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The BRICS' Dangerous Idea
The BRICS concept as a building block of a new world order is not just an empty gesture which allows the five countries – Brazil, Russia, India, China, South Africa -- to preen themselves in a mirror. It is positively dangerous because if it does anything at all it will be to provide the five with mutual support for narrow national interests and to erect new barriers to global trade and capital flows.
Discussion at the BRICS summit in Delhi last week included an idea for a BRICS- built development bank providing finance for other developing countries free from western theories and prejudices. But in practice only one of the five, China, is in any position to provide major long-term funding for such an institution. Its massive reserves reflect not just flows of short-term money but years of surplus on trade and long term capital accounts.
Not so the other four. India’s reserves are owed more to short-term Non-Resident Indian deposits than long-term capital, and its current account remains deeply in the red. Russia has impressive looking reserves – but ones which could melt away very quickly if oil goes back to US$60 a barrel. Brazil likewise has been buoyed by high commodity prices yet is still struggling to sustain growth and keep its current account in the black. As for South Africa it is not really big enough to count as a BRIC at all. It is there because Africa needs to be represented for political reasons, not because it is more important than Indonesia.
Nor does any of the five, even China, have a currency regime and capital market which enables it to underpin the proposed bank with capital in convertible currencies – other than those of non-BRICS. Thus a financing arm would either have to use dollars, euros and yen or – worse – involve barter deals based on BRICS currencies.
More worrying than this piece of nonsense however are the actual economic policies in place or currently proposed for the member states. Russia may not be sliding back into Soviet-era central planning but it has yet to show that the oligarchic form of pseudo-capitalism which emerged with the Soviet collapse is being superseded by one in which Russia’s many skills are free to flourish in a competitive environment. As a very latecomer to the WTO it is at best feeling its way to operating in a global environment in which it does not depend on oil income and its freest, if least acknowledged, sector, agriculture.
China is surely a global trade player but whether it will remain committed to relatively free trade when the benefits it has enjoyed for 20 years from other countries’ open markets are no long so attractive, remains to be seen. What we do know about China’s economy is that for all the talk of continued liberalization, there has actually been a strengthening of the power of the state-controlled sector. Yet because China is seen as a model of success its influence on other BRICS, let alone the bigger group of developing countries, is likely to promote state capitalism at the expense of the genuinely private sector and open competition.
The shine has come off India too for the time being. In this case the problem is not so much that of state enterprises – protected as many are through preferential treatment. It is the uncertainty of laws and rules in a country where politics are in almost constant turmoil and ministers are either venal or blow with the prevailing political winds. Government deficits caused by consumer subsidies are one problem, raising the cost of capital. But given the good return to private capital in India this is far less of a problem than arbitrary laws and imposts. Recent cases of retrospective taxation, large-scale graft and blatantly unequal treatment of local and foreign, state and private firms are not just negative for India.
Transplanted to the international arena by political leaders who like to enhance state power for their own pecuniary interest. India would again have a negative impact on global trade, and the attitudes of other developing countries, that it did in the 1960s and 1970s. Meanwhile it is likely to see China’s relative outperformance as due to Beijing’s mercantilism than to India’s failures to reform.
Like China and India, Brazil has come a long way in the past 15 years of opening up its economy and pursuing broadly sensible policies. But here too the tide may have turned. It has not been content with measures to bring down its commodity-inflated currency to make its manufactures more competitive. It has raised barriers to many foreign goods, particularly from China. Competition from its BRICS partner has not created solidarity among the five but induced Brazil to appear to start to go backtrack after years of liberalization. Brazil has a history of high tariff barriers and state capitalism. In the 1960s this seemed successful for awhile in raising growth rates but then led to years of stasis because capital was used inefficiently and protected industries stagnated. Will the BRICS doctrine lead it back to that era?
Debt problems in the US, Europe and Japan are worrying. But they are less worrying for the globe than the creeping retreat from liberalism among the countries which are supposed – at least according to themselves -- to be the future leaders. The interests of very large countries anyway tend to be different from those of the small and medium sized ones, like Turkey, Thailand, Mexico and Morocco, which are the majority. Being less self-sufficient, they thus have greater interest in free trade. They are less likely too to indulge in the BRICS goal of reducing bilateral trade imbalances among them, a sure cover for managed rather than free trade.
With US leadership of the global system slowly on the wane it is natural that other countries want to play a large role. But the BRICS’ attempt to arrogate leadership to themselves will not only not work but could do lasting damage to the world trading system and hurt the small and medium size developing countries more than any.