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The BRICS Summit 2012 – Is an architectural change in world trade and finance in the offing?

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The recently concluded BRICS Summit held in New Delhi represented by Brazil, Russia, India, China and South Africa has resulted in some bold measures which may pave way for some structural changes in world trade and finance.

Now what is BRICS? The acronym BRIC was the brainchild of Goldman Sachs economist Jim O’Neil to identify the shift in global economic growth moving towards emerging markets. With the addition of South Africa in 2010 BRIC became BRICS.

Ever since their formation leading to their first summit in 2009 nothing tangible could be created as all the members in the group were from four different continents having radically divergent economic and political systems and competing priorities. But even though they have varying economic models with divergent governments, they share some common geopolitical, economic and trading interests. For example on issues like reform of the United Nations and expansion of the Security Council to be more representative, greater role  at  Bretton Woods  institutions, boosting intra-BRICS trade etc., they share common views. These ambitions kept them together and now after many deliberations there seems to be some concrete proposals emanating from their parleys.

The  New Delhi meeting  which could provide some  ground breaking measures was held against the background of Brazilian manufacturers  protesting against the Chinese  exchange rate mechanism which keeps the Chinese yuan (Renminbi) undervalued  and with  most member countries  facing an economic slowdown. Chinese  Premier  Wen  Jiabao  created an uneasy reaction from investors  when he said that that Chinese GDP growth forecast for 2012 is 7.5%  as against the rate of 9.2% in 2011.China is not the only economy losing steam. Brazil’s GDP is slowing down and the country’s central bank has been slashing rates as a result. India’s GDP grew at the lowest in the last three years during the fourth quarter of 2011 although it was relatively up at 6.1%. South Africa has not addressed its energy problem as yet and Russia is reeling under a heavy unemployment index.

Yet the economic index of these emerging markets are far better than the more tepid developed economies of the United States , Europe and Japan.  Together the BRICS account for 26% of the world’s landmass and 42% of the global population including India and China, two of the world’s most populous countries. They account for 40% of the global GDP (US$18, 486 trillion) and it is rapidly increasing. It is predicted that the BRICS’ total GDP will be larger than that of the United States within three years and is expected to make up to 50% of the global GDP in the next eight years with China being billed to overtake the US economy by 2027. The BRICS bloc is aiming to achieve an intra trade of US$500 billion by 2015.

According to O’Neill “For different reasons, each of the countries has got some serious policy issues to deal with,  that will determine whether they continue down the path we got everybody so excited about” .

At the Sanya summit in China held in 2011, BRICS nations signed a framework agreement to enable them to grant credit in local currencies. This was the first time the BRICS emerged with a concrete idea to develop an alternative to the dominant position of the dollar in international trade and finance. Now as a follow up to the Sanya resolution, at the New Delhi summit, more pronounced measures were taken to make intra trade viable without the dollar being used as a medium of exchange.

In the words of Indian Prime Minister Manmohan Singh, the supply –side factors like energy, food, water and capital could upset the growth story of the BRICS in the medium term. Dr. Singh advocated reforms in most global institutions and active sharing of expertise among five nations to overcome the adverse effects of supply side factors in not just the developing world but Europe as well. He felt that the BRICS must address the deficiencies in global governance because institutions of global political and economic governance created more than six decades ago had not kept pace with the changing realities of the world.

Of the four constraints the summit identified capital as the one that should be tackled urgently. It was felt that the BRICS must address the expansion of the capital base of the World Bank and other multinational development banks to enable them perform their appropriate role in financing structural development.

Wide ranging measures affecting global financial architecture

1. The major item on the agenda at the summit was a potential BRICS “basket currency” that could serve as an alternative to the US dollar and euro. This is a significant move that would redefine the global exchange architecture. At the summit all the leaders signed an agreement to give out loans in their local currencies thus moving away from the US dollar and euro. This will further widen External Commercial Borrowing mechanism.

2.  Another Important milestone has been the possibility of a “BRICS bank” to serve as an alternative to the Western –led traditional institutions like the World Bank and the IMF. The initiative would allow the member countries to pool resources for infrastructure improvements and could be used in the long term as counter balancing vehicle of lending during global financial crisis such as the euro sovereign debt crisis.

However Mr. Sudhir Vyas, a senior Indian foreign ministry official told reporters that the BRICS would have to determine how the bank would be structured and capitalized. Such an ambitious project would take time. But a beginning has been made to defy the criticism that the BRICS is nothing but an empty acronym.

3. Another significant development is the benchmark equity index derivative shared by the stock exchanges of the five BRICS nations. This would be cross –listed, so stocks can be bought in local currencies.

4. The BRICS Trade and Economics Research Network ( BRICS –TERN) has called on member countries  to build a consensus to field a common candidate from among the developing countries for the post of Director –General of the World Trade Organization.  The Network’s meeting was equally vociferous  against unilateral protectionist measures on climatic change like aviation tax, border adjustment tax and related issues being taken by some developed countries  and called for the BRICS countries to adopt pro-active measures to counter  such unilateral measures adopted by some developed countries.

When we look at the above moves by the BRICS it is an indication that the South Bloc is aiming for a major role in balancing the architecture of global economic governance. It would be interesting to see a US reaction. Will it be a story of BRICS and mortar?

By S. Srinath

Email: srinath@verveindia.com

The author is a director  – Advisory Services, Verve Financial Services

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