Building a solid foundation for the Brics economies
Five emerging giants to create alternative development bank
Russian president Vladimir Putin speaks during closing remarks at the fifth BRICS Summit in Durban. Photograph: Rogan Ward/Reuters
Unfolding events around separate financial dramas playing out on opposite sides of the world this week were a stark reminder, if one was still needed, of the changing fortunes of nations in the global economy.
In the northern hemisphere, the crisis-ridden Cypriots were forced to restructure their banking system as part of a €13 billion loan supplied by the World Bank and International Monetary Fund.
The contentious deal has staved off the implosion of the near bankrupt Mediterranean country’s economy for now. Such an event would have had serious consequences for the European Union, as it could lead to the island nation abandoning the euro.
At the very least, Cyprus’s exit from the euro would have further dampened investor sentiment in the EU and reduced its chances of shaking off the economic recession that has gripped it for the past five years.
Nearly 6,800km away in South Africa, the leaders of the developing nations known as Brics were signing financial agreements to strengthen emerging markets foundations, rather than staving off potential disaster.
Brazil, Russia, India, China and South Africa agreed to establish a Brics development bank that will rival Western-backed institutions like the World Bank, and a pooled contingent reserve arrangement worth an initial $100 billion to protect against volatility in global financial markets.
Other pacts signed at inter-governmental level, for which details were not immediately available, included a “multilateral agreement on infrastructure co-financing for Africa” and a “multilateral agreement on green economy co-operation co-financing”.
In addition, the Brics Business Council was formed and will be chaired by South Africa’s first black billionaire, Patrice Motsepe, for the first year. Thereafter, a nominated business person from each of the five countries will chair the organisation for a year each.
The aim of the council will be to provide technical support and advice to facilitate the implementation of multilateral business projects among the five member states. It also emerged that the creation of a Brics Think Tank was already agreed earlier this month.
Numerous other business and finance deals were signed between stakeholders from participating countries, which included 15 other African leaders, as the summit had a strong focus on the continent’s development.
For instance, South Africa’s Industrial Development Corporation (IDC) signed agreements with partners from Russia and Brazil. Economic development minister Ebrahim Patel said of the IDC signings: “Agreements with state financial institutions from Brazil and Russia will allow us to learn from each other … the agreement with Brazil also provides for potential co-funding in key industrial areas.”
Intra-Brics trade is estimated at $360 billion, but this figure is expected to grow to $500 billion by 2015 if the right mechanisms are put in place to facilitate the extra business.
The Durban summit, the first to be held in Africa, was hailed a success by leaders of the five-member nations, even though much of the detail of the accords still needs to be worked out.
While the deals are positive developments, analysts believe of equal importance is the fact that the Durban summit shows for the first time that the Brics grouping intends being more than just a talking shop.
Since the Brics formation began in earnest five years ago, the grouping has maintained that the World Bank, the United Nations Security Council and the International Monetary Fund are biased towards Western interests despite a changing world order.
Since 2008, the fastest growing world economies are all found outside North America and Europe, with the Brics nations now accounting for about 25 per cent of global Gross Domestic Product and 40 per cent of the global population.
Despite this changing world order, the traditional western nations still dominate global institutions. The World Bank is and has been led by an American since it came into existence over 60 years ago. The IMF is currently led by a Frenchwoman and traditionally has had a European at the helm.
Both of these situations exist because of unwritten agreements between Western nations that skew voting in favour of the US and Europe. In addition, no Latin American or African country is a permanent member of the UN Security Council.
Trade Law Centre researcher Sean Woolfrey said the agreements over the new bank and the creation of a $100 billion reserve fund were the most significant developments to come out of the summit, as they offer countries an alternative to Western financial institutions to source money.
“These deals indicate there is a level of seriousness to the Brics formation that many observers would have questioned until now. South Africa is especially interested in the development bank, as it is being touted as its host nation.
“There are now tangible agreements in place to build the organisational infrastructure that will power Brics as genuine entity that can be availed of by developing countries,” he said.
The Brics development bank will offer emerging economies an alternative to Western-backed financial institutions when seeking finance for infrastructure projects, which are central to their economic development.
The contingency fund will also enable these emerging economies to reduce their reliance on international institutions for assistance, if and when the next financial crisis comes around.
While the Brics nations have been outperforming their more established Western rivals when it comes to economic growth for much of the last five or six years, some member states have begun to experience economic slowdowns.
The Financial Times wrote this week that growth in Brazil has stalled over the past 12 months, and its government is now casting about for measures to revive its economy.
GDP grew by less than 1 per cent in the South American country last year, the lowest posted by a member of the Brics club, and the newspaper said investors are shunning it in preference for Mexico, something unthinkable only two years ago.
South Africa, by far the smallest of the Brics nations, fared only marginally better in 2012 posting a growth rate of just 2.6 per cent. Despite it being the largest economy in Africa, it suffers from unemployment rates believed to be in the region of 40 per cent, and its economic problems are compounded by the fact that Europe is its largest trading partner by far.
According to the Organisation for Economic Co-operation and Development’s latest economic survey of South Africa, the country needs to introduce a range of reforms and interventions “to foster strong, inclusive economic growth that creates jobs”.
So, have these downturns in fortune been the main driving force behind the progress made in Durban this week? Woolfrey thinks not.
“What was announced in Durban was part of a longer process of trying to create new markets for emerging economies, so they do not have to rely on their traditional trading partners in the West,” he said.
“The woes that Europe and the US have been experiencing in recent years have just heightened the sound of the alarm bells that started ringing over a decade ago,” he maintained.
And was the drama in Cyprus a significant talking point amongst those who attended the Brics Summit?
Not really, according to trade and economics expert Taku Fendira, who attended the conference. “People in attendance were far more interested in talking about how the Brics nations can engage with Africa and what we can learn from these countries doing so well. There was no real talk of Cyprus or the EU, it just wasn’t on the agenda,” he concluded.