What is the point of Brics? Jim O?Neill invented the acronym to make it easier for young share-dealers sitting at fast computers to make their investments without having to worry about the details of what they were doing. Bric, at first, gave them four fast growing economies at the start of the 21st century. Later, it became Brics. But beyond their being fast growing?then, though not now?there is no coherence to Brics as a group.
During the Cold War years, we had the West and the East. There was also later the North and the South as invented by The Economist. Both those notions are now outdated. The Cold War is over and the North is struggling to grow at positive rates, while the South is bounding away. Brics are an uneasy combination of the North-East (Russia), South-West (Brazil) and South-East (China, India and South Africa). Two of the five are land-poor, labour-abundant economies?China and India?and three others are land-rich, labour-scarce. There has been no trade relation between them historically, though China?s hunger for energy and mineral resources has taken it to South America and to Africa. Russia sells energy mainly to Europe and armaments to everyone. The trade flows among the countries are not the most important they have among all nations. Brics is an accident which has happened; a joke that has taken an ever larger shape.
There is a vacuum in the global economy because unlike in the second half of the 20th century, the G7 are no longer capable of ruling the system they set up. The US?G1?is especially stuck in paralysed politics, still mired in recession and incapable of any swift action. It is its size?a result of the growth during the previous century?which has made it an obstacle to progress in the IMF and the World Bank. The G1 is like a beached whale incapable of moving and difficult to be moved by anyone else.
In this vacuum, one body which emerged is the G20. This is both to replace the UN, which had become incapable of any action, and to overcome the feebleness of the G7. The G20 is, alas, past its best. It was set up to cope with the Great Recession. The idea in those happy Keynesian days was that the G20 will initiate a coordinated reflation to get the global economy out of recession. This was what Gordon Brown tried at the London Summit in 2009. But having signed the declaration for a coordinated reflation worth several trillion dollars, all the leaders went home and became cautious fiscal conservatives. The G20 failed to tackle the financial crisis and now it is the BIS rather than the G20 which has taken the lead in financial governance.
Brics has thus become a junior and smaller gathering of the group of those who feel excluded from the G7 but cannot control the G20 by themselves. Add the usual paranoia about the power of the US in Bretton Woods institutions and you have the Brics. Aware of their limited power to change the Bretton Woods institutions, they have decided to launch a Brics Bank. This will copy the World Bank but can only provide money as long as China provides the bulk of the capital. China is slowing down from its historically high growth rates. Its export dependence needs to be shed in favour of domestic spending. Thus, its mercantilist strategy will have to be reversed. Its treasure of UST Bills will not last forever. It may also to have to bite the bullet and make the RMB a truly convertible currency and liberalise its capital markets. This will make it less willing to loan money out.
So, unless one of the other Brics becomes a significant contributor, the Brics Bank may face problems 10 years down the line. But suppose not. Why should the Brics Bank be any better than the World Bank at loaning money to needy countries? Is it envisaged that it will lend on easier terms or less stringent collaterals or softer investment criteria than the World Bank, let alone commercial lenders? If so, is that a wise strategy?
Nostalgia is a bad guide to economic success. If there is nostalgia for the days when the South was deprived by the North of resources and hence thwarted from development, someone needs to give reality check to the sponsors of the scheme. The South countries grew rapidly during the 1990-2007, thanks to private capital flows guided by profit considerations, no thanks to World Bank. Terms of trade for energy and raw material commodities were also good. China could export aggressively because the WTO had made the ground even for manufacturing exports from Asia to the West. All went well till 2008. The task is to revive those market forces which will give the hard-working high-savings economies their chance to win in the global competition.
Let us hope the Brics Bank will not do too much harm.
The author is a prominent economist and Labour peer