Current General Studies Magazine (March + April 2015)

General Studies - II "International Relations Based Article" (Role of India in BRICS)

BRICS had a tentative start in the margins of the 61st session of the UN General Assembly in New York in September 2006. The foreign ministers of four countries, Brazil, Russia, India and China, met briefly to explore ways to cooperate politically. The proposal for the meeting came from President Vladimir Putin of the Russian Federation at a meeting of the leaders of Russia, India and China in the margins of a G-8 Outreach Summit in St. Petersburg in July 2006.

What brought these countries together? Why only these four?

The answer to these questions lies oddly enough in a report prepared by one of the world’s leading investment companies, Goldman Sachs, in 2001. Its British chief economist, Jim O’Neill, who authored its Global Economics Paper No.66, captioned it "The World Needs Better Economic BRICs”. The report predicted that the four emerging economies would become the world’s largest over the next 50 years. This in itself did not require much prescience. What was new about the report was O’Neill’s recommendation that these four countries should be included in the apex consultative process on the global economy, which till then was confined to the G-7: the United States, Canada, the United Kingdom, France, Germany, Italy and Japan. O’Neill realised that this exclusive club had become outdated. BRIC countries were already major players in the global economy and needed to be accommodated at the high table.

The G-7

The highest body in the current international financial system is an informal consultative group which meets annually at summit level. This is the Group of Seven, or G-7, formed in 1975 with the heads of 6 countries (Canada joined a year later) meeting "to provide a venue for the non-communist powers to address pressing economic concerns, which at the time included inflation and a recession sparked by the OPEC oil embargo.”

The formation of the G-7 was an admission by the US that it could no longer run the global economy on its own. The Vietnam War and the oil price hike had taken their toll. Four years earlier, President Nixon had to take the US dollar off the gold standard. Besides, Western Europe and Japan had by now recovered from the ravages of the Second World War and were looking to play a more active role in the world economy.

In 1998, the Russian Federation was invited by President Clinton to join the group. This was a political move to bring the new country into the western fold. The finance ministries of the G-7 did not agree that Russia, which was a relatively small economy with a large public debt, was qualified to be a member. They continued to meet without Russia. Russia was eventually expelled in 2014 on the issue of Crimea. G-7 leaders used the forum to impose sanctions on Russia for its annexation of Crimea.

Jim O’Neill’s sound advice to include BRICS in the high echelons of the global financial system, however, went unheeded. The BRIC countries too did not grasp the significance of holding consultations among themselves on the global economy. Their meeting in New York in 2006 was at the level of foreign, not finance, ministers and the on menu was political cooperation. They did not feel the need to make a coordinated effort to seek reform of the G-7 hold on the global economy.

The Financial Crisis of 2008

Then the financial crisis broke out in the United States in late 2007. It shook the foundations of the market-based economic model that had been promoted by it and other advanced economies since globalisation began in the 1990s. The crisis gave critics the confidence to call for change in the international financial architecture and the blind faith in the market’s abilities. The time had come for the outliers to speak up.

The leaders of the global economy found themselves beset with problems they could not handle alone. The BRIC countries, on the other hand, were relatively unaffected. They realised the urgency of coordination to protect themselves. The crisis also gave a fillip to their confidence. BRIC finance ministers met in November 2008 in Sao Paulo. Their joint communiqué noted that "the crisis revealed the weakness in risk management, regulation and supervision in the financial sectors of some advanced economies”.They called for "reform of multilateral institutions in order that they reflect the structural changes in the world economy and increasingly central role that emerging markets play”. They agreed to work together.

In the same month, during the visit of President Medvedev to Brazil, President Luiz Inacio Lula da Silva agreed that the time had come for Brazil to join the other three countries, India, Russia and China, which had been meeting informally thus far. The group already had a name, BRIC. They announced the holding of a summit meeting of the four countries at a joint press conference in Rio de Janeiro. President Lula said, "We, the developing countries, should not allow the crisis to harm our development. We must, jointly with India, China and Russia, help the world get out of the crisis.”[4] President Medvedev added, "The financial crisis, which we haven’t started and we are not to blame for, affected the global economic situation and we are forced to react.”

The International Financial Architecture

The economic crisis exposed the limitations in the running of the global economy by the advanced economies and the development model created by them after the advent of globalisation in the early 1990s. In fact, the very structure of the international financial architecture came under fire.

This international financial architecture had been created by the Bretton Woods Conference in 1944. It rested on three pillars, of which two were set up then and the third added later:

1. International Monetary Fund: to regulate exchange rates. Based in Washington, its Managing Director is always a European and the weighted voting gives the United States a veto on all major decisions. The combined vote share of BRICS in the IMF is 11%, even though their share of global GDP is 22% in nominal terms and 32% in PPP terms.

2. International Bank for Reconstruction and Development: commonly known as the World Bank, to help rebuild countries ravaged by the war. Also based in Washington, its President is always an American. The collective vote share of BRICS in the World Bank is 14%

3. World Trade Organisation: Bretton Woods had decided on an International Trade Organisation to regulate world trade, but after the adoption of its charter in Cuba, it was abandoned. The Western countries went ahead with their own trading bloc, the General Agreement on Tariffs and Trade in 1947, with 23 members. GATT was based in Geneva. In 1994, it was converted into the World Trade Organisation.

The collapse of communism in Eastern Europe in the late 1980s and early 1990s discredited socialism. The triumphant Western countries now insisted on imposing a package of financial reforms on any country seeking financial assistance. This model of fiscal austerity, trade liberalisation and market economy had been developed in Washington in the 1980s and was referred to, often pilloried, as the Washington Consensus.

BRICS

BRIC countries began with demands on the advanced economies to accommodate them in the decision-making processes. They made solemn affirmations of their resolve to stay together. The first BRICs summit in June 2009 was hosted by Russia at Yekaterinburg. Medvedev described it as a "necessary reaction to the global financial crisis”. He emphasised the need for a more "diverse international monetary system” and "reduced reliance on the dollar” as a global reserve currency.

BRICS countries soon expanded their goal to cooperating with each other in creating their own institutions, initially in the financial sector, but soon in other fields as well. At the New Delhi summit in 2012, the group called for increasing their quotas and voting rights in the International Monetary Fund. It also started talks on a BRICS-led development bank. Iran’s nuclear program and the importance of energy and food security were discussed.

At the fifth summit in South Africa in 2013, the group agreed to set up a BRICS Business Council, with five entrepreneurs from each country. Agreements on establishing a development bank and a currency reserve pool were signed at the sixth summit at Fortaleza in Brazil last year:

New Development Bank

The New Development Bank will have a capital of $ 100 billion, starting initially with $ 50 billion. Each member will contribute $ 10 billion. Other countries can join the Bank but the share of the BRICS countries cannot be allowed to fall below 55 percent. The Bank will be based in Shanghai. Its first president will come from India, the first chair of the Board of Directors from Brazil and the first chair of the Board of Governors from Russia. South Africa will host the Bank’s first regional centre for Africa. The Bank is expected to become operational by 2016.

Contingent Reserve Arrangement

This will be a currency reserve pool, like the IMF, to meet balance of payment problems of member countries. It will have an initial reserve of $100 billion. China will contribute $ 41 billion, India, Russia and Brazil $ 18 billion each, and South Africa $ 5 billion.

Cooperation in BRICS runs on two tracks. The first is consultations on various international issues. This is chiefly at summit level, but also at the level of ministers and diplomats. The second track is promoting engagement among BRICS countries in business, academics and other areas. Having come together because of the financial crisis in the advanced economies the initial area of consultations in BRICS was, inevitably, international finance. Reform of the Bretton Woods institutions and the international financial architecture was their main concern. However, as consultations progressed other topical issues also came under discussion: international terrorism, climate change, food and energy security, trade protectionism and negotiations in the World Trade Organisation.

Thus, within six years of its commencement BRICS had finalised the setting up institutions parallel to the World Bank and the IMF. It continued to call for institutional reforms to give emerging economies a bigger role in the global financial system. But it was ready to go ahead and set up its own institutions if its call went unheeded. During this period the BRICS countries had also increased their share of global GDP in PPP terms to 32%, bringing them almost on par with the G-7, who are at 34%. In nominal terms too, BRICS have increased their share to 22%, as against the 45% of the G-7.

South Africa’s admission

At the second summit in Brazil in 2010, President Jacob Zuma of South Africa was invited to attend. Later in the year, South Africa was invited to join. The group had moved beyond its original conception and acquired its own global character. The continent of Africa had been missing from this group. South Africa was willing and eminently qualified to join. It completed the representation of all continents in the group.

National security is another area that has been brought into the ambit of cooperation in BRICS. National Security Advisers have been meeting to develop common strategies of money laundering, financing of terrorism, illegal migration and corruption. Other areas where cooperation is being promoted by BRICS countries are: agriculture, health, science and technology and education.

BRICS and the G-20

Meanwhile, the advanced economies had done some fire fighting on their own: both to deal with the crisis and to dampen the demand for reform. They elevated an informal consultative group formed a few years earlier to summit level and invited their leaders to cooperate in dealing with the crisis. The Group of 20 had been formed as an informal process by the G-7 finance ministers in 1999 to hold consultations with some of the leading countries on global economic issues and governance. The first meeting had been held in Berlin in December 1999. The G-20 comprised the G-7, the five who later formed BRICS and 8 other countries: Turkey, Saudi Arabia, Australia, Mexico, Indonesia, Argentina and South Korea. (The European Union is the 20th member, even though four EU members are also in the group).

G-20 leaders first met in November 2008 in Washington. President Obama called it the "premier forum for global economic coordination.” The G-20 was useful in ensuring a coordinated effort by governments to pump liquidity in the market to keep it from sliding into recession and avoid trade protectionism and currency wars. However, the G-7 members retained their exclusive club and used the G-20 as a sounding board for their decisions. Nevertheless, BRICS saw the utility of supporting this group in dealing with the continuing financial slowdown. In the Fortaleza Declaration last year BRICS affirmed that the G-20 remains "a critical factor for strengthening the prospects for a vigorous and sustainable recovery worldwide”.[6]

India’s Contribution

The proposal to set up a New Development Bank came from India at the New Delhi summit. India also initiated the idea of bringing together think tanks and business publications from BRICS to promote thinking on economic linkages and developmental challenges within and outside BRICS. This suggestion took shape in the Academic Forum and the Think Tanks Council.

India is the only member of BRICS that goes back to the non-aligned movement, in the framework of which it has waged a relentless struggle for democratisation of the global order, be it in security, finance, information, nuclear or trade. India adapted rapidly to the global changes after the Cold War but it continued to speak up on the inequities of the international system. The continuity of this long experience has been invaluable for BRICS, which has now taken up the mantle of that struggle, initially in the international financial architecture and then in various others.

Russia’s Role

Other members have also contributed ideas for institutions in BRICS. It was Brazil, for example, that initially mooted the idea of a currency reserve arrangement. However, one must also acknowledge the pioneering role of Russia in the formation of BRICS. It will host the next summit in Ufa on 8-9 July 2015. The goals it has set for this summit are:

1. "To strengthen international peace and security. To promote BRICS interests on the international arena.
2. "To facilitate multilateral financial cooperation and reform of the international financial system.
3. "To enhance trade and economic cooperation within BRICS.
4. "To expand social cooperation of the BRICS countries.
5. "To deepen humanitarian cooperation in the format of BRICS.”

Russia has been particularly keen on regular consultations among BRICS countries at the diplomatic level to discuss international issues and develop common positions on them.

New Members

The issue of new members joining BRICS has been the subject of speculation in international circles since South Africa joined it. In fact, South Africa’s admission itself led to some wry comments. Jim O’Neill expressed doubt over the merit of its inclusion. He felt that South Korea with its high growth fitted the bill better. This view overlooks the fact that South Korea is already a member of the West-led Organisation for Economic Cooperation and Development (OECD). The Economist suggested that South Africa, and not Nigeria, was included because it kept the acronym BRIC intact.

In the build-up to the Fortaleza summit last year, there was speculation that Argentina could be asked to join. President Cristina Fernandez de Kirchner had been invited to attend. However, during the summit, President Dilma Rousseff of Brazil ruled out the possibility. Indonesia, Mexico and Vietnam have also been mentioned as potential candidates.

Evaluation of BRICS

BRICS has evolved well beyond the original conception of both the inventor of the acronym and of its own members. At the New Delhi summit Jim O’Neill, who had been invited, acknowledged this when he said, "It is more than ten years now since I had the good luck of dreaming up the odd acronym BRIC.....By the end of 2011 the BRIC economic story has been much more powerful than I had proposed in 2001.”

The Brazilian professor and author of "BRICS and the Global Order”, Oliver Stuenkel, not only agrees but also supports this progression as essential, "As the BRICS seek to advance in their attempts to strengthen cooperation and jointly influence global affairs, they would be well-advised to forget Jim O’Neill. While acknowledging the British economist’s key role in the conception of the BRICs is important, policy makers in Brasilia, New Delhi, Moscow, Beijing and Pretoria are now moving on and beginning to develop idea that are far removed from anything O’Neill even had in mind when he coined the term.”

Some critics dismiss the viability of BRICS by pointing to the poor foreign trade among them. Only China emerges as a leading trade partner for them. China is the largest trading partner of all the other four members. But thereafter, the others figure low on the list. None of the others figures in the top ten trading partners of India, Russia or Brazil. For South Africa, India is the fifth largest trading partner. For China, Brazil and Russia are the 9th and 10th trading partners, respectively.

However, this criticism misses the point. BRICS is not a regional trade association seeking to set up a free trade area. It is a consultative forum to put pressure on the prevailing system for reform. The lack of progress in this is encouraging the association to move towards creating its own institutions for protecting itself from financial crises and promoting alternatives for development. The setting up of the Currency Reserve Arrangement and the New Development Bank has to be seen in this perspective. The former will cushion members from balance payments problems without having to go to the IMF and facing its onerous conditionalities. The latter will help finance projects, particularly infrastructure projects, in developing countries which the World Bank no longer finances on environmental and social safeguard considerations. The BRICS countries are willing to share their experience, expertise and relative prosperity with other developing countries.

Besides, BRICS offers a platform for alternative views on a host of global issues for which there is no other avenue left. These are views that question the prevailing orthodoxy of market fundamentalism. An instance of this can be found in the Fortaleza Declaration (para 23) where the role played by state owned companies in the economy is lauded. In this age of globalisation, such companies are the favourite target of economic reformers.

The success of BRICS will lie in its ability not only to offer alternative models of growth but also financial institutions to fund it. BRICS is strengthening global multipolarity in the world. This is how it should be. It is important that it does not take us back to the bi-polar world of the Cold War. Fortunately, there is no reason for such apprehension. Each of the BRICS members has close economic ties with the West and wishes to promote cooperation with it. BRICS must repose trust in a cooperative approach both with the West and with the rest. BRICS should also endeavour to gain the trust of other developing countries through its developmental activities

There is a tendency to dismiss BRICS as nothing more than a catchphrase that will fade away soon. This view ignores the key force that holds its members together. They are all major economies with the ambition to play a commensurate role in global financial institutions and resentment of the existing order. There is no dearth of other catchy acronyms dreamt up by investment banks, but these have remained smart marketing techniques for their products.

The progress made by BRICS has not gone down well in the financial centres of the West. The British journalist, Philip Bowring, did not hide his feelings in his assessment of the Hainan summit in China in 2011. He wrote in the New York Times, "The truth is that the interests of ‘emerging forces’ are far more comprehensively represented by their members in the Group of 20 than by the BRICS. This was a summit meeting the emerging world does not need.”

It must be recognised though that BRICS has run into a brick wall in its efforts to reform the IMF. Reform of quotas agreed to in 2010 in the 14th General Review of Quotas remains unimplemented due non-ratification by the United States. The prospects of this happening are not bright. BRICS have called for a new quota formula in case the earlier one is not implemented. The deadline set for that at Fortaleza was January of this year.

The diversity within BRICS must be recognised, but without any peremptory judgement on its impact or its effectiveness. The disparity in size is all too evident. China towers above the rest. Its GDP (PPP) is over 10 times that of South Africa. Political systems are divergent as are views on a host of international issues. There are serious political differences and some unresolved disputes among them. However, this diversity enables the group to accommodate the complexity of the developing world and expound views that have resonance across the continents. Regular exchanges and cooperation will help in mitigating bilateral issues.

The diversity in BRICS is even more pronounced in the UN system. Two of its members, Russia and China, are permanent members of the Security Council, unenthusiastic about any change. The other three are ardent aspirants for permanent membership of the Security Council and campaigning vigorously for it. The association steers clear of this in its declarations and confines itself to economic issues, where all five are outliers and share a common zeal for reform.

This lack of cooperation is also evident in their voting in the UNSC in 2011, the only year when all four were on the Council. BRICS did not vote as a block. In the Human Rights Council too, the BRICS countries hold regular consultations but vote individually.

The future shape of BRICS will depend on how the high priests of the present order react to their legitimate demands. What began as a prescient tip of a farsighted investment banker may either result in reorganisation of the existing system or lead to the setting up a rival structure. The world would be better off in both eventualities.

(Source- Amb (Retd) Dilip Sinha @ WWW.mea.gov.in)
 

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