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Opinion

BRICS: A New International Economic Order

March 22, 2013

by JOSEPH INGRAM and DANIEL POON

Embassy

At the fifth BRICS summit, convening in Durban, South Africa March 25 to 27, delegates from Brazil, Russia, India, China and South Africa have a window to make gains on the elusive “promise of development” that preoccupies the developing world. It is this “tryst with destiny” which largely went unfulfilled during previous movements of third-world struggle and solidarity, that is now undergoing a renaissance.

Ironically, while some “South-South” rhetoric is still alive and well today, the substance and potential interactions among developing countries have changed dramatically in a global economic context where global power is shifting East and South. Whereas South-South alliances were once essentially political and ideological in nature, today the key feature could very well be described as policy “pragmatism” – perhaps more solid footing for stronger and more effective South-South development ties.

For instance, intra-BRICS trade was roughly $310 billion in 2012, an eleven-fold increase from $28bn in 2002. In all, the BRICS share of global trade has grown to nearly 16 percent in 2012, up from 10 percent in 2008.

Building on these trends, the plan to establish a BRICS development bank – to feature prominently at the Durban meetings – is intended to provide an institutional backbone to bolster the existing commercial momentum and allow for more dynamic linkages among the BRICS members. Beyond just more trade flows, however, this bank initiative potentially symbolizes a structural breakthrough in global capital flows that third-world movements of times past could only dream of attaining.

According to a report by South African-based Standard Bank, it is expected that each of the five BRICS members would contribute $10 billion in seed capital to the bank (to leverage in global capital markets) and establish a working group to determine technical and operational details. There is much work to be done including decisions on funding source, target borrowers, types of projects, geographical reach, personnel and bank headquarters, among others.

And yet, despite the uncertainty, the policy implications of such a bank should give Canadians policy-makers pause. While the report downplays the proposed bank as a direct challenge to incumbent multilateral banks – like the World Bank – it does recognize the continued dominance of US and EU interests in the Bretton Woods institutions as an ongoing problem. As such, the BRICS bank is portrayed as a tool to guide development processes to better reflect BRICS priorities (such as infrastructure, job creation) and policy experiences, which were often driven by heterodox policy approaches including the active use of industrial and sector policy strategies.

Controversially, former World Bank president Robert Zoellick has argued that the desire by BRICS countries for their own new financing vehicle was in reaction to the World Bank’s decision to diminish its support for middle-income emerging markets in preference for poorer countries. As Mr. Zoellick pointed out, “If you believe in a multilateral system then India and Brazil are going to become more important over time and we need to draw from their knowledge and, in time, their finances.”

Left unsaid is the outsized role played by China. And this is where Canada should take note. China not only drives the convergence in trade flows among BRICS members, but also strategically deploys its accumulated capital in driving state-led trade and investment links with other emerging markets. Unlike the other BRICS members, China acts as the partner in 85 percent of all intra-BRICS trade flows. Moreover, in 2011, China’s Export-Import Bank issued loans worth roughly $15bn to African countries, double the amount provided by the World Bank that same year, and solidifying a trend that began in 2005.

Crucially, the terms of these loans are not connected to policy conditionality with regards to what are considered sound “best practice” free-market economic policies. As an analyst from Fitch, the ratings agency, noted: “Chinese loans are more flexible – they often have longer grace periods, and longer repayments. And they are less restrictive in their financial conditions, unlike World Bank loans which have more stringent fiscal conditions.”

Such beneficial features, unique to present-day South-South links, do not go unnoticed for long and would likely be enhanced by a BRICS development bank. Despite his warning in July 2012 that China would need to change the unbalanced and “unsustainable” features of its trade ties with Africa, South African president Jacob Zuma earlier this month also cautioned western companies and institutions that they would lose out to new partners, especially China, if they do not shed the old paternalistic “colonial” approach in deciding what’s best for Africans and viewing the continent primarily for its energy and natural resources.

This also applies to Canada, as they do to other western nations, with serious implications for our own economic fortunes – not just Africa’s. As Mark Carney, Governor of the Bank of Canada, noted last year, Canada’s deteriorating export performance can be explained more from the drag caused by our export market structure – only 8 percent of Canada’s exports directed toward fast-growing emerging markets from 2000 to 2010 – than from competitiveness effects (exchange rate, productivity, wages). Actively engaging with the BRICS and sorting out our own China policy could help reverse these trends.

Fulfilling the developing world’s tryst with destiny is likely to involve striking a pragmatic middle ground between the two stances articulated by President Zuma. Cynics may lament the lack of cohesion amongst the BRICS and its toned-down political overtures, but that may actually be more conducive to effective South-South development ties than ever before.