New Delhi: The five emerging economies under the BRICS umbrella on Thursday, aware of their growing global stature, offered the most audacious challenge to the old economic order by proposing to trade among themselves in their local currencies.
Not only will it reduce trade transaction costs, it will, if implemented, most certainly challenge the domination of the dollar in global trade, besides reasserting the economic clout of the BRICS grouping of Brazil, Russia, India, China and South Africa.
BRICS accounted for 25% of the world’s gross domestic product (GDP) in 2010 and had a 15% share in global trade the same year. While intra-BRICS trade stood at around $230 billion (around Rs11.75 trillion today) in 2011, the member countries are targeting $500 billion by 2015.
Cementing ties: (From left) Brazilian president Dilma Rousseff, Russian president Dmitry Medvedev, Indian Prime Minister Manmohan Singh, Chinese president Hu Jintao and South African president Jacob Zuma at the fourth BRICS Summit in New Delhi on Thursday. Photo: Ramesh Pathania/Mint
The head of states of Brazil, Russia, India, China and South Africa also maintained the position adopted by their trade ministers on Wednesday that they will only abide by United Nations sanctions and not the unilateral sanctions imposed by the US and the European countries, which assumes significance in relation to Iran and its nuclear activities.
As a part of the Delhi declaration, the BRICS countries signed an agreement to promote trade in local currencies among themselves with the aim to reduce their dollar dependency and protect themselves from the high volatility of the US currency and conversion charges.
However, trading in local currency will be carried out only through the state-owned development banks such as the Export-Import Bank of India.
The agreement is intended to “reduce the demand for fully convertible currencies for transactions among BRICS nations, and thereby help reduce transaction costs of intra-BRICS trade,” a joint statement said.
“This will surely reduce the importance of the dollar and improve trade volume among BRICS countries,” said Biswajit Dhar, director general of Delhi-based think tank Research and Information Systems for Developing Countries. Dhar said this may increase India’s exports to China as rupee payments against huge imports may encourage China to import more from India.
Ajay Sahai, director general of the Federation of Indian Export Organisations, said the new system will gradually gain ground and would initially benefit large exporters. “If you do not want to speculate, you will trade in local currency. Exporters of projects and engineering goods will initially benefit from the move,” he added.
Ma Zhaoxu, China’s assistant foreign minister, talks about President Hu Jintao’s talk at the BRICS summit in Delhi and the possibility of creating a new development bank.
The countries also signed a “multilateral letter of credit confirmation facility agreement”, through which BRICS banks aim to provide credit guarantee for their neighbouring countries, thus reducing transaction costs for exporters who currently depend on US and European banks for such guarantees.
The BRICS nations also “considered” the possibility of setting up a new development bank for mobilizing resources for infrastructure and sustainable development projects within the bloc and in other emerging and developing countries to “supplement the existing efforts of multilateral and regional financial institutions for global growth and development”.
The Delhi declaration said the heads of states have directed their finance ministers to examine the feasibility and viability of such an initiative and set up a joint working group for further study, and report back by the next summit to be hosted by South Africa.
Dhar said the proposed development bank could one day challenge the Bretton Woods institutions, the World Bank and the International Monetary Fund (IMF).
“By this, BRICS countries are asserting that they can take leadership in generating funds,” he said.
Chinese president Hu Jintao said in his speech, however, that the proposed institution would supplement rather than replace existing multilateral and regional financial cooperation mechanisms.
“The goal and the function of the new development bank will be primarily to provide support to BRICS countries and other developing countries in their infrastructure development projects and sustainable development projects,” he said.
Luo Zhaohuiof the Chinese foreign ministry’s Asian affairs department says India and China are making progress on their border issue.
BRICS countries said in the Delhi declaration that they are concerned at the slow pace of quota and governance reforms in IMF and urged the institution to comprehensively review the quota formula “to better reflect economic weights and enhance the voice and representation of emerging market and developing countries” by January 2013.
Even as the BRICS nations failed to put forward a consensus candidate for the upcoming election for the post of World Bank chief, they maintained that they “welcome candidatures from the developing world for the position”. “We reiterate that the heads of IMF and World Bank be selected through an open and merit-based process,” they said.
The leadership of IMF and the World Bank has, by tradition, been controlled by the Europeans and Americans, respectively. While France’s Christine Lagarde heads IMF, the US has proposed the name of the South-Korean born Jim Yong Kim for the position of World Bank chief.
The BRICS countries said the yet-to-be-elected World Bank chief “must commit to transform the bank into a multilateral institution that truly reflects the vision of all its members, including the governance structure that reflects the current economic and political reality”.
Urging the advanced economies to adopt responsible macroeconomic and financial policies and to avoid creating excessive global liquidity since it inflates commodity prices and makes capital flows volatile, the BRICS countries advocated further international financial regulatory oversight, reform and the strengthening of policy coordination.
The Delhi declaration also focused on major geopolitical problems confronting the world with deep implications for the global economy. The proposal to discuss political issues at the BRICS Summit was made by Russia during the group’s third meeting hosted by China in Sanya last year.
“We recognize the vital importance that stability, peace and security of the Middle East and North Africa holds for all of us, for the international community...we wish to see these countries living in peace and regain stability and prosperity as respected members of the global community,” the Delhi declaration said.
Regarding Syria and Iran, over which members of the BRICS grouping have found themselves at variance with the West, the declaration said members states had expressed “concern” at the current situation.
On Syria, where the United Nations estimates some 9,000 people have been killed in violence between anti-government protesters and Syrian government troops for more than a year, the declaration called for “an immediate end to all violence and violations of human rights”.
The interests of all would “best be served by dealing with the crisis through peaceful means that encourage broad national dialogues, which reflect the legitimate aspirations of all sections of the Syrian society and respect the Syrian independence, territorial integrity and sovereignty”.
On Iran, the declaration said the situation “cannot be allowed to escalate into conflict, the disastrous consequences of which will be in no one’s interest. Iran has a crucial role to play for the peaceful development and prosperity of a region of high political and economic relevance”, it said, adding that BRICS nations recognized “Iran’s right to peaceful uses of nuclear energy consistent with its international obligations”, but supported “resolution of the issues involved through political and diplomatic means and dialogue”.
Former foreign secretary Lalit Mansingh noted that the Delhi declaration “has a lot more on political issues” than previous summits. “The statement is balanced, it is not confrontational, though the comments on Iran seem to be at variance with the Western portrayal of Iran,” Mansingh said, referring to the section of the declaration that speaks of a “crucial role” for Iran within the region.
“BRICS is a young organization and its role is evolving, and in that context, the declaration has references to other issues of importance to member countries,” he said.
Dhar said the strong language used in the Delhi declaration is reassuring. “By this, BRICS is telling the world that we can work together and have a commonality of view. This is a very powerful message,” he added.
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