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Apr 03 2013
BRICS Summit: Moving Ahead, Slower
By Dan Steinbock
Before the fifth annual BRICS summit, Chinese president Xi Jinping first visited Russia and toured Africa. Both reflect China’s changing role in the BRICS alignment.
The common denominator among the BRICS is the legacy of colonialism, which is reflected in their lower level of prosperity as measured by GDP per capita. On the other hand, China’s economy has grown a fourth larger than that of the other four BRICS nations combined. Even as China’s more prosperous coastal regions move toward mass consumption, other major emerging nations are still coping with industrialization.
The differential pace of economic development is reflected in the political friction that has surfaced between some emerging and developing nations – which, in turn, has been seized by the BRICS critics as a sign of the impending demise of the alignment.
But to paraphrase Mark Twain, rumors of the death of the BRICS are greatly exaggerated.
China’s growth shift creates new opportunities
In Moscow, President Xi Jinping focused on trade relations and shared views on the nascent multipolar world. In the case of trade, the goal was to facilitate bilateral talks over natural gas prices, a deal that is vital for China’s energy needs and for the diversification of Russia’s energy exports as European demand is anticipated to fall. In the case of multi-polarity, both China and Russia share views of non-interference in the domestic matters of sovereign states.
After Moscow, Xi began his African tour; with a brief stay in Tanzania, the BRICS Summit in South Africa, and then a visit to the Republic of Congo. Since 2007, trade between Africa and China has doubled to over $200 billion, while Chinese investment amounts to $20 billion.
While African nations welcome the investment and job-creation, many also hope for accelerated localization and skill transfers, in order to intensify their own industrialization efforts. However, as China shifts from exporter to investor, China’s presence in Africa will refocus from trade to investment. In a positive scenario, it will provide opportunities to invest Chinese capital and intensify industrial growth in Africa.
The BRICS Bank: To be or not to be?
In Durban, one of the key issues on the BRICS table is the proposed BRICS Development Bank. Critics argue that there is no need for such an institution since the International Monetary Fund (IMF) and the World Bank already exist. However, these international financial institutions were created in the post-World War II era by the major advanced economies. Although global growth is driven by the large emerging economies, reforms of these institutions have proceeded very slowly as the G7 club is reluctant to reduce its bargaining power despite decades of promises.
In many nations, development banks do an important job by providing financing for long-term economic projects, which are seen as in the national interest, but challenging for the private sector alone to initiate. In turn, the proposed BRICS Bank would seek to provide capital for long-term infrastructure projects, which are vital for industrialization and urbanization. It would also be expected to support trade and investment, as well as financial channels, among the BRICS nations.
Of course, such projects should be the basic staple of the World Bank or national development banks. However, the former does not represent the world in a proportionate way, while the latter lack adequate capital resources. While differences prevail differences prevail over funding for and the location of the BRICS bank, its creation is no longer a question of principle, but a matter of time.
Advanced economies: monetary expansion and fiscal stagnation
Recently, observers in the West have suggested that the BRICS are fading away, making note of reduced growth prospects in large emerging economies. As Bloomberg concluded, the currencies of the largest emerging have posted the biggest declines since 1998: “The real, ruble and rupee are weakening the most among developing-nation currencies, while the yuan has depreciated more than in any other period since its 1994 devaluation.”
Actually, the yuan closed at record high after the Cyprus deal, while further appreciation against the U.S. dollar, is expected to be slower. Indeed, what the BRICS currency reports neglect to mention is that, since the great global recession, all major advanced economies have resorted to successive liquidity injections to alleviate their fiscal challenges.
Although the balance sheets of the major central banks have soared to almost $10 trillion, the payoffs have been few. In the United States, stagnation has replaced growth, unemployment remains at nearly 8 percent and labor force participation has plunged. In the Eurozone, unemployment has soared to 12 percent and the area is in recession, again. In the ailing Southern periphery, the rate is twice as high and youth unemployment more than 55 percent. In Japan, the third lost decade has begun.
In the past two years, the expected growth of the advanced economies has been halved to 1.3 percent, while that of emerging and developing economies has decreased by a fifth to 5.1 percent.
The BRICS: reduced growth prospects
The more the BRICS have integrated with advanced economies, whether through trade, investment or financial channels, the more exposed they have become to the debt crises in the West.
In China, growth is currently at 7.5-8 percent annually. In the short-term, inflation may increase slightly, but tighter monetary policy, coupled with lingering overcapacity, will keep prices in check. The real challenges will follow in the medium-term as local debt – the result of liquidity unleashed after 2008 – must be contained. Further, the shift from investment and net exports to consumption rests on accelerating social transfers.
The past year has been very challenging for India, which has experienced several record lows in growth performance. In the short term, growth is likely to rebound with further investment. While neither structural reforms nor fiscal adjustment should any longer be deferred, achieving a growth rate of 6 percent will be challenging.
Currently, growth is lingering at around 3-3.5 percent in Russia; as long as the business environment continues to be perceived as risky, investment will remain subdued, which will reduce growth prospects. While Russian monetary policy may shift closer to a pro-growth stance, sustained growth requires a shift from government spending toward consumption.
Finally, growth is likely to remain around 3-4 percent in Brazil over the next two years. President Dilma Rousseff’s greatest challenge is internal inflation, supported by rigidities in the labor markets, and imported inflation, aggravated by the Fed’s successive rounds of quantitative easing.
World leaders representing the world
When the Peace Conference took place in Paris after World War I in 1919, the world was led by only three nations. While President Woodrow Wilson, British Prime Minister David Lloyd George, and George Clemenceau of France represented only a tenth of humanity, they made the decisions for the remaining 90 percent.
When Presidents Xi Jinping, Dilma Rousseff, Vladimir Putin, Jacob Zuma and Prime Minister Manmohan Singh convene in Durban, they directly represent more than 40 percent of the world’s population and global foreign exchange reserves and more than a fifth of the world GDP. Their combined role in global growth is even higher.
What we are witnessing is the eclipse of the old order of international affairs and the rise of a new one. While the BRICS are no longer immune to the debt crises in the advanced world, they are moving ahead.
The common denominator among the BRICS is the legacy of colonialism, which is reflected in their lower level of prosperity as measured by GDP per capita. On the other hand, China’s economy has grown a fourth larger than that of the other four BRICS nations combined. Even as China’s more prosperous coastal regions move toward mass consumption, other major emerging nations are still coping with industrialization.
The differential pace of economic development is reflected in the political friction that has surfaced between some emerging and developing nations – which, in turn, has been seized by the BRICS critics as a sign of the impending demise of the alignment.
But to paraphrase Mark Twain, rumors of the death of the BRICS are greatly exaggerated.
China’s growth shift creates new opportunities
In Moscow, President Xi Jinping focused on trade relations and shared views on the nascent multipolar world. In the case of trade, the goal was to facilitate bilateral talks over natural gas prices, a deal that is vital for China’s energy needs and for the diversification of Russia’s energy exports as European demand is anticipated to fall. In the case of multi-polarity, both China and Russia share views of non-interference in the domestic matters of sovereign states.
After Moscow, Xi began his African tour; with a brief stay in Tanzania, the BRICS Summit in South Africa, and then a visit to the Republic of Congo. Since 2007, trade between Africa and China has doubled to over $200 billion, while Chinese investment amounts to $20 billion.
While African nations welcome the investment and job-creation, many also hope for accelerated localization and skill transfers, in order to intensify their own industrialization efforts. However, as China shifts from exporter to investor, China’s presence in Africa will refocus from trade to investment. In a positive scenario, it will provide opportunities to invest Chinese capital and intensify industrial growth in Africa.
The BRICS Bank: To be or not to be?
In Durban, one of the key issues on the BRICS table is the proposed BRICS Development Bank. Critics argue that there is no need for such an institution since the International Monetary Fund (IMF) and the World Bank already exist. However, these international financial institutions were created in the post-World War II era by the major advanced economies. Although global growth is driven by the large emerging economies, reforms of these institutions have proceeded very slowly as the G7 club is reluctant to reduce its bargaining power despite decades of promises.
In many nations, development banks do an important job by providing financing for long-term economic projects, which are seen as in the national interest, but challenging for the private sector alone to initiate. In turn, the proposed BRICS Bank would seek to provide capital for long-term infrastructure projects, which are vital for industrialization and urbanization. It would also be expected to support trade and investment, as well as financial channels, among the BRICS nations.
Of course, such projects should be the basic staple of the World Bank or national development banks. However, the former does not represent the world in a proportionate way, while the latter lack adequate capital resources. While differences prevail differences prevail over funding for and the location of the BRICS bank, its creation is no longer a question of principle, but a matter of time.
Advanced economies: monetary expansion and fiscal stagnation
Recently, observers in the West have suggested that the BRICS are fading away, making note of reduced growth prospects in large emerging economies. As Bloomberg concluded, the currencies of the largest emerging have posted the biggest declines since 1998: “The real, ruble and rupee are weakening the most among developing-nation currencies, while the yuan has depreciated more than in any other period since its 1994 devaluation.”
Actually, the yuan closed at record high after the Cyprus deal, while further appreciation against the U.S. dollar, is expected to be slower. Indeed, what the BRICS currency reports neglect to mention is that, since the great global recession, all major advanced economies have resorted to successive liquidity injections to alleviate their fiscal challenges.
Although the balance sheets of the major central banks have soared to almost $10 trillion, the payoffs have been few. In the United States, stagnation has replaced growth, unemployment remains at nearly 8 percent and labor force participation has plunged. In the Eurozone, unemployment has soared to 12 percent and the area is in recession, again. In the ailing Southern periphery, the rate is twice as high and youth unemployment more than 55 percent. In Japan, the third lost decade has begun.
In the past two years, the expected growth of the advanced economies has been halved to 1.3 percent, while that of emerging and developing economies has decreased by a fifth to 5.1 percent.
The BRICS: reduced growth prospects
The more the BRICS have integrated with advanced economies, whether through trade, investment or financial channels, the more exposed they have become to the debt crises in the West.
In China, growth is currently at 7.5-8 percent annually. In the short-term, inflation may increase slightly, but tighter monetary policy, coupled with lingering overcapacity, will keep prices in check. The real challenges will follow in the medium-term as local debt – the result of liquidity unleashed after 2008 – must be contained. Further, the shift from investment and net exports to consumption rests on accelerating social transfers.
The past year has been very challenging for India, which has experienced several record lows in growth performance. In the short term, growth is likely to rebound with further investment. While neither structural reforms nor fiscal adjustment should any longer be deferred, achieving a growth rate of 6 percent will be challenging.
Currently, growth is lingering at around 3-3.5 percent in Russia; as long as the business environment continues to be perceived as risky, investment will remain subdued, which will reduce growth prospects. While Russian monetary policy may shift closer to a pro-growth stance, sustained growth requires a shift from government spending toward consumption.
Finally, growth is likely to remain around 3-4 percent in Brazil over the next two years. President Dilma Rousseff’s greatest challenge is internal inflation, supported by rigidities in the labor markets, and imported inflation, aggravated by the Fed’s successive rounds of quantitative easing.
World leaders representing the world
When the Peace Conference took place in Paris after World War I in 1919, the world was led by only three nations. While President Woodrow Wilson, British Prime Minister David Lloyd George, and George Clemenceau of France represented only a tenth of humanity, they made the decisions for the remaining 90 percent.
When Presidents Xi Jinping, Dilma Rousseff, Vladimir Putin, Jacob Zuma and Prime Minister Manmohan Singh convene in Durban, they directly represent more than 40 percent of the world’s population and global foreign exchange reserves and more than a fifth of the world GDP. Their combined role in global growth is even higher.
What we are witnessing is the eclipse of the old order of international affairs and the rise of a new one. While the BRICS are no longer immune to the debt crises in the advanced world, they are moving ahead.
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