Exhibit 1
Projected relative size of economies (US=100) 2005–2050

The BRIC thesis, developed by Jim O’Neill, recognizes that Brazil, Russia, India and China have changed their political systems to embrace global capitalism. In the report, Goldman Sachs predicts China and India, respectively, to be the dominant global suppliers of manufactured goods and services while Brazil and Russia would become similarly dominant as suppliers of raw materials (O’Neill). Cooperation is thus hypothesized to be a logical next step among the BRICs because Brazil and Russia together would form the commodity suppliers to India and China. Thus, the BRICs have the potential to form a powerful economic bloc to the exclusion of the modern-day G6 status. Brazil is dominant in soy and iron ore while Russia has enormous supplies of oil and natural gas. Goldman Sachs’ thesis thus documents how commodities, work, technology, and companies have diffused outward from the United States across the world.

Following the end of the Cold War or even before, the governments comprising the BRICs all initiated economic or political reforms to allow their countries to enter the world economy. In order to compete, these countries have simultaneously stressed education, foreign investment, domestic consumption, and domestic entrepreneurship. According to the study, India has the potential to grow the fastest among the four BRIC countries over the next 30 to 50 years. A major reason for this is that the decline in working age population will happen later for India and Brazil than for Russia and China.

The BRICs have continued to increase their contributions to the ever globalizing markets with about 28% of global growth expressed in US dollar terms, and 55% in Purchasing Power Parity terms (O’Neill). Their combined share of global trade is currently 15% annually since 2001. Additionally, intra-BRIC trade has increased to 8% of their total trade compared with 5% in 2000, according to Goldman Sachs. With 30% of world reserves and a threefold increase of Foreign Direct Investment (FDI) within their borders to 15% since 2000, the BRICs’ role in the world economy today and into the future cannot go unnoticed. As their productivity increases, their currencies will appreciate, further contributing to their GDP growth. Because the BRICs have the scale and trajectory to challenge today’s major developed economies in terms of their impact on the world economy and the evolution of globalization, it is worthwhile to study their economies to gain a better understanding of the world economy today and the world economy in the future. (See Wilson & Purushothaman, 2003; O’Neill et al., 2005; Ahya, Xie, Roach, Sheth, & Yam, 2006; Wong & Wong, 2006; King & Henry, 2005, 2006).

While the BRICs are not on a sure path to economic hegemony in the world economy, the interplay between BRICs economies and those of the G6 and Canada (what is known as the G7) is viewed by the investment community as a critical aspect of globalization and interdependence. However, there are many obstacles that must be overcome to ensure their success today and into the future. The key to further progress is improving long-term conditions to promote growth including macroeconomic stability, political institutional development, trade and investment openness, and education. The BRICs have yet to make many of the necessary steps to establish these conditions. The synergies between economic well-being, sustainability, macroeconomic fundamentals on the one hand and the well-functioning of a country’s financial markets in general and the stock markets in particular are still an open question. Thus, further research is needed to disentangle the effects of specific institutional channels on growth and to understand the impact of institutional change on growth.

Once the supplier of gold that financed the Portuguese empire, the Brazil territory has a history as an important player in the world economy. The last century has witnessed Brazil’s transformation from a market dominated by raw-material exports to a strong industrial power that was predicted to attract US$17 billion of foreign direct investment in 2005, according to the Central Bank of Brazil.

Yet like the other BRICs, Brazil still faces many obstacles to growth. It ranked an unimpressive 121 among the 175 countries in this year’s edition of the World Bank’s Doing Business survey which gauges the ease of doing business in a country.

Brazil’s recent rise began in 2003, when growth in the main world economies, price elevation for Brazilian exports, and full liquidity of capital for emerging countries (due to low interest rates in the US, Euro-zone, UK, and Japan) combined to improve Brazil’s economic position. Both inflation and foreign and fiscal indebtedness have dropped substantially over the past decade.

From 2003 onward, the Central Bank has regained credibility in its fight against inflation. For the first time in the target system, the Central Bank’s forecasts for inflation for 2006 (3.74%) have been lower than the set target (4.5%). Furthermore, the deepening of commercial and financial globalization in Brazil enabled the appreciation of the exchange rate to produce positive effects on the drop in the rate of inflation.

Yet behind the excellent fiscal results hides an unsustainable situation. Increasing primary surpluses have been guaranteed by increased tax collection (illustrated by the corporate tax burden mentioned previously) that has been compatible with increases in primary spending, which excludes interest payments. This may cause continued growth in the Public Debt/GDP ratio. Primary revenue has risen each year in proportion to the GDP, together with federal tax collections, which reached a record 18.01% of GDP in 2005 (Bank of Brazil).

There is also evidence that the elevated expenditures by the central government are being pressured by an increase in retirement expenditures by the INSS (Social Security Administration), which represented 5.84% of GDP in 1998 and ended the year 2005 at 7.55% of GDP. In contrast, investment expenditures represent a declining portion of GDP.

A change in this pattern would require at least two difficult adjustments. First, the retirement system should adopt a minimum age for Social Security payments and should detach retirement benefits from the minimum wage. Second, there must be established rules which, in fact, limits the increase in current expenditures in proportion to the GDP. (See Boum, 1999; Financial Times Group, 2005).

Yet like the other BRICs, Brazil still faces many obstacles to growth. It ranked an unimpressive 121 among the 175 countries in this year’s edition of the World Bank’s Doing Business survey which gauges the ease of doing business in a country. Particularly in terms of the corporate tax burden (medium-sized companies must annually spend an average 71.7% of profits and 2600 h to file taxes, compared with 47.8% and 202.9 h for those in the OECD), Brazil remains a difficult place to run a business.

Obviously, changing the quality of the fiscal adjustment to allow for the broadening of public investments, without raising tax revenues or reducing the primary surplus, would require time and demand a mobilization of the government before Congress and the Brazilian society. Despite its difficulty, the task should be a government priority.

Expansion has been known to Russia since the early 17th century when the Romanov Dynasty expanded its dominance across Siberia to the Pacific. While the Soviet economy stagnated under the communist rule of Lenin and Stalin in the mid-20th century, General Secretary Mikhail Gorbachev set in motion the modernization of Communism under his glasnost (openness) and prestroika (restructuring) policies in the late 1980s. By 1991, however, the USSR split into Russia and 14 other independent republics. Fifteen years later Russia, with a population of 140 million, still struggles with the establishment of a democratic political system and market economy.

Many believe that President Vladimir Putin’s efforts to recentralize power have led to an erosion of nascent democratic institutions, but Russia’s economy continues to gain speed with an average annual growth at 6.45% since the financial crisis of 1998. Many look to high oil prices and a relatively cheap ruble as the driving forces to this economic rebound; oil, natural gas, metals, and timber account for more than 80% of exports, leaving the country vulnerable to fluctuations in world prices. But investment and consumer-driven demand have played a noticeably increasing role since 2000. According to Goldman Sachs, real fixed capital investments have averaged gains greater than 10% since 2000, and real personal incomes have increased over 12% to $10,700 in terms of PPP. Poverty has continued to decline and the middle class has continued to expand.

Internationally, Russia has made many rebounds since the 1998 financial crisis. The Central Intelligence Agency’s (CIA) (2006) World Fact Book reports that Russia’s foreign debt has declined from 90% of GDP to around 31%. In less than a decade, Russia has increased its foreign reserves from only $12 billion to around $180 billion at yearend 2005. Russia continues to maintain a current account balance of $89.31 billion.

Russia is not without its problems, however. The economy showed signs of slowing with growth only reaching 5.9% for 2005 while inflation continues to hover around 10% (O’Neill). The economy continues to face strict government regulation. The recent Index of Economic Freedom (IEF) for 2006 ranks Russia as a mostly un-free country. A series of investigations was launched against a major Russian oil company, resulting in the arrest of its CEO in 2003 and acquisition of the company by a state owned firm. Many view this and the other large acquisitions by the government as President Putin’s desire to grant more power within his administration to those seeking to regain state control over the economy.

Additionally, Russia faces many non-tariff barriers which include tariff-rate quotas, discriminatory charges and fees, and discriminatory licensing, registration, and certification regimes. Russia ranks a disappointing 96th in the World Bank’s Doing Business 2006 ranking.

Russia’s weak banking system is a major barrier to creating a strong business climate. Corruption and widespread lack of trust in institutions has discouraged domestic and foreign investors. The banking sector in Russia is dominated by two state-owned banks which controlled 35% of loans in 2003, out of approximately 1300 banks (The World Bank). This year’s IEF estimates that only 50 of Russia’s 1300 banks perform any significant banking services. The links between the major state-owned banks and the major raw-materials exporters does not promote confidence in the banking system, either.

Equally important is Russia’s lack of rule of law. Russian tax law and administration is not well-defined, government regulations are inconsistent, property rights are poorly protected, and the unreliable and corrupt legal system discourages investors. According to The Economist Intelligence Unit (2005), corruption is rampant among law enforcement bodies and judges, and court decisions are often difficult to enforce. Foreign investors have experienced difficulties in executing court rulings. There is little consistency and coordination in the interpretation and application of regulations across branches of government and jurisdictions making it difficult to stay abreast of legal changes.

India has the potential to grow the fastest among the four BRIC countries over the next 30 to 50 years. A major reason for this is that the decline in working age population will happen later for India and Brazil than for Russia and China.

Continuing the evolution of a civilization that dates back five millennia, India obtained independence from British rule in 1947 and became a Democratic Republic with a multiparty parliamentary political system and a legal system based on English common law. Influenced by the Soviet system, the young Republic followed an economic development policy with the public sector playing a central role. Since then, India has become an economic dynamo, sustaining an average growth rate of more than 6% over the last 25 years. If the projections of similar growth for the next 45 years are realized, the Indian economy will roughly equal the size of the U.S. economy (in PPP terms) by 2050.

By 1981, adjusted for size and income, India was better in its share of value added in manufacturing compared to China and East Asian countries (Kochhar, Kumar, Rajan, Subramanian, & Tokatlidis, 2006). In contrast to the “aging” economies of the EU and Japan, India has a rising percentage of youth population which makes increased investments in education even more important. In 1981, India had specialized in skill intensive industries and its labor productivity in those industries was high. In contrast to today, India’s share of services in value added at that time was significantly lower than in other countries.

In general, India decentralized and undertook many “pro business” and “pro market” reforms during the 1980s and the 1990s.An 8% growth rate, increased employment opportunities, high stock market performance, etc., have changed the psyche of Indians. Optimism and an increasing income level have led to a consumption boom, according to the World Bank’s World Development Indicators.

India’s economy today is diverse and encompasses traditional farming, modern agriculture, handicrafts, and diversified modern manufacturing and service industries. Industrialization continues as foreign direct investment (FDI) enters India with the United States accounting for approximately 10% of this FDI from 1991 to 2005 (DeSilva, 2006). Services have become the major engine of economic growth, accounting for half of India’s output and employing less than one quarter of its labor force. Since about 60% of India’s labor-force is in agriculture, governments cannot afford to ignore policies that improve the lives of the rural poor. India’s economic growth and development over the last 25 years has reduced poverty by more than 10%. Projections suggest that this trend will continue, as per capita GDP (in PPP terms) is forecasted to increase 7-fold from 2005 ($3224) to 2050 ($21,872) (Hawksworth, 2006; Embassy of India, Washington DC, 2006; Press Trust of India, 2006; Rajan, 2006; Reserve Bank of India; Reserve Bank of India, 2006; Tseng & Fisher, 2005; World Bank, Asian Development Outlook, 2005).

However, significant problems remain. Major effort will be required to eliminate a culture of bribery and corruption by developing an appropriate set of incentives and penalties. Better governance systems are also required for states whose remote rural population has yet to see any meaningful benefits of economic growth. Large cities like New Delhi and Bombay need better management to provide basic services like clean water, electricity and transportation. India requires significant investment in general infrastructure, airports and highways, and must create the right conditions to attract foreign investment critical to its long-term growth. Urgent reforms related to hiring–firing policies as well as privatization of inefficient government-owned enterprises are needed to enhance productivity and attract investment.

Finally, the combined state and federal budget deficit, running at approximately 9% of GDP, has to be contained. To do this, the government must reduce spending on social programs and price subsidies (particularly those associated with oil and gas) and resolve its border conflicts with Pakistan and China (as a means to reduce high military expenditures). The prospects of the South Asian Free Trade Agreement (SAFTA) becoming an effective trading bloc will further India’s aspirations to become a developed nation (see Winters & Yusuf, 2007).

China has been protective in opening its trading and distribution services sector, but progress has been made.

With 3.7million square miles (over 9.6million km2), the People’s Republic of China (PRC) is the fourth largest country by area and the world’s most populous nation with over 1.3 billion people. In the past decade, China’s cities expanded at an average rate of 10% annually. The country’s urbanization rate increased from 17.4% to 41.8% between 1978 and 2005, a scale unprecedented in human history. Nearly 70% of the PRC’s economy has been privatized in the past three decades under “Socialism with Chinese characteristics”. (See, BBC, 2006; China Daily; Reisen, 2005; Kynge, 2006; Dillon & Tkacik, 2005; Gang, 2005; HKU POP, 2006; Anderson, 2006; Lohmar & Somwaru, 2006; Nolt, 2006; People’s Daily Online, 2000; UCLA, 2006; World Bank, 2006).

Beginning in late 1978, the Chinese leadership has been reforming the economy from a Sovietstyle centrally planned economy to a more market-oriented economy that is still within a rigid political framework under the Communist Party control. The reforms replaced collectivization with privatization of farmlands, increased the responsibility of local authorities and industry managers, allowed a wide variety of small-scale enterprises to flourish, and promoted foreign investment. Price controls were also relaxed. These changes resulted in China’s shift from a planned economy to a mixed economy, with 70% in the private sector. China became a member of the World Trade Organization in 2001 and has been growing at an average annual GDP rate of 9.4% for the past 25 years, according to a July 2003 study by the China Daily (2003). The People’s Daily Online reports that at the end of 2005, the PRC became the fourth largest economy in the world by exchange rate, and the second largest in the world after the United States by PPP at US$8158 trillion. China’s success against poverty since the reforms that began in 1978 is undeniable. A closer inspection of the numbers, however, holds some warnings for the future and caveats on the implications for fighting poverty in the rest of the developing world. Between 1981 and 2001, the proportion of population living in poverty in China fell from 53% to just 8%.

China has been protective in opening its trading and distribution services sector, but progress has been made. Since the 1990s, the success of the five original Special Economic Zones (SEZ: Shenzhen, Zhuhai, Shantou, Xiamen, Hainan Province) has led to an expansion to other major Chinese cities, including Shanghai and Beijing. SEZ’s have been a primary inlet for foreign investors where investment laws are relaxed so as to attract foreign capital.

On July 21, 2005 the People’s Bank of China announced that it would move to a floating peg, allowing its currency to move against the United States dollar by 0.3% a day and 3% a day against other currencies. More recently, a significant breakthrough came in 2005 when the Ministry of Commerce (“MOFCOM”) issued its Administrative Measure for Foreign Investment in the Commercial Sector (“the New Measure”), commonly referred to as Circular 8. The measure enables a foreign investor to establish a wholly owned company anywhere in China, with full-fledged trading and distribution rights for as little capital as US$4000, subject to approval. Prior to December 2004, foreign investors wanting their own distribution vehicles in China had to resort to trading companies established in free trade zones, minority-owned joint ventures, or China investment holding companies (for some 250 investors who are big enough to afford them). None of these structures were able to serve the full needs of foreign investors, due to restrictions imposed on geographical presence, source of products, import/export rights, and business scope limitation.

As a result of Circular 8, companies are no longer required to segment their marketing efforts and can present a single, coherent “face” to the marketplace. However, a regulation with such a far-reaching impact as Circular 8 does come with a unique set of implementation issues, and there is clearly a need for proactive dialogue and ongoing clarification from the Chinese authorities. Despite these implementation challenges, the issuance of Circular 8 makes tapping the domestic market a real possibility for many smaller to medium size companies who wish to exert direct control over their China business activities. Due to the mixing of market and planned economies, the PRC is faced with a number of problems associated with each, including unemployment and an increasing rural/urban income gap. Despite its powerhouse economy, China, with its large population, has a relatively small average GDP per person at an estimated US$6300.

Investment in China continues to be hindered with constantly changing tax and investment regulations that often lack interpretive clarity and consistency in implementation. A recent tax survey conducted by PriceWaterHouseCoopers nevertheless ranked China number one in the list of Asian countries that pose the greatest tax challenge. China also adopts a fairly aggressive audit approach, and a hefty penalty and surcharge regime. Worst of all, China’s current legal system does not provide an effective appeals process. Unsurprisingly, a country like China, with its high investment growth, invariably presents significant tax challenges.

Despite these shortcomings, China’s long-established preferential income tax policies – designed to attract foreign direct investment – is beginning to bear fruit. From a base rate of 33%, generous tax holidays and reduced rates were offered for a wide range of activities, resulting in foreign investors paying on average an effective tax rate of about 10%–15% in China (whereas domestic companies are generally taxed at 33%).

Overall, foreign investors are faced with the challenges of a vast, but fragmented market with strong protectionist barriers and need to consider their entry plans carefully.

The private sector is central in promoting growth and expanding wealth opportunities in any country. It is generally believed to encourage investment, improve productivity, create jobs, and increase the standard of living. However, the BRICs region will not be able to reach these objectives unless proper internal domestic reforms are implemented in the financial, regulatory, and legal environment. These include protection of property rights, access to credit, and efficient judicial, taxation, and customs systems. Entrepreneurial motivations and the development of the private sector are often influenced by factors such as the regulatory costs of business and regulations that enhance or constrain investment, productivity, and growth (Shachmurove, 2005).

Table 1 outlines some characteristics for each of the economies, including Gross National Income per capita, the size of the informal economy as a percentage of the Gross National Income and the size of the population. For comparative benchmarks, the averages of the more developed OECD countries are included.

Tables 2–5 examine five indicators that play a significant role in the investment decision of any entrepreneur investing in a foreign country. For comparative benchmarks, the statistics for the BRICs’ regions, Europe and Central Asia, as well as the OECD countries are included. The five factors include: Starting a business, Hiring and firing workers, Enforcing contracts, Getting credit, and Closing a business (The World Bank Group, 2005). The following subsections detail the importance of the five indicators and present comparative figures for the BRICs.

Table 2
Starting a new business in the BRICs

The regulations for creating new businesses differ significantly across various countries. In order to incorporate and register a new business, an entrepreneur has to comply with legal procedures. While some economies facilitate the process of new business entry with a straightforward and affordable process, others have lengthy, tedious and highly bureaucratic procedures that induce bribery of officials to smooth the process. Depending on these costs, entrepreneurs might try to run their business informally. These inefficiencies of heavier regulation are often associated with corruption and a larger unofficial economy (Djankov, La Porta, Lopez-de-Silanes, & Shleifer, 2001). Countries with more interventionist and less democratic governments limit the creation of new businesses and control the level of economic development more heavily than countries with more democratic and limited governments. Public choice theory predicts that most regulations exist for the benefit (and bribery) of politicians and bureaucrats (McChesney, 1987).

In order to legally operate businesses, the entrepreneur has to go through a number of obligatory procedures. These include (1) obtaining the necessary permits and licenses, and (2) completing all of the required inscriptions, verifications and notifications that enable the company to start its operation. Table 2 shows that entrepreneurs in Brazil can expect to go through 17 steps to launch a business over 152 days on average, at a cost equal to 10.1% of gross national income (GNI) per capita. In China, entrepreneurs will go through 13 steps in 48 days at a cost of 13.6% of GNI per capita, compared to India which demands 11 steps, 71 days, and a cost of 61.7% of GNI per capita. Russia can expect to go through eight steps to launch a business over 33 days on average, at a cost equal to 5% of GNI per capita, compared to 19.5 days at a cost of 6.8% of GNI per capita for the OECD.

The costs associated with starting a business are found in the text of the Company Law, the Commercial Code, or specific regulations. The minimum capital requirement is generally specified in the Commercial Code or the Company Law, dictating the amount that the entrepreneur needs to deposit in a bank account in order to obtain a business registration number. Entrepreneurs in Brazil, China, India, and Russia must deposit at least 0%, 946.7%, 0%, and 4.4%, respectively, of GNI per capita in a bank to obtain a business registration number, compared to 41% among the OECD.

A complex system of laws and institutions exists to protect the interests of workers and to guarantee a minimum standard of living in each country. Botero, Djankov, La Porta, Lopez-de-Silanes, and Shleifer (2004), study these regulatory bodies and find that poor countries regulate labor markets more than rich countries do, thus having adverse effects on unemployment, labor force participation, and economic activity remaining official. Taking these factors into consideration, the procedures and regulations of hiring and firing workers can have a significant impact on a country’s economy. Table 3 presents the four indices of hiring and firing workers. Each index contains values between 0 and 100, where higher values indicate more rigid regulation. These indices are: (1) the flexibility of hiring index which includes the availability of contracts for part-time and fixed-term; (2) conditions of employment which include working time requirements, such as mandatory minimum daily rest, maximum number of hours in a normal workweek, premium for overtime work, restrictions on weekly holiday, mandatory payment for nonworking days, and minimum wage legislation; (3) flexibility of firing covers workers’ legal protections against dismissal, including grounds for dismissal, procedures for dismissal, notice period, and severance payment, and (4) the index of employment regulation which is a simple average of the previous 3 indices.

For Brazil, China, India and Russia, the overall index is 20, 40, 90, and 30, respectively, compared to 35.8 among the OECD. Difficulty of both hiring and firing in Brazil, China, India, and Russia is 67 and 20, 11 and 40, 56 and 90, and 0 and 30, respectively. Difficulty of hiring and firing in the OECD is 30.1 and 27.4, respectively.

Table 3
Employment indices

Investment, trade, and ultimately economic growth are highly dependent on the security of property and the enforcement of contracts. Inefficient regulations of contractual enforcement induce informal relationships based on family ties or previous transactions. A system of courts is responsible for enforcing contracts between debtors and creditors, suppliers and customers. However, in many countries, the courts are slow, inefficient, and even corrupt. The performance of courts that is determined by how the law regulates their operations, or procedural formalism, was found to be lower in the richer countries (Djankov, La Porta, Lopez-de-Silanes,&Shleifer, 2003b). Significant inefficiencies are also implied in their findings of the expected duration of dispute resolution, which is often extraordinarily high. This suggests that courts may not be an attractive venue for resolving disputes. These inefficiencies may impede the courts from properly protecting property and contracts, leading to alternative strategies, including private dispute resolution.

Table 4 includes four indicators that examine the differences in the efficiency of contract enforcement. (1) The number of procedures counted from the moment the plaintiff files the lawsuit in court until the moment of actual payment, (2) the associated time in calendar days, and (3) the associated cost, including court fees, attorney fees, and other payments to professionals. In Brazil, it takes 24 steps and 546 days to enforce contracts at a cost of 15.5% of debt. In China, contracts are enforced with 25 steps in 241 days at a cost of 25.5% of debt on average and for India, contracts are enforced with 40 steps, 425 days at a cost of 43.1% of debt. In Russia, 29 steps and 330 days are required to enforce contracts at a cost of 20.3% of debt, compared to 19.5 steps in 225.7 days at a cost of 10.6% of debt among the OECD.

Table 4
Indicators of contract enforcement efficiency

Obtaining credit for business operations may be one of the greatest barriers to a firm looking to continue its growth. Credit registries, or institutions that gather and disseminate information on credit histories, act as facilitators for creditors to assess risk and entrepreneurs to attain capital. Thus, credit registries enable the dissemination of credit so that entrepreneurs can rely on external credit rather than personal relations. If a bank lacks the information needed to screen credit applications and to monitor borrowers, it faces “adverse selection” or “moral hazard” problems in its lending activities leading to an inefficient allocation of credit. The efficiency of information exchange between lenders depends on the type of information shared and the design of the sharing mechanism. Thus, instituting a policy that would mandate the sharing of information, such as done in a public credit register, can stimulate competition, enhance the stability of the banking system, and attain efficiency (Jappelli & Pagano, 2000). On a microeconomic level, Galindo, Schiantarelli, andWeiss (2001) find that better developed credit registries benefit a country by reducing financial restrictions or more specifically reducing the sensitivity of a firm’s investment decision to capital availability.

Table 5 details the factors affecting the ease of access to market credit. Measures on credit information sharing and the legal rights of borrowers and lenders in the Russian Federation are shown below. The Legal Rights Index ranges from 0 to 10, with higher scores indicating that those laws are better designed to expand access to credit. The Credit Information Index measures the scope, access and quality of credit information available through public registries or private bureaus. It ranges from 0 to 6, with higher values indicating that more credit information is available from a public registry or private bureau.

Table 5
Factors affecting ease of access to market credit

In times of insolvency, an efficient exit strategy plays an important role in business operations and credit procurement. The existing bankruptcy laws determine the efficiencies of the bankruptcy process and insolvency resolutions. With inefficient procedures, inept businesses continue to exist despite misallocation of assets and human capital. The inefficient judicial process can act against the interest of creditors in instituting a formal insolvency resolution. It can lead creditors to abstain from using the formal bankruptcy procedures all together.

Table 6 details the criteria for closing a business. The time measure estimates the average duration needed to complete the insolvency procedure. The cost estimate takes into account the bankruptcy process including court costs, insolvency practitioners’ costs, the cost of independent agents, (i.e. assessors, lawyers, accountants, etc.), and excluding the costs of bribes. The recovery rate, expressed in terms of how many cents on the dollar claimants, recover from the insolvent firm. For Brazil, China, India, and Russia the average duration needed to complete insolvency procedure is 10, 2.4, 10, and 3.8 years, respectively, compared to 1.5 days for OECD countries. The cost to resolve a bankruptcy is 9%, 22%, 9%, and 9% of estate on average for Brazil, China, India, and Russia, respectively. The cost is 7.4% among the OECD. The recovery rate for these countries is 0.5, 31.5, 12.8, and 27.6 cents on the dollar, respectively, compared to 73.8 cents on the dollar among the OECD.

Table 6
Business insolvency, bankruptcy and closure

Seemingly inevitable, however, is not guaranteed. Many hurdles remain for the BRICs to overcome which, if not handled properly, may prevent the group from realizing these spectacular growth forecasts. Contributing to the prevention of growth are, on one side, social frictions and demographic changes caused by unequal division of recent economic success. Recall, for example, the urban migration to Indian cities and the resulting increased demand on failing urban infrastructures. While the percentage of the population below the poverty level has decreased over the past 30 years in each of the BRICs, inequality is still a major issue for these four economies. To achieve sustainable growth, it will be necessary for each country to expand economic participation to include broader shares of its population and to ensure the well being and greater participation of the most deprived segments of their work force.

Beyond social pressures, there remain major legislative and regulatory obstacles to the growth of the BRICs. As demonstrated by the data in the Doing Business Report, the business conditions of these four markets are far from ideal. Governmental security regulation, such as Russia’s recent Yukus debacle under President Putin and its resulting economic uncertainty, as well as small business restrictions, as the onerous bank deposit requirement of Chinese authorities, and other challenges including the privatization of SOEs, SMEs, and banking regulations and nonperforming loans, all hinder the functioning of entrepreneurial activities. These obstacles impede the development of the private sector and the entrepreneur’s ability to open, develop and sustain successful, growing businesses. Unambiguous, clearly stated legislation, simplified tax systems, lesser administrative burdens, and more flexible employment markets are needed for the BRICs to expand stable economic bases which could sustain a major role in the global economy.

As the BRICs continue to rise in importance, and as the future unfolds, there remain obstacles to the growth of these economies. For example, the increased demand for energy sources by these countries will strain supply networks, and their higher participation in trade will reconfigure global equity and bond markets. Will the New World economy be built by BRICs? Perhaps, but if not built, it will at least certainly be transformed by them.