of Defense, 'Instruments of National Power,' Department of Defense Dictionary of Military and Associated Terms, Joint Publication 1-02 (Washington, D. C., April 12, 2001), http://www.fas.org/irp/doddir/dod/jp1_02april2010.pdf.

9

David Jablonsky, 'National Power,' in The U.S. Army War College Guide to National Security Issues, vol. 1: Theory of War and Strategy, Fourth. (Pennsylvania: U.S. Army War College, 2010), 123.

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M A I N P O W E R T R E N D S A M O N G T H E B R I C S +

This chapter reviews broad trends in BRICS+ countries with respect to all five components over the last 10‒20 years. These trends within countries however, provide only a limited picture. In the next steps we will look at the interactions between BRICS+ and the West in various domains.

3.1 Population Demographic projections are among the most reliable in social sciences for future trends. For instance, the size of the labor force in a particular country in 20 years' time is to a large extent already determined since young people who will join the labor force in that time are already born. Even when demographic dynamics in a country experience a rapid change, it typically takes many years for aggregate numbers to change significantly. Fertility patterns and demographic statistics are thus relevant measures for a country's future potential. Countries with rapidly rising populations will have a larger number of workers in the future and larger economic output, all other things being equal. However, when young people suffer from high unemployment and inequality, their large share in the population might increase the risk of political instability in that country.10 Demographically, the BRICS+ countries do not bear many similarities (see Figure 1). They can be separated into two broad clusters based on the expected population growth rate: • Slow-growing (or declining) and aging: Russia, South Korea and China; • Fast-growing and young: India, Indonesia, Turkey and Brazil. South Africa is placed somewhere between these two clusters. On the one hand, it is still a young country with a higher fertility rate than any other BRICS+ country except India (2.5 births per woman). On the other hand, its very high mortality rate11 makes its expected population growth closer to the first cluster than the second.

10 I. Bremmer and P. Keat, The Fat Tails: The Power of Political Knowledge for Strategic Investing (Oxford: Oxford University Press, 2009). 11

Probability for a newborn male infant to live to 65 years is just 32% in South Africa, by far the lowest number among all BRICS+ countries. By way of comparison, it is 76% in China.

24 NE W P L AY E R S , NE W G A M E ?



MAIN POWER TRENDS AMONG THE BRICS+

Figure 1

30 European Union

Old Age Depedency Ratio, %

25

20

United States

Russian Federation Korea, Rep. China

15

Brazil

Turkey

10

5

South Africa

India

Indonesia

0 -0,04

-0,02

0

0,02 0,04 0,06 0,08 0,1 Expected Population Change, 2020 over 2010, %

0,12

0,14

0,16

Figure 1 Demographic profile of BRICS+, the EU and the U.S. Size of bubble represents total population of a country. Source: UN World Population Prospects, the 2010 Revision, http://esa.un.org/wpp/index.htm.

Although population growth in some BRICS+ countries is expected to be considerable, only India's population is likely to grow at a rate faster than the world's average in the next 30 years. India is also expected to become the world's most populous nation around 2020, overtaking China. Nevertheless, the combined population of BRICS+ countries is likely to decline from 48% of the world total in 2010 to 47% in 2020 and 43% in 2040.

3.2 Economics The first decade of the 21st century was a time of rapid economic growth in large emerging economies. As Figure 2 illustrates, growth in all BRICS+ economies was faster in the first decade of 21st century than in the 1990s, with the exception of South Korea.12 In the case of Russia the reversal of economic fortunes was striking; the average growth rate in Russia went from -3.6% in the 1990s to +4.9% in 2001‒2010. But countries such as India,

12 This is another observation suggesting that this country is in many respects closer to the U.S. and the EU than to the rest of BRICS+.

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M A I N P O W E R T R E N D S A M O N G T H E B R I C S +

Figure 2 12 10 8 6 4

1991-2000 2001-2010

2 0 Brazil

China

India

Indonesia South Korea

Russia

South Africa

Turkey

-2

OECD members

-4 -6

Figure 2 Average GDP Growth Rates, % p.a. Source: World Development Indicators; authors' calculations.

South Africa and Brazil have also seen a significant up tick in economic growth. By contrast, growth in most OECD countries was substantially slower in the first decade of the 21st century than in the previous decade. Recessions, first after the dotcom boom in early 2000s and then after the financial crisis of 2007‒2008 (the Great Recession) have had a large negative impact on growth in OECD countries. A direct implication of these diverging rates of economic growth is that the BRICS+ economies are getting larger not just in monetary (absolute) terms but also relative to the EU (see Figure 3). The combined gross domestic product (GDP) of all BRICS+ countries increased from 69% of the EU's in 1991 to 147% in 2010 (at purchasing power parity, PPP). The chart also shows that growth in the BRICS+ accelerated substantially around 2003, mostly as a result of accelerated growth in China.

26 NE W P L AY E R S , NE W G A M E ?



MAIN POWER TRENDS AMONG THE BRICS+

Figure 3 1,6

1,4 1,2

Turkey South Africa

1

Russian Federation

0,8

Korea, Rep. Indonesia

0,6

India

0,4

China Brazil

0,2

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

0

Figure 3 GDP of BRICS+ Countries as a share of EU's GDP (at PPP in current international dollars). Source: World Development Indicators; authors' calculations.

Spectacular growth in China made the real difference. It managed to more than double the size of its economy relative to the EU's in both decades (see Table 1). As a result, its GDP leaped from just 14% of the EU's in 1991 to 64% in 2010. Other countries were not as successful. The 1990s were a difficult decade for Russia and South Africa; their economies actually shrank relative to the EU's, while the Brazilian and Indonesian economies saw only minor increases. This volatility in the economic performance of emerging countries should be kept in mind when considering forecasts projecting growth rates for the BRICS+ well into the future. Others are more skeptical, arguing that increasing wealth will dampen rampant growth as consumers want more health care, education, and free time.13

13 van Agtmael, 'Think Again: The BRICS.'

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M A I N P O W E R T R E N D S A M O N G T H E B R I C S +

Country

1991

2001

2010

Brazil

11.3%

11.4%

13.7%

China

14.1%

29.6%

63.8%

India

11.1%

15.4%

26.3%

Indonesia

4.2%

4.7%

6.5%

South Korea

5.4%

7.7%

8.9%

Russian Federation

16.2%

9.6%

17.7%

South Africa

2.9%

2.8%

3.3%

Turkey

3.5%

5.0%

7.2%

Combined BRICS+

68.5%

86.2%

147.4%

Table 1 GDP of BRICS+ Countries as Percentage of EU's GDP (at PPP in current international dollars)

There is substantial debate over the main factors explaining the acceleration in growth in the BRICS+ during the first decade of this century. There are obviously some factors unique to each country. However, given the fact that rapid growth in the first decade of 21st century was not confined to just the BRICS+ but was a common phenomenon among developing countries, there should be some more general explanations. We would like to highlight two of them. The first is the 'China factor'. Although the average growth rate in China remained essentially the same in the 1990s and 2000s, the contribution of the Chinese economy to global growth became much larger. One aspect of this growth is that China became the largest market for many commodities. China's exploding demand for commodities put upward pressures on prices worldwide and was likely a major factor in driving the current upswing in a commodity supercycle.14 This boosted growth among commodity exporters such as Russia, Brazil and South Africa. This commodity boom cannot be viewed independently from China's role as a major energy consumer. The International Energy Agency (IEA) notes that China alone accounts for 30% of the projected growth in energy demand

14 Bilge Erten and José Antonio Ocampo, Super-cycles of Commodity Prices Since the Mid-nineteenth Century, DESA Working Paper (United Nations Department of Economic and Social Affairs, February 2012), http://www.un.org/esa/desa/ papers/2012/wp110_2012.pdf.

28 NE W P L AY E R S , NE W G A M E ?



MAIN POWER TRENDS AMONG THE BRICS+

over the next 25 years. By 2035 China will consume nearly 70% more energy than the United States, making it the world's largest energy consumer. India, Indonesia and Brazil will experience similarly high rates of growth in energy consumption.15 China also became the largest trading partner of many of its neighbors (more later on the importance of China as a trading partner and its impact on all BRICS+). In addition, Chinese outward foreign investment has played a big role in many developing countries, especially in Africa and Asia. The second factor was a general expansion of foreign investment driven by the worldwide flood of cheap money after interest rate cuts in the early 2000s in the U.S. and the EU.16 Private investment into emerging markets accounted for 2% of their GDP in the 1990s but jumped to 9% in 2007.17 Furthermore, many BRICS+ countries experienced significant economic difficulties, economic and financial crises in 1990s and early 2000s (for example, Russia, India, Indonesia, Brazil, Turkey). In response, many of these nations improved financial discipline, liberalized markets and restructured many uncompetitive industries. These reform efforts brought benefits in the 2000s.

3.3 Public finances Improved financial discipline, combined with rapid economic growth, led to visible improvements in the public-finance situation in the BRICS+, including lower debt and budget deficits. At the same time, the economic crisis starting in 2008‒2009 has caused public debt to swell in many European countries. Currently not a single large EU country meets the criteria established by the Maastricht Treaty with respect to government finance: • The ratio of the annual government deficit to gross domestic product (GDP) must not exceed 3%; • The ratio of gross government debt to GDP must not exceed 60%.

15 International Energy Agency, 'World Energy Outlook 2011 Factsheet', 2011, http:// www.worldenergyoutlook.org/media/weowebsite/factsheets/factsheets.pdf. 16 The current head of the Federal Reserve B. Bernanke called it a 'saving glut'. 17 Ruchir Sharma, Breakout Nations: In Pursuit of the Next Economic Miracles, First. (New York: W. W. Norton & Company, Inc., 2012).

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Meanwhile six out of eight countries in the BRICS+ group easily satisfy the Maastricht criteria (see Figure 4). The other two, South Africa and India, still have debt lower than 60% of GDP. The irony of this positive state of BRICS+ finances is that many have in fact been serial defaulters. In the 20th century Brazil defaulted 7 times, Turkey and Indonesia 5 times, India 4 times, Russia 3 times and China twice.18 These cases only include defaults on external debt; the count would be higher if

Budget Balance, as % of GDP

defaults or restructuring of domestic debt were included.

6

3

Brazil

South Korea Russia

0 0

-3

10

20

China

30

40

Indonesia

50

60

70

Turkey

80

90

Germany Netherlands

India -6

South Africa France

-9

-12

US

Public Debt, as % of GDP

Figure 4 Public Finance Situation in BRICS+ and Major OECD Countries. Restore the shaded region, as in the image provided. Source: The CIA World Factbook, data for 2011 or latest available.

This historic reminder might have relevance for the future as well. Although BRICS+ countries are generally younger and likely to grow faster than the OECD group, economic growth in the BRICS+ has been more volatile than in the OECD. This directly affects government revenues and makes servicing the same amount of debt more challenging, all other things being equal.

18 Reinhart, Carmen M., Vincent R. Reinhart, and Kenneth S. Rogoff. 'Debt Overhangs: Past and Present'. Harvard, 2012. http://www.economics.harvard.edu/files/ faculty/51_Debt_Overhangs.pdf. Tables 4 and 5. 30 NE W P L AY E R S , NE W G A M E ?

UK



MAIN POWER TRENDS AMONG THE BRICS+

The past volatility of the BRICS+ economic and credit performance is reflected in their relatively lower credit ratings. In October 2012 China had the highest rating among BRICS+ according to Standard & Poors'; AA, reflecting 'very strong capacity to meet financial commitments' while Turkey and Indonesia were still below investment grade (BBB-) and could face 'major uncertainties to adverse business, financial and economic conditions.'19 In terms of financial health, the BRICS+ countries are varied (see Table 2). Standard & Poors' credit ratings for these states in September 2012 range from 'very strong capacity to meet financial commitments (A+)' such as for Korea, to 'lowest investment grade' such as for Turkey (BB) and Indonesia (BB+). Notable however is that according to the rating agency all BRICS+ governments have 'investment grade' status. In other words, the bonds floated by these emerging economies are considered solid enough to expect repayment. This is a testament to the relative promise and solidity of the economies and their governing institutions, which have only recently started to play a notable role in the international economy.

Country

Rating

Brazil

BBB

China

AA-

India

BBB-

Indonesia

BB+

Korea, Rep. of

A+

Russia

BBB

South Africa

BBB+

Turkey

BB

Table 2 Foreign currency sovereign credit rating by Standard&Poor's. 20

19 Standard and Poor's Rating Services, 'Ratings Sovereigns Rating List,' S&P, 2012, http://www.standardandpoors.com/ratings/sovereigns/ratings-list/en/us?sectorNa me=null&subSectorCode=&filter=K. 20 Ibid.

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M A I N P O W E R T R E N D S A M O N G T H E B R I C S +

3.4 Military Power Rapid economic growth generally fills a government's treasury. Among other things this can be used to increase military expenditure. According to the Stockholm International Peace Research Institute (SIPRI), military spending in the BRICS+ was 109% higher in 2011 than in 2000 (in 2010 constant U.S. dollars), compared with an 80% increase in the U.S. and a 7% increase among the three largest EU spenders (Germany, UK and France).21 The largest absolute and relative (percentage) increase in military expenditure was in China, where it grew by 286% between 2000 and 2011. However even in China this startling growth looks much less impressive when military expenditure is measured as a percentage of GDP (see Figure 5). With respect to that metric, China's military expenditure grew from 1.9% of GDP in 2000 to 2.1% in 2010.22

Figure 5 6

5

4

Average BRICS+

3

European Union United States

2

1

0 1993

1995

1997

1999

2001

2003

2005

2007

2009

Figure 5 Military Expenditure as % of GDP.

21 Stockholm International Peace Research Institute, SIPRI Yearbook 2012, SIPRI Yearbook Series (Oxford: Oxford University Press, 2012). 22 Ibid.

32 NE W P L AY E R S , NE W G A M E ?

2011



MAIN POWER TRENDS AMONG THE BRICS+

Figure 6 Militarization in BRICS+ and the USA. Size of bubble corresponds to the absolute size of military expenditure. Source: World Development Indicators

In other countries, with the exception of the United States in response to the 9/11 attacks and the wars in Iraq and Afghanistan, military expenditure as a share of GDP was generally either flat or declining in the first decade of 21st century (chart). On the whole, on two basic measures of militarization – military expenditure as a share of GDP and armed forces personnel as a percentage of the total labor force – BRICS+ countries do not look excessively militarized. Most of them spend around 2% or less of GDP on defense (which is the NATO goal). Only two countries stand out: Russia and South Korea, the latter of which maintains a large military standing as a result of persistent threats from North Korea (see Figure 6). Still, since their economies have been expanding rapidly, the absolute increases in military expenditure are significant. Many countries have undertaken large modernization programs of their armed forces. As a result, one can expect considerably improved military capabilities. This appears true at least for India, Brazil and China.

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M A I N P O W E R T R E N D S A M O N G T H E B R I C S +

Analyses done by think tanks such as the Center for Strategic and International Studies (CSIS), the Center for Strategic and Budgetary Assessments (CSBA) and RAND Corporation show that China's military capabilities are indeed improving rapidly, as a result of constant doubledigit growth in the defense budget over several years.23 RAND published two studies in 2000 and 2009 assessing the balance of power over the Taiwan Strait. The most recent assessment signaled a rapid modernization and expansion of military capabilities at the disposal of China's People's Liberation Army. This is just one example but it is indicative of changing power trends. The growing military might of China and in some recent cases its increased assertiveness in territorial disputes, such as in the South China Sea, is raising eyebrows among China's neighbors and in the U.S.

3.5 Technological Sophistication Economic development and technological sophistication typically go hand in hand. The richer a country becomes, the more it relies on employing capital and moving up the value chain. Since there is no single comprehensive measure of technological development that can be easily used for comparison between countries, we looked at several indicators related to the technological prowess of nations, which are described below. Taken together, these indicators should provide a broad picture of the relative performance of the BRICS+ countries in the science and technology field. The level of penetration and use of information and communication technology (ICT) infrastructure is one such indicator. ICT has become a key technology in recent decades and its level of penetration provides an important indicator of technological sophistication of firms and population in a particular country. Figure 7 compares the situation in the BRICS+ countries to the EU level in this respect. It illustrates that the penetration of

23 See for example, a broad assessment of Chinese defense modernization in Anthony H. Cordesman and Nicholas S. Yarosh, Chinese Military Modernization and Force Development: A Western Perspective (Washington, D. C.: Center for International and Strategic Studies, July 30, 2012), http://csis.org/files/publication/120727_ Chinese_Military_Modernization_Force_Dvlpment.pdf.

34 NE W P L AY E R S , NE W G A M E ?



MAIN POWER TRENDS AMONG THE BRICS+

Mobile cellular subscriptions 150%

100% Brazil China

50% Fixed broadband Internet subscribers

India 0%

Telephone lines

South Korea Russia Turkey European Union

Internet users

Figure 7 ICT Infrastructure (EU level = 100%). Each indicator measures the level of penetration per 100 people. Source: World Development Indicators.

ICT infrastructure in various BRICS+ differs wildly. On the one hand, South Korea outperforms the EU on most measures. On the other, India is far behind the other countries on almost all measures. This might be surprising given the global prominence of such Indian ICT companies as Infosys, Wipro and TCS. However, these companies are just a pocket of excellence in a country where the penetration of modern ICT infrastructure is quite limited and has yet to reach many areas. Another way to assess a country's performance in science and technology is to look at how much it invests in research and development (R&D). R&D expenditure is one of the most commonly used measures of innovation. It is an imperfect measure since it shows only input to the innovation process but it also clearly demonstrates the priority that governments and firms give to investment in science and technology.

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M A I N P O W E R T R E N D S A M O N G T H E B R I C S +

Figure 8

3,5 Brazil

3

China India Korea, Rep.

2,5

Russian Federation South Africa

2

Turkey European Union

1,5

High income: OECD

1

0,5

0 1996

1998

2000

2002

2004

2006

2008

Figure 8 R&D Expenditure as % of GDP. Source: World Development Indicators.

Figure 8 shows that two countries have had a very rapid increase in R&D expenditure: South Korea and China. Korea's R&D expenditure as a percentage of GDP far exceeds that of the EU and that of the OECD countries in general. In the EU only Finland was spending more than South Korea on R&D in 2010. China is a remarkable case for its sustained growth; it is on the way to tripling its R&D expenditure over 15 years. Given that its GDP also grew very rapidly over the same period, this means R&D grew by approximately 19% per year over 1996‒2008 in constant prices. Currently, China is above all other BRICS+ countries on this measure (excluding South Korea). In the rest of the BRICS+ there is also a slight trend toward greater R&D expenditure but this trend is much less sustained and impressive than in South Korea and China. R&D expenditure in this group tends to be either slightly above or below 1% of GDP. Nevertheless, growth in R&D expenditure in almost all of these countries was quite substantial.

36 NE W P L AY E R S , NE W G A M E ?

2010



MAIN POWER TRENDS AMONG THE BRICS+

Another source of information that is helpful for a brief assessment of countries' technological performance is comparing rankings of countries on various technological development indices: the World Economic Forum's Networked Readiness Index; the International Telecommunication Union's ICT Development Index; the World Bank's Knowledge Economy Index; and the Global Innovation Index of INSEAD, an international business school, in cooperation with the World Intellectual Property Organization. Table 3 below shows the percentage of countries that perform worse than the given country in each particular ranking. The higher the percentage, the better the score. The four selected rankings give a good indication of the relative standing of the BRICS+ in terms of their ICT infrastructure development and capacity to generate and use innovations. The average numbers from all the rankings again suggest that South Korea is among the world leaders (it is in the top 10% of all countries) while other BRICS+ countries are far behind. Overall, the results of Russia, Brazil, China and Turkey in the rankings are quite similar. India and Indonesia perform significantly worse and South Africa is between these two groups.

Country

Networked Readiness Index, 2012 (WEF)

ICT Development Index, 2010 (ITU)

Knowledge Economy Index, 2012 (World Bank)

Global Innovation Index, 2011 (INSEAD)

Average

Brazil

54%

58%

59%

62%

58%

China

64%

47%

42%

77%

58%

India

51%

24%

25%

50%

38%

Indonesia

44%

34%

26%

21%

31%

Korea

92%

99%

80%

87%

90%

Russian Federation 61%

69%

62%

55%

62%

South Africa

49%

36%

54%

53%

48%

Turkey

63%

61%

53%

48%

56%

Table 3 BRICS+ position in innovation/technology ranking.

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M A I N P O W E R T R E N D S A M O N G T H E B R I C S +

3.6 Conclusions In economic terms, the rise of the BRICS+ countries is clear. Almost all countries in this group grew significantly faster during the 2000s than in the previous decade. Fiscal policies within the BRICS+ countries have greatly improved and the state of their public finances is in most cases better than in the EU or the U.S. The improved financial health of the BRICS+ countries gives them more freedom in selecting their own political and economic priorities (rather than following the ones imposed externally, for example by the International Monetary Fund, IMF) and becoming stewards of their own economic destiny. Military forces have been one of the beneficiaries of increased spending and in some cases the improvement in military capabilities has been rapid and substantial. However, it should be pointed out that previous economic performance of the BRICS+ economies has been quite volatile and future economic conditions might not be as favorable as they were between 2003 and 2008. Some of these countries are already showing signs of complacency and diminishing drive to implement difficult economic reforms to sustain growth.24 With the exception of South Korea, all of the BRICS+ countries lag significantly behind the EU in terms of their level of development and technological sophistication. Ultimately, the BRICS+ group (and BRIC for that matter) comprises countries that are very different in terms of their levels of development, economic structure and future challenges and prospects. This creates different interests and national priorities. Although their influence in the international arena has increased significantly, these differences evidently create barriers for developing a common position on many political and economic issues.

24 Sharma, Breakout Nations: In Pursuit of the Next Economic Miracles; van Agtmael, 'Think Again: The BRICS.'

38 NE W P L AY E R S , NE W G A M E ?

BRICS+ AND GLOBAL ECONOMIC GOVERNANCE

4 BRICS+ and G lobal Economic G overnance

The previous sections looked at the broad trends within the BRICS+ countries essentially in isolation from each other. These trends, however, do not reveal a great deal as to whether BRICS+ countries are moving toward becoming a bloc, coordinating policy efforts and collectively challenging the existing status quo. For this we need to look at interactions among the BRICS+ countries and between the BRICS+ and the West. This chapter addresses the extent to which the BRICS+ are cooperating strategically on economic governance issues. It reviews changes in geographical trade patterns for BRICS+ in last 10‒20 years and examines their proposals and efforts for reforming the global economic and financial system. The next chapter will look at strategic diplomatic cooperation connections and BRICS+ approaches to security issues.

4.1 Trade The last two decades have been a period of a very rapid expansion in international trade and BRICS+ countries have been at the forefront of this. From 1995 to 2010 their exports increased by a factor of 6.3.25 In China the growth was even more breathtaking as its exports increased more than tenfold in the same period. Exports from other BRICS+ countries expanded at a slower but still brisk rate – by 4.4 times in the same period. As a result the importance of BRICS+ countries, especially China, in global merchandise trade has increased greatly in the last 10‒15 years (see Figure 9). Together all BRICS+ countries account for more than one-fifth of global exports (see Table 4).

25 This number excludes exports from Indonesia because the data on Indonesia were available only from 2003.

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BRICS+ AND GLOBAL ECONOMIC GOVERNANCE

Figure 9

0,12

0,1

0,08 BRICS+ (excl China and Indonesia)

0,06

China 0,04

0,02

0 1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

Figure 9 BRICS+ share of world's exports.

Country

Share

Brazil

1.3%

China

10,4%

India

1.6%

Indonesia

1.0%

South Korea

3.1%

Russia

2.5%

South Africa

0.6%

Turkey

0.8%

BRICS+ Total

21.20%

Table 4 Share of world exports, 2010. Source: authors' calculations; UN Conference on Trade and Development (UNCTAD).

40 NE W P L AY E R S , NE W G A M E ?

BRICS+ AND GLOBAL ECONOMIC GOVERNANCE

Figure 10

0,35 0,3 0,25 0,2

Exports to China Exports to the EU

0,15

Exports to the US

0,1 0,05 0 1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

Figure 10 Unweighted average share of BRICS+ exports.

The ratio of foreign trade to GDP26 in the BRICS+ countries increased from 41.9% in 1995 to 61.0% in 2008 before sliding to 53.6% in 201027 as a result of the global economic crisis. By comparison in the EU this ratio was 78% in 2010. There are substantial differences between individual BRICS+ countries in this respect however. The lowest trade openness ratio was Brazil (23% in 2010) and the highest South Korea (101%). China is increasingly becoming one of the most important trade partners for BRICS+ countries. The share of China as a destination for BRICS+ exports has been steadily increasing while the shares of the EU and the U.S. have been declining almost as steadily (see Figure 10).28 However the chart below shows that the EU still remains the main export destination for these emerging economies. This is also apparent from Table 5, which shows major trading partners for each BRICS+ country.

26 This ratio is also known as trade openness ratio or index. 27 These are unweighted shares. 28 We used unweighted averages for all countries in order to give a broader picture of trends in BRICS+ countries.

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BRICS+ AND GLOBAL ECONOMIC GOVERNANCE

The EU is the main export market for 6 BRICS+ countries, the exceptions being Indonesia and Korea (see Table 5). In five out of eight BRICS+ countries the EU is also the main origin of imports; and for the other three it is in the top four. From a geopolitical point of view this underlines the influence of the EU and Europe's trade commissioner in particular, in shaping relations with the BRICS+. This provides leverage to the EU, if it chooses to take advantage of it. The gravitational pull exerted by the Chinese economy is more visible in Asia. In Indonesia and South Korea trade with China exceeds that with the EU. The table further shows that the BRICS+ can be clearly divided into two clusters depending on the economic sector of their main export goods. Such BRICS+ economies as Russia, Brazil, South Africa and Indonesia are heavily dependent on the export of primary commodities – agricultural and/or mineral. At the same time more than half of the merchandized exports from Turkey, Korea, India and China are manufactured goods. One way to summarize and present changing patterns of trade is to look at how trade 'centers of gravity' have shifted over time. For this we calculated where the center of gravity lay for all BRICS countries in 2000 and 2010 (see Figure 11). In these calculations, the share of trade (exports + imports) for any BRICS+ country with the EU, U.S., BRICS+ and the rest of the world (RoW) is analogous to the mass of the body in a corresponding corner. The location of each country is then determined as the weighted average location of all the mass in a group of these 4 bodies. Thus if a country trades equally (25% of the total) with all 4 selected countries/regions it would be located in the centre of the square. If it trades only with the EU for instance, then its location on the plane would be in the upper-left corner where the EU lies. Arrows show the direction of change in 2010 compared to 2000.

42 NE W P L AY E R S , NE W G A M E ?

ST R AT E GY 77.6

EU (47.1)

Table 5 Major trading partners for each BRICS+ country

8.2

10.9

Turkey

40.1

EU (26.1)

37.3

9.6

South Africa

3

Russian Fed. (4.1)

(5.3)

(9.9)

Iraq

USA

(11.4)

(5.1)

Turkey

(10.7)

USA

(9.9)

China

(10.7)

USA

(13.8)

Kong

Hong

(9.7)

USA

China

(5.8)

Ukraine

(11.5)

EU

(10.9)

(16.3) China

EU

Japan

(12.4)

(18.8)

(52.2)

20.2

88.2

37

UAE

EU

(18)

(19.7)

Federation

70.4

9.1

39.4

63.9

USA

EU

EU

2.0

Korea,

5.2

22.8

Indonesia

25.4

93.6

(15.6)

(21.8)

2 China

1 EU

Russian

10.7

India

3.0

Manufactures 35.2

(25.1)

3.3

China

27.9

Fuels and Mining Products

(3.3)

USA

(9.0)

Japan

(5.1)

China

(6.0)

Japan

(9.1)

USA

(7.9)

China

(7.7)

Japan

(9.3)

Argentina

4

Share by Export Destination

Republic of

34

Brazil

Agricultural Products

Main Commodity Exports

5

(2.9)

UAE

(4.2)

India

(4.5)

Belarus

(5.4)

Hong Kong

(8.7)

Singapore

(4.3)

Hong Kong

(4.4)

Korea

(3.6)

Japan

(39.0)

EU

(32.1)

EU

(38.3)

EU

(16.8)

China

(15.1)

China

(12.1)

EU

(12.7)

Japan

(21.2)

EU

1

Fed. (11.6)

Russian

(14.3)

China

(15.7)

China

(15.1)

Japan

(14.9)

Singapore

(11.8)

China

(12.1)

EU

(15.1)

USA

2

(9.3)

China

(7.3)

USA

(5.6)

Ukraine

(9.5)

USA

(12.5)

Japan

(8.8)

UAE

(9.9)

Korea

(14.2)

China

3

(6.6)

USA

(5.3)

Japan

(4.5)

USA

(9.1)

EU

(7.3)

EU

land (6.3)

Switzer-

(8.3)

Taiwan

(8)

Argentina

4

Share by Import Origin

5

(4.1)

Iran

Arabia (4.0)

Saudi

(4.1)

Japan

Arabia (6.3)

Saudi

(6.9)

USA

Arabia (5.8)

Saudi

(7.7)

China

(4.7)

Korea

BRICS+ AND GLOBAL ECONOMIC GOVERNANCE

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BRICS+ AND GLOBAL ECONOMIC GOVERNANCE

EU

BRICS+

Russia Turkey

South Africa

Brazil

India

South Korea

Indonesia China

US

Figure 11 Trade centers of gravity, 2010 vs. 2000 Notes: ROW=rest of world; origin of arrows corresponds to country's trade centre of gravity in 2000 except for Indonesia, for which it corresponds to 2003; the destination of arrows corresponds to country's trade centre of gravity in 2010. Source: authors' calculations;, UNCTAD

The graph illustrates a clear shift in the centre of gravity over 2000‒2010 for all countries. The general movement is towards the upper right-hand corner, implying that inter-BRICS+ trade was expanding more rapidly than BRICS+ trade with other regions. Since growing trade with China was the main driver of this change, China's position shifted less than the other BRICS+ countries. India and Turkey present a partial exception to this general trend. Their centers moved not just rightwards but also downwards indicating that trade with the rest of the world was also expanding rapidly, at the expense of trade with the EU and the U.S.

44 NE W P L AY E R S , NE W G A M E ?

RoW

BRICS+ AND GLOBAL ECONOMIC GOVERNANCE

Despite these shifts, it should be kept in mind that little by way of formal rapprochement appears to be occurring in the economic sphere. BRICS+ countries continue to compete as rivals in various arenas, for example China and Brazil in the quest for resources in Africa.29 This is underpinned by the fact that no single free trade agreement has yet been signed between any of the original five BRICS countries.

4.2 Arms Trade One aspect of trade is much more strategic in character than any other: this is the trade in armaments. If, as von Clausewitz said, '[w]ar is the continuation of politics by other means', then the arms trade can be also be viewed as a continuation of politics in the economic area. Countries select their arms suppliers very carefully given that they often have to rely on suppliers' services and support for many years. Their views on the security environment, possible future conflicts, quality, friendliness and assessed reliability of suppliers all play an important role in the selection process. In short, arms-buying countries want to rely on suppliers that they consider friendly or at least neutral toward them. Price and performance characteristics sometimes play a subordinate role to political and strategic considerations. Sometimes large arms deals serve as a substantial stepping stone toward a closer political relationship between a supplier and a buyer, and might lead to a closer relationship in other areas as well. This is why we look at main arms suppliers for all BRICS+ countries. Table 6 indicates three main arms suppliers to each BRICS+ country, which are listed in the top row. The number in parentheses indicates the share of all arms over the period 2000‒2011 that came from that supplier.

29 van Agtmael, 'Think Again: The BRICS.'

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Brazil

China

India

Indonesia

South Korea

Russia

Turkey

South Africa

France (31%) Russia (86%)

Russia (77%) Russia (29%)

USA (74%)

Ukraine (87%)

USA (33%)

Germany (63%)

USA (17%)

France (7%)

Israel (5%)

Netherlands (25%)

Germany (12%)

Czech Republic (8%)

Germany (28%)

Sweden (19%)

Germany (14%)

Switzerland (3%)

UK (4%)

South Korea (19%)

France (8%)

Germany (4%)

Israel (10%) UK (9%)

Table 6 Main arms suppliers to BRICS+ countries (for 2000-2011) Source: SIPRI Arms Transfers Database, http://www.sipri.org/databases/armstransfers.

This table reveals some interesting facts. First, among BRICS+ countries only Russia has been a substantial supplier of armaments to other BRICS+ countries (with the exception of South Korea, a large supplier to Indonesia). Second, all BRICS+ can be clearly split in two groups: the first one include Brazil, South Korea, Turkey and South Africa, who rely on Western countries as suppliers; and the second one of China and India, for whom Russia is a dominant supplier. Indonesia is somewhere in between, with Russia and South Korea competing with the EU countries. It should be also noted that this table reflects aggregate results for the last 12 years. Given that many countries want to develop their domestic defense industry and become significant arms suppliers on their own (Turkey and South Korea, for example) it might look quite different in a few years' time. For example, China has been quite successful in this respect and has significantly cut purchases of Russian weapons in recent years.

4.3 Protectionism Of growing concern is the scale of protectionist measures in the BRICS+. Figure 12 illustrates the number of protectionist measures identified by the European Commission over the past four years.30 For comparative purposes,

30 Directorate-General for Trade, Ninth Report on Potentially Trade Restrictive Measures Identified in the Context of the Financial and Economic Crisis (European Commission, May 1, 2012), http://trade.ec.europa.eu/doclib/docs/2012/june/ tradoc_149526.pdf.

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the United States and Japan are included as well. It shows that Russia has introduced the greatest number of measures in the four-year period, mostly in the form of border barriers such as duties and quotas. Indonesia also has substantial services barriers in place as well as murky 'behind-the-border' barriers which may include certification requirements that discriminate against international goods and set standards that deviate from those recognized internationally. Oft-used measures furthermore include the application of stimuli to support domestic companies, for instance to promote the creation of 'national champions'. The European Commission has observed that 'notably Brazil, China, India, South Africa and Ukraine have recently introduced large stimulus packages to promote specific industrial sectors, combined with trade distortive measures.'31 Other measures, which are also common in developed countries, may include the preferential treatment of domestic producers for government procurement. The graph below illustrates that the BRICS+ economies have more protectionist measures in place than the developed economies.

Figure 12

USA Border barriers

Japan

Behind the border measures

Turkey ROK

Government procurement

RSA

Services and investment barriers

Russia Export restrictions

Indonesia

Measures to stimulate export

India China

Stimulus and other measures and Other Measuers

Brazil 0

20

40

60

80

100

Figure 12 Number of potentially trade-restrictive measure introduced from October 2008 to May 2012. 32

31 Ibid. 32 Ibid.

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These market-distorting measures are undertaken to maintain or increase economic advantage by protecting domestic production. The emerging economies, we learn from the declarations of yearly meetings of BRICS leaders, have claimed special privileges as developing economies which offers them 'policy space to pursue legitimate objectives of growth', in other words allowing them to apply protectionist measures.33 The argument advanced is that because emerging economies are still relatively poor in terms of GDP per capita, they are entitled to protect their markets and industries.

4.4 Reform of International Financial Institutions The data above demonstrate the diverse economic and financial characteristics of the BRICS+ countries, yet we have also seen that there is more and more intra-BRICS+ trade taking place. On several economic and financial policy measures the states are increasingly finding common ground. Coalescing mostly takes place within the BRICS arrangement. The strongest example of how the emerging economies are taking an assertive stance on the international stage is with respect to international finance and development. Existing multilateral formats are not yet sufficiently well-adapted for emerging economies in particular to have adequate opportunities for participation.34 Among the most important topics is the issue of the future of international financial institutions. BRICS policy is potentially leading to the development of alternatives to the existing international financial institutions, and thereby a move away from the current international economic model. IMF and World Bank reform is a major issue of concern. The BRICS countries are frustrated with the balance of power in the international financial institutions, which is skewed towards the Western, developed economies. The emerging economies are concerned by a lack of representative voting weight and allocation of senior positions in the institutions. Since at least

33 The 2nd Meeting of the BRICS Trade and Economic Ministers, 'Joint Press Release: Overview of Global Economic Developments and Impact on Trade and Investment', March 28, 2012, http://www.brics.utoronto.ca/docs/120328-trade.pdf. 34 Debiel et al., 'Global Trends 2013. Peace - Development - Environment.,' 10.

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2009 they have repeatedly pointed this out in common declarations. The BRICS summit in 2012 noted that 'more representative international financial architectures, with an increase in the voice and representation of developing countries' were needed to create stability in the international financial system. To underline the increasing power of their economies, the BRICS alluded to the notion that they are 'now significant contributors to global recovery.' In 2010 a package of IMF/World Bank reform was agreed upon, yielding a greater say in the institutions to emerging economies. The BRICS voiced increasing frustration with the lack of comprehensive implementation of the reform agreement, and warned that their contribution to solving the global financial crisis was dependent on 'confidence that the entire membership of the [IMF] is truly committed to implement' the reforms. A related factor is that the global financial crisis harms development initiatives in developing countries. This led the BRICS to worry that most of the attention was going to the wealthy eurozone countries instead of pursuing a development agenda. At previous BRICS summits, the leaders of the emerging economies called for more equitable representation in international financial institutions, as well as greater attention to the impact of the crisis on developing countries. From their point of view, these calls went unheeded. As a result, at the 2012 summit the leaders of the BRICS countries announced that they would explore the creation of a 'new Development Bank for mobilizing resources for infrastructure and sustainable development projects in BRICS and other emerging economies and developing countries.' This so-called BRICS bank will be discussed at the next BRICS summit in 2013, yet given the current and future size of the BRICS economies it could effectively become an alternative to the existing World Bank, and offer another vehicle through which the BRICS economies influence the global economy while pursuing greater cooperation. Moreover, if successful, the establishment of the 'BRICS bank' will give legitimacy to smaller models of 'club-based' models of global governance and further erode the traditional multilateral institutional architecture.35 This matches the commitment of the BRICS economies to 'expand economic cooperation both among BRICS countries and between BRICS

35 Debiel et al., 'Global Trends 2013. Peace - Development - Environment.,' 11.

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countries and all developing countries, with a South-South perspective.'36 This underlines that the BRICS countries exhibit the ambition to play a role of global economic significance, and could in time evolve into an alternative South-South economic regime.

4.5 Financial Initiatives BRICS+ countries are some of the largest holders of foreign reserves in the world. China alone accounts for 27% of total world reserves (including gold), making it by far the largest holder in the world.37 However, four other BRICS+ countries – Russia, Brazil, South Korea and India – are also among the top ten holders of foreign reserves. Altogether the BRICS+ own 42% of world reserves – a higher share than the OECD countries. Since 2000 the total reserves of the four BRIC countries have increased by a factor of 16. The large holdings of U.S. dollars is a double-edged sword: it gives these countries the ability to influence the exchange rate of their own currencies, yet it also gives them leverage over the U.S. Treasury. Large holdings of foreign currencies also make BRICS+ countries active participants in the discussion on global reserve currencies. It also is leading them to look for ways to reduce their reliance on the U.S. dollar given its current volatility in light of the credit crisis. The renminbi (RMB) is the most likely candidate to be a competitor to the dollar and the euro as a vehicle for international trade. Until now, China has artificially kept its exchange rate low in order to promote export-led growth. This and controls on the movement of capital have kept it from using its currency to settle accounts with other countries. However this might change and recent decisions at the BRICS summit in 2012 indicate a new step in this direction. The use of the renminbi in the settlement of cross-border trade has been growing very rapidly and RMB-denominated trade transactions account for almost 10% of China's total trade.38 In August 2012 HSBC concluded the

36 BRICS Trade Ministers, 'Ministerial Declaration of the BRICS Trade Ministers', December 14, 2011, http://www.brics.utoronto.ca/docs/111214-trade.html. 37 Data for 2011 from the World Bank. Data for China excludes reserves of Hong Kong. 38 Lingling Wei, 'Yuan Shows Potential to Be Reserve Currency,' The Wall Street Journal, June 29, 2012, http://online.wsj.com/article/SB10001424052702303561504 577496233362694486.html.

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first renminbi-denominated transaction with India. This demonstrates increasing willingness from the Chinese to use the RMB as a currency for international finance, as well as confidence from trading partners in the Chinese currency. The growing volatility in international capital markets as a result of the euro crisis and the previous U.S. credit crisis have led to skeptical attitudes towards both the dollar and the euro. This volatility has substantial impact on intra-BRICS+ trade and commodity prices. Creating alternative models that limit exposure to euro or dollar volatility therefore makes sense. While the details are still under consideration, this signals a move away from the dollar as the only global reserve currency. The so-called Master Agreement on Extending Credit Facility in Local Currency and the BRICS Multilateral Letter of Credit Confirmation Facility Agreement are two initiatives presented at the 2012 BRICS summit in New Delhi. Both initiatives are intended to facilitate a move away from relying on the U.S. dollar as a go-between in intra-BRICS trade. The BRICS challenge to the reserve currency is also apparent in criticism of U.S. financial policy and calls for greater transparency and more 'balanced, proactive, coordinated and countercyclical' macroeconomic policy from the U.S.39 The BRICS have also called for a balancing of foreign reserve holdings to better match the SDR (Special Drawing Rights – a basket of international currencies developed by the IMF), in order to reduce dollar holdings. In addition, they have called for more studies from the IMF on the role of reserve currencies in general. The fundamental question remains whether the BRICS will play a role in stabilizing the existing international financial system, or whether they wish to develop alternatives to shield themselves from its volatility?

39 Reuters, 'Full Text of BRIC Countries Joint Communique,' Reuters, March 14, 2009, http://www.reuters.com/article/2009/03/14/g20-brics-textidUSLE47000820090314.

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4.6 Conclusions The role of the BRICS+ and other large emerging economies in global trade and finance is expanding rapidly. It should come as no surprise then that these countries expect a greater say in decision making on the issues related to the governance of global trade and the international financial system. The last decade has also seen a rapid expansion of inter-BRICS+ trade and investment, driven foremost by the breathtaking growth in China. China's role is especially prominent among Asian countries, where it is the main trading partner for many countries. Expanding inter-BRICS+ trade provides an economic foundation for increasing policy coordination on issues of global economic and financial governance. BRICS+ countries often share similar concerns over Western economic policies. One of the issues where they find common ground is reallocation of votes between the West and developing countries in the international financial institutions. Loose monetary policy, especially in the U.S., that might undermine the value of foreign currency reserves held by BRICS+, is another cause for concern in many of these countries. It is also a factor in their search for alternatives to the U.S. dollar as the main reserve currency. The proposal of a BRICS bank and their currency initiatives demonstrate a rising ambition among the BRICS to play an increasingly large role in international economics and finance as an alternative to dominant Western regimes. At the same time it seems that it is much easier for the BRICS+ to demonstrate their opposition to 'Western' economic policies and institutions than it is for them to put forward a 'positive' international agenda. So far their proposals have often been vague and limited in scope. These countries have also been quite active in introducing trade-restrictive measures in the wake of the global financial crisis of 2007‒2008, despite their pledges at G20 summits. In order to form a counterweight to intra-BRICS+ economic policy coordination, Europe along with the United States could from a strategic perspective aim to increase trade relations with the BRICS+. Economically this would allow Europe to enjoy the fruits of the growth witnessed among the BRICS+ at a time of domestic economic malaise, whilst simultaneously help reduce the increasing momentum towards BRICS+ economic cohesion and policy coordination.

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5 Diplomatic interactions o f the B RI C S + and the West

This chapter assesses the extent to which there is strategic cooperation among the BRICS+ in diplomatic forums and on selected security issues. What unites the countries in this study is first and foremost their status as 'emerging economies', their strong economic growth, and their desire to be heard in the debate on international economic and financial governance. At the same time it seems clear that this is a grouping of very different countries in terms of level of development, geopolitical aspirations, economic structure, future challenges, and future prospects. As mentioned in the introduction, the question is whether their new-found wealth also forms the basis of closer diplomatic ties. More importantly, does this translate into a more assertive stance on geopolitical issues and a drive towards a mutual coordination of policies in this area? In other words, is there a kind of 'BRICS+ pact' on issues of global governance and security? To test whether this is the case, the following chapter demonstrates the results of an analysis into four different elements of diplomatic interaction: first, an assessment is made of the extent of formal diplomatic ties between the BRICS+ countries and the rest of the world (5.1). The second part of this chapter focuses on the decision-making behavior of the BRICS+ countries within the UNSC (section 5.2). Paragraph 5.3 discusses the degree to which common positions are taken during Non-Proliferation Treaty (NPT) Review Conferences and, finally, paragraph 5.4 analyzes the extent of BRICS+ coordination during Conference of the Parties (COP) Summits in the context of the United Nations Framework Convention on Climate Change (UNFCCC).

5.1 Diplomatic Connections Trade relations are important, but just one factor connecting two countries. Diplomatic links are another crucial consideration. Diplomatic relationships are top-down and centralized in a way that makes them very different from

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trade (or other economic) connections, which are – at least in theory – an aggregate outcome of decisions made by many independent actors and as such are much more bottom-up. There is no single indicator that can be used to judge the closeness of the diplomatic relationship between two countries. Many are possible and some can be only assessed in a qualitative way, for example the extent to which two countries share common ground with respect to the most important international issues. In this section we use two more quantitative proxies to assess the strength of diplomatic connections between countries. The first is the number of consulates they keep in a particular country. The second is destinations for official visits by the head of state or the head of government. These indicators obviously provide only a very crude assessment that misses out many important considerations in the relationship between countries. But at the same time they are more objective and verifiable and less easily manipulated. For example, having an additional consulate is expensive; a building (or part of it) must be bought or leased and additional diplomats and other staff hired. Therefore, unless there are sufficient grounds, such as significant economic, touristic, or other links to a particular region of a country, it is unlikely that a consulate will be established. Obviously if a country is territorially small, it probably does not make sense to have several consulates. As a result, more densely populated countries should expect a proportionally smaller number of consulates than less densely populated, large countries (in proportion to population). Another disadvantage is that the number of consulates does not tell much about commonalities of political positions between countries. Hence, in the next section we consider diplomatic positions of the BRICS+ on several important international issues. However, despite all the aforementioned drawbacks, the number of consulates nonetheless provides a useful indication of where main interests currently lie. In Table 7 we list for all BRICS+ the countries where they keep at least three consulates. The countries are ordered by the number of consulates, which is given in parentheses. Other BRICS+ countries are highlighted in green.

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Brazil

China

India

Indonesia

South Korea

Russia

U.S. (10)

Japan (6)

U.S. (4)

Malaysia (5)

U.S. (11)

Germany (5) Germany (12) U.S. (3)

Bolivia (5)

France (5)

Afghanistan (4)

Australia (4)

Japan (9)

U.S. (4)

France (4)

Paraguay (5)

U.S. (5)

Australia (3)

China (7)

China (4)

Greece (4)

Argentina (4)

Canada (4)

Germany (3)

Russia (4)

Italy (4)

U.S. (4)

Uruguay (4)

Russia (4)

South Africa (3)

Germany (3) Japan (4)

Austria (3)

Canada (3)

Germany (3)

Sri Lanka (3)

Canada (3)

Ukraine (4)

China (3)

India (3)

Iraq (3)

Italy (3)

Russia (3)

Venezuela (3) South Africa (3)

Turkey

South Africa

Poland (3) Turkey (3)

Table 7 Consular Presence of BRICS+ countries.

There are some important lessons that can be drawn from the table. Neighbors are important. Despite often strained relationships between some neighboring countries (e.g., China and Japan, Russia and Poland, Turkey and Greece), all countries keep significant number of consulates there. Judging by the number of consulates that the BRICS+ maintain in various countries, the West still seems more important than other BRICS+. The U.S., Germany and Japan are the largest countries by the number of BRICS+ consulates. China comes fourth on this list. In terms of inter-BRICS+ diplomatic presence the three most important countries seem to be China, Russia and India. Indonesia and South Africa do not have a substantial diplomatic presence abroad compared to other BRICS+. They also focus mainly on close neighbors. It should be kept in mind that diplomatic presence is typically (but not always) a lagging indicator; it takes some time for diplomats to react to the changing intensity of bilateral connections. As such it presents a somewhat outdated picture. In a few years' time it might become more BRICS+ centric, reflecting more fully the changing trends in trade highlighted earlier. But we still expect that Western countries will remain dominant on this indicator over the next ten years.

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These observations are largely supported by the destinations of BRICS+ state leaders' visits in the last three years. Neighboring countries typically account for the largest share of state visits. The Brazilian president most often visits other Latin American countries and close to half of all visits of the South African president were to African countries. For Russia, countries in the EU and the former Soviet Union accounted for almost two-thirds of presidential visits in 2009‒2011. BRICS+ countries account for a relatively small share of official visits. Unsurprisingly, China receives more official visits than any other BRICS+ country. However it is usually not the most frequently visited country, even by leaders of the BRICS+ group.

5.2 The BRICS+ within the United Nations Security Council The UNSC is commonly seen as the pinnacle of geopolitics. If the BRICS+ wish to influence international decision-making, the UNSC is the obvious vehicle of choice. If coordination is taking place among the BRICS+, one would expect disagreement with other Security Council members to occur more often than not. However, in practice, the overwhelming majority of resolutions which are put to a vote are passed unanimously. Figure 13 shows that in the observed period (1997‒2012)40, only 7% of UNSC resolutions were adopted with some countries either having abstained or voted against. Topically, most of the observed disagreement centers around issues that affect another state's sovereignty, such as sanctions, diplomatic pressures/demands, and non-combat missions (see Figure 14). Cases of 'across-the-board' abstentions – cases when Russia and/or China, and at least one other Western and BRICS+ country abstain – are rare (4% of the total; see Figure 15). The only two observed cases where this has happened were over the imposition of no-fly zones over Libya in March 2011 (UNSC Resolution 1973) and the March 2005 resolution to refer the war in Darfur to the International Criminal Court (UNSC Resolution 1593).

40 An analysis was carried out of all UNSC resolutions which were passed in the period 1997-2012.

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Figure 13

56; 6%

6; 1%

Passed unanimously

With abstentions (incl. 3 w/votes against)

With votes against only 886; 93%

Figure 13 Distribution of non-unanimous UNSC Resolutions 1997-2012 out of 948 total adopted Resolutions

2; 3% 7; 12%

Force with Consent

Force without Consent

13; 22% Sanctions

Inspections

15; 26%

9; 15%

Tribunal

6; 10%

Non-combat mission

7; 12% Pressure/Demands

Figure 14 Topical distribution of non-unanimous UNSC Resolutions 1997-2012 (62/948; 7%)

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Another known case where disagreement occurred between the BRICS+ and the West, but where a final vote was not cast in the end, was the possible intervention in Iraq during the period 2002‒2003.

5

Number of Instances

gure 15

D I P L O M AT I C I N T E R A C T I O N S O F T H E B R I C S + A N D T H E W E S T

4 3 2 1 0

Type of Resolution

Figure 15 Across-the-board abstentions: number of times China or Russia abstained together with at least one other Western and BRICS+ country (2/56; 4%) Source: United Nations Security Council.

Within the BRICS+ group, abstentions on the part of Russia and/or China together with at least one other BRICS+ country were rare occurrences (a mere 5% of the total; see Figure 16). Topically, resolutions featuring such 'BRICS+ unity' were confined to the authorization of 'UN interventions without consent of the host country'41 and the establishment, referral of cases to, or mandating the extension of UN tribunals.42

41 UNSC Resolution 1973 on the establishment of no-fly zones over Libya of 17 March 2011. 42 UNSC Resolution 1593 on the referral of the war in Darfur to the International Criminal Court of 31 March 2005 and UNSC Resolution 1757 on the establishment of a tribunal for the assassins of the former Prime Minister Hariri of Lebanon of 30 May 2007.

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Number of Instances

5 4

3 2

1 0

Type of Resolution

Figure 16 Lack of BRICS+ unity: number of times China or Russia abstained together with at least one other BRICS+ country (3/56; 5%). Source: United Nations Security Council.

This leads us to conclude that a kind of 'BRICS+ geopolitical pact' within the UNSC does not exist. When there is disagreement within the Council, the BRICS+ countries are often found acting alone, rather than in concert. Moreover, it is more common for China and/or Russia to abstain together 17 at least one Western country (see with Figure 17).18 Figure 17 Figure Figure 18 Figure 5

2 1 0

4 3 2 1

Number of Instances

3

5

5 Number of Instances

4

Number of Instances

Number of Instances

5

4 3 2 1

3 2 1 0

0

0

4

Type of Resolution Type of Resolution

Type of Resolution Type of Resolution Figure 17 Chinese and/or Russian and

Figure 18 Western Abstention: Number

Western Abstention: Number of times

of times only one or more Western

China or Russia abstained together

countries abstained (9/56; 16%).

with at least one Western country

Source: United Nations Security

(5/56; 9%). Source: United Nations

Council.

Security Council.

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Finally, the most abstentions were in fact recorded on the part of Western countries only (16% of the total; see Figure 18).

5.3 Non-Proliferation UNSC resolutions on non-proliferation are generally adopted unanimously. One notable exception however is UNSC Resolution 1929 of 9 June 2010 on sanctions against Iran over the latter's nuclear program. Prior to the vote, Brazil and Turkey had been trying to revive a deal in which Iran would ship much of its stockpile of enriched uranium fuel abroad for further processing; the uranium would return afterwards as fuel rods for use in a medical research reactor. When the plans were largely dismissed by other members of the Security Council and sanctions ultimately proposed, Brazil and Turkey voted against. Russia and China did not vote along with the other two BRICS+ members however. Such open disagreement on nonproliferation within the UNSC is rare. It is much more common for such differences to arise in the proceedings of the 5-yearly NPT Review Conferences. Based on an analysis of the last three NPT Review Conferences (held in 200043, 200544 and 201045), Brazil and South Africa46, as part of the New Agenda Coalition (NAC),47 and Indonesia, as part of the Non-Aligned Movement (NAM)48, appear the most vociferous advocates of total

43 All documents released prior and in the course of the 2000 NPT Review Conference can be found here: http://www.un.org/disarmament/WMD/Nuclear/2000NPT/2000NPT.shtm. 44 All documents released prior and in the course of the 2005 NPT Review Conference can be found here: http://www.un.org/en/conf/npt/2005/. 45 All documents released prior and in the course of the 2010 NPT Review Conference can be found here: http://www.un.org/en/conf/npt/2010/. 46 2005 Review Conference of the Parties to the Treaty on the Non-Proliferation of Nuclear Weapons, 'NPT/CONF.2005/43.', May 20, 2005; 2010 Review Conference of the Parties to the Treaty on the Non-Proliferation of Nuclear Weapons, 'NPT/ CONF.2010/WP.8.', March 23, 2010. 47 The New Agenda Coalition (NAC), composed of Brazil, Egypt, Ireland, Mexico, New Zealand, South Africa and Sweden, is a geographically dispersed group of middle power countries which seek to build an international consensus to make progress on nuclear disarmament. 48 The Non-Aligned Movement (NAM) consists of a group of states which do not formally associate themselves with or against any major power bloc.

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disarmament of nuclear-weapon states.49 Turkey also proves an ardent advocate of disarmament when Ankara acts alone. When acting in concert with the EU, its tone softens due to the presence of European and nuclearweapon states France and the United Kingdom.50 China and Russia are – at least on paper – committed to nuclear disarmament. However China insists that Russia and the U.S. should take the first step, all the while strongly emphasizing that it is a strictly sovereign decision.51 Russia for its part insists the first step should be taken by the U.S.52 Brazil and South Africa share the view that the use of nuclear power for peaceful purposes is a fundamental right. Most Western countries, Turkey and the five permanent members of the Security Council (P5) with the exception of China see ratification of the International Atomic Energy Agency (IAEA)'s Safeguards Agreements and Additional Protocols as preconditions for the transfer of nuclear technology. This view is shared by the group of nuclear supplier countries53, who strongly emphasize international regulation of technology transfer to prevent the uncontrolled

49 2000 Review Conference of the Parties to the Treaty on the Non-Proliferation of Nuclear Weapons, 'NPT/CONF.2000/18.', April 24, 2000; 2005 Review Conference of the Parties to the Treaty on the Non-Proliferation of Nuclear Weapons, 'NPT/ CONF.2005/45.', May 20, 2005. 50 2005 Review Conference of the Parties to the Treaty on the Non-Proliferation of Nuclear Weapons, 'NPT/CONF.2005/27.', May 5, 2005; 2005 Review Conference of the Parties to the Treaty on the Non-Proliferation of Nuclear Weapons, 'NPT/ CONF.2005/WP.35.', May 11, 2005; 2005 Review Conference of the Parties to the Treaty on the Non-Proliferation of Nuclear Weapons, 'NPT/CONF.2005/WP.43.', May 18, 2005; 2010 Review Conference of the Parties to the Treaty on the NonProliferation of Nuclear Weapons, 'NPT/CONF.2010/WP.69.', May 11, 2010. 51 2000 Review Conference of the Parties to the Treaty on the Non-Proliferation of Nuclear Weapons, 'NPT/CONF.2000/22.', May 2, 2000; 2000 Review Conference of the Parties to the Treaty on the Non-Proliferation of Nuclear Weapons, 'NPT/ CONF.2000/1.', May 21, 1999; 2010 Review Conference of the Parties to the Treaty on the Non-Proliferation of Nuclear Weapons, 'NPT/CONF.2010/WP.63.', May 6, 2010. 52 2005 Review Conference of the Parties to the Treaty on the Non-Proliferation of Nuclear Weapons, 'NPT/CONF.2005/29', May 6, 2010. 53 Nuclear supplier countries are united in the so-called 'Zangger Committee', consisting inter alia of China, France, Germany, Netherlands, Russia, South Africa, Turkey, UK, USA and South Korea.

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spread of nuclear material. The presence of several major powers in the group of nuclear suppliers appears to hinder the otherwise vocal South Africa in its quest for the right to non-discriminatory access. Whereas the West and the P5 hold firmly to their belief that ratification of the IAEA Safeguards Agreements and Additional Protocols are a necessary precondition for the transfer of nuclear technology, Brazil and the NAM (including Indonesia) claim such conditionality violates their fundamental rights and represents a form of outright discrimination.54 Within the P5, China appears to be the only member who does not strictly require ratification of the Additional Protocols, only encouraging states to do so. In conclusion, there appears to be no common position on non-proliferation among the BRICS+ countries as a whole. However this is not to say that cooperation is entirely absent. Indeed, partnerships within the BRICS+ do exist, though they arise more on a case-by-case basis. The alliance between South Africa and Brazil on the right to nuclear technology for peaceful use as part of the New Agenda Coalition is the clearest example of this type of ad hoc cooperation. Similarly, albeit less formalized, some overlap in behavior occurs between South Africa, Brazil and Indonesia when it comes to disarmament and the latter two's reluctance to sign up to the IAEA Additional Protocols.

5.4 The BRICS+ and the Global Commons: Negotiations within the UNFCCC For any international agreement on climate change to have a serious impact, it is essential for the emerging economies to be on board. Therefore the extent to which the BRICS+ countries coordinate their positions prior

54 2005 Review Conference of the Parties to the Treaty on the Non-Proliferation of Nuclear Weapons, 'NPT/CONF.2005/WP.11', April 26, 2005; 2005 Review Conference of the Parties to the Treaty on the Non-Proliferation of Nuclear Weapons, 'NPT/CONF.2005/WP.14', April 26, 2005; 2010 Review Conference of the Parties to the Treaty on the Non-Proliferation of Nuclear Weapons, 'NPT/ CONF.2010/35', May 5, 2010; 2005 Review Conference of the Parties to the Treaty on the Non-Proliferation of Nuclear Weapons, 'NPT/CONF.2005/WP.19', May 2, 2005; 2010 Review Conference of the Parties to the Treaty on the Non-Proliferation of Nuclear Weapons, 'NPT/CONF.2010/WP.8.'

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to UNFCCC Conference of the Parties' (COP) meetings is something which could carry enormous consequences for the ability of the Conference to conclude a successful deal. The goal of the December 2009 Copenhagen Climate Summit (COP15) was clear: to reach agreement on a global climate deal stretching beyond 2012, when the Kyoto Protocol would expire. Whereas the EU was open about its intentions to work towards a legal agreement that would incorporate binding emission targets for both developed and developing states, the emerging economies had a different view on the matter altogether. Indeed, for Brazil, South Africa, India and China (commonly referred to as the BASIC countries within the UNFCCC), binding emission cuts and the negotiation of a wholly new agreement were a non-starter.55 Prior to the Conference, the BASIC countries had agreed on a common strategy which involved establishing a second commitment period under the Kyoto Protocol and a demand

for

increased

funding

for

climate-change

mitigation

and

adaptation.56 These diametrically opposed views resulted in a heavy clash between the EU on the one hand and China and India on the other. When confronted with the draft final text brokered by the Danish Presidency which proposed an alternative to the Kyoto Protocol, India and China claimed to have been 'ambushed' by the EU.57 In response, BASIC joined forces with the U.S. to broker a final deal. The 'Copenhagen Accord' was afterwards presented to the EU as a 'done deal' without European leaders having been actively involved.58 Copenhagen was a clear victory for the emerging economies. However, the BASIC countries are not always as united in their efforts as they were during Copenhagen. Illustrative was the disagreement in the run-up to the COP16 meeting in Cancun, Mexico on whether all countries, both developed and emerging, would be bound by legally binding emissions cuts. Whereas

55 Stockholm Environment Institute, 'Together Alone? Brazil, South Africa, India, China (BASIC) and the Climate Change Conundrum - Policy Brief', 2010. 56 Ibid. 57 Norden, 'Together Alone - Basic Countries and the Climate Change Conundrum', 2011, 20. 58 C. Haug and F. Berkhout, 'Learning the Hard Way? European Climate Policy After Copenhagen,' Environment 52, no. 3 (2010): 24.

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South Africa and Brazil indicated an openness to the idea, China and India thoroughly disapproved. Similarly, South Africa hinted that all decisions taken at Cancun ought to be part of a single legally binding agreement – much to the chagrin of Brazil, India and China.59 Following COP15 and 16, Brussels began to realize that a legally binding climate treaty with both the U.S., as well as the emerging economies on board, was growing increasingly unrealistic. This belief led the EU to be more receptive to the idea of a second commitment period under the Kyoto Protocol, albeit out of necessity. In Durban (COP17), the Union put forward a 'Roadmap' which proposed developing a legal framework applicable to all countries. The process would work towards a framework agreement under which all countries would commit to new targets to cut greenhouse gas emissions 'after 2020' when their current, non-binding targets ran out. In return for agreement on the Roadmap, the EU offered to endorse a second commitment period of the Kyoto Protocol. Whereas South Africa and Brazil signaled an openness to the idea of binding emission cuts after 2020, India and China proved more reluctant. India felt that as it had one of the smallest per-capita carbon footprints in the world, it should not be compelled to agree to tougher reduction measures.60 Wary of the proposed deal, negotiations almost fell through on the final day after India inserted the words 'legal outcome' into the negotiating text at the last minute. India felt developing countries were being asked to sign up to a deal before they knew what the content of the proposed treaty would be and whether it would be fair to poor nations. China joined India in its angry calls. In the end, Brazil managed to broker a compromise between the two sides by inserting the words 'an agreed outcome with legal force' into the text – an act which ultimately proved

59 N. Sethi, 'SA Toes West Line, Ruptures BASIC Unity,' The Times of India, October 9, 2010, http://articles.timesofindia.indiatimes.com/2010-10-09/india/28235935_1_baliaction-plan-basic-meeting-basic-group. 60 K. Palitza, 'TRADE: Small Steps Towards Emission Reduction Deal,' IBSA News and Media Portal – India, Brazil and South Africa, December 5, 2011, http://www. ibsanews.com/trade-small-steps-towards-emission-reduction-deal/.

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convincing enough for the EU to endorse a second commitment period for Kyoto.61 In conclusion, coordination in the field of climate change is much more outspoken than it is within the UNSC or in the area of non-proliferation. The emerging economies have much to gain from forming a 'bloc' against industrialized nations in what they see as protection against measures harmful to their (continued) economic growth. Differences within the BASIC group do exist however. Whereas Brazil and South Africa often display a sense of pragmatism and a general willingness to commit to legally binding measures over time, India and China act as hard-liners. That said, the analysis makes clear that the BASIC group has a firm impact on international climate talks, strategically utilizing their combined 'weight' as the world's major greenhouse-gas emitters.

61 L. Rajamani, 'Deconstructing Durban,' Indian Express, December 15, 2011, http:// www.indianexpress.com/news/deconstructing-durban/887892/.

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6

Conclusion

This study has addressed the question of whether a group of emerging economies are likely to coalesce into an economic or political bloc that would fragment global governance and promote alternative approaches to global

economic,

diplomatic,

or

security

issues

and

develop

a

counterbalance to Western influence in existing economic, financial, and political institutions. The two main issues addressed are: • The nature of the increased influence of emerging economies on the international stage • The extent to which the emerging economies are cooperating strategically on economic, diplomatic and security matters Our brief review of large emerging economies shows that the recent decade was a period when their economic growth accelerated substantially compared to the decade before. At the same time, in OECD countries (the West) the trend went in the opposite direction: growth rates have been negatively affected by two recessions – the first after the dotcom boom and the second (the 'great recession') in the aftermath of the 2007‒2008 financial crisis. In 2010 the economic output of all eight BRICS+ countries combined (measured in GDP at PPP) exceeded the EU's GDP by almost 50%, while just 9 years before (in 2001) it was 14% less than the EU's overall GDP. Rapid economic growth in the BRICS+ countries has helped many of them to greatly improve the state of their public finances. This is quite a remarkable improvement taking into account that in the 1990s and early 2000s Russia, Brazil, Turkey and Indonesia along with some other large emerging economies all either defaulted on their foreign debt or were on the brink of doing so. Public finances in many BRICS+ countries are currently in much better shape than in large OECD members. Public debt in

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the U.S., UK, and many continental European economies has surged as a result of the great recession and reached a level that is likely to weigh down their economic growth in the coming years.62 The military in the BRICS+ is another sector that has benefited from the rapid growth. While the general trend in military expenditure as a share of GDP in the BRICS+ countries does not show any substantial increase over the last 10 years, absolute resources available to defense increased significantly across the board. Apart from Brazil, Indonesia and South Africa, all of them spend more on defense as a proportion of GDP than the EU member states. In some particular cases this seems to be shifting the military balance of power in favor of the BRICS+ countries. At the same time, it should be kept in mind that all of the BRICS+ are relatively poor in per-capita terms compared to the OECD countries (with the exception of South Korea). The technological sophistication of their economies and their research capacities are still quite a way behind OECD member states (again with the exception of South Korea). The BRICS+ are also dependent on Western foreign direct investment (FDI) to bring in new technologies and know-how. An analysis of BRICS+ technological levels reveals big differences between individual countries in the group. This is what causes some analysts to argue that 'though an era of American or Western domination may be over, BRICS domination is still some time off.'63 China has been the engine behind BRICS+ economic growth. All the while, China's growth rate has been far higher than in the rest of the BRICS+ and the size of the Chinese economy exceeds that of the combined economies of Brazil, India, Russia and South Africa (at PPP). Growing Chinese economic influence has been especially visible in foreign trade. The share of interBRICS+ trade has been growing very rapidly in the first decade of the 21st century, often coinciding with a declining share in trade with the EU and

62 Carmen M. Reinhart, Vincent R. Reinhart, and Kenneth S. Rogoff, 'Debt Overhangs: Past and Present' (Harvard, 2012), http://www.economics.harvard.edu/files/ faculty/51_Debt_Overhangs.pdf. 63 van Agtmael, 'Think Again: The BRICS.'

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the U.S. Nevertheless, the EU remains the most important trading partner for the BRICS+. These developments beg the question: are the BRICS+ countries slowly forming an economic and political bloc to counterbalance Western influence and putting forward alternative agendas for global economic and political governance? To answer this question we analyzed the interaction between the BRICS+ in a number of different arenas where their economic and diplomatic behavior play out. Our investigation reveals that although substantial differences between the BRICS+ countries still exist, they all exhibit an ambition for greater policy coordination on economic issues. Arguably the most prominent arena where states take up political positions is in the UN Security Council. If coordination between BRICS+ countries does take place, one would expect disagreement with Western UNSC members to occur more often than not. However, most of the resolutions that are put to a vote are passed unanimously; only in a relatively small number of cases were abstentions or votes against recorded (a mere 7% of the total resolutions in the period 1997‒2012). There thus seems to be little desire to voice dissent during voting. Moreover, disagreements among the BRICS+ countries in terms of UNSC voting demonstrate a lack of any consistent pattern that would indicate common approaches. It is true that China and Russia have often voted or abstained together but when they abstain they are more likely to be joined by one of the Western countries than any of the other BRICS+. Non-proliferation issues are another example where divided attitudes among the BRICS+ countries come to the fore. Here the main dividing line lies between the haves and have-nots, i.e. nuclear-weapon states and the rest. Whereas the former see the IAEA Additional Protocols as a precondition for the transfer of nuclear technology (albeit with varying degrees of firmness), Brazil, Indonesia, and many other developing countries see this as outright discrimination. In other words, we see significant divergences here among the BRICS+ themselves. We also see this in the domain of climate change. However there is stronger agreement among the emerging economies, particularly among Brazil, South Africa, India and China – commonly known as BASIC – within the UNFCCC. On a general level, the 'BASIC climate alliance' plays into each country's common foreign-policy objective to raise their international

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status. Climate diplomacy should thus be viewed as part of a wider geopolitical game which raises the possibility for bargaining between major parties (both intra-BASIC, as well as towards developed nations).64 On a more detailed level however, significant differences remain. On the part of Brazil and South Africa, a general realization that binding emissions cuts will in time be inescapable seems to be part of their mindset. For India and China however, this notion is still very far away. As a result, they often find themselves vehemently opposed to what they view as a 'warming up' of Brazil and South Africa to Western proposals. Nevertheless, as emerging economies, many of their goals coincide, endowing them with formidable influence over global climate change negotiations. With respect to arms trade, a clear dividing line between BRICS+ countries emerges. On the one hand, Brazil, South Korea, Turkey and South Africa rely on the West for arms supplies, whereas on the other, China and India source most of their arms imports from Russia. Indonesia is positioned somewhere in between these two groups. An analysis of BRICS+ diplomatic ties to the rest of the world (measured by the number of consulates) reveals that neighboring and Western countries feature strongly in BRICS+ foreign relations. Although the growing trade between the BRICS+ may result in a shift towards closer diplomatic ties between the BRICS+, it is likely that this will take many years to substantially change the diplomatic balance. The main area where the emerging economies share common views and exhibit an ambition to further pursue policy coordination is the issue of global economic governance. The BRICS countries often take similar positions on the reform of the Bretton Woods international financial institutions, the IMF and the World Bank. The BRICS countries have also voiced concern over the current international financial architecture which relies on the U.S. dollar, and have taken steps to challenge its role as the main global reserve currency. Many of these countries have also introduced trade-restrictive protectionist measures in the wake of the global financial

64 Stockholm Environment Institute, 'Together Alone? Brazil, South Africa, India, China (BASIC) and the Climate Change Conundrum - Policy Brief.'

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crisis of 2007‒2008 while expecting easy access to Western markets. Compounded with the trend of greater intra-BRICS+ trade, this could potentially evolve towards increasingly anti-Western economic policy coordination.65 The above initiatives could possibly grant greater legitimacy to the BRICS (and perhaps the BRICS+) beyond acting as another 'club of countries' within contemporary global governance. If successful, the BRICS bank could potentially constitute a first step toward developing an alternative economic development regime based on South-South relations, thus granting BRICS' attempts at alternate forms of global governance an actual face. Moreover, if attempts to challenge the dominance of the U.S. dollar were to increasingly materialize, this will further exacerbate the erosion of the traditional multilateral financial architecture in which the West is dominant. On the whole, the BRICS+ countries have a much easier time sharing their opposition to 'Western' economic policies and institutions than in developing concrete proposals on reforming the existing system. Many of the policy initiatives they have proposed still need to come to fruition. Nevertheless, economic coordination often precedes political coordination, and we therefore may well be witnessing the first signs of economic bloc formation. In sum, our analysis suggests that while cooperation between the BRICS+ countries is increasing, differences between them remain large as well. These

differences

include

economic

structure,

level

of

economic

development, external and internal security situation, level of democracy and so on. They create substantial barriers for finding true common ground and often limit cooperation among the BRICS+ on many issues. The absence of a broadly shared positive agenda is the main reason why it is highly unlikely for these countries to grow into a geo-economic, geopolitical alternative to the West within the next five to ten years.

65 A further issue where this is possible, which we did not address in this study, is the role of resource governance. The BRICS+ countries are major primary commodity exporters as well as consumers. Greater economic policy coordination in the field of resources among these states could evolve to become a challenge for U.S. and European economic interests.

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The good news for Europe is that there is still more dividing the BRICS+ than there is uniting them. For Europe this represents an opportunity to engage with the BRICS+ through intensified trade relations. Importantly, this will not only increase European political and economic influence in these countries, but also potentially reduce the momentum of intra-BRICS+ economic integration and dampen its spillover into the political domain. Secondly, Europe should engage in a strategic-level discussion on economic governance and the future of development policy to ensure that the BRICS+ complement and do not substitute existing regimes. The question is whether Europe is up for the task.

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BIBLIOGRAPHY

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BIBLIOGRAPHY

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BIBLIOGRAPHY

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A N N E X : I N D I V I D UA L C O U N T R Y N O T E S

8 A nnex: I ndividual Country N otes

8.1 Brazil Key Takeaways

• Strongly diversified economic base, consisting of agriculture, mining, petroleum, manufacturing and service activities; • New oil finds grant Brazil the potential to develop into the 6th-largest oil producer worldwide by 2035; • An expanding R&D sector and potential for specialized R&D firms to enter the market; • A booming urban security market, particularly in the fields of public safety and security, large events (2014 FIFA World Cup, 2016 Summer Olympic Games), mass transportation, airport security, personal and domestic defense, and cyber security. However, this is equally due to a high incidence of urban crime. • Bureaucratic and inefficient business climate; • Slower economic growth and lower investment levels compared to other emerging economies; • High levels of traffic congestion; • Ethanol market under pressure due to underinvestment; distorted domestic fuel prices as a result of subsidies and government bureaucracy.

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A N N E X : I N D I V I D UA L C O U N T R Y N O T E S B R A Z I L

Variable

Brazil's Rank

International Trade Logistics63

45th out of 155

Human Development

84th out of 187

64

101st out of 187

Education65

30th out of 132

Environmental Performance

66

53rd out of 142

Economic Competitiveness67 Perceived Governmental Corruption

73rd out of 182

Entrepreneurship69

56th out of 79

68

66 67 68 69 70 71 72

Population In the period 2007-2011, the population of Brazil grew on average by 0.92% per year.73 This rate of growth is similar to that experienced by European

countries such as Belgium and Sweden. Other emerging economies such as Indonesia, India and Turkey grew slightly faster with around 1.2% growth recorded in the same period. Like the aforementioned countries, Brazil has a very high urbanization rate with 87% of its population living in cities. For the period 2010-2015, urbanization is set to continue year-on-year by about 1.1%.74

66 The World Bank, 'Logistics Performance Index', August 23, 2012, http://info. worldbank.org/etools/tradesurvey/mode1b.asp. 67 UNDP, 'International Human Development Indicators - UNDP', August 23, 2012, http://hdr.undp.org/en/data/profiles/. 68 UNDP, 'Education Index (expected and Mean Years of Schooling)', August 23, 2012, http://hdrstats.undp.org/en/indicators/103706.html. 69 Yale University, '2012 EPI: Rankings | Environmental Performance Index', August 23, 2012, http://epi.yale.edu/epi2012/rankings. 70 The World Economic Forum, 'The Global Competitiveness Report 2011 - 2012', August 23, 2012, http://reports.weforum.org/global-competitiveness-2011-2012/. 71 Transparency International, '2011 Corruption Perceptions Index -- Results', n.d., http://cpi.transparency.org/cpi2011/results/. 72 George Mason University Centre for Entrepreneurship and Public Policy (CEPP), 

'The Global Entrepreneurship and Development Index (GEDI) 2012 Country 



Rankings', 2012. 

73 The World Bank, 'Population Growth,' Population Growth (annual %), 2011, http:// data.worldbank.org/indicator/SP.POP.GROW. 74 US Central Intelligence Agency, 'CIA - The World Factbook. Brazil Country Page', n.d., https://www.cia.gov/library/publications/the-world-factbook/geos/br.html.

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In terms of education, Brazil occupies place 101 out of 187 countries reviewed in the context of the UNDP education index.75 University schooling in Brazil has long been something available to the privileged few only, with a mere 11% of working age having a degree. Graduates earn on average 2.5 times as much as those without a degree. Until recently those gains went mostly to those who had attended private school. To make matters even more unfair, they often went on studie at public universities for which they had to pay no fee.76 Recently however, an explosive growth in private, for-profit universities is opening up higher education to the less privileged. A large and young population, inadequate schools and the growth of industries, such as oil (see also infra, societal challenges and opportunities) that demand skilled workers all mean that the demand for higher education will continue to rise. Since the public sector will not have the finances to expand, this will have to come from private institutions.77 But, public universities still offer some of the best courses. Charging fees would make up for some of the subsidy to better-off Brazilians. However, this is not permitted under the constitution. As a result, the government decided to install admission quotas. Universities have until 2016 to reserve half of their places for students from state schools. Of those, half must go to very poor students, and black, mixed-race or Amerindian students must be admitted according to their share of the local population.78 Economy

On average, the Brazilian economy grew by 3.7% in the period 2000-2010. Compared to the rest of the BRICS+ countries, it finds itself in pursuit; with the exception of South Africa (3.6%), all other BRICS+ countries experienced stronger growth. China (10.3%) and India (7.4%) top the list (see Figure 1).79 Although still growing, there is some degree of concern about the Brazilian economy. The 3% growth rate forecasted for 2012 may be high compared to Western economies, it falls well short of what Brazil needs to continue recent social gains.

75 UNDP, 'Education Index (expected and Mean Years of Schooling).' 76 The Economist, 'Higher Education in Brazil: The Mortarboard Boom', September 15, 2012, http://www.economist.com/node/21562955. 77 Ibid. 78 Ibid. 79 The World Bank, 'World Development Indicators | Data', July 2012, http://data. worldbank.org/data-catalog/world-development-indicators.

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Brazil Figure 1 12 10 8 6 4 2 0 Brazil

China

India

Indonesia

South Korea

Russia

South Africa

Figure 1: Average GDP growth rates 2000-2010 (%) Source: The World Bank, World Development Indicators July 2012; International Monetary Fund, World Economic Outlook, April 2012.

Also, the Brazilian national currency, the Real, is overvalued compared to the U.S. dollar and causes Brazilian products to be relatively expensive abroad. An additional worrisome factor is what is known as the 'Brazil cost', or the vast array of issues which make doing business in Brazil more costly compared to elsewhere (see infra business climate).80 Brazilian exports were worth U.S. $19.4 billion in June 2012. Its main export products are transport equipment, iron ore, soybeans, footwear, coffee, autos, automotive parts and machinery. Furthermore, Brazil accounts for 25% of the world's exports of raw cane and refined sugar and it is world leader in soybean exports.81 Aided by recent oil and natural gas discoveries,

80 Bill Hinchberger, 'Carnaval Is Over,' Foreign Policy, April 7, 2012, http://www. foreignpolicy.com/articles/2012/04/07/carnaval_is_over?print=yes&hidecomments= yes&page=full; The Economist, 'The B in BRICS: The Brazil Backlash,' The Economist, May 19, 2012, http://www.economist.com/node/21555583/; Albert Fishlow, 'Down, but Not Out,' Foreign Policy, May 18, 2012, http://www.foreignpolicy.com/ articles/2012/05/18/down_but_not_out. 81 Trading Economics, 'Brazil Exports,' Trading Economics, July 2012, http://www. tradingeconomics.com/brazil/exports.

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Brazil is likely to develop into one of the world's major hydrocarbon exporters in the years to come.82 Investment levels in 2010 (gross fixed capital formation) were, at 18.4% of GDP, relatively low compared to other emerging economies. By comparison, in 2011 China and India invested 45.4% and 29.5% of GDP, respectively.83 With terms of trade having improved by around 25% between 2000-2010, Brazil needs productivity gains, more savings and investment to keep growing. With productivity gains at 0.9% for the past decade, labor costs rising and a strong currency, analysts expect that annual growth will remain at current levels.84 Looking at foreign direct investment (FDI) levels, Brazil scores on par with the leading emerging economies. With an inward FDI stock of 22.9% of GDP in 2010, it performs roughly equal to Turkey (24.5%) and Russia (28.7%).85 For the period 2008-2010, agriculture and the extractive industries (mining, steel, oil, gas and petrochemicals) accounted for the largest share of FDI inflow (18.2%). Industry, the automotive sector in particular, also continued to attract large shares of investment (17.5%), followed by the services sector (7%).86 The low level of investment has worried economists and led them to downplay Brazilian GDP growth forecasts for 2012 to 2.3-2.5%. Despite these concerns, the general belief is that the Brazilian economy will expand

82 Simon Romero, 'In Brazil, Energy Finds Put Country at a Whole New Power Level', October 10, 2011, http://www.nytimes.com/2011/10/11/business/energyenvironment/in-brazil-energy-finds-put-country-at-a-whole-new-power-level. html?pagewanted=all. 83 The World Bank, 'Gross Fixed Capital Formation (annual % Growth)', 2011, http:// data.worldbank.org/indicator/NE.GDI.FTOT.KD.ZG. 84 The Economist, 'Brazil's Economy: A Bull Diminished', May 19, 2012, http://www. economist.com/node/21555588?zid=305&ah=417bd5664dc76da5d98af4f7a640fd8 a; The Economist, 'The B in BRICS: The Brazil Backlash.' 85 UNCTAD, 'World Investment Report 2011. Country Fact Sheet: Brazil', 2010. 86 Economist Intelligence Unit, 'Brazil Business Environment', August 19, 2010, http:// store.eiu.com/article.aspx?productid=1930000193&articleid=417375826; KPMG, 'Investing in Brazil', 2011, 8.

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by around 4% in 2013.87 Moreover, long-term economic prospects for Brazil are viewed positively in light of its strongly diversified economic base, consisting of agriculture, mining, petroleum, manufacturing and service activities.88 Political Developments

Dilma Rousseff, Brazil's first ever female President, took office on 1 January 2011. Under her predecessor, Rousseff was an energy minister and chief of staff. The Workers' Party (PT) to which Rousseff belongs, now holds 383 out of 513 seats in the Brazilian lower house and 60 out of the 81 seats in the Senate.89 Like under former President Luiz Inácio Lula da Silva, Rouseff has to maintain a cohesive alliance with the centrist Brazilian Democratic Movement Party (PMDB). The PMDB has the largest number of governors, mayors and senators, and is second only to the PT when it comes to the amount of lower house representatives.90 Under Lula, Brazil saw a spectacular rise of its middle class. Rouseff's biggest challenge undoubtedly is to continue this development.91 On the external level, Brazil – as many other emerging economies – is reinventing its foreign policy signature. Contrary to some of the other BRICS+ countries, Brazil is not investing as heavily in military capabilities. However, as one of the world's five largest economies, and as an aspiring leader in agribusiness and energy, Brazil is increasingly deserving of its place at the table.92 Examples of Brazil's new foreign policy posture are its abstention on the UN resolution authorizing the NATO operation in Libya,

87 Francisco Marcelino & Andre Soliani, 'Credit Suisse Cuts Brazil's 2012 GDP Growth Forecast to 1.5%,' Bloomberg, June 20, 2012, http://www.bloomberg.com/ news/2012-06-20/credit-suisse-cuts-brazil-s-2012-gdp-growth-forecast-to-1-5-1-. html; Reuters, 'Analysts Cut Brazil GDP Growth, Inflation Forecasts,' Reuters, June 11, 2012, http://www.reuters.com/article/2012/06/11/us-brazil-economy-surveyidUSBRE85A0JG20120611. 88 Albert Fishlow, 'Down, but Not Out'; The Economist, 'Brazil's Economy: A Bull Diminished.' 89 Bertelsmann Stiftung, 'BTI - Brazil Country Report', 2012, 31. 90 EDC Economics, 'Brazil Country Report', May 2012, 2. 91 Bertelsmann Stiftung, 'BTI - Brazil Country Report,' 31; Bill Hinchberger, 'Carnaval Is Over.' 92 David Rothkopf, 'Brazil's New Swagger,' Foreign Policy, February 28, 2012, http:// www.foreignpolicy.com/articles/2012/02/28/brazil_s_new_swagger?page=full.

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its refusal to vote on a resolution to condemn the human rights violations in Syria, and its alternative proposal, co-produced with Turkey, designed to cut a deal to defuse the Iranian nuclear crisis.93 Equally, Brazil is keen on acquiring a permanent seat in the United Nations Security Council. However, during a visit to the United States in April 2012, U.S. President Barack Obama only acknowledged Brazil's aspiration for a permanent seat. He did not endorse it, unlike his response to India's wish in 2010.94 Research and Development

In 2007, the Brazilian government launched the 2007-2010 PACTI program, which constituted the new setup of the National Policy of Science, Technology and Innovation. The plan meant an increase in support for scientific and technological research, in particular with respect to engineering and areas which were deemed strategic for the country's development. The five most important strategic priorities are (i) competitiveness

in

biotechnology

and

nanotechnology;

(ii)

biofuel

technological development and fuel types; (iii) R&D for refining, oil and gas exploration, production, transport, natural gas, (clean) coal production and usage; (iv) satellite and earth observation technology; and (v) nuclear energy, enlargement of the Brazilian nuclear fuel cycle, construction of new nuclear power plants and the implementation of a nuclear waste management policy.95

93 James Traub, 'Will the Good BRICS Please Stand Up?,' Foreign Policy, March 9, 2012, http://www.foreignpolicy.com/articles/2012/03/09/will_the_good_brics_please_ stand_up; David Rothkopf, 'Brazil's New Swagger.' 94 Ian Bremmer, 'Brazil Wants Some Security Council Love. But It Won't Get It (yet),' Foreign Policy, April 3, 2012, http://eurasia.foreignpolicy.com/posts/2012/04/03/ brazil_wants_some_security_council_love_but_won_t_get_it_yet; The Economist, 'Brazilian-American Relations: One Step at a Time | The Economist', April 14, 2012, http://www.economist.com/node/21552592?zid=305&ah=417bd5664dc76da5d98af 4f7a640fd8a. 95 Erawatch, 'Brazil Country Report', 2011, 3–4.

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Over the years, the R&D intensity of the Brazilian economy has been steadily rising from 1.02% of GDP in 2006 to 1.16% of GDP in 2009.96 The goal was to nearly double per capita Gross Domestic Expenditure on R&D (GERD) from €58.19 to €107.49. During the same period, business sector R&D intensity also jumped from 0.62% to 0.74%.97 The share of the total GERD borne by the private sector amounted to 45.25% in 2009, and that borne by the public sector stood at 54.75% of GDP. The goal is to raise overall R&D intensity to 2.2% by 2020.98 For 2012, R&D intensity is forecasted at 1.25% of GDP.99 Brazil's research system is clearly expanding, however the capacity of research institutions and universities to interact with firms is still lacking. The number of innovative firms is still small (106,800 firms in industry, services and R&D sectors) and the number of those who do actual R&D is even smaller (a mere 38.7%; 41,300 firms, of which 17,679 industrial and 727 service related). According to an innovation survey covering the period 2006-2008, many industrial firms reported a high cost of innovation, excessive economic risks, a shortage of qualified personnel, and of finance resources in general. For those who did not engage in innovative practices, the main issues are market conditions, a lack of experience in doing innovation and other obstacles.100

96 Brazilian Ministry of Science and Technology, 'PORTAL DO MINISTÉRIO DA CIÊNCIA, TECNOLOGIA E INOVAÇÃO', September 24, 2012, http://www.mct. gov.br/index.php/content/view/336625/Dispendios_nacionais_em_pesquisa_e_ desenvolvimento_P_D_em_relacao_ao_produto_interno_bruto_PIB_de_paises_ selecionados.html. 97 Erawatch Brazil, 'Basic Characterisation of the Research System', 2011, http:// erawatch.jrc.ec.europa.eu/erawatch/opencms/information/country_pages/br/countr y?section=Overview&subsection=BasicChar. 98 Erawatch, 'Erawatch Country Reports 2010: Brazil', 2010, 3. 99 R&D Magazine, Batelle, International Monetary Fund, World Bank and CIA Factbook, '2012 Global R&D Funding Forecast: R&D Spending Growth Continues While Globalization Accelerates', December 16, 2011, http://www.rdmag.com/ Featured-Articles/2011/12/2012-Global-RD-Funding-Forecast-RD-Spending-GrowthContinues-While-Globalization-Accelerates/. 100 Erawatch, 'Erawatch Country Reports 2010: Brazil,' 3–4.

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Business Climate

According to the 2012 edition of the World Bank's Ease of Doing Business Monitor, doing business in Brazil is not particularly easy. Brazil ranks number 126 out of a total of 183 countries reviewed. Compared to other emerging economies, Brazil is positioned roughly equal to Russia (120) and India (132), but is outperformed by China (91) and Turkey (71). Brazil has a poor reputation when it comes to starting up a business (120/183), dealing with construction permits (127/183), trading across borders (121/183) and the ease with which insolvency can be dealt with (136/183). These poor scores however are nothing compared to the bureaucratic tax system which is ranked at number 150 out of 183.101 This is deemed so problematic in fact, that some authors speak about the 'Brazil Cost', or the myriad of issues that make doing business in Brazil more costly than in other countries.102 Brazil has a relatively high import tariff103 compared to other emerging economies, almost twice that of Russia and China and three times as high as Turkey and Indonesia. Compared to the OECD average, Brazil charges the highest rate in U.S. Dollars for container imports, twice that of India, Turkey and the EU and more than three times the rate of China and Indonesia. Custom formalities are not spared by the 'Brazil cost' where it takes up to 8 different documents to clear imported goods. By comparison, South Korea (3) and China (5) require significantly less documents to 'clear' an import.104 Societal Challenges and Opportunities

Urban Security The high growth and economic pull of Brazil's larger cities such as Sao Paolo and Rio de Janeiro have caused large-scale urbanization. This 'urban sprawl' concentrated itself in the 'favelas' or shanty towns located on the

101 'Ranking of Economies - Doing Business - World Bank Group', June 2011, http:// www.doingbusiness.org/rankings/. 102 The Economist, 'The B in BRICS: The Brazil Backlash'; Bill Hinchberger, 'Carnaval Is Over.' 103 Applied weighted mean for all products imported. 104 The World Bank, 'Data on Trade and Import Barriers', December 2011, http://econ. worldbank.org/WBSITE/EXTERNAL/EXTDEC/EXTRESEARCH/0,,contentMDK:21051 044~pagePK:64214825~piPK:64214943~theSitePK:469382.00.html.

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edge of the cities and surrounding hills. Often disengaged from the up-town areas, crime is rife. Muggings, kidnappings, gang violence and homicide incidences are high in Brazil and have given birth to a sprawling urban security industry, designed specifically to counter these problems. The designation of the 2014 FIFA World Cup and the 2016 Olympic Games to be hosted in Brazil are a further stimulus for an already booming sector. Brazil's security industry recorded an average annual growth of 15-20% during the last eight years and annual sales amounted to 24 billion Brazilian Real. The market is divided with a roughly 50% foreign share of the market, with half of these imports represented by American products. Other important actors come from Israel, South Korea and Japan, with each taking up approximately 10 to 15% of the import market share.105 Crime rates set aside, another reason for the high growth rates of the Brazilian urban security market is the fact that prosperity in Brazil has been rising fast.106 There are around 8,000 private security companies operating in the country, the majority of which provide either security to retailers and installers (49%), or monitoring services (30%). The vast majority (84%) of Brazil's electronic surveillance is in the hands of a few small and micro businesses, but the highest revenues are generated by a few large companies. Bosch, Johnson Controls, Tyco, Siemens, Pelco, Samsung, General Electric and others have already established representations, and/ or joint-ventures in Brazil. Key-sectors for security services are public safety and security, large events, mass transportation, airport security, personal and domestic defense, and cyber security, data cryptography in particular.107

105 Juliana Mello, 'Introduction to the Security Industry in Brazil,' The Brazil Business, March 28, 2012, http://thebrazilbusiness.com/article/introduction-to-the-securityindustry-in-brazil. 106 Newsweek, 'How Street Gangs Have Replaced Cops in Rio - The Gangs of Rio,' Newsweek, February 22, 2009, http://www.thedailybeast.com/ newsweek/2009/02/22/the-gangs-of-rio.html; Juliana Mello, 'Introduction to the Security Industry in Brazil.' 107 Juliana Mello, 'Introduction to the Security Industry in Brazil.'

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Mobility and Transport Due to its high degree of urbanization and the strong growth of its cities, Brazilian urban centers suffer from congestion. The 2010 IBM Commuter Pain Index108 – an index which ranks the emotional and economic toll of commuting – places Sao Paolo on sixth place with a score of 75/100.109 Urban public transport systems are said to be deficient and responsible for holding back economic potential. Some estimates claim that wasted time and fuel consumption cost the Sao Paolo economy nearly U.S. $20 billion in 2008, or about 10% of its GDP.110 Brazil ranked fourth worldwide in terms of annual registration of new vehicles in 2010, up from ninth a decade ago. Population growth was 11% in that period, vehicle registration however increased by 120%.111 The share of public transport usage when commuting from A to B in Brazilian urban centers has been declining for years, from 85% in 1960 to 50% in the period 2000-2010 – a trend which is set to continue.112 Congestion is so bad in fact, that it has prompted affluent residents of Sao Paolo to resort to unorthodox solutions, using helicopters instead.113

108 The IBM Commuter Pain Index is the result of a survey among 8,192 motorists in 20 cities on six continents. The index is comprised of 10 issues: 1) commuting time, 2) time stuck in traffic, agreement that: 3) price of gas is already too high, 4) traffic has gotten worse, 5) start-stop traffic is a problem, 6) driving causes stress, 7) driving causes anger, 8) traffic affects work, 9) traffic so bad driving being stopped, and 10) decided not to make trip due to traffic. The results of the survey are compiled into an index on a scale of one to 100, with 100 being the most onerous. 109 IBM, 'IBM Global Commuter Pain Study Reveals Traffic Crisis in Key International Cities', June 30, 2010, http://www-03.ibm.com/press/us/en/pressrelease/32017. wss?re=traffic_hero. 110 Economist Intelligence Unit, 'Traffic Congestion in Brazil's Metropolitan Regions Undermines Country's Competitiveness,' EUI for the Media, November 3, 2011, http://www.eiumedia.com/index.php/latest-press-releases/item/247traffic-congestion-in-brazil%E2%80%99s-metropolitan-regions-underminescountry%E2%80%99s-competitiveness; Economist Intelligence Unit, 'Making up for Lost Time: Public Transportation in Brazil's Metropolitan Areas', November 2011, 3. 111 Economist Intelligence Unit, 'Making up for Lost Time: Public Transportation in Brazil's Metropolitan Areas,' 4. 112 Ibid., 7. 113 Rafael Romo, 'Rich Fight Brazil's Congestion with Helicopters,' CNN, April 8, 2010, http://articles.cnn.com/2010-04-08/world/brazil.congestion_1_motorcyclemessengers-anderson-silva?_s=PM:WORLD.

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It is clear that to be able to host the 2014 FIFA World Cup and the 2016 Summer Olympic Games, public transport systems have to be radically upgraded. In addition, restrictions on private car usage should be implemented, analogous to for example the 'congestion charge' used in central London. The reality however does not reflect this necessity. The projected increase in infrastructure investment from U.S. $34 billion between 2006 and 2009 to U.S. $80 billion from 2011 to 2014 falls well short of the U.S. $250 billion required to adequately host the events.114 Multimodal transport systems which integrate bus rapid transit, metro and train traffic in an intelligent way are urgently needed. Energy According to the US Energy Information Administration, Brazilian oil production will reach 2.8 million barrels per day in 2012 and 3 million barrels per day (bbl/d) in 2013.115 Oil exploration and production is expected to increase strongly in the coming years, particularly due to the exploitation of Brazil's off-shore pre-salt deposits. The pre-salt is composed of oil deposits located under thick layers of salt, in areas on average 18,000 feet below the ocean's surface. This new development requires heavy investments in the latest technologies and provides strong incentives for Western companies to become involved.116 However, the difficulty in accessing reserves, considering both the great depths and pressures involved, represent technical hurdles which still need to be overcome.117 The total recoverable volume of oil and gas reserves is estimated to be around 50 billion barrels of oil equivalent (boe), thus quadrupling Brazil's current reserves and potentially making the country the world's 6th largest oil producer by 2035. 28% of concessions have been granted so far. The rest will be developed under a new regulatory framework of productionsharing agreements.118

114 Economist Intelligence Unit, 'Making up for Lost Time: Public Transportation in Brazil's Metropolitan Areas,' 5. 115 US Energy Information Administration, 'Country Analysis Briefs: Brazil', February 28, 2012, 2. 116 Swiss Business Hub Brazil, 'The Brazilian Oil and Gas Sector', September 2011, 1. 117 US Energy Information Administration, 'Country Analysis Briefs: Brazil,' 6. 118 Swiss Business Hub Brazil, 'The Brazilian Oil and Gas Sector,' 2.

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In addition to oil production, Brazil is the second largest producer of ethanol in the world, after the United States. A combination of high world sugar prices, a poor sugar cane harvest and underinvestment however caused ethanol production to seriously decline in 2011 to around 390,000 bbl/d, down from 486,000 bbl/d in 2010.119 The sector continues to struggle as investment was down to U.S. $700 million in 2011, from U.S. $7.84 billion in 2008. Satisfying domestic demand has been difficult as Brazil's fastgrowing fleet of hybrid cars will cause domestic demand to skyrocket in the coming years to 50 billion liters per year by 2018. Brazil requires an average of 15 new distilleries annually to reach its government target of 60 billion liters by 2021. Biofuel investors however are faced with poor infrastructure, government bureaucracy and distorted domestic fuel prices which are below international market levels. The low prices for competing fuels have caused ethanol producers to be unwilling to raise prices, thus capping profits and reducing investment.120

119 US Energy Information Administration, 'Country Analysis Briefs: Brazil,' 4. 120 Raymond Colitt and Stephan Nielsen, 'Brazil Ethanol Drive Falters on Domestic Supply Shortage,' Bloomberg, March 13, 2012, http://www.bloomberg.com/ news/2012-03-13/brazil-ethanol-slows.html.

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8.2 China Key Takeaways

• The average age of the population in China is quite high – the country might grow old before it gets rich. Its labor force is likely to start declining after 2015; • China achieved almost a 10% average growth rate in the last decade. It can become the largest economy in the world around 2030; • China's R&D expenditure increased by a factor of 8 and the number of researchers almost tripled over 1996-2008; • Political transition to a new generation of political leaders might increase political risk in near term; • Urbanization, environmental degradation, health and food safety are among the most important societal challenges in China. Variable

China's Rank

International Trade Logistics118

26th out of 155

Human Development

101st out of 187

119

114th out of 187

Education120

116th out of 132

Environmental Performance

121

26th out of 142

Economic Competitiveness122 Perceived Governmental Corruption

75th out of 182

Entrepreneurship124

58th out of 179

123

121 The World Bank, 'Logistics Performance Index.' 122 UNDP, 'International Human Development Indicators - UNDP.' 123 UNDP, 'Education Index (expected and Mean Years of Schooling).' 124 Yale University, '2012 EPI: Rankings | Environmental Performance Index.' 125 The World Economic Forum, 'The Global Competitiveness Report 2011 - 2012.' 126 Transparency International, '2011 Corruption Perceptions Index -- Results.' 127 George Mason University Centre for Entrepreneurship and Public Policy (CEPP), 

'The Global Entrepreneurship and Development Index (GEDI) 2012 Country  Rankings.'

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Population

China has 1.3 billion inhabitants and is the most populous country in the world. China's population – its median age was 34.5 years in 2010 – is older than in other developing countries with a similar level of per capita income. Two other countries in the BRICS+ group that have a somewhat higher median age – South Korea and Russia – are substantially wealthier than China. Total fertility rate in China has been steadily declining in the last few decades and reached 1.6 in 2010, which is far below the replacement level (approximately 2.1) and lower than in many EU countries. As a result, in the last decade population growth in China has been quite low – less than 0.6% pa, which is again not much higher than in the EU. The 'one child' policy undoubtedly has a substantial effect on slowing down population growth but a rapid fall in the fertility rate began even before this policy was introduced in 1978. These developments suggest that China will experience a rapid population aging in the not so distant future. China's labor force is likely to start declining around 2015.128 At the same time its old age dependency ratio129 will grow substantially. In recent years China has also rapidly extended pension system coverage.130 These factors suggest that China might see growing pressures on its public finances in the future. Another demographic issue that has significant economic and other implications is a rapid growth in urbanization. China has the second lowest rate of urbanization among all BRICS+ countries – 44.9% in 2010 (India has the lowest). This suggests that its rapid urbanization (in 2001-2010 the annual average growth in urban population was 2.8%) will continue in the future. It is expected that by 2030 urban residents will make up approximately two thirds of the total population. This means an addition of about 13 million new urban residents each year. As a consequence, the

128 World Bank, China 2030: Building a Modern, Harmonious, and Creative High-Income Society, 2012. At http://www.worldbank.org/content/dam/Worldbank/document/ China-2030-complete.pdf. 129 The ratio of the number of people aged 65 and above to the number of working age people (aged between 15 and 64 years). 130 The Economist, 'Asia's next revolution', September 8th, 2012.

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development of urban infrastructure and delivery of public services in the cities will continue to be important issues for policy-makers. Economy

China's economic development over the last three decades was remarkable and unprecedented for such a large country. Its growth rate in this period averaged almost 10% and dropped below 7% only twice. Over this time China managed to lift out of poverty some 500 million people as the poverty rate fell from more than 65% to less than 10%.131 Its share of the world's economy has increased by 270% since 1990 (to more than 13% in 2010 – see Figure 1). It is poised to overtake the U.S. and to become the world's largest economy by 2030.

(%"# ($"# (!"# '"# &"# %"# $"# !"#

Figure 1 China's Economy as a Percentage of World's Economy (in PPP) Source: World Development Indicators

131 World Bank, op.cit.

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However, economic growth in China in the years ahead should slow down. Several structural factors will push the growth rate toward a lower level: • Demography – as it was mentioned above, China's labor force will soon start falling; • China has an exceedingly high investment ratio (45% of GDP) and it is unlikely to be sustained at this level. In any case, the capital-labor ratio will increase thus reducing marginal productivity of capital and its contribution to growth; • Wage growth for unskilled workers has accelerated and now exceeds that for skilled workers.132 This indicates that the growth model built on a large supply of cheap labor may run its course. The IMF predicts that growth rates in China in the next few years will still be above 8%. However, longer term forecasts foresee significantly lower growth. For example, a recent review of 27 projections for long-term economic growth in China and India133 found that the average GDP growth rate in China for the period from 2020 through 2025 was 5.7% pa with a range of 3.8 -9.0% (almost the same as in India). China is the world's largest manufacturing power. Manufacturing has an unusually high share in China's economic output – it stayed within a narrow range between 31 and 34% in 1990-2009. This is the largest share among BRICS+ countries. The principal manufacturing sectors are basic metals, ICT and the chemical industry. Political developments

The year 2012 marks an important milestone in China's political development. In the fall China Communist Party's congress selected a new generation of political leaders, including a new general secretary of the party, Xi Jinping.134 While China would have liked to present to the outside world as smooth a picture of transition as possible, the scandal surrounding the fall of Bo Xilai, a Politburo member and leader of the Chongqing region,

132 Sharma, R., Breakout Nations: In Pursuit of the Next Economic Miracles , 2012. 133 Wolf, C., et al. China and India, 2025: A Comparative Assessment, RAND Corp. 2011. 134 http://en.wikipedia.org/wiki/18th_National_Congress_of_the_Communist_Party_of_ China (assessed July 13, 2012).

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has revealed signs of internal strife within the leadership.135 In any case, leadership transition means higher political risk for China at least in the short-term. R&D performance and priorities

One distinct feature of China's recent development was a very rapid increase in R&D expenditure and the number of researchers. China became the third largest R&D spender in the world after the U.S. and Japan. As a share of GDP its expenditure more than doubled from 0.57% in 1996 to 1.47% in 2008. Given that its GDP also grew rapidly over the same period its monetary expenditure on R&D increased by a factor of 8 (in real terms)! The number of researchers almost tripled over the same period. China also achieved some significant and visible milestones in its technical development in the last 10-15 years: it launched its first manned space flight in 2003, opened the world's first commercial operation of a high-speed maglev train in 2004, developed indigenous versions of modern defense tech­nologies, such as a fourth-generation jet fighter aircraft, anti-satellite missiles, etc. The country's leadership put a strong emphasis on innovation and technology development. For example, the 12th five-year plan (2011– 2015) set the following objectives:136 • Raising expenditure on research and development to 2.2% percent of GDP; • Increasing rates of patenting to 3.3 per 10,000 people; • Promoting enterprise-led innovation. It also assigns a central role to selected strategic industries, which include energy-saving and environmental protection, next generation information technology, bio-technology, high-end manufacturing, new energy, new materials and clean-energy vehicles. In addition, government plans to support a number of mega-projects with a focus on basic research including

135 http://www.cfr.org/china/chinas-leadership-shift-disarray/p27974 (assessed July 16, 2012). 136 World Bank, 2012, p.176.

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two in the life sciences – on drug discovery and on major infectious diseases.137 Patent statistics provides another way to look at the sectors that are most active in terms of R&D output. World Intellectual Property Organization (WIPO) data on international patents for 2007-2009 show that electrical engineering,

in

particular

electrical

machinery

and

energy,

telecommunications and digital communications, were the most active fields. For example, in digital communication Chinese residents held more than 17% of all international patents.138 Similar results emerge from the U.S. Patent

and

Trademark

Office

(USPTO)

data

as

well.

Chinese

telecommunication technology companies such as Huawei and ZTE are quickly expanding on the global market and might become world leaders in this sector. For example, Huawei filed for more international patents than any other firm in 2008.139 Business climate

In general the business climate in China is not particularly business friendly. The 2012 Ease of Doing Business Index compiled by the World Bank put China in 31st place out of 49 upper-middle income countries.140 This means that China has better business conditions than Russia or Brazil but worse than South Africa or Turkey. Despite this, foreign investors have been very active in China, attracted by the rapidly growing domestic market and the opportunity to cut production costs by relocating manufacturing facilities to China. China received the largest volume of foreign direct investment among all BRICS+ countries in the last decade even when measured as a percentage of GDP.

137 Ibid.,p.176. 138 Ibid., p.209. 139 The Economist, 'The end of cheap China', March 10th, 2012. 140 A high ranking on the ease of doing business index means the regulatory environment is more conducive to the starting and operation of a local firm.

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China's market is often very competitive and many foreign investors struggled to achieve an acceptable level of profitability. Protection of intellectual property rights has been another large concern for foreign investors in China. However, in recent years there have been some signs that the Chinese leadership has started to take this issue more seriously, especially because many Chinese companies are becoming more and more active in patenting.141 Societal challenges and opportunities

Environmental degradation and pollution One of the most visible downsides of China's economic growth is environmental degradation and resource depletion. The cost was estimated to be close to 10% of China's GDP over the last decade. This includes the cost of air and water pollution and soil degradation.142 Out of the world's 30 most polluted cities, 20 are in China. Over 300 million people in China use contaminated water supplies.143 China's soaring energy consumption has made it the world's largest emitter of carbon dioxide, a greenhouse gas. Its per capita emissions have been growing very rapidly as well and are now above those of France and Spain.144 At the same time, China is quite vulnerable to climate change. Our calculations of climate change vulnerability indicate that China will be among 20% of countries worst affected by climate change. These problems have not been unnoticed by policy makers. China intro­ duced ambitious energy efficiency and emissions goals, and heavily promoted the development of green industries. Since 2009 China has been the world's leader in terms of investment in renewable energy. Investment in renewable power and fuels in China increased from U.S. $2.2 bn in 2004 to U.S. $52.2 bn in 2011, a compounded annual growth rate of 57%.145

141 The Economist, 'Patents, yes; ideas, maybe', October 14th, 2010. 142 World Bank, op. cit., p.39 143 Ibid., p.70 144 Ibid., p.235. 145 UNEP and Bloomberg New Energy Finance, Global Trends in Renewable Energy Investment 2012, 2012.

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In 2010, China became the largest wind energy provider in the world, with a total installed capacity of 41.8 gigawatts (GW). Urbanization As it was mentioned earlier Chinese cities experience a large influx of new residents. Many cities are undergoing construction and transportation booms. Some side effects of these developments have been air pollution, traffic jams, high energy consumption, etc. Although urban air pollution has been declining it still has a very large impact on health, which was nearly 3% of GDP in 2009.146 The downsides of rapid urbanization might become even more serious because urban residents will buy more cars, electrical appliances and demand more living space as their income grows. Cities provide many opportunities to reduce energy consumption and emissions of greenhouse gases. One area for improvement is smarter and greener buildings that use energy, water and other resources much more efficiently. Greater use of energy efficient appliances provides another area for the reduction of energy use. Analysis done by McKinsey & Co highlights large potential of many existing technologies to reduce energy use and carbon emissions in China. 147 New approaches to urban planning that aim at creating denser urban areas with high-rise buildings are also important. Dense cities make it easier to encourage important behavioral changes such as more frequent use of public transportation instead of cars. Health care Given rapid population aging, pollution, and some bad health habits (there are 350 million Chinese smokers148) some experts argue that China faces a 'perfect storm' with 'steeply rising social and financial costs that could become a huge burden on the nation in a handful of decades.'149 One of the

146 World Bank, op.cit., p.251. 147 McKinsey & Company. 2009. 'China's Green Revolution: Prioritizing Technologies to Achieve Energy and Environmental Sustainability'. 148 http://en.wikipedia.org/wiki/Smoking_in_the_People's_Republic_of_China, assessed on July 17, 2012. 149 World Bank, 2012, p. 201.

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big concerns is the rise of non-communicable diseases, which account now for 80% of all deaths – higher than in advanced countries. There are many areas in which technological innovation can play an important role in addressing health related problems. Some concern very basic needs such as ensuring access to clean water and good sanitation. Better use of digital technologies (ICT) should improve health care quality and efficiency. Bio-pharmaceutical innovation is also important and became one Figure of the China 2 strategic priority industries designated by the central government.

600 500 400 300 200 100 0

Figure 2 Top 15 Countries of Origin for Notifications to the RASFF

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Food Safety Chinese food is bedeviled by scandal after scandal, particularly relating to chemical adulterations.150 The most significant of these was in 2008 and involved melamine intended to disguise fraudulently diluted milk in protein tests – a cost-cutting measure with disastrous consequences as dozens were killed and hundreds hospitalized with kidney stones, including many babies. Empty supermarket shelves became iconic of the tragedy and highlight the enormous cost to the economy. Europe also feels the impact of China's food safety difficulties: Chinese food is by far the largest source of notifications to the Rapid Alert System for Food and Feed (RASFF) for alerts, information and border rejections; see Figure 2.151 Food safety is a problem recognized all the way up to the highest echelons of Chinese society, with former vice premier Wu Yi forced to issue an apology for the multiple crises which have occurred.152

150 Nicholas Zamiska, 'Who's Monitoring Chinese Food Exports?,' The Wall Street Journal, April 9, 2007, http://online.wsj.com/article/SB117608207682763704.html; Morgan Figuers, 'Apologies for Food Safety in China,' China Digital Times, March 9, 2007, http://chinadigitaltimes.net/2007/03/apologies-for-food-safety-in-china/; Patti Waldmeir, 'China Milk: Not so Bright,' Financial Times, June 28, 2012, http:// blogs.ft.com/beyond-brics/2012/06/28/china-milk-not-so-bright/#axzz252PzGVPh. 151 Rapid Alert System for Food and Feed, 2011 Annual Report (Luxembourg: European Commission, 2012), http://ec.europa.eu/food/food/rapidalert/docs/rasff_annual_ report_2011_en.pdf. 152 Figuers, 'Apologies for Food Safety in China.'

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8.3 India Key Takeaways

• India has a young and rapidly growing population and is poised to overtake China as the most populous nation around 2020; • The share of working age population as a proportion of the total is growing rapidly. As a result India might enjoy benefits of a 'demographic dividend' in the future; • India is the poorest country among all other BRICS+ nations (in terms of GDP per capita). Agriculture still employs more than 50% of the labor force; • It enjoyed a period of rapid economic growth between 2003 and 2008 with the average GDP growth rate approaching 9%; • There are significant risks to future growth that include inadequate infrastructure, corruption, absence of further economic reforms, weak public finances; • India has some successful high-technology sectors, such as IT services, pharmaceutical and space; • Addressing challenges related to agriculture and infrastructure will be one of the main issues for decision-makers. Variable

INDIa's Rank

International Trade Logistics150

46th out of 155

Human Development

134th out of 187

151

134th out of 187

Education152

125th out of 132

Environmental Performance

153

56th out of 142

Economic Competitiveness154 Perceived Governmental Corruption

95th out of 182

Entrepreneurship156

74th out of 179

155

153 The World Bank, 'Logistics Performance Index.' 154 UNDP, 'International Human Development Indicators - UNDP.' 155 'Education Index (expected and Mean Years of Schooling).' 156 Yale University, '2012 EPI: Rankings | Environmental Performance Index.' 157 The World Economic Forum, 'The Global Competitiveness Report 2011 - 2012.' 158 Transparency International, '2011 Corruption Perceptions Index -- Results.” 159 George Mason University Centre for Entrepreneurship and Public Policy (CEPP), 

'The Global Entrepreneurship and Development Index (GEDI) 2012 Country Rankings.'

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Population

India is the second most populous country in the world with 1.22 billion inhabitants; approximately 10% less than in China.160 However, unlike China's population, which is aging rapidly, India 's population is young and growing fast. In the last 10 years (1991-2010) it has increased by 37% and is expected to continue to grow faster than any other BRICS+ country. India should overtake China as the most populous country in the world right after 2020.161 At the same time the population growth rate in India is steadily falling (from 2.1% in 1991 to 1.4% p.a. in 2010) driven by the rapidly declining fertility rate, which fell from 3.9 in 1991 to 2.6 in 2010. Since old age cohorts are still very small, the falling birth rate will decrease India's total dependency ratio (the number of young- and old-age dependents to the working-age population). This opens a window of opportunity in the country's demographic transition for a so-called 'demographic dividend' that could boost growth. However, this outcome is far from certain and its realization depends on the creation of favorable conditions for economic growth including better education for younger generations. Currently the education level of the population is quite poor. The literacy rate among adults is just 74% and is well below the world average of 84%,162 or the rate in China and Indonesia. Only 21% of rural males and 10% of females had an education of secondary school or higher. Unless the Indian government takes more serious measures to improve the situation, Indian ambitions to become a more knowledge-oriented economy might run into difficulties and a demographic dividend can easily become a population bomb or poverty trap. Economy

Economic growth in India strongly accelerated in 2003 and exceeded 8% p.a. until the economic crisis struck in 2008. The impact of the crisis was

160 Unless specifically noted all figures quoted in this brief are from the World Development Indicators database, at http://data.worldbank.org/data-catalog/worlddevelopment-indicators. 161 UN World Population Prospects. The 2010 Revision, UN, New York, 2011. 162 http://en.wikipedia.org/wiki/Literacy_in_India.

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relatively mild – India's GDP still grew 4.7% in 2008 and 9% the following year. However in 2011 it slowed to 7%, constrained by an uncertain global economic environment and tighter monetary policy triggered by high inflation. Current projections from the IMF expect even slower growth (6-6.5%) for 2012-2013.163 The recent economic growth has been service-led. The service sector grew significantly faster than overall GDP and contributed more than 60% to the total GDP increase between 1993 and 2007.164 The IT-related service sector that includes software development and business process outsourcing (BPO) is one of the main success stories of the Indian economy. The sector revenues as a proportion of GDP increased from 1.2% in fiscal year (FY) 1998165 to an estimated 7.5% in FY 2012.166 It provides direct employment to about 2.8 million people and generates a further 8.9 million indirect jobs. It accounts for 25% of total Indian exports (merchandise plus services) compared with just 4% in 1998. Another success story but probably less known is the pharmaceutical industry. Industry turnover increased from just U.S. $300 million in 1980 to about U.S. $19 billion in 2008.167 The industry consists of about 5,000 firms and employs 340,000 workers directly. India is currently the third-largest pharmaceutical producer worldwide by volume behind the U.S. and Japan. Pharmaceutical exports grew at an average rate of 22% between 2003 and 2008. These high-technology success stories should not mask the fact that India is still mostly a poor country. It is significantly poorer than the other seven BRICS+ countries – its GDP per capita is less than 80% of Indonesia's and less than 50% of China's (measured at purchasing power parity, PPP). In

163 http://www.imf.org/external/pubs/ft/weo/2012/update/02/index.htm. 164 WIIW, Models of BRICs' Economic Development and Challenges for the EU Competitiveness, Research Report #359, December 2009. 165 Fiscal year in India runs from 1 April to 31 March, http://en.wikipedia.org/wiki/Fiscal_ year. 166 Data are from the NASSCOM, the industry association for the IT-BPO sector in India, http://www.nasscom.org/indian-itbpo-industry. 167 Mani, S., Ch.17 'India' in UNESCO Science Report 2010, UNESCO, Paris, France, 2010.

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2010, 32.7% of India's population lived below the international poverty line of U.S. $1.25 (PPP) per day (compared to 18% in Indonesia) and 51.7% lived on less than U.S. $2 per day. Agriculture plays a very prominent role in the economy and accounts for 51% of total employment. The shift from agriculture to manufacturing and the rate of urbanization have been relatively slow in India. Many farmers show a tendency to stay on the farm instead of moving to cities to take more productive manufacturing or service jobs.168 Only 7% of India's labor force is employed in the organized sector with formal work contracts, twothirds of which are in the public sector.169 India's labor regulations – some of the most restrictive and complex in the world – are at least partially responsible for this. More rapid urbanization is going to be one the main challenges if India wants to achieve a high level of economic growth comparable to that of China. Meta-analysis of long-term economic growth estimates for India shows that the average forecasted GDP growth rate for the period from 2020 through 2025 was 5.6%, essentially the same as the 5.7% growth rate predicted for China for the same period.170 However, growth in employment is expected to be much more rapid in India (1.6% pa) than in China (only 0.4% pa). Political developments

The current government is led by Manmohan Singh, who as minister of finance was instrumental in initiating economic reforms in 1991 that dismantled the License Raj and liberalized the Indian economy. Many observers are however skeptical about the government's performance in recent years. Even a cabinet minister has called the government directionless.171 It has not implemented any major economic reforms in several years and is beset by a series of corruption scandals. It has reversed its decision to open the retail industry to foreign investment and failed to

168 Sharma, R., Breakout Nations: In Pursuit of the Next Economic Miracles, 2012 . 169 http://en.wikipedia.org/wiki/Economy_of_India#Employment. 170 Wolf, C., et al. China and India, 2025: A Comparative Assessment, RAND Corp., Santa Monica, 2011. 171 The Economist, 'Booted Upstairs', July 21, 2012, http://www.economist.com/ node/21559360.

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cut costly and inefficient subsidies. Foreign investors were also put off by its plans to introduce some retroactive taxes.172 From a longer-term perspective, regionalization and fragmentation in Indian politics represent an important trend. Two large national parties, the ruling National Congress and the opposition Bharatiya Janata Party, are becoming less popular while regional parties are increasing their importance. This has made coalition government the norm at federal level and as a consequence reaching agreement on major reforms more difficult. Another interesting fact is that the average age of cabinet ministers in India is the highest compared to other major countries including China, Brazil and Russia, while its population is the youngest (see Figure 1).173

Figure 1 Average age of Cabinet Ministers, July 2012. Source: The Economist

172 New York Times, 'India's Tax Plan Troubles Foreign Investors', April 6, 2012, http:// www.nytimes.com/2012/04/07/business/global/tax-plan-gives-a-chill-to-indiasforeign-investors.html?pagewanted=all. 173 http://www.economist.com/blogs/graphicdetail/2012/07/daily-chart-14.

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R&D performance and priorities

India's gross expenditure on R&D (GERD) has been growing strongly in absolute terms in the last decade but as a ratio to GDP (or R&D intensity) it has not changed much and remains below 1% because of rapid GDP growth. The Indian government had planned to increase the R&D intensity to 2% of GDP by 2007 in its Tenth Five-Year Plan but the GERD/GDP ratio lagged at 0.76% in that year. Its Eleventh Plan (2007-2012) aims to triple R&D expenditure to 2.5% but this also seems unlikely. Government funding accounts for two-thirds of all R&D expenditure, higher than the BRICS+ and OECD averages. Government expenditure tends to focus on nuclear energy, defense, space, health and agriculture.174 Business R&D expenditure has increased more rapidly than public R&D expenditure in recent years. There has been a very large increase in the number of foreign R&D centers from around 100 in 2003 to about 750 at the end of 2009, with most of these centers working in the IT, automotive and pharmaceutical fields.175 In general, the pharmaceutical and transport sectors (in this order) account for the lion's share of business R&D expenditure, with the IT sector a distant third. One particular feature of the Indian innovation system is its focus on innovation at the 'bottom of the pyramid' i.e. for a very large, low-income market. Tata Nano as the 'world's cheapest car' is the most publicized example of this type of innovation but there are many others. These include a U.S. $34 water purification system, a U.S. $70 refrigerator that runs with batteries and a baby's heart monitoring system at 10% of the world price.176 Rapid expansion of knowledge-intensive industries has significantly increased demand for highly educated personnel. Many companies have been complaining of serious shortages of skilled workers. The central government aims to improve the quality and quantity of human resources in science and engineering in its eleventh plan by establishing, for example, 30 new central universities and opening the country to foreign universities.177

174 Mani, S., Ch.17 'India' in UNESCO Science Report 2010, UNESCO, Paris, France, 2010. 175 Op. cit., p.363. 176 Wolf, C., et al. China and India, 2025: A Comparative Assessment, RAND Corp., Santa Monica, 2011. 177 Mani, S., Op. cit., pp.367-369.

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These and other measures will however take time to make an impact and currently scientists and engineers remain in short supply. Business climate

India scores very poorly in the World Bank's 'Doing Business' surveys. It was ranked 132nd out of 183 countries in the latest edition (in 2012), the worst of all the BRICS+ countries. Especially troublesome are such issues as dealing with construction permits and enforcing contracts, where India was at the very bottom of the world rankings. Other authors draw attention to problems such as corruption and crony capitalism and express concern that these problems are becoming more serious in recent years.178 A hunger strike by social activist Anna Hazare in 2011 to demand a stringent anti-corruption law led to nation-wide protests in his support and the government in the end accepted Hazare's demands. Societal Challenges and Opportunities

Developing Agricultural Sector A rapidly growing population and rising living standards put pressure on the agriculture sector to expand food supply and increase productivity. While meeting food demand of the growing population is challenging already there are at least two major factors that make achieving this objective even more difficult. First, India and its agriculture are going to be strongly impacted by climate change. According to calculations done by HCSS, India is among 20% of countries that will be worst affected by climate change. Changing climate patterns will be very unfavorable to the yields of many crops in India. W. Cline projects that India might see a drop in agricultural crop output of 30-40% by 2080 as a result of climate change.179 There are already signs of

178 Sharma, R., Op. cit. 179 Cline, W., 2007. Global Warming and Agriculture: Impact Estimates by Country. Washington, DC: Center for Global Development and Peterson Institute for International Economics. http://www.cgdev.org/doc/books/Cline%20global%20 warming/Chapter%205.pdf.

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climate change affecting the monsoon patterns, making them more volatile and unpredictable.180 A second factor is water stress. Agriculture is by far the main consumer of water in India. The 2030 Water Resources Group predicts that in 2030 it will still account for 80% of total water demand and the gap between existing supply and projected demand could be 50% in a base case scenario.181 The gap might be amplified by the effects of climate change. Addressing the problems of India's agricultural sector under the conditions of water and climate-change stress will require a significant and broad portfolio of R&D investment including new varieties of heat-resistant crops, improved water management and irrigation. Improving physical Infrastructure The World Economic Forum identified an inadequate supply of physical infrastructure as the main problem for doing business in India.182 Improving physical infrastructure was also selected as one of the main challenges for India in the BRICS report written with active participation of officials from the five BRICS countries.183 One recent example demonstrating these infrastructure problems was a large-scale blackout that included two successive power outages on 30th and 31st July 2012. They affected over 600 million people in 14 states and were the largest blackouts in history.184 The power grid is only one element of a more general problem. Ports, roads, bridges, airports and power plants are all generally underfunded. Many experts consider chronic underinvestment in infrastructure as one of the main reasons for the low competitiveness of India's manufacturing. McKinsey estimates that the national electricity transmission system alone

180 The Economist, 'Monsoon, or later', July, 28, 2012. 181 2030 Water Resources Group, Charting Our Water Future: economic framework to inform decision-making, 2009. 182 World Economic Forum, Global Competitiveness Report 2011-2012, 2011, http:// reports.weforum.org/global-competitiveness-2011-2012/. 183 The BRICS Report, Oxford Univercity Press, 2012. 184 http://en.wikipedia.org/wiki/July_2012_India_blackout.

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needs some U.S. $110 billion of new investment.185 Infrastructure experienced an investment boom in the years of the rapid economic growth. Private firms have been actively involved in infrastructure investment. However the slowing economy, high leverage at many infrastructure firms and a string of corruption scandals related to infrastructure projects and deals has brought a halt to new investments.186 The government, expected to run a fiscal deficit of 5.5% of GDP this year, is also severely constrained in its ability to increase funding for infrastructure projects. Nevertheless, better infrastructure is essential for economic growth in India. Information technologies The IT-BPO sector is undoubtedly one of the great success stories in the Indian economy. It has experienced very rapid expansion and has now become one of India's key economic sectors. Such Indian companies as HCL, TCS, Wipro, and Infosys have developed into the world's services behemoths and take top spots in various rankings of global IT companies. A large diaspora of Indian researchers and entrepreneurs abroad has played an important role in establishing the sector and helping it grow. The sector provides a large variety of IT-enabled services such as backoffice operations, remote maintenance, accounting, public call centers, medical prescriptions, insurance claims, and other processing. There is also a trend toward increasing the sophistication of the services that the sector provides. U.S. and European companies now outsource to India not just simple tasks but also analytical jobs such as financial analysis, data mining, etc. India is now encouraging foreign firms to set up R&D centers in Indian knowledge hubs. Over 250 Fortune-500 firms have established R&D centers/labs in various cities such as Bangalore, Delhi, Mumbai, Chennai, etc.187

185 http://www.economist.com/blogs/banyan/2012/07/india%E2%80%99s-power-cuts. 186 The Economist, 'Ifrastructure in India: Infrastruggles', December 31st, 2011, http:// www.economist.com/node/21542184. 187 ERAWATCH Country Reports 2010: India by V.Krishna, http://erawatch.jrc.ec.europa. eu/erawatch/export/sites/default/galleries/generic_files/file_0133.pdf.

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8.4 Indonesia Key Takeaways

• Strong and steady economic growth, with an expanding middle class giving rise to a fast-growing services market; • High levels of domestic, as well as foreign direct investment compared to other emerging economies; • Limited science and technology possibilities, in light of low public and private funding and low availability of adequate knowledge pools; • Inefficient business climate and high and widespread levels of corruption; • Uneven distribution of economic gains, fueling a divide between a growing middle class and a poor underclass, which in turn breeds crime, piracy and social tension; • A seeming inability of the government to adequately handle the recent rise in ethnic and religious violence; • High levels of traffic congestion and an overburdened and underdeveloped power infrastructure. Government aims to significantly increase investments in infrastructure; • An enormous natural resources sector, including a largely untapped geothermal energy market, with unprecedented potential. Variable

Indonesia's Rank

International Trade Logistics185

59th out of 155

Human Development

124th out of 187

186

119th out of 187

Education187

74th out of 132

Environmental Performance

188

46th out of 142

Economic Competitiveness189 Perceived Governmental Corruption

100th out of 182

Entrepreneurship191

60th out of 79

190

188189190191192193194

188 The World Bank, 'Logistics Performance Index.' 189 UNDP, 'International Human Development Indicators - UNDP.' 190 UNDP, 'Education Index (expected and Mean Years of Schooling).' 191 Yale University, '2012 EPI: Rankings | Environmental Performance Index.' 192 The World Economic Forum, 'The Global Competitiveness Report 2011 - 2012.' 193 Transparency International, '2011 Corruption Perceptions Index -- Results.' 194 George Mason University Centre for Entrepreneurship and Public Policy (CEPP), 

'The Global Entrepreneurship and Development Index (GEDI) 2012  Country Rankings.' 

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Population

Indonesia is the largest Muslim country in the world, with roughly 248 million inhabitants.195 It is a patchwork of more than 300 different ethnic groups. The largest are the Javanese who make up around 40% of the population, followed by the Sundanese at 15%.196 Population growth has been stable throughout the last five years at around 1% per year.197 The rate of population increase thus roughly equals that of European countries such as Norway, Sweden and Belgium. Population growth remained slightly below that of other emerging economies such as Turkey and India who grew around 1.2%.198 The degree of urbanization is relatively low at 44% of the population living in cities compared to countries such as Brazil (87%), Turkey (70%) and South Africa (62%). Urbanization is nonetheless set to continue by 1.7% per year.199 The consequences of increased urbanization for Indonesia's already overburdened infrastructure are severe (see infra, societal challenges and opportunities). In terms of education, Indonesia occupies place 119 out of 187 countries reviewed in the context of the UNDP education index.200 In order to continue its strong economic growth and to be able to create enough jobs in the future, the International Labour Organization (ILO) and the Asian Development Bank warned Indonesia that more investments in education are required in order to make the transition from a middle-income to a high-income economy.201

195 U.S. Central Intelligence Agency, 'CIA - The World Factbook, Indonesia Country Page', September 10, 2012, https://www.cia.gov/library/publications/the-worldfactbook/geos/id.html. 196 Institute of Southeast Asian Studies, 'Indonesia's Population: Ethnicity and Religion in a Changing Political Landscape', 2003, http://muse.jhu.edu/ login?auth=0&type=summary&url=/journals/population_review/v042/42.1hugo.pdf. 197 The World Bank, 'Population Growth,' Population Growth (annual %), 2011, http:// data.worldbank.org/indicator/SP.POP.GROW. 198 The World Bank, 'Population Growth.' 199 U.S. Central Intelligence Agency, 'CIA - The World Factbook, Indonesia Country Page.' 200

UNDP, 'Education Index (expected and Mean Years of Schooling).'

201 Z. Nazeer, 'Indonesia Warned to Invest More in Education', March 27, 2012, http:// www.thejakartaglobe.com/education/indonesia-warned-to-invest-more-ineducation/507426.

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Economy

Average GDP growth over the past decade was a healthy 5.2%, with which Indonesia finds itself performing on par with most other emerging economies (see Figure 1).202 Projections are that Indonesia will continue to boom as its middle class expands, with growth climbing to 6.9% this year and reaching 8.5% annually in 2017.203 Household spending, responsible for around 60% of economic output, has been growing year-on-year at over 6%.204 In 2013, Indonesia is expected to join a venerable club of 15 economies with an annual GDP over $1 trillion.205 The economy was not substantially affected by the 2008 financial crisis. This is due to a large domestic market – exports make up about one-third of Indonesian GDP – and most of its exports are to the region. Net foreign debt now stands at less than 10% of GDP.206 Gross National Income (GNI) per capita over the period 2007-2011 was U.S.$ 2,940, roughly double that of India (U.S.$ 1,410).

12 10 8 6 4

2 0 Brazil

China

India

Indonesia

South Korea

Russia

South Africa

Turkey

Figure 1: Average GDP growth rates 2000-2010 (%) Source: The World Bank, World Development Indicators July 2012; International Monetary Fund, World Economic Outlook, April 2012.

202 The World Bank, 'World Development Indicators | Data.' 203 Ibid. 204 Oxford Analytica, 'Indonesia: Country Profile' , 16 July 2012. 205 The Economist, 'Indonesia: The Komodo Economy', February 18, 2012, http://www. economist.com/node/21547866. 206 Ibid.

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Agriculture took up a 17% share of GDP over the period 2007-2011. Industry takes up almost half (45%), and the services sector – which has been making impressive inroads in recent years due to the burgeoning middle class – is responsible for 38% of total GDP.207 The biggest source of economic growth in the first half of 2011 was the trade, hotel and restaurant sector (1.4%) with total growth at around 8.7%.208 Export is mostly focused on East- and South Asia and heavily dominated by natural resources (oil, gas, minerals, plywood, rubber and food) and manufactured products such as electrical appliances and textiles.209 Oil and gas exports make up a little over a quarter of total exports.210 Indonesia's lush natural resources are, next to a blessing, also a source of tension as illegal fishing and logging are rampant, causing widespread deforestation, high CO2 emissions, overfishing and impoverished fishing communities. 211 Investment levels in the Indonesian economy (gross fixed capital formation) stood at 32.2% of GDP in 2010. Compared to other emerging economies, this is relatively high. Turkey, Brazil, South Africa and Russia all invested around 20%; South Korea and India around 28-30%. Indonesia was only surpassed by China, at 45.4% of GDP.212 With a Foreign Direct Investment (FDI) stock of 17.2% of GDP in 2010, Indonesia outperformed China (9.9%), India (12%) and South Korea (12.6%).

207 The World Bank, 'World Development Indicators - Agriculture, Value Added (% of GDP) | Data | Table', September 24, 2012, http://data.worldbank.org/indicator/ NV.AGR.TOTL.ZS; The World Bank, 'World Development Indicators - Industry, Value Added (% of GDP) | Data | Table', September 24, 2012, http://data.worldbank. org/indicator/NV.IND.TOTL.ZS; The World Bank, 'World Development Indicators Services, Etc., Value Added (% of GDP) | Data | Table', September 24, 2012, http:// data.worldbank.org/indicator/NV.SRV.TETC.ZS. 208 Statistics Indonesia, 'BPS Strategic Data', August 2011, 14. 209 U.S. Central Intelligence Agency, 'CIA - The World Factbook, Indonesia Country Page.' 210 Statistics Indonesia, 'BPS Strategic Data,' 26. 211 K. Marks, 'Illegal Logging Responsible for Loss of 10 Million Hectares in Indonesia,' The Independent, October 26, 2009, http://www.independent.co.uk/news/world/ asia/illegal-logging-responsible-for-loss-of-10-million-hectares-in-indonesia1809417.html?printService=print; D. Prasodjo, 'Fighting Illegal Fishing Is a Net Gain | The Jakarta Post,' The Jakarta Post, September 12, 2011, http://www.thejakartapost. com/news/2011/09/12/fighting-illegal-fishing-a-net-gain.html.  212 The World Bank, 'Gross Fixed Capital Formation (annual % Growth)', 2011, http:// data.worldbank.org/indicator/NE.GDI.FTOT.KD.ZG.

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Unfortunately, economic growth has mostly benefited a small part of society. Poverty remains a critical issue as more than 100 million Indonesians have to get by on less than $2 per day.213 Connected to this is the wide range of socio-economic conditions across the various islands that make up Indonesia. Social mobility of the lower socio-economic classes in Indonesian society is limited. Access to education is a problem and many socio-economic initiatives are directed at the middle-class or at the very poorest. Those in between are left by the side.214 Corruption plays a role in the poor distribution of wealth, with Indonesia ranking 100th out of 182 countries reviewed in the 2011 Transparency International Corruption Perception Index.215 Within the political establishment there seems little willingness to effectively tackle the corruption. No political party has made a priority out of doing away with corruption and attempts to discredit KPK, the country's corruption watchdog, are frequent. Corruption is said to also play a key role in fueling the illegal logging activities in the country.216 Although president Yudhoyono has committed to fighting the growing inequality in the country, progress has been slow.217 A factor to keep an eye out for is the fact that food price increases have hit Indonesia much harder than most other countries in the region. While the government has been able to soften the impact of the price increases on the rural and urban poor through its National Community Empowerment Program (PNPM), increased small-holder productivity in the medium and long term is vital to limit volatility, poverty and pressure on natural resources.218 Related to the

213 '120 Million Surviving on $2 a Day,' Jakarta Post, September 15, 2010, http://www. thejakartaglobe.com/home/120-million-surviving-on-2-a-day/396341#Scene_1. 214 Labour and Social Trends in Indonesia 2010: Translating Economic Growth into Employment Creation (Genève: International Labour Organisation, 2011), 2–4. 215 Transparency International, '2011 Corruption Perceptions Index -- Results', September 24, 2012, http://cpi.transparency.org/cpi2011/results/. 216 K. Brooks, 'Is Indonesia Bound for the BRICs?,' Foreign Affairs, December 2011, http://www.foreignaffairs.com/articles/136539/karen-brooks/is-indonesia-boundfor-the-brics. 217 'Indonesia's Poverty Line: To Make a Million People Unpoor,' Economist, August 3, 2011, http://www.economist.com/blogs/banyan/2011/08/indonesias-poverty-line. 218 The World Bank, 'Country Partnership Strategy Progress Report for Indonesia FY2009-2012. Investing in Indonesia's Institutions for Inclusive and Sustainable Development', February 8, 2011, 9.

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poverty issue is the occurrence of piracy in the waters around Indonesia – an issue which directly affects western economic interests.219 Indonesia remains one of the world's piracy hot spots, accounting for almost 20% of the global cases of piracy.220 The gap between the poor underclass and the growing middle class is thus a cause for concern also from the point of view of piracy. Among other things, due to the remoteness of some parts of the country and its challenging geography, infrastructure and access remain an issue of concern (see infra, societal challenges and opportunities). Political Developments

Indonesia's first parliamentary elections were held in 1999, after over thirty years of authoritarian rule under General Suharto. Direct presidential elections were held for the first time in 2004 during which incumbent president Megawati was defeated in a run-off vote by the current president Yudhoyono. In 2009, Yudhoyono was reelected for another five years with a landslide victory.221 As noted in the section on population, Indonesia is an extremely multiethnic, multilingual and multi-religious state. Following the step-down of General Suharto, communal violence occurred in all parts of the country, occasionally spurred by ethno-religious or separatist motives. Conflict somewhat subsided thereafter. After the independence of East-Timor and the end to the violence in Maluku, Indonesia proved capable of dealing with the threats of religious extremists such as Jemaah Islamiyyah and Javanese separatists. Police have managed to capture or kill several high-profile terrorist suspects, including Noordin Mohammad Top, the alleged ringleader behind

219 J. Kraska, Contemporary Maritime Piracy: International Law, Strategy, and Diplomacy at Sea (Santa Barbara, CA: ABC-CLIO, 2011), 42. 220 CNN, 'Report: 2010 Was Worst Year yet for Piracy on High Seas – This Just In - CNN.com Blogs', January 18, 2011, http://news.blogs.cnn.com/2011/01/18/ report-2010-was-worst-year-yet-for-piracy-on-high-seas/; International Chamber of Commerce, 'Six Month Drop in World Piracy, IMB Report Shows', July 16, 2012, http://www.icc-ccs.org/news/747-six-month-drop-in-world-piracy-imb-reportshows. 221 Bertelsmann Stiftung, 'BTI 2012 | Indonesia Country Report', 2012, 3–4.

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the twin suicide bombings at the JW Marriott and Ritz-Carlton hotels in Jakarta's business district on 17 June 2009.222 Recently, however, ethnic and religious unrest has been on the rise again (see infra, societal challenges and opportunities). Indonesia is home to the Association of South-East Asian Nations (ASEAN) and in 2011 it stood at the helm of the organization. Where the organization has led a largely blameless existence, it now faces a serious setback after the 45th ASEAN Ministerial Meeting in Phnom Penh, Cambodia. For the first time since its establishment, the organization failed to reach a consensus on a joint communiqué.223 The cause was open disagreement among ASEAN members over China's territorial claims in the South China Sea. ASEAN members with claims in the South China Sea themselves – Vietnam, the Philippines, Malaysia and Brunei, supported by Singapore and Thailand – wanted to include a concern over what they view as belligerent moves by China. Others however, mainly Cambodia with the support of Laos and to some extent Myanmar, were reluctant to alienate China. The idea to reach a 'Code of Conduct' on the South China Sea now appears a distant prospect, with ASEAN unable to speak with a single voice on the topic.224 The challenge for ASEAN – and Indonesia as host of its secretariat – is now to make sure the organization is not marginalized due to a renewed great power struggle in the region, with some countries (Thailand, the Philippines and Singapore) looking to the U.S. for support and others to China (Cambodia, Laos and possibly Myanmar).225 Research and Development

Although Indonesia has identified research and development (R&D) as a policy priority, its efforts to promote national R&D have been severely

222 Bertelsmann Stiftung, 'BTI 2012 | Indonesia Country Report', 2012, 5. 223 R. Sukma, 'Insight: Without Unity, No Centrality,' The Jakarta Post, July 17, 2012, http://www.thejakartapost.com/news/2012/07/17/insight-without-unity-nocentrality.html; The Economist, 'ASEAN in Crisis: Divided We Stagger', August 18, 2012, http://www.economist.com/node/21560585. 224 R. Sukma, 'Insight: Without Unity, No Centrality'; The Economist, 'ASEAN in Crisis: Divided We Stagger.' 225 The Economist, 'ASEAN in Crisis: Divided We Stagger.'

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reduced ever since the Asian financial crisis of the late 1990s and have hardly increased since then.226 Gross Domestic Expenditure on R&D (GERD) in Indonesia is low compared to other emerging economies at a mere 0.1% of GDP in 2010. By comparison, Brazil, India, Russia, South Africa and Turkey spend roughly 8 to 10 times as much.227 Indonesian GERD is projected to increase to 0.20% of GDP in 2012.228 Indonesia's poor business climate (see infra, business climate) causes investors to have a preference for short-term investments that can be more easily liquidated over projects with a longer time horizon. The negative implications for the more risky, R&D-intensive investments are obvious. Multinational enterprises do not consider the country a suitable base for R&D policy, owing to a weak skill base, limited protection of intellectual property rights and the absence of any significant public support for R&D.229 Characteristic of the Indonesian science and technology landscape is the large number of actors, including governmental and research institutions.230 The Indonesian Institute of Sciences (LIPI) plays a major role, but its funding and scientific resources are however insufficient to support a major research effort.231 The 2010-2014 Mid Term Development Plan (NMDP) aims, inter alia, to work towards the management of maritime resources in an encompassing way towards security in energy and the anticipation of climate change impacts (including in the form of tsunami and adverse

226 SEA-EU-NET, 'R&D Country Profile Indonesia', 2009, http://www.sea-eu.net/asia/ info/4/indonesia.html. 227 The World Bank, 'Research and Development Expenditure (% of GDP)', 2009, http://data.worldbank.org/indicator/GB.XPD.RSDV.GD.ZS; R&D Magazine, Batelle, International Monetary Fund, World Bank and CIA Factbook, '2012 Global R&D Funding Forecast: R&D Spending Growth Continues While Globalization Accelerates.' 228 R&D Magazine, Batelle, International Monetary Fund, World Bank and CIA Factbook, '2012 Global R&D Funding Forecast: R&D Spending Growth Continues While Globalization Accelerates.' 229 H. Hill and P. Tandon, 'Innovation and Technological Capability in Indonesia', June 2010, 10. 230 SEA-EU-NET, 'R&D Country Profile Indonesia.' 231 H. Hill and P. Tandon, 'Innovation and Technological Capability in Indonesia,' 10.

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weather early-warning systems). With respect to food security in particular, R&D activities in the field of agriculture should be stepped up in order to create superior seeds and other research outputs aimed at the enhancement of the quality and output of national agricultural products.232 Beyond these governmental targets, there is little support for innovation. None of Indonesia's major conglomerates has yet shown any inclination to support large scale innovation programs, as occurs for example in China or India.233 Overall, the Indonesian R&D sector is plagued by a predominance of (limited) public R&D, weak linkages among science and technology actors, few technical-economic cluster initiatives and limited access to knowledge pools.234 Business Climate

The 2012 edition of the World Bank's Ease of Doing Business Monitor ranks Indonesia 130th out of a total of 183 countries reviewed for their business climate. Compared to other emerging economies, Indonesia is placed at roughly the same position as Brazil (126), India (132) and Russia (120). China (91) and Turkey (71) perform significantly better however. Setting up a business in Indonesia proves notoriously difficult (155/183), as is getting access to basic services such as electricity (161/183) and filing taxes (131/183). Similar difficulties exist when faced with resolving insolvency (146/183), enforcing contracts (156/183) and getting credit (126/183). By contrast, Indonesia performs fairly well on the ease with which one can trade across borders (39/183) and with respect to investor protection (46/183).235

232 Ministry of National Development Planning/National Development Planning Agency, 'Appendices Regulation of the President of the Reupblic of Indonesia Number 5 of 2010 Regarding the National Medium-Term Development Plan (RPJM) 2010-2014 Book 1 National Prorities', 2010, 53 and 57. 233 H. Hill and P. Tandon, 'Innovation and Technological Capability in Indonesia,' 11. 234 SEA-EU-NET, 'R&D Country Profile Indonesia.' 235 'Ranking of Economies - Doing Business - World Bank Group.'

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Indonesia has a fairly low import tariff236 compared to other emerging economies. By comparison, importing goods into Brazil, India and South Korea costs more than three times as much. General import tariffs for Indonesia are still roughly 1.5 times as high as for the European Union, yet relatively cheap compared to other emerging markets. Container import tariffs differ, where Indonesia charges a comparably low fee ($660). It costs almost twice as much to import a container into the EU, Turkey and India. For Russia, Brazil and South Africa this is at least three times that price. Customs formalities are a real nuisance however, with up to 7 different documents required to clear imported goods. By comparison, South Korea (3) and China (5) require significantly fewer documents to 'clear' an import.237 Business dynamism is stifled due to the high costs of setting up and closing a business. On top of this, restrictive severance pay and related conditions make innovative firms with inherently uncertain business prospects reluctant to hire new workers. Moreover, weak contract enforcement provides little protection for intellectual property rights and in light of the rampant commercial piracy that exists in the country, the legal system is unlikely to offer much protection.238 Widespread corruption represents a further hindrance to the ability to do business efficiently within Indonesia.239 Societal Challenges and Opportunities

Overburdened Infrastructure As highlighted in the introductory and economy section, Indonesia's infrastructure is heavily overburdened. Traffic jams are boosting delivery costs and times, a lack of power restricts capital investment and delays at airports and ports are slowing down the flow of exports. As in other developing nations, a complex bureaucracy, a cautious attitude towards involvement of the private sector and a lack of financing have prevented Indonesia from building the necessary roads, bridges, airports and power

236 Applied weighted mean for all products imported. 237 The World Bank, 'Data on Trade and Import Barriers.' 238 H. Hill and P. Tandon, 'Innovation and Technological Capability in Indonesia,' 8. 239 The Economist, 'Indonesia's Politics: Corruption Everywhere', September 2, 2011, http://www.economist.com/blogs/banyan/2011/09/indonesias-politics.

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stations it needs in order to sustain its economic growth. In order to alleviate the country's overburdened and outdated infrastructure, President Yudhoyono announced a plan in 2012 to increase spending on ports, roads, power plants and other infrastructure by 15% next year.240 President Yudhoyono has made the revitalization of Indonesia's infrastruc­ ture a political priority. He has proposed to increase infrastructure spending to 194 trillion rupiah (U.S.$ 20 billion) in 2013 from a target of 169 trillion rupiah this year. The fund will be used to improve 4,431 kilometers of road, add 380 kilometers of new railway, and finance the construction of 15 new airports and the expansion of another 120. To encourage local and international investment, the President said he planned to abolish more than 800 regional restrictions on businesses that clash with national regulations.241 Skepticism surrounds the ambitious nature of these plans. One of the biggest problems is the sliding popularity of his party. Subdued popular support seems to hinder Yudhoyono in making the tough decisions required for the plan. Support for Yudhoyono has been waning in light of his struggle to quell the country's widespread corruption. The bribery charges brought against his party's former treasurer in September 2011 were particularly painful in that regard. Indicative was his failure to push through an increase in fuel prices, which are highly subsidized in Indonesia.242 Another problem seems to be that there is little interest from foreign investors. At an infrastructure conference in Jakarta in August 2012,

240 E. Bellman and A. Ismar, 'Indonesia to Ramp Up Infrastructure - WSJ.com,' The Wallstreet Journal, August 16, 2012, http://online.wsj.com/article/SB100008723963 90444375104577592690374350480.html; B. Bland, 'Indonesia Infrastructure: Good Intentions, Little Progress,' Financial Times - Beyondbrics, August 28, 2012, http:// blogs.ft.com/beyond-brics/2012/08/28/indonesia-infrastructure-good-intentionslittle-progress/#axzz27f3ueBxt. 241 E. Bellman and A. Ismar, 'Indonesia to Ramp Up Infrastructure - WSJ.com.' 242 Y. Rusmana and F. Wulandari, 'Yudhoyono's Support Slips as Indonesia Stalls on Fuel Policy,' Bloomberg, n.d., http://www.bloomberg.com/news/2012-0401/yudhoyono-s-support-falters-as-indonesia-stalls-on-fuel-policy.html; The Economist, 'Indonesia's Politics: Corruption Everywhere'; E. Bellman and A. Ismar, 'Indonesia to Ramp Up Infrastructure - WSJ.com.'

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President Yudhoyono repeated his pledge to tackle the infrastructural issues once more. Few investors had turned up to the event however. In the past, Hitachi, the Japanese industrial group, has attempted to build a mass transport system in Jakarta. A monorail was supposed to be built, but the project was abandoned in 2008 due to financial and political problems. The company has however not given up hope to bid for contracts for the proposed new Japanese-funded Jakarta Mass Rapid Transport network (MRT).243 The entire MRT project which spans approximately 110.8 kilometers throughout Jakarta and creating two 'transit corridors', North-South and East-West, is planned to be ready by 2024. Earlier sections of the network, including the North-South line which will create a section from Lebak Bulus to Kampung Bandan is scheduled to be operational in 2018. The East-West corridor is currently still in a feasibility study phase.244 Ethnic, Religious Unrest and Piracy As mentioned under political developments, after the fall of the Suharto regime, violence erupted. Despite the surge in tensions, Indonesia proved capable of dealing with the threats of extremists following the independence of East-Timor and the end to the violence in Maluku. Recently however, religious and ethnic tensions have been on the rise. Two suicide attacks on places of worship took place in 2011, killing one person and injuring dozens of others.245 These attacks were not the work of organized terrorist organizations, but rather a manifestation of extreme activism. The perpetrators

were

not

affiliated

to

any

underground,

clandestine

organization, yet were involved in a popular protest targeted against Christians.246 In many cases, the perpetrators of such acts carry at least the tacit support of the authorities, who in many cases have not intervened to

243 B. Bland, 'Indonesia Infrastructure: Good Intentions, Little Progress.' 244 MRJ Jakarta, 'Overview - Project Feature', September 27, 2012, http://jakartamrt. com/index.php?option=com_content&view=article&id=52&Itemid=95&lang=en. 245 Australian Government Department of Foreign Affairs and Trade, 'Indonesia | Travel Advice', September 20, 2012, http://www.smartraveller.gov.au/zw-cgi/view/Advice/ Indonesia. 246 International Crisis Group, 'Asia Briefing No 132 Indonesia: From Vigilantism to Terrorism in Cirebon', January 26, 2012, 9–10.

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stop the events from occurring.247 Also in the Maluku province, ethnic tensions have escalated into riots and arson attacks, while violence in the struggle for the independence of Papua seems to be increasing.248 It is in this province that for some time already small scale violent clashes have been taking place between the police and rebel movements. Casualties have been recorded on both sides.249 Next to ethnic and religious unrest, Indonesia's large and spread-out geography is difficult to control and makes it tough for the authorities to prevent acts of piracy in their waters. The occurrence of piracy can not be seen independently from the issue of poverty within the country. The big increase in the number of piracy attacks in Indonesian waters and ports over the past ten years was largely due to its sharp economic downturn and domestic instability following the end of the Suharto regime. After that, when the country began to experience rapid economic growth, the uneven nature of the benefits of this growth have caused a widening gap between the middle class and the poor. This in turn has led to a new breed of pirates. Most pirates are themselves poor fishermen and traders.250 In other words, piracy puts the issue of overfishing and social deprivation in a whole different perspective.

247 The Economist, 'Religious Persecution in Indonesia: Lightly on the Lynch Mob', July 31, 2011, http://www.economist.com/blogs/banyan/2011/07/religious-persecutionindonesia. 248 International Crisis Group, 'Asia Briefing No 126 Indonesia: Hope and Hard Reality in Papua', August 22, 2011; International Crisis Group, 'Asia Briefing No 128 Indonesia: Trouble Again in Ambon', October 4, 2011. 249 N. Dharma Somba and R. Pramadutama, 'Shoot First, Riot Later in Papua,' The Jakarta Post, June 8, 2012, http://www.thejakartapost.com/news/2012/06/08/ shoot-first-riot-later-papua.html; 'Papua Man Injured in Police Shootout,' The Jakarta Globe, September 25, 2012, http://www.thejakartaglobe.com/lawandorder/ papua-man-injured-in-police-shootout/546383; B. Ambarita, 'Separatists Kill Soldier, Attack Chopper in Papua: Police,' Jakarta Globe, August 3, 2011, http:// www.thejakartaglobe.com/home/separatists-kill-soldier-attack-chopper-in-papuapolice/457062. 250 International Chamber of Commerce, 'Six Month Drop in World Piracy, IMB Report Shows'; D. Rosenberg, 'The Political Economy of Piracy in the South China Sea,' Naval College War Review 62, no. 3 (2009): 46.

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Increasingly, piracy incidents are moving closer to land, even to docked ships. Armed robberies aboard ships docked in Indonesia reached a sixyear high in 2012 with 32 recorded incidents, according to the International Chamber of Commerce's International Maritime Bureau. The year before, 21 incidents were reported between the months of January and June of 2011.251 Energy Sector Indonesia's crude oil production has been declining since 1998 due to the maturation of its oil fields and the failure to develop new, comparable reserves. In the meantime, its total primary energy consumption grew by nearly 50% between 1999 and 2008. As a result, the country became a net oil importer in 2004. Indonesia was a member of the Organization of Petroleum Exporting Countries (OPEC) until it suspended its membership in January 2009. Indonesia's two largest producing oil fields are the Minas and Duri fields, located on the eastern coast of Sumatra and operated by Chevron. Production in both fields is in decline, even with enhanced oil recovery techniques such as the injection of steam. An important discovery of the past years which may offset some of Indonesia's declining oil industry is the Cepu Block of East and Central Java. Exxon Mobil operates Cepu PSC (45% interest) in a joint-venture with PT Pertamina's E&P unit (45% working interest) and four local government companies (10% interest). Cepu is estimated to hold around 600 million barrels of recoverable oil. Although originally discovered in 2001, the project has experienced manifold delays, causing Exxon to revise its goal for peak production from 2012 to 2014. In general, Indonesia has difficulties to increase investments in the country's upstream sector, inter alia due to investors still viewing the upstream investment environment as risky. Recent attempts by the government to mandate cost recovery caps for all new production sharing agreements (PSAs) were not a welcome relief in that regard. New PSAs have been in decline already for a number of years. 252

251 J. Vit, 'Criminals Increasingly Targeting Indonesian Ports: World Piracy Report,' The Jakarta Globe, n.d., http://www.thejakartaglobe.com/home/criminals-increasinglytargeting-indonesian-ports-world-piracy-report/530837. 252 U.S. Energy Information Administration, 'Country Analysis Brief Indonesia', May 2011, 1–3.

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Where the oil sector is in relative decline, Indonesia continues to be a major exporter of pipeline and liquefied natural gas (LNG). In 2011, Indonesian natural gas production was 75.6 billion cubic meters (bcm), an increase of 19% compared to ten years before. LNG exports are particularly important to Indonesia as the country was the third largest LNG exporter worldwide in 2011, holding 9% of the market, just after Malaysia (10%) and Qatar (31%).253 However, domestic consumption is steadily rising as economic growth continues, up by 22% compared to a decade ago to 37.9 bcm in 2011.254 Indeed, LNG exports have been a politically charged topic in Indonesia due to this growing domestic consumption, leading the government to pursue policies for securing domestic supplies for the local market before issuing approval for new LNG-export projects. There have been recent reports that the government considered a moratorium on new gas exports.255 Recently, the centrally located Bontang LNG plant has started to serve the domestic market. The majority still gets shipped overseas, however the trend towards increased domestic use cannot be ignored.256 A clear need thus exists for the construction of additional LNG terminals in order to keep the balance between LNG for the domestic and export market. Indonesia's largest publicly listed oil and gas company, PT Medco Energi Internasional (MEDC), is currently constructing a LNG plant at Donggi-Senoro in Central Sulawesi. It is expected to complete its first deliveries in 2014.257 In addition to the hydrocarbon sector, Indonesia is home to 40% of the world's

known

geothermal

resources,

but

these

remain

vastly

253 International Gas Union (IGU), 'World LNG Report 2011', 2011, 8. 254 'Indonesia Considers Limiting Gas Exports,' UPI, July 6, 2012, http://www.upi.com/ Business_News/Energy-Resources/2012/07/06/Indonesia-considers-limiting-gasexports/UPI-77801341590232/. 255 Ibid.; U.S. Energy Information Administration, 'Country Analysis Brief Indonesia,' 6. 256 R.D. Fadillah, 'First LNG for Domestic Users Dispatched,' The Jakarta Post, April 26, 2012, http://www.thejakartapost.com/news/2012/04/26/first-lng-domestic-usersdispatched.html. 257 R. Pramudatama, 'LNG Plant Construction on Schedule: Medco,' The Jakarta Post, August 3, 2012, http://www.thejakartapost.com/news/2012/08/03/lng-plantconstruction-schedule-medco.html.

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underdeveloped with only a little over 3% being used.258 By 2025, the Indonesian government aims to install 6.7 gigawatts (GW) of new renewable energy capacity, including geothermal, but also wind, solar, biomass and hydropower. The share of renewables in total energy production thus would increase from 7 to 15%.259 In order to meet this goal, 6.7 GW of new renewable energy capacity must be installed in the next 15 years based on current growth projections.260 Since 2008 the government has offered tax incentives for foreign investment, including for renewable energy. For geothermal companies, additional incentives are afforded, including longterm licenses for land use (more than 30 years) and a regulated price for geothermal energy. However, the fact that the Indonesian state electricity company PLN has a monopoly on the provision of electricity does put some stress on the profitability of projects.261 Also, similar to the oil and gas industry, geothermal in Indonesia is prone to policy inconsistency and unclear regulation.262 Nonetheless, as an emerging sector, much of its potential remains untapped and unexplored, particularly in the western part of Indonesia. This area has more advanced infrastructure, thus lowering costs for any potential investors.263 Indeed, several U.S. companies have already invested in the Indonesian geothermal sector, a trend which is likely to increase as policy incentives for geothermal energy continue to improve.264 Recently, the Indonesian energy minister announced a raise in the feed-in-tariff for geothermal energy in an attempt to lure more investors to the market.

258 U.S. Department of Commerce / International Trade Administration, 'Renewable Energy Market Assessment Report: Indonesia', May 2010, 3. 259 Ibid., 1. 260 Ibid., 3. 261 Ibid. 262 Global Intelligence Alliance, 'Geothermal Energy in Indonesia Heating Up', June 28, 2012, http://www.globalintelligence.com/insights-analysis/bulletins/geothermalenergy-in-indonesia-heating-up. 263 Ibid. 264 U.S. Department of Commerce / International Trade Administration, 'Renewable Energy Market Assessment Report: Indonesia,' 3.

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8.5 SOUTH Korea Key Takeaways

• One of the highest levels of education in the world, but rapidly aging population with no positive net migration; • Considerable export sector, particularly in high-tech products, but also heavy exposure to external shocks; • One of the most research-intensive economies in the world with R&D expenditure continuing to rise fast; • Strong reliance on large conglomerate businesses ('chaebols') might stifle dynamism and innovation. Variable

Korea's Rank

International Trade Logistics262

21st out of 155

Human Development263

15th out of 187

Education

6th out of 187

264

Environmental Performance265

43rd out of 132

Economic Competitiveness

24th out of 142

Perceived Governmental Corruption267

43rd out of 182

Entrepreneurship

26th out of 179

266

268

Population The Republic of Korea's population of almost 49 million makes it the world's 25th most populous country. With respect to many demographic indicators

Korea is very similar to the European Union Member States. Its population growth is just around 0.2%, which is quite close to the EU's rate. The degree of urbanization in South Korea is one of highest in the world: 83% of the

265 The World Bank, 'Logistics Performance Index.' 266 UNDP, 'International Human Development Indicators - UNDP.' 267 UNDP, 'Education Index (expected and Mean Years of Schooling).' 268 Yale University, '2012 EPI: Rankings | Environmental Performance Index.' 269 The World Economic Forum, 'The Global Competitiveness Report 2011 - 2012.' 270 Transparency International, '2011 Corruption Perceptions Index -- Results.' 271 George Mason University Centre for Entrepreneurship and Public Policy (CEPP), 

'The Global Entrepreneurship and Development Index (GEDI) 2012  Country  Rankings.'

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population lives in urban areas and its share is slowly increasing at a rate of 0.6% per year. One big difference is migration: virtually all developed countries experience positive net migration, while South Korea, like Japan, is balanced with a rate of zero.272 Life expectancy at birth in the Republic of Korea is high at 79.3 years, just outside the world top 40. The population is rapidly aging and predicted to become the world's second-oldest by 2050.273 The level of education in South Korea is very high, ranking sixth overall worldwide. 63% of Koreans aged 25-34 have completed tertiary education, the highest rate in the OECD.274 Analysts have highlighted three key limiting factors to the Korean economy relating to the population: low birth rates, low net migration and the large gender gap in the labor market.275 The problem of a declining population and excessive numbers of people with high levels of education risks creating an imbalance in various job sectors which, without a boost from migration to compensate for declining birth rates, will be a difficult issue to resolve. To this end the government has embarked on a campaign promoting acceptance and welcoming migrants into South Korean society.276 Korea's fertility rate is one of the lowest in the world and has exhibited a dramatic shift, falling from around six children per woman in 1960 to just 1.3 in recent years. This is seen as one of the biggest challenges to Korea's economy as the working population declines and may struggle to support the baby-boomers as they become older and their health-care needs increase. Figure 1 illustrates Korea's fall from an exceptionally high to an exceptionally low birth rate.

272 U.S. Central Intelligence Agency, 'CIA - The World Factbook. South Korea Country Page.,' CIA - The World Factbook, September 10, 2012, https://www.cia.gov/library/ publications/the-world-factbook/geos/ks.html. 273 Seo Eunkyung, 'South Korea Shuns Moms at Peril as Workforce Shrinks,' Bloomberg, July 3, 2012, http://www.bloomberg.com/news/2012-07-03/southkorea-shuns-moms-at-peril-a-workforce-shrinks.html. 274 The Economist, 'Exams in South Korea: The One-shot Society,' The Economist, December 17, 2011, http://www.economist.com/node/21541713. 275 Ibid.; Eunkyung, 'South Korea Shuns Moms at Peril as Workforce Shrinks.' 276 The Economist, 'South Korea's Foreign-born: The Lovable Ms Lee,' The Economist, May 12, 2012, http://www.economist.com/node/21554582.

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Korea Figure 1

Average number of children per woman

7 6 5 4 Korea 3

OECD

2 1

2005

2003

2001

1999

1997

1995

1993

1991

1989

1987

1985

1983

1981

1979

1977

1975

1973

1971

1969

1967

1965

1963

1961

1959

1957

1955

0

Figure 1 Korea's falling birth rate

South Korea is an exception among rich countries in the sense that women with lower levels of education are more likely to work than those with higher levels.277 Women frequently report the inability to combine a demanding career with raising a family, given traditional expectations that the latter task falls entirely in the domain of women.278 The problems have been slow to shift, with no appreciable improvement in participation rates for twenty years, despite measures from the government including free daycare for all children up to two years old and requiring firms of a certain size to adopt measures promoting gender equality.

Economy

South Korea has gone through a dramatic transformation over the past decades. It was part of the first wave of 'Asian tigers' along with Hong Kong, Singapore and Taiwan. Its GDP per capita stands at U.S. $32,100 (at PPP, in 2011), making it one of the wealthiest countries in Asia and one of the 20 largest economies in the world. This is a remarkable turnaround from the 1960s when Korea was comparable with the poorest countries of

277 The Economist, 'South Korea's Economy: What Do You Do When You Reach the Top?,' The Economist, November 12, 2011, http://www.economist.com/ node/21538104. 278 Ibid.; The Economist, 'The One-shot Society'; Eunkyung, 'South Korea Shuns Moms at Peril as Workforce Shrinks.'

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Africa and Asia.279 The Korean economy has grown steadily over the past ten years by 4.6%, and expectations are that similar, though somewhat depressed growth will continue for the next several years. IMF estimates an average growth of 3.9% over the next five years, considerably lower than the new Asian tigers China (8.6%) and India (7.6%), though comparable to Brazil and Russia (both also 3.9%). South Korea is known for its high-tech knowledge economy, fuelled by the hard work and high education of its people. The 2008 crisis hit the economy hard, with 1.2 million jobs lost in the nine months between June 2008 and February 2009, but recovery was faster than in any other rich country, with growth back to 6% in 2010 and unemployment down to 3% in 2011.280 However these strong headline figures hide what analysts identify as serious underlying concerns in the sustainability of South Korea's success. Korea's economy is strongly influenced by the phenomenon of chaebols: large business conglomerates such as Samsung and LG which have benefited, particularly in the past, from strong state backing.281 Chaebols have been credited for Korea's strong recovery from the recent crisis, with many of them gaining market share.282 However despite this success, there are inherent risks in putting all of one's eggs in one basket, as the Asian crisis of 1997 demonstrated, with the collapse of around half of Korea's chaebols, including Daewoo, the biggest corporate bankruptcy in history at the time.283 There is concern that society at large does not benefit sufficiently from chaebols: President Lee Myung-bak has called on them to

279 U.S. Central Intelligence Agency, 'CIA - The World Factbook. South Korea Country Page.' 280 The Economist, 'South Korea's Economy: What Do You Do When You Reach the Top?'. 281 U.S. Central Intelligence Agency, 'CIA - The World Factbook. South Korea Country Page.' 282 Christian Oliver, 'South Korea: An Economy Divided,' Financial Times, May 29, 2011, http://www.ft.com/intl/cms/s/0e9c9e6a-8a1c-11e0-beff00144feab49a,Authorised=false.html?_i_location=http%3A%2F%2Fwww. ft.com%2Fcms%2Fs%2F0%2F0e9c9e6a-8a1c-11e0-beff-00144feab49a.html&_i_ referer=#axzz26R5tMzOh. 283 The Economist, 'Reformed Characters,' The Economist, September 25, 2008, http:// www.economist.com/node/12237177; Oliver, 'South Korea: An Economy Divided.'

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share more of their takings, particularly with small and medium enterprises, and the government has acknowledged the need to support these smaller firms. Corporate governance at chaebols is often an issue for outside investors. Circular shareholding is commonplace – founding families are thus often able to control the firm with only a small stake. In addition, their close ties with the government have made dubious transactions and arrangements a concern.284 Meanwhile problems on the horizon require attention now: the population issues highlighted above are widely considered a major threat. Household debt in 2011 had reached 146% of income – higher than the level recorded in the U.S. just before the subprime crisis (138%).285 Youth unemployment is also a challenge: the number of university students may be reaching excessive levels as 40% of the last cohort of graduates failed to find work in the four months after leaving university.286 Lastly, the Korean economy is heavily reliant on exports, which make up over half of GDP; this leaves it as open as ever to shocks from markets abroad.287 Political Developments

Emerging from dictatorship in the mid 20th century, South Korea has developed into a sophisticated representative democracy. The center-right conservative Saenuri Party secured a slender majority in the April 2012 legislative election. Presidential elections held on 19 December 2012 brought to power Park Guen-hye, the daughter of assasinated authoritarian leader Park Chung-hee, the mastermind behind South Korea's industrial take-off.288 Korea's position in the Corruption Perception Index puts it in the league of countries such as Poland, Brunei and Dominica. Though still in the top 50 least-corrupt, it lags behind most developed countries. This is reflected in

284 The Economist, 'Reformed Characters.' 285 Oliver, 'South Korea: An Economy Divided.' 286 The Economist, 'The One-shot Society.' 287 U.S. Central Intelligence Agency, 'CIA - The World Factbook. South Korea Country Page.' 288 The Economist, 'South Korean Politics: The Iron Lady in Red,' The Economist, July 14, 2012, http://www.economist.com/node/21558623.

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news reports of scandals surrounding families in politics and chaebols.289 This culminated in president Lee making a public apology on national television for a string of scandals involving most prominently his brother, arrested on bribery charges. Other scandals have involved three relatives, four senior presidential aides and several former senior officials in the cabinet and government-run companies, all indicted or convicted of corruption.290 In foreign policy, Korea's clear focus on economic development is evident and likely both a cause and effect of its strong export trade. South Korea is a founding member of the Asia-Pacific Economic Cooperation forum and chaired the organization in 2005. It maintains relations with virtually every country in the world and a broad network of trading relationships.291 Its current major objective is to secure its place in a free-trade agreement with China and Japan. The legacy of Japanese occupation which ended in 1945 is still evident. There has been a steady thawing of bilateral relations in the decades since, culminating in the joint hosting of the 2002 FIFA World Cup. There are nevertheless tensions between the two countries in some areas, e.g. the dispute regarding sovereignty over the Liancourt Rocks, a group of small islets. The latest manifestation of the dispute involved president Lee Myungbak becoming the first South Korean president to visit the Rocks, resulting in Japan temporarily withdrawing its ambassador to South Korea. Tensions between North and South Korea are persistent and pernicious. Dating back to the end of the Second World War, the division of Korea by the United States and the Soviet Union resulted in two regimes, both of which claimed sovereignty over the whole nation and territory. Sixty years

289 The Economist, 'Corruption in South Korea: Rotten Shot,' The Economist, July 21, 2011, http://www.economist.com/node/18989193. 290 Sang-Hun Choe, 'President Lee Myung-bak of South Korea Apologizes for Corruption Scandals,' The New York Times, July 24, 2012, http://www.nytimes. com/2012/07/25/world/asia/lee-myung-bak-of-south-korea-apologizes-forcorruption-scandals.html?_r=1. 291 U.S. Department of State, 'South Korea,' U.S. Department of State, April 12, 2012, http://www.state.gov/r/pa/ei/bgn/2800.htm#foreign.

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since the Korean War which cemented this division through a demilitarized zone between the two states, tough rhetoric and occasional incidents continue, including the November 2010 artillery firing on Yeonpyeong Island, in which four South Koreans were killed. Some analysts assert that the South's incumbent president Lee Myung-bak has aggravated the situation with a hard-line approach. Park Guen-hye has signaled her intention to employ softer tactics in an effort to break 'the vicious cycle of distrust' between the two states.292 Relations between the People's Republic of China (PRC) and South Korea have been steadily improving, and China is now South Korea's largest trading partner. China often plays the role of mediator in relations between the two Koreas, Japan and the U.S. The talks on setting up a free-trade area with China, Japan and Korea promise to cement a relationship already worth U.S. $690 billion in 2011.293 Research and Development

The Republic of Korea leads in the field of research and development (R&D) with one of the world's highest R&D expenditures as a percentage of GDP (R&D intensity) at 3.36%.294 This has also been growing at a very fast rate as illustrated by Figure 2. It also reveals the substantial role played by private firms in this; as an example, Samsung's R&D expenditure has been increasing rapidly in recent years, increasing 23.3% from 2009 to reach U.S. $7.873 billion in 2010. In perspective, this means that Samsung alone accounts for almost 15% of South Korea's R&D expenditure.295

292 Oxford Analytica, 'South Korea: Country Profile,' Oxford Analytica, July 2, 2012, http://www.oxan.com/; The Economist, 'South Korean Politics: The Iron Lady in Red.' 293 Bloomberg News, 'China Plans Talks With Japan, Korea on Free-Trade Area,' Bloomberg, May 13, 2012, http://www.bloomberg.com/news/2012-05-12/chinajapan-korea-to-start-free-trade-talks-this-year.html. 294 OECD, 'Country Statistical Profile: Korea,' OECD iLibrary, January 18, 2012, http:// www.oecd-ilibrary.org/economics/country-statistical-profile-korea_20752288table-kor. 295 Barry Jaruzelski and John Loehr, The Global Innovation 1000: Why Culture Is Key, Strategy + Business (Booz & Company, 2011), http://www.booz.com/media/ uploads/BoozCo-Global-Innovation-1000-2011-Culture-Key.pdf.

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Korea Figure 2

Expenditure on R&D, $m currrent, PPP

60000 50000 40000 30000

Private Non-Profit Higher Education Government

20000

10000 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Figure 2 Expenditure on R&D by funding sector. Source: OECD

Recent substantial increases in R&D expenditure have been spread among a number of fields of specialism for the Korean economy: information technology including semiconductors and displays, green technology, nanotechnology and biotechnology. Analysts see the biggest increases going into green research, such as energy-efficient and environmentally friendly technologies. Materials are also an area of focus, with a trillion-won (U.S. $865 million) programme underway to support research into 'world premier materials', future industry-leading products to be developed over the coming years.296 But issues remain. Expenditure on R&D does not always deliver value for money,297 and chaebols even stand accused of stifling innovation by squeezing small high-tech companies.298 There is also concern that the power of the chaebols may be rising, making many markets in which they operate more and more oligopolistic. Chaebols have been known to acquire small firms likely to threaten their market dominance, sometimes simply to

296 David Cyranoski, 'South Korean R&D Budget to Soar,' Nature, November 19, 2009, http://www.nature.com/news/2009/091119/full/news.2009.1090.html. 297 Jaruzelski and Loehr, The Global Innovation 1000: Why Culture Is Key. 298 The Economist, 'South Korea's Economy: What Do You Do When You Reach the Top?'.

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Private Enterprise

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'strip out talent and snuff out competition'.299 There have been some moves toward improving market contestability, but skepticism remains. 300 Business Climate

The World Bank's 2012 Ease of Doing Business ranking places South Korea as one of the easiest in the world for doing business, in 8th place of 183, up from 15th in 2011.301 This outperforms BRICS countries to quite a considerable degree, with Brazil (126), Russia, (120), India (132), China (91), South Africa (35) and Turkey (71) all far lower down the list. Some of the government's measures to encourage more small businesses and reduce the dominance of the chaebols are evident here. For example, Korea's ranking for ease of starting up a business moved from 59th to 24th, an impressive 35-step leap, thanks in part to a new online service known as StartBiz, launched in 2010, which simplifies and streamlines six separate bureaucratic procedures into a single all-online system. Remaining challenges include the dominance of the chaebols and weak protection of minority shareholders. Some founding chaebol families seem to have been placed above the law, as was illustrated for instance by the pardoning of Samsung chairman Lee Kun-hee, convicted of serious financial crimes.302 Societal Challenges and Opportunities

Aging Population South Korea's population has been growing at a glacial pace for some years now and, according to one report, will have begun to shrink within the next four years.303 Korea's population will be the second-oldest in the world by 2050, with one of the highest old-age-dependency ratios in the world. This could have dire consequences for the economy, holding back growth and

299 Oliver, 'South Korea: An Economy Divided.' 300 Ihlwan Moon, 'Do the Chaebol Choke Off Innovation?,' Bloomberg Businessweek, December 3, 2009, http://www.businessweek.com/magazine/content/09_50/ b4159058699422.htm. 301 'Ranking of Economies - Doing Business - World Bank Group', June 2011, http:// www.doingbusiness.org/rankings/. 302 Oliver, 'South Korea: An Economy Divided.' 303 Eunkyung, 'South Korea Shuns Moms at Peril as Workforce Shrinks.'

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putting pressure on the relatively new national health insurance system, established in 2000. The Korean government has recognized this concern and in 2008 introduced a long-term care insurance scheme as part of the social insurance system. While initial developments have been promising, the World Health Organization (WHO) identifies a number of challenges as the elderly population in need of care continues to proliferate.304 In particular, disparities between numbers needing care and the capacity of facilities are already appearing, with some areas such as Seoul oversubscribed and more rural facilities undersubscribed. Ensuring the quality of care is also a challenge, particularly in the training given to lowskilled carers. Maintaining Innovation South Korea's information society is readily identifiable as one of the big factors behind its success, however it will have to maintain its pace to avoid being eclipsed by new, powerful competitors also undergoing rapid development, particularly China. The issues related to the cheabols are particularly relevant here: changes in regulation and governance are needed to increase the level of competition and dynamism in many of Korea's industries in order to award greater opportunities to deserving small players. Korea lags behind other OECD countries on sustainability and environmental responsibility. The Greenpeace Guide to Greener Electronics ranks Korea's top electronics firms Samsung and LG among the worst of the 15 firms evaluated, in 7th and 13th place respectively. The Tomorrow's Value Rating is a report which assesses firms' long-term investment value given future sustainability needs by looking at the importance of building sustainability into sound strategic business models.305 Its authors have highlighted some of the achievements of South Korean firms in terms of understanding and addressing certain issues such as energy efficiency and recycling, however there are shortcomings in terms of integrating these points into an overall

304 Chang Bae Chun et al., 'Republic of Korea: Health System Review,' Health Systems in Transition 11, no. 7 (2009), http://www.euro.who.int/__data/assets/pdf_ file/0019/101476/E93762.pdf. 305 Two Tomorrows, 'Tomorrow's Value Rating 2011,' Tomorrow's Value Rating, 2011, http://www.tomorrowsvaluerating.com/Page/TomorrowsValueRating2011.

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strategy. Korean firms need to become leaders in this field in order to continue adding value in a sustainable way; the increase in R&D expenditure on green technologies is a step in this direction. Defense In the wake of increased tension between the two Koreas, the South's tough rhetoric – the Defense Ministry vows to 'pulverize the enemy's will to attack again' – is being supported with increased military spending and a crucial change is planned: on the 1 December 2015, Seoul will take over wartime control of South Korean troops from the U.S., a process already half complete.306 But there are also opportunities: South Korean annual defense expenditure is expected to increase and with it the market for homeland security is forecast to grow at a rate of 9.01% from its U.S. $324million value in 2012. Defense imports, despite a sharp decline in 2009, grew at a rate of 7.73% in 2011 to reach U.S. $1.42 billion.307

306 Sangwon Yoon, 'South Korea to Focus Defense Strategy on Possible Border Island Conflict,' Bloomberg, January 4, 2012, http://www.bloomberg.com/news/2012-0104/south-korea-to-focus-defense-strategy-on-possible-border-island-conflict.html. 307 ICD Research, The South Korean Defense Industry: Market Opportunities and Entry Strategies, Analyses and Forecasts to 2017, July 2012, http://www.reportlinker.com/ p0936510-summary/The-South-Korean-Defense-Industry-Market-Opportunitiesand-Entry-Strategies-Analyses-and-Forecasts-to.html.

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8.6 Russia Key Takeaways

• Although there are some positive signs in Russia's demographic situation, longer-term trends suggest that Russia will be severely impacted by population aging; • Russia's economic growth in the next decade is likely to be slower than in 1998-2008; • The Russian government is eager to develop a strong high-tech sector in order to diminish dependence of the economy on the oil and gas sector. It has undertaken several initiatives to promote innovation but a bad business climate and weak institutions are major hurdles for faster development; • President Putin's popularity is likely to deteriorate but there is no unifying opposition figure at the moment; • Some major opportunities in Russia might include: - Energy production and energy efficiency - Health - Economic modernization Variable

Russia's Rank

International Trade Logistics305

95th out of 155

Human Development

66th out of 187

306

49th out of 187

Education307

106th out of 132

Environmental Performance

308

66th out of 142

Economic Competitiveness309 Perceived Governmental Corruption

143rd out of 182

Entrepreneurship311

62nd out of 179

310

308 The World Bank, 'Logistics Performance Index.' 309 UNDP, 'International Human Development Indicators - UNDP.' 310 UNDP, 'Education Index (expected and Mean Years of Schooling).' 311 Yale University, '2012 EPI: Rankings | Environmental Performance Index.' 312 The World Economic Forum, 'The Global Competitiveness Report 2011 - 2012.' 313 Transparency International, '2011 Corruption Perceptions Index -- Results.' 314 George Mason University Centre for Entrepreneurship and Public Policy (CEPP), 

'The Global Entrepreneurship and Development Index (GEDI) 2012 Country  Rankings.'

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Population315

Russia has severe demographic problems and will be heavily impacted by population aging. It is one of the few countries that has already experienced a fall in population in the last two decades – since 1991 its population has decreased by 4.5%. However, at the moment the Russian population is not particularly old, at least judged by the European standards, and on many demographic metrics Russia is quite close to average EU values.316 The dissolution of the Soviet Union and market restructuring of the Soviet economic system coincided with a rapid fall in birth rates and a substantial increase in death rates (see Figure 1). The increase in mortality rates in Russia was unprecedented for an industrialized nation in peacetime. This increase was particularly large for working age adult males. The probability that a newborn male will live until 65 is only 48% in Russia. This is approximately the same level as in many poor Sub-Saharan African countries and well below the level, for example, in North Korea, India, or Indonesia. The difference in life expectancy between males and females in Russia is one of the highest in the world – almost 12 years. Risky behavior and unhealthy lifestyles are some of the reasons for these striking figures. These negative trends started to slow down and in some cases reverse in the early and middle 2000s. In 2009 the Russian population increased for the first time since 1994 because of positive net migration. This growth continued in subsequent years (since the crude death rate is still above the birth rate, the population would be still shrinking if the effect of migration is excluded). The total fertility rate increased from 1.2 in 2001 to 1.6 in 2011 as steadily rising living standards encouraged couples to have more children. The Russian government also undertook several measures in recent years to stimulate births.

315 A good but somewhat outdate review of the demographic trends in Russia is: DaVanzo J. and C.Grammich, Dire Demographics: Population Trends in the Russian Federation, RAND, Santa Monica, MR-1273, 2001. 316 Median age in Russia was 38.5 years in 2010 compared to 40.9 in the EU (data from CIA and Eurostat). Total fertility rate in Russia was 1.6, higher than, for example, in Spain or Germany.

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Russia Figure 1

19 18 17 16 15 14 13 12 11 10 9 8 7 6 5 1985

1990

1995 Birth rate

2000

2005

Death rate

Figure 1 Crude birth and death rates in Russia (per 1,000 people) Source: World Development Indicators

Despite these positive trends Russian population is aging fairly rapidly and the challenges related to this will be quite serious. The sustainability of the public pension system already raises many questions and an increase in the pension age is considered as unavoidable by many experts although it has been ruled out for now by the government. Economy

Russia's economy grew very rapidly in the first years of the 21st century. In 1999-2008 its GDP growth rate averaged almost 7%. Growth in Russia's dollar GDP (measured at market exchange rates) was even more impressive – it increased at an average annual rate of 24% or more than eightfold in the same period.317 This rapid growth has changed Russia's fortunes. From a country that was unable to service its debt in 1998, which reached almost 100% of GDP, it has transformed into a country with one of the largest foreign reserves and government debt of less than 8% of GDP in 2008. Living standards of the population have also improved dramatically over

317 Russia's dollar GDP grew more rapidly than its GDP in constant prices because of a rapid appreciation of the rouble against dollar in that period, see Oliker, O., K.Crane, L.Schwartz, and C.Yusupov, Russian Foreign Policy: Source and Implications, RAND, Santa Monica, MG-768, 2009.

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the same period. The average wage increased more than eleven fold from approximately U.S. $60 in 1999 to almost U.S. $700 in 2008. The basic factors driving growth in Russia were very much the same as in other transition economies, including: privatization of state-owned companies, market discipline, competitive pressures, foreign direct investment. In addition the rising prices for energy commodities also provided a substantial boost to the growth. The financial crisis of 2007-2009 hit Russia hard and its GDP dropped 7.8% in 2009. The recovery, however, was relatively rapid and Russia's GDP reached its pre-crisis level by early 2012. Nevertheless the after-crisis growth trend seems to be significantly slower than in the pre-crisis years. The economy grew by 4.3% both in 2010 and 2011. Forecasts from the OECD and the IMF for the next few years suggest that growth should be close to 4% pa or slightly lower. Many factors that boosted Russia's growth in 1999-2008 are unlikely to be major drivers of growth in the future, including: • Very favorable changes in terms of trade due to rapidly rising oil prices; • Low utilization of production capacity inherited from the Soviet Union; • Low-hanging fruits of corporate restructuring and more professional management; • Rapid expansion of bank credit (it increased from 10 to 40% of GDP). Therefore, one of the main issues confronting Russia is the diversification of its economy away from reliance on oil and gas toward innovation-based development. The oil and gas sector has been the main source of export revenues for Russia – earnings from exports of crude oil, petroleum products and natural gas increased from U.S. $53 billion in 2000 (or about 50% of total exports) to U.S. $310 billion in 2008 (or 66% of total exports).318 At the same time, its links to the rest of the economy are limited. All extractive industries employ just 1.6% of all workers in Russia. Hence it is

318 Most of this growth came from rising prices for oil and gas. In constant prices Russia's energy exports increased by 51% between 2000 and 2008.

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unlikely to serve as a engine of diversification.319 Moreover, the sector's dependence on volatile oil and gas prices serves as a major source of instability for the economy. 320 Political Developments

Recent parliamentary (in December 2011) and presidential (in March 2012) elections were marred by abuses of administrative resources and widespread allegations of vote rigging. They led to numerous protests and some of the largest demonstrations in Russia since the break-up of the Soviet Union. Putin was elected as president for a 6-year term and still retains a large approval rating although his popularity fell compared to the pre-crisis years. Political opposition with the exception of the Communist party is weak, disorganized and does not have popular leaders. The Kremlin's recent political steps have been contradictory. On the one hand, some barriers to participation in the political process have been reduced including a simplified registration of new parties and the return to popular elections of regional governors. On the other hand, a new law has increased fines for participation in unsanctioned demonstrations, and new bills could create a 'blacklist' of websites to be blocked and put NGOs that receive funding from abroad under more scrutiny.321 Research and Development

The Russian government is well aware of the dangers related to overdependence on oil and gas and has developed several programs that intend to promote innovation and high-technology industries. One of the strengths it can rely on to achieve these goals is a highly educated population. For example, gross enrolment rate for tertiary education in Russia is one of the highest in the world (76%) although many observers have serious doubts about the quality of education. The number of researchers per million people is also quite high – around 3,000 – a level comparable to that of the Netherlands. In addition Russia has significant

319 World Bank, Export Diversification through Competition and Innovation: Overview, April, 2012. 320 For example, exports of petroleum and natural gas dropped by 39% in 2009, from U.S. $310 billion to U.S. $191 billion. 321 The Economist, 'If you can't suppress them, squeeze them', July 21st, 2012.

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strengths in several high-tech sectors.322 Some of these sectors, such as nuclear technologies, aerospace and armaments are, to a large extent, the legacy of large investment in the military-industrial complex in the Soviet period. Development of other sectors such as software and nanotechnologies is a more recent phenomenon. One of the most ambitious Russian projects in the area of innovation policy is the Skolkovo Innovation Center. Located near Moscow, it is intended to house up to 1,000 technological start-ups, 40 corporate R&D centers and a research university (in partnership with the MIT). Companies located in Skolkovo will get substantial tax breaks and grants, simplified regulation and visa procedures. Around 20 companies have already signed up, including such names as IBM, SAP, and Cisco. Skolkovo will have five clusters that broadly correspond to Russia's main high-tech strengths: 323 • IT • Space • Energy efficiency • Biomedical technologies • Nuclear technologies Business Climate

The Russian business climate leaves much to be desired for and is one of the main barriers for a bigger role for innovative and high-tech industries. The World Bank in its Doing Business-2012 ranking puts Russia in 120th place out of 183 countries in terms of quality of business regulation. Russia scores particularly badly on such issues as getting electricity, dealing with construction permits and trading across borders. More generally, the quality of institutions in Russia is quite low (judged by the Worldwide Governance Indicators from the World Bank). The Corruption Perception Index from Transparency International ranks Russia 143 among the 182 countries in the 2011 survey.

322 Crane, K., and A.Usanov, 'The Role of High-Technology Industries', in Russia after the Global Economic Crisis, Petersen Institute for International Economics, Washington DC, 2010. 323 http://www.sk.ru/Model.aspx.

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However, recently there have been some positive signs as well. After 18 years of negotiations (the longest in the history of the World Trade Organization) Russia finally joined the WTO in July 2012. This should lower tariffs, improve customs administration and treatment of foreign investors. The World Bank estimates that Russia should gain more than 3% of GDP per year in the medium term through lower prices and increased FDI.324 President Putin in his speeches has emphasized that Russia needs to improve its business climate. He set the goal to raise Russia's position in World Bank's 'Doing Business' ranking from 120th place to 20th in a few years. Plans to sell shares in several state-owned companies have also been approved. Societal Challenges and Opportunities

Energy Production and Energy Efficiency Russia is the largest producer and exporter of fossil fuels. The bulk of its production comes from mature fields with declining productivity. Arresting or slowing down the decline in production at these fields requires the application of new technologies. Another area where foreign technologies should play a bigger role involves modernization of energy transmission and distribution infrastructure, including the electrical grid and pipelines. Russia is also a very large consumer of energy. It is the third largest emitter of greenhouse gases in the world. Atmospheric pollution caused by the energy sector is estimated to cause up to 40,000 deaths annually among the urban population. The energy intensity of GDP in Russia in 2008 was estimated to be more than double the world average and triple the European average (in PPP terms).325 The Russian government has made energy efficiency one of its modernization priorities and approved the Energy Efficiency Program until 2020.

324 World Bank, Russian Economic Report, #27, April 2012, at http://www-wds. worldbank.org/external/default/WDSContentServer/WDSP/IB/2012/05/02/00033 3037_20120502005616/Rendered/PDF/682760WP0Box360C000270march20120 eng.pdf 325 OECD Reviews of Innovation Policy: Russian Federation, OECD, Paris, 2011.

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Health Poor health of the Russian population represents one the most serious risks to Russia. It will increase medical costs, reduce the number of healthy workers, raise absenteeism, destabilize families and raise national security risks. The main causes of deaths and poor health in Russia are injuries and non-communicable cancers.

326

diseases,

including

cardiovascular

diseases

and

Dealing with many non-communicable diseases requires early

detection and better diagnostics tools. In the injuries category, road traffic accidents are one of the largest causes for deaths and disability-adjusted life years (DALYs) lost. Rapid raise in car ownership led to much higher traffic while investments in road infrastructure were lagging behind. Better design of new road infrastructure and retrofitting the existing ones should be one of the main ways to address the road safety problems. Economic modernization and diversification Finally, industrial diversification and modernization of the economy is probably the main economic challenge. Russia can rely on its strengths in high-technology sectors to jump start the process but to promote innovation in a wider range of industries it needs more foreign direct investment and R&D cooperation. One area where such cooperation might take place is in the area of infrastructure. The Russian government and companies are making substantial investments in railroads, ports, electricity grids, natural gas pipelines, etc. These investments often rely on foreign technologies. However, Russian institutions and business climate should improve in order to attract more private investment from abroad.

326 World Bank, Dying Too Young: Addressing Premature Mortality and Ill Health Due to Non-comminicable Diseases and Injuries in the Russian Federation, Washington DC, 2005.

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8.7 South Africa Key Takeaways

• Positive economic growth forecasts for the medium-term; • The South African economy is a magnet for FDI, particularly in the extractive industries; • Fast-growing services sector; • High-quality business climate compared to other emerging economies; • Fast-growing private security industry, yet this is also a reaction to security concerns; • Ambitious R&D goals for the next few years and good opportunities in the fields of public health and energy; • Public health situation under stress, low life expectancy due to, inter alia, a high prevalence of HIV/AIDS and tuberculosis and underinvestment in the public health system – yet this also represents an opportunity; • Extreme youth unemployment of over 50%. Potential source of instability if left unmanaged; • High incidence of crime, although this has been dropping slightly in recent years. Variable

South Africa's Rank

International Trade Logistics324

23rd out of 155

Human Development

123rd out of 187

325

82nd out of 187

Education326

128th out of 132

Environmental Performance

327

50th out of 142

Economic Competitiveness328 Perceived Governmental Corruption

64th out of 182

Entrepreneurship330

45th out of 179

329

327328329330331332333

327 The World Bank, 'Logistics Performance Index.' 328 UNDP, 'International Human Development Indicators - UNDP.' 329 UNDP, 'Education Index (expected and Mean Years of Schooling).' 330 Yale University, '2012 EPI: Rankings | Environmental Performance Index.' 331 The World Economic Forum, 'The Global Competitiveness Report 2011 - 2012.' 332 Transparency International, '2011 Corruption Perceptions Index -- Results.' 333 George Mason University Centre for Entrepreneurship and Public Policy (CEPP), 

'The Global Entrepreneurship and Development Index (GEDI) 2012 Country 



Rankings.'

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Population

In the period 2007-2011, South Africa experienced a population growth of around 1.2% per year on average. This rate of growth outpaced that of most Western countries and is comparable to the population growth recorded in other emerging economies, such as Indonesia, India and Turkey.334 Similar to other emerging economies, population growth is also strongly an urban phenomenon. South Africa has a relatively high degree of urbanization with 62% of the population living in cities. The urbanization rate for the period 2010-2015 is estimated to be about 1.2%.335 A big difference in South Africa's demographic statistics compared to the world's average is life expectancy at birth. Whereas worldwide a newborn has on average 68 years to live, in South Africa this number is significantly lower, at only 54 years. Manifold health-related issues lie at the basis for this low number, including a high prevalence of HIV/AIDS of over 20 times the global average (see also infra, Public Health).336 In terms of education, South Africa occupies place 82 out of 187 countries reviewed in the context of the UNDP education index.337 This might seem reasonable, but as Africa's largest and most advanced economy, the country is not performing as well as it should in terms of education. Only one out of six South Africans ever makes it to university in the end. Of those who do make it, a third drop out within a year. With a few notable exceptions, university standards in South Africa are rather low. Employers frequently complain that universities produce graduates who are largely unemployable.338 Three million South Africans in the age of 18-24, over half of the total, are outside of education, training or employment. Seven out of ten lack any qualification and even among those who graduate from high school, only 17% are likely to get a job within a year of leaving school.339

334 The World Bank, 'Population Growth.' 335 U.S. Central Intelligence Agency, 'CIA - The World Factbook. South Africa Country Page.', 2011, https://www.cia.gov/library/publications/the-world-factbook/geos/ sf.html. 336 World Health Organization, 'South Africa Health Profile', May 2012. 337 UNDP, 'Education Index (expected and Mean Years of Schooling).' 338 The Economist, 'Education in South Africa: Still Dysfunctional', January 21, 2012, http://www.economist.com/node/21543214. 339 Ibid. ST R AT E GY

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Economy

During 2000-2010, GDP grew by 3.6% on average. Other BRIC countries China Southsuch Africaas Figure 1 (10.3%) and India (7.4%) experienced stronger growth in the same period. Brazil (3.7%) only just manages to stay ahead of South Africa (see Figure 1).340 12 10 8 6 4 2 0 Brazil

China

India

Indonesia

South Korea

Russia

South Africa

Turkey

Figure 1 Average GDP growth rates 2000-2010 (%) Source: The World Bank, World Development Indicators July 2012; International Monetary Fund, World Economic Outlook, April 2012.

South Africa is a country well endowed with minerals and other natural resources. It is no surprise therefore that their export takes up a dominant position in the economy. The main export products are gold, platinum, diamonds and coal, but also machinery and equipment. Despite the strong focus on the extractive industries (16% of total value added to the GDP), the services sector in South Africa is booming and contributed around 66% of the value added to GDP in 2010.341 Investment levels (gross fixed capital formation) in South Africa stood at 19.6% of total GDP in 2010. Compared to other BRIC countries, investment levels in the economy are lower. By comparison, in 2011, China and India invested 45.4% and 29.5% of GDP, respectively. Compared to developed economies, the South African investment rate is slightly above OECD average (17.8%).342

340 The World Bank, 'World Development Indicators | Data.' 341 Ibid. 342 The World Bank, 'Gross Fixed Capital Formation (annual % Growth).'

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When it comes to foreign direct investment (FDI), South Africa is the leading economy among the BRICS. In 2010, South African inward FDI stock stood at 36.6% of GDP – the highest rate of all the BRICS countries.343 Extractive industries played a major role, consistently having attracted the bulk of FDI over the last ten years. In 2010, mining and quarrying attracted over 38% of total FDI. Services come close, having attracted a good 35% of FDI in 2010. The majority share goes into the financial services sector, which attracted 66% of services-related FDI in 2010 and 23.8% of total FDI in 2010.344

South AfricaAFigure 2 potential source of instability however is South Africa's staggeringly high level of youth unemployment (see Figure 2 for a comparison for 2009). With over 50% of the people aged 15-24 without a job in South Africa during the first quarter of 2012, the government should place a high priority on finding an adequate solution.345 50 45 40 35 30 25 20 15 10 5 0 Brazil

Russia

South Africa

Turkey

Indonesia

South Korea

Figure 2 Youth Unemployment Rates in 2009 for Several Emerging Economies 346 Source: United Nations Statistics Division. Millennium Development Goals Indicators.

343 UNCTAD, 'World Investment Report 2011. Country Fact Sheet: South Africa', 2010. 344 UNCTAD, 'Investment Country Profiles: South Africa', February 2012, 6. 345 Statistics South Africa, 'Quarterly Labour Force Survey. Quarter 1, 2012.', May 2012, 36. 346 Comparison based on most recent data year available. China and India have data which is too outdated.

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Overall, despite being the undisputed leader in Africa in terms of GDP, quality of infrastructure and with unrivalled soundness of auditing standards and

securities

exchanges

regulation,

the

South

African

economy

increasingly feels the heat from other African economies. Nigeria has been growing at twice the speed for the past eight years and Egypt – if it manages to become more politically stable – could develop into a regional economic powerhouse. Other countries, such as Ghana and Kenya equally compete with South Africa for the location of multinationals' African headquarters – General Electric for example recently chose Nairobi as its sub-Saharan hub.347 Political Developments

The fourth general election in South Africa since apartheid was held on 22 April 2009. ANC leader Jacob Zuma was elected President for a term of five years after having won 65.9% of the vote. The largest opposition party, the Democratic Alliance (DA) won a share of 16.7% of the vote. The second biggest opposition party, the New party Coalition of the People (COPE – formed by former ANC members), secured 7.4% of the vote.348 A new candidate for the ANC for the next presidential elections will be chosen in 2012. Although all-out popular support for the ANC seems to be waning, it is expected that it will remain the largest party after the 2014 general elections.349 In terms of foreign relations, South Africa's foreign policy has long been influenced by the end of apartheid and its desire to be a force for good in the world. However, much has changed since Nelson Mandela was president. Under Thabo Mbeki, Mandela's successor, foreign policy moved more in the direction of asserting South Africa's position as a regional power, even if that meant ignoring some of the human rights violations in countries such

347 'South Africa: The Gateway to Africa? | The Economist', June 2, 2012, http://www. economist.com/node/21556300?zid=304&ah=e5690753dc78ce91909083042ad12 e30. 348 UK Foreign and Commonwealth Office, 'Country Profile: South Africa', May 2012, http://www.fco.gov.uk/en/travel-and-living-abroad/travel-advice-by-country/ country-profile/sub-saharan-africa/south-africa/?profile=politics. 349 Rabobank, 'Country Report South Africa', February 2012.

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as Myanmar and Zimbabwe.350 Under Jacob Zuma, Mbeki's successor, this process has continued. Recently for example, after initially backing the no-fly-zone to support Libyan rebels, South Africa turned around and openly criticized the NATO bombing campaign. South Africa's foreign policy seems to be contradictory. On the one hand, it upholds the principles of national sovereignty and non-interference and on the other hand its aim is to contribute to the ideals of democracy, human rights and justice.351 Other examples include Zuma's call for the resignation of Hosni Mubarak after unrest erupted in Egypt and his silence when Cote d'Ivoire plunged into violence, refusing to acknowledge Alassane Ouattara's internationally recognized election victory.352 Research and Development

In 2007/2008, over 70% of South Africa's business and enterprise-funded research and development (R&D) was devoted to engineering sciences, medical and health sciences, information and communication technologies and applied sciences and technologies. Whereas private sector R&D is spread out over the extractive industries, IT and health, the government spends more than 50% on social, agricultural and medicine health sciences.353 The R&D intensity of the South African economy stood at 0.92% in 2008, down slightly from 0.93% in 2007. Business R&D intensity for the same year stood at 0.54% of GDP.354 In 2008, South Africa launched its Ten-Year Innovation Plan to guide the country's transformation toward a knowledge-based economy. A keycomponent of the Plan is the National Strategic Infrastructure Programme,

350 The Economist, 'South Africa's Foreign Policy: All over the Place', March 24, 2011, http://www.economist.com/node/18447027; Eve Fairbanks, 'South Africa's Awkward Teenage Years,' Foreign Policy, February 2012, http://www.foreignpolicy. com/articles/2012/01/03/south_africa_s_awkward_teenage_years?page=0.1. 351 The Economist, 'South Africa's Foreign Policy: All over the Place'; James Traub, 'Will the Good BRICS Please Stand Up?'. 352 The Economist, 'South Africa's Foreign Policy: All over the Place.' 353 SAccess ACCESS4EU - South Africa, 'Supporting the EU Access to South Africa's Research and Innovation Programmes', 2011, 17. 354 Erawatch, 'Basic Overview of South African Research System', July 16, 2012, http:// erawatch.jrc.ec.europa.eu/erawatch/opencms/information/country_pages/za/coun try?section=Overview&subsection=BasicChar.

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which targets investment in high quality research equipment and infrastructure. Five priority areas for investment have been identified: (i) scientific equipment, (ii) specialized facilities – both physical and organizational which allow for the best performance of research equipment, (iii) cyber infrastructure, (iv) high-end infrastructure which is at the bridging point between R&D and commercialization, and (v) global – networked international infrastructure both single-sited and distributed.355 For 2018, the Plan formulated a number of 'grand challenges' in the areas of pharmaceuticals, space science and technology, energy security, climate change and human and social dynamics. South Africa envisages becoming one of the top three emerging economies in the global pharmaceutical industry, increasing foreign investment in health-related R&D and creating and funding five centers of competence focused on national health priorities. Equally by 2018, the country plans to become a key contributor to global space science and technology. Among other things, the Plan foresees the development of an African network of satellites, the actual launch of a satellite and the construction of a powerful radio-astronomy telescope. To meet its future energy demands, South Africa turns to an expansion in the energy supply infrastructure so that more than 50% of additional capacity is derived from clean coal technologies and nuclear plants and sourced from local suppliers. To make best use of its geographic position to play a leading role in global climate science, South Africa wants to develop several centers of excellence on climate change and southern oceanography

with

robust

and

strengthened

research

and

global

monitoring capabilities. Finally, through the Plan, South Africa wishes to increase its contribution to a greater global understanding of shifting social dynamics and the role of science in stimulating growth and development, inter alia¸ through the development of an internationally recognized 'knowledge hub' on social sciences research in Africa.356

355 Erawatch South Africa, 'Research Infrastructures', July 16, 2012, http://erawatch.jrc. ec.europa.eu/erawatch/opencms/information/country_pages/za/country?section= NationalPolicyDevAndEuropeanResearchArea&subsection=ResearchInfraestructur es. 356 Erawatch, 'Erawatch - Research Policy Goals', n.d., http://erawatch.jrc.ec.europa.eu/ erawatch/opencms/information/country_pages/za/country?section=ResearchPolic y&subsection=RecentPol.

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Business Climate

In the 2012 edition of the World Bank's Ease of Doing Business Monitor, South Africa ranked 35 out of a total number of 183 countries reviewed. When compared against other emerging economies, South Africa strongly outperforms Brazil (126), Russia, (120), India (132), China (91) and Turkey (71), who are all placed much lower on the scale. When set against developing economies, South Africa is ranked only slightly below the OECD average which occupies place 31. Notable areas where South Africa stands out are the ease with which credit can be obtained and the quality of investor protection.357 When it comes to issues which potentially hamper efficient trade, a number of observations can be made. Looking at import tariffs358, South Africa has a rate almost half of that of South Korea, India and Brazil. Still, import tariffs in South Africa are approximately twice as high as in Turkey and in the OECD and almost three times as high as in the EU.359 When it comes to customs formalities (the number of permits and documents required for importing), South Africa demonstrates a similar level of bureaucracy as other emerging economies. South Africa (8 documents required in total) is on the same level as Brazil (8), India (9), Turkey (8) and Indonesia (7). By comparison however, South Korea (3) and China (5) require significantly fewer documents to 'clear' an import.360 The number of formal documents required is also reflected in the total time it takes for a product to be imported, which in South Africa takes 32 days on average. With this amount, South Africa is among the countries for which it takes longest for imports to clear customs. Only Russia has a longer clearance time, at 36 days. China (24), India (20), Brazil (17), Turkey (15) and South Korea (7) move goods considerably faster.361

357 'Ranking of Economies - Doing Business - World Bank Group.' South Africa ranks number 1 in terms of getting credit and tenth with respect to the quality of investor protection. 358 Applied weighted mean for all products imported. 359 The World Bank, 'Data on Trade and Import Barriers.' 360 Ibid. 361 Ibid.

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Societal Challenges and Opportunities

Public Health As mentioned under demographic developments, newborns in South Africa have a life expectancy that remains far below the world's average. In particular, this is caused by an HIV/AIDS prevalence among adults aged 15-49 of 17.8% in 2009. Pregnant women attending antenatal clinics showed a prevalence of 29.4% in 2009. Mother-to child-transmission of HIV/AIDS therefore is also the number-one cause of death among children under the age of five (28%).362 In addition to problems with HIV/AIDS, South Africa also deals with a high incidence of tuberculosis (TB) of 981 per 100,000. South Africa has the world's highest TB-HIV co-infection rate at 73%. South Africa is one of the 22 High Burden Countries that contribute around 80% of the global burden of all TB cases.363 TB is also the leading cause of death for people living with HIV.364 TB cure rates have gone up from 40-55% to 70% in 2009. Detection rates have risen to 78%, and success rates by means of Directly Observed Therapy Short course (DOTS) treatment – a World Health Organization (WHO) recommended treatment strategy – achieved a success rate of 74%.

362 World Health Organization, 'South Africa Health Profile,' 1; World Health Organization, 'Country Cooperation Strategy South Africa', May 2011, 1. 363 Department Health, Republic of South Africa, 'Tuberculosis Strategic Plan for South Africa, 2007-2011', 2007, 5. 364 The Center for Strategic and International Studies (CSIS) Global Health Policy Cente, 'South Africa and Tuberculosis', August 5, 2011, http://www. smartglobalhealth.org/blog/entry/south-africa-and-tuberculosis/; World Health Organization, 'Global Health Observatory Data Repository', 2011, http://apps.who. int/ghodata/?vid=18400&theme=country.

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Health issues weigh heavily on South Africa's government budget with 40.1% of general government expenditure and 8.5% of GDP having gone into health spending in 2009. Next to HIV/AIDS and TB, priority areas for future health spending and investment in South Africa are malaria; maternal, child and adolescent health; and the prevention of road traffic accidents.365 Private Security Industry In 2011, the South African private security industry reached a turnover of 50 billion Rand, or approximately U.S.  $6 billion. The biggest sector of the security services industry is the security guarding segment, which contributed 18 billion Rand, close to U.S. $2.2 billion. Since 2001, the number of private security officers and companies in South Africa increased by 111.3% and 66.7% respectively, making the industry one of the largest worldwide. The amount of security officers outnumbers the South African police by 2:1.366 The growth of the South African private security market has turned the country from an importer of security goods, to an exporter of security services and products. Four key technology segments form the backbone of the South African private security market: access control, CCTV surveillance, intrusion detection and alarms, and fire protection. Other important sectors are asset tagging, physical- and perimeter security, vehicle security and IT security.367 The tremendous growth is propelled by a number of factors: first, violent crime in South African cities has been one of the main drivers of the growth of the private security industry. Although the homicide rate has been decreasing in recent years, violent crime is still a major problem in South Africa compared to other countries. Second, the changes in property associations as a result of the growth of mass private property caused by urbanization, new building demands related to social controls and the need

365 World Health Organization, 'Country Cooperation Strategy South Africa.' 366 Elite SA Security Solutions, 'Private Security Growth in 2012 | Security Guarding In Pretoria', April 10, 2012, http://securityguardinginpretoria.co.za/private-securitygrowth-in-2012/. 367 Swiss Business Hub South Africa, 'South Africa Private Security Industry', December 2011.

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to secure new properties drive the sector forward. Third, the growing trend toward viewing security as a 'good' which can be purchased led to individuals buying their own security, including the use of armed response companies and counter surveillance. Companies went on to acquire security services from security companies, such as security guarding, equipment surveillance and armed response reaction – all largely as a result of the inability of the state to provide these services. Finally, the rise of cooperative systems whereby not only the police, but increasingly also private security patrols, metro police and neighborhood-watch organizations work together to secure an area caused a rise in the presence of security services.368 Transport, Mobility and Road safety South Africa's high degree of urbanization and strong population growth put a lot of stress on the country's ability to deal with traffic congestion. The capital city, Johannesburg, has a notorious reputation when it comes to traffic congestion; the average one-way commuting time is close to 40 minutes.369 The 2010 IBM Commuter Pain Index370 – an index which ranks the emotional and economic toll of commuting – places Johannesburg on third place with a score of 97/100, just after Mexico City and Beijing.371 Apart from causing irritation among commuters, congestion in South African cities makes businesses incur enormous costs. According to a survey conducted by mobile GPS manufacturer TomTom, 78% of Johannesburg's 3.8 million drivers are stuck in a severe traffic jam on a daily basis. As a

368 Elite SA Security Solutions, 'Private Security Growth in 2012 | Security Guarding In Pretoria'; United Nations Office on Drugs and Crime, 'Homicide Statistics', 2011, http://www.unodc.org/unodc/en/data-and-analysis/homicide.html. 369 PayScale South Africa, 'Johannesburg City Commute Time Survey', July 17, 2012, http://www.payscale.com/research/ZA/Location=Johannesburg/Commute_Time. 370 The IBM Commuter Pain Index is the result of a survey among 8,192 motorists in 20 cities on six continents. The index is comprised of 10 issues: 1) commuting time, 2) time stuck in traffic, agreement that: 3) price of gas is already too high, 4) traffic has gotten worse, 5) start-stop traffic is a problem, 6) driving causes stress, 7) driving causes anger, 8) traffic affects work, 9) traffic so bad driving being stopped, and 10) decided not to make trip due to traffic. The results of the survey are compiled into an index on a scale of one to 100, with 100 being the most onerous. 371 IBM, 'IBM Global Commuter Pain Study Reveals Traffic Crisis in Key International Cities.'

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result, 10% of commuters are forced to cancel meetings due to traffic and over 40% are late for work. Employers are estimated to lose approximately U.S. $34 per employee per month and just under U.S. $130 million on aggregate per month.372 To tackle this problem, simply building more or wider roads is an inadequate solution. The results of these surveys demonstrate that what South African cities urgently need is the development of a smart, sustainable and – above all – rapid public transport system. Road safety in South Africa has a bad reputation and much remains to be done to improve the country's record. According to the WHO, South Africa has a road traffic death rate of 33.2 per 100,000, an unusually high figure compared to developed countries such as the Netherlands (4.8), Sweden (5.2), France (7.5) and the United States (13.9). Other emerging economies such as Turkey (13.4), Indonesia (16.2), China (16.5) and India (16.8) also appear to have much safer roads.373 WHO data shows that the seat-belt wearing rate in South Africa is very low. In only 50% of cases is a seat-belt worn in the front of the car and only 8% of the time in the back.374 When it comes to enforcement of the seat-belt law, results are equally disappointing. A survey conducted by the South African Ministry of Health indicates a perceived lack of adequate enforcement of legislation with respect to speed limits, drunk-driving and seat-belt wearing to be partly responsible for South Africa's poor road safety record.375

372 GPS Navigation & Road Safety Blog, 'TomTom Releases Remarkable Traffic Statistics in South Africa', May 16, 2012, http://gps.arrivealive.co.za/2011/05/ tomtom-release-remarkable-traffic-statistics-in-south-africa/. 373 World Health Organization, 'Global Health Observatory Data Repository.' 374 Ibid. 375 World Health Organization, 'South Africa Road Safety Profile', 2008.

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8.8 Turkey Key Takeaways

• Fast-growing, young, relatively well educated population; • High urbanization rate and a subsequent high demand for construction and urban redesign; • High levels of FDI and a steadily growing economy with a positive medium-term outlook; • Fast-growing services sector; • A booming defense industry, aided by an assertive Turkish foreign policy; • A fast-growing automotive industry at a strategic location with continued positive growth perspectives; • Low import tariffs and fast logistical handling of container imports. • Construction sector plays a pivotal role in the economy and is very sensitive to economic growth fluctuations; • Major tensions on the Turkish border with Syria and a threat of domestic terrorism; • Relatively low levels of investment (gross fixed capital formation) in the Turkish economy compared to other emerging economies. Variable

Turkey's Rank

International Trade Logistics373

27th out of 155

Human Development

92nd out of 187

374

120th out of 187

Education375

109th out of 132

Environmental Performance

376

59th out of 142

Economic Competitiveness377 Perceived Governmental Corruption

61st out of 182

Entrepreneurship379

36th out of 79

378

376377378379380381382

376 The World Bank, 'Logistics Performance Index.' 377 UNDP, 'International Human Development Indicators - UNDP.' 378 UNDP, 'Education Index (expected and Mean Years of Schooling).' 379 Yale University, '2012 EPI: Rankings | Environmental Performance Index.' 380 The World Economic Forum, 'The Global Competitiveness Report 2011 - 2012.' 381 Transparency International, '2011 Corruption Perceptions Index -- Results.' 382 George Mason University Centre for Entrepreneurship and Public Policy (CEPP), 

'The Global Entrepreneurship and Development Index (GEDI) 2012 



Country Rankings.' 

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Population

Compared to most western European countries, Turkey has experienced a rapid and steady population growth over the last twenty years. For the period 2007-2011, Turkey's population grew by 1.3% annually.383 This rate of growth outpaced that of most Western countries and is comparable to the population growth recorded in other emerging economies, such as Indonesia and India.384 Much of Turkey's population growth manifests itself in urban areas. By 2010, 70% of Turkey's population was living within urban centers and it is estimated that its urban population will continue to increase in the foreseeable future, growing 1.7% annually.385 In terms of education, Turkey takes up place 120 out of 187 countries reviewed in the context of the UNDP education index.386 Among younger people, 42% of 25-34 year-olds have earned the equivalent of a high-school degree. This is below the OECD average of 81%, but showing signs of progress.387 Economy

During the period 2000-2010, the Turkish economy experienced consistent growth with a 4.2% annual increase of GDP on average. With this growth, the Turkish economy finds itself performing roughly on par with the majority of emerging economies (see Figure 1).388 After the 2008 financial crisis when the country was badly hit, Turkey showed great resilience in coming back. In 2010, the economy grew by as much as 9%.

383 The World Bank, 'Population Growth.' 384 Ibid. 385 U.S. Central Intelligence Agency, 'CIA - The World Factbook. Turkey Country Page.', 2010, https://www.cia.gov/library/publications/the-world-factbook/geos/tu.html. 386 UNDP, 'Education Index (expected and Mean Years of Schooling).' 387 OECD, 'Turkey – OECD Better Life Index', October 1, 2012, http://www. oecdbetterlifeindex.org/countries/turkey/. 388 The World Bank, 'World Development Indicators | Data.'

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Turkey Figure 1

12 10 8 6 4 2 0 Brazil

China

India

Indonesia

South Korea

Russia

South Africa

Turkey

Figure 1 Average GDP growth rates 2000-2010 (%) Source: The World Bank, World Development Indicators July 2012; International Monetary Fund, World Economic Outlook, April 2012.

Although, its exports are still heavily dominated by clothing and textiles, foodstuffs, metal manufactures and transport equipment, the strength of the services sector is increasing. In 2010, the services sector accounted for 75% of the value added to the GDP.389 The levels of investment (gross fixed capital formation) in the Turkish economy stood at 18.7% of GDP in 2010, compared to 17.8% for OECD countries.390 By comparison, other emerging economies such as India, China and Indonesia demonstrate much higher levels of investment. The low Turkish figure could potentially hint at underinvestment in infrastructure and the productive capacity of the economy. However, FDI stock in the Turkish economy stood at 24.5% of GDP in 2010 and was significantly higher than that of India (12%), China (9.9%), and Indonesia (17.2%), hinting at positive growth prospects for the near to medium-term future.391 The majority of foreign direct investment in the period 2001-2010 accrued in the utilities (36%) and financial services sectors (31%).392

389 The World Bank, 'World Development Indicators | Data', July 2012, http://data. worldbank.org/data-catalog/world-development-indicators. 390 The World Bank, 'Gross Fixed Capital Formation (annual % Growth).' 391 UNCTAD, 'Investment Country Profiles: Turkey', February 2012. 392 Ibid., 7.

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Political Developments

The Justice and Development (AKP) Party led by Prime Minister Recep Tayipp Erdo an has been in power since 2002 and has won three consecutive elections. Not an Islamist party in the traditional sense, it sticks to a principle what Erdo an dubbed 'conservative democracy', rather than strict Islamic references.393 The Turkish military who is wary of the potential Islamist intentions of the AKP has held a strenuous relationship with the party ever since it came to power. The failed attempt by Turkey's chief prosecutor in 2008 to have the AKP banned on grounds that it pursued an Islamist agenda to subvert the secular republic, and the fact that by early 2012 half of all Turkish admirals and one out of ten active-duty generals were jailed for plotting against the government, are tell-tale signs of the troublesome ties.394 Internationally, hesitation on part of the EU to embrace Turkey's membership aspirations – worsened by the economic crisis – have meant a reorientation of Turkish foreign policy and warmer ties to Iran and Arab neighboring states as a result. Accentuating its role as regional power broker, the AKP foreign policy in general aimed at 'zero problems with neighbors'.395 However, closer ties with Iran and the Hamas government in Gaza saw relations with Israel dwindle. Particularly damaging were the 2009 Israeli assault against Gaza and the incident where Israeli commandos raided a Turkish flotilla destined for Gaza to deliver humanitarian aid and construction materials in May 2010.396 The Syrian crisis put Turkey under pressure. The Turks felt they could not stand by and watch innocents being killed in a former Ottoman region. Recent incidents including the firing on Syrian refugees on Turkish territory

393 Ömer Taspınar, 'Islamist Politics in Turkey: The New Model? | Brookings Institution', April 2012, http://www.brookings.edu/research/papers/2012/04/24-turkey-newmodel-taspinar. 394 Ibid. 395 'Turkey's Foreign Policy: Growing Less Mild | The Economist', April 14, 2012, http:// www.economist.com/node/21552602?zid=307&ah=5e80419d1bc9821ebe173f4f0f 060a07; Ömer Taşpınar, 'Islamist Politics in Turkey: The New Model? | Brookings Institution.' 396 'Turkey's Foreign Policy: Growing Less Mild | The Economist'; Ömer Taşpınar, 'Islamist Politics in Turkey: The New Model? | Brookings Institution.'

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and the downing of a Turkish F4 Phantom jetfighter by Syrian anti-aircraft fire caused relations between the two countries to reach an all-time low. Early January 2013, NATO ordered the deployment of Patriot missiles to the Turkish-Syrian border to repel any attacks by missiles or aircraft from Syria.397 The international tensions also touch upon one of Turkey's own top domestic problems, the Kurdish question. Despite promises to the contrary, Erdo an has not worked to expand the limited political space for Turkey's ethnic groups. Some commentators insist that Turkey's tough stance on Syria also has to do with its desire to prevent the Syrian Kurds from acquiring more rights than Ankara is willing to grant its own.398 Research and Development

Sectors of the Turkish economy which have a strong research and development (R&D) and innovative basis are the automotive, machine manufacturing and ICT sectors. Sectors which for continued and accelerated growth are dependent on further R&D and innovation efforts are Turkey's energy, water, food, defense and space sectors.399 In 2010, the portion of Turkish GDP spent on R&D, or the 'R&D intensity' of the Turkish economy, stood at 0.84%. The business sector was responsible for 42.5% of this share. Despite falling short of the EU average of 2%, R&D intensity in Turkey has been steadily increasing over the years and increased by 15% over the last three years. This steady increase shows that the

397 'Turkey and Its Neighbours: Delicate Balance | The Economist', July 7, 2012, http:// www.economist.com/node/21558279?zid=307&ah=5e80419d1bc9821ebe173f4f0f 060a07; 'Turkey's Foreign Policy: Growing Less Mild | The Economist'; Justin Vela, 'Turkey's Not Messing Around Anymore - By Justin Vela | Foreign Policy', June 27, 2012, http://www.foreignpolicy.com/articles/2012/06/27/turkey_s_not_messing_ around_anymore. ; 'BBC News - Nato Deploying Patriot Missiles to Turkey-Syria Border' January 7, 2013, http://www.bbc.co.uk/news/world-europe-20929753. 398 Ömer Taşpınar, 'Islamist Politics in Turkey: The New Model? | Brookings Institution'; 'Turkey's Foreign Policy: Growing Less Mild | The Economist.' 399 TÜBİTAK - BTYPD (STIPD), 'National Science, Technology and Innovation Strategy (2011-2016)', 2010, http://www.tubitak.gov.tr/sid/2415/pid/2400/index.htm;jsess ionid=D8765AD20D4E48F6029BB30638F10B7D%20(link%20to%20UBTYS%20 strategic%20framework%20in%20English).

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financial crisis had little impact on existing R&D policies.400 According to the Turkish National Science, Technology and Innovation Strategy (NSTIS) for 2011-2016, R&D intensity should reach 3% by 2023. At the same time, business R&D expenditure is projected to reach 2% of GDP (up from 0.36% in 2010).401 Business Climate

A 2012 World Bank review of Turkey's business climate places the country at number 71 out of a total of 183 countries analyzed for the ease with which business can be conducted. Compared to the BRIC countries, Turkey stands out favorably, with Brazil (126), Russia, (120), India (132) and China (91) all placed lower than Turkey. South Africa's business climate however is valued much better at number 35. Compared to developed economies, Turkey also scores much lower than the OECD average at 31.402 Taking a look at specific barriers to trade, a number of things stand out. Compared to other emerging economies403, Turkey imposes the lowest import tariff rate404 and it requires the least amount of days (15) for a product to be imported. In terms of how many U.S. dollars it costs to import a container, Turkey is only outmatched by South Korea, Indonesia and China.405 When it comes to import formalities however (the number of permits and documents required), the emerging economies score poorly. Turkey (8 in total) scores similar to Brazil (8), India (9), South Africa (8) and Indonesia (7). By comparison, importing goods into South Korea (3) and China (5) requires significantly less documents and permits.406

400 Erawatch, 'Turkey Country Report', February 13, 2012, 20. 401 Ibid., 21. 402 'Ranking of Economies - Doing Business - World Bank Group.' Turkey rankings: starting a business (61); dealing with construction permits (155); getting electricity (72); registering property (44); getting credit (78); protecting investors (65); paying taxes (79) trading across borders (80); enforcing contracts (51); resolving insolvency (120). 403 Compared to the BRICS countries, Indonesia and South Korea. 404 Applied weighted mean for all products imported. 405 The World Bank, 'Data on Trade and Import Barriers.' 406 Ibid.

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Societal Challenges and Opportunities

Urban Construction and Redesign As a result of strong urbanization and continued population growth it is to be expected that Turkish cities continue to grow rapidly in the coming years, providing opportunities in the housing and urban (re)design market. The Turkish construction sector is growing strongly as indicated by a 10.6% growth between July and September 2011. Although growth will continue, it is expected that the pace will be somewhat subdued as a result of the recession in Europe and more expensive domestic loans.407

Turkey Figure 2

FDI flows into the Turkish economy are largely flowing into sectors which are highly sensitive to changes in economic growth as Figure 2 points out.

2.400 2.250 2.100 1.950 1.800 1.650 1.500 1.350 1.200 1.050 900 750 600 450 300 150 0

Agriculture, hunting forestry and fishing Mining, Quarrying and Petroleum Food, Beverages and Tobacco Machinery and Equipment Construction

2008

2009

2010

Transport, Storage and Communications

Figure 2 FDI flows into the Turkish economy by industry (million U.S. dollars) Source: UNCTAD Investment Country Profile Turkey, February 2012.

407 Company in Turkey, 'Turkish Construction Sector Increases by 10.6% in 2011', n.d., http://www.companyinturkey.com/turkish-construction-sector-increases-in-2011. html.

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In 2009 and 2010, FDI flows into the food, beverages and tobacco sector were reduced to less than half of their 2008 levels, but the Turkish construction sector also got badly hit. Having attracted a large portion of FDI in 2008 (U.S.  $336 million), it shrunk in 2009 (U.S. $208 million) and expanded again in 2010 (U.S. $328 million). As one of the most sensitive sectors to changes in economic growth, the construction sector should thus be eyed with caution. Alongside new construction, emphasis should be placed on urban redesign and smart building solutions. Apart from the argument of sustainability, the fact that Turkey lies in a seismically active region prone to earthquakes, which cause heavy damage to buildings and often result in casualties, builds a strong case for urban redesign from the point of safety. By comparison, the 2003 earthquake in the Japanese city of Hokkaido which measured 8.3 on the Richter scale caused 1 fatality, whereas the 2011 earthquake in the Turkish city of Ecris of 7.3 on the Richter scale caused over 534 deaths.408 Defense Industry After the United States, the Turkish army is the largest army within NATO, and measured in terms of armed forces personnel, it is the eighth largest army in the world. Turkish defense exports have doubled in the period 2005-2009 from U.S.  $337 million to U.S.  $669 million. By comparison, Turkey is still far from a top-level defense exporter on a global scale. Italy, for example, the number 10 defense exporter worldwide, exported 11 times as much in 2009.409 Nevertheless, figures for 2011 underline the sector's continued growth as defense exports amounted to nearly U.S.  $1 billion.

408 Wikipedia, 'List of Earthquakes in Japan - Wikipedia, the Free Encyclopedia', June 6, 2012, http://en.wikipedia.org/wiki/List_of_earthquakes_in_Japan.The Huffington Post, 'Turkey Earthquake 2011: Death Toll Rises To 534', October 27, 2011, http://www.huffingtonpost.com/2011/10/27/turkey-earthquake-2011-deathtoll_n_1034565.html. 409 Francesco F. Milan, 'Turkey's Booming Defense Industry', May 17, 2011, http://www. isn.ethz.ch/isn/Digital-Library/ISN-Insights/Detail?lng=en&id=129257&tabid=14507 52282&contextid734=129257&contextid735=129255.

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The Turkish government is working hard to strengthen its defense industry. The strategic plan of the Undersecretariat for the Defense Industry (SSM) for 2012-2016 aims to increase revenue to U.S. $8 billion, having generated approximately U.S. $3 billion in 2011, and exports to U.S. $2 billion by 2016.410 Furthermore, through the creation of the Ostim Defense & Aviation Cluster, an organization which consists of over 60 small and medium sized enterprises (SMEs), it tries to enhance coordination of SMEs in the industrial area of Ostim, Ankara.411 Turkey's active foreign policy in turn attempts to forge strategic partnerships with the aim to expand its defense industry. In 2009 for example, during a visit to Indonesia, President Güll signed a U.S. $400 million contract for the delivery of armored vehicles, wireless devices and rockets. Other noteworthy deals include the sale of armored vehicles to Malaysia and Azerbaijan, and the modernization of Pakistan's F-16 air force, as well as the sale of wireless equipment to the Pakistani military.412 Auto Industry The Turkish auto industry has firmly established itself as a regional hub for automotive production. Labor costs are generally low and the strategic location offers companies a good position to serve export markets in Europe, North Africa and Asia. Companies such as ThyssenKrupp, MercedesBenz, Cummins, Michelin, Toyota and Ford have all invested large sums of money in Turkish industrial development. Production levels increased by 25.9% in 2010 compared to 2009 and domestic vehicle sales boomed with a 37.3% increase compared to 2009. The first half of 2011 showed similar growth figures when passenger car and light commercial vehicle sales increased even by as much as 59%. The second half of 2011 showed a slowdown in demand caused, among other

410 Aydin Albayrak, 'Turkish Defense Industry Set to Boost Economy', May 27, 2012, http://www.todayszaman.com/newsDetail_getNewsById.action?newsId=281588. 411 Francesco F. Milan, supra note 16. 412 Ümit Eginsoy, 'ECONOMY - Turkey Targets Indonesia, Malaysia for Defense Exports', March 29, 2011, http://www.hurriyetdailynews.com/default. aspx?pageid=438&n=turkey-targets-indonesia-malaysia-for-defense-exports-201103-29.

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things, by the government's increase in the rate of Special Consumption Tax which levies 25% extra on the price of larger engine vehicles and 10-15% on those with smaller engines. This tax was introduced to subdue public consumption a bit and to attempt to prevent the industry from boiling over. After the tax increase, car sales dropped to a 21% year-on-year rise in November 2011.413 January 2012 started off with an 8% drop in vehicle manufacturing compared to the same month in 2011. Passenger car sales also declined by 29% year-on-year. Nevertheless, it is expected that growth will continue, albeit at a slower pace of around 7.1% for the entire year.414

413 Agentschap NL, 'Turkije: Automotive, Kwartaal I - 2012', January 31, 2012, http:// www.agentschapnl.nl/onderwerp/turkije-automotive-kwartaal-i-2012. 414 Business Monitor International, 'Turkey Autos Report Q2 2012', June 2012, http:// www.marketreportsonline.com/158897-turkey-autos-repo.html.

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