What emerged as the brainchild of a Goldman Sach economist is now turning out to be the possible future of the world economy. International organizations are usually the products of the vision of world leaders or statesmen; seldom do they originate as an afterthought of a research study by a private investment bank. But such is the birth story of what can be described as the BRIC of the world economy in the near and medium future.
Goldman Sach had predicted at the turn of the new millennium that Brazil, Russia, India and China all of them fast emerging economies would soon surpass the G8 economies and come up as the new center of gravity of the global economy. In its study, the bank had even set a time period by which it expected the four BRIC economies; an acronym for the four countries mentioned above would achieve the feats forecasted by it. The study had attracted some attention and it was left to the policy makers of the four BRIC nations to convert the idea into reality. This they soon did and now the BRIC nations hold regular summit level meetings, the latest being held in Sanya, Hainan, China on 14th April 2011.
The present summit saw BRIC turning into BRICS with the formal joining of another upcoming economic powerhouse, namely South Africa. With this the BRICS is now home to nearly 3 billion people that is almost half the population of the globe spanning over four continents. The statistics in favor of this grouping is simply mind- boggling. According to the International Monetary Fund (IMF), by 2015, BRICS will satisfy half the global demand for capital and technology and will account for over 60 per cent of the global economic growth. At present the sum of the GDPs of the five nations is over 25 per cent of the world GDP. It is not surprising that a magazine of the stature of Forbes has declared this grouping as “a new engine of global economy”. Being predominantly if not so far wholly an economic alliance, BRICS’ primary agenda is economic in nature. In times of global economic uncertainty as faced in the last two years, BRICS was expected to focus on ways and means of pulling the world economy out of choppy financial waters and thus prove to the entire international community that it had come of age and was ready to bear a sizeable part of the burden of facilitating the global economic recovery. The members of BRICS have time and again highlighted the unsustainable fiscal deficits in many developed countries as a prime reason behind the economic meltdown of 2008. It has also been felt in many economic circles that with the dollar likely to face depreciation in the near future, an over reliance on the dollar may be harmful for the developing economies. Hence in the recent BRICS summit, one of the main agendas was to pull away the global economy from relying too heavily on the dollar and to find a viable substitute for the same. The need to reform the world financial system which had failed the world economy in times of its worst crisis was also a focus point of the summit. Doing away with excessive reliance on the dollar and global financial reforms, both of which are inter- related, are also the means to create a ‘turbulence- free space within the global economy’, to borrow a term from Professor Andrei Volodin of the Moscow Institute of International Relations.
Overall the BRICS summit 2011 with the theme of ‘Broad Vision, Shared Prosperity’ can be categorized into four main agenda items, namely 1) the international situation, 2) the international economic, financial and trade issues, 3) the challenges of sustainable development and 4) cooperation amongst BRICS nations. Of these the discussions on financial and economic matters were the ones which are likely to be most substantial and with far- reaching implications not only for the individual nations of the group but also for the world economy in the years to come. All five nations agreed unanimously that major economies of the world must continue to enhance coordination of macro- economic policies with the aim of achieving a strong, sustainable and balanced growth. It was macro- economic policy coordination which to a great extent helped in subsiding the economic depression that not so long back swept large swathe of the globe. The timely and coordinated injection of economic stimulus by major economies, including the BRICS economies have helped in pulling the world economy out of depression and this is a fact acknowledged by most analysts and economists. But the fears of persisting too long with the stimulus package and the exact timing and the manner of its withdrawal are presently being debated. Concerns have been aired that if the stimulus is not withdrawn soon, there could be economic overheating and the possibility of creating asset bubbles. This would hike inflation which in turn would reduce demand and result in pushing the economy back into depression. On the other hand there is the viewpoint that the depression- affected nations are yet to regain their normal economic health and a hurried pull back of the stimulus package would adversely affect them. The BRICS nations considering the arguments of both sides concluded that while the stimulus packages given for economic recovery have to be withdrawn, that has to be done very carefully. It was mentioned in the Sanya Declaration that by cooperating in economic, financial and trade matters the BRICS countries will ensure that they enjoy strong and sustained economic growth, unaffected by the uncertain weather in the global economic atmosphere. The countries expressed hope that economic growth experienced by them will lead to steady, sound and balanced growth of the world economy. Indeed if economies of the size of the BRICS countries can maintain sustained growth then eventually they will propel the global economy on the path of balanced and sustained growth.
The G8 grouping which comprised of the eight most developed economies of the world has now made way for the G20 grouping as the fulcrum of the world economy. The transition from G8 to G20 has been quite spectacular. Most of the important economic and financial decisions which required international cooperation and policy coordination was taken earlier by the G8, which comprised the most industrialized nations of the world. But with increasing globalization of the world economy, it was increasingly realized by the industrialized world that major economic decisions could not be implemented without taking major developing or emerging economies like the BRICS into confidence. More so, with their mammoth sizes, fast growth rates, growing demand, burgeoning foreign exchange reserves and expanding global trade, the decisions taken by the governments and central banks of these countries especially with regards to macro- economic policies could influence the economies of the industrialized countries. Hence the practice of inviting 12 major emerging economies to the G8 was started. The 5 BRICS nations were part of this group of 12 which participated in mostly informal discussions and were still left out of the core group of 8 most industrialized nations. The merger between the G8 and the 12 emerging economies was finally brought about by the global economic recession of 2008. In the wake of the global depression, the emerging countries finally broke all barriers which differentiated them from the G8 and heralded a new episode in the world’s economic history- the birth of the G20. The coordinated macro- economic policies undertaken under the aegis of this new- born grouping helped stem and thereafter, to a great extent, overcome the recession. However given its relatively young age, the G20 needs all the support and nurturing that it can get. And who better to give that support than BRICS which can be considered to be a powerhouse within the G20. So, in Sanya the BRICS nations pledged their support to the G20 as the premier forum for international economic cooperation. The Russian offer to host the 2013 G20 Summit was welcomed by the other members.
The Sanya summit laid stress on the need for reforms and improvement of the international monetary and financial system. As the post- mortem of the financial recession was done by economists, it was felt that present international financial system represented by the twin Bretton Woods institutions; the World Bank and the International Monetary Forum had failed the world when it was needed the most. Part of the problem was inadequate representation of the emerging economies in the financial institutions. Also the monitoring by the financial institutions of the flow of credit was felt to be grossly inadequate leading to the downturn. The BRICS called for quick achievement of the reforms targets agreed at previous G20 summits. The most notable feature however of this BRICS summit is possibly the mooting of the idea of a viable broad- based reserve currency system as a possible alternative to the dollar. Much of the present global trade is done in dollars. Also, much of the foreign exchange reserves of the BRICS nations, which is a huge figure are held as dollar denominated assets. A potential depreciation of the dollar will result in the devaluation of these assets, something which the nations would want to avoid at any cost. Over reliance on the dollar being thus fraught with risks, there is need for finding an alternative to the dollar. Attempts at diversification of the forex assets from the dollar is not a very good alternative as it would automatically cause a depreciation of the dollar resulting in erosion of value of the assets. So the best possible alternative to the dollar thought out at the summit is the Special Drawing Rights (SDR). The exchange rate of SDR is the weighted average of a basket of convertible currencies. SDRs can be swapped with dollars at a pre- fixed rate. While the avowed objective of the BRICS in suggesting that the SDR gradually complement if not outright replace the dollar is for the purpose of providing stability and certainty in that the SDR would be more like a supranational currency, the proposal if put to practice is bound to alter global economic power equations for it would undoubtedly end the reign of the dollar the prime global currency. In other words, through this proposal, the BRICS has thrown up a tacit challenge to US economic might, which is slowly tiring with the burden of wars in different regions and with a fiscal deficit which may be unsustainable. Another important step taken towards ending the dominance of the dollar was a framework agreement on financial cooperation which provides for mutual payments and loans in national currencies rather than in dollars, which has been the practice so far. This agreement along with currency swap arrangements will protect trade of the BRICS countries from the vagaries of a fluctuating dollar. But once again it would have the effect of nullifying to a certain extent the importance of the dollar in the world economy.
The risks of massive cross- border capital flows or the so- called ‘hot money’ faced by emerging economies was identified as a problem as such capital flows result in foreign exchange reserves volatility. To overcome this problem, the BRICS suggested the creation of an international financial regulatory mechanism for necessary oversight of sudden and unprecedented capital flows. The need to strengthen policy coordination, financial regulation and cooperation with respect to supervision were aired. It was also agreed that there could be no alternative to the sound development of the global financial markets and banking system so as to ensure availability of suitable financial instruments even in times of credit crunch. A sound financial and banking system is a basic precursor to healthy economic development which in the times of liberalization and globalization is heavily dependant on private business activity.
Concerns regarding the volatility in commodity prices were raised. This volatility with strong upwards inflationary tendencies has partly got to do with the expansionary monetary policies adopted by the economies to pull out the world economy from recession. High prices for commodities like food and energy can hamper the global economic recovery and growth. If people have to pay more for purchasing food grains then they will have little purchasing power left after paying up for two square meals. Low purchasing power means less demand, which in turn leads to recession. Similarly, energy is the very basis upon which stand modern civilizations and economies. Nothing can damage economic activity more than spiraling energy prices. To curb price volatility, a tighter monetary policy can be adopted. However that may result in slowing down economic activity with respect to the manufacturing sector. Recession in this crucial sector undoubtedly has adverse effects on the overall economy. The manipulation of monetary policies can only be a short term solution for checking commodity price volatility. In the long run, what is needed is an increase in production capacity, a strengthening of producer- consumer dialogue to balance demand and supply and also to do away as much as possible the need for middlemen who take commissions thereby increasing the selling price to the consumer, and providing more support to developing countries in terms of funding and technology by international financial institutes for which greater representation in them is necessary. Closer cooperation with respect to food security was needed which would in turn check high food prices and ward off the problems of hunger and malnutrition which can stifle the human resource potential of a nation. Also proper regulation of the derivatives market for commodities was required for strengthening the same so as to prevent market destabilizing activities. Lack of proper information systems regarding demand for commodities at the international, regional and national levels is another problem according to BRICS which needs to be addressed.
Regarding the present international scenario, there was an overall convergence of views. Countries like India, Brazil and South Africa have often highlighted in different international forum that the present United Nations (UN) dispensation reflects the realities of the immediate post World War II scenario and is not reflective of the changes that have taken place another 60 years since 1945. The BRICS summit document also pointed out that there was ‘need for comprehensive reform of the UN, including its Security Council’. In previous summits, need for reform of the UN was mentioned but there was no mention of reforms in the Security Council. The reference to the Security Council is a positive addition to the overall agenda of reforms in the UN. While China and Russia are permanent members of the Security Council, India and Brazil are aspirants to the permanent membership of the UNSC. These two countries along with Germany and Japan have lobbied hard to book a berth in the SC as a permanent member. Though such efforts have so far failed to bear fruit they have now reverted to the more realistic attempt of achieving their objective through sustained diplomatic efforts including furthering their claims in forums like the BRICS. China and Russia, already part of the P5 while not directly supporting the claims of India and Brazil provided indirect support by reiterating the importance they attach to the status of India, Brazil and indeed even South Africa in international affairs and by understanding and backing their ‘aspiration to play a greater role in the UN’. It was noted by the BRICS countries that 2011 is a unique year in that all five of them will be present in the UNSC, two as permanent members and the remaining three as non- permanent members. The leaders of the member- states agreed that this was a rare opportunity of working together under the UNSC aegis in times of strife in different parts of the world. The manner in which the nations can work together in dealing with various international issues may well pave the way for the emergence of BRICS as a political grouping as much as it is an economic grouping. Though dreams of BRICS as a political grouping may seem premature given the political differences that some of its members have, nonetheless a start can well be made within the UNSC. The members expressed concern regarding the ‘turbulence in the Middle East, Northern Africa and Western Africa regions’. They reiterated that in principle, the use of force should be avoided and diplomacy should be used, thereby gently snubbing the NATO air-strikes in Libya. More specifically on Libya the summit declared that all parties should resolve their differences through peaceful means and dialogue in which the UN and regional organizations should play their appropriate role. The ‘appropriate regional organization’ in this case is the African Union (AU) and the BRICS gave its whole- hearted support to the AU High- Level Panel Initiative on Libya which is headed by South Africa. South Africa has been BRICS link with the AU on Libya. The AU has been trying to get Gaddafi and the rebels on the talking table and work out a power- sharing arrangement which does not necessitate the exile of Gaddafi. On the other hand the rebels have so far steadfastly refuted any arrangement which allows Gaddafi to stay on in Libya and have continued their civil war. Members of the AU were almost attacked by the rebels when they met in Libya to work out a viable solution. The NATO has been supporting the rebels and has been conducted air- strikes against Gaddafi’s forces and in support of the rebels thus tacitly strengthening the rebel’s demand for Gaddafi’s ouster. Thus there is a subtle and yet significant difference in the stands taken by NATO and the BRICS. No wonder the summit maintained that independence, sovereignty, unity and territorial integrity of each nation should be respected.
Terrorism is a global threat which knows no borders. India, Russia and China have faced terror in their soil and know how ugly it can be. Brazil and South Africa too have had brushes with terrorism. To combat terrorism within the framework of the UN, the BRICS called for an early conclusion of negotiations in the UN General Assembly of the Comprehensive Convention on International Terrorism. A new emerging form of terrorism is cyber- terrorism whose damage potential is enormous. Hence the five member countries committed themselves to strengthening the international information security and also agreed to pay special attention in combating the menace of cyber- crime.
Sustainable development has turned out to an important challenge confronting the globe. The BRICS nations are playing their parts individually in helping foster sustainable development. South Africa will host the UN Conference on Climate Change in 2011; Brazil will play host to the Conference on Sustainable Development, 2012; and in the same year the Conference of Parties on the Convention of Biological Diversity and the Cartagena Protocol on Biosafety will be held in India. The BRICS welcomed the fact that its members will be hosting all these global events related to sustainable development. With respect to global warming and climate change, the BRICS emphasized the principles of equity and common but differentiated responsibilities. They also agreed to intensify cooperation on the Durban Conference in which negotiations are already underway. The need for practical cooperation in adapting the societies and economies of the five nations to climate change was also discussed. One way of adapting the economy to climate change would be to slowly make the transition from non- renewable energy to renewable energy. The BRICS nations decided to exchange information amongst each other with respect to renewable energy. An important source of renewable energy is nuclear energy. However the recent nuclear disaster in Japan and the huge human loss in its aftermath have cast a cloud over its use. Safe use of nuclear energy is of paramount importance and the BRICS called for international cooperation in ensuring the same. It also called for the strict observance of safety standards with regards to the design, construction and operation of nuclear power plants.
The UN has pledged the achievement of the objectives of the Millennium Development Goals (MDG) by 2015. The BRICS nations felt that economic growth and development were central to the realization of the MDGs. In particular, the eradication of extreme poverty and hunger were earmarked as development goals which have moral, social, political and economic connotations especially in the least developed countries in Africa and other places in the world. The upliftment of Africa also has its utilitarian value in that its vastness of size will provide a huge market for BRICS and other fast emerging and emerged countries. To stimulate economic growth in Africa which will not only benefit that continent but will also provide a lucrative market in the future for BRICS, which in turn would help in the development of the latter, what is needed most is infrastructure. The BRICS accordingly discussed infrastructure development in Africa and industrialization within the framework of the New Partnership for Africa’s Development (NEPAD).
Skeptics might wish away the BRICS as a group of nations having vastly divergent political cultures that will never see eye to eye on important global issues. They may insist that the BRICS is unlikely to be another NATO and that the member states may mostly be bogged down by their own disputes.
However what they miss out is the fact that the BRICS never aspired to be like a NATO. Its predominant focus is economic cooperation and it is so far purely an economic grouping. What may appear today to be extremely innocuous decisions taken by the BRICS in the economic domain might well cause a paradigm shift in the global economy tomorrow. All said and done when five economies of the sizes of the BRICS countries meet on a regular basis, the world does take note lest the balance of global economic power be challenged. And there is no reason to believe that the BRICS will not do that in the future.