BRICS: Time to Reset Priorities

By Biswajit Dhar | Guest Blog | September 13, 2017

The Xiamen BRICS Summit held in September 2017 was the ninth since this formation of emerging economies met in Yekaterinburg in June 2009. When the four original members of the formation (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 the post-war multilateral economic governance, which continues to be under the dominating influence of the major economies. This is one of the biggest ironies of the times that should not have been, 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 Jim O’Neill in 2001 when he argued that the 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 would also provide a more inclusive agenda.

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 must be reformed for reducing the legitimacy deficits. In the 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 in the backdrop of discussions in the Fund to realign the quotas held by the members, which would have an impact on the governance of the institution. In 2008, the Board of Governors adopted the 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 quota increased by over 70% and 44% respectively.

For the BRICS, the outcome of the 14th General 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 reallocation of the quotas to take 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 “15th General Review of Quotas, including a new quota, by the 2019 Spring Meetings and no later than the 2019 Annual Meetings”. At the same time they 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 focus 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 higher as the NDB chose projects in the areas of renewable energy and infrastructure, two critical areas for developing countries. The group members seemed willing to back the NDB fully as they agreed that entity would have an authorised capital of USD 100 billion. The subscribed capital was USD 50 billion, with every member having equal share. Although these are early days, the promoters of the NDB need to consider at least two factors that could stymie the effectiveness of the Bank. The first is that the paid-in capital of the NDB has reached only USD 1.5 billion in 2017, which could limit the ability of the Bank to raise resources from the capital market. The second and the 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 by a number of development finance entities, which will be a challenge for this new kid on the block.

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 areas to understand the nature of intervention of the grouping.

Challenges of climate change are 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 negotiations on the United Nations Framework Convention on Climate Change (UNFCCC) and had put a joint front by forming the BASIC group in 2009 (coinciding with the formation of the BRIC). The BASIC 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 ceased to be a strong collective voice for developing country interests, as the priorities of the group members became divergent.

This absence of a common position of the BRICS in the response to challenges 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 under the Paris Accord, has been operating with a fraction of the funds, but this serious problem has not flagged by the leaders of the BRICS in the Summit Declaration.

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 Organization (WTO) better suited to their interests. The developing countries had taken advantage of the Doha Round negotiations initiated in 2002, 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 negotiations 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 negotiations would decide whether the WTO would become a more inclusive institution.

The Xiamen Declaration seems to mark a watershed in the dynamics of the WTO as it makes no reference to the Doha Round. This is not the first instance when the reference to Doha Round was dropped; Ufa Declaration in 2015 was the first time that the BRICS avoided referring to this crucial process. By giving a short shrift to the Doha negotiations, the BRICS have dealt a body blow to the hopes of the poorest members of the WTO members, namely the least developed countries. 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 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 has 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 as 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 the support from the global community. This spirit seemed to have deserted the BRICS, when the forum is at the threshold of completing a decade of its 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, this dimension of the Ninth BRICS Summit received the maximum coverage; the deliberations and the decisions of the collective found a place in the back-burner. Few in the developing world would disagree that the BRICS need to change this perception about their forum and that the upper-most 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.

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