Bricking up the BRICS | Value Research A self-congratulatory medley of countries that have come together simply because of a convenient acronym may end up in the footnotes of history
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Bricking up the BRICS

A self-congratulatory medley of countries that have come together simply because of a convenient acronym may end up in the footnotes of history

Jim O' Neil, Chief Economist for Goldman Sachs, laid out the theory in a Global Perspective Report for Goldman Sachs. It projected that by 2050, this disparate combination of countries would have a combined economic clout greater than the developed world (i.e. the OECD). Later, these target dates were revised to 2032, during the gung-ho years before 2008.

The theory is that these five economies -- Brazil, Russia, India, China and South Africa, hence BRICS, have the critical mass of resources and population, besides poverty and low cost, to outgrow the developed world. Since then, there have been various permutations and combinations, with BRIC (without South Africa), BRIICS (with Indonesia), BRICKS (with Korea), ad infinitum.

The concept 'went viral', i.e. companies started to use the term, nay, formulate strategy around the concept. Nissan worked on a BRICS car, FMCG companies had BRICS products, banks started a BRICS orientation......there were BRICS thematic funds, Mutual Funds, Private Equity and Hedge Funds. Even the concerned countries saw in themselves, the potential for an 'economic bloc', not to be confused with an EU-style politico-economic configuration.

This culminated in a BRIC Summit in Russia in 2009, which has now become a regular affair, into its 6th year. South Africa joined in 2010. One of the first institutional initiatives is the BRICS Bank, a sort of South-South IMF, to which everyone contributes. Of the $100 billion capital, China puts in $41 billion, while Russia, India and Brazil put in $18 billion each, and South Africa puts in $5billion. Voting power will be in proportion to capital contribution, and the BRICS Bank will spearhead South-South co-operation, countering Western dominance of global/multilateral banking.

So this is the historical background. What started as a catch-all acronym at Goldman Sachs, went into everyone's vocabulary, denoting one of the pillars of global business strategy. Slowly, as the idea withstood the ravages of the Global Financial Crisis, 2008, it started to take on a political dimension too, with the formation of a loose economic 'bloc', now given a real shape with its first brick-and-mortar institution, the BRICS Bank.

There will be the usual doubts. Will the capital contribution be in hard currency (i.e. dollars) or will it be in the respective currencies of the member states? If the idea is to provide a bulwark against Western domination of global finance, then a Dollar-denominated Bank ends back where it started. If the Bank issues 'SDRs' (IMF-style Special Drawing Rights, a kind of mutual currency), then it gets automatically dominated by the Chinese Yuan, which would create ego hassles in Moscow and Delhi.

There will be other questions...who gets to draw how much? For all their so-called potential, India, Brazil and South Africa do not have the macro-stability needed to be a global donor. With fast depreciating currencies and huge, stubborn current account deficits, the Bank could soon turn into a 'beggars' club', dominated by China; even Russia would find it difficult to carry such big deadweight. Brazil has seen hyperinflation, Russia has seen debt default, India and South Africa seem to be looking for their own macro-economic experiences along the same will probably be currency crisis or hyperinflation in India and default in South Africa.

All this was preceded by an offer of $75 billion from the BRICS, linked to a 're-orientation' of voting rights in the IMF. Obviously, the leader in this would have been China, since they are the only country, apart from Russia, with real reserves (India's reserves all have attached debt liabilities, which we are learning painfully just now).

Will the BRICS configuration be hung up on the acronym, or will its constitution be made up of “the leaders of South potential”? In that case, will membership be open to new potential leaders, and will the laggards be dropped? Will the 'I' of India be dropped in favour of Indonesia, a far more macro-stable country with a clear memory of the 1997 crisis, to ensure that they don't go down the path of fiscal profligacy? India has still to learn those lessons, and looks likely to drop out of the configuration, leaving the word scrabblers scratching their heads.

The 'spirit of BRICS' is that you must be a potential global economic growth engine, and assumes that the growth comes with macro-stability. Yet its appeal comes from the huge 3 billion population, and the communicability of the idea. In reality, it is just an acronym that includes apples, oranges & banana (republics). And there seems to be no 'exit clause' for the rotten apples... or an entry strategy for a new tiger!!!

And what of the N-11, who bring up the second tier of world growth, and may actually have far better quality than the first tier BRICS? Bangladesh, Egypt, Indonesia, Iran, Korea, Mexico, Nigeria, Pakistan, the Philippines, Turkey, Vietnam. Smaller countries have more potential, but more importantly, better governance and a proper philosophy underpinning their economic growth, which will give them momentum even after they have reached middle income.

On the one hand, the BRICS have 'accidental growth' coming from different places. In case of Russia, it comes from oil and gas wealth, but brings along with it cronyism and oligarchies, and consequent social and political dysfunction. Given the background of demographic decline, Russia looks an unlikely world leader. At the other extreme is South Africa, with the same 'accidental wealth' coming from mineral wealth, accompanied by similar inequality in wealth distribution. This has skewed the reinvestment of this wealth, resulting in unsustainable growth patterns amid overpopulation. Amazingly, with all this mineral wealth, South Africa has a huge current account deficit, high unemployment and a ghetto culture that has broken up the country into 2 distinct realities: an affluent 'white' (includes the new oligarchs, of 'honorary whites') and the rest.

India just does not belong to this club. Had it not been for the fact that it contributes the much-needed vowel “I” in the BRICS, it would have not been part of the original acronym. It made it past Indonesia, simply because that country was still showing the full results of its comeback from 1997. India does not even have the 'accidental wealth' provided by a mineral resource boom. Just as well, because knowing what I do about India, it would have frittered that away either in doles and handouts, or got even more lop-sided in its cronyism.

China is the only systematic aspirant to world leadership. It has a clear philosophy, which also gives it the ability to change in mid-course corrections. While India bumbles along, with no idea why it is growing well, and hence no idea what to do when things are not going according to plan. The same can be said of the others, but I focus on India, just to bring home the point.

The history of this recent episode of world growth is still to be written. If it turns out that it was merely a 'rush of blood', triggered by Greenspan's money printing and then accelerated by the splashes of liquidity generated by Bernanke's various QEs, then the BRICS will be one more word consigned to the dustbins of history, an accidental aspirant to non-existent world greatness.

In the next 5-7 years, as world productivity rises on the back of multiple technological booms, we will see deleveraging in the corporate and household sectors on a gargantuan scale. Some Governments might also deleverage, and those are the real world greats. The also-rans will be those who are left behind by the tectonic changes that are brought about by the falling cost of energy and the dramatic changes in manufacturing; they will fight for the investment flows created from a new deleveraged rich world population.

An egotistical, self-congratulatory medley of countries that have come together simply because of a convenient acronym will end up in the footnotes of history. Aspiration to world leadership will be decided by a process far more complex than Scrabble.

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