Abstract
The economies of the so-called BRICS countries (Brazil, Russia, India, China and South Africa) are exceeding all expectations. Their current and future influence on the global economy is beyond doubt. However, it is still unclear which specific role these countries will play in relation to more industrialised countries (the G-7) and how they will cooperate among themselves. Can they help to solve the European mess? We argue that investment in emerging economies, such as the BRICS, is the main chance the EU and the US have to create growth. It is time for G-20 leaders to grab this opportunity as a powerful driver for global growth.
In a famous Goldman Sachs report from 2003, Brazil, Russia, India and China (the BRICs) were identified as the global economic powers of the future [4]. Now South Africa has joined the club (the BRICS), and Indonesia is standing in the wings (some call this group the BRIICS). Does this disparate group have the collective clout to influence outcomes in the global economy, now that the G-7 economies are in such trouble, or is it all puff and no push?
BRICS of substance
There are many who subscribe to the ‘puff’ rather than the ‘push’ thesis. The BRICS appear to be more competitors in the global economy than capable of strategic cooperation, so the puff argument runs. Collectively, they might be a big element in the world economy, but interaction between them—in trade or financial flows—is limited, with China dominating what there is and the balance of power going China's way.
The other view is that there is a powerful case for believing that the influence of the BRICS on global outcomes is already clear and present. ‘The future is arriving sooner than anticipated’, Sourabh Gupta [5] says. ‘The present had arrived much earlier than is conventionally presumed.’
The long-term trajectory that foresaw the emergence of these new economic powers has been elevated. Catapulted forward by their economic resilience during the global financial crisis, the BRICS already have a more prominent place and role in the global system. The prediction less than a decade ago was that they would account for under 10% of global output at the end of the first decade of the twenty-first century. Already they hold twice that share. And now global consumption growth in the years ahead is predicated on their continuing and rapid growth, with a lacklustre outlook for most of the G-7 industrial world.
The BRICS’ first move
The BRICS’ coming of age is typically dated to their inaugural, stand-alone leaders meeting in Yekaterinburg, Russia, in June 2009. But the rise of the BRICS phenomenon can be dated back to September 2003, when at a Doha Round meeting in Cancun, Mexico, that year, Brazil, India, South Africa and a loosely formed G-20 agricultural group of developing economies chose to reject a skewed negotiating draft that the US and the EU had jointly sprung two weeks earlier and tried to foist on the World Trade Organization [1]. A revised draft around which a workable multilateral consensus could be built was produced the following year, Gupta [5] says, in no small measure due to the creation of an inner Non-Group-5 (NG-5) in March 2004 comprising the US, the EU, Brazil and India, along with Australia.
This outcome at Cancun in 2003 provides a pointer, both to the shared characteristics that bind the BRICS as well as to the fundamental purposes that they seek to realise. Each BRICS country individually constitutes one among a selectively precious list of non-Western states, which, with variances, can afford the luxury of exercising genuine independent-mindedness within the international system. Yet collectively they nurse a common sense of impotency and marginalisation within many of the key institutions of global economic and financial governance. Hence their individual interest in accumulating voice and leverage on those multilateral issues that impinge on their development trajectories. Each possesses a degree of leverage that ranges from the modest to the negligible in its bilateral economic dealings with the West (as the Brazilian and Indian leaders once again discovered in their recent summit-level exchanges with Washington), yet collectively they possess the wherewithal to resist Western economic impositions within multilateral settings. Hence their grouping format loosely akin to that of a credit union, where individual worthiness is enhanced further by membership of the group than it would otherwise be the case if preferences were simply aggregated. [5].
A supple entente
It is true that each of the BRICS individually shares a competitive trade or resource relationship with the other, yet their divergences over the pressing issues of common international economic interest—global recovery, trade, finance, development, climate change, global economic governance—are much narrower, typically, than those with the West. It is this ‘co-dependency that implicitly supplies the BRICS their mortar: that if they do not hang together, they will hang separately as defections are progressively engineered within their ranks by more powerful constituents within the multilateral system’ [5].
A conception of the changing structure of global economic power that sees the BRICS as ‘a supple entente of rising powers, organised as a mutual support network that is committed to assist and backstop—sans recourse to litmus tests on intra-group cooperation—each other's rise within the international economic order’ leads to somewhat different conclusions about the future of the global order from one that puts the G-7—or alternatively, the contest of power between China and the US—at its centre. The world is now biting its fingernails in anticipation of developments in the global economy and geopolitical landscape. Can the emerging BRICS economies really contribute to global recovery around the impasse resulting from the deep fragilities of the G-7?
What to do with the mess now?
Most economies need to undertake significant structural adjustment if there is to be rising productivity and sustainable long-term fiscal and external balance. But far too many governments have committed themselves, prematurely, to fiscal austerity at a time of deficient global demand, damaging prospects for sustained recovery in developed economies. In the short term, there will be enormous tensions as the relative economic weight of emerging economies grows apace. This is a defining moment for the G-20, one that will either demonstrate or destroy its capacity to be an effective steering committee for the global economy.
Europe is in a mess. The European experiment is at risk. Deep down the worry is that the writing is on the wall for the euro itself. There's no doubt at all that despite all the emergency measures to prop up Greece and keep it in the fold, there's a serious risk that the eurozone will collapse. Greece is not the only eurozone member trapped in the euro straitjacket. The core problem for southern Europe is its chronic inability to match German productivity growth.
When two countries—Germany and Greece, for example—engage in free trade, the country with the slower rate of productivity growth normally experiences a depreciation of its currency. But currency depreciation need not occur. There are other possibilities: its workers’ wage rates could grow at a commensurately slower rate; it could experience ever-increasing unemployment; its workers could emigrate; or it could find some means of ‘validating’ its increasingly over-valued real exchange rate. Greece chose the last of these options. And the means it chose to validate that was to increase government spending, financed by borrowing. Over the last decade, unit labour costs in Greece have grown by about 30% more than in Germany. This implies a 30% effective appreciation of Greece's real exchange rate. The validation of a real appreciation of that magnitude has required a lot of government spending, and such a fiscal stance was bound to prove unsustainable. Greece is not the only European country in this pickle. Whether the Greek and European body politic can now weather the fiscal burdens of an adjustment without breaking the euro currency system remains to be seen.
What can the BRICS do to alleviate the mess in Europe?
Investment-led recovery
The perverse reality is that even at a time of deficient global demand, the savings of emerging economies, most of which are generated in Asia, are being intermediated chiefly in the financial markets of New York and London. These savings are then invested largely outside Asia, with a significant part lent to governments of already heavily indebted developed (usually Western) economies in order to finance their fiscal deficits [7]. This money can be put to better use.
With Europe and the US stuck in the mire, the main chance globally for medium-term growth is investment and growth in emerging economies, notably the BRICS. This doesn't just involve another big fiscal stimulus in China—there are risks with that which the Chinese authorities are justifiably cautious about assuming. It means putting the emerging BRICS economies at the leading edge of a global recovery strategy.
As growth in the G-7 economies stagnates, the average growth rate in emerging market economies remains strong, at around 6.2%. Over the next few decades the economies of Brazil, China, India, Russia and South Africa will play a far greater global role, along with other emerging economies like Indonesia, South Korea, Taiwan and Singapore. Stronger economic growth in these countries is also securing greater bargaining power, creating stronger leverage in international trade and diplomatic negotiations. The BRICS now have a bigger say in world financial matters and are eager to play a key role in creating transparent and predictable financial architecture [9].
The potential for productive investment in the infrastructure of BRICS economies is enormous [2]. The Organisation for Economic Co-operation and Development (OECD) estimates global infrastructure requirements to 2030 to be in the order of $50 trillion [6]. Much of this demand is in Asia, which is also the primary source of the savings that are currently sloshing around the global economy. There is almost a trillion dollars’ worth of infrastructural investments there that have been given the once-over by the Asian Development Bank. China may be facing a temporary problem of overheating, but its stock of capital relative to population and income is low. India and Indonesia offer vast scope for investment infrastructure. The US also needs to make large investments in order to rehabilitate or extend its economic infrastructure. More generally, global investment is at an historically low share of global output [6 p.27].
Refocusing the G-20 development agenda
An atavistic G-7 mindset has the G-20 focused on a development agenda that largely misses this main point. G-20 leaders have appointed a High Level Panel on Infrastructure [3] to advise them on improving the institutional and enabling environment for investment in infrastructure, and to generate ideas for financing infrastructure projects with significant but delayed returns to investors. Yet the panel's brief focuses only on infrastructure, much needed though it is, in the world's most difficult investment environments, especially sub-Saharan Africa. That focus is too narrow. The issues of institutional capacity and innovative financing and risk management need attention everywhere. Cannes, G-20 leaders need to grab the panel's terms of reference and widen them, challenging their officials, financial sector managers and international financial institutions to use their expertise to find ways to intermediate more savings into commercially viable investment in infrastructure wherever it is needed, but especially in the BRICS.
The Asian six in the G-20 can take a lead here. On a visit to Jakarta in September 2011, Japanese Minister of Economy, Trade and Industry Yukio Edano announced that Japan would support the reconstruction of Jakarta's ramshackle port capacity, including its airport, and help to build a long-overdue urban subway system [8]. This is the kind of infrastructure investment that will both boost Indonesian productivity and lift Japan's and the G-7's recovery and growth prospects.
Europe is clinging to a global agenda that it has dominated for too long. It is time for G-20 leaders to look beyond the G-7 funk and focus on the opportunity for sustaining global growth through a development agenda extending well beyond Europe's messy backyard, one driven by robust investment and growth in the BRICS.