GLOBAL FINANCIAL ARCHITECTURES: THE VIEW FROM THE GLOBAL SOUTH-BRICS

This is the second in a series of articles about global financial developments analyzing the changing Global Financial Architecture in the age of confrontation between the West and the Global South.  In the first article, we presented the  presents the background of the emergence of challenges to the Western-dominated Global Financial Architecture.  This article focuses on he BRICS

The term BRIC was first coined by Goldman Sachs in 2001 to designate the largest and most influential emerging markets:  Brazil, Russia, India and China. Later on, South Africa was added to the moniker, upgrading it to BRICS.  In 2009, the BRICS countries actually held their first summit. Since then, the group has developed into a formal organization, building an organizational infrastructure and agreements.  In effect, it is both a rival, and a complement to the Bretton-Woods institutions and the other major groupings of the GFA, the G7 and the G20.

More than a dozen countries of the Global South have applied for membership. In 2023, the original BRICS admitted six new members (effective on January 1, 2024):  Argentina, Iran, Egypt, Ethiopia, Saudi Arabia and the United Arab Emirates (UAE). Together,  the BRICS countries account for about a third of global output and 50% of global population.

However, the BRICS  comprise a group of countries at very different levels of development and integration in the global economy, with per capital output in 2023 ranging from $1,473 for Ethiopia to over $50,000 for the UAE.  While the group is economically and financially dominated by China in terms  of both trade and output, it now includes four of the largest global oil producers (Saud Arabia, Russia, Iran and the UAE), three global industrial power houses (China, Brazil and India), the largest African nation (South Africa), and three heavily indebted and struggling emerging markets (Argentina, Egypt and Ethiopia). Furthermore, two of the countries (Russia and Iran) are international pariahs subject to a heavy set of Western sanctions and essentially cut off from the dollar/euro financial and banking system. Furthermore, with the probable exception of Iran and Russia, the BRICS countries are closely integrated with the G-7 and other countries of the Global North in terms of trade, finances and investment.

Table 1.  BRICS Major Trading Partners, by Rank, 2022

For six of the BRICS countries, China is the main trading partner. However, in the case of Saudi Arabia, the UAE and Iran, oil accounts for a large share of the trade. Furthermore, the dominant position of China in trade also reflects geopolitical realities for Iran and Russia, which are cut off from the Global North as a result of sanctions.

Over the years,  the BRICS countries started a number of programs that mirrored the Bretton Woods institutions. The Contingent Reserve Agreement, an IMF-like institution designed to provide hard currency swap lines to central banks of countries facing external payment problems. The New Development Bank is provides lg-term development loans. 

The New Development Bank was set up in 2015, with a $100 billion in capital, distributed as follows: China (41%), Brazil, India, Russia ad South Africa, (18% each).  Since its inception, the NDB, headed by Dilma Rousseff, a former Brazilian president, has distributed about $25 billion loans to a number of emerging markets/developing countries, and plans to issue $8-10 billion of new loans per year.  The addition of cash-rich countries like Saudi Arabia and the UAE is likely to provide additional resources to the NBD.

The Contingent Reserve Agreement (CRA) is a $100 billion pool of funds set up in 2015 by the BRICS.  This pool , which mirrors the IMF,  will be used to provide  short-term liquidity to BRICS countries facing short-term international liquidity problems.  China is the biggest contributor of funds (41%), followed by 18% each for Brazil, Russia, India and Iran, and 5% for South Africa. Voting rights and access to funds reflect the same percentages.  As of yet, there is no data about any use of these funds or conditionality.  The recent expansion of the BRICS should lead both to new funding from cash-rich member countries (Saudi Arabia and the UAE), as well as new demands from struggling member countries (Argentina, Egypt and Ethiopia). Once again, there is no new information yet about information about the rearranging of shares and access to funds that followed the accession of new members.  As in the case of the NDB, the CRA will have to set credible norms for its lending operations. Furthermore, since money is fungible, this raises the question of whether BRICS funding will ultimately end up paying of Western official and private creditors

 The NDB has a steep learning curve ahead of it.  In response to the kinds of conditionality and restrictions required by the Bretton Woods institutions, the NBD model underscores  “non-Western norms and values” in lending, while leaving geo-politics out.  In practice this could translate into lax credit  standards and ignoring environmental and global warming standards, human rights and other globally accepted norms, as well as advancing loans to both politically favored partners as well as pariah countries. While there is room for challenging some of the lending standards of the Bretton Woods, such an approach would quickly backfire and undercut the effort of the NDB to present itself as a responsible multilateral financial institution fulfilling accepted norms in international banking, particularly as it moves to financing joint projects with other multilateral financial institutions and global banks. Ultimately, we are likely to see a convergence to best-practices.

The addition of new members (there is a long list of applicants, including countries like Pakistan and Indonesia)  will give a boost to the credibility and international influence of the BRICS. At the same time, while China will remain the BRICS’ superpower, countries like Brazil and India also consider themselves as Global South leaders.  Furthermore,   the addition of “middle power” countries like Saudi Arabia and the UAE is likely to change the balance of power away from China.  Increasing the financial heft of the BRICS is likely to be accompanied by a stricter adherence to international financial norms—the Middle Eastern financial power houses are likely to demand tighter credit standards.  In addition, the moderate block of countries could emphasize a greater degree of cooperation with the Global North’s institutions.  Brazil in particular will play an important role in 2024 as the president of the G20. 

Finally, a major goal of the BRICS has been to challenge the dominance of the US dollar in global trade and finance by creating an alternative reserve currency and a clearing system, as well as planning an optical cable system connecting the payment systems of the BRICS countries.  A common currency is a very long-term aspirational project.  In the  short term, the most likely candidate for an alternative to the US dollar is the Chinese yuan (aka renminbi).  While it is an important currency in the context of trade among the BRICS members, it only accounts for about 4% of global transactions.

Over the next decade or two, the world is facing major interrelated challenges:  climate change, debt relief for the low income countries and global poverty, just to name a few. In this context, the BRICS framework can be an important element of the evolution of the Global Financial Architecture and the reform of the multilateral financial institutions.  However, in order to be achieve these goals, it must go beyond being an instrument of China in the superpower competition.