BRICS in Search of Political Leverage or Financial Capital?

CEIC WorldTrend Data Talk - August 15, 2014 The BRICS, started as just an acronym for Brazil, Russia, India, China, and South Africa, went a step further in July 2014 by initiating the establishment of two new bricks-and-mortar institutions. It seems that the long wait for voting weights adjustments inside the US-dominated Bretton Woods institutions drove the BRICS countries into establishing a new multilateral development bank and a reserves fund with subscribed capital of USD 50 billion and USD 100 billion, respectively. Indeed, for the past two decades GDP valued at purchasing power parity (PPP) of middle-income countries (developing countries with gross national income per capita in the range of USD 1,064-12,745, including the BRICS) has grown by 196% and is now 47% of the world’s total. In 2013, 2.26 percentage points of the 3.10% growth in world GDP valued at PPP was attributable to these middle-income countries, while BRICS’ GDP constituted 21% of the world’s total, compared to 10.6% in 2005, and the latter provided 43.5% of the world’s labour force. In the first quarter of 2014 the BRICS received 13.9% of the world’s and 13.5% of advanced economies’ exports, and accounted for 18.4% and 17.6% of their respective imports. At the beginning of 1992 these figures were just 3.6% and 3.3% for exports, and 5.3% and 5.5% for imports. While leverage in addressing the democratic deficit in the current global financial order is a possible BRICS’ target, satisfying capital needs is another. Factors such as the slowdown in the emerging and developing economies (EMDEs), the stabilisation of most of the advanced ones and weakening commodity prices make the flow of capital more insecure for all EMDEs, BRICS included. Financial accounts of the BRICS have been dynamic in the past couple of years with primary income, reflecting the investment income and wages balances with the rest of the world, staying mostly negative and not necessarily following investment dynamics. Such has been the case with the MSCI BRIC index (excluding South Africa), showing equity investments performance in the constituent countries. This may suggest that additional, easy-to-access funds, self-managed by BRICS countries and less vulnerable to extraneous volatilities will be more than welcomed. Besides capital outflows, threats, such as economic slowdown and protectionism by their trade partners, influence the BRICS’ capital needs. The lower share of domestic consumption in China and India requires high levels of investment. In 2012 gross investment constituted 48.6% of GDP in China and 35.5% of GDP in India. Both shares are estimated to remain at these levels until at least 2016. In Brazil, Russia and South Africa these shares are around 20%, but their economies are more commodity export dependent, where commodity prices have been declining for the past three years and another 13% decrease in the general commodities price index by 2019 has been predicted by the IMF. More alternative sources of investment appear necessary and the new BRICS development bank will have to grow and flourish to be able to fuel its constituent countries’ multi-billion dollar investment flows. The BRICS’ ability to collaborate together has always been met with scepticism. The Chinese economy is far bigger than the other BRICS’ combined and is expected to keep outpacing them to become 44% larger than their aggregated GDP in PPP terms by 2019. Also, Chinese foreign exchange reserves, standing at USD 3,993 bn in June 2014, are larger than any other BRICS nation’s, giving the “Middle Kingdom” greater ability to maintain cheap currency and compete with other BRICS’ exports, something they have already been complaining about. Chinese trade with the EMDEs and the advanced economies already surpasses the other BRICS’ combined. All these raise questions among researchers about how much China needs a reserves fund and whether the BRICS bank would be considering each nation’s interests equally. It seems that prudent leadership is needed to maintain the sense of equal costs and benefits, and fair credit control mechanisms, if these institutions are to move forward. Nevertheless, the history of frictions between the BRICS and their large IMF positions do not suggest they will reach the point of abandoning the Bretton Woods Institutions anytime soon. Contributed by Hristo Nikodimov, CEIC Analyst Discuss this post and many other topics in our LinkedIn Group (you must be a LinkedIn member to participate). Request a Free Trial Subscription. Back to Blog
15th August 2014 BRICS in Search of Political Leverage or Financial Capital?