New Game, Old Rules

At the time when Jim O’Neill, then chief economist at Goldman Sachs, coined the acronym ‘BRIC,’ he never envisaged that these countries would form a political alliance. The acronym merely referred to four nations that showed a great deal of economic growth potential. As time went by, the BRIC club gained some ideological weight and was joined by South Africa, but the BRIC nations themselves were drifting apart. The situation was further exacerbated by the fact that none of the five nations had an open economy, which is exceedingly important for any alliance of countries.

On the other hand, the fact that 12 years later the BRICS group is still around means that the idea caught the investor community’s fancy. Today it continues to develop not as a fully-fledged alliance, but rather as a club of like-minded nations with a clear-cut mission – to provide a counterweight to the developed countries; to enable the emerging markets to speak with one voice that will be heard by the dominant powers and, primarily, the United States and Europe. So far the BRICS countries have been successful in pursuing this mission. A more difficult question is whether this club should remain closed – or is it about time to invite new members? It is often said that Indonesia would make a fine addition to the club, with Turkey and Mexico trailing slightly behind. To be perfectly honest, greater internal contradictions would not make the club’s job any easier. After all, from a structural viewpoint, we are talking about very different economies, national histories, and regional perspectives.

I liked the BRIC idea from the very beginning. The new BRICS format also seems like a very promising project. However, before the five countries admit further members, they need to develop a common platform, learn to interact, and become a tighter-knit economic alliance.

The only thing that really matters to the market is the success or failure of domestic economies. Indeed, finances have become increasingly mobile and their flows spur on technological development, but no club of countries can have anything to do with this: these processes are governed by objective market laws. The U.S. financial market still remains the primary recipient of such flows, with the Dow Jones index being a fine case in point. Another critical area would be the fixed-income securities from developing countries. This boom may lead to yet another bubble. Geographically, the main centre of gravity is shifting to Southeast Asia, and especially Hong Kong and Singapore.

However, we still live by rules written years go by the global power players. To an extent, the BRICS group’s agenda is to change these rules, and help countries whose pleas fall on deaf ears to make sure their voices are heard. However, we can only talk about it in hypothetical terms. Recall the not-so-distant past, when Western companies were moving production to Southeast Asia. At the time it seemed that the region was growing stronger and stronger, that it was about to embark upon a new era. However, these corporations’ brain trusts and headquarters stayed where they were – and now the tables have turned, with the United States and other countries heading for re-industrialisation. What is more, even if we dislike the old rules of the game, it doesn’t mean they are about to change. Before such a change can occur, all of the accumulated contradictions have to reach a critical mass.

I would cite a simple example to illustrate my point. To change the geographic distribution of seats at the International Monetary Fund (IMF), the question would have to be put to a vote. The IMF’s financial resources are made up of contributions provided by its member countries, and members’ voting power in turn depends on a formula based on the relative size of their economies. A change in the geographic distribution would require at least 85% support, and the United States has 16.75% of all votes. This illustrates well who really takes the critical decisions.

Therefore, merely feeling or even stating the obvious truth that the world order is about to change is not enough. The BRICS countries have yet to form a monolithic fist that can tear down that wall of injustice. There was an idea once popular in the Soviet Union that the U.S.S.R. should merge with China. According to its proponents, such a supranational alliance would ensure global victory for the socialist system. Most likely that would have been the case, but the obvious differences between the two countries outweighed whatever they had in common. But, truth be told, the U.S.S.R. and China had a lot more in common than the current members of the BRICS do.

Today the club clearly lacks its own global institutions. The BRICS development bank could really help in this regard without infringing upon the mandate of local institutions. It could be made sufficiently powerful – what with the deep pockets of the donor countries – and be put in charge of integration projects, the support of mutual trade and investments, and the provision of independent analytical data and consulting services. Such a bank should be more independent than the large international organisations dominated by Western countries.

Usually, development banks are proportionate to the size of the economies or foreign-exchange reserves of the countries that create them. Based on this criterion, such an institution for the BRICS would be dominated by China. It still remains unclear what could be done in this regard. One could try to find another option based on parity, but this would entail difficult negotiations and compromise. In other words, it would once again bring to the fore the contradiction that is deeply embedded in the BRICS. But the exercise would still be worth the effort.

Another popular question today is where this bank should have its headquarters. Objectively speaking, Hong Kong would be the best choice, being the only global financial centre located in a BRICS country. However, this decision is likely to be political. Therefore, there is a good chance that the headquarters could be in Moscow, which would further the city’s ambition of becoming an international financial centre, or in St. Petersburg, which has historically played the role of a bridge between the East and the West.