By M K Venu
As the leaders of BRICS countries meet for their fifth summit in Durban this week, it might be instructive to conduct a reality check to assess where the BRICS project is headed. There is no doubt that the acronym BRIC, which was originally thrown up by an American investment bank purely as an arbitrary aggregation of large emerging economies, has occupied the collective mindspace like no other acronym in the alphabet soup of regional trade or security arrangements in recent years. The BRICS cannot be slotted as a purely trade or a security grouping. This ambiguity seems to be its special brand proposition so far, though it provokes strong reactions (for and against) from the scholars and practitioners located east and west of the Suez. That a Wall Street firm should have sparked off the idea of an emerging pressure group against West-dominated financial arrangements lends itself to rich irony.
The fifth summit, to be held in South Africa, has special significance. South Africa is a more recent entrant to the group, which originally comprised Brazil, Russia, India and China. The country is trying to position itself as a representative of the entire African continent. Africa is seen by all as the next big driver of global growth. As part of a larger BRICS initiative, the Chinese are already talking about setting up an African development bank. This is interesting because it seems to follow the pattern adopted by the West as it defined the global financial architecture after the Second World War.
For instance, the BRICS development bank, formalised at the New Delhi summit last year, will be positioned on the lines of the World Bank to drive development funding in emerging economies. The African development bank that Chinese officials have lately been talking about could play the role of the Asian Development Bank, which was largely funded by Europe, the US and Japan to drive development in poverty-ridden Asia in the 1970s. The African development bank could also be imagined as a loose subsidiary of the BRICS bank, which will help fund development in Africa.
Additionally, both China and India have supported the idea that the BRICS could create a foreign exchange currency reserve pool to fortify these economies against a possible balance of payments crisis, leading to speculative attacks on their currencies. The threat of global capital volatility has not receded as most of the OECD economies continue to face prolonged recession and possibly worse sovereign debt crises in the future. It is being proposed that a sizeable currency reserve pool may be created on the lines of the combined foreign exchange kitty formed by the ASEAN economies as part of the Chiang Mai Initiative, in the aftermath of the East Asian financial crisis in the late 1990s. This reserve pool was increased to $240 billion after the 2008 meltdown, when many Asian economies experienced serious capital flight.
It is felt that the BRICS must also have its own currency reserve pool, which acts as a psychological cushion against short-term capital flights and speculative attacks on the currency. For instance, a foreign exchange currency pool of, say, $200 billion will send a strong signal that these economies can dip into the fund whenever there is a balance of payments crisis. This institutional arrangement, by itself, could deter potential currency speculators. In essence, the currency reserve pool seeks to partly replicate the role of the IMF, which helps stabilise economies facing a liquidity crisis in the short run. In a sense, the BRICS bank will act like the World Bank and the currency reserve pool could play a financial stabilisation role, like the IMF. The creation of a new financial architecture in a South-South context is the most concrete idea that has emerged from the four BRICS summits held since 2009. The contours of the new financial architecture emerged during the previous two summits, held in New Delhi and China.
In these two summits, it was decided that BRICS nations must start lending to each other in local currency for trading purposes so as to partially move away from dollar denominated trade. Following this, the RBI had even opened a special yuan window for foreign borrowing by Indian corporates. Some big infrastructure companies have started accessing yuan loans from Chinese banks to import equipment from China.
With the advanced economies focused inwards, grappling with their own economic problems, it is perhaps time to give a further push to the new financial architecture being fleshed out by the BRICS economies. The concept of a BRICS currency reserve pool, as a future cushion against a short-term balance of payments crisis, is well timed. It comes at a time when the G-20 is unable to address some of the issues raised repeatedly by the emerging economies with the US and Europe. For instance, the BRICS nations have argued that successive and large liquidity injections by the US and Eurozone governments have tended to create speculative bubbles in oil and other commodities, affecting the energy and food security of importing countries in the emerging world. The central banks of the US and Europe have effectively pumped close to $5 trillion of fresh money since 2008 without any significant output growth. This scale of fresh currency injection has created multiple bubbles in real estate assets and commodities all around the world. The BRICS economies are particularly vulnerable to this. The proposed BRICS currency pool is therefore relevant in this very context.
The success of the new financial architecture and other initiatives depends on how inclusive China is in terms of its larger vision for the BRICS. China is the largest economy in the grouping and so will have the biggest role in nurturing these new institutions. It will have to act selflessly if it wants to build alternative institutional arrangements that look at development from the emerging economies prism. The BRICS will also have to be careful about what it regards as its core strength. So far, it has largely been perceived to be pushing for an alternative economic development paradigm. But in recent times, the BRICS has also started taking positions on global security related matters. The danger is that on many critical security matters, the BRICS could be split down the middle. Many emerging nations coming together in strong economic alliances still seek active military cooperation with the US. The global economic architecture is changing much faster than the global security architecture. The BRICS would do well to recognise this reality.
As published in The Indian Express