Rebuilding the World Order isn’t going to
happen
The
BRICS concept as a building block of a new world order is not just an empty
gesture which allows the five countries – Brazil, Russia, India, China, South
Africa -- to preen themselves in a mirror. It is positively dangerous because
if it does anything at all it will be to provide the five with mutual support
for narrow national interests and to erect new barriers to global trade and
capital flows.
Discussion
at the BRICS summit in Delhi last week included an idea for a BRICS- built
development bank providing finance for other developing countries free from
western theories and prejudices. But in practice only one of the five, China,
is in any position to provide major long-term funding for such an institution. Its
massive reserves reflect not just flows of short-term money but years of
surplus on trade and long term capital accounts.
Not so
the other four. India’s reserves are owed more to short-term Non-Resident
Indian deposits than long-term capital, and its current account remains deeply
in the red. Russia has impressive looking reserves – but ones which could melt
away very quickly if oil goes back to US$60 a barrel. Brazil likewise has been
buoyed by high commodity prices yet is still struggling to sustain growth and
keep its current account in the black. As for South Africa it is not really big
enough to count as a BRIC at all. It is there because Africa needs to be
represented for political reasons, not because it is more important than
Indonesia.
Nor does
any of the five, even China, have a currency regime and capital market which
enables it to underpin the proposed bank with capital in convertible currencies
– other than those of non-BRICS. Thus a financing arm would either have to use
dollars, euros and yen or – worse – involve barter deals based on BRICS
currencies.
More
worrying than this piece of nonsense however are the actual economic policies
in place or currently proposed for the member states. Russia may not be sliding
back into Soviet-era central planning but it has yet to show that the
oligarchic form of pseudo-capitalism which emerged with the Soviet collapse is
being superseded by one in which Russia’s many skills are free to flourish in a
competitive environment. As a very latecomer to the WTO it is at best feeling
its way to operating in a global environment in which it does not depend on oil
income and its freest, if least acknowledged, sector, agriculture.
China
is surely a global trade player but whether it will remain committed to
relatively free trade when the benefits it has enjoyed for 20 years from other
countries’ open markets are no long so attractive, remains to be seen. What we
do know about China’s economy is that for all the talk of continued
liberalization, there has actually been a strengthening of the power of the
state-controlled sector. Yet because China is seen as a model of success its
influence on other BRICS, let alone the bigger group of developing countries,
is likely to promote state capitalism at the expense of the genuinely private
sector and open competition.
The
shine has come off India too for the time being. In this case the problem is
not so much that of state enterprises – protected as many are through
preferential treatment. It is the uncertainty of laws and rules in a country
where politics are in almost constant turmoil and ministers are either venal or
blow with the prevailing political winds. Government deficits caused by consumer
subsidies are one problem, raising the cost of capital. But given the good
return to private capital in India this is far less of a problem than arbitrary
laws and imposts. Recent cases of retrospective taxation, large-scale graft and
blatantly unequal treatment of local and foreign, state and private firms are
not just negative for India.
Transplanted
to the international arena by political leaders who like to enhance state power
for their own pecuniary interest. India would again have a negative impact on
global trade, and the attitudes of other developing countries, that it did in
the 1960s and 1970s. Meanwhile it is likely to see China’s relative
outperformance as due to Beijing’s mercantilism than to India’s failures to
reform.
Like
China and India, Brazil has come a long way in the past 15 years of opening up
its economy and pursuing broadly sensible policies. But here too the tide may
have turned. It has not been content with measures to bring down its
commodity-inflated currency to make its manufactures more competitive. It has
raised barriers to many foreign goods, particularly from China. Competition
from its BRICS partner has not created solidarity among the five but induced
Brazil to appear to start to go backtrack after years of liberalization. Brazil
has a history of high tariff barriers and state capitalism. In the 1960s this
seemed successful for awhile in raising growth rates but then led to years of
stasis because capital was used inefficiently and protected industries
stagnated. Will the BRICS doctrine lead it back to that era?
Debt
problems in the US, Europe and Japan are worrying. But they are less worrying
for the globe than the creeping retreat from liberalism among the countries
which are supposed – at least according to themselves -- to be the future
leaders. The interests of very large countries anyway tend to be different from
those of the small and medium sized ones, like Turkey, Thailand, Mexico and
Morocco, which are the majority. Being less self-sufficient, they thus have
greater interest in free trade. They are less likely too to indulge in the
BRICS goal of reducing bilateral trade imbalances among them, a sure cover for
managed rather than free trade.
With US
leadership of the global system slowly on the wane it is natural that other
countries want to play a large role. But the BRICS’ attempt to arrogate
leadership to themselves will not only not work but could do lasting damage to
the world trading system and hurt the small and medium size developing
countries more than any.
Asia
Sentinel
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