BRICS is not about economics

The meeting this week is little more than a rumble in the jungle

This week South Africa will host the BRICS summit at the Sandton Convention Centre. BRICS is a coalition of five emerging economies – Brazil, Russia, India, China and South Africa – that hopes to ‘challenge Western hegemony’ or, simply put, the perceived dominance of the US and Europe. And it is attracting interest from other emerging markets: 22 countries have formally asked to join, including Argentina, Bangladesh, Nigeria and Saudi Arabia. Several more have informally expressed interest.

But step beyond the rhetoric of challenging Western hegemony, and there is little agreement on how to get there. Each country seems to be agitating for its own economic interests, often leading to diverging strategies and goals. The lack of cohesion highlights the complexity of forming a unified approach among nations with varying economic structures, political ideologies, and regional concerns.

Take the hosts, South Africa. Last week, Minister of International Relations & Co-operation Naledi Pandor stated the issue of trade deficits would be high on South Africa’s agenda: ‘South Africa continues to have a deficit in its overall trade with BRICS countries. The urgent need for trade diversification [remains] as primary products continue to be the largest share of exports.’ Some concur with her. UCT Graduate School lecturer Steven Kuo also sees a potential opportunity in our BRICS role: ‘We should make lemonade and focus on leveraging our BRICS membership to open up markets to SA products.’

But here’s the thing: tackling trade deficits is not exactly equivalent to making lemonade. Let’s begin by stating the obvious: global supply and demand forces, along with exchange rates, are intricate and challenging to manage. Interconnected economies mean that efforts to reduce a trade deficit, possibly through changes in domestic consumption or production, can lead to unintended consequences, such as inflation or unemployment. And any attempt to open markets would require us to reciprocate with lower import tariffs, further increasing competition in the local market and increasing the trade deficit.

In any case, much of South Africa’s current economic problems, including the trade deficit, are self-created and are deeply tied to structural factors within the economy. These encompass issues like poor infrastructure, marked by electricity blackouts, the unreliability of rail transport, and inefficient ports. Any meaningful effort to reduce the trade deficit would likely require a comprehensive strategy targeting these underlying structural problems, a task fraught with complexity and potential political resistance.

The most ambitious economic policy initiative, however, is the idea of a new currency for members. The plan would be to use it – the BRIC (?) – for cross-border trade by BRICS member states and those affiliated to it, avoiding the dependence on major Western currencies like the U.S. dollar or the Euro. This, according to its proponents, could enhance financial autonomy and foster closer economic integration among the BRICS nations, potentially reducing vulnerability to global financial fluctuations.

Some find it an intriguing idea. In an April article of Foreign Policy, Joseph Sullivan, staff economist at the White House Council of Economic Advisors under Donald Trump, noted:

However early plans for it are, and however many practical questions remain unanswered, such a currency really could dislodge the U.S. dollar as the reserve currency of BRICS members. Unlike competitors proposed in the past, like a digital yuan, this hypothetical currency actually has the potential to usurp, or at least shake, the dollar’s place on the throne.

But many – and let me stress here many – economists disagree. Lord Jim O’Neill, for example, the Goldman Sachs economist who coined the BRICS acronym, dismissed it recently as ‘ridiculous’ and ‘embarrassing’. Why?

It’s Economics 101 stuff, really. A successful currency union requires a solid and stable underlying economic structure. The member countries must have similar fiscal policies, inflation rates, and economic cycles to prevent imbalances within the union. Granted, the variation in some macroeconomic variables has fallen over recent decades, as the figure below on inflation demonstrates.

But a currency union requires much more than low volatility. Reckless spending in one country has to be prevented through coordinated fiscal policies and adherence to agreed-upon fiscal rules. Centralised monetary policy must be aligned with the diverse needs of the member states, and there must be mechanisms in place for fiscal transfers to mitigate asymmetric shocks.

And there’s more. Another second vital component is a robust legal and institutional framework. An effective central bank, clear rules for fiscal policy coordination, and an efficient system for resolving disputes are necessary for smooth functioning. Financial integration that allows the seamless transfer of capital and savings across the member states is essential. This financial integration helps absorb shocks and aids in risk sharing among member states, making the union more resilient to economic downturns.

Finally, political will and public support underpin a successful currency union. Member states must be committed to ceding some national control over monetary and fiscal policies and adhere to the rules that govern the union. Trust and solidarity among member countries, as well as popular support, facilitate the difficult decision-making processes that are sometimes required.

The problem is: BRICS fulfils none of these criteria. An unspoken truth about BRICS is that member countries’ GDP per capita are diverging from one another, not converging. As I write in Our Long Walk to Economic Freedom, to see how far South Africa has fallen, compare the country’s performance with its more famous BRICS partners:

Between 1994 and 2018, it is only Brazil, at 2.1 %per cent per annum, grew at a slower pace than South Africa, at 2.9% per cent. Russia (4.4% per cent), India (4.7% per cent) and China (5.4% per cent) experienced rapid catch-up growth. China’s GDP per capita, as recently as 1990, was half of South Africa’s; by 2016, China was richer on a per capita basis.

I noted that South Africa’s poor economic performance, especially in the 2010s, raises questions about its inclusion in BRICS. Nigeria, the largest economy and most populous country on the African continent, achieved 4.5% per cent growth between 1994 and 2018. Perhaps BRINC is a more appropriate acronym.

The best outcome for South Africa at the BRICS summit this week is a big party for like-minded political leaders and bureaucrats that temporarily boosts our tourism statistics. The worst outcome would be that our one institution performing remarkably well – the South African Reserve Bank – is usurped into a proposed currency union with little regard for our context. Perhaps someone should leave complimentary Economics 101 textbooks on the Convention Centre tables.

An edited version of this article was first published on News24. Image created with Midjourney v5.2.