Author: Sourabh Gupta, Samuels International
In its catchy 2003 report which conjectured that the combined GDP of the BRIC economies would exceed that of the United States, Japan, Britain, France and Germany, collectively, by mid-century, Goldman Sachs projected the sizes of the Chinese, Indian, Russian and Brazilian economies to be US$ trillion 4.8, 1.4, 1.2 and 0.9 respectively, in 2015.
In fact, each of the BRICs surpassed its projection in 2010. Clearly, the future is arriving sooner than was thought!
Looking at growth prospects in the decade ahead, the protracted global under-achiever is not likely to be a BRIC economy. In fact, gauging by the influential body of emerging research on growth dynamics in economies labouring under large output gaps, excess leverage-induced dislocations and declining working age population structures (which have tended to peak virtually concurrently with asset price bubbles), the US economy appears to face structural headwinds to growth that would be familiar to old policy-hands in Tokyo.
If the future is arriving sooner than anticipated, the present had arrived much earlier than is conventionally presumed. Catapulted into the limelight as a result of their economic resilience (save Russia) during the Global Financial Crisis (GFC) and their track record as drivers of global consumption growth in the period since, the BRICS’ coming-of-age is typically dated to their inaugural, stand-alone leaders meeting in Yekaterinburg, Russia, in June 2009. Yet the rise of the BRICS phenomenon can in fact be traced to a much earlier date: September 2003. At a Doha Round ministerial meeting in Cancun, Mexico that year, Brazil, India, South Africa and a loosely-formed G-20 agricultural group of developing economies chose uniformly to reject a skewed negotiating draft that the United States and the European Union had jointly sprung two weeks earlier and tried to foist at the ministerial. A revised draft around which a workable multilateral consensus could be built was produced the following year, in no small measure due to the creation of an inner Non-Group-5 (NG-5) in March 2004 comprising the US, the EU, Brazil and India, along with Australia.
Parenthetically, that Doha and international climate change talks have since dissolved into acrimony can be traced primarily to the inability of both developed and developing economies to arrive at operationally meaningful North-South bargains on the conceptual principles of special and differential treatment (S&DT) and common but differentiated responsibility (CBDR), respectively, within these negotiations. Hard as it is to get the balance on S&DT and CBDR right at a moment of frenetic change in the global pecking order (the BRICS’ share of global GDP valued at market exchange rates rising from 8 per cent in 2000 to a little under 20 per cent in 2010), the tendency, further, of some developed countries, notably Washington, to unilaterally and indulgently adjust the terms of the bargain mid-stream has not made matters easier.
The confluence of interest at Cancun 2003 nevertheless provides a valuable pointer, both, to the shared characteristics that bind the BRICS as well as the fundamental purposes that they seek to realise. Each BRICS country individually constitutes one among a selectively precious list of non-Western states which, with variances, can afford the luxury of exercising genuine independent-mindedness within the international system. Yet collectively they nurse a common sense of impotency and marginalisation within many of the key institutions of global economic and financial governance. Hence their individual interest in accumulating voice and leverage on those multilateral issues that impinge on their development trajectories.
Each possesses a degree of leverage that ranges from the modest to the negligible in its bilateral economic dealings with the west (as the Brazilian and Indian leaders once again discovered in their recent summit-level exchanges with Washington), yet collectively they possess the wherewithal to resist Western economic impositions within multilateral settings. Hence their grouping format loosely akin to that of a credit union where individual worthiness is enhanced by membership of the group than would otherwise be the case if preferences were simply aggregated.
Each of the BRICS individually, furthermore, shares a competitive trade and/or resource relationship with the other, yet the daylight evident within each position in relation to the other on pressing issues of common international economic interest — trade, finance, development, climate change, global economic governance — is noticeably narrower, typically, than vis-à-vis the West. Hence the co-dependency that implicitly supplies the BRICS their mortar: that if they do not hang together, they will hang separately as defections are progressively engineered within their ranks by more powerful constituents within the multilateral system. And hence also the motivation of individual BRICS states in their pursuit of mutual self-help to occasionally bear the opportunity cost of forgoing narrowly self-regarding bargains — forcefully in evidence in Brasilia’s deferring to New Delhi’s defensive agricultural interests in Geneva at the July 2008 Doha ministerial and Moscow to the BASIC (Brazil, South Africa, India, China) countries at the December 2008 Copenhagen climate change talks.
Altogether, then, the BRICS constitute a supple entente of rising powers, organised as a mutual support network that is committed to assist and backstop — sans recourse to litmus tests on intra-group cooperation — each other’s rise within the international economic order.
Looking ahead, and in keeping with the limited objective of accumulating voice and leverage on those multilateral issues that impinge on their development trajectories, lessening the dependence on the US dollar as the international monetary system’s — and their — principal reserve asset over a medium-term horizon appears to be the BRICS’ key international economic policy agenda item. To this end, a number of steps, individually and/or as a group and with varying degree of urgency, are already being implemented. To date, these include:
(a) internationalisation of their currencies, notably for China and to a lesser extent India — although the high hurdle of allowing domestic currency-denominated funds raised offshore to freely enter regulated onshore financial markets remains to be tackled;
(b) intra-BRICS bilateral trade settlement in local currencies which, gauging by the typical imbalance in trade with Beijing, is likely to witness a mushrooming of BRICS-domiciled banks offering RMB trade settlement in Hong Kong;
(c) calls for expanded tranches of SDR (Special Drawing Rights) issuance by the IMF so as to facilitate BRICS central bank reserve diversification — although the likelihood of such artificial reserve asset becoming a principal one would require a degree of global policy coordination that is frankly unlikely to be forthcoming;
(d) and, finally, opposition to constraints that interfere with domestic policy space to manage volatile capital inflows that lead to the build-up of non-core, dollar-denominated liabilities within their banking systems — although the case for macro-prudential levies on such liabilities is yet to find official favour with the IMF’s Executive Board.
International financial integration remains fundamentally beneficial, reciprocally, to emerging and advanced countries. For the former, it eases financial constraints for productive investment projects at a time when such projects are essential to their development. For advanced economies, the development of long-term, fixed rate local currency debt markets in emerging economies, engendered by such integration, offers higher returns as well reduces emerging market incentives to plough their glut of savings into dollar assets.
Given however that phases of high international capital mobility have tended to serially produce financial crises, and that the leveraging-deleveraging cycle of the banking sector has been the key channel of instability, a new international monetary architecture with built-in insurance buffers to guard against sudden-stop capital flows and a principles-based insolvency mechanism to facilitate orderly default, remains essential to the case for deepening BRICS and emerging market integration within the international monetary system (IMS) . With the European Union already having proceeded down this route earlier this year (by way of the European Stability Mechanism), and with US Treasury Secretary Tim Geithner having assented to a variation of such a bankruptcy mechanism in his capacity as the IMF’s deputy managing director a decade ago, it’s time to commence a debate to ensure a similar re-write of the IMF’s Articles of Agreement to statutorily incorporate such an insolvency procedure within the global financial order.
Sourabh Gupta is a Senior Research Associate at Samuels International Associates, Inc. in Washington DC, and a contributor to EAF.