Column : Cementing the BRICS symbolism

Written by MK VENU | Updated: Feb 6 2013, 06:55am hrs
The BRICS countries meeting in Durban early next month would further flesh out some ideas that had become part of their resolution at the New Delhi Summit in March 2012.

Some of the big ideas, such as setting up of a BRICS bank to create a long-term fund base to facilitate social and infrastructure development projects in emerging economies, will be discussed in greater detail. Of course, sceptics in the West believe these five countriesBrazil, Russia, India, China and South Africasuffer from too much ego associated with rising powers, and will not be able to agree on how to structure the new development bank, its shareholding pattern, location of the headquarters and so on.

For instance, western analysts are quite convinced of the intense rivalry between China and India, and cite this as one reason why BRICS will not be able to evolve robust institutions. Well, the answer to this could possibly be to study the unprecedented rivalries among the rising European powers such as Germany, the UK and France in the late 19th and early 20th centuries. That certainly did not prevent them from moving towards a common European institutional mechanism in the decades following after the War.

Anyway, the concept of BRICS is a nascent one and will take its time to mature, and it is indeed meaningless to prejudge its outcome so early. At the moment, it must be taken seriously as a reflection of the aspiration of emerging economies to evolve their own institutions of governance, which can even work as partners with the existing multilateral institutions dominated by the western powers.

In this regard, the BRICS bank is being envisaged as an institution that will supplement the efforts of existing multilateral funding agencies like the World Bank. While this will take some time, the BRICS economies can immediately explore some powerful, even if symbolic, ideas to tell the world about their long-term commitment to the project of imparting stability and security to a rapidly changing world order.

The power of symbolism is often used very effectively in diplomacy and it can produce a disproportionately big impact if timed correctly. Perhaps the time has come for the big emerging economies to resort to such symbolism if only to reinforce their long-term commitment to the BRICS project.

As a symbolic beginning, the central banks of BRICS economies can agree to subscribe to safe, risk-free bonds issued by the other BRICS governments. For instance RBI, which keeps over 60% of its reserves in US treasury bills, can easily keep about 0.5% of its reserves in the bonds issued by China, Brazil, Russia and South Africa. Similarly, purely as a symbolic beginning, China too can keep 0.5% of its reserves in bonds issued by India, Brazil, Russia and South Africa.

Brazil, Russia and South Africa can do the same. The reserves of China ($3.2 trillion), India ($300 billion), Brazil ($380 billion), Russia ($540 billion) and South Africa ($50 billion) total about $4.4 trillion. Therefore, central banks of these five nations could hold bonds issued by the other BRICS nations valued at about $22 billion (0.5% of $4.4 trillion). This will send out a loud message that emerging economies are no longer keeping their reserves in the dollar, euro, pound and yen alone.

In reality, if one goes by the size of GDP on a PPP basis as well as the trade and investment volume among BRICS economies, a lot more than 0.5% weightage needs to be given by these central banks to bonds issued by other BRICS governments. Possibly the only reason why this is not happening today is because most of the BRICS economies do not follow a policy of capital convertibility. Their government bonds cannot be bought and sold freely in the international market.

Of course, this will take time as rising economic powers like China and India are quite aware that gradually they will have to build new financial architectures to enable them to become convertible on the capital account and internationalise their currencies. This may follow a non-linear trajectory once intra-emerging economies trade and investment volumes grow so big as to put massive pressure for a change in the financial architecture in these economies. This is bound to happen in the next two decades.

However, in the current context, a small beginning can be made by BRICS central banks to diversify their reserves in the emerging market government bonds. The sheer symbolism of this will not be lost on those who preside over global institutions whose relevance is rapidly eroding as they fail to take cognisance of emerging realities. The greatest irony that hits one in the eye is the manner in which the IMF increased its fund corpus substantially from $500 billion to about $900 billion only to de facto mitigate the European financial crises. Any reform within the IMF to reflect the aspirations of emerging economies is mere tokenism so far. The World Bank too is fast losing its relevance as much of the emerging world can do without its funding. For instance, Africa already has multiple sources of bilateral development funding from China and other emerging economies which possibly far exceeds what the World Bank can ever imagine committing to them. Therefore, the emergence of the new bottom-up financial architecture is a reality that cannot be wished away, whatever the sceptics in the West may imagine.

Consequently, as a starting point, the Durban summit could propose that the central banks of BRICS economies subscribe to the bonds issued by other BRICS governments as a symbol of their long-term commitment to working with each other in the overall interest of global security, stability and prosperity.