Where do Bric economies stand vis-?-vis last week?s blip on the OECD?s economic radar? What if last Thursday?s jump in indicators proves to have been just a will o? the wisp, and the numbers again head south? And, should Brics see this as the opportune moment to ?de-link??i.e., look inwards, and within their neighborhoods, for markets and finance? Many commentators see the latter to be much the preferred alternative, but I demur. I would assert that exercising the last option is not the answer.
OK, yes, this is the right time for Bric (and other emerging or developing) economies to reconcile themselves to life minus the locomotive power of OECD economies. They are being taught to develop domestic consumption demand after 50 years of being taught the mantra of export-led growth; they are being wooed for investment capital, and being praised for having kept their economies insulated from the vagaries of international portfolio capital; the IMF is even asking governments to embark on domestic pump-priming to fuel consumption and investment; and there are rumors of regional trade agreements (RTAs) being favorably viewed?as initial dips before the cold bath of ?mfn? rates. But the optimal approach for developing economies would be to maintain (and intensify) the trade and productivity enhancing links that already exist with particular developed economies. That holds whatever is the aftermath of the currently disputed (?V-?, or ?W-? shaped?) ?recovery?, and the import-intensities that might emerge.
One might also add that this is absolutely the first time developing economies can afford to act thus?and that too because the recession (80 years after the Great Depression of 1929) has reopened the rule-book.
That applies for instance to the Smithsonian Agreement (1971) ending the Bretton Woods system of fixed exchange rates. It laid the foundations of today?s crisis by de-linking currencies from gold?thus enabling dollar-seigniorage and the USA?s negative current account spiral. In trade as well, it was the OECD started to alter the rules of free trade in the 1970s. Developed economies did that with non-tariff barriers (NTBs) for sectors in which they could not ?adjust?. The pace of the latter picked up after the Kennedy Round of GATT. Many within developing economies have fretted over such developments and been insistent about the need to de-link from the OECD.
What they seem to miss out on, however, is that de-linking is not only infeasible, it is also an inferior alternative to simply rewriting the rules of the game in line with non-OECD interests and aspirations. For instance, the aim should be to export higher manufactured value added (MVA) products and bypass NTBs altogether.
The creation of the Group of 20 (G20) already shows the coming of age of non-OECD interests. It also measures out a maturing response to the reality of existing (or potential) links, and underscores the urgency of cultivating economic tie-ups also with developmentally congruent and regionally contiguous economies.
In sum, we would stress not only the selective intensification of links with the OECD, but also suggest that the process should be accompanied by a strengthening of links amongst the region?s economies?and even distant emerging ones.
Brazil and China for instance both have strong extra-regional links of that nature. Plus, this year these two Bric economies became even greater trading partners. China has actually become Brazil?s number one source of imports. The USA comes second despite her regional location and strong historical links with Brazil!
Returning to Brazil and the USA, the complementarities and competition generated by their relationship are legion. Their interdependence illustrates an instance where neither side stands to gain from de-linking. Brazil stands to lose because it is Latin America?s biggest recipient of US FDI. De-linking now would narrow investment leeway for both Brazil?s government and its private sector. It would also stall Brazil?s Growth Acceleration Programme (2007) targeted at making good infrastructure deficiencies. At the same time, Brazil?s FDI hurdles are infamous! Brasilia, it seems, spares none in its dealings with private firms.
The Doing Business 2010 report of the World Bank Group ranks the country at 129?two places below its 2009 position. The Bank reports even lower rankings in certain other areas. Thus, Brazil ranks 138 for the ease with which businessmen might employ workers, pay taxes (150) or even close shop (131). Those apart, this year?s overall rank is two places below the 129 that Brazil had been awarded in 2009. (Comparator figures for China and India for Ease of Doing Business are 89 and 133 respectively, Employing Workers 140 and 104, Paying Taxes 130 and 169?and 65 and 138 for Closing a Business. India, therefore, trails the two other Bric economies in the overall ranking?and also in the ease with which taxes might be paid or businesses closed. But its labour laws are the most favorable of the three.)
Turning next to Brazil?s links with other regional, and emerging economies, Mercosur is a the benchmark regional trade agreement (RTA) of the western hemisphere?much like Asean is in the east. Founded in 1991 between Argentina, Brazil, Paraguay and Uruguay (Treaty of Asuncion) it has FTAs with Bolivia, Chile, Colombia, Ecuador, Venezuela, Peru. It even has extra-regional preferential trade agreements (PTAs)?one with ?distant? India (signed in New Delhi, January 25, 2004), and another with Israel (2008). There are plans for others with Mexico, Canada and one pending since 1995 with the EU.
Brazil is also fast becoming a serious aid and investment target for China. But to return to the benefits of staying linked with the OECD, neither the crisis, nor its distrust of industrialised economies seem to have stopped Brazil from collaborating with the US to evolve a new variant of sustainable biofuel (after a 2007 MoU). That makes excellent sense because Brazil, along with the US, is one of the world?s largest producers of biofuels. Yet, this sort of technical and economic progress through complementarity is just what would get nixed by myopic de-linking. .
?Writer is a fellow at the Maulana Abul Kalam Azad Institute of Asian Studies