BRICS without straw, or the building blocks of a New World Order?
The Brics bank is likely to be the only real deliverable to emerge from this week’s five-nation summit in Durban and the city’s flagpoles are festooned with messages of welcome from international audit and financial advisory services companies. Delegate packets are stuffed with their material. However, with so much about the proposed bank still up in the air, including its location, by the end of the first day, South African officials admitted that the announcement of the bank will actually only be a document stamped “details to follow”, someday. One thing the bankers and their sidekicks will have picked up on, though, is that, unlike South Africa, China is speaking the Wall Street language of investment and support for SMEs as the generators of jobs and economic growth. By J BROOKS SPECTOR.
Just as the Brics summit was about to begin, one of the author’s friends, an African businessman from KwaZulu- Natal, sent an email note deliberately scrambling the letters in the Brics acronym – turning it into Cribs instead, thereby channeling widespread cynicism by many about the motives of the grouping’s largest member in its growing entry into Africa. In this note, he argued this altered letter order much more accurately reflected the ranked importance and heft of the delegations now gathered in Durban for this two-day, five-national- leaders summit – as well as whose will may eventually prevail over the only really contentious issue at the meeting. That, of course, is where the proposed Brics development bank will end up being headquartered, once all the dust is settled and all the pushing, shoving and backroom dealing is finished.
Back at the beginning, Brics was just a Bric – and rather than originally being an initiative of any of its eventual member nations, it was actually the inspired marketing ploy of someone in the investment banking firm, Goldman Sachs. This acronym was first imagined by Jim O’Neill in his 2001 paper, “Building Better Global Economic Brics”, as a way of describing an historic shift in global economic power – but also as a way of focusing attention on one of Goldman Sachs’s key businesses – selling investment opportunities in a collection of quickly growing emerging market economies. His clever acronym stuck and that, in turn, gave an impetus to some thinking among the national political leadership of those four countries – Brazil, Russia, India and China – as they sensed a geopolitical opening to help drive more global attention – and respect – towards their growing international impact.
Then, several years later, after some serious lobbying and importuning by South Africa to be allowed to play with the big boys, and with strategic support inside the grouping from China, South Africa was invited to join the party. This was despite the lack of parity in population terms on the part of South Africa, as well as a major imbalance in the size of its economy, relative to that of the other players. Following this successful push, this year has become South Africa’s turn to host the meeting of the heads of government from the group’s member states. Taking the initiative that comes with being host and chair, South Africa decided it would also invite the various multilateral economic clubs in Africa like The Economic Community of West African States (Ecowas) and the Southern African Development Community (SADC), as well as over a dozen presidents from Africa. This is in order to provide a way of helping convince the other nations on the continent that South Africa is in Brics on behalf of the whole continent – not just for its own benefit.
Prior to the actual summit meetings, the larger gathering has brought together hundreds of technical experts and observers who have attended the all-day business forum on various big picture economic themes with speakers from each of the five members of the group. Key among them have been how best to improve minerals beneficiation, improve infrastructure investment and spending, and generate ideas about how to nurture financial innovations and reforms – all for the edification of all those state bankers, development advisors, investment analysts and general do-gooders.
The former theme, fitted in with the South African government’s publicly expressed interest in finding ways to goose the country’s declining share of the world minerals trade up the value chain and thus simultaneously reverse the country’s worrying and ongoing deindustrialisation. The finance theme was a kind of code for how best to gain a larger share of the global financial services sector, improve financing for SMEs, and, concurrently, channel more investment flows into Africa through South Africa, under the summit’s theme, “Brics and Africa: Partnership for Development, Integration and Industrialisation”. In support of that theme, South Africa exercised the prerogative of the chair and invited representatives of the various regional economic groupings on the continent such as Ecowas and SADC, as well as some 15 African heads of state, including leaders like Egypt’s Mohamamed Morsi.
Before coming to this year’s gabfest, the writer spoke with a banker friend in Johannesburg who had advised that the key to the real meat, if there was to be any, would be made clear from who paid for advertising, put up their banners or provided giveaway items. Given the certain focus of this summit on the proposed Brics development bank, not surprisingly, then, international audit and financial advisory services companies like Ernst and Young and DeLoitte’s dutifully had their stuff put into the delegate packets and flying from flagpoles – even though the city itself seemed curiously devoid of any evidence of welcome for this event or its putative importance for the country.
As it seems now, the Brics bank would end up being the one real deliverable to come out from this meeting. However, by the end of the first day, while South African officials were saying there was agreement on creating the bank, they also admitted the announcement of this bank will actually only be a document stamped with the phrase “details to follow”, someday.
While details will be scarce, one other wrangle in the preliminary negotiations and discussions over this bank has been where it will actually be headquartered. Not surprisingly, the Chinese have been pushing for Shanghai, the Indians for Mumbai, and the South Africans for Johannesburg. Given that neither the Russians nor the Brazilians can really make a strong case for housing it, those two countries would hold the deciding votes. Smart money now seems to say the result will either divide up the functions of this bank to two locations, or, what is now more likely, create a kind of virtual institution located everywhere and nowhere. That, of course, will make its viability and management even more complex than the creation of a brand-new multilateral financial institution would ordinarily be.
The way some of its proponents have been making the case for the bank, this new institution is an inevitable and natural reaction to the ancient dead hand of the Bretton Woods financial institutions created at the end of World War II – and still heavily reflective of the old political and economic universe that was true nearly 70 years ago – just like the UN. Many proponents also argue that those multilateral financial institutions insist on the crippling hand of conditionality – a proposition that handcuffs borrowers, forcing them to shrink government welfare programmes, cut state salaries, and institute ruinous privatisation of government services. From that perspective, the posited Brics bank could operate liberated from those conditionalities and thereby lend with a social conscience as well as an eye for economic – and especially job – growth.
The problem with this reasoning may well be that no bank can truly hope to maintain an adequate return on its investment so as to generate future funds for new investment and lending without conditions. Otherwise it would quickly end up with a depleted principal. Moreover, such a bank would be that much more pressed to lend for political purposes and prestige projects in political deals that might not be economically viable. Further, there is concern that even raising the initial start-up capital would be a huge strain on a small nation like South Africa and it could well divert scarce state funds from other more urgent national priorities. While no one expects its initial capitalisation to be $50 billion/nation any more, even the more modest target of $10 billion could be a bridge too far for Pretoria. As an aside, while one of the ostensible purposes of the bank is to facilitate the use of other currencies from Brics nations in place of the dollar, it is interesting to note that all calculations for the bank have still been made in that same dollar.
Yet others question the actual utility of such a bank for African development, noting that many corporations in South Africa are already cash flush and their real problem is concern for the political conditions that would impinge on potential large, long-term investments. Moreover, the Chinese clearly have large – and growing – cash reserves, but have similarly chosen for the most part, so far, to engage in trade (in basic commodities leaving Africa and manufactured goods into the continent’s markets) or big ticket aid programmes, rather than large-scale investments in Africa.
Shortly before the summit was to begin, the Wall Street Journal commented: “Investment among Brics countries remains marginal even as they increase their share of global investment flows, despite the buzz about burgeoning commercial ties between big emerging economies, a report by the United Nations Conference on Trade and Development shows. Monday’s report comes just ahead of a Brics summit that kicks off in Durban, South Africa, on Tuesday. Leaders from Brazil, Russia, India, China and South Africa hope to find ways to counterbalance Western influence in the global economy, in part by swapping their currencies more efficiently and establishing a development bank to extend their influence in emerging markets... But these countries are still trading far more with developed nations and with their neighbours than with each other, according to Unctad’s report. ‘For the time being these countries are not major investors in each other’s economies,’ said James Zhan, director of Unctad’s investment and enterprise division and an author of the report.”
Thus, what pressures would lead China to reverse course in a major way? In fact, in Xi Jinping’s first Africa stop on the way to Durban, the newly confirmed president of China promised to invest more heavily in Africa’s development, although, as noted by the author’s own Durban businessman friend, some complain China is just trying to exploit the region’s oil and coal to strengthen further its industrial might. When Xi arrived in Tanzania the other day, he told the country’s leaders Africa is a place of “hope and promise [and] the sincere friendship of the African people toward the Chinese people is as warm and unforgettable as the sunshine in Africa.” Sound economic?
That, of course, points to the fact that while much of the Brics rhetoric is phrased in economic and financial terms, the primary impetus may well be political. Some analysts such as Petrus de Kock, research director for Brand SA, concede as much, but add that those political imperatives will, over time, enforce growing attention to the longer term economic benefits such a grouping can generate.
Curiously, while many of the South African speakers in the business forum events seemed to be arguing from a playbook first hatched back in another age with its reliance on state intervention and government direction, the Chinese speakers seemed to speak the Wall Street language of investment and support for SMEs as the generators of jobs and economic growth. In fact, banking and mining executive Rick Menell argues that for just such a reason, closer connections between South Africa and China could actually provide important intellectual competition to long-held ideas in the economic sphere. Now who would have thought such a thing would ever happen? DM
- Brics Investment in Own Bloc Is Limited, Report Shows in the Wall Street Journal
- China’s Xi vows to invest in Africa’s development at the Des Moines Register> BRICS Raises South Africa’s Profile as Economic Gateway at the VOA website
- Africa and China - More than minerals at the Economist
Photo: South African President Jacob Zuma (L) greets Russian President Vladmir Putin before their bilateral meeting the 5th BRICS Summit in Durban, March 26, 2013. REUTERS/Rogan Ward