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CHAPTER 2
Future of BRICS as an Economic Block: Does Macroeconomic Heterogeneity and Unshared Political Mandate Stand in Its Way?
Partha Ray
Economics Group, Indian Institute of Management Calcutta, Kolkata, India
Introduction
Economic blocks are normally the outcome of certain historical and political process.1 One can discern the birth of G7 in the pre-Cold War days when France, Italy, Japan, the UK, the US, and West Germany formed the Group of Six in 1975 and Canada joined the following year. Effectively, it emerged as a forum for the non-Communist powers to address pressing economic concerns such as inflation and the recession sparked by the OPEC oil crisis and dominated by Cold War politics. Or take the case of the euro area, which was born in the aftermath of the Cold War perhaps motivated by a search to question the hegemony of the US dollar. From that standpoint the genesis of the BRIC block, having emanated from the research report of a global investment bank, was indeed unique.
Research reports of global investment banks are perhaps more known for their topicality and contemporary policy relevance rather than analytical rigor. After all, these reports are primarily meant for assistance of their clients’ investment strategy. Thus, it may not be an exaggeration to say that these reports are typically known to have a relatively short shelf life. But when the Goldman Sachs Global Economics Paper No.: 66, titled Building Better Global Economic BRICs, was brought forth by the London-based Goldman Sachs Economic Research Group (led by Jim O’Neill, M.D. & Head of Global Economic Research) in 2001, the authors of the report also might not have realized that they were about to create history. From the vantage point of 2018, it seems that the report has stood the test of time and generated enormous research output and a movement toward economic cooperation among these nations.
Initially the focus of the analysis was confined to four economies, viz., Brazil, Russia, India, and China — thus giving birth to the acronym of ‘BRIC’ economies. In projecting future GDP trends in BRIC economies, the Goldman Sachs 2001 report considered a number of scenarios.2 The report arrived at a startling result: “Over the next 10 years, the weight of the BRICs and especially China in world GDP will grow, raising important issues about the global economic impact of fiscal and monetary policy in the BRICs” (Goldman Sachs, 2001). In particular, in all four scenarios, the relative weight of the BRICs rises from 8.0% at present (in current USD) to 14.2%, or from 23.3% to 27.0%, converting at purchasing power parity (PPP). Subsequently, in a sequel to the original report, Goldman Sachs argued: “If things go right, the BRICs could become a very important source of new global spending in the not too distant future. … India’s economy, for instance, could be larger than Japan’s by 2032, and China’s larger than the US by 2041 (and larger than everyone else as early as 2016). The BRICs economies taken together could be larger than the G6 by 2039” (Goldman Sachs, 2003). Such discussion has been the subject of a number of academic studies as well.3
Interestingly, the discussion was not limited to academic research or research reports of investment banks. In due course, BRIC economies emerged as a formal group after the meeting of the leaders of Russia, India, and China on the margins of G8-Outreach Summit in July 2006 in St. Petersburg. The grouping was formalized during the first meeting of BRIC Foreign Ministers on the margins of the UN General Assembly in New York in September 2006 (Government of India, 2016). Later, in the aftermath of the global financial crisis, the BRICS block got a shot in the arm and the first BRIC Summit was held in Yekaterinburg, Russia, in June 2009. Subsequently, the foreign ministers of BRIC nations, at their meeting in New York in September 2010, agreed that South Africa may be invited to join BRIC. Accordingly, the group of ‘BRIC countries’ was extended as ‘BRICS countries’ so as to include South Africa, and South Africa formally joined the group in April 2011.
More recently, following the report from the Finance Ministers at the fifth BRICS summit in Durban (2013), the BRICS leaders signed the Agreement establishing the New Development Bank (NDB) (formerly referred to as the BRICS Development Bank) which is expected to, ‘strengthen cooperation among BRICS and will supplement the efforts of multilateral and regional financial institutions for global development, thus contributing to collective commitments for achieving the goal of strong, sustainable and balanced growth’.
Are all these developments pointers toward the emergence of BRICS as a new kid on the global economic power block? Are these five countries going to pose a threat to G7 economies in the years to come? This chapter argues that there are ample dampeners in the way of this expectation turning out to be true. While such a possible outcome could be reasoned out using differing viewpoints, viz., economic, social, or political, my focus here is somewhat limited. In particular, I will argue that the differences in macroeconomic structure and economic policies could make the BRICS block (and not necessarily individual countries) fragile with little cohesion.
The
