The formation of the BRICS – the bloc made of Brazil, Russia, India, China and South Africa – was supposed to be the harbinger for a new approach to global economic governance. The leading emerging markets and developing countries were becoming major players in the global economy. And they expected to play a commensurate governance role.
BRICS leaders have now been meeting annually for nine years. They recently met for the ninth BRICS Summit in Xiamen, China. They have positioned themselves as a force for transforming global economic governance so that it’s more responsive to the concerns of developing economies. They are seeking a more just and equitable global economy.
The question is: how effective have they been in reforming global economic governance and the fairness of the global economy?
The honest answer is that as a group, BRICS hasn’t been an effective force at all. This is for a number of reasons.
What’s not happened
The following examples illustrate the point.
At least formally the G20, which consists of 20 major economies including the five in BRICs, has supplanted the G7, made up of Canada, France, Germany, Italy, Japan, the UK and the US, as the premier forum for global economic governance. But the agenda in these meetings is still largely set by the most powerful countries which now include China but not the other BRICS.
The IMF and World Bank have both changed their voting arrangements to give a louder voice to developing economies and emerging economies. This has particularly benefited China, India and Brazil. But BRICS hasn’t supported South Africa’s call for a third African seat on the board of the IMF. This has left Africa as the most underrepresented region on the board.
BRICS countries, together with other G20 developing countries, have become more active participants in organisations responsible for developing international financial regulatory standards. This means that they now can participate in the writing of standards that guide the international financial system. But the system continues to be more responsive to the interests of the rich and powerful than those of the developing world.
New international financial institutions have been created, including the BRICS’ New Development Bank and the Contingent Reserve Arrangement, which provides financial support for BRICS countries experiencing balance of payments problems. Unfortunately, the New Development Bank operates in a less transparent and less accountable way than other multilateral development banks. For example, it’s harder for outsiders to access information on the operational policies and practices of the bank than those of the World Bank or the African Development Bank. Unlike those other banks, there isn’t yet a mechanism to hold the New Development Bank accountable if it causes harm.
The New Development Bank also risks repeating the tragic mistakes of these other institutions, which for many years concentrated only on economic issues in their operational decision making. Following a number of scandals they began to pay more attention to the social, human rights and environmental impact of their operations.
Members of the New Development Bank seem to share this concern. The BRICS leaders have reiterated their commitment to achieving
sustainable development in its three dimensions - economic, social and environmental- in a balanced and integrated manner.
But it’s hard to see how they expect the bank to meet this commitment if it continues to place more emphasis on speed in project implementation than on identifying and managing the adverse environmental, human rights and social effects of its projects. To fulfil their commitment to promote a more just and equitable global economy the BRICS will need to up their game.
How to fix the problem
Achieving a just and equitable international economic order requires governments to take seriously their commitment to protect and promote human rights as set out in the UN Charter and other human rights treaties.
The starting point is a commitment to respect and promote the rights of each individual affected by each project, programme or policy that governments undertake or support. This requires developing a good system to forecast the impact of a project on the environment, society as well as human rights. And to have a plan to manage them.
Another element is accountability. Any person adversely affected by a project should have access to a mechanism that can provide them with an effective remedy.
Finally, the relevant decision makers must be able to show how their proposed activity is using the maximum available human and financial resources to fulfil the human rights of all the people affected by their decisions. This suggests that the relevant decision makers bear the burden of explaining why the proposed allocations are the most feasible. This includes governments, international organisations as well as private parties.
There are reasons to think the BRICS leaders could be persuaded to adopt a human rights based approach to making global economic governance more democratic and responsive to the needs of developing countries and for a more just, equitable and sustainable global economy. They, and their colleagues in other developing countries, are governing societies with continuing, and some cases worsening poverty, inequality, unemployment and environmental degradation levels. And they don’t seem to have an effective strategy for meeting this challenge.
At the BRICS summit in Russia two years ago, Chinese Premier Xi Jinping invoked physics when asking fellow leaders “to boost the centripetal (unifying) force of BRICS nations through cooperation in innovation and production capacity to boost competitiveness.”
That was the theory, but the economic reality of the once-feted Brazil-Russia-India-China-South Africa alliance is contradictory.
Instead of centripetal strengthening, the world is witnessing much more powerful centrifugal dividing forces, including overproduction, over-indebtedness and deglobalisation of capital. These elements have been spinning out of control even before the chaotic era of US President Donald Trump began.
Over production is mostly found in the coal, steel, non-ferrous metals, cement and chemicals industries. It’s largely driven from China where over-capacity is more than 30%, according to a new International Monetary Fund report that also raised worries about the country’s vast debt.
Over borrowing by companies, states and households represents a global crisis in the making. The Institute of International Finance has just reported that world debt is now USD$217 trillion (327% of world GDP), up from USD$149 billion (276%) in 2007.
Deglobalisation is simply the reversal - mostly since 2008 - of prior rapid growth in cross-border trade, investment and finance. Should that be viewed as a bad thing? Rather than fear globalisation’s unravelling, leading scholar-activists including Samir Amin in Africa, the late Ruy Mauro Marini in Latin America, Walden Bello in Asia and the 20th century’s most important economist, John Maynard Keynes, have all advocated national economic sovereignty. If pursued cleverly, deglobalisation could be the basis for restoring links between once vibrant sectors subsequently destroyed by imports.
Could BRICS leaders evolve in this direction? Their summit next week
will be distracted by geopolitical tensions. Although a welcome deal on Monday prevents the feared Sino-Indian border war, a much more durable geo-economic battle is unfolding in the China-Pakistan Economic Corridor, which in May left Prime Minister Narendra Modi boycotting China’s Belt and Road mega-conference three months ago.
Beijing’s BRICS logo designers, perhaps being unconsciously subversive, have illustrated how the once overlapping, interlocking BRICS are now being wedged apart as paper thin subjects of centrifugal forces. For Africa, fewer illusions in these economies would be welcome, given how exploitative the BRICS and their firms have become against societies, democratic movements and environments.
A counter-summit challenges the BRICS
This argument is made by the Hong Kong People’s Forum, initiated by the city’s progressive labour, intellectual and faith leaders to question the BRICS. Their meeting this weekend follows in the counter summit traditions of the 2013 brics-from-below in Durban, the 2014 Dialogue on Development in Fortaleza, and the 2016 Goa People’s Forum on BRICS.
According to the Hong Kong People’s Forum:
Instead of offering an alternative, the BRICS actually offer a continuation of neo-liberalism. On top of BRICS there is also China’s new mega project, the Belt and Road initiative whose main purpose is to export China’s surplus capital.
These surpluses are vast, as witnessed in China’s foreign reserves which recently topped USD$4 trillion, though then fell 20% due to bouts of capital flight and two stock market crashes in 2015-16.
Global trade, finance and investment were meant to be the motors for the advancement of BRICS. But according to the World Bank, global trade peaked at 61% of world gross domestic product (GDP) in 2008 but retreated to 58% in 2015.
During the 1990s each BRICS country raised its trade to GDP ratio by at least 10 points. But trade has receded in importance in each of the BRICS. Russia peaked first at a 69% trade/GDP ratio in 1999, and then fell steadily to 45% today. Brazil rose to 30% in 2004 and fell to 25%. China soared to 66% in 2006 and has since plummeted to 36%. South Africa’s 2008 ratio was 73% but is now back to 60% and India peaked last, in 2012 with 56%, and is now at 40%.
On top of this, the ratio of world financial assets that are held overseas compared to GDP fell from 58% in 2008 to 38% in 2016, even as overall financial assets increased in line with soaring debt.
Finally, another deglobalisation symptom is the halving of relative global foreign direct investment: from 3.7% of world GDP in 2008 to 1.7% in 2016.
Leading financiers now talk of an imminent world recession, given over priced stock markets and corporate debt. This is not just due to wild New York share speculation, as also occurred before the crashes of 1987, 2000 and 2008. Three BRICS stock markets are also bubbling: South Africa’s stock market is 90% higher than in 2010, India’s market is up 70% and Russia has risen by 50%.
Centrifugal realities crowd out centripetal fantasies
These dangerous centrifugal forces cannot be easily regulated or reversed. The only recent relief came from the Chinese state’s massive urban construction investments (albeit leaving scores of near-empty cities) and the Indian service sector boom. But since 2015 the other three BRICS have suffered recessions as the crash in commodity prices hit home.
As the Hong Kong People’s Forum statement explained:
China has now evolved into a global engine promoting a neo-liberal agenda from free trade agreements to corporate led integration across borders.
The BRICS had promised to challenge an unfair global economic system. But in December 2015 their main multilateral reform strategies failed:
the Paris Climate Accord was non-binding, unambitious and outlaws climate-debt lawsuits by victims of Western and BRICS emissions;
the World Trade Organisation phased out any semblance of food sovereignty; and
IMF voting shares were shifted to favour BRICS at the expense of poorer countries.
Adds the Hong Kong People’s Forum: “The 2017 World Economic Forum in Davos was one site where Xi clearly took the lead in promoting world corporate power, as Trump leads the US-UK retreat into crony-capitalist protectionism.”
South African President Jacob Zuma pronounced last month at his party’s policy congress, “The ANC is part of the global anti-imperialist movement. We are historically connected with the countries of the South and therefore South-South cooperation such as BRICS is primary for our movement.”
If centrifugal economic forces now pressuring the bloc overwhelm Xi’s desired centripetal capitalism, then we can expect yet more talk-left walk-right politics, as the BRICS sub-imperialists desperately try to pretend they’re anti-imperialists.
South Africa's Jacob Zuma, will preside over the launch of the African Regional Centre of the New Development Bank (NDB) on 17 August 2017. The President will be joined by the President of the NDB, Mr Kundapur Vaman Kamath, cabinet ministers, NDB executives and other dignitaries.
BRICS countries signed the Agreement establishing the New Development Bank at the Sixth BRICS Summit in July 2014 in Brazil, and the Seventh BRICS Summit marked the entry into force of the Agreement on the New Development Bank. The NDB headquarters were officially opened in Shanghai, China in February 2016.
Another key resolution taken at the Summit was to establish regional offices that would perform the important function of identifying and preparing proposals for viable projects that the Bank could fund in the respective regions.
The first of its kind would be set up in Johannesburg, South Africa. The launch of the African Regional Centre will showcase the NDB's service offering, highlighting the Bank's potential role in the area of infrastructure and sustainable development in emerging and developing countries.
The New Development Bank recently held its second annual meeting in the Indian capital of New Delhi to discuss the sustainability of financing development projects in its member states.
The multilateral bank was established by the BRICS states of Brazil, Russia, India, China and South Africa. With headquarters in Shanghai, China, it was created to support emerging economies and provide an alternative to the domination of the World Bank and the International Monetary Fund.
But the new bank is already proving to be a replication of the Bretton Woods institutions. This can be seen through the partnerships the new bank is forming as well as its operating posture.
It’s also showing bias towards the development of Asian countries. This is evident from its funding patterns and the recent proposed enlargement of the BRICS bloc. The list of proposed additions includes Pakistan, Bangladesh, Iran, Nigeria, South Korea, Mexico, Turkey, Indonesia, the Philippines and Vietnam. All except three are Asian.
The proposed expansion of the BRICS countries has been justified as a move to strengthen the bloc and fill the void created by rising protectionism in the US. But it has been met with mixed reactions even among member countries. India, for example has expressed its disapproval that BRICS “plus” is China’s ploy to cut New Delhi’s influence in the group by roping in more pro-China countries.
The New Development Bank’s business as usual and its bias towards Asia suggests that it will not become an alternative source of finance. It will not address the key areas of needs for emerging economies like human capital development, poverty alleviation and basic healthcare.
More of the same
The New Development Bank was set up as an alternative to the World Bank and IMF which are viewed to be pushing western agendas. It was to provide a development model that would be sensitive and beneficial to emerging economies. But it’s quickly abandoning this mandate and falling into the trap of operating like the institutions it was created to replace.
In September 2016 the New Development Bank signed partnership deals with the World Bank to co-finance projects. The agreement also aims to facilitate knowledge and staff exchanges. This puts the bank in bed with the institutions it was established to counter.
The bank has also signed memorandums of understanding with the European Investment Bank, European Bank for Reconstruction and Development, the Asian Infrastructure Investment Bank and the Eurasian Development Bank and the International Investment Bank (IIB). The agreements cover co-financing of infrastructure projects, the bulk of which are in Asia.
Perhaps the foundations of the bank were faulty from the start. Its original designers were two former World Bank chief economists, Joe Stiglitz and Nick Stern. Given this history, it’s possibly never going to challenge the world financial order.
Today, the New Development Bank is pushing the corporate-led development model just like the World Bank, the IMF and other Bretton Woods institutions. Their investments are profit-oriented which tends to undermine social justice. Thus similar to the World Bank and IMF, the New Development Bank seems more focused on protecting its investments at the expense of saving the interests of the BRICS citizens.
Over the past decade, the corporate led model has impoverished many people in emerging economies, particularly in Asia. It has led to farmer suicides, large-scale privatization, natural resource looting and environmental degradation.
Funding so far
The New Development Bank has so far made loans of $811 million to entities in four BRICS countries towards energy infrastructure. Of this $300 million went to Brazil, $81 million to China, $250 million to India, and $180 million to South Africa.
For South Africa, the bank has so far not provided any meaningful opportunity to obtain additional finance. The loan of $180 million (R2.6 billion) was given to South Africa’s power utility Eskom to develop 670 MW of power generation and 500 MW worth of renewable energy projects involving independent power producers. This unnecessary loan to an inefficient state owned entity has only contributed to BRICS’s power over South Africa by adding onto the current contingents liabilities dollar-based loans that the government has guaranteed for the next 12 to 20 years.
There are weaknesses in the way in which the New Development Bank works that also raises questions about its intent.
First, the bank’s activities are often shrouded in secrecy. There are no clear official records available to the public about the bank’s activities, decisions and operational guidelines. Analysts have to rely on secondary and tertiary information sources.
Second, the bank is yet to present any socio-economic redress and environmental operational guidelines for communities. This would ensure that its funding does not lead to displacement, evictions, ecological destruction, loss of livelihoods and threats to the basic right to life. These issues have recurred for decades due to projects funded by other multilateral development banks.
Lastly, as a co-financier with development institutions like the World Bank, the bank’s seriousness about promoting transparency, accountability and probity remains questionable.
To strengthen its relevance to emerging economies, the New Development Bank must review the much criticised, inequitable representation of developing countries, especially from Africa. It must also focus more on small-scale investments rather than large-scale infrastructure projects. These often lead to exclusion of people and communities, and aggravate existing vulnerabilities rather than bringing about development.
Misheck Mutize, Lecturer of Finance and Doctor of Philosophy Candidate, specializing in Finance, University of Cape Town and Sean Gossel, Senior Lecturer, UCT Graduate School of Business, University of Cape Town
The idea of establishing an alternative credit rating agency led by the BRICS bloc of countries is gaining momentum. But there are questions as to whether it will prosper given the major challenges it’s bound to face.
Leaders from the bloc made of Brazil, Russia, India, China and South Africa are championing the idea. The idea formerly emerged during the 2015 BRICS summit in Ufa and was affirmed by the Goa Declaration at the 8th BRICS Summit. Most recently South Africa’s President Jacob Zuma said BRICS countries had taken the decision that they could rate themselves, and perhaps others too. The aim would be to ensure a more “balanced view” when ratings are made.
Both Brazil and Russia have recently been downgraded by Moody’s. And for over a year South Africa has lived with a possible downgrade by the “big three” Western credit rating agencies, Standard & Poor’s, Moody’s and Fitch. The big three have faced increasing criticism. Critics claim that the frequent downgrades of developing countries are unjust and serve Western political interests.
BRICS has started engaging financial experts on a business model for the new rating agency as well as what methodology it would adopt.
This isn’t the first time there’s been an attempt to challenge the big three. China, Russia, India and Brazil have all established their own credit rating agencies. But none has ever come close to establishing itself as an alternative.
Will the BRICS initiative be the exception?
Critics of the big three were emboldened after the 2008 financial crisis. The rating agencies were forced to pay over $2.2 billion in fines relating to their complicity in the credit crisis. This further damaged their credibility and heightened accusations, particularly in emerging countries.
Critics have also attacked the rating agencies’ issuer pay model. Under this system credit rating agencies are paid by the institutions being rated (debt issuers) and not by the investors who use the information, creating a conflict of interest. Critics also argue that this entrenches geopolitical biases.
The hope is that a new agency would compensate for the perceived bias in the global financial architecture. It would also create competition and offer investors, issuers and other stakeholders a wider choice and a more diverse view on creditworthiness.
Weakness in the BRICS muscle
Given that BRICS is home to half the world’s population, accounts for more than a quarter of the world’s economic output and has recently set up a nascent New Development Bank, the countries under its banner have, between them, the capacity to establish an influential credit rating institution.
But questions have been raised about whether the new rating agency satisfies a financial need or is politically motivated. And if it will be competent to provide an independent, objective and credible credit rating service based on sound methodology. China has already expressed concerns about the credibility of a new agency. Analysts have also strongly criticised the probable adoption of the existing “issuer-pay” model. This would mean that the current model is simply replicated.
Tough market to crack
Considering that the three major rating agencies control more than 90% of the world’s ratings business, establishing a new one wouldn’t be easy. It could take years, or even decades, to gel.
There have been previous attempts to launch new ratings agencies. All failed to take off. Examples include the Lisbon headquartered ARC Ratings which was launched in November 2013 as a consortium of five national ratings agencies from South Africa, Malaysia, India, Brazil and Portugal. It is yet to release its first sovereign rating. The CARE Rating agency of India, started in April 1993, is still rating small to medium enterprises.
The Global Credit Ratings (GCR) was established in South Africa in 1995. It is only planning to start offering sovereign credit ratings from 2017.
Others that have been launched include:
MARC of Malaysia which has been operational since 1996, but still only covers corporate ratings;
The Hong Kong based Universal Credit Rating Group which was launched in 2014l
Russia’s Analytical Credit Rating Agency (ACRA) which was established in 2015;
the Beijing based China Chengxin Credit Rating Group, established in 1992;
and Dagong Global Credit Rating established in 1994.
None has established itself as an alternative credit rating agency of choice for emerging countries.
The task ahead
The biggest task for a new BRICS credit rating agency will be to convince investors, particularly those from the US and Europe, that the ratings assigned are politically impartial. One way of doing this would be to adopt the “investor-pays” model where investors subscribe to ratings released by the agencies, and the subscription revenues become its source of income. This would ensure transparency and credibility while avoiding conflicts of interests.
But adopting a new model might not fly given that main users of the credit rating information are global pension and mutual funds which currently use at least one of the “big three” rating agencies. They are therefore unlikely to trust any ratings from the new BRICS rating agency with a yet to be tested rating model. Adopting a new model would also be tricky as the BRICS rating agency would need to wield enough influence to be able to attract sufficient subscriptions from international funds.
Finally, investors will be sceptical about the new BRICS rating agency’s ability to compensate for losses in the event that it issues false ratings as the “big three” did in the US. The BRICS agency is likely to be another failed rating agency project unless it can overcome these three hurdles.
Misheck Mutize, Lecturer of Finance and Doctor of Philosophy Candidate, specializing in Finance, University of Cape Town and Sean Gossel, Senior Lecturer, UCT Graduate School of Business, University of Cape Town