The BRICS of a New Global Economic Order

Cover Story

The Fortaleza summit of the BRICS Forum marked a crucial fork in the road for this historic grouping, but there are clouds on the horizon. If the BRICS are not careful in navigating an incipient renewal of East-West tensions resulting from nationalist inspired geopolitical compulsions, the group’s credibility and achievements will become encumbered by distractions, thereby deviating it from its core business: global economic governance reform, insists Francis A Kornegay, Jr

The unveiling of the ‘New Development Bank’ (NDB) and ‘Contingency Reserve Arrangement’ (CRA) at Fortaleza highlights that the BRICS Inter-Banking Mechanism has finally broken new institutional ground in the much needed expansion of the global financial architecture, the group’s raison d’etre. These developments give momentum to the institutionalising of what has become the proverbial West-to-East shift in the global economy’s centre of gravity.

Western financial media may belittle Fortaleza in a short-sighted tendency to throw cold water on non-Western initiatives that appear to threaten the status-quo of a still Western-dominated global economy. Yet, they themselves are well aware that Rome was not built in a day! It is, therefore, unsurprising that it took the BRICS this long (actually in comparatively short time given the challenges confronting setting up such an institution and the diversity of the BRICS) to arrive at the treaty launch of the NDB – and it will take a while longer still for it to become fully operational.

Nor will its capacity or that of the CRA soon match that of the Bretton Woods Institutions. Thus, making such dismissive comparisons are no-brainer exercises in what passes for geopolitical economic analysis. The fact of the matter is that over the long-term, if political dysfunction in Washington continues delaying ratification of World Bank and IMF reforms, these institutions will face diminishing influence. Indeed, they could become redundant.

This forecast is underpinned by the fact that the NDB-CRA launch has to be viewed in a larger context of new generation Development Finance Institutions (DFIs) emerging on the scene. Notably, these include the promise of an Asian Infrastructure Investment Bank (AIIB) and the Nairobi-based China-Africa Development Fund, which has partnered with the African Development Bank in creating the Africa Growth Prosperity Fund. Moreover, the first regional presence of the BRICS bank will be headquartered in South Africa – the New Development Bank Africa Regional Centre.

African-BRICS Nexus

South Africa, meanwhile, might consider parleying this Regional Centre into the focal point of something that should have emerged as its legacy from having chaired the fifth BRICS summit but didn’t: a BRICS-Africa or AU-BRICS forum as a means of institutionalising a proactive dynamic into how Africa as a whole (not just South Africa) relates to BRICS and other emerging powers and their different national, self-interested strategies on the continent. The absence of such a legacy ‘big idea’ emerging from South Africa’s hosting BRICS may be due to a still unresolved African ‘outreach partnership process.’

Yet, the urgency of much needed African strategic proactivity in coordinating BRICS and other emerging powers’ agendas on the continent makes an African-BRICS nexus imperative. The Regional Centre in South Africa could conceivably become a means of elaborating on what Zuma started with his BRICS Leaders-Africa Retreat and a stated commitment enunciated in the Fortaleza Declaration ‘to foster BRICS-Africa cooperation in support of the socioeconomic development of Africa, particularly with regard to infrastructure development and industrialisation.’ Otherwise, Africa is at the mercy of its fragmentation placing it at a distinct disadvantage in negotiating external agendas on the continent, agendas set by Africa’s partners, not by Africa.

The broader point underlined by the NDB launch is the urgently needed financing for Africa’s initiatives under the New Partnership for Africa’s Development (NEPAD). This applies to other developing regions as well. It is reflected in Fortaleza’s support for the regional integration process underway in the Union of South American Nations (UNASUR). This underlines the importance of a BRICS integrationist dynamic for all members of this grouping, vindicating South Africa’s Africa-centred approach to the fifth summit.

New Era of Cooperative Developmental Financing

However, given the reality this poses in terms of developmental financing resources, the Bretton Woods institutions have become inadequate for meeting the burgeoning demand of emerging market and developing countries (EMDCs). Neither, moreover, is filling this gap in development financing, a zero-sum proposition as the cooperative agreement between the World Bank and the Russian-dominated Eurasian Development Bank attests.

The room for cooperative developmental financing partnerships is probably set to expand with the NDB and other new generation DFIs. Further, what starts out as a BRICS bank will, over time, become a BRICS-led bank as non-BRICS emerging economic powers are allowed to buy into it. Thus, with a starting capital of $50 billion, to expand over time to $100 billion, the BRICS capital share is to never fall below 55 percent. Thus, control of the new bank will reside amongst the BRICS with each having an equal share in the bank’s governance.

Each member will not be able to increase its share without all other BRICS members agreeing. Here, India’s influence proved decisive. Beijing had to accommodate a more democratic power-sharing arrangement from that of the World Bank and the IMF under American and European leadership respectively. As such, the NDB should be considered as signalling expanded possibilities for a new era of cooperative (rather than competitive) development financing. This could apply just as well to Beijing’s AIIB partnering with the Japan-dominated Asian Development Bank, similar to partnerships China has forged with the AfDB.

Individual BRICS members, however, will need to sort out their particular niche within this fledgling financial architecture and what they expect to get from it. The fact that the NDB will be headquartered in Shanghai reflects the new realities of the Asia-centric gravitational pull of the global economy with China emerging at the head of what amounts to a new economic sub-order within the G20. Indeed, the BRICS and the G7 might be perceived as two branching sub-orders within an over-arching but fluid G20 economic order.

That power remains the overriding currency of exchange in the international system is reflected in the fact that the new bank is being headquartered in Shanghai, not Mumbai. Yet placing it in Mumbai would certainly have added to its credibility as it was conceived as India’s ‘big idea’ legacy in the first place, coming out of the fourth BRICS summit hosted by Delhi in 2012. Pax-Sinica, however, is the unchallenged reality of the BRICS sub-order with Shanghai as its capitol. China’s influence within the BRICS set-up will be offset by the rotational formula for choosing the NDB’s president, which will initially be under an Indian presidency. China, nevertheless, will in turn, offset this dilution of its influence by enjoying full control over the AIIB to which it has offered an invitation to India to join.

The intra-BRICS politics of these new generation DFIs notwithstanding, their institutional emergence comes none too soon. This is due to projections that the anticipated convergence between the EMDCs and the OECD economies will fail to become a reality by 2050. This is because of the marked slowdown in the BRICS and other EMDC economies.

Thus, in a recent Beyondbrics analysis for the Financial Times, Mario Pezzini of OECD observed that: “At their average growth rates during 2000-2012, several lower middle-income countries such as India, Indonesia and Vietnam, but also countries in the upper middle-income bracket such as Brazil, Colombia, Hungary, Mexico and South Africa, will fail to converge with the average OECD income level by 2050. Their challenge is deepened by the slowdown in China, whose rapid growth in the past has benefited its overseas suppliers, especially natural resource exporters. The free ride towards convergence for many developing countries, based on China’s growth, is over.”

Complications in the BRICS Mandate

These challenges are reflected in difficult political transitions underway within the IBSA members of BRICS. They are compounded by the economic warfare being waged by the West against Russia’s irredentism in Ukraine and the threat perception this is seen posing to the post-cold war status-quo in the European borderlands. If there is anything that could complicate the BRICS mandate, it is the nationalist compulsions toward geopolitical adventurism emanating from Moscow and Beijing. In Moscow’s case, this involves pursuit of a chauvinist restoration project motivated by insecurities emerging from both ends of its geography: US-backed EU-NATO encroachment from the West; Chinese economic encroachment from the east into Central Asia.

These East-West pressures threaten the Eurasian economic regionalism that Vladimir Putin wants to carve out in Russia’s geostrategic space between China and the EU, even as Moscow tightens its alliance with Beijing under the escalating pressure of US-EU sanctions. Indeed, this underlying tension illuminates a Sino-Russian power-struggle over another DFI: the still-born Shanghai Cooperation Organisation (SCO) development bank. The Kremlin wanted this bank to build upon the already existing Eurasian Development Bank, whereas Beijing wanted to set up an SCO bank from scratch. Apart from how this reflects the extent to which Moscow has had to concede China being first among equals in their co-leadership of the SCO, thereby enhancing the importance of Putin’s Eurasian project, the predicament that he has placed Russia in accentuates its stake in the new BRICS bank.

The NDB emerges as a geopolitically palatable alternative to an SCO bank that has failed to materialise and as a new source of co-financing for its own regional projects. A letter to the editor in the Financial Times put it succinctly: “To the extent the West takes increasing steps to restrict Russian access to financial markets, the New Development Bank launched by the BRICS during their recent meeting in Brazil may of necessity become a source of capital for Moscow once it begins operations in 2016. The bank, to be based in Shanghai, will count the five BRICS nations as equal members, but China’s overwhelming relative economic weight will mean its voice carries the furthest, particularly if Russia runs into balance of payments problems and avails itself of the contingent reserve arrangement that was also agreed. The risk is that Russia ultimately becomes even further reliant on Chinese goodwill, with the attendant strategic dimension that implies.”

The problem is that under these circumstances, the NDB risks becoming unnecessarily drawn into Sino-Russian neo-cold war geopolitics, thereby polarising the BRICS profile overall as an anti-Western adversarial bloc. China’s neo-tributarian compulsions for regional dominance in the South and East China seas only add to this baggage, which is already loaded with Russia’s designs on eastern Ukraine.

As it is, on both sides of the ideological divide within BRICS countries on the one hand and within the US and other Western countries on the other, there are those who would like to imagine BRICS at the head of an anti-Western vanguard to its credit or discredit depending on the vantage point. This can only complicate and confuse the global economic governance reformism of the BRICS with Russian and Chinese tendencies toward geopolitical revisionism. This could compromise the group’s credibility. Russia’s hosting of the seventh BRICS summit in 2015 will reinforce this predicament if Moscow’s irredentism in Ukraine is still in play a year from now.

Impetus to Long-Term Vision

There is, however, an eminently more compelling Sino-Russian agenda to be pursued in conjunction with India. This would be upgradation of the trilateral Russia-India-China (RIC) ministerial into a summit level heads-of-state mechanism for pursuing the interregional integration of Central, South and Northeast Asia along lines advocated by faculty members of the Observer Research Foundation in a February 2014 policy brief. From India’s vantage point, this would dovetail with Prime Minister Narendra Modi’s overtures for Chinese investment in India’s massive infrastructural development interacting with NDB financing.

Whereas the RIC could constitute the northern focal point of a BRICS global agenda, developing a relationship between BRICS and IBSA, possibly revolving around a more robust role for the IBSA Development Fund, could address a global South-South cooperation agenda. This would round out a BRICS sub-order within a G20 navigating the regionalising multipolarity of an evolving global economic federalism. This could reveal the long-term vision to which the BRICS intended to give an impetus.

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Francis A Kornegay

Francis A Kornegay is co-editor of ‘Laying the BRICS of a New Global Order: From Yekaterinburg 2009 to eThekwini 2013’, Africa Institute of South Africa.

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