If the BRIC countries were a car, you could confidently say that one wheel has fallen totally off, one wheel is wobbly and could eventually fall off, one wheel needs air and the remaining wheel is the only one barely keeping the car from hitting the pavement.

Before moving on with this post I need to make one quick note. In 2010 South Africa was interested in joining the BRIC forum and consequently was invited to join. The reasoning behind this was that South Africa represents the world’s emerging markets and it could play an important role to the other BRIC members as a gateway to the African continent. In spite of the fact that South Africa is now officially and deservedly part of this group, I will not be posting information on South Africa in this particular piece. The reason is that the premise behind this post is that pundits don’t always get it right. Since South Africa was not originally included in Jim O’Neill’s paper entitled “Building Better Economic BRIC” which was meant to envisage those developing economies that would replace the G7 countries in economic power, I will leave any comments on South Africa for a later post, if that opportunity arises.

“Most of our predictions are based on very linear thinking. That’s why they will most likely be wrong.”
Vinod Khosla, in “GIGATRENDS,” Wired 04.01

Projections made a decade ago about the BRIC economies seem to not be in line with today’s reality.

The BRIC acronym refers to the countries of Brazil, Russia, India, and China which in 2001 were deemed to be at an advanced stage of developing economies by Jim O’Neill from Goldman Sachs in a paper entitled “Building Better Economic BRIC”. These economies were deemed to represent the apparent shift in global economic power away from the G7 which represent Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States.

In fact some experts have suggested that the BRIC economies would in all likelihood overtake the G7 economies by 2027.

While these four countries have been considered to be among the biggest and fastest-growing emerging markets, it is doubtful that they will replace the G7 in economic power by 2027 as previously reported. As a matter of fact Goldman Sachs has since revised its prediction and has been saying in recent years that 2050 is a more realistic year for the BRIC countries to replace any of the G7 economies in economic power. Making a prediction that takes us to 2050 does not seem to have any relevancy at this time, since anything can happen in the span of 34 years.

Unfortunately with the exception of India, these economies have been sputtering in the last three years. Even India has severe problems in infrastructure, extreme poverty, substandard health care, corruption, protectionism and messy governance. These problems need to be overcome as soon as possible in order for sustainable growth to occur.

Brazil

Inward-oriented / Protectionist

The Brazilian economy is an inward-oriented economy with markets that are to a great degree highly protected by the government. This is done by imposing an applied customs averaging tariff of 13.5% plus different types of non-tariff barriers that include import quotas, administrative requirements, and an internal taxing system that is preferential to locally manufactured products. As a typical inward-oriented economy, Brazil attempts to attain economic independence or self-reliance by imposing comprehensive regulations on the private sector in order to impose its protectionist policy.

According to the European Commission’s latest Reports on Potentially Trade Restrictive Measures, Brazil is among the countries that have resorted to the highest number of various trade barriers.

Brazil is an unusually closed economy not only from an import perspective, but also regarding their exporting efforts. Most outwardly-oriented economies have a ratio of one exporting firm per 250 people. Brazil has an astonishing ratio of one exporting firm per 10,000 people.

Critics point to the fact that should Brazil be open to imports and exports the local economy would become more efficient in resource allocation and enable people to consume a highly diversified basket of goods lowering prices to consumers.

Crime

According to most sources, Brazil possesses high rates of violent crimes such as murders and robberies; depending on the source (UNDP or World Health Organization) the homicide rate is 30–35 homicides per 100,000 inhabitants placing Brazil in the top 20 countries by intentional homicide rate.

Carjacking is common throughout Brazil. Local citizens are targets. Pick-pocketing and bag snatching are common in outdoor markets, hotels and on public transport. Express kidnappings, where individuals are abducted and forced to withdraw funds from ATMs to secure their release, are common. Much of the violent crime is done by gangs which has become an important issue affecting the youth. Up till 2015, murder has been the most common cause of death among youth in Brazil, with 40% of all murder victims aged between 15 and 25 years old.

Corruption

Corruption in Brazil is a pervasive social problem. Corruption has become an important part of Brazil’s politics. For years, embezzlement and corruption have been involved in Brazilian elections, and yet the electorate continues to vote for the same convicted politicians.

Corruption in tax administration, public procurement and natural resource sectors is a limitation to business. Collusion between government and business is also widespread. The latest corruption scandal involves the state-run oil company Petrobras and Dilma Rousseff the president of Brazil. A congressional impeachment commission has been formed which will make a recommendation to the two congressional chambers which in turn will decide as to whether to impeach Ms. Rousseff or not. This process is expected to cause two or three years of political and economic disruption in the country.

Education

Brazilian education is among 35 worst in global ranking. The World Economic Forum as well as other international institutions has in several occasions pointed out what even the Brazilian government already knows that when it comes to education, Brazil is closer to the worse examples in the world than the best. In fact the World Economic Forum has ranked the country as 88th out of a total 122 countries when it comes to education.

Racial inequality

Anybody traveling to Brazil will immediately notice the racial divide that permeates throughout the country. Racial inequality is deeply ingrained in Brazilian culture. Statistics show the following:

· 63% of blacks earn less than minimum wage compared to 34% of whites

· Of the richest Brazilians, 11% are black and 85% are white.

· 93% of respondents acknowledged that there is racial prejudice in Brazil

· The richest 10% of the population accounts for 48% of the national income, and the poorest 50% account for 10% of the national income.

· 2.7% of black Brazilians are employed in management positions.

· 55% of blacks perform manual labor.

· 2.5% of blacks have a university degree.

· Black children born into poverty have a 93% chance of being impoverished for their entire life.

Wrap-up

In spite of vast natural resources and possessing the second largest population in the American continent, it is doubtful Brazil can rise above developing nation status any time soon. Brazil has for many decades faced greatly devastating social problems and overcoming these problems will not be easy. Cultural and social changes typically occur in glacially slow time. A move to open markets where import barriers are for the most part taken down, and export initiatives are encouraged would be a good start. Tackling corruption is also a must. After the economy stabilizes and a good track record of growth is established the government must create initiatives that improve education, decrease crime and reduce racial inequality. Unfortunately at this point in time, it is hard to see a day anytime soon, when these issues are solved.

Russia

Economic system still in transition

In 1991 the Soviet economic system of centralized control came to an end with the collapse of the USSR and its communist form of government. A process of market transformation was initiated by Prime Minister Yegor Gaidar, second in command to President Boris Yeltsin. This was a difficult process of market transformation, often referred to as “shock therapy” which at least in the short-term was very costly in human terms.

Since 1991 the Russian economy has been greatly transformed. The large-scale privatization that took place ended to a great extend state ownership in industry, and market oriented initiatives were established including the freeing up of prices. However Russia remains a predominantly statist economy with a high concentration of wealth held in the hands of a few. Currently the energy, transportation, banking, and defense-related sectors remain under government ownership and control. Most of the media remain in the hands of the government and overall the state continues to interfere in the free operation of the private sector.

In recent years the Russian government has begun to implement protectionist policies imposing 15.5% tariffs, plus NTB’s (non-tariff barriers) that include administrative barriers, import quotas, targeted bailouts and direct subsidies for local companies.

Main Industries

Russia’s main industries are: oil and gas, mining, processing precious stones and metals, aircraft building, aerospace production, weapons and military industry, electric engineering, pulp-and-paper production, automotive industry, transport, road and agriculture machinery production, foodstuffs industries.

Oil and gas exports, represent Russia’s main source of hard currency.

Russia’s energy industry is one of the largest in the world possessing the largest reserves of natural gas, the second largest coal reserves and the eighth largest oil reserves. Russia is the largest exporter of oil in the world in absolute numbers.

As of 2012 the oil-and-gas sector accounted for 16% of the GDP, 52% of federal budget revenues and over 70% of total exports.

Based on the information above, the comment that Russia is nothing more than a gas station with nuclear weapons seems to apply quite well.

Transition to a dictatorship

In a December 2014 article for Bloomberg, Leonid Bershidsky wrote:

“Vladimir Putin’s regime is on the verge of transitioning from mild authoritarianism to outright dictatorship. The country’s newly amended military doctrine is an especially ominous sign. Judging by it, the Kremlin’s response to the ongoing economic crisis will be to crack down on all signs of popular discontent. The Kremlin seems determined to turn inward and complete its break with the Western world”.

Since Vladimir Putin originally took over as president of Russia from 2000–2008 and then again 2012 to present, Putin has been responsible for:

· A stream of assassinations of journalists

· Suppression of the opposition

· Assassinations of prominent opposition leaders

· Election fraud

· Inundation of the internet as well as the media with pro-Putin propaganda

· Isolation of Russia from the West

· Annexed Crimea

· Sent troops to Ukraine

· Has effectively remained in power from 2000 to present by holding the post of prime minister in order to circumvent constitutional limitations on consecutive presidential terms

· Changed the constitution so that he can have a third term

· Total control over the military

· Reported to have pilfered and be worth close to $70 billion

Corruption

Corruption in Russia is wide spread and considered a major problem. It affects all aspects of daily life including public administration, law enforcement, healthcare and education. Corruption in Russia can be considered as institutionalized and largely a result of weakness in the rule of law.

Russia’s corruption has been getting worse since Vladimir Putin’s becoming president. It went from 90th place in the Corruption Perception Index in 2012 to 126th place in 2013. This represents a drop of 36 places in only one year. An equally pessimistic picture emerges from the estimates of the average size of bribes which has substantially increased over the last five years.

A World Bank report estimates that corruption in Russia amounts to 48% of GDP!!!

Alcoholism

Alcohol consumption in Russia is among the highest in the world. Although Russia has implemented anti-alcoholism initiatives such as banning sales of spirits and beer at night, raising taxes, and other measures, alcohol producers claim falling legal drinks consumption is accompanied by growth of sales of illegally produced drinks.

High volumes of alcohol consumption have serious negative effects on Russia’s social fabric and it has political, economic and public health ramifications. A study of Russian alcohol’s consumption effects, determined that 52% of deaths of people between the ages of 15 and 54 were the result of alcohol abuse.

Wrap-up

While Russia has some clear competitive advantages such as a large reserve of raw materials, low internal energy prices and a relatively well-educated work force, it has other negative factors that will limit its growth in the next twenty years. Some of these negative factors are:

· Dependence on energy production

· Lower energy prices that are expected to stay low for some time

· Expectation that global oil consumption will drop in the future

· No large manufacturing industry

· Protectionist policies

· Aggressive geopolitical approach pitting it against the West.

· Western sanctions

· Corruption

· Severe social problems

· Decreasing population

Russia is certainly a great power. Since the fall of the Soviet Union, Russia has grown economically by a factor of three. The question is whether this type of growth will continue considering the issues Russia is facing. With Putin firmly in control and the possibility of him staying at the center of power in Russia until 2024 or even beyond, it is doubtful Russia will experience sustainable growth in the foreseeable future.

India

India, with a population of over 1.2 billion people is the most populous democracy in the world. Its origins date back to 2500 BC. Currently the Indian economy is the seventh largest in the world based on nominal GDP figures, and the third largest based on Purchasing Power Parity (PPP). India’s modern day growth goes back to the market focused economic reforms of 1991, which turn it into the fastest growing major economies globally as of 2014, replacing China. Additionally it is currently considered a newly industrialized country. In spite of this tremendous growth, it still continues to suffer from poverty, malnutrition, corruption, decaying infrastructure and inadequate health care.

Currently, India is the seventh largest economy in the world, however based on its currently growth it is expected to become the third largest within the next ten years. In fact according to the IMF, the Indian economy is the “bright spot” in the global landscape as it is expected to grow by 8% from 2016 to 2017.

India’s major industries are:

  • Textile Industry
  • Food Processing Industry
  • Chemical Industry
  • Cement Industry
  • Steel Industry
  • Software Industry
  • Mining Industry
  • Petroleum Industry

Additionally, India has one of fastest growing service sectors in the world with annual growth rate of above 9% since 2001 contributing to 57% of GDP in 2012–13. India has become a major exporter of IT services, BPO (business process outsourcing) services, and software services with $167.0 billion worth of service exports in 2013–14. It is also the fastest-growing part of the economy. The IT industry continues to be the largest private sector employer in India. India is also the fourth largest start-up hub in the world with over 3,100 technology start-ups in 2014–15

India’s exports are as follows:

India has been recording sustained trade deficits since 1980 mainly due to the high growth of imports, particularly of crude oil, gold and silver. For 2015 India’s trade deficit was recorded at $125 billion. In recent years, the biggest trade deficits were recorded with China, Saudi Arab, Iraq, Switzerland and Kuwait. India records trade surpluses with US, Singapore, Germany, Netherlands and United Kingdom.

Protectionism

In spite of India’s economic reforms that have taken place in the last two decades, it has lagged behind its neighbors in lowering commercial barriers. India’s trade negotiations with the U.S. and with the European Union have made very little progress as market access and intellectual property rights have been issues. During negotiations at the World Trade Organization, India has tried to torpedo a deal that simplifies global customs procedures unless it received concessions on its massive farm subsidies.

India maintains significant tariff and non-tariff barriers that limit its trade with the world. It imposes an average applied tariff of 12.4%, which is among the highest in the world. India’s non-tariff barriers are among the most complex in the world. The World Bank has ranked India in its ease to do business at 134 out of 189. That ranking basically means that it is virtually impossible to export to India.

In the long run such mercantilist approach could limit India’s export efforts and New Delhi’s hope of raising India’s share of world trade to 3.5% by 2020 from 2% presently. Meeting its target of $900 billion in yearly exports by 2020 would require India to sell twice as much to the rest of the world as it does today. This will be a very difficult task unless agreements on trade are reached with the United States, the European Union and other trade partners.

Corruption

India’s ranking in Transparency International’s Corruption Perception Index for 2015 is 76th out of 176. This ranking places India at the same ranking level as Brazil, but just above China, Sri Lanka and Colombia, all three ranked at 83rd. In recent years there have been several high-profile scandals that have underscored the extent of the problem. Some of these high-profile scandals are the Army Bribery scandal, Wikileaks Cash for votes, a scam involving homes for war widows, financial irregularities involving the Delhi Common Wealth games, and many more.

Some facts about corruption in India

· A study conducted by Transparency International found that more than 62% of people in India had paid bribes or peddled influence to get a job in a public office.

· Transparency International estimates that truckers pay annually of more than US$3.3 billion in bribes.

· Dev Kar of Global Financial Integrity concluded that about 1.5% of India’s GDP on average per annum basis gets deposited into Swiss bank accounts in the form of “black money”. This money includes corruption, bribery and kickbacks, criminal activities, trade mispricing and efforts to shelter wealth by Indians from India’s tax authorities.

The Indian media is mainly owned by corrupt politicians and industrialists who also play a major role in most corruption scams. Typically these outlets attempt to mislead the public with wrong information and using media for mudslinging against their political and business opponents.

Various studies and reports have noted several causes that encourage corruption in India. These reports suggest high taxes and excessive regulation bureaucracy as a major cause. India has high marginal tax rates and numerous regulatory bodies with the power to stop any citizen or business from going about their daily affairs.

While India has many laws dealing with different types of corrupt practices, the level of institutionalized corruption will continue to be a major factor in slower economic growth. Foreign companies looking to establish businesses in India will find it difficult to achieve the level of success they would normally attain under less corrupt and complex regulatory environments.

Infrastructure need

Years of under-investment in infrastructure have left India with poor infrastructure that endangers its economic growth.

The government under Prime Minister Narendra Modi has identified eight infrastructure sectors that must be brought up to world standards. These are: civil aviation, ports and inland waterways, roads, railways, telecom, power, coal, and new and renewable energy.

It is estimated that India will need a minimum of $1 trillion in infrastructure expenditures in order to close the gap needed to continue its economic expansion. Part of this enormous funding must be raised through foreign direct investments (FDI), however due to India’s protectionist tendencies FDI’s remain politically divisive.

Poverty

Poverty in India is widespread and a historical reality. Rapid economic growth since 1991, has led to sharp reductions in extreme poverty in India. However, those above poverty line live a fragile economic life. Lack of basic essentials of life such as safe drinking water, sanitation, housing, health infrastructure as well as malnutrition impact the lives of hundreds of millions.

According to the World Bank living at or below $1.90 per day represents poverty. It is estimated the world has 872.3 million people below the poverty line, of which 179.6 million people live in India. In other words, India with 17.5% of total world’s population had 20.6% share of world’s poorest in 2014. It is also estimated that 58% of the total population in India was living on less than $3.10 per day during that same year.

Wrap-Up

There is no doubt that India has several advantages over the other BRIC members. First of all although it is a messy democracy, it is non-the-less a democracy. Its relationship with Pakistan is complex and sometimes violent. However, since the election of new governments in both India and Pakistan in the early 2010s, some steps have been taken to improve relations between both countries. This new development toward a more peaceful coexistence between both countries is quite positive since both countries have nuclear weapons. The risks of two nuclear able antagonist states living in close vicinity, represents a regional as well as a global danger.

Instead, India seems to be looking toward China as a potential adversary.

Those that observe India point to the “China factor” as one of several factors driving India’s attempt to modernize its navy. The need to protect India’s 4,600 mile long coastline and exclusive economic zone that exceeds a million square-miles is another of the reasons for its naval build up.

India has ambitious plans for the development of a 160-plus-ship navy, comprising three aircraft carrier battle groups by 2022. More than 40 warships and submarines are on order or under construction at the country’s three major shipyards. These include stealth destroyers, anti-submarine corvettes and stealth frigates. These vessels will supplement and in some cases replace the country’s older destroyers. (Source: Deutsche Welle German radio; issued Feb 23, 2015)

India views itself as a counterweight to China. To this end it is seeking to strengthen its anti-submarine capabilities in response to the growing presence of Chinese vessels in waters of the Indian Ocean Region. India is also cooperating with other regional navies concerned about the rise of China’s naval ambitions. Examples are India and Japan bilateral naval exercises in June 2012 and India providing training to Vietnam in underwater warfare.

No doubt that India is destined to be a great power and an important ally to the U.S. and to other Western powers. Based on its current population growth it will become the most populated country in the world by 2022. The question that needs to be answered is can India overcome the social, infrastructure, corruption, poverty issues that are holding it back. A good start is to open its economy further, forego protectionist attitudes, and allow more foreign direct investment (FDI) specially those related to infrastructure projects.

China

Billions of words have been written about China and billions more are yet be written about her. China is both enigmatic and paradoxical with a history that dates back to at least 2070 BC. This post is merely a minute snapshot of China today. It is meant to allow the reader to get a peek at this great country and determine whether China can catch up and even replace the West not just economically, but as a super power. In fact China (if you believe the figures the Chinese government has provided) has already overtaken the U.S. in GDP PPP valuation. (US$19.5 trillion vs. US$18.9 trillion) The calculus for nominal GDP is much more in favor of the U.S. (US$17.9 trillion vs. US$11.4 trillion). But irrespective of how you view these numbers China is a force to be reckoned with.

Government officials claim that China wishes to rise peacefully, that it has never invaded another country, but yet it continues to build its military at an alarming rate. It has embarked on an ambitious and unprecedented construction project in the South China Sea that entails the building of airfield and ports on a series of small islands and atolls. It has also built new islands where there were none before by reclaiming large sea areas with dredged sand.

When China was dealing with its internal problems and not able to project its power beyond its borders, many of China’s neighbors felt at ease and even benefited. Now that China sends gunboats into disputed waters, it makes those same neighbors feel an impending sense of domination from a foreign power. They see China as a menacing warmongering resource hungry expansionist.

However, China has massive problems of its own. These problems are sure to limit any of its expansionist ideas and ultimately limit its growth.

Negative Demographics

China’s one child policy has caused a demographic imbalance of massive proportion. Its population is aging more rapidly than its growth in GDP. In other words, China’s population is aging more rapidly than it is accumulating wealth. This very fact will have profound ramifications for China’s future growth outlook. This means that there are not enough young workers to support retirees at a time that the elderly population is rising dramatically. The government estimates that the number of elderly will rise from 194 million in 2012 to 300 million by 2025.

In 2012 alone 13,600 primary schools nationwide closed due to a falling population of primary and secondary school children.

An aging population will put a strain on existing health care programs that have already been weakened by the elimination of the universal health care system that was in place before the transition from a centrally planned to a more market oriented economy. The Chinese health care system also will have to respond to a disease burden that is shifting toward the aging population. By 2030, older adults will account for two-thirds of the total disease burden in China.

An aging population will also limit military infrastructure expansion, due to lack of funding from taxes to the working class as well as limitations on able-bodied young recruits.

Inept and totalitarian government

When China began its transformation from communism to state capitalism most observers felt that greater freedom for its markets and its citizens would eventually come. However this has not been the case. Instead Chinese leader Xi Jinping has clamped down on the flow of information in the internet and the media. Free expression is being completely strangled. The Great Firewall is alive and well and getting stronger.

Secret and illegal abductions of Chinese citizens that dare voice their opinions about the government are common place. Case in point the recent open letter to Chinese leader Xi Jinping asking him to resign which was published on a state-controlled website has led to the disappearance of at least 20 Chinese citizens. In general dissidents and their families are typically subject to investigation, harassment, threats, imprisonment and worse by the government.

State capitalism is also being viewed as an invalid model for growth. It is based on endless debt issuance, mercantilist trade policies, top-down industrial direction from Beijing and a forced 40% savings rate. Government owned businesses cause severe damage to private industry as they swallow up loans from state owned banks. Basically, the economy is being strangled by the government.

The debt created by the government is also a sign of ineptness. Debt-fueled over-investment and excessive capacity building in order to inflate GDP figures has been a modus operandi of the government. The creation of unnecessary factories, the building of ‘ghost towns’ with empty buildings have provided lots of jobs but have turned manufacturing and real estate into major liabilities. China’s illegal shadow banking system has approximately $3 trillion of municipal debt using real estate as collateral. When all of this real estate loose value due to slowing economy or too many empty building, the borrowers will need to provide many billions of dollars’ worth of additional collateral. That will soak cash out of the economy and make any slowdown even worse.

Pollution

Pollution in China creates a health hazard of massive proportion. The pollution seen in China is manifested in various forms.

· Soil contamination — Threatens the environment, food and water safety, sustainable agriculture

· Waste — Insufficient recycling systems, 300 million tons of waste annually

· Electronic waste — 2.3 million tons of electronic waste annually.

· Industrial pollution  — Hundreds of thousands of premature deaths annually attributed to industrial pollution, waterways are affected, environmental degradation that goes beyond China’s borders, cancer leading cause of death in China, 500 million people without safe drinking water, only 1% of city dwellers breath air considered safe, lead poisoning, marine life affected,

· Water pollution — Water shortages and severe water pollution.

· Air pollution —  It has become a major issue, in China, can cause asthma, bronchitis, acute chronic respiratory problems, premature death, becoming China’s biggest health threat.

· Particles — Particle matter is of great concern in all major cities, smog often causes airports to shut down.

· Lead — Lead poisoning is a major pediatric problem, one third of Chinese children suffer from elevated serum lead levels.

· Persistent organic pollutants — Perfluorinated compounds are associated with altered thyroid function, illegal pesticides.

Government efforts to curve pollution have been for all intents and purpose futile. Pollution continues to be a major problem in China.

Corruption

Corruption in China is widespread and starts at the very top echelons of power, working its way down to the lowliest of bureaucrat.

When Xi Jinping began his campaign to stamp out corruption, expert China watchers saw right through his real motives. They immediately knew that his anti-corruption initiatives were more about getting rid of political competitors and enemies than about cleaning up corruption. The Panama papers scandal that recently hit the news showing money stacked away in off-shore banks points to many world leaders, athletes and rich businessmen. One of these world leaders is Xi Jinping proving the theory that Xi’s anti-corruption efforts are nothing more than a hypocritical and disingenuous act of self-promotion.

As soon as the news on the Panama papers was reported in the media and internet, the Chinese government immediately moved to squash the news. China has blocked news and social sites that are revealing information about their political parties involved in the panama papers scandal. Words and phrases such as Panama, off-shore, Panama banks, and many others are immediately erased by the Chinese sensors.

Innovation Gap

China’s innovation gap, threatens the country’s long-term economic competitiveness. Currently China ranks number 29th in the Global Innovation Index behind countries such as Japan with a ranking of 19th, the U.S.A. ranked 5th, the U.K. ranked 2nd and Switzerland as the number one ranked.

China’s education system has been blamed to a great extent for stifling creativity and innovation. Chinese universities typically provide students with a good basic education. Yet graduates show very little creative and critical thinking skills.

China continues with its practice of copying and reverse engineering intellectual property developed by others in order to drive its industry, especially as it relates to high-tech products. This practice, however, stifles Chinese development of any meaningful intellectual property as local companies forego R & D efforts and instead depend on theft of others ideas and product developments.

All experts agree that a country that cannot innovate and can only depend on someone else’s ideas will not be able to grow in today’s global environment. The best that China can expect is to continue to be the manufacturer for companies like Apple which are the ones making the lion’s share of the profits for the products they have created. Chinese factories currently make less than 10% of the money each iPhone generates. The rest of the revenues generated by each iPhone go to Apple and the retailers selling the phones to consumers.

For China to catch up with the West it needs global brands. Without innovation, global brands will not happen.

China’s GDP numbers are fabricated

It might come as a shock to many, but several sources have reported in the last years that China’s GDP figures are not reliable. In fact most economic figures coming out of the Chinese government are bogus.

A CNN Money report dated July 15, 2015 makes the following claim:

“In 2007, Li Keqiang, a Chinese provincial official, let the American ambassador in on a little secret: China’s GDP figures are “man-made” and therefore unreliable. He told the ambassador that most of the country’s economic data, and especially its GDP, should be used for “reference only,” according to a diplomatic cable published by Wikileaks.”

On Wednesday, the debate over the accuracy of China’s GDP figures was revived after officials announced that the economy grew by 7% in the second quarter — a level that few economists thought probable. First quarter GDP also came in at 7%, and Beijing’s official growth target for 2015 is … you guessed it: 7%.

“China does not have an independent statistics bureau, “Andy Xie, an independent economist. It depends on local government reporting the numbers from the bottom up, and local governments do have an incentive to distort numbers.”

Xie, a former chief economist for Asia-Pacific at Morgan Stanley, said the country’s current GDP is probably closer to 4% or 5%.

CNN is not the only news outlet to report this. Newsweek reported the same story by saying “The People’s Republic of China is awash in gaudy numbers”. Bloomberg as well as dozens of other news outlets have come out with a similar story.

The World Bank calculates that China’s true GDP for 2015 is US$10 trillion rather than the US$19.5 trillion it has reported.

This revelation puts into total doubt the claims that China is now the world’s number one or even number two economy. It also puts into doubt all the hoopla that has been made of China’s growth and eventual economic domination.

Wrap-Up

It will take many decades before China can catch up with the West, especially the U.S.

Americans are far richer than Chinese. Europeans are also far richer than the Chinese. Democracy, open markets, better education, relative lack of corruption, governments that for the most part have citizens well being in mind, greater innovation, to name a few will keep the West well ahead of China.

China’s severe problems will prevent it from growing in the near future. Perhaps fifty years from now a different story can be told, but for now unless there are major changes in government, market fundamentals, reduction in pollution, reduction in corruption, perhaps even a shift in culture, the type of growth economists originally predicted China would experience will not be here just yet.

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