BRICS – does it really make sense?

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KATARZYNA CZUPA
Between 14th and 16th of July, the highest representatives from Brazil, Russia, India, China and South Africa participated in the 6th BRICS Summit held in Fortaleza and Brasília.  The event takes places annually and always attracts a great deal of attention, yet this year’s edition was particularly longed for, as it aimed to prove that BRICS is a real alternative to the Western economic and political order.

Given the meeting outcomes, expectations in terms of the group’s position on the global stage seem right (at least to some extent). The Summit adopted plenty of seemingly momentous documents: the Fortaleza Declaration and Action Plan, the Agreement on the New Development Bank, the Treaty for the Establishment of a BRICS Contingent Reserve Arrangement and agreements among BRICS Development Banks and Export Credit Insurance Agencies. Nevertheless, analysing situation more deeply, one will notice pretty soon that the future of the BRICS’ cooperation may not be that bright.

Big words

First there is the Fortaleza Declaration and Action Plan. It’s a non-binding document enumerating sets of goals that the group’s members (if we can call them that) wish to achieve. Inclusive economic growth, the world peace, engagement with other developing countries and commitment to international law and to multilateralism are only some of them. Such phrases, although undeniably noble, appear bogus even in the mouth of leaders of more democratic and economically liberal countries, let alone Vladimir Putin’s (President of the Russian Federation), Jacob Zuma’s (President of South Africa) or Xi Jinping’s (President of China). Not only none of them managed to shift their countries toward a genuine political and economic development, but also during their ruling all mentioned countries only strived to sustain the economic growth shelving plans of so needed structural reforms. Worse yet, these incumbents seem to value neither democracy nor human and political rights. Russia’s recent annexation of the Crimea (the Ukrainian Peninsula in the Black Sea), in defiance of the international law, and its covert (or maybe not) support for the Ukrainian rebels show that BRICS is probably not the best custodian of the global welfare, isn’t it?

Then we have the so-called New Development Bank. During the event, the group’s members, “mindful of a context where emerging market economies and developing countries continue to face significant financing constraints to address infrastructure gaps and sustainable development needs”, signed an agreement creating an international institution which aims to balance the West’s influence on the economic order (the New Development Bank is claimed to be the World Bank’s counterpart). According to the agreement, the bank would “reflect the close relations among the BRICS countries, while providing a powerful instrument for increasing their economic cooperation”. Quite a deed, one would say. Yet it took over a year to reach a consensus just on choosing the form of the bank and the main framework of its operations (plans about creating the institution were revealed during the 5th BRICS Summit taking place in March 2013 in Durban). Few believed that these ideas would be put into action at all.

The New Development Bank’s primary focus will be to mobilize resources for infrastructure and sustainable development projects in BRICS and other emerging economies and developing countries, which is said to “complement the existing efforts of multilateral and regional financial institutions for global growth and development”. To fulfil its purpose, the Bank, which will have its headquarters in Shanghai, will support public or private projects through loans, guarantees, equity participation and other financial instruments as well as provide technical assistance for projects implemented by this institution. There will be also an international reserve fund, so-called Contingent Reserve meaning an alternative to the International Monetary Fund (IMF) that is to complete the BRICS system. According to Treaty for the Establishment of a BRICS Contingent Reserve Arrangement, this institution will forestall short-term balance of payments pressures, provide mutual support and further strengthen financial stability. The initial total committed resources of the CRA are planned to amount to one 100 billion US dollars.

Destined for failure

It all sounds very reasonably. Five most rapidly developing countries (at least in theory) want to foster their own prosperity not being patronized by erstwhile powers. They even give helping hand to others and are open to global cooperation (according to the agreement the membership will be open to members of the United Nations).  But each of BRICS countries faces some internal problems that may thwart all these elevated plans. Firstly, there are immense income inequalities. In 2009, income shares held by highest 10 per cent of populations of Brazil, Russia, China, India (data for 2010) and South Africa were 42.9, 31.7, 29, 30 and 51.7 per cent respectively. In the case of the lowest 10 per cent the values were 0.8, 2.8, 3.7, 1.7 and 1.2 respectively. It means that one tenth of these countries’ inhabitants was disproportionally more affluent than other groups. Even in countries from the post-soviet region income distribution is more equal – in Poland and Ukraine the highest 10 per cent held 27 and 22 per cent of income, while the lowest 10 per cent’s share was 3.3 and 4.2 per cent respectively. This problem incurs social unrests, which together with political rights restrictions seriously affect stabilization, an essential element of development. Having not enough money and not being able to express their dissatisfaction people simply take to the streets. Mass protests in Brazil taking place just before the World Cup and frustration rising among the Chinese low-paid workforce shows that if the group’s members want to help the world they ought to resolve their problems first (given the vast financial resources of each of these countries creating a multinational institution seems to be not very useful tool for it).

Another thing is that success of the World Bank and IMF derives from the fact that the United States, a country that shaped most of these institutions’ operations since their creation, has been a leading global economy with a truly democratic political system. The reasoning behind establishing the whole Bretton Woods system was to help rebuild Europe after World War II, promote free trade, make currencies more stable and support troubled economies so as to eradicate poverty around the world. Granted, the system was conceived so that Washington could increase its influence on other states by pumping in them its money and selling them its goods. It’s also true that the voting procedures within these institutions are far from fair (position of particular country depends on its wealth) and that some of their actions have not been the most fortunate (applying the so-called Western model of development without analysing local needs as well as demanding implementation of austerity measures at all costs have been particularly criticized). Nevertheless it’s hardly possible to imagine a situation in which a sick person, and BRICS is definitely not the healthy one, tries to heal other people. None of the World Bank and IMF’s projects would have been successful if it hadn’t had a stable financing and clear formula. The United States, although not acting selflessly, has been able to uphold this global system. Brazil, Russia, India, China and South Africa seem to be no match for this task.

Looking for panacea

There are also plenty of technical problems. As Shaji Vikraman from the Economic Times noticed, the international reserve fund can help BRICS economies abandon regressive measures such as a clampdown on imports and outflows during a volatile phase and liquidity shocks thus bolstering, in the medium-term, global acceptance of their currencies as additional financial sources boost production and trade. But the dilemma could be in terms of the rate of borrowings the new Bank will charge compared to the IMF and WB and over a longer tenure. As far as the New Development Bank is concerned, it may not secure a composite rating on the lines of those lenders given the individual sovereign ratings. So borrowings ought to be costlier. That seems a lot.

The global balance of powers has changed. There is no point in denying that. The World Bank and the International Monetary Fund, along with the United Nations Security Council’s decision-making process, in their current form no longer fit in it. No wonder that some emerging powers want to change the status quo. Yet, creating an alternative system while struggling with a great deal of internal problems is not a good solution. Maybe it will be better if instead of wasting time and money BRICS’s incumbents just focus on modernizing their countries. Given their increasing role on the global stage (according to the Economist, China will become the world’s largest economy by the end of the year), they should try to change rules of game. After all the simplest solutions turn out to be always the best.


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Katarzyna Czupa

Katarzyna Czupa jest ekspertem Centrum Inicjatyw Międzynarodowych ds. Bliskiego Wschodu oraz koordynatorem projektu „Let’s talk about Islamic finance”. Obecnie pracuje jako młodszy analityk w firmie Analizy Online, gdzie zajmuje się analizą rynku funduszy inwestycyjnych. W okresie od kwietnia do listopada 2016 r. pracowała na stanowisku młodszego analityka w Domu Maklerskim Banku Zachodniego WBK, gdzie była odpowiedzialna za analizy rynkowe oraz wycenę spółek. W okresie od stycznia 2014 r. do kwietnia 2016 r. pracowała w CASE – Centrum Analiz Społeczno-Ekonomicznych na stanowisku koordynatora ds. projektów oraz asystenta naukowego. Obecnie realizuje studia doktoranckie w Kolegium Ekonomiczno-Społecznym Szkoły Głównej Handlowej. Jest absolwentką kierunków finanse i rachunkowość (Szkoła Główna Handlowa) oraz stosunki międzynarodowe (Uniwersytet Warszawski). W 2013 roku otrzymała stypendium Ministra Nauki i Szkolnictwa Wyższego za wybitne osiągnięcia naukowe.

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