The determinants of economic growth in BRICS Countries

One of the key goals of the formation of BRICS (Brazil, Russia, India, China and South Africa) was to promote stability in trade and investment which would boost growth as the five BRICS countries recovered from the 2009 global financial crisis. This however has not been the case for all BRICS countries where only certain members have experienced a substantial increase in growth while others have experienced declining growth rates. The objective of this study was to analyse the determinants of economic growth in BRICS countries in order to investigate the causes of growth rates varying amongst the BRICS economies. This paper considered various economic theories for proximate and fundamental determinants of growth which included: The Harrod-Domar model, The Neoclassical Growth Theory, The Endogenous Growth Model, The New Growth Theory, Institutions and Economic Growth, Democracy, The Quality of Governance and Growth, Finance and Growth, Trade and Economic Growth and lastly Financial Openness and Growth. The study was conducted for a period covering from 1995 to 2016 and made use of the Autoregressive Distributed Lag (ARDL) model for the single-country analysis and Pooled Mean Group (PMG) was used for the panel analysis. In the single-country analysis, the descriptive statistics indicated that individually all of the BRICS members on average experienced positive GDP growth, positive investment (capital formation) and trade openness between 1995 to 2016. The single-country analysis made use of the ARDL Bounds test to investigate cointegration in each country and a long-run relationship was established in all BRICS countries except for China. The augmented Solow model was extended to incorporate both proximate and fundamental determinants of growth. The estimated results for the ARDL model found that capital and trade openness were significant in determining GDP growth for all of the BRICS countries except for China. FDI was insignificant in determining growth in BRICS countries except for India and the remaining variables gave mixed results between the countries. The error correction term (ECT) was significant and negative in all of the BRICS countries (except for China) which indicated that there was convergence. In the panel analysis, a long-run relationship was established using the KAO Residual cointegration test. The panel correlations test for BRICS revealed that GDP growth had a positive correlation with all the variables under analysis except for inflation which was in line with the anticipated correlations. The PMG estimated results for BRICS found that the proximate determinants (capital and labour) were both significant in determining growth in the long-run where capital had a positive relationship and labour had a negative relationship with growth. Trade openness, inflation and FDI were significant in determining growth in the long-run, though government expenditure was insignificant in determining growth. The error correction term for BRICS illustrated that there was convergence and 92% of the disequilibrium in the short-run is corrected each year. The analysis revealed that BRICS economies should adopt more policies that encourage domestic investment and trade in order to boost growth. Policies such as relaxing local corporation taxes can encourage domestic investment which will aid local businesses in competing against foreign competition. Countries such as Brazil, India and South Africa can adopt more policies that encourage the development and growth of SMME’s. An area for future research would be to incorporate a location variable into the fundamental determinants of growth where the analysis could be conducted per region in each of the BRICS countries, which would give a broader view on which regions are determining growth in BRICS countries