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THIRD WORLD RESURGENCE

BRICS: Time to reset priorities

The BRICS group of developing countries - Brazil, Russia, India, China and South Africa - held their ninth summit in September in Xiamen, China. Surveying the progress made by this formation since its inception almost a decade ago, Biswajit Dhar argues that while its initiatives in the financial sector (including creating its own financial institutions) are highly commendable, it has little to show with respect to the goal of changing the rules of global governance through collective action.


THE BRICS summit held in Xiamen, China, in September was the ninth since this formation of emerging economies met in Yekaterinburg, Russia, in June 2009. When the four original members of the formation - Brazil, Russia, India and China (South Africa joined in 2011) - met in the shadow of the worst economic downturn since the 1930s, there was a huge opportunity before the emerging economies to reshape postwar multilateral economic governance, which continues to be under the dominating influence of the major economies.

This dominance is one of the biggest ironies of the times that should not have been, for at least two reasons. The first is the oft-repeated assertion made by multilateral institutions that the developing countries need to be provided a facilitating environment to help them address their development deficits. The second is the reality of the emerging economies and their growing influence, the sense of which was captured by Goldman Sachs economist Jim O'Neill in 2001 when he argued that the then BRIC had all the credentials to be part of a 'more effective global policymaking'.

But, more than a decade and a half after O'Neill coined the term and nearly a decade after the BRIC(S) came together on a common platform, the ability of the grouping to challenge the hegemons on the global stage seems to be extremely limited.

This was not the case a few years back when the BRICS were seriously engaged in building an institutional framework in order to give shape to their agenda on the global stage. A number of areas were picked up for this purpose, and interestingly, in most of these the global processes were skewed against the interests of the developing countries. The expectation, therefore, was that the BRICS would not only challenge the dominant narrative but also provide a more inclusive agenda.

Financial reform

In this regard, the most noteworthy was the string of initiatives that the BRICS have taken in the financial sector. Ever since its formation, the grouping has emphasised that the governance structure of the Bretton Woods institutions - the International Monetary Fund (IMF) and the World Bank - must be reformed for reducing the legitimacy deficits.

In their second summit, in 2010, the leaders of the BRICS argued that 'reforming these institutions' governance structures requires first and foremost a substantial shift in voting power in favour of emerging market economies and developing countries to bring their participation in decision making in line with their relative weight in the world economy'. This demand was made against the backdrop of discussions in the IMF to realign the quotas held by the member states, which would have an impact on the governance of the institution. In 2008, the IMF Board of Governors had adopted a Resolution on Reform of Quota and Voice and requested the Executive Board to 'recommend further realignments of members' quota shares in the context of future general quota reviews, beginning with the Fourteenth Review [in 2010], to ensure that they continue to reflect members' relative positions in the world economy'.

The quota reform of the IMF, which was finally implemented in 2016, was aimed at enhancing the quotas of each member of the BRICS, but the outcome did not favour all countries in the grouping: South Africa's quota in 2016 was slightly lower than its quota in 2011, while the quotas of China and India increased by over 70% and 44% respectively. For the BRICS, the outcome of the quota review should be disappointing for two reasons: one, not all countries in the grouping were allotted larger quotas, and two, the grouping was not able to exercise any influence in preventing the process of quota reallocation from taking an inordinately long time.

These setbacks notwithstanding, the grouping has kept its focus on the task at hand by demanding at the end of the Xiamen summit that the IMF must conclude the Fifteenth Review of quotas, 'including a new quota formula, by the 2019 Spring Meetings and no later than the 2019 Annual Meetings'. At the same time, the BRICS resolved to 'promote the implementation of the World Bank Group Shareholding Review'.

It must be said to the credit of the BRICS that they did not limit their efforts at reforming the financial architecture to just focusing on the governance of the Bretton Woods institutions; they also created their own financial institutions/mechanisms. This facet of cooperation was set rolling by two agreements between the BRICS development banks which were aimed at providing trade credit on terms that would help in promoting intra-BRICS trade. Following this, the grouping took a couple of initiatives that were unprecedented for the developing countries, namely, establishing international financial institutions. The BRICS breached the exclusive preserve of the developed countries by establishing a development finance institution, the New Development Bank (NDB), and a lender of last resort, the Contingent Reserve Arrangement (CRA). While the former was to provide development finance to other developing countries as well, the latter was to meet the needs of the BRICS in financial distress.

The NDB, which began operations in 2015, raised tremendous expectations, especially because it was promoted by a group of countries that were already establishing their credentials as partners in the development endeavours of a large number of developing countries. The expectations on this score became even higher as the NDB chose projects in the areas of renewable energy and infrastructure, two critical areas for developing countries. The BRICS seemed willing to back the NDB fully as they agreed that the entity would have an authorised capital of $100 billion. The subscribed capital was $50 billion, with every member having an equal share.

Although these are early days, the promoters of the NDB need to consider at least two factors that could stymie its effectiveness. The first is that the paid-in capital of the NDB has reached only $1.5 billion in 2017, which could limit the ability of the Bank to raise resources from the capital markets. The second and more critical factor is that the NDB seems to be entirely dependent on the capital markets for its funds. The latter implies that the Bank will face stiff competition from a number of development finance entities, which will be a challenge for this new kid on the block.

Climate change

One of the more important aspects of the functioning of the BRICS is the collective response of the grouping to important developments in the global sphere that have implications for not only their development prospects but other developing countries as well. We will pick up two such areas in order to understand the nature of intervention of the grouping.

The challenge of climate change is confronting all economies in the developing world. Lack of investible resources and appropriate technologies were long flagged as the binding constraints for these countries in their quest for adoption of a low-carbon pathway. Importantly, four BRICS members (excluding Russia) highlighted the significance of these constraints in the United Nations climate change negotiations and adopted a joint front by forming the BASIC group in 2009 (coinciding with the formation of the BRIC). The BASIC group took a well-reasoned position that the developed countries, the largest emitters of greenhouse gases over generations, must make structural changes in their economies in order to prevent global warming beyond the agreed threshold. Besides, they must provide adequate funding and access to relevant technologies to the developing countries. But strangely, the BASIC group then ceased to be a strong collective voice for developing-country interests, as the priorities of the group members diverged.

This absence of a common position of the BRICS in the response to the challenge of climate change was evident in the statements coming from their own forum. Not only has the grouping been making low-key statements, it has not pointed to the serious constraints that are being encountered in garnering the necessary funding and technology. For instance, the Green Climate Fund, established to support developing countries in tackling and adapting to climate change, has been operating with a fraction of the funds, but this serious problem was not flagged by the BRICS leaders in their Xiamen summit declaration.

Trade

Multilateral trade governance has been yet another area in which a subset of the BRICS was very active until the end of the previous decade, with a clear intent of changing the rules of engagement. India, Brazil and South Africa were in the forefront of a developing-country upsurge to make the rules governing the functioning of the World Trade Organisation (WTO) better suited to their interests. The developing countries had taken advantage of the Doha Round negotiations initiated in 2001 after the trade ministers of WTO member states gave the mandate to review the framework of multilateral trade rules. The developed countries tried to jettison the Doha Round by arguing for the inclusion of new issues, namely investment, competition policy and government procurement, but the developing countries held out in the face of these pressures. It was clear that the outcome of the Doha Round would decide whether the WTO would become a more inclusive institution.

The Xiamen Declaration however makes no reference to the Doha Round. This is not the first instance when reference to the Doha Round was dropped; the Ufa Declaration in 2015 marked the first time that the BRICS avoided referring to this crucial process. By giving short shrift to the Doha Round negotiations, the BRICS have dealt a body blow to the hopes of the poorest members of the WTO, namely the least developed countries (LDCs). These countries were expecting that the Doha Round would conclude on the basis of the original mandate, as the existing rules of the WTO had done little to improve their presence in global markets. Since the WTO was established, the share of the LDCs in global exports increased from just under 0.5% in 1995 to 0.9% in 2016. The share of LDCs was just under 0.8% in 2005, which implies that in the past decade, their share has virtually remained stagnant. In sharp contrast, the share of LDCs in imports increased from 0.6% in 1995 to 1.4% in 2016, indicating thereby that their trade balance has worsened.

Contrast these numbers with those of the BRICS: their share in global exports expanded from 6.5% in 1995 to 18% in 2006; the corresponding figures for imports were 6% and 14.6%. In the face of this evidence, the question that arises is whether the BRICS have aligned their interests with those of the dominant economies, thus abandoning their past publicised role of partnering the lesser developed countries.

When the BRIC met in Yekaterinburg in the immediate aftermath of the economic downturn, they spoke on behalf of poorest countries that needed support from the global community. This spirit seems to have deserted the BRICS, when the forum is at the threshold of completing a decade of existence. More importantly, collective action of the grouping for changing the rules of the game of global economic governance seems to have given way to managing bilateral relations. In fact, it was this dimension of the Xiamen summit that received the maximum coverage; the deliberations and the decisions of the collective found a place in the backburner. Few in the developing world would disagree that the BRICS need to change this perception about their forum and that the uppermost priority of these emerging economies should be to change the course of global economic governance through collective action.          

Biswajit Dhar is a Professor of Economics at the Centre for Economic Studies and Planning, School of Social Sciences, Jawaharlal Nehru University, New Delhi. This article first appeared on the website of New Delhi-based think-tank Madhyam (www.madhyam.org.in).

*Third World Resurgence No. 322/323, Jun/July 2017, pp 7-9


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