Homework for BRICS

After the 2008 crisis the world has been trying to find new development models to replace existing ones that have outlived their usefulness. Futurists such as Jeremy Rifkin call for a move to a new economic paradigm based on the principle of long-term sustainability in the context of a Third Industrial Revolution. At the same time, they are searching for new approaches to measuring social and economic progress, instead of continuing to rely on a traditional GDP approach that clearly does not factor in new realities. What do you think about that?

The latest trends that have been taking shape in many economies, developing and developed alike, show that old growth models are no longer viable or do not yield the same results. All countries are constantly trying to replace them, each in their own way. At the same time these are not only to do with the Third Industrial Revolution and the rise of new technologies, but also with the development and strengthening of market institutions and investments into human capital.

Meanwhile, the discussion as to what social and economic progress should imply, and how national wealth and wellbeing should be measured is still far from over. As a rule, futurologists, including Jeremy Rifkin, are theoreticians of various hypothetical post-capitalist economic systems. For instance, they predict a transition to socialism, technocracy, green economy and so forth. As far as economists are concerned, it seems to me their position is somewhat simpler.

What does it come down to?

First of all, economists share a common belief that the future belongs to a green economy and energy efficient technologies. This vision started taking shape back in 1972 when Dennis Meadows published his celebrated book, “Limits to Growth”. An updated version of the book entitled “Limits to growth: the 30-year update” was released in 2004. At that time economists reached the conclusion that material production and environmental pollution fall within the parameters of this report.

That is why the ideology of sustainable development, as well as related issues such as the green economy, quality of life and human capital that futurologists have written about for decades (to prevent or delay the scenario described by Meadows), are not seriously questioned today even though, of course, the discussion is still very much underway.

A greater emphasis is placed on environmental protection and improving quality of life, supporting the viability of ecosystems and creating an enabling environment to capitalize on human potential. This moves away from a reliance on ever-increasing manufacturing and consumption of goods and services.

The BRICS group has yet to formulate a common economic agenda. Obviously, due to geographic, natural and economic factors these countries are looking at great potential to develop trade and cooperation in the extractive sector, agriculture, energy, environmental protection and the development of human capital. Infrastructure projects also hold a great deal of promise and could expand relations between these countries as well as stimulating exports to others

Secondly, economists believe that traditional macroeconomic indicators such as GDP do not always meet today’s challenges because they do not reflect the price that mankind is paying for economic growth. The GDP indicator takes into consideration manufacturing and sales of goods and services, but does not account for many other important factors such as depletion of natural resources and environmental degradation, distribution of wealth, public goods, external effects, non-market and volunteer sectors, general access to knowledge and improved quality of goods and services. The drive to maximize GDP often ignores aspects such as quality of life and tends to downplay the accumulated imbalances related to economic growth. In so doing it changes the purpose of economic science.

Thirdly, the mechanisms to be used to facilitate the transition to a sustainable development model are known. These include building national innovative systems, stepping up scientific and technological development, and investing into human capital.

When it comes to scientific and technological development, the key emphasis should be placed on stepping up the implementation of green and energy efficient technologies, developing new composite materials that would reduce energy costs many times over.

Another key source of development in today’s information-based economy is supporting network-based forms of public cooperation and e-democracy, including those that aim to generate public benefits. This primarily involves proactive implementation of remote cooperation (crowd-sourcing) technologies and establishing Wiki projects. The objective is to plug the public’s knowledge and potential into the process of developing, taking and monitoring decisions affecting social, economic and territorial development.

Is Russia ready to face this transition given the incredibly pressing question of finding a new growth model in this country?

A transition to a sustainable development model and proactive implementation of green technologies are key imperatives of the long-term social and economic development for all countries that are striving to advance. We are hardly an exception. In future, Russia will have to play a leading role in the development of a green economy worldwide. This should become the core content of the government’s long-term proactive pre-emptive strategy. A sustainable development ideology must be embedded in the current objective to stimulate GDP growth, ultimately replacing GDP growth in the mid-term.

How would this affect economic policy?

It should become “human oriented.” It makes it necessary to implement self-regulation instruments, develop democratic institutions in a bottom-to-top manner and do it more proactively. Today, people show an ever-growing willingness to take part in shaping their own “habitat”, in developing and implementing territorial development strategies. Local communities act as co-authors of the policies in place. They value the quality of the environment they live in, including that of the soil, air and water. Even issues such as waste recycling really matter.

Overall, the strategic pivot of Russia’s economic policy must be aimed at resolving the problems that restrict long-term sustainable economic growth opportunities. These include institutional transformations, improving the business climate, building a massive middle class, and striking a balance between the government’s social obligations and its ability to mobilize financial resources both at the federal and the regional level.

Can and should this strategy fit together with similar strategies pursued by the other BRICS countries?

Speaking about the BRICS, one should bear in mind that these countries are very different from their political and economic perspectives. Nevertheless, a number of problems to do with better investment climates and development of human capital are common to all countries in this group. The potential for cooperation to resolve these and certain other economic issues between the BRICS countries still remains untapped. So there are broad opportunities there both in the private and public sectors.

In your opinion, which areas of this cooperation hold the greatest promise for Russia?

There are a number of vectors where work that is currently underway is of systemic importance to Russia.

First of all, the demand for Russian natural resources, including liquefied natural gas, mineral fertilizers and coal in the BRICS markets has not been fully explored yet. Power equipment and aviation solutions offer further untapped export opportunities. In turn, the Russian market needs agricultural goods from India and Brazil (primarily, meat products) as well as Indian pharmaceuticals, especially against the backdrop of a domestic economic crisis.

Secondly, economic integration must be accompanied not just by the lifting of formal restrictions by the parties such as import duties and non-tariff barriers, but also by quality efforts designed to generate added value chains. For instance, the BRICS governments could facilitate the development of joint manufacturing projects by businesses, foster scientific research, and train human resources through specialized bi-lateral groups involving other stakeholders.

Thirdly, efforts to encourage better relations between private businesses and promote private contracts are extremely important.

Who should drive these relations?

Work in this area needs to be stepped up by commercial representative offices that could act as consultants and mediators between private companies.

Developing export insurance and public-private partnerships is another important step – this work needs to go hand in hand with efforts to liberalize access to domestic markets between all parties.

Similar goals could be identified for other integration-oriented amalgamations involving Russia. From the economic perspective, the governments of member nations should pursue the objective of creating an enabling environment to foster cooperation among economic agents, reduce barriers for business integration on a bi-lateral and multilateral basis and create a set of rules acceptable to and shared by all members.

Reverse Globalization

Regional trade and economic integration are evidently being stepped up against the backdrop of an obvious WTO crisis. Does this mean that the globalization process that continued throughout several recent decades also ran its course? In this regard, how would you interpret new mega agglomerations such as the Transatlantic Trade and Investment Partnership (TTIP) and the Trans-Pacific Partnership (TPP) promoted by the United States?

Following the crisis of 2008, the global economy and the international trade dynamic has fallen significantly. Over the preceding 20 years, global trade continued to grow on average at a rate above 7% per annum but today the figure is a mere 3%-4%. There are many reasons behind it. Some of them include the transfer of manufacturing capacities to developing countries and even a certain turnaround due to another industrial revolution, as а well as shifting balance between developed and the developing countries and the economic pivot to the East that results from it.

As far as TPP and TTIP are concerned, they represent an attempt on the part of the United States to enter into agreements with their dynamic partners from the Asia Pacific region and their key developed partner – the European Union – to fix trading rules that take into account the changes taking place around the world. This is an attempt to shape a more favorable environment in the future to facilitate trade expansion for American companies and to protect investments.

Of course, given the sluggish nature of the WTO negotiation process, it is probable that these specific partnerships will be used to shape future rules governing trade and that in time they will become a norm for everyone.

What would you say about the widespread opinion that these projects are designed to contain China in the Asian region and even globally? How adequate a response can initiatives such as the Economic Silk Road offer in this regard?

It’s possible that one of the goals behind forming these alliances is to contain China. However, the core reasons underlying these efforts are still economic in nature: to arrange preferred treatment for US corporations in the countries that form part of these partnerships, to offer the People’s Republic a chance to accede to a ready-made set of rules.

The mechanisms to be used to facilitate the transition to a sustainable development model are known. These include building national innovative systems, stepping up scientific and technological development, and investing into human capital. When it comes to scientific and technological development, the key emphasis should be placed on stepping up the implementation of green and energy efficient technologies, developing new composite materials that would reduce energy costs many times over

As a project, the Economic Silk Road is in a slightly different category. It is designed to create a financial, infrastructure and humanitarian environment to promote Chinese goods and at the same time to strengthen the People’s Republic’s position in Eurasia. Among other things, this process will be accompanied by the promotion of free trade agreements. For example, in May Russia and China agreed to combine the Eurasian Economic Union with the Economic Silk Road Belt. However, it is still too early to talk about free trade with China.

Could this cooperation spread to the entire BRICS space? Could it precipitate a truly profound economic integration among the countries that belong to this group based on a common agenda?

The BRICS group has yet to formulate a common economic agenda. Obviously, due to geographic, natural and economic factors these countries are looking at great potential to develop trade and cooperation in the extractive sector, agriculture, energy, environmental protection and the development of human capital. Infrastructure projects also hold a great deal of promise and could expand relations between these countries as well as stimulating exports to others. The new BRICS Development Bank is one of the tools proposed for this purpose.

The objective of building a common trade space is long-term in nature. In order to succeed, it is necessary to understand how existing integration initiatives involving the BRICS countries are going to work. This is a kind of homework for the BRICS countries, something they need to get done. I hope and believe that in the near future – a few years down the road – we will see significant strides in this area.