A Bank of BRICS?

Since the inception of the term “BRIC” nations was invented by a Goldman Sachs employee back in 2003, there has been a lot of hoopla about the rise of the emerging BRIC nations viz. Brazil, Russia, India and China. A new member to this club – South Africa, was added a few years ago to make the club sound even stronger as “BRICS”, the S standing for South Africa.

These nations stand out as different from the other emerging nations primarily because of their rapidly rising populations (except Russia which actually faces a decline), high growth rates as compared to the developed nations and most importantly their newly found economic dynamism. There is no doubt that these five emerging nations have done pretty well for themselves in the first decade of the 21^st century and still continue to do so, albeit at a comparatively slower pace. They also share a more or less similar timing at which they started on this rapid rise. Russia adopted market based capitalism after the fall of its predecessor state – The Soviet Union in 1991, China really picked up its already liberalized market to a pace of progress previously unheard of after the Tiananmen Square massacre of 1989, India let go of its self-imposed shackles after the Balance of Payments crisis of 1991, Brazil re-structured itself after the currency crisis of the early 90s and South Africa was finally accepted back into the international fold after the end of apartheid in 1994.

Despite so many common factors and similar historical incidents shared by these nations and the escalation of their impression as an “emerging” power bloc on the world stage to counter the historical dominance of the western powers the BRICS countries still remain a loose and ragtag sort of coalition of nations brought together by global media hype rather than common interests. This weakness was evident when these countries were unable to come to a consensus on nominating a candidate for the presidency of the World Bank, a position on which America’s hegemony reigns supreme.

At a recent BRICS summit in New Delhi, the BRICS leaders made a call for a new BRICS bank which would aid development in these countries as well as other poor nations of Asia, Africa and Latin America. This announcement rekindled media speculation about the BRICS emerging into a power bloc to counter the west.

In my opinion, this is more wishful thinking than anything else. Let us go a bit deeper into the actuality of this situation and forget the media hype for some time.

First, let us consider the basic definition of a power bloc. A power bloc is basically an association of nations that project their combined political, economic (and in some cases even military) power as a single unifying force in order to achieve a common advantage. By this metric US-NATO and the former Warsaw Pact nations of the Eastern Bloc can be considered to be power blocs. Another property shared by most power blocs is that most nations in these blocs are neighbors or in the same region. Bloc members have intertwined economic interests, similar cultures and very little (if any) internal animosity amongst themselves. Moreover, a power bloc generally has only one (or rarely – two) major power leading the rest. The US-NATO relationship has the USA has the major power and the Warsaw Pact was led by the erstwhile Soviet Union. All these features are clearly absent in the BRICS at this point of time.

I agree that the manifold increases in bilateral trade amongst the BRICS have brought about an unprecedented integration of these economies compared to say 20 years ago. But, the level of integration in terms of economic interests is still not mature enough. Each of these countries has extremely distinct cultures and “ways of life”. Each nation is in geographically diverse regions in the world (even though India and China and China and Russia share common borders they are in distinct geostrategic regions of the world).

With the difference in geostrategic regions come differences in geostrategic and long term interests. For example, Brazil would not be too keen or interested in the solution to the India-Pakistan Kashmir dispute, nor would Russia be too interested in increasing racial harmony between blacks and whites in South Africa.

Another impediment to closer integration would be internal disputes between bloc members. Classic cases within BRICS include the Siachen and Arunachal Pradesh border issues between India and China and the mini Cold War going on between Russia and China about the “Great Game” in Central Asia which has historically been Russia’s backyard but now is slowly becoming China’s. Inevitably, such conflicts of national interests supersede the supranational interests of a BRICS body if it would ever come into existence. China would definitely not be happy (or agree) with India’s application for a loan to build infrastructure in Arunachal Pradesh which China considers its sovereign territory. Issues over Tibet would assume similar proportions on the supranational scene.

At the other end, if these countries do become somewhat idealistic, rise to the challenge and think long term the BRICS Bank could actually become a tremendous step towards development throughout the world and actually have a shot at challenging western dominated global institutions like the World Bank and IMF. The development of such a body would also shoot countries like India and Brazil which (rightly) deserve a permanent berth at the UN Security Council to their goal in the right direction. A BRICS bank would also increase by leaps and bounds the social, political (and even military) integration of these nations on an unprecedented scale. A BRICS bank would also facilitate to shift the dependence of developing nations worldwide from the US Dollars to something like a basket of BRICS currencies.

For all this to happen, disparities in economic conditions have to be reduced to a point where such a structure is actually feasible. Brazil, Russia and South Africa are middle income nations in terms of per capita GDP whereas China and India are middle income countries at best. Brazil and Russia are net commodity exporters whereas India and China import the same commodities in large quantities. Synergies between such situations can also be engineered, but for that to happen a lot of political courage is required on part of all these countries. Sadly, political courage is lacking everywhere these days.

To summarize, conventional wisdom is against the formation of a BRICS bloc or a BRICS bank, but if it indeed does materialize, then we can look forward to a golden era of integration between these countries which ultimately benefits its citizens the most. For nearly 40 percent of the world’s population, that would not be a bad deal.

Mitul Choksi

23-April-2012

An Amateur Economist's Solution to the Euro crisis

It now seems to be every other week that we see a coordinated crash in various stock, currency and commodity markets around the world with various indices ranging from the Nikkei, Dow Jones, Hang Sang and FTSE to the quaint Baltic Dry Index (a shipping index) blinking in red while only occasionally treading towards the greener side. People of all sorts from different trades ranging from stock market "analysts" to self proclaimed investment gurus, pundits and even politicians routinely parade the screens of news and business channels, screaming for their views to be heard on the latest cause of the recent crash.

It turns out, there is a pattern to these market crashes and screaming analysts on TV. They've mostly been about the looming crisis in the 17 member Euro zone. Besides baffling me at times, it also makes me a bit upset on seeing this same pattern keeping on repeating due to reasons as quaint as the Greeks asking for political leeway for making the latest round of cuts to get their next bailout fund of a few billion Euros to the fear of what might happen if the Spanish worker's union call a strike to protest against a small change in their country's horrible labour laws. While analysts and pundits have an opinion on what might happen if the strike lasted too long or what if the Greeks opted for a referendum on some trivial issue, it seems no one has an answer to address the main problem - whether the Euro zone will survive as it is today or eventually break up into some washed up, has been currency union of a few northern European rich countries.

Most analysts, the media and even most governments shudder to even think much less discuss the possibility for an exit of Greece (or by extension Portugal, Ireland and Spain) from the euro zone. The reason for this fear is the perceived chaos resulting from such an exit.

In the event of an exit of even one country from the euro zone I agree, there would be chaos. But the thing to ponder about is whether the chaos and breakup will bring result into a stronger euro zone in the future or herald in a European "financial nuclear winter" that will throw the continent into a decade long depression and the rest of the world into a more severe version of the Great Recession.

Lets be clear on one thing before I get to the core of this post. The trillions of euros worth of financial engineering being tried by the European Central Bank (ECB) to recapitalize European banks and the creation of a European "Super Fund" of roughly Euro 500 Billion to act as a financial firewall in case of a severe financial storm is hardly enough to defend European finance ,if indeed a member country like Greece decided to (or forcibly had to) exit the euro.

As a self proclaimed amateur economist, I have come up with my own little scenario of what it would be like if Greece did indeed exit the euro zone.

• A surprise announcement is made by the Greek government over a weekend about its decision to exit the euro starting the coming Monday.
• A new rate of exchange is declared of the new Greek drachma against the euro. The new exchange rate is devalued immediately against the euro and other major currencies.
• All bank deposits are renominated from euros to the new drachma
• Tight capital controls are introduced to stop the outflow of money outside the country
• The Greeks use existing euro notes rubber stamped as a temporary hard cash equivalent to the new drachma until the new drachma notes are brought into circulation. The rubber stamped euro notes are swiftly phased out
• Strict border checks are imposed to restrict the outflow of unstamped euro notes outside the country
• Banks and financial institutions are given time to update their software in order to phase in to the new drachma

While this plan sounds simplistic enough, it would take a tremendous amount of political courage to implement it. It would also face a lot of challenges once its implementation is started.

• The implementation of this plan will almost immediately lead to severe financial chaos, rise in crime and bankruptcies.
• Legal nightmares will obviously follow
• Entities involved in cross border transactions will face a great deal of uncertainty (read: losses) as the values of their assets and liabilities would severely fluctuate.
• The introduction of a new currency would raise doubts of not only Greece's ability to borrow from the international markets but also severely affect the borrowing capacity of strained euro zone economies like Portugal, Italy, Spain and Ireland.
• A loss of confidence in the euro due to the Greek exit would start a scramble for other relatively "safe" currencies like the US Dollar, Swiss Franc and the Japanese Yen as holders of the euro dump it in favour of these currencies. As most global trade is invoiced in US Dollars, the fluctuation in the dollar's exchange rate could cause severe exchange losses to global exporters and importers sending an already weak global economy into a tailspin.
• The most dangerous outcome of this entire ordeal would be the rise of a new question - Is the euro viable?

That question comes with a whole Pandora's box of its own challenges which are not under the scope of this post. If another country like highly troubled Portugal or Ireland left the euro, then it would certainly be curtains for the euro "as we know it" and the start of a global depression. Whether the euro would survive as a rich country (mainly northern European countries including France, Germany, Netherlands, Belgium Luxembourg, Austria, Finland and eastern European countries including Slovakia and Slovenia) currency union

Its amusing and scary at the same time to think that a country like Greece with 2% of the euro zone's GDP can hold the financial stability of the planet at ransom! It is also a lesson for future economists and planners who fathom of creating a common currency anywhere else in the world. Nevertheless, the danger Greece poses is absolute and true. Lets hope that the analysts, media and governments come to realize that and shake their legs.

Mitul Choksi

April 8, 2012