Rumours Of The Death Of The BRICS Are Greatly Exaggerated: Dan Steinbock

April 3, 2013Marketsby Dan Steinbock

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Rumours Of The Death Of The BRICS Are Greatly Exaggerated: Dan Steinbock

As a result of monetary expansion and fiscal stagnation in the advanced world, the BRICS countries are no longer immune to the debt crises that have plagued the developed economies. But contrary to what the critics may believe, the BRICS, as an alignment, are not headed towards demise.

As the large emerging economies met at this year’s BRICS Summit in Durban, South Africa, last week, they focused on proposals for a BRICS development bank and the future of the global economy in an attempt to counter reduced growth prospects.

Along with long-term growth potential, the common denominator among the BRICS is the legacy of colonialism, which is reflected in their lower level of prosperity as measured by GDP per capita.

On the other hand, China’s economy has grown a fourth larger than that of the other four BRICS nations combined. Even as China’s more prosperous coastal regions move toward mass consumption, other major emerging nations are still coping with industrialization.

The differential pace of economic development is reflected in the political friction that has surfaced between some emerging and developing nations – which, in turn, has been seized by the BRICS critics as a sign of the impending demise of the alignment.

But to paraphrase Mark Twain, rumours of the death of the BRICS are greatly exaggerated.

The BRICS Bank: To Be Or Not To Be?

In Durban, one of the key issues on the BRICS table is the proposed BRICS Development Bank. Critics argue that there is no need for such an institution since the International Monetary Fund (IMF) and the World Bank already exist.  However, these international financial institutions were created in the post-World War II era by the major advanced economies. Although global growth is driven by the large emerging economies, reforms of these institutions have proceeded very slowly as the G7 club is reluctant to reduce its bargaining power despite decades of promises.

In many nations, development banks do an important job by providing financing for long-term economic projects, which are seen as in the national interest, but challenging for the private sector alone to initiate. In turn, the proposed BRICS Bank would seek to provide capital for long-term infrastructure projects, which are vital for industrialization and urbanization. It would also be expected to support trade and investment, as well as financial channels, among the BRICS nations.

Of course, such projects should be the basic staple of the World Bank or national development banks. However, the former does not represent the world in a proportionate way, while the latter lack adequate capital resources. While differences prevail differences prevail over funding for and the location of the BRICS bank, its creation is no longer a question of principle, but a matter of time.

Related: BRICS Close To Creating Common Development Bank: Reports

Related: World Bank Keen To Work With New BRICS Development Bank

Advanced Economies: Monetary Expansion & Fiscal Stagnation

Recently, observers in the West have suggested that the BRICS are fading away, making note of reduced growth prospects in large emerging economies. As Bloomberg concluded, the currencies of the largest emerging have posted the biggest declines since 1998:

“The real, ruble and rupee are weakening the most among developing-nation currencies, while the yuan has depreciated more than in any other period since its 1994 devaluation.”

Actually, the yuan closed at record high after the Cyprus deal, while further appreciation against the U.S. dollar, is expected to be slower. Indeed, what the BRICS currency reports neglect to mention is that, since the great global recession, all major advanced economies have resorted to successive liquidity injections to alleviate their fiscal challenges.

Although the balance sheets of the major central banks have soared to almost $10 trillion, the payoffs have been few. In the United States, stagnation has replaced growth, unemployment remains at nearly 8 percent and labor force participation has plunged. In the Eurozone, unemployment has soared to 12 percent and the area is in recession, again. In the ailing Southern periphery, the rate is twice as high and youth unemployment more than 55 percent. In Japan, the third lost decade has begun.

In the past two years, the expected growth of the advanced economies has been halved to 1.3 percent, while that of emerging and developing economies has decreased by a fifth to 5.1 percent.

The BRICS: Reduced Growth Prospects

The more the BRICS have integrated with advanced economies, whether through trade, investment or financial channels, the more exposed they have become to the debt crises in the West.

In China, growth is currently at 7.5-8 percent annually. In the short-term, inflation may increase slightly, but tighter monetary policy, coupled with lingering overcapacity, will keep prices in check. The real challenges will follow in the medium-term as local debt – the result of liquidity unleashed after 2008 – must be contained. Further, the shift from investment and net exports to consumption rests on accelerating social transfers.

The past year has been very challenging for India, which has experienced several record lows in growth performance. In the short term, growth is likely to rebound with further investment. While neither structural reforms nor fiscal adjustment should any longer be deferred, achieving a growth rate of 6 percent will be challenging.

Currently, growth is lingering at around 3-3.5 percent in Russia; as long as the business environment continues to be perceived as risky, investment will remain subdued, which will reduce growth prospects. While Russian monetary policy may shift closer to a pro-growth stance, sustained growth requires a shift from government spending toward consumption.

Finally, growth is likely to remain around 3-4 percent in Brazil over the next two years. President Dilma Rousseff’s greatest challenge is internal inflation, supported by rigidities in the labor markets, and imported inflation, aggravated by the Fed’s successive rounds of quantitative easing.

World Leaders Representing The World

When the Peace Conference took place in Paris after World War I in 1919, the world was led by only three nations. While President Woodrow Wilson, British Prime Minister David Lloyd George, and George Clemenceau of France represented only a tenth of humanity, they made the decisions for the remaining 90 percent.

When Presidents Xi Jinping, Dilma Rousseff, Vladimir Putin, Jacob Zuma and Prime Minister Manmohan Singh convene in Durban, they directly represent more than 40 percent of the world’s population and global foreign exchange reserves and more than a fifth of the world GDP.  Their combined role in global growth is even higher.

Related: A New Economic Disorder – When Old Western Powers & Emerging Markets Clash: Mohamed El-Erian

Related: Can The Growth of Emerging Markets Outpace Developed Markets?

Related: Have the BRIC Nations lived up to the Hype?

What we are witnessing is the eclipse of the old order of international affairs and the rise of a new one. While the BRICS are no longer immune to the debt crises in the advanced world, they are moving ahead.

By Dr. Dan Steinbock

Dr. Dan Steinbock is Research Director of International Business at India China and America Institute (USA) and Visiting Fellow at Shanghai Institutes for International Studies (China) and the EU Center (Singapore).

The above article is an original release by Dan Steinbock, "The BRICS Summit: Moving Ahead, Slower," China-US Focus, March 28, 2013.

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