Ivo Daalder: Ed, you and I have decided to take little global tour, to go round some of the key emerging markets of the world to see where we think the opportunities and challenges for global business lie.
Perhaps we’ll start with the BRIC economies – because that’s the place where most people think most of the opportunities reside with Brazil, with Russia, India, China. Now, I’m not an economist and I don’t invest. I’m a political scientist, a diplomat and I look at this category of BRICs and I don’t understand it. If you look at these four, they are completely different.
Brazil is a country of enormous opportunity but perhaps even greater challenges. This is a country that is trying to find out where it is going economically and politically. It’s a leader of South America and yet it is struggling internally.
Russia is in many ways a declining power. John McCain famously called it a petrol station with nuclear weapons which I think is slightly unfair. But it certainly has lots of natural resources, lots of weaponry and perhaps not a lot else.
India – we will have to see. Change in government will be very interesting to see whether Mr Modi and his party can really change the fundamental direction of India. But it is a country that has huge as yet unfulfilled potential.
And last but certainly not least, China, the undoubted rising power. We’ve been focused on it for 20 years and continue to do so.
So, my question to you Ed is this: is it useful to think about the BRICs almost as a single emerging market from an economic and investment opportunity? Or should we really look at these countries as individual entities?
Ed Nusbaum:. I think you’re absolutely right, the BRICS term, coined by Goldman Sachs a few years back, is probably past its prime in a way of a term. The countries are so different. Their economic position is different and their development trajectories are so different.
China remains a global leader, growing at 7.5%—a rate many countries envy. Its growth is well-planned, supported by robust infrastructure, and business optimism remains high. Interestingly, while most global business leaders are more confident in their companies than their economies, in China, the reverse is true. Leaders show greater optimism about government-led economic development than their own operations, reflecting some caution in a shifting economy. China is transitioning from exports and investments to consumerism but retains its status as an economic powerhouse.
India is very, very different to China. It’s way behind in terms of infrastructure and corruption remains a key issue. But business leaders are very excited about the new government. Our Q2 report showed Indian business optimism as the strongest in the world at present. They’ve clearly got a lot of issues, but they’re dealing with them and remain very enthusiastic.
Brazil has hit a bump in the road. It’s really emerged over the last ten years as a strong trading partner with the US and China, but economic and political challenges remain. It now seems a long time since 2010 when the economy expanded by 7.5%.
And Russia is struggling. The people there are very patriotic and they’re very supportive of their government in terms of ongoing conflicts. But our surveys show a tremendous amount of growth concerns amongst business leaders, obviously because of the political issues we see today.
ID: Okay, we’ll come back to the BRICs later, but is there another place in the world we should be looking at? Take for example, Southeast Asia. We are seeing rapid development in Myanmar, Vietnam, Indonesia and Malaysia. Are these now the truly emerging markets? If we accept that the BRICs are not moving together, would Southeast Asia be a more useful focus as an actual geographic regional entity?
EN: Well clearly there’s opportunity in all of those countries – but they are still a long way off from being as successful as China.
Indonesia is the fourth most populated country in the world – more than 240 million people. Business confidence has taken a bit of a setback recently but the latest I heard is that Jokowi is set to win the election. He’s a former business person, governor of one of the states there. So, he’s probably the right leader from a business standpoint.
In Malaysia on the other hand, business optimism is up. It’s a much smaller country – just 30 million people – but we’ve seen a track record of 50 years of economic growth there. It will continue to expand, I think, but they still have a lot of issues to contend with.
Vietnam – we’ve seen a lot of companies moving there with much success; we have a lot of very successful clients in Vietnam. But, it’s still a long way off from having the infrastructure and the capacity that China has.
So, yes, I do think these economies are emerging quickly, and offer increasing opportunities for investment. But they each have a certain level of infrastructure issues and certainly have a long way to go before they can compete with China.
ID: So, let’s move back to China. It remains the big elephant in the room. It’s where a lot of folks are putting a lot of hope on, and rightly so, for all of the reasons that we know.
I recently spoke with Hank Paulson, former US Treasury Secretary, and Kevin Rudd, former Australian Prime Minister. Both expressed extraordinary optimism about Xi Jinping’s ability to address China’s challenges. These include severe environmental issues, like unbreathable air in cities, rising nationalism, regional tensions in the South and East China Seas, and widespread corruption within the party and society. Despite these significant hurdles, they believe Xi, who holds total control over China’s economy, foreign, and security policies, has the capacity to resolve them effectively.
As someone who thinks about investment and looks at the problems across the country and looks at the leadership, how should we look at this?
EN: We have about 3,000 people in China, a complex place facing significant challenges. While I’m unsure if a single leader can solve everything, China is clearly prepared to tackle its problems. In my recent visits, including meetings with the Ministry of Finance, it’s evident they recognize the pollution crisis and are determined to address it. Though it may take years, they allocate vast resources to solve issues head-on. However, pinpointing the exact cause of pollution – factories, trucks, or energy production – remains difficult, as explanations vary widely.
But there are a lot of complicated issues in China. You’ve got tremendous wealth and growth in Beijing and Shanghai, still huge poverty out in the countryside, although the situation is certainly improving in many rural areas. There’s much more consumerism in society than ever before, which is a positive thing in many ways because it generates domestic demand for products and services.
So I don’t think any single person will be able to solve the problems – or that they’ll solve all their problems overnight – but China has a pretty good process and is moving in the right direction.
ID: Let’s mark China as a win and turn to India, where challenges are greater, and the journey longer. Optimism from business surveys aligns with the population’s hope in the new government, led by a former successful governor with a nationalistic political background. How do you see this government tackling challenges and proposing solutions? And what are the prospects for long-term growth?
EN: Indian businesses are successful all over world and we do some great work there. I think those opportunities will continue to grow and many of those Indian firms will become more successful in the global marketplace. Just take an internationally-renowned company like Tata, which bought Jaguar-Land Rover: it’s incredibly successful.
We held our global conference last October in New Delhi and the whole experience was classic India. We had a great time there; it was a great conference, with great speakers, the service was fantastic. However, originally we were going to use the beautiful facilities at the JW Marriot; when I visited in February it was almost done but because of security fears they couldn’t get an operating license. They finally opened in October, but by that stage we had already chosen a different hotel. Bureaucracy remains a real challenge.
The amount of corruption that exists in India is still very strong and the infrastructure is not there for global businesses to be successful. We have a very successful operation in India which is growing very rapidly, but if you had to build a factory you could do so with much more confidence in China than you could in India.
Now, having said that, there are a lot of things that are successful in India, including outsourcing. Like many other global companies, we have a large shared service centre there. There’s a huge, talented, well-educated group of people that can provide a wide variety of services. They are much stronger than many other countries in terms of the quality of education. The business enthusiasm is there but the new government really needs to get to grips with infrastructure and bureaucracy if India is to fulfil its enormous potential.
ID: Finally, let’s look at Russia. Here’s a country that in one sense holds huge promise. It does have extraordinary resources, it has an extraordinary, well-educated talent pool. It has the infrastructure and transportation otherwise to be closely connected and the bridge between Europe and Asia. But it just has this small problem: it has a bunch of political leaders that don’t seem to care about the economic health of the country, but care deeply about its political and military strength. And not just because of what happened in Ukraine in the past few months.
When you look at Russia, where does the opportunity lie from an investment perspective? Or, is this the kind of place where you would prefer to start looking at alternatives?
EN: Well, you have to consider both short and long-term growth prospects. Whereas business optimism has reached record levels in Europe, Japan and the US – driven by the digital economy and increasing export opportunities – Russia has gone the other way because business leaders see the government getting in the way of their ability to export and to grow their operations.
Russia’s economy thrives on natural resources, benefiting from high oil and gas prices. Recent deals to supply gas to China and a strong European market support its strength. However, for external investors, the risks tied to Russia’s political environment are significant. For US companies, for instance, investing in Russia is challenging, with Ukraine illustrating these difficulties. In the short term, Russia poses considerable risks for Western businesses, making it a tough environment to navigate.
In the long-term, there is considerable underlying strength in the economy, as you say. But, right now, the current government and its policies are very popular. They’re not changing. As long as that is the case, I think it is a difficult place to do business.
ID: Well, I think that’s all we have got time for. Thank you, Ed.
EN: Thank you, Ivo. I really enjoyed it.
Ed Nusbaum is global CEO at Grant Thornton
Ivo Daalder is president of the Chicago Council on Global Affairs and was formerly the US Permanent Representative to NATO