Proposals for strengthening BRICS countries’ pragmatic cooperation

Proposals for strengthening BRICS countries’ pragmatic cooperation

By Professor Xu, Hongcai; Deputy Director of Information Department of CCIEE

（the presentation for conference ‘Shifting Coalitions and Potential Blocs for Asian & Pacific Leadership in the G20’, Shanghai, September 13-15th, 2012）

Good afternoon, everyone.

Thanks for chairman’s introduction. I am very glad to be here today to share my ideas with new and old friends. I come from China Center for International Economic Exchanges. My presentation is proposals for strengthening BRICS countries’ pragmatic cooperation, which is consisted of three parts.

Part one: the development of BRICS countries’ cooperation

Over the past decade, we have witnessed remarkable transformation of emerging economies from peripheral players to significant drivers of economic growth in the international community. Mr. Jim O’Neill from Goldman Sachs said that it has been more than 10 years since he dreamed up the odd acronym ‘BRIC’ to describe the rising economic importance of Brazil, Russia, India and China.In fact, the strategic cooperation among BRICS countries has achieved substantial progress over the past 6 years since foreign ministers’ first meeting in 2006.BRICS countries have gradually formed a multi-level cooperation framework including the country leader summit, the departmental minister meeting and the permanent multilateral organization, as well as the cooperation in various areas such as think tanks, businesses and financial institutions.

In June 2009, the first BRIC countries leaders summit was held in Russia. At that time, South Africa had yet enrolled in BRIC countries’ cooperation mechanism. The leaders of four countries issued a joint declaration after the meeting and called for implementing the consensus of the Group of 20 countries (G20) in London Summit in order to improve the environment for international trade and investment, and increase the representation from emerging markets and developing countries in international financial institutions. In April 2010, the BRIC leaders met in Brazil and released a joint announcement with regard to the world economic outlook and urged further reform of international financial system to promote solid cooperation and coordination among BRIC countries.

South Africa is the largest and one of the most influential economies in southern Africa. In November 2010, South Africa applied for the membership of BRIC countries when the G20 leader summit was held in Seoul and was accepted in December 2010. After that, BRIC was renamed as BRICS and includes five countries. Geographically, BRICS covers four continents including Asia, Africa, Europe, and America, and further enhances their representation and influence in global economy. The enlarged BRICS’ cooperation mechanism would not only strengthen economic and trade relations among these 5 countries, but also expand cooperation into broader scope including global climate change, the United Nations reform, poverty reduction, major global and regional issues, as well as building a new fair and balanced international political order.

In April 2011, the third summit of BRICS countries’ leaders held in Sanya, China. BRICS countries firstly agreed to implement currency swap to strengthen financial cooperation. Most importantly, the leaders formally signed a financial cooperation framework agreement and agreed to set up a development Bank for BRICS nations.

In March, 2012, BRICS leaders met again in New Delhi, the Indian capital. The key theme of this meeting was global stability, security and prosperity. The leaders agreed to take proactive steps to promote the bilateral cooperation in trade, investment and financial areas. They determined to establish regular consultation mechanism among their trade ministers, EXIM/development banks, and central bank. In addition, they aimed at strengthening cooperation in capital market such as setting up BRICS stock exchange alliance.

The development from BRIC concept of Mr. Jim O’Neill to BRICS countries’ progressive cooperation reflects increasing importance and motivation among major members of emerging countries. Over the recent 10-20 years, BRICS countries have substantially increased their contribution to international economy and become the new economic growth engine while the major developed countries reached economic stagnation. In line with their increasing economic contribution, BRICS countries would have common concerns over future reform of global economic and financial governance. Strengthening political, economic and financial coordination among emerging countries reflects the new trend of international relations.

Although the five countries have different economic endowment, they are at similar economic development stage and are facing increasing challenge to sustain economic growth, maintain social stability and improve people's living standard. They will also encounter similar difficulties such as restructuring economy, saving natural resources, and protecting eco-environment. BRICS countries’ cooperation provides a platform to share experience and tackle challenge as they have different competitive advantages and their economies are highly complementary. Therefore, the cooperation can promote these countries’ economic development and is also in line with the common interests of international community.

Generally speaking, the cooperation mechanism of BRICS countries is different from that of the G7 countries. It is not a new power bloc or political allies, but development partners. The mechanism focuses on discussing key issues relating to economic, financial and development areas that are generally concerned by both developed and developing countries. BRICS countries are active advocates and practitioners of global partnership for development, North-South dialogue and cooperation bridges.

To sum up, the BRICS countries’ cooperation mechanism has achieved some initial progress, which can be summarized as follows.

Firstly, the membership has been expanded. On the 2011 summit in Sanya in China, South Africa was accepted as a new member of the BRIC summit, as such, ‘the BRICs’ was transformed into a ‘five-country’ summit. So, the geographical representation was extended to give a greater legitimacy and representation of the mechanism.

Secondly, significant progress has been made in the area of cooperation mechanism from initial investment concept to current mechanism with multilayer operational functions. Departmental ministers have established regular dialogues to address agriculture, finance, health and international security issues. The most important achievement is the establishment of regular meetings among the BRICS countries’ leaders at all levels and in all areas.

Thirdly, the financial cooperation has been initiated. In recent year, the BRICS countries’ central banks have signed the currency swap agreements and strengthened financial cooperation that has led to positive outcome. The currency swap can reduce exchange rate risks and forex-associated transaction costs among BRICS members. It could also help the United States to reduce its responsibility of international reserve currency.

Lastly, a more comprehensive cooperation mechanism has been formed. The BRICS cooperation initially focused on economic issues. Later on, the members have expanded their discussions into broader strategic issues including major international affairs, such as expressing their own stance in Libya, Syria, and Iran issues.

Part two: challenges and problems

Today, the contribution of BRICS countries to global economy has been rising and the influence of their cooperation mechanism has been expanded in the international political and economic arena. However, BRICS countries are also facing some complicated structural problems. Firstly, the gap in national income distribution is expanding, which may cause social instability. Secondly, their major industries have been in the low-end of global industrial value chain, and thus need to move up along the value chain to sustain economic growth. To most BRICS countries, they have to enhance their industrial competence through technological innovation and industrial structure’s upgrading in order to avoid the so-called middle income trap. In other words, that means to transit to technology- and knowledge-intensive industries from labor- and resource-intensive industries. Thirdly, they also need to improve social security system. Lastly, BRICS countries are facing with increasing inflationary pressure during recent years caused by international hard and soft commodity price hikes. These countries also need to cope with economic and financial volatility stemmed from international capital inflows and outflows.

All of above posts a potential risk to BRICS’ long term economy prosperity. Plus, these countries exist as more scattered individual rather than an integrated bloc, which doesn’t help them to protect their common interest. Thus, better cooperation among BRICS members is needed. Due to different economic and cultural conditions, the BRICS countries will probably have some misunderstandings, which require them to strengthen dialogues and mutual trust to establish a beneficial cooperation. Especially, more attention should be paid to the following two issues.

(1) There is mismatch between the economic strength and financial influence of BRICS countries. They have not been able to prevent negative impact of short term international capital flows. When western countries suffered financial crisis and the debt crisis, the BRICS countries’ economic strength has been further improved over the past 4 years, especially China. However, the economic power of BRICS countries has not brought them greater economic influence, and their role in the global economic governance is still insignificant. The key is a lack of effective methods to strengthen influence over global monetary and financial system. Meanwhile, the international rating system is controlled by three major rating agencies, which have played a catalytic role during the global financial crisis and the European debt crisis.

(2) The mismatch between economic influence and political clout. BRICS countries have been trying to enhance their international political influence. This does not mean anti-US and anti-West, but aims at maintaining their independent political stance and promote democratization and impartiality of international relations, so as to achieve world peace and sustainable development. However, BRICS countries have not explicitly touched on political cooperation. In international political affairs, they have not reached consensus regarding major international issues, except a few declaration. For example, during the recent vote on Syria issues in United Nations, they did not form a unified stance.

Undoubtedly, the rise of BRICS countries needs a stable international political and economic environment. Owing to various constraints, the political coordination of BRICS countries will have long way to go. Therefore, they should develop practical road map to strengthen a pragmatic cooperation.

Part three: my proposals

BRICS could reach more consensuses in multilateral cooperation and global economic governance, especially in expanding financial and economic cooperation, such as increasing currency swap, opening capital market, and reducing trade and investment barriers.

Firstly, strengthen the construction of BRICS’ cooperation mechanism. In early years, the loose cooperation provided a certain degree of flexibility and space for each member country. Yet, now, if this mechanism still remains in loose phase, it will hinder more profound cooperation. As a symbol of mechanism construction, BRICS should set up a permanent secretariat as soon as possible, and then establish several working teams and expert groups. The secretariat may be set up in China. The secretary-general should be selected regularly by the member states.

Secondly, enlarge the scope of BRICS countries’ cooperation and coordinate their common stance to make sure that the interests of emerging countries are properly represented in international organization such as the UN, IMF, WTO, and G20. BRICS should aim at improving the UN’s efficiencies so that the UN can play a leading role in dealing with global challenges and threats. China and Russia should support Brazil, India and South Africa to act as greater role in the UN. Meanwhile, BRICS should actively participate in the reform of the IMF and the G20 in order to reshape the image of G20 as a talking shop.

Thirdly, promote the reform of international monetary system and strengthen financial cooperation. The individual major developed economy issues its sovereign currency that finally causes the global crisis and BRICS countries become the victims. BRICS countries should increase mutual cooperation to push forward the reform of international monetary system and promote the establishment of regulatory regime for the major reserve currencies. Specifically, the quota adjustment, the SDR reform, and the head selection of international institution should be reviewed and reformed to reflect the rising economic contribution made by BRICS countries.

Fourthly, reform the international rating system. Credibility is the economic basis of modern society. International credit development is one of the major factors of international political and economic dynamics. On one hand, a transparent, objective and independent international rating system will better assess credit risks in international financial system, prevent international credit crisis, and benefit global economy. On the other hand, the fluctuation of international credit relations will exert negative impact on the emerging economies’ sustainable development. BRICS countries should consider establishing a supra-sovereign and independent international rating agency, and urge the G20 to establish a new international rating regulatory organization.

Fifth, actively promote regional economic integration. To take advantage of economic complementarities among BRICS countries, the members should make more efforts to open their markets, reduce tariff, and increase market shares in global trade. Furthermore, the members should strengthen regional economic development and cooperation in the field of high-tech and infrastructure construction. BRICS countries should seize the historic opportunity and gradually form bilateral free trade areas or regional economic integration, in order to increase investment and exports to emerging economies, and to achieve win-win strategic objective.

Sixth, clearly commit against trade and investment protectionism. After the global financial crisis, the protectionism becomes prevailing in some countries, which is likely to threaten global trade development and internationalization. BRICS countries should coordinate policies and actively promote globalization. In particular, the development of international trade will lead to further globalization. The advantages of developed countries in finance, technology, and resources management should combine with the comparative advantages of developing countries such as cheap labor and the demand from urbanization to promote mutual prosperity.

Seventh, joint responses to global climate change. Industrialized countries should now take more responsibilities in preventing global warming. Apart from that, these countries should transfer the environment-friendly technologies to developing countries at low prices, or even free. Nowadays, some developed countries are unwilling to transfer technologies to developing countries, but require reducing carbon emissions. This is unreasonable and unfair.

Lastly, strengthen policy coordination at different levels in international affairs. The scholars of BRICS countries should participate in discussion and coordinate their positions. In particular, the exchange and sharing of development experience can benefit each other. So, BRICS countries should build a network of think tanks formed by member states under the coordination of the secretariat. The previous experience suggests that think tanks can play a unique role in global economic governance. The BRICS members could choose their leading think tanks to facilitate relevant academic exchanges between member states. In the case of China, for example, the China Center for International Economic Exchanges (CCIEE) could be an ideal candidate, and is capable of taking a leading role.

Thank you for attention.