Power Up

The big question for China has been whether it can forge an economy that depends not on exports to the West, but on consumption. Klibaner says it's happening, because the strongest real-estate growth now is not in big cities that cater to exporters but in smaller ones geared toward the domestic market. That follows the trend in Brazil, where the middle class is the largest segment of the population, and also in India. "Consumer spending is 60 percent of GDP in India," says Global Insight chief economist Nariman Behravesh. "That's a key reason why the economy hasn't been hit harder in this downturn."

None of this means that BRIC consumers will save a world in financial crisis. Their purchasing power is still far too weak compared with rich nations like the U.S. and Japan. Yet as their economies grow, so will the power of their wallets. Sooner rather than later, consumers in the BRIC nations will dictate the R&D investments of major corporations, the travel routes of airlines and the marketing campaigns of multinationals.

The BRICs are better positioned to recover than their richer peers. Broadly speaking, better control of inflation, lower deficits, increasing productivity, richer social programs and greater political stability have given the emerging giants greater room for error at a time when the macro-economic environment in rich countries has been deteriorating. Even Brazil and hard-hit Russia have used raw-materials windfalls (oil and gas for Russia, soybeans and iron ore for Brazil) to build a buffer for the downturn—Russia has spent more than $300 billion defending the ruble, and still has that much in reserve. Brazil's $208 billion reserve remains almost untouched.

What's more, the BRICs have learned from our follies. Strong regulatory oversight allowed the Indian and Chinese financial sectors to emerge relatively unscathed from the credit crisis. Through the first half of 2008 (the most recent available data), Chinese banks were acquiring foreign rivals and increasing their share of global financial markets. If that continues, a Deutsche Bank report released last week predicts, China will become one of the dominant financial markets in the world by 2018, alongside the U.S. and the EU, with a 13 percent share in global bond markets, 40 percent of equity markets and 18 percent of global banking.

Sooner than that, the Chinese will likely see an uptick in exports. Purchasing-order surveys in China have been up for three months now, notes CLSA economist Andy Rothman, as factory owners in places like the Yangtze River Delta struggle to fill rush jobs for Western clothing chains that panicked and reduced orders too much. Rothman calls it the "Wal-Mart effect", and expects the interest of increasingly thrifty Western consumers in all things cheap to help Chinese exporters rebound. Many others say the "cheap is cool" phenomenon will ultimately buoy all kinds of emerging-market products and services, from Mexican cement makers to Indian telecom providers, that still tend to offer the best prices. When consumers around the world do start buying again, it seems they'll be doing it in the BRIC countries.

With Mac Margolis in Rio and Jason Overdorf in New Delhi

© 2009