Sunday, April 17, 2011

Cementing the BRICS : Strategy, Structure and Execution

The world's five largest emerging economies, Brazil, Russia, India, China, and, for the first time, South Africa came together in the week of April 11 in Sanya, Southern China to form an expanded five-member bloc known as the BRICS. The heads of state and government of BRICS, Brazilian President Dilma Rousseff, Russian President Dmitry Medvedev, Indian Prime Minister Dr Manmohan Singh , Chinese President Hu Jintao, and South African President Jacob Zuma gathered for what definitely has been a watershed moment in the quest of the five nations for a bigger say in the global economic and financial architecture, and delivered the Sanya Declaration of BRICS partnership. Political and economic analysts have placed significant emphasis on the new grouping that is set to emerge, despite the cultural, geographic, political and economic differences the countries have. They see the growth of the BRICS as an important attempt to create new centers of influence and prevent domination of the world economic order by one or two major players.
The five countries are loosely joined by their common status as major fast-growing economies that have been traditionally underrepresented in world economic bodies, such as the IMF and the World Bank. With the G-20 group of major economies, dominated by the current most developed nations, seeking to remake parts of the global financial architecture to stabilize their own skewed economic systems, it is time for the BRICS group to test whether they can overcome internal differences and act as a bloc pursuing common interests. Though largely an ad-hoc grouping at present, BRICS has the potential to emerge as a new force in world affairs on the back of the massive share of the block in global population and economic growth. With the inclusion of South Africa, the group accounts for 40 percent of the world's people, 18 percent of global trade and about 45 percent of current growth, giving BRICS formidable heft when dealing with the developed economies. The success of this endeavor would, however, depend on the strategy-structure-execution mechanisms that can reinforce the strengths, overcome the differences and create synergy.

Differences and commonalities

Each nation of the BRICS block has its own geographic uniqueness, cultural ethos, political systems, economic profiles and social moorings with great diversity caused by centuries of independent and colonial evolution. All the countries broadly support free trade and oppose protectionism, although China in particular has been accused of erecting barriers to foreign competition. In foreign affairs, they tend toward nonintervention and oppose the use of force: Of the five, only South Africa voted in favor of the Libyan no-fly zone. While the economies of Brazil, Russia and South Africa are driven largely by raw material exports, India - poised to be the world’s third largest economy - and China - already the world's second-largest economy - are oriented more toward manufacturing and services. Brazil and India are also concerned over large trade deficits with China that critics say are supported by a deliberately undervalued Yuan. Politically, Brazil, India and South Africa are functioning democracies, while China, and to a lesser extent, Russia, are authoritarian states characterized by heavy government control over the economy and civil society.

In today’s world, however, resource capability, economic policy and social aspirations have emerged as the major factors of comparative advantage circumventing the other differences. BRICS nations view the subtle and not so subtle campaigns of excessive consumption against their development efforts by the developed nations as palpably unfair. The very lack of a common cultural, political or geographical identity positions BRICS as a new type of grouping forged by nontraditional concerns such as trade barriers and monetary policy. A key concern for BRICS now will be stemming inflation and pushing back against debt-fueled expansionary monetary policies being pursued by developed nations that now suffer from negative or anemic growth. With about 40 percent of world reserves, led by China with USD 2 trillion, and the relatively recent unfolding of manufacturing and economic power by India and Brazil, the BRICS countries share a concern over exchange rate volatility and macroeconomic instability in the developed world. Other priorities include reducing economic imbalances and volatility in commodity prices, pushing for even greater influence in the United Nations, World Bank, IMF and other international bodies, and gaining a say in the potential introduction of new reserve currencies, possibly including the Chinese Yuan in the near term, and presumably the Indian Rupee in the medium term.

Development profiles

The BRICS countries vary significantly in their economic profiles (data courtesy World Fact Book). China leads the pack with GDP (PPP) of USD 10 trillion, with India following at USD 4 trillion, Brazil and Russia at USD 2.2 trillion each, and South Africa at USD 0.5 trillion. There is, therefore a 20X factor between the different ends. In global rankings of GDP, China ranks high at 3, Russia at 7, India at 12, Brazil at 18, and South Africa at 123. In population too, China leads at 1,336 million, followed by India at 1,210 million, Brazil at 203 million, Russia 139 million and South Africa at 49 million. In terms of per capita GDP (PPP), however, Russia leads the BRICS block at USD 15,900 followed by Brazil at USD 10,900, South Africa at USD 10,700, China at USD 7,400 and India at USD 3,400, reflecting the different levels of income inequities that exist within the block and in each country (and also, therefore, the growth potential of India in particular). It is, however, forecast that India would not only overtake China in population by 2025 to become the most populous country of the world but also overtake several other counties to become the third largest economy by 2035, behind only the USA and China. The only threat could be a high rate of inflation in India which hovers around a recent average of 12 percent, compared to 5 to 7 percent of other countries.

The demographic advantage favors the larger BRICS countries. China leads the world with a labor force of 780 million, followed by India at 478 million while Brazil, Russia and South Africa have labor forces of 104, 76 and 17 million respectively. The biggest demographic advantage, however, lies with India with the claim to having the world’s youngest population base. India leads the world with the highest percentage of population below 15 years of 30 percent, followed by South Africa at 28, Brazil at 26, China at 18 and Russia at 15 percent. The median ages of these countries are 26, 25, 29, 36 and 39 respectively. Clearly, there is a significant potential in each of the BRICS economies to power economic growth with greater production and consumption capabilities of population. China with the highest gross fixed investment of 48 percent of GDP has demonstrated how investments in infrastructure can boost economic growth. India follows at 32 percent while the other three countries are around 19 percent. In fact, it is considered that China’s investment and liquidity policies in the global meltdown of 2008 and 2009 stabilized the world financial and trade systems to an extent. India also stayed strong with prudent fiscal and liquidity policies. Yet, the high level of public debt (as a percentage of GDP) could be a spoiler for India and Brazil at 56 and 61 percent respectively while Russia, China, and South Africa fare better at 10, 18 and 33 percent respectively. There is no doubt in the overall that BRICS countries not only weathered the economic crisis that originated in the developed world and spread contagiously but also led the global recovery with their economic growth.

Resource endowments

The BRICS countries represent a significant land mass and natural resource bank. The aggregate land area of BRICS is 39.72 million square kilometers, with Russia leading the block at 17.10 million square kilometers, followed by China at 9.60, Brazil at 8.51, India at 3.29 and 1.22 million square kilometers respectively. The natural resources that are discovered and utilized in the huge land mass of BRICS is perhaps insignificant compared to the intrinsic, and latent availability. BRICS countries enjoy relatively complementary resource profiles, which paves the way for even more cooperation. Russia is verily the world's energy reservoir with rich oil and gas resources. Brazil is probably the world's largest raw material base abounding in agricultural commodities and select metals, led by iron ore. China is not merely the world's workshop with a strong manufacturing sector but also has rich coal and rare earth resources. India is billed as the world's back office for its highly professional employees in IT and service sectors but is now developing into a major manufacturing base backed by agricultural, mineral, metal and energy resources, which are getting to be known for their development potential only now. South Africa is most well known for its platinum, gold, diamond and chromium resources but has several other mineral and metal resources. The BRICS countries are also famous for their respective major hotspots of biodiversity.

Traditionally, resource rich economies have built economies around agriculture and mining. This has posed its own challenges in terms of adverse environmental impact and narrow definition of economic activity. The natural resources are strategic resources and need to be exploited for economic development but also need to be renewed for environmental sustainability. It is but natural for each country of the BRICS block to try to reverse such trends and diversify the economic base, including by forward integration or backward integration as applicable. Some such trends are already visible. China, for example, has imposed controls on export of its rare earths and is possibly seeking to build value through own manufacture of electronic and other sophisticated products incorporating rare earths. South Africa has deemphasized gold mining rather than apply technology to develop the resources further in a people and environment friendly manner. India is keenly attempting industrial expansion through access to, and exploitation of energy resources. Brazil has also built its industrial base around its natural resources rather than other externally available inputs. China has been an exception with massive export-oriented and outsourcing-driven manufacturing operations for the entire globe.

Battling inflation, reigning deficit

The liberal monetary policy adopted by the world's major economies during the financial crisis has largely increased global liquidity, leading to asset bubbles, budget deficits and imported inflation. BRICS countries have been no expansion with their expansive monetary and fiscal policies which have also pushed up inflation and fiscal deficit. The latest political unrest in Middle East and North Africa as well as Japan's earthquake and the subsequent nuclear crisis have also pushed the prices of large commodities such as oil to high levels. To avoid hard-landing of the economy, the BRICS countries are gradually withdrawing from their stimulus policies and starting to take measures to curb inflation and reduce fiscal deficit. The global financial crisis has also triggered widespread reflection on the former economic development mode not only in developed countries, but also among BRICS countries. BRICS countries probably now realize the non-sustainability of the past development paths, and have started to restructure their economies. China for instance, is entering a new phase in its development: a structural shift from an export- and investment-led economy to one driven by domestic consumption. Property tightening measures, healthcare reforms, low-cost housing programs and continued transportation spending are key to the government's efforts. In addition, weak global demand and rising wage demands are pushing the country to move away from the export-driven model that features low added value.

In Russia, heavy reliance on energy and raw material exports makes its economy vulnerable to outside risks. The Russian government is speeding up structural reforms and investing heavily on high-tech and innovative programs such as energy-saving, aerospace, nuclear energy and medicine to cultivate new industries to drive economic growth. India benefits from the flourishing IT and service sectors, yet poor hardware and infrastructure hamper its further development. The wide rich-poor gap and erosion of resources are also the government's pressing concerns. The Indian government has been introducing a series of supportive measures to make better use of its demographic dividend to further develop manufacturing, and is planning to introduce more favorable polices for foreign investment in a wide range of sectors, including infrastructure. Brazil's economy has been relying heavily on bulk commodities, but now it is trying to shift its focus on exports of commodities and services with high added value. The government is pushing the speeding-up of industrial technological innovation, opening up the market, encouraging competition, and improving infrastructure. South Africa puts manufacturing, infrastructure and clean energy as the focus of development, and expects to increase employment through a more equal and reasonable growth. In addition, all the BRICS countries are taking policy measures to reduce inflation and tone down budget deficits. These measures, though are welcome and appropriate in each country context, may not fully optimize the potential of the BRICS block as a whole. The Sanya Summit of the BRICS leaders hopefully has been the first step in that direction.

BRICS, strategy and structure for execution

BRICS as a block needs to go beyond conventional country-specific economic strategies. The fundamental premise should be to take advantage of complementary strengths and overcome individual country weaknesses. The foundation for such a strategy would be in terms of developing a complete inventory of natural resources in each of the BRICS countries. This should be followed by, or even simultaneous with, a perspective plan for the use of resources within the BRICS block based on a strategic industrialization plan. Once the industrial development cum resource consumption plan is finalized, the countries should implement exchange of technologies and people to fully optimize the mutual capabilities in natural resource development and utilization. Complementary resource strategy should be accompanied by a dovetailed industrial strategy whereby each country would supplement each other’s strengths instead of using them as competitive weapons against each other. It is appropriate, for example, for any BRICS country other than India and China not to develop and manufacture pharmaceuticals, and instead rely on India and China for the entire needs of pharmaceuticals for BRICS. Within that framework, China may choose to rely on India for pharmaceutical formulations and India may choose to rely on China for biopharmaceutical APIs. India may help Brazil and South Africa in building local automobile industries in a more cost-effective manner than the developed world would do. China could help India and other countries with bullet trains and other infrastructure projects. Russia could make available its vast oil and gas reserves to BRICS countries and also help the others in oil and gas exploration. Civilian uses for the Russian defense technologies could be another area of great relevance. South Africa could provide its mining and food processing capabilities to other nations. In essence, each country should offer its national comparative advantage to the other countries in the BRICS block.

An elevated strategy such as this would need a permanent administrative structure and robust execution methodology to succeed. While leadership summits are important, they are not sufficient. A standing BRICS strategic council with its own administrative secretariat needs to be created. The strategic council should have a virtual location (with summits taking place in all countries) while the administrative secretariat should have a central location with regional headquarters. The strategic council should have senior ministerial representation (including prime ministers and presidents) from all the countries while the secretariat must have administrative and business leaders from all the countries. Like the top-ranking international bodies, the councils should have charters, budgets and full complement of employees from the BRICS block. The principal objectives of the secretariat and council should be to draw up charters, strategies and plans, develop enabling policies and monitor implementation. Supplemental institutions such as an economic policy institute, an intellectual property council, an apex financial institution and an integrated trade body for BRICS would provide the needed institutional support. The economic policy institute could determine appropriate inter-linkages in economic policies within BRICS, including setting of central bank rates and exchange rate mechanisms. Exchange programs in science, technology and education under the aegis of intellectual property council could accelerate research and education. An apex financial institution could start with a corpus and direct the available liquidity within the BRICS countries, and from outside to facilitate infrastructure projects in the needy BRICS countries. The integrated trade body could help duty-free or duty-balanced movement of raw materials, components and finished goods within the BRICS block to ensure competitive manufacture for domestic as well as international consumption. It could also enable intra-BRICS technology transfer arrangements.

BRICS, a new paradigm of high potential

Rarely, a configuration of countries has been formed which is not bound together by geographical proximity or economic vintage or even by considerations of hegemony. It is remarkable that the BRICS country-comity platform has mirrored the economic growth potential of the five of the leading emerging market economies of the world, namely China, India, Russia, Brazil and South Africa. With appropriate strategy, structure and execution mechanisms as outlined in this blog post, each constituent country of the BRICKS block and BRICS as a block would be well poised to exceed the growth potential that they have, both individually and collectively.

Posted by Dr CB Rao on April 17, 2011

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