New Challenges for the BRICS

April-May 2014 | Global

Twelve years have passed since Jim O’Neill, former head analyst for Goldman Sachs, suggested to the business community that several large and fast-growing economies be grouped together to make investment decisions much easier. Since that time, China, India, Russia, and Brazil have become and see themselves as nations bound by common economic interests and pursuing similar goals. Just how justified the hopes are that they’ve attached to this remains to be seen, but it is already clear today that these states, which recently expanded their ranks to include South Africa, are keeping an eye on both economic and political issues that could become their contribution to the global agenda.

This process is very, important, first and foremost, because the BRICS countries are, on the one hand, intrinsically perceived as non-western (Russia and China were antagonists to the West during the years of the Cold War, India and Brazil were European colonies at various times, and South Africa is a symbol of the struggle between the local population and their alien colonial masters), yet they also strongly depend on the West and play a complementary role to its economic system. If these countries truly intend on becoming the legislators of the world’s economic trends in 30-40 years, they will have to tackle, within that time, the topics that currently dominate global politics. And not tackle them by confrontation with the leading powers, but rather through “creative development” of existing trends.

In this situation, I think the BRICS agenda should be combine several factors, which would force this association to be taken seriously as a prominent agent on the global political and intellectual scene. First, it must certainly address topics that are of particular significance to these countries: energy, the export of natural resources, industrial development, etc. Second, these topics ought to be positioned in a defensive rather than an aggressive manner, highlighting not just the countries’ achievements, but also their potential for development; not just their rights, but also their responsibility. Third, major topics introduced into the global discourse should not be reduced to North-South relations nor should they be pigeonholed as “non-West,” but should be framed as global in character from the outset. And fourth, it would be worth bringing up topics that the leading powers would most likely not expect to see from the BRICS countries.

Rethinking Financial Imbalances
Equally important is a possible BRICS initiative to better understand the financial situation that has developed around the world in recent years and which is unlikely to change radically in the decade ahead.  The most important characteristic of this situation seems to be the massive imbalances in economic relations between the developed nations and the BRICS states. Whereas the West was a global lender in the mid-90s and the periphery countries had a difficult time recovering from either the 1980s crisis or the collapse of the Soviet bloc, today America and Europe are the doubtful debtors while China (including Hong Kong), Russia, India, Brazil, and South Africa (at the end of November 2013) have reserves of $5.2 trillion.

Yet the very self-confidence that this state of affairs has given the BRICS countries could play a cruel joke on them as well.
Let us not forget how the rapid rise of China happened: After the 1997 Asian crisis, the U.S. and Western Europe failed to put any protectionist measures in place against countries that drastically devalued their currency, putting the West at an obvious disadvantage. The same can be said about oil prices, the rise in which could have been stopped in the mid-2000s, but the U.S. and Europe took no action and allowed Russia and Saudi Arabia to reap the benefits. Much of the BRICS’ phenomenal growth in decades past has been made possible thanks to the laissez-faire attitude of the West, and the global imbalances weren’t so much the consequence of developed countries trying to borrow money as they were of the desire of the emerging economies to ensure themselves reserves in the event of a new crisis.

But we should be aware that developed countries can devalue their own currencies too, accelerating inflation and devaluing the BRICS’ reserves in one way or another. Moreover, just as in 1971, they would not be risking anything, which is why newly rich countries seem nowhere near self-sufficient and why global imbalances are more likely to threaten them than Europe and the U.S. Depreciating the dollar and the euro may be more favorable for their issuers, but is fraught with the danger of serious turmoil in the global periphery. That’s why many of the self-confident steps these new “masters” are allowing in their economic policies elicit nothing more than a smile from me.

In this situation, the BRICS countries would be wise to put the issue of overcoming the global financial imbalances first, and not in the form of an ultimatum to the West, but rather as an offer to gradually and rationally solve the problem. The first step could be recognizing that the imbalances were caused by the economic policies of both sides, the West and the periphery. From the late 1990s and throughout the 2000s, the West contributed significantly, with its unrelenting demand, to the development of the BRICS states; today, the BRICS countries are finally recognizing the need to support the West in its tough position. This could radically change the relationship of developed countries and the whole world to the BRICS, both economically and politically.  The second step could be to reach an agreement whereby western debt could be used to purchase real assets in these countries. Existing restrictions on investments from BRICS countries in Europe and the U.S. could be removed and the debts of the leading powers could be sharply reduced, ensuring quicker economic growth worldwide. Thirdly and finally, if they managed to achieve equal opportunities for investing in the world’s leading economies, the BRICS would become the natural leaders in the eyes of other periphery countries seeking to do the same.

In other words, it is vital for both political and economic relations that the BRICS countries offer the West a respectful and effective method of resolving the current debt crisis.

Concept of “New Disarmament”
One of the modern world’s major problems is maintaining global security. Each of the BRICS countries has expressed itself on this issue multiple times in one form or another and in most instances, this bloc’s position looks much different than the West’s. Though there is some solidarity with the U.S. on the fight against terrorism, Russia and China are strongly opposed to the West, which is increasingly doubtful about the effectiveness of UN mechanisms and is more ready to intervene in various conflicts, thereby violating  sovereignty as it is traditionally understood. In response to military actions by the U.S. and its allies, the BRICS countries are talking more often about the need for an appropriate response and are strengthening their military power.

In our view, this is futile. Despite the fact that no major interstate conflicts took place from 2011-2013 and that local wars and guerrilla fighting mainly used low-intensity weapons, defense spending reached a historical high of $1.83 trillion in 2013. And while the U.S. is usually the biggest militarist, in 2012 China came in second, spending $166.1 billion and increasing military spending 7.5-fold since 2000. Russia has announced its intention to spend 20 trillion rubles [$71 billion] by 2020 for developing and retooling its armed forces.

There is no justification for military spending that is 17 times more than all nations spend on humanitarian aid or aid to the poorest countries in the world. But even more importantly, the resumption of an arms race between the U.S. and China is fraught with dangerous consequences. Many experts analyzing the nature of China’s behavior in the Pacific draw direct parallels to Germany at the beginning of the 20th century and predict a repeat of the events that led up to the beginning of World War I. But as in the case of their economic power, the power of the BRICS countries seems to be largely illusory.

Under such conditions, the most rational move that we think all of the BRICS countries can take is to call for drastic and proportional reduction in military spending and to redirect all of the savings globally towards aid for the poor countries. Such a move today could unexpectedly satisfy all interested parties: the U.S., because it is starting to seriously fear the Chinese threat; Europe, which would undoubtedly welcome the humanitarian direction of such an initiative; all of the underdeveloped states, which would be receiving huge benefits from such a plan; and finally, the BRICS countries themselves, whose economies aren’t strong enough to well withstand long-term increases in military spending.

Corruption and Transparency Problems

It’s well known that the BRICS states re constantly rebuked by developed countries is for the lack of transparency in their economies, the dominance of state-owned companies, and the merging of business interests with those of government officials, resulting in widespread corruption. According to the Corruption Perception Index compiled annually by Transparency International, Brazil and South Africa tied for 72nd place for the least corrupt countries, China ranked 80th, India – 94th, and Russia – 127th. It seems that the BRICS are constantly apologetic and the West benefits from positioning itself as a society that has reached the highest level of governance and responsibility.

Indeed, corruption is a real issue in developing nations; moreover, the relevance of this problem on a global scale is to a large extent determined by its extent in the periphery countries. But now we apparently should recognize that the battle against corruption is impossible in a particular country, in the context of the all-permeating globalization. Perhaps one country could be relatively successful in eliminating the low-level corruption of those at the very bottom, but when it comes to plundering the national budget, providing contracts to large international companies, and corruption at the top echelons of government, it seems that such forms of abuse are only possible through the close collaboration of the national and international financial systems. Preventing these people from legalizing their wealth abroad, where it is safeguarded from the invasiveness of national law enforcement agencies or changes in government, would be the most powerful inhibitor of corruption that has been envisaged in the modern world. As a Russian researcher recently noted, in a corrupt country, the elite “would rather hang themselves than be ‘nationalized.’ ”

Furthermore, the scale of interaction between the corrupt elites of developing countries and western financial institutions is striking. According to some estimates, the average number of annual financial transfers from countries in the “South” to banks in the “North” exceeds $1 trillion, while corruption curtails the GDP in developing countries by 4-8% annually. If western financial institutions weren’t so eager to benefit from this state of affairs, and if large international companies didn’t cash in on kickbacks abroad, and if real estate owners in the most prestigious cities of the world weren’t so interested in maintaining high foreign demand for luxury properties, corruption at the state level wouldn’t be possible in developing countries.

The BRICS countries, under these circumstances, could take the initiative to combine the efforts of periphery countries and developed powers to combat corruption. Such an initiative could seriously intensify the fight against corruption within the BRICS countries themselves, using all of the mechanisms of citizen participation and monitoring, while the West could reject the use of offshore jurisdictions and almost completely ban large-sum transfers from developing countries to U.S. and European banks. Were this to happen, the BRICS countries could act quickly and decisively to head off the West’s initiative in addressing one of the most important and pressing issues of our time.

The BRICS countries today are on the threshold of a certain crisis in developing mutual relations. Trade among member states is less than 6.5% of their total trade and no single country in the bloc is the major trading or investment partner of any of the others. Politically and socially, these countries differ greatly and their relations to the western world are just as different.

To save the BRICS as a single association and to strengthen the feeling of internal solidarity and the sense of identity, it is critically important for bloc members to initiate a number of proposals in the years ahead that will revolutionize global politics. We list below the first ones that came to mind, but there could be many more. All of these initiatives, however, should have a number of common features.

First, they must advance in areas that have recently become of interest to politicians in western countries.

Second, they must directly or indirectly recognize that developing countries are either just as responsible as developed countries for what happens, or should work in accordance with a set of standards, or should want to participate alongside developed nations to improve the world.

Third, their implementation should offer substantial benefits to either the BRICS countries themselves, or to states tied to the association through alliance obligations or economic interests, or to countries with which the BRICS countries are most interested in developing relations.

Fourth, all initiatives that are formally placed on the “western” agenda should contain proposals or points that would be very difficult or impossible for the West to adopt – in which case, the BRICS would win, whatever happens.

Of course this proposed paradigm does not necessarily mean that the BRICS countries will actually form a single, powerful bloc in the long run. But at the very least, such a policy could bring them closer for many years and ease potential tensions among them, if not global conflicts.

Text: Vladislav Inozemtsev, PhD in Economics and Director of the Center for Post-Industrial Studies