International Forecaster Weekly

What Will Happen in Durban

Although the BRICS are a rapidly rising force on the world stage, they started off as inauspiciously as any international political organization can: as an idea in a white paper from Goldman Sachs. In June of last year, when the fall of the Euro was still acceptable dinner conversation among the global jetset, Christine Lagarde was going around begging for spare change from the couch cushions of the world's leading economies to capitalize a global emergency fund.

James Corbett | March 23, 2013

            There is a meeting of world leaders happening in Durban next week that will influence the economic, financial, social and political futures of over half the world's population...but it doesn't directly impact Europe or America so you've likely never heard of it. I'm referring of course to the BRICS Summit scheduled for March 26th and 27th bringing together the leaders of Brazil, Russia, India, China and South Africa for a discussion on their deepening political and economic alliance. This will be the fifth such summit, an annual event that has been hosted by each of the member nations in turn: Russia in 2009, Brazil in 2010, China in 2011 and India last year. It is perhaps only fitting that South Africa, a late entry to the original BRIC grouping, should be the last of the members to play host to the meeting.

            Although the BRICS are a rapidly rising force on the world stage, they started off as inauspiciously as any international political organization can: as an idea in a white paper from Goldman Sachs. “BRIC” was originally the brainchild of Jim O'Neill, the bank's chief economist, in a paper entitled “Building Better Global Economic BRICs” back in 2001. The idea was that “the Big Four” of Brazil, Russia, India, and China had arrived by that point at a similar state of economic development: emerging markets with large populations and room for explosive growth over the next 10 years. As it turns out, the prediction was not only correct (combined BRIC share of global economic output rose 6% in the first 8 years of the decade), it was transformational. In 2003, the Government Sachs boys released a projection of the global economy in 2050 that built on the original BRIC paper. It projected that within 34 years, the combined GDP of the BRIC countries would surpass the G7 economies. This lit a fire in the international corporate world and the concept exploded into mainstream financial discourse.

            Sure, there have been (and continue to be) numerous critics of the grouping: it's too arbitrary; their economic potential is over-hyped; the political tensions within the group limit their willingness to cooperate; the inclusion of economically miniscule South Africa is a Chinese attempt to gain a further foothold on the African continent. However accurate those charges might be, it doesn't change the simple fact that the idea of the BRIC(S) stopped being an idea at some point and became an actual association that engages in annual diplomatic meetings. In addition to the annual summit, the group now boasts a BRICS Forum that works to further the political, social and economic cooperation between the group's members, as well as regular ministerial meetings and high-level working groups that are studying plans for further integration.

            Last year in Delhi the group emerged with its widest-ranging vision yet of the association's scope. The Delhi Declaration affirmed that the BRICS countries are committed to the global fight against (the completely fictitious) manmade global warming (scare), interested in governance reform in the IMF and World Bank, concerned about peace and stability in the Middle East and North Africa, attached to sustainable development as the only viable model for economic growth, and a bunch of other mealymouthed political gobbledegook that sounds good in bland Summit Declarations. Of far greater importance were some of the ideas listed in the end-of-summit action plan, including the possibility of the formation of a new BRICS Development Bank. More on that shortly.

            It didn't take long after the Delhi meeting before the BRICS started to throw their collective weight around in pursuit of their quest to earn a seat at the table with the big boys in international finance. In June of last year, when the fall of the Euro was still acceptable dinner conversation among the global jetset, Christine Lagarde was going around begging for spare change from the couch cushions of the world's leading economies to capitalize a global emergency fund. Who should surprise everyone by coming to the rescue? Why the BRICS, of course, who raised a combined $73 billion for the fund. China alone contributed $43 billion, the third largest such contribution in IMF history behind Japan's $60 billion offering and Germany's $54.7 billion. The money came with a catch, however: "These new contributions are being made in anticipation that all the reforms agreed upon in 2010 will be fully implemented in a timely manner, including a comprehensive reform of voting power and reform of quota shares," the BRICS leaders stipulated at the time. And just like that, the BRICS were one step closer to getting that seat at the table.

            So what's on the agenda for this year's summit, you ask? That's a good question, because in some respects this could be a make-or-break meeting for the future of the association. Oh, sure, the grouping will continue to meet and will continue to press ahead with various initiatives regardless of what is actually achieved at this meeting, but this is the first chance to show the BRICS naysayers that this is actually an organization with relevance in an increasingly decentralized global economy. After all, after the hot mess that the Eurozone has degenerated into, the world can be forgiven for believing that international integration is so last decade.

            This is where the development bank idea comes in. It—like everything else BRICS-related—is an idea that seems innocuous enough at first but has the potential to be a gamechanger down the road. The idea is to create a development bank that would be able to loan out funds for infrastructure projects in developing nations. Rather than a rival to the existing IMF/World Bank institutional framework, the BRICS are framing their proposal as a complement to that structure. So far so good for the last vestiges of the old Bretton Woods system; after all, as Lagarde's fundraising last year showed, the world economy is fragile enough to warrant all the extra safeguards and safety nets that can be mustered for it. But depending how the fund is capitalized and implemented, it could end up being that IMF rival after all.

           Preliminary reports suggest that the five countries are prepared to offer $10 billion each to capitalize the fund. But what currency will the fund lend out? This, as observers are now noting, is the $50 billion question, and one that could have a profound effect on international finance, if not now than in the predicted future of global trade dominated by the BRICS and their emerging market cohorts. At last year's summit the BRICS signed a banking agreement on trading in local currencies, thus bypassing the greenback and putting yet another nail in the petrodollar coffin. But what if the development bank were to lend in yuan? This would be a significant step toward raising the yuan's prospects as a contender for the next world reserve currency. Granted, as we discussed in these pages recently, this would only be one more step in a changeover that—all things being equal—will take decades to complete, but it would be a significant step at that, and perhaps a definitive one. Once there is a $50 billion development fund loaning out yuan to developing countries that will conceivably be the emerging markets of a future era, the hardwiring of the yuan into global trade will be that much closer to reality.

            To be sure, this is all quite speculative at this point. Fundamental details about the bank have yet to be worked out, and even relatively minor points like where the bank will be located have proven to be a sticking point in negotiations. Sources are indicating that China's proposal to host the bank in Shanghai has been shot down by India. Even if these details can be worked out, and the currency question can be dealth with, the bank is still some way off from coming together. Whatever progress is made at this summit, the actual finalization of the proposal will not be ready until next year's meeting. But still, this is exactly why this summit has the potential to be such an important one: by the end of next week we will either have a sense of whether or not there is genuine momentum behind this grouping or whether it is just an expedient talking shop and photo op for the Presidents to grandstand over.

            There are other issues of significance on the agenda in Durban as well. A BRICS Business Council is set to be launched at the summit which will see five business representatives from each BRICS member providing support for multilateral business deals within the bloc. Putin, meanwhile, is pushing for a greater role for the grouping in the geopolitical arena. He laid out a rather sweeping vision for the BRICS in a pre-Summit interview with Itar-Tass earlier this week: “We invite our partners to gradually transform BRICS from a dialogue forum that coordinates approaches to a limited number of issues into a full-scale strategic cooperation mechanism that will allow us to look for solutions to key issues of global politics together,” he said. What this means, apparently, is that the members will be working on joint declarations on Iran's nuclear program, as well as the conflicts in Afghanistan and Syria. In the host country, there have been calls amongst prominent South African union representatives for a comprehensive energy coordination strategy to emerge from the summit that would put forward a clear vision for coal, oil, gas, and nuclear trade and cooperation amongst the members.

            All of this talk, of course, needs to be tempered with an understanding of what the BRICS ultimately represents: not a warm, cuddly, friendly alternative to the US/NATO/IMF/World Bank hegemon so much as a potential alternative hegemon of its own. It is still small enough to seem innocuous from afar, but we would have to be delusional to think that this power bloc would not be equally as imperialistic with its actions if it were to un-seat the current Washington consensus. Putin's quest for geopolitical and military partnership combined with China's economic ambitions should make clear that a BRICS-led world would be equally as centralized and authoritarian as a Washington-led world. But regardless of whether the BRICS turns into the organization that some are predicting it can be, or whether it falls flat on its face at this year's summit, the economic solutions for the average man or woman remains the same: buy tangible assets, avoid debt, invest locally, and detach yourself from the system as much as possible.