Friday, Dec 19, 2014

A new club for India

The complaint is not with the need for a new institution, but with the current membership.  (Source: Reuters) The complaint is not with the need for a new institution, but with the current membership. (Source: Reuters)
Written by Bhaskar Chakravorti | Posted: August 4, 2014 12:20 am | Updated: August 4, 2014 5:09 am

With BRICS, we seem to have mistaken an acronym for real policy.

If there is anything recent years should have taught us, it is this: be wary of investment bankers bearing gifts. One of the most durable of such offerings — thanks to Goldman Sachs — is a seemingly harmless acronym: BRIC. This was shorthand for grouping the four largest (in GDP terms) emerging market countries, Brazil, Russia, India, China, when grouping countries as “rich” and “poor” was beginning to appear vaguely antediluvian. Thus far, as boring economic memes go, the acronym has been rather sticky but harmless.

It has generated a cottage industry of pundits coining alternative acronyms. The BRICs themselves felt a sense of international kinship, added an “S”, an actual country (South Africa), conducted summits, postured and issued lofty communiqués. Up till now, it was all cheap talk; but the northeastern Brazilian city of Fortaleza changed all that. Now the BRICS have actually put some real mortar between them: they’ve committed real money to become “equal” partners in a New Development Bank. Now, that decade-old investment banking make-believe product carries a real cost. This is worrisome because there are several faultlines running through.

The first faultline affects the club’s global credibility. One member, the “R” nation, has seen sanctions imposed by the US and the EU for having invaded a sovereign country, annexed territory and perhaps being the source of weaponry that brought down a civilian airliner. Far from making the appropriate sympathetic noises in a timely way, it has done as much as it can to obfuscate and block access to evidence or recovery of the bodily remains of innocent victims. This does not bode well for the reputation of the BRICS as a globally responsible coalition.

The second faultline has to do with the credibility of the BRICS among its own members. Consider the “C” nation. Its leadership must, in private moments, be asking why it is hanging out at the children’s table. Its own China Development Bank and Export-Import Bank are so large that they have made more loans than the World Bank. The proposed new BRICS entity seems no more than a toy in comparison. As a small sign of how irrelevant the New Development Bank’s $10 billion ask is, consider that President Xi Jinping rounded off his tour of South America with a unilateral loan from his own development bank of $7.5 billion to Argentina and established an office in Venezuela, made a loan of $5.7 billion there, to top off at least $40 billion lent since 2008. Now that is grown-up money. It is hard to imagine why this new entity is anything more than an exercise in geopolitical game-playing for China, with table stakes that are the equivalent of pocket change.

The third faultline lies in the inherent inequity within the supposedly “equal” partnership. For at least one member, the partnership is extremely asymmetric and costly. The “S” nation has committed a whopping 2.8 per cent of its GDP for membership dues in the New Development Bank, while another member, with 26 times more people and an economy that is 28 times larger, has committed a modest 0.1 per cent of its GDP. This ought to be a particularly touchy subject since the latter, China, has also been rebuked for fostering a potentially neo-colonial relationship with South Africa.

A fourth faultline runs through the country that hosted the latest BRICS summit. Like its star player, Neymar, the “B” nation is retired hurt for the season, and perhaps even longer. As it picks up the pieces from its financially, politically and emotionally exhausting hosting of the FIFA World Cup, it is left to contemplate far more than the less-than-beautiful future of its jogo bonito. The economic prospects do not look pretty: growth projections for 2014 have already been downgraded to less than 1 per cent, potentially jeopardising its credentials for even claiming to be an “emerging” market. From the perspective of its interest in development funding, Brazil already has a 60-year-plus giant development bank, BNDES, that has been lending at twice the rate of the World Bank in recent years. For several years, this institution has been dealing with criticism that its lending is too limited to big entrenched players, of ignoring much needed infrastructure development and of cronyism. Given the political turmoil in the country that played out in the form of protests in Sao Paulo against rising bus fares and wasted investments in football stadia, to the malls of Rio, where working-class youth staged rolezhinos, protesting by just strolling about where the upper-class goes to shop, is Brazil really ready to handle a second development banking effort right now?

This leaves the “I” nation — the one that could genuinely benefit from a sensible injection of development funding — dangling. India appears to have experienced a MARP (mistaking an acronym for real policy) crisis. Its political and policy leaders have been had by the others, perhaps because no acronym can survive in this brutally competitive world without a vowel.

An alternative to the sclerotic Bretton Woods institutions is long overdue. With development investments of up to $1 trillion a year necessary, a new transnational development bank that has the prime target countries in decisionmaking capacities is necessary. With rising savings and sovereign wealth in the developing world, a new institution can help channel this surplus towards productive investments and manage the inherent risks. This institution should be the entrant that finally helps the Bretton Woods legacies, the World Bank and the IMF, evolve, in the same way that new entrants in any healthily functioning industry force the incumbent to adapt and innovate.

The complaint is not with the need for a new institution, but with the current membership. We need an institution that offers middle income countries more than leverage vis-à-vis the Washington Consensus; we need leverage vis-à-vis the Beijing Consensus (which may include China and its growing network of trading partners, locked in asymmetric relationships) and the energy consensus (currently the primary oil producing nations) as well. I would recommend committing real resources to a club of solid middle-income nations with several shared socio-political characteristics, common future development challenges and, potentially, complementary skills and resources to bring to the table. Where should we begin? Consider the countries labelled the Fragile Five by Morgan Stanley (yes, another investment bank) late last year. Today, many of them have gone past electoral uncertainties, become the primary targets for yield-hungry global investors and are among the best-performing assets. This might require bringing India back together with Brazil and South Africa, along with Indonesia and Turkey. To these one can add others. Consider Poland and Chile.

In fact, these proposed new club members are not all the same, even if they share many characteristics in terms of where they are in the development cycle and the incomplete state of development of their socio-political institutions. Their economies may be riding a rollercoaster together. Each brings elements to the table that makes the collective powerful without the fissures inherent in the BRICS structure. This club may not have the prestige or economic leverage of being associated with an economic superpower such as China. It does not even make for a handy acronym. But an accord for real action will trump an empty acronym that dissolves in acrimony. Indeed, it is time to dismantle the BRICS, evolve the septuagenarian Bretton Woods system and build a new global economic order with building materials that last.

The writer is the senior associate dean of international business and finance at the Fletcher School at Tufts University

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