Challenges of the BRICS

The success of the BRICS – Brazil, Russia, India and China and South Africa – partnership will depend on whether individual members can overcome the dilemma of being allies as well as fierce competitors, for markets, goods and geopolitical influence.

Given the diversity of interests of the BRICS members, it is not only very difficult to get the members to agree on priorities, but it is also very difficult to get them to act in concert.

CHINA HAS THE LARGEST PURSE

Within the BRICS alliance, China has the largest purse. With about a quarter of its $3.2 trillion foreign exchange reserves in euros, China's foreign exchange reserves are three times bigger than those of the four other BRICS countries combined.

This naturally brings an imbalance in power in favour of China. The sustainability of the BRICS alliance will heavily depend on whether the Chinese dragon, will use its financial muscle to force its way on issues.
Domestic growth policies in one partner often cause economic imbalances in the economies of other BRICS partners. China is at the target of most of the complaints. Policy-makers from South Africa, Brazil and India have alleged China keeps its currency, the renminbi, artificially undervalued to help boost Chinese exports, and so power its industrialisation and growth, which is causing imbalances in the economies of the BRICS partners.

THE ROLE OF CHINA’S CURRENCY

The cheap value of the Chinese currency is hurting South Africa’s manufacturing sector. Guido Mantega, Brazil’s Finance Minister, for example has said the twin factors of China’s undervalued currency and lack of global growth are among the ‘distortions in world markets,’ which is undermining the stability of the global economy. At the April 2011 BRICS meeting, Assistant Chinese Foreign Minister Wu Hailong defended the China policy saying the ‘renminbi's exchange rate is not on the agenda for discussion.’

From January to June 2012, China had a total of 40 trade disputes with both developed and developing countries, with 70 percent of those cases involving Brazil, India, South Africa and other emerging powers.
The South African Department of Trade and Industry is inundated by local companies asking for protection against cheap subsidized products from BRICS countries which they say undermine local production, investment and jobs. Recently, Sappi, the largest producer of glossy paper, has formally approached the South African Department of Trade and Industry to help against cheap products from Chinese – which is subsidized by the Chinese state - which the company says has dented production and jobs.
The South African textile industry has for long been hard hit by cheap imports from China with factories closing down and heavy job losses since 2002.
By end 2012, India had initiated 149 anti-dumping cases against China. Brazil has long-running trade disputes with China, with Brazil having introduced a number of anti-dumping duties against cheap Chinese imports they say have been subsidized by the Chinese policy of keeping the yuan at low levels.
Brazil has lodged a complaint at the World Trade Organization to challenge South Africa's use of anti-dumping measures on shipments of Brazilian poultry meat. South Africa's International Trade Administration Commission (ITAC) has imposed anti-dumping duties on frozen chickens and chicken meat imported from Brazil after investigating suspected dumping in 2008-2010.
The challenge for the BRICS alliance is also to agree on what kind of mutually beneficial policies should be made priority, how to strike mutually beneficially agreements on these and how to pursue ‘synergistic investment and trade’ with partner countries.

ESTABLISHING A RESERVE POOL OF EMERGENCY FUNDS

One of these potential mutually beneficial policies on the agenda of BRICS is a proposal that the BRICs members should combine their estimated US$240bn in foreign exchange reserves to protect individual members from short-term liquidity volatility.

The idea would be that the money would be accessible to individual members as an emergency fund if they fall in balance of payment problems. Given that China’s foreign exchange reserves dwarf that of the other members, it will make sense for the partners to each contribute an equitable share, to such an envisaged emergency fund, rather than allowing China to provide the bulk share – and so risking it dominating the fund.

A big question is whether such a BRICS reserve pool should be at least partially managed by the International Monetary Fund – which has been suggested by some policy makers in India. Clearly, it really would not make sense to have such a BRICS credit facility managed by the IMF – the very institution whose operations have been criticized by developing countries for being biased towards industrial nations.

A NEW INTERNATIONAL RESERVE CURRENCY SYSTEM

Another of these potentially mutually beneficial proposals on the BRICS agenda is looking at ways to reform the international monetary system to benefit developing countries. At the March 2012 BRICs meeting the members broadly called for a new international reserve currency system which they said should be ‘providing stability and certainty.’ However, BRICS countries have different views of how to go about this, but more importantly, disagree over which currency should be the “reserve currency”.

The Special Drawing Right (SDR), the International Monetary Fund’s unit of account, currently comprises the dollar, the euro, the Japanese yen and the British pound. BRICs countries readily agree that the IMF’s Special Drawing Right (SDR) basket of currencies should be broadened to include emerging powers.

In a recent research paper, Zha Xiaogang, a researcher at the Shanghai Institutes for International Studies, argued rightly that a wider menu of global currency options, rather than just the US dollar, when investing, trading or seeking a store of value would produce better results for the world economy.

However, it appears that China’s specific campaign has been to see its currency, the renminbi, included as one of the basket of currencies making up the IMF unit of account. In March 2009, Zhou Xiaochuan, the former governor of the People’s Bank of China (PBOC) set out China’s long-term view, of having the US dollar replace with a ‘super-sovereign currency,’ in a global monetary system that will be continued to function like the IMF’s SDR system, but with the renminbi as one of the core currencies.

In the current BRICs debate, Brazil, India and South Africa argue that the current SDR system remains in place, but that the currency basket of the SDR should be broadened. Russia has been silent on this, except for its support for broadening the SDR currency basket.

The most optimum international monetary system should consist of a mix basket of the dollar, euro, yen, renminbi, and other BRICs currencies – rather than a domination of either the US dollar or the Chinese renminbi.

The reform of the IMF broadly is a very strong focus of the BRICs countries. BRICs countries at the past Group of 20 Summit in Mexico pledged giving US$75bn to the IMF on condition the IMF reforms its voting system to give BRICs countries a bigger voice.

REFORM OF IMF AND UN

BRICS members’ specifically wants the IMF to increase the quotas of its members – and wants a new formula for quotas distribution. Again, there are wide differences between BRICS members over how such a new quota formula should look like – which is not going to be overcome easily.

Russia, for example, argues that if the IMF does not agree to quota reforms, the BRICs should use their planned foreign exchange reserves pool as an alternative to the IMF, to totally sideline the IMF as an organization; yet other members have a softer stance.

Reforming the United Nations Security Council is another of the core priorities of BRICS. Competing strategic interests of individual BRICS members may undermine their efforts. For example, China and Russia are permanent members of the United Nations’ Security Council, while SA, Brazil and India are looking for seats on the Security Council – yet China appear to be reluctant to firmly support India’s case for a seat on the council.

On the of the BRICS priorities is a joint strategy to deal with wildly fluctuation commodity prices. BRICs are heavily affected by persistent volatility in commodity prices which undermines their growth and industrialisation. South Africa, Brazil and Russia are major exporters of commodities, while China is a major importer.
China has blamed the dominance of the US dollar as one of the main reasons for the volatility in oil and commodity prices. China argues that replacing the US dollar as the sole issuer of the global reserve currency will almost immediately stabilize commodity prices.

Some of the BRICS proposals call for tightening of regulation of commodity derivatives, to prevent it from playing havoc with prices, for BRICs countries to coordinate their policy efforts to secure a ‘balanced supply and demand in the physical markets’.

Clearly, although there is lot of intent among the BRICs countries to manage swings in commodity prices, it will be harder in practice, given the vastly different domestic commodity strategies of individual BRICS countries, to secure a united response from the BRICS group.

A BRICS BANK

Another of the major objectives of the BRICS group is plans to launch a joint development bank, based on the World Bank model. The aim of the bank would be to fund infrastructure and act as an alternate lender to the World Bank and other finance bodies. It will also be a vehicle for lending during financial crises. The big questions are how the bank would be structured and capitalized, where it would be based, and whether the bank would use different models and lending criteria than the World Bank.

It appears that China wants the new BRICS bank to be in Beijing – however, countries such as India and Russia oppose this. The expectation is that China will put in the most funds into such a bank given its buckets full of reserves. However, the best compromise would be for each partner to provide an equal start-up amount – pegged at lower levels. This would give each member state an equitable share – with no one dominating. It would also be prudent to have the bank in South Africa – which would be neutral territory.

Overcoming the conflict of being allies and competitors, agreeing on core priorities and cobbling together mechanisms to bind BRICS members to agreements will be crucial to prevent the BRICS partnership from ending up as a talk shop.

* William Gumede is author of the bestselling Restless Nation: Making Sense of Troubled Times, Tafelberg
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