Brics countries may be growing faster, but they're not growing friendlier
The developed world doesn't have much good news for us these days. Eurozone growth forecasts are on the zero mark. US economic data continues to disappoint. Japan and Australia are facing headwinds. Surely then, it is time to open shop where the growth story really is happening - in the Brics?
Well, that's not what business executives seem to think. According to a quarterly survey led by the Economist Intelligence Unit, leaders see the biggest emerging economies as less and less friendly places to do business. And they seem to be voting with their wallet: amid renewed tremors in Greece and Spain, cash outflows show that few believe the Brics are the safest, easiest place to park one's money. EM equities fund have seen outflows equal to 0.3% of assets under management in the week to Wednesday alone.
So what's wrong with the Brics? Quite a few things, it would seem. One is the still-discouraging amount of red tape executives have to go through to do anything related to their business. To get a construction permit, for example, 51 formalities need to be completed in Russia, 33 in China, and 34 in India. In Brazil there are only 17 of them, but it takes up to 469 days to get the permit - an average of 27 days per formality.
The Brics' tax systems are rather intimidating, too. Russia seems to fare all right here, despite the 18 tax payments you would have to make throughout the year. It takes an average 148 hours to complete the tax form and the low total tax rates, at 46.9% profits, is relatively low. But elsewhere the Brics perform badly. In India there are 29 payments to be made, in China it takes an average 398 hours to prepare tax declarations and in Brazil it can be take up to 2600 hours a year. Brazil and China respectively have total tax rates of 63.5% and 67.1%, so even if you do manage to fill your declaration you're left with rather little money to send back home.
And there's more of this in every aspect of your day-to-day relations with the administration. Registering real estate is a nightmare almost everywhere. Getting a loan is long and painful. Selling your stuff across borders is slow and expensive. But all of this is rather old news: executives have been complaining about these hurdles for ages. What really explains the recent slump in business sentiment vis-à-vis the Brics is another, more subjective factor: the degradation of the overall investment climate.
There are a few things you would take into account before opening shop somewhere new. You would assess at the strategic value of setting up a branch in a new market. You would look at the prospective return on investment you could expect from your new operation. You may try and estimate what synergies you would get with assets you already run within the country, or in markets nearby. But before all this strategic decision-making process begins, you would have one overriding concern. You would make sure the rules of the game are not changing every minute - and that they allow you to play in a relatively fair way.
On this account the Brics have fared particularly badly in recent days. In India, the finance ministry's awkward stance on FDI legislation has exposed foreign investors, such as Vodafone, to huge retrospective tax bills. Its flip-flopping on plans to liberalise foreign investment in retail, as well as various scandals in mining and telecoms, has helped maintain a climate of opacity and uncertainty. In Brazil, the government's interference in the economy, through the implementation of 'local content' rules and other protectionist measures, have made foreign investments more costly; questions over the independence of the Central Bank has also sowed uncertainty in the markets; its populist, nationalist stance against foreign majors in the oil sector hasn't helped build confidence. The Bo Xilai affair, involving the murder of an English businessman tied to the Beijing establishment, has exposed the murky world of deal-making in China. And Putin's Russia, still firmly in the grip of its newly re-elected, illiberal president, remains a rather scary place to do business.
The Brics may think they can get away with snubbing foreign investors, and that it is now their turn to go shopping around the world. That would be a mistake. To continue developing their most strategic industries, Russia, Brazil and China still rely on foreign skills, expertise, network, and talent. And they could do with a bit more foreign cash, too: China's forex reserves are huge, but no longer growing; Russia's budget balance is threatened by dwindling oil prices; Brazil continues to spend too much; India's current account is deeply in the red. As the Brics keep on growing richer, they should open even more to foreign investors. There is neither pride nor benefits in forgetting your old friends.