BRICS: Emerging, not dominating

Shifting the balance

Last month we published an article from the Bertlesmann Foundation arguing that the rise of the BRICS could mean the end of Western domination of global financial and political institutions. Today, Helmut Reisen, Head of Research at OECD Development Centre and author of the Shifting Wealth blog, replies.                              

Wishes and reality often diverge. Najim Azahaf claims that “the BRICS are about to change the power structure in the world economic system”,  one of the major motivations behind the BRICS’ cooperation  being their shared desire to limit the power of the developed economies in the global financial system.

Sure, the sustained growth that large emerging countries has experienced over the last decade and more has conferred on them a considerable growth delta over the OECD average. Combined with very large populations, these growth differences are translating into a new world economy.  For the first time in history, the countries with the largest economic mass are not also the richest countries. 

The shorthand for this complex event is what we call “Shifting Wealth – the recalibration of the world economy toward the East and the South – , well documented in the two first issues of the OECD Perspectives on Global Development. The next report, forthcoming in 2013, will argue that Shifting Wealth is here to stay, notwithstanding severe structural challenges to the process of cross-country income convergence.

An important noncyclical concern is that China’s growth will come down as it is caught in the middle income trap, and with it other emerging middle-income countries whose growth has been increasingly China-dependent in the last decade. A look at the data, however, would seem to suggest that escaping the middle income trap has not been a rare event recently. Cross-country income convergence and emerging-country middle class consumption are probably the strongest pillars for Shifting Wealth for the future decades. These fundamental growth drivers for low and middle income countries remain under emphasised in the media.

Does the change in the world economic system imply a change in the power structure, as Mr. Azahaf writes? The geopolitical dimensions of Shifting Wealth have moved very much into the forefront, as shown by the OECD Development Centre’s Perspectives on Global Development 2010: Shifting Wealth. The re-invigoration of the G20 (which had been created in the aftermath of the 1990s Asian financial crisis) as the premier global economic policy forum, the modernisation of countries’ inclusion, representation and voice in international organisations such as the Bretton Woods institutions and higher political ‘power’ in particular of the large emerging countries are noted features of their shifting geopolitical stance on a global scale.

For international monetary governance, the prospect of the renminbi and perhaps other emerging-country currencies entering reserve-currency functions beside key OECD currencies has gained momentum.  In global trade policy, Shifting Wealth translates into higher retaliation and bargaining power.

Finally, the growing importance of non-OECD countries may translate into acceptance of a different intellectual paradigm underlying cross-border collective arrangements and lower effective compliance of standards and best practices defined and scripted by the advanced economies, not least in the global aid architecture.

However, the majority of smaller emerging countries still submit to the Pax Americana, as is for example visible in the 70+ countries that engage with the OECD in one way or another. And within the BRICS group, there are considerable economic and geopolitical divergences, with China for the time being the only true superpower.

So economic and geopolitical reality still diverge.

Useful links

On the rise of emerging countries and the implications for investment, poverty reduction and development, see Helmut Reisen’s Shifting Wealth blog

See Thomas Fues, “Multilateral politics: At a crossroads”, D+C, on who signed DAC agreements and who didn’t  at the November 2011 Busan conference on aid effectiveness.

Building a new power balance BRIC by BRIC

Today’s post is from the Bertelsmann Foundation and was written by freelance journalist and editor Justine Doody

Western dominance of global financial and political institutions is about to end if the BRICS (Brazil, Russia, India, China and South Africa) have anything to do with it. In June 2012, as Europe stumbled, the BRICS came to the rescue, pledging $75 billion to the IMF’s Eurozone bailout fund of $460 billion. The move illustrates the bloc’s increased importance in the global economy.

Najim Azahaf, project manager of the Bertelsmann Stiftung’s SGI project which analyses the governance structures and reform capacities of countries (and whose study on Sustainable Governance in the BRICS will be published this fall), claims that “the BRICS are about to change the power structure in the world economic system, and our study will provide a detailed profile of strengths and weaknesses in terms of institutional frameworks, government performance and governance capacity and help to answer central questions such as how sustainable their economic development is”.

It’s true that the BRICS’ growth has slowed in 2012, but their success in the downturn compared to the developed economies has seen their relative importance to the global economy skyrocket. Brazil, Russia, India and China accounted for 20 per cent of world economic output in 2012 according to the IMF, a fourfold increase in the last ten years. Along with South Africa, the grouping’s most recent member, the BRICS are home to 43 per cent of the world’s population. And they see in cooperation a way to make their mark on global governance, just as they have on the global economy.

One of the major motivations behind the BRICS’ cooperation is their shared desire to limit the power of the developed economies in the global financial system. Since its first summit in 2009, the group has sought changes to the structures of the IMF and the World Bank. At their March 2012 summit in New Delhi, the leaders of the BRICS again called on the IMF to implement quota reforms agreed at the G20 summit in 2010. The $75 billion promised to the bailout fund in June was given “in anticipation that all the reforms agreed upon in 2010 will be fully implemented in a timely manner, including a comprehensive reform of voting power and reform of quota shares”.

The BRICS agree that Western dominance of financial structures must end, but they have been slow to put forward suggestions for a new order. In New Delhi, they failed to unite around a candidate for the presidency of the World Bank and their action plan was heavy on agreements for future meetings but light on specific policy pronunciations.

This lack of specificity can be traced back to the considerable differences between the countries, on economic as well as on geopolitical issues. Russia is an energy exporter, and benefits from the high energy prices that threaten the manufacturing economies of India and China. Brazil profits from high food prices that disadvantage others in the bloc. China is a true economic superpower, where South Africa is a minnow. India’s population and economic potential is expanding quickly, while Russia’s is in decline.

On security, the bloc has to overcome mutual suspicions that stretch back generations. China and India have long-standing border disputes, and Russia fears that China has designs on Siberian resources. And the five countries have very different systems of government. India, Brazil and South Africa are democracies, China is a communist state, and Russia’s democratisation can at times appear in doubt.

But in spite of their divergences, the BRICS have found ways to work together that will impact their own development and that of the rest of the world. Intra-BRICS trade stood at $230 billion in 2011 and the group is targeting $500 billion by 2015. At the G20 summit in June 2012, the BRICS’ leaders discussed creating a joint safety net in the form of a reserve fund to be used to counter capital flight in any of the BRICS countries. The proposal should be finalised at the BRICS summit in 2013. At the New Delhi summit in March, they had already agreed to explore the creation of a joint development bank. The June declaration brought this plan closer to reality.

Financial cooperation will give the BRICS greater power to shape the world economy, but already, their influence has been felt across developed and developing economies alike. The BRICS’ involvement in development funding is growing. A study by Global Health Strategies showed that between 2005 and 2010, Brazil’s foreign assistance spending rose about 20 per cent a year, China’s grew by about 24 per cent, and India’s by 11 per cent – far more quickly than growth in development assistance from the G7 countries. And an IMF working paper in 2011 argued that the spillover effects of the BRICS’ good performance during the economic crisis added 0.3 to 1.1 percentage points to the growth of low-income countries.

The world is watching to find out whether the BRICS can provide an alternate engine of growth in a post-Western world, or whether their star will wane along with that of the developed economies. But in growth or decline, it is clear that their fortunes will have significant implications for the future of the global economy.

Useful links

Brazil, India, China and South Africa are key partners of the OECD.

On 30 November 2007, the OECD Council approved the roadmap to accession for the Russian Federation.