Are Brics states ready to unleash their growth potential?
If they can rise above political differences and see the advantages of cooperation, they might yet validate Goldman Sachs’s 2001 vision
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Brics: The very word has such a good feel. In one of those experiments where they map areas of the brain which light up in response to various stimuli, I am sure the word “bricks”, like sun-dappled, lights up the happy areas. It has that constructive association, with building and improvement, and structures that keep out the rain.
Bric in singular, which is what it started out as, was an invented country grouping of the research department of Goldman Sachs in 2001—Brazil, Russia, India and China. With the bursting of the dot-com bubble, the ground was fertile for creating a new group of large economies and investing it with the responsibility of powering growth in a globalized world. It became Brics with the inclusion of South Africa 10 years later.
That initial vision projected economic pre-eminence for the group over a horizon of 50 years. We are only 15 years into it, but from this vantage point, the vision looks decidedly askew. What did the initial four in 2001, or the five today in 2016, have in common other than the fact of being large and federally governed? But the anointed countries took the grouping sufficiently seriously that they formalized it in 2006. After the global crisis of 2008 which gave it a further sense of its own importance in pulling the world out of recession, annual Brics summits were convened. In October, India hosted the eighth annual summit.
How well are the Brics countries poised to unleash their growth potential through providing economic opportunity for all? For this, the best measure, with all its limitations, is the World Bank’s Ease of Doing Business (EDB) rankings. The 2017 edition of this annual exercise has just come out. It assigns to each of 190 countries an index value configured as an average across 10 constituent indicators. These include time taken to get construction permits and electricity connections, procedural issues with paying taxes and such. The World Economic Forum’s Competitive Index by contrast encompasses far too wide a range of indicators to be useful.
The 2017 edition shows very little change from 2016 in the relative standing of Brics countries. The media coverage focuses on rankings, but what matters is the index value itself. For each of the 10 constituent indicators, the distance to frontier (DTF) score is obtained for each country as a percentage of the distance from the worst to the frontier. Of the Brics five, Russia shows the highest improvement in its index value relative to 2016 (but interestingly is not marked with an upward arrow in the summary table!). The index value for India has improved by roughly 0.6 over last year. It has to be remembered that even if a country stays where it was on a particular indicator, its DTF index could change if the performance of the worst country changes (the frontier is revised only once every five years).
As things presently stand, the Brics span goes from Russia at an overall index value of 73.19 to India at 55.27, with South Africa (65.20), China (64.28) and Brazil (56.53) in between. The relatively low value for China is a bit of a surprise. Hong Kong is listed separately and is of course somewhere near the top.
The limitations of the index are well known—the confinement of data collection to the largest city in each country, or in countries of Brics dimensions, the two largest cities. But the much more serious limitation is that each constituent indicator is measured by the median or modal duration between application and receipt of permit, as assessed by knowledgeable people. The principal structural problem in India is that the dispersion around such a median is very high on the upside.
The evidence for this is clearly visible in the evolution of banking regulation over the last few years. In any loan contract, the date of commencement of commercial operations (DCCO) marks the date from which servicing of the loan is scheduled to commence. In May 2013, when the definition of non-performing assets was tightened with a forward effective date of 1 April 2015, regulatory forbearance of DCCO delays on account of failure to get the requisite permits was actually extended at the same time, by up to two years. These are delays beyond the expected date of getting starting permits.
Staying with the median measure, with all its limitations, what is interesting is that the relative positioning of the Brics five shifts between the 10 constituent indicators. India has the highest DTF index value for protecting minority investors within Brics, and surprisingly, for getting electricity connections. The shifting rankings within Brics between indicators suggests a promising field for mutual consultation and learning.
For any kind of deep structural cooperation between member countries, Brics needs to set up working groups which would meet sequentially in the different countries, and take on board the particular issues needing redressal in each within a particular sector. Instead, the Brics meetings have degenerated into the usual content-free official exchanges, with some sectoral meetings but in a conference format with very little to take away in terms of specifics.
When the Brics idea first took shape, I was actually in favour of it. At the time of its formation, there was no G20, only G8, and I saw it as recognition of the importance of wider global partnerships. It was not a free trade group, which was refreshing because it indicated intent to develop other avenues of mutual economic assistance. There have indeed been some positive moves in that direction.
There is the New Development Bank (NDB) for infrastructure lending, with a focus on renewable energy. Headquartered in Shanghai, it started operations in July 2015 under the chairmanship of K.V. Kamath, who has a record of dynamism in the Indian banking sector. It has made an initial set of project loans in all five member countries, and has successfully concluded a bond flotation in the Chinese market.
There is also a Brics currency reserve arrangement amounting to $100 billion, operationalized in July 2015. Access for members to short-term liquidity to tide over external crises is defined at the amount of capital contributed, less for China, more for South Africa. This too is an important initiative. But both this and the NDB are too recent to look for impact.
The proposals before the eighth summit just held in Goa were very promising. One was to create a new Brics credit rating agency, a much needed element of competition in the sovereign rating space. The other was for cooperation between the national Export-Import banks of the five countries and the NDB, which could have augmented infrastructure loans with trade finance for construction exports.
These excellent Indian initiatives might have been made earlier and progressed faster if bureaucratic responsibility for Brics were differently housed in India, in a group including the NITI Aayog and the department of economic affairs of the ministry of finance instead of just the ministry of external affairs. But located as it is, the Brics formation is viewed in diplomatic terms. The latest summit declaration of group solidarity in the battle against terror may have carried some signalling value, but what it can deliver is uncertain given the funding patterns for terror. Any heft such a message carries can only emanate from the combined economic might of Brics, and more importantly, evidence of economic cooperation within the group.
Russia, politically the dominant member, shows no indication of being interested in any form of group identity with other countries in defining its global presence. Its focus seems confined to restoring the geostrategic pole that was lost with the disintegration of the former USSR. Russia seems more interested in bilateral deals with individual members of Brics, especially if they include a defence equipment purchase component, rather than in the group itself. Even though Russia is now in an oil-induced recession, this is a temporary blip in a country that has robustly survived its transformation from a socialist to a market-based economic system, and going by the EDB exercise, has surpassed many countries with longer traditions of freedom to engage in markets.
China is far and away the dominant member in economic terms, and will remain so for the foreseeable future. It is madness to cite the recent crossing of the Indian growth rate above the Chinese as evidence in any sense of the loss of China’s economic dominance. Alarmists might speak of the imminent collapse of the Chinese financial sector owing to runaway local government fiscal deficits, or point to its performance on the EDB index as evidence of structural infirmity. But the many decades of high investment in physical and human capital have given China an unsurpassed asset base in infrastructure, energy, health and education, everything needed to power the economic engine. The physical infrastructure is visibly in place, even if some of it is in vacant unoccupied housing. China prowls the world in search of raw materials, seemingly unfettered by any sense of group identity or obligation to Brics.
At the same time at which the Brics NDB was started, China spearheaded a parallel Asian Infrastructure Investment Bank (AIIB) with roughly the same size of authorized capital and much wider country membership extending well beyond Asia. But the sectoral focus of NDB on renewable energy differentiates it from AIIB, and gives it a more progressive colour.
If the country members of Brics display the statesmanship needed to rise above political differences and see the advantages of mutual cooperation, the club might yet validate that 2001 vision of the Goldman Sachs research department.
Indira Rajaraman is an economist.