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30 March 2012, Gateway House

BRICS: Moving in the right direction?

The 4th BRICS Summit in New Delhi has brought a new dimension to emerging markets. The author explains why the summit was perhaps the most significant of the BRICS meetings so far – and one that should have the developed world really worried about their eroding position at the top of the global heap.

Executive Director, Gateway House

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The five most important emerging economies – India, Brazil, China, Russia and South Africa, or BRICS – met in New Delhi on March 29th.  It was the fourth meeting of these nations since they decided to take their acronym seriously. This was also the most significant of the meetings so far, and one that should have the Western-dominated developed world worried about its eroding position at the top of the global heap.  

Much of the worry centred on the announcement of the formation of a South-South development bank which would facilitate Intra-BRICS trade and finance projects in local currencies. Western commentators view this as a challenge to the World Bank, which disperses development funds largely to the third world, with conditions attached.

Of course it is a challenge to long-held privileged positions. The idea of a South-South bank is overdue. In fact, the very powerful idea of South-South economic comity is overdue. In the last five years, there has been heady growth in the developing world, and the arrival of China on to the world stage has given the group new heft. On average, the BRICs countries put together have seen an annual 7.1% GDP growth rate since 2005, powerful compared to the slowdown in the developed world due to the financial crisis.

But the BRICS don’t really see their goals as a defiance of the established order. These countries have many preoccupations, of which poverty alleviation and failures of governance are of primary importance. Taking over the world isn’t on their agenda. What they are looking for is a level playing-field with the developed world. They’ve created new models of business, new development methods and a new international engagement. They are impatient with the lecturing and hectoring that comes with the funding given by the multilateral institutions. They don’t want to be blamed for the trade impasse in Doha, nor do they want capable candidates from their part of the world to be denied a fair shot at the top international jobs in Geneva and Washington. They have similar issues, and can share solutions that will make a positive contribution to the world’s future. So they decided to start their own shop, one which will consider their peculiar needs, use their common experiences and learnings, and lend to joint projects in their own currencies, decreasing exchange rate volatility and saving millions in transaction costs.

It isn’t just economics on which the BRICS diverge from the West. It’s also politics. In the last year, for most of the U.S. or European-led resolutions on Libya and Syria, the BRICS have voted together. Like India, they don’t believe in interfering in the affairs of sovereign nations; better to let people sort out their own problems organically, the solutions that emerge are more likely to endure. In a joint statement issued after the meeting in Delhi, the BRICS nations declared that diplomacy would work better in Iran and Syria, than war-mongering.

Such determined unity, seen for the first time among developing countries, will seem surprising for those who are not paying attention. But to those in the bloc, it is high time. “Inclusive growth is a BRICS-wide problem,” says Catherine Grant Makokera of the South African Institute of International Studies, who was in Delhi addressing a pre-Summit networking meeting by Jaipur think tank CUTS International. “How do we, as emerging players, balance national interests with common interests? How do we keep the balance between development and redressing global imbalances?” she added.

Clearly, the BRICS countries are starting to feel responsible for the world that they have inherited, and want to take a more active global role.

It’s a good thing. The West, groaning under a massive pile of debt and a thoroughly unfashionable victor’s overhang from the Second World War, should allow them to share the stage. A BRICS bank won’t displace the Bretton Woods system in a hurry, or snatch the role of global policeman from the U.S. tomorrow.

Instead, the BRICS will use their new co-operation to learn how to act in concert at multilateral fora; to trade fairly amongst themselves and learn how to negotiate well; to share valid experiences especially in the development of agricultural economics and on issues of technology transfers; to work together on the environment. They need to think about ironing out the distortions created in the global economy from subsidies by both the North and the South; and to link investment in manufacturing to services which will lead to increased people-to-people contact. “It is so much easier to deal with the advanced countries with their established systems,” says T.S. Vishwanath, principal adviser at the Delhi law firm APJ-SLG, “so we did. Now we need to develop linkages with each other.”

Some of the new efforts of the BRICS will work; some will not. Analysts point out that the idea of a regional bank has been tried by the Gulf countries, and not worked. In a BRICS bank, the clear fear is that the Chinese Renminbi will dominate – China already conducts some bilateral trade in Renminbi. The stand-off in Doha can easily cause a stalemate within BRICS: Each of the five countries suffer from lack of transparency, shaky governance, populist politics, mutual suspicion over tariffs and other intra-BRICS trade barriers.

But this is the first time in history that such an effort is being made. The BRICS seem determined to make it work amicably, and with pragmatism. Russia’s foreign minister Sergey Lavrov, writing for the BRICS Research Group at the University of Toronto, says the BRICS grouping should be that space used to “accelerate the modernization” of their economies, expand public support for mutual benefit and create a “common information space for BRICS.” That means staying as an informal mechanism, and relying on regular summits and meetings between representatives on issues of security, foreign policy, finance and trade.

This is an eminently sensible suggestion, and the group has already moved in the right direction: rather than set up yet another large and inefficient bureaucracy, there is no plan to start a ‘secretariat’ for the BRICS bank; instead, it would focus on extending credit in local currencies and facilitating a multilateral letter of credit for trade, according to the Delhi Declaration.

The test of the BRICS’ strength will come soon. On March 23, U.S. President Barack Obama announced his nominee for the position of World Bank president, which will fall vacant by June 2012. There are already two candidates from the developing world – Nigerian finance minister Ngozi Okonjo-Iweala, and Colombia’s former finance minister José Antonio Ocampo. Next year, the post of Director General of the World Trade Organization, another key multilateral body, will be up for nomination. For both, the BRICS countries will have to reach a consensus and rally behind a strong common candidate. Then they will disprove the snarky remarks of prominent Western commentators like the New York Times and the U.K’s BBC, who dismiss the BRICS as an “era that has yet to arrive” and the summit as “an organization without any structure at all. Just a little bit of unity but nothing more.”

The UN took years to become an effective union, and the Euro took nearly four decades to become a reality. Given technological advancements and political endorsement, it is likely that the BRICS will coalesce sooner than expected.

Manjeet Kripalani is Executive Director of Gateway House.

This article was exclusively written for Gateway House: Indian Council on Global Relations. You can read more exclusive content here.

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