When talking about BRICS, what will you think of? The material that is used for building walls? In fact, BRICS stands for five countries, i.e. Brazil, Russia, India, China and South Africa. These countries bring together five major emerging economies, comprising 43% of the world population, having 30% of the world’s GDP and a 17% share in the world trade. The idea of BRICS originated from an investment bank which had conjectured a theoretical possibility of five countries in the developing world. Globally, the influence of the BRICS countries is rapidly increasing. They have been engaged in official and non-official development cooperation for decades. The concept of BRICS only gained more relevance after the financial crisis in which it was believed that the emerging markets were decoupled from the developed ones and were driving the world economy.
Holding in September 2017 in China, the initiatives of the ninth summit of the member nations of BRICS is to set up a new financial architecture. On the summit of last year held in India, new institutions set up by the BRICS were expected to provide a much-needed change in the global financial architecture. These institutions include the New Development Bank (NDB), the BRICS-led Contingency Reserve Fund (CRF), and the Asian Infrastructure Investment Bank (AIIB). The primary purpose of all the institutions is to mobilize resources for infrastructure and sustainable development projects in BRICS and other emerging economies. By furthering economic development in the region, they can help stimulate growth and improve access to basic services. The establishment of more and more institutions of the BRICS reveals their rising global influence.
The Summit this year is significant as it comes probably at a very crucial time. The world economy is in a state of introspection. In the past, it has been observed that globalization has led to an increase in the volume of trade and investment. That has been regarded as a win-win situation for all nations for a long time. However, with countries more worried about the employment fallouts of the process of globalization, there has been a tendency to look more inwards, such as the US and UK. Therefore, it is not hard to say that these five nations will collaborate more closely in the future. In more detail, they may enhance their ties in the following three areas.
The first one is trade. The idea is to create ‘global value chains’ for various products and services which can help these nations to integrate faster. Given the size of the economies of the BRICS nations and their geographical spread, the potential of expanding the frontiers is high, and the others could benefit from sharing the comparative advantage of each nation. However, the challenge is the physical distance of BRICS nations. Unlike NAFTA where the nations are contiguous, BRICS nations are situated far apart which might bring some obstacle in actual trading activities.
The second economic tie-up would be through investment. Presently, the major flow of investment is from the developed to developing countries. This can change now if surpluses in these nations are invested in each other’s countries. The external balances of these nations vary from surpluses to deficits and by having such flows of funds through more liberalised entry policies there are mutual benefits to be gained. This can set in a secondary chain of foreign investment circles, which will bring about a more symbiotic growth process.
The third area which is already being worked on extensively is finance through the New Development Bank. The whole idea is to create a financial institution analogous to the World Bank which can raise funds and lend in the member countries for infrastructure development. As it matures, the same can be used also for the development of private sector industry. This is a very important initiative taken as funding is a major problem for developing economies which have major lacunae in infrastructure. Cheap funds are required to grow these structures and presently the funds which come from the western multilateral agencies come with conditions which come in the way of independent policies being pursued by the respective governments. By having this bank without any inbuilt prejudice, there can be a freer flow of funds to the member nations.
Another thing that needs to be mentioned is that besides these five nations, there are also some observer nations present in the summit. These are Thailand, Mexico, Egypt, Tajikistan and Guinea, which spread across the continents from where the original BRICS nations are located. Hence, it is highly possible that at a later stage these nations would also get subsumed in this group which will help to foster the process of economic integration.
Although, as we mentioned before, the BRICS is the ‘third giant’ after the EU and the US, BRICS member nations are too different, and have too few synergies to represent a solid economic and political power. First, the dominance of the Chinese economy and its role in trade relations makes the BRICS much more a China-with-partners group than a union of equal members. Second, BRICS nations are too similar in some key areas. All members, except Russia, hold huge foreign reserves and have low external debt. Apart from Russia, they are heavily integrated into consumer goods production with the western world. Besides, in many areas, from clothing, through economic influence in Africa to international aircraft and military equipment markets, BRICS nations compete with one another. All of them are able to re-engineer and copy technologies, which means sharing R&D results and innovations and the development of cross-country scientific cooperation has limited potential. Next, cultural differences mean BRICS nations lack common understandings on business activities.
Last but not least, the successes of BRICS need to be tempered by the tensions between the BRICS nations, for instance, the tension between India and China and Brazil’s recent political turmoil. Hence, though a union of BRICS is undoubtedly positive, its role should not be overestimated. For most BRICS nations, the union represents a means to discuss opinions, and perhaps take a joint position on any areas of mutual interest. The BRICS will reinforce its position of leadership among emerging economies in the future.