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The outcome of the 1st BRIC Summit: a derelict zero

Sushovan Dhar The first-ever summit of the BRIC1 countries took place at Yekaterinburg at Russia on 16th June 2009 calling for a more diversified international monetary system. The core focus of the meeting, attended by President Dmitri Medvedev of Russia, the Indian Prime Minister Manmohan Singh, Chinese president Hu Jintao and Brazilian President Luis Inacio Lula da Silva was to improve the current global financial situation, to discuss how the four countries could collectively work better in the future and to reform the financial institutions. At the end of the summit, the BRIC nations suggested the need for a new global reserve currency that is diversified, stable and predictable. Background BRIC encompass over 25% of the worlds land coverage, 40% of the planetary population and hold a combined GDP (PPP) of $ 15.445 trillion 2 which is 22.4% of global GDP. They are among the biggest and fastest growing emerging markets. These countries belong to the middle rung of the development ladder and the meeting ground is essentially their high GDP growth rate, explosion of the financial markets with rapidly rising stock markets, high recipient of Foreign Direct Investment, etc. China and India lead the pack in most of these aspects. The following table3 provides the BRIC positions vis--vis the other nations with a few macro-economic parameters: BRAZIL Total Area Population GDP (Nominal) GDP (PPP) Exports Imports Current Account Balance Received FDI

5th 5th 10th 9th 21st 27th 47th 16th

RUSSI A 1st 9th 8th 7th 11th 17th 5th 12th

INDIA 7th 2nd 12th 4th 23rd 16th 169th 22nd

CHINA 4th 1st 3rd 2nd 2nd 3rd 1st 5th

BRIC refers to the fast growing developing economies of Brazil, Russia, India, and China. The acronym was first coined and prominently used by Goldman Sachs in 2001.Goldman Sachs argued that, since they are developing rapidly, by 2050 the combined economies of the BRICs could eclipse the combined economies of the current richest countries of the world. 2 IMF, World Economic Outlook Database, Data for 2008. 3 http://en.wikipedia.org/wiki/BRIC#cite_note-5

Foreign Exchange Reserves External Debt Public Debt Electricity Consumption Number of Mobile Phones Number of Internet Users

7th 23rd 47th 10th 5th 5th

3rd 20th 117th 3rd 4th 11th

4th 27th 29th 7th 2nd 4th

1st 19th 98th 2nd 1st 1st

The Summit Held in the midst of this profound global crisis, this Summit was intended to be a space to officially announce the creation of this loose block. The summit was also organised at a critical juncture when the advanced industrial states which also forms the core of the imperialist order or the G8 is bereft of legitimacy. The typhoon unleashed by the neo-liberal project has resulted in a total deregulation of the financial markets and is wracking the globe in the form of simultaneous crises from global financial collapse to worsening climate changes. It is plausible that the BRIC leaders decided to intensify their efforts at a time when the foundations of the G8 domination seem to be trembling. Hitherto, their attempts have been all too sporadic, either at the negotiation table of the now derailed World Trade Organisation (WTO) or at the annual jamboree of the big business leaders as well as the rich and elite at the Davos World Economic Forum (WEF). The meeting aimed to face the reforms proposals in circulation or in the pipe-line; largely put forward by the developed countries - mainly represented by the G-7, in the wake of current crisis. As evident from the statements and deliberations, the purpose is not really to challenge the hegemony or to emerge as the new hegemons, at least in the immediate future. But to protect and secure safe places within the current hegemonic order, which is, however, far from absolute. The final statement felt a strong need for a stable, predictable and more diversified international monetary system. However, the summit spelt out nothing new or novel in any of its deliberations, discussions or declarations to provide a way out of the crisis or towards a new global political-economic order that can save humanity from this predicament. To the dismay of a lot of its admirers, who envision the BRIC or the Shanghai Cooperation Organization (SCO)4 as a strong bulwark against the US imperialism, the BRIC countries are following the same neo-liberal order which has immensely contributed to the instability, volatility and turbulence of the global economy. The monetary system which they critique so much has also been a product

The Shanghai Cooperation Organization (SCO) is an intergovernmental mutual-security organization which was founded in 2001 by the leaders of China, Kazakhstan, Kyrgyzstan, Russia, Tajikistan, and Uzbekistan. India, Iran, Mongolia and Pakistan enjoy observer status while Sri Lanka, Belarus and Afghanistan are dialogue partners.

of the capitalist order that values profit and accumulation above anything else. The phenomenal growth of the BRIC is due to its ability to entrench this capitalist order by firmly embracing the neo-liberal tenets. No wonder that they earn so much praise from Goldman Sachs whose thesis 5 recognizes that Brazil, Russia, India and China have changed their political systems to embrace global capitalism. Goldman Sachs predicts China and India, respectively, to be the dominant global suppliers of manufactured goods and services while Brazil and Russia would become similarly dominant as suppliers of raw materials6. Thus, the attempt to reposition BRIC on a global scale is essentially an endeavour of its rising capitalist class who have already cornered large chunks of their domestic markets and, are keen to find a larger share of the global pie. The bourgeoisie of these countries are desperately banking upon their states to act on their behalf either alone or collectively. It must be noted that the nation state has historically been a vehicle for capital to enforce the logic of the market, while covering its tracks with fine sounding phrases about social responsibility and patriotism. The Current State of Affairs Let us turn our attention to the recent state of affairs within the BRIC components. China The leading economic power of this group is in the strong grips of the current global crisis sending exports from the workshop of the world tumbling, thereby slashing its trade surplus. It is often said that when the West sneezes, Beijing catches cold. Exports in February dropped by 25.7% 7 from a year earlier, dwarfing forecasts of 5%. The trade surplus was only $4.84 billion - a three-year low - compared to $39.1 billion in January and a record $40.1 billion in November. That was far short of market expectations of $27.3 billion. The fallout is felt across the Chinese economy, resulting in the possibility of accelerated growth of unemployment and further slow down of consumption, despite a $586 billion 8 stimulus package that the Government hopes will cushion the blow. Paul Cavey, an economist with Macquarie Securities in Hong Kong, observed: China has finally and spectacularly succumbed to the world financial crisis on the export side, and it's difficult to see why that would improve in the short term.9 The collapse in global demand for Chinas toys, footwears and other goods has already put 20 million migrants out of work. Leaders worry that more job losses could spark unrest and are promising to spend heavily to create employment. Isaac Meng, an economist with BNP Paribas in Beijing, argued that it was unrealistic to expect China to remain immune to the sharpest drop in global trade in 80 years. The exports were . a terrible number. It will have a
5 6 7 8 9

Ask the expert: BRICs and investor strategy,

Financial Times, Nov 6 2006 http://www2.goldmansachs.com/ideas/brics/index.html China View http://news.xinhuanet.com/english/2009-03/11/content_10990447.htm BBC http://news.bbc.co.uk/2/hi/business/7936528.stm FX Press http://thefxpress.com/?tag=paul-cavey

pretty big impact on Chinese domestic demand. Probably 60 million to 70 million workers directly work in these export sectors, so there will be secondary impacts on capital expenditure, employment and consumption. 10 That is bad news for those dreaming that China, with its huge domestic savings, could tow other economies out of the distress. It is indeed catastrophic that the Chinese authorities perturbed by the Tibetan protests have to face the crisis and have no practical responses to it in a year which also marks the 20th anniversary of the Tiananmen protests. The growth that was celebrated with complete disregard of labour and environmental concerns has considerably slowed down and would halt if the situation drags on indefinitely. Russia The biggest military superpower in the group, Russia, who had called for developing new reserve currencies to complement the dollar, at a separate event earlier in the day is also not in a cosy zone. In absolute logical senses, a post-Cold War scenario would have warranted the ultimate dismissal of all military pacts and posts. However, she witnesses that NATO is being extended right up to its front-yard and its erstwhile allies (?) capitulating to its competing political and military block. The culmination of these assaults was the US-led action in engineering Kosovos February 2008 selfproclamation of independence. Russia is also a member of G8. Given the fact that she is the worlds wealthiest country in natural resources from fertile farmlands and metals, to gold and timber, the erstwhile G7 could not ignore her. Her colossal hydrocarbon reserves are too alluring. Indeed in the postSoviet era all that represents a lucrative opportunity to exploit by global capitalism. Besides, she also remains a nuclear and missile superpower and any antagonism with the country would not let business flow unhindered. Hence, Russia was accommodated in the select club considering all such geo-political and economic compulsions. However, it does not imply that the fellow club-members are in perfect agreement with her. Indeed, there are several contradictions and strains with the other members of the selfappointed group. At the onset, the authorities insisted that they had ample cash reserves to weather any storm. But as distress has ensued trouble - plunging oil prices, a 70% crash in stock markets, a global credit crunch and a slow-motion run on this countrys private banks - Russia has had to spend its reserves sooner than anybody imagined. In August 2008 reserves peaked at just under $600 billion11, the third largest in the world. By October end, they fell down to $48412 billion after money flew out of government vaults to sustain the rouble, prop up the banking system and bail out the businesses of the rich Russian oligarchs. In fact, Moscows economic fortunes for long have been tied too heavily to oil - a commodity with volatile prices. In 1980, the Soviet

The Peninsula http://www.thepeninsulaqatar.com/Display_news.asp? section=Business_News&subsection=market+news&month=March2009&file=Business_News200903129422.xml 11 The New York Times, October 31, 2008. 12 Ibid.

Union overtook Saudi Arabia as the biggest oil producer. During the Putin presidency, rising oil prices played a key role in Russian economic revival. However, if oil prices continue to descend, zero growth would pull the rug from under the hope for a middle-class life for millions, shrinking their horizons back to cramped apartments and garden plots. Amid the global fear, one thing still sets this country apart: The crisis of 2008 is just the latest in a long string of post-Soviet bank failures, financial swindles and economic collapses. Few Russians own stocks and hence, the markets decline has not affected them directly. Instead, businesspeople that relied on Western bank credit are now burdened by debt, and foreign investors have fled to safer places. In September 2009, Russians withdrew 4% of deposits from private banks. Some went into state banks, perceived as more reliable, but about half remained in cash. Deposits dropped far more precipitously in October: up to 30% for some private banks, according to an estimate by Citibank's Moscow office. About a dozen Russian banks have failed and have been subsequently bailed out. The big risk here is a loss of faith among clients and subsequent bank runs, rather than structural troubles with liquidity. President Medvedev speaking at the countrys top business forum, on June 5, 2009 at St. Petersburg sounded cautious about the state of Russian economy and said that the global crisis is not over as yet13. His remarks were devoid of the bombast and exuberance which characterized last years Forum, when global oil prices were riding high, Moscows coffers were full and the economy was growing rapidly. Indeed, the global financial crisis has hit Russia harder than any other big emerging market. Brazil The Lula government initially declared that the world crisis was not going to affect Brazil; after a 5.67% GDP growth in 2007, his spirit was high. What was going on elsewhere didnt matter; growth would continue at its present rate for the next 15 to 20 years14 . The epidemic stretched in March 2009 and it scared the nation. The Bradesco banks estimates of growth nosedived from more than 4% in June 2008 to 2.5% in December and then to -0.3% in April. Morgan Stanley has even predicted a 1.5% contraction of the Brazilian economy, which would be its biggest setback since 1948. 15 Brazils industrial production plunged 14.7% in the first quarter of this year16. Eight hundred thousand workers lost their jobs between October and January17 (nearly 1% of the workforce), and that doesnt even take account of job losses in the informal economy, which employs around 40% of Brazilian workforce. Half a million Brazilians have found themselves back in poverty or extreme poverty. Brazils economic results meant an end to the debate about its immunity from global contagion. The myth of decoupling was over. Initially, Lula declared that the problem of external debt no longer existed,
13 14

Reuters http://www.reuters.com/article/worldNews/idUSTRE55421J20090605 The delights of dullness, The Economist, 17 April 2008. 15 Andre Solani and Fabiola Moura, Latin America may contract 4%, Morgan Stanley says, Bloomberg, 16 March 2009. 16 Latin American Herald Tribune, Caracas, June, 18, 2009. 17 Source: Ministry of Labour & Employment, Federal Government of Brazil.

and that the Brazil had recovered its total political, economic independence, etc. A little later it was evident that the external private debt is an extraordinary mortgage. The Brazilian industries have proceeded to grant advanced holidays, to suspend and to lay-off hundreds of thousands of people. In the past 15 years the countrys dependence on foreign capital has increased drastically and one of the most significant developments has been the acceleration of foreign access to Brazils financial markets. Brazilian exports grew at an average annual rate of 20% in 2003-6, temporarily resolving the balance of payments problem. But those exports were stimulated by a new surge of FDI, which went from $10billion in 2003 (about 2% of GDP) to the record level of $45billion in 2008 (or 3.5% of GDP). In other words, these exports came at the cost of even deeper penetration of the Brazilian economy by foreign capital. In 2007, for example, the inflow of foreign currency linked to the export boom appreciated Brazilian Real by around 20% to the dollar, while at the same time domestic debt securities enjoyed an annual interest rate of 13%. Foreign investors (or Brazilians who had borrowed dollars abroad at relatively low interest rates) therefore benefited from a return on investment of more than 30% at the end of the year. Its hardly surprising that internal debt reached 160 billion Real in January 2009 (over $80billion) which the president boasts of as a sign of Brazils economic independence. In this arena all that has been achieved is further lining the pockets of the 20,000 Brazilian families who hold 80% of debt securities. Servicing those debts eats up 30% of the federal budget. Less than 5% of that budget meanwhile goes on health and 2.5% on education. In the space of a few months, the collapse of the international financial system transformed the Brazilian balance of payments into a sieve through which money poured. Take the commercial balance: it has been declining since 2006 the value of the Real has meant that imports have been growing at a faster rate than exports and this January it recorded its first deficit in 93 months. Theres no real sign of recovery in sight since the IMF predicts an 11% fall in world trade in 2009. In conditions such as these, it becomes more difficult for Brazil to import the equipment on which its own output depends. Repatriation of profits and dividends abroad rose to nearly $34billion in 2008 (nearly 3% of GDP), an increase of 50% over the previous year, and of 500% compared to 2003. The current account balance also recorded its biggest deficit in 10 years in 2008: $28.3billion or 2.5% of GDP. Today, Brazil stresses that it has international reserves of around $200billion to reassure investors worried about the risk of a balance of payments crisis. It was negative in the last quarter of 2008 for the first time since the end of 2005, but with a deficit that was seven times greater, at $21billion, or 1.85% of annual GDP. According to the economist Paulo Henrique Costa Mattos, current liabilities could reach $600billion18. India

A crise econmica e suas consequncias para os trabalhadores, Socialismo e liberdade, So Paulo, 16 April 2009.

A report jointly prepared by World Economic Forum and Confederation of Indian Industry was released just ahead of the annual India Economic Summit held in November 2008 in New Delhi attended by top government officials to interact with heads of global firms. The report said Indias dependence on capital flows to finance its current account deficit is a macroeconomic risk and the global crisis could generate a sharp increase in capital outflows and a reduction in the availability of finance19. Clearly, the global economic picture will be harsher next year and there will be greater pressures on Indian economy20. The GDP grew by 6.7% for the financial year 2008-09 on the back of a better than expected 5.8% in the last quarter (January-March). However, the economy had grown at a heady 8.9% annually during 2003-08. Even in the first half of 2008-09 the rate of growth was 7.8%. Yet the fact remains that the 6.7% is the lowest in six years. Also, there are doubts as to whether this rate can be achieved in 2009-10. In the past, capital inflows and the IT boom played a large role in driving job creation, investment and asset bubbles. Indias high dependence on foreign capital and IT exports increased its vulnerability to the global crisis. FDI has slowed in recent months and Indias IT sector may find it difficult to maintain its outsourcing competitiveness as cost differentials with the West have waned since the last recession. Additionally, other low-cost locations have emerged and the U.S. plans to raise taxes on outsourcing companies. There is already a dip in the employment market. Anecdotal evidence of this in the IT and financial sectors are abound, and also reports of quiet downsizing in many other fields as companies cut costs. More than the downsizing itself, which may not involve large numbers, what this implies is a significant drop in new hiring - and that will change the complexion of the job market. At the heart of the problem lie questions of liquidity and confidence. What the Reserve Bank of India needs to do, as events unfold, is to neutralise the outflow of FII money by unwinding the market stabilisation securities that it had used to sterilise the inflows when they happened. This will mean drawing down the dollar reserves and that could deplete foreign exchange reserves and if the oil prices shoot up once again the situation could be precarious. Meanwhile, facing its worst crisis in over a decade, Indias ailing export sector wants the new government to gift it a three-year income-tax holiday, with experts pushing for concrete steps to protect some 20 million direct jobs in the industry. Falling global demand, the high cost of credit and protectionism by some economies like the US are the reasons why Indias external trade industry is seeking such sops, after missing the export target for the previous fiscal. India's merchandise exports fell last October for the first time in a decade, and missed the target of $200 billion set for fiscal 2008-09. Exports grew by a mere 3.4% to $168.7 billion, from $163.1 billion in 2007-08. This has resulted in the retrenchment of some 0.5 million people,
19 20

India Risk Report, 2008 ibid.

especially in sectors like gems and jewellery, handloom, and textiles, with the rising rupee further exacerbating the problems. Outcomes and contradictions It is in the above contexts that we have to analyse the outcome of the BRIC summit. As said earlier, Russia had called for developing new reserve currencies to complement the dollar, at a separate event earlier on the day of the summit. However, that did not find any reference in the final statement issued at this occasion. Instead, the cautious wording appeared to reflect Chinas concerns that any anti-dollar statements could erode the value of its currency reserves. Chinas dollar reserves touched $2 trillion by the end of 200821. It is important to recall that the U.S. dollar is generally thought to be an extremely safe asset to hold, which is why it has been the worlds main reserve currency since WWII. Developing countries view plentiful dollar holdings as a hedge against economic crises that might precipitate a run on their own currencies. Dollars represent as much as 60% of reserves in some developing countries, such as China and Thailand. However, a strategy, once considered a source of economic stability is becoming more and more dangerous. The dollar has fallen sharply against other major currencies in the last two years, and because of massive U.S. current account deficits, it could fall further in the years ahead. If that happens, the losses from dollar reserves for some developing countries may exceed 20 % of their annual budgets. The damage of a declining dollar could be extensive: If many developing countries were to sharply increase their exports in order to rebuild the value of their reserves, it could lead to a serious drag on world economic growth and possibly prolonged stagnation in much of the developing world. For large corporations, this would be especially painful because the fastest-growing markets in Asia, Latin America, and Eastern Europe, which they are depending on for their growth, could be stopped cold. The absence of any criticism of the US dollar appeared to be a compromise by Russia. There was an earnest plea for a greater representation at major institutions such as the IMF or the World Bank for the emerging economies such as Brazil, Russia, India and China. . In a more or less direct attack on the Western domination of Bretton Woods institutions the statement said emerging and developing economies must have greater voice and representation and the heads and senior leadership of these bodies should be appointed through an open, transparent and merit-based selection process. It is indeed problematic to note that this group completely ignores the role that these organisations play. These agencies portray themselves as development agencies, donors, politics-neutral and independent. Anybody examining their role would find how state department of the US, US treasury, Pentagon, CIA, big multinationals, and the World Bank and the IMF go hand in hand. In many ways, investigations of the pattern of

Source: Chinability http://www.chinability.com/Reserves.htm

actions of these institutions reveal the visible fist behind the invisible hand. Different country experiences show how the World Bank and the IMF actually work for creating or smoothening path for global corporate grabbing by influencing, lobbying, creating support base through consultancy, trip abroad and by manufacturing consent. These institutions therefore work as instruments to bargain or lobbying to create necessary arrangements with different countries to protect global corporate and imperial interest. Their enthusiasm for development in some countries or its indifference to crisis of some other countries is strongly linked with these objectives. Lending support to South Vietnam or South Koreas pro-US regime, hostility to Allende government and sudden change of policy towards Chile after the military take over, or after reinstatement of President Aristide in Haiti, long hostile policy towards Cuba or policy towards Afghanistan and Iraq are a few instances of long list of rhetoric and crimes. Same goes with the IMF. The list goes long and would virtually include all hated dictators that have stepped on this planet. It is painful to see that the BRIC countries whose statement talks about a collective agenda ranging from food security and financial reform to the creation of a more diversified international monetary system and a more democratic and just multipolar world order, prefer to fight for a larger share of decision making of these oppressive institutions instead of raising a call to dismantle it. Abandoning any initiative for South-South co-operation and solidarity, their earnest plea is to be co-opted in the global league of gendarmes. Even though Brazil is involved in the project for the Bank of the South, it has no commitments to it. Recalling the actions of the Lula government in 2007, it is not difficult to find that Brazil had been initially reluctant to join the Bank of the South. Brazil sees it essentially as an instrument of commercial policy speaking primarily in terms of economic bloc and uncritically accepts the European Union (EU) as its model. In this case, the problem with Brazil is the orientation of the Lula government and the economic and social model that it practices. It is clear that Brazils integration into the Bank of the South will lead the Bank to adopt a much more traditional pattern, not too far removed from neo-liberalism, while if Brazil did not participate, it would be easier to reach a definition closer to the alternative model that a lot of radical movements advocate. Brazil has joined the Bank of the South because it cannot be absent from it; and it must maintain its regional economic dominance. The 16 point BRIC statement also underlined support for a more democratic and just multipolar world order based on the rule of international law, equality, mutual respect, cooperation, coordinated action and collective decision making of all states. However, judging the statement vis--vis the role that these countries have played in the last decade, one can only conclude that this announcement is an anomaly of its sort. The Chinese, 9

Indian and the Brazilian government have been lobbying extremely hard to be included in the G8 led group and the heads of these states are regularly attending the annual summit of the select group in recent times. There is very little doubt about the fact the G8 is a fountain head of the global subversion of democracy. In none of the G8 summits since its 28 th edition at Kananaskis, Alberta, Canada in 2002, there has been any discussion on the invasion of Iraq or Afghanistan. Offensives were led by its leading member state, the US and also faithfully accompanied by a few other member states. These wars were not attempted to liberate the mass of humanity but, to enslave them and to have a greater control on their natural resources or at least the hydrocarbons. The G8 has been one of the greatest violator of the international laws and has been a self-proclaimed agency to control the globe by a few rich and elites. Certain BRIC members have also placed confidence on the G20 summit to rescue the world out of this mess that we are in. Though it seems that there is a little unanimity about the matter, even within the group, nevertheless, to a certain extent, the statement of the Indian prime minister amply manifests their common position on this issue. In his speech at the summit, Dr. Singh hailed the cooperation already achieved by BRIC at the G-20 deliberations on the international financial crisis. The important issue today, he said was to implement the decisions that had been taken. He also said cooperation in the G-20 process must be backed by cooperation in the real economy. As certain commentators have pointed out Yet what happened in Washington? A sorry show, a script that lacks any credibility, but few spectators seem to care. In detective films it is seldom the case that the keys to the Court of Justice be given to arch criminals. Yet this is what the G20 summit is planning to do. 22 In the midst of this profound crisis it is a matter of common sense that G20 was not born out of any genuine concern to save the planet or to provide authentic solutions; on the contrary it was a hasty act since November 2008 to salvage the powers that be and try to plug the ruptures of the capitalist system in the first place and to rescue it from further decays. Therefore, to expect this body to opt for measures that are sufficiently radical is conceptually impossible. Conclusion The BRIC countries, if they desire to mean what they pronounce in the statements, have to radical rethink their policies. They must have a systematic break with the current global order that seeks to ensure privileges for a selected few imperilling the bulk of humanity. To begin with, they must raise effective demands and strive for the abolition of tax havens. In order to achieve this, it must declare it illegal for companies and residents to have any assets in, or relationships with partners located in, tax havens. It must pressurise the EU countries that function like tax havens (Austria, Belgium, the UK, Luxembourg) as well as Switzerland, to do away with

The G20 and the Inconsistent Script: What Really Happened in Washington? - Damien Millet and Eric Toussaint, Counterpunch, November 18, 2008. http://www.counterpunch.org/millet11182008.html


bank secrecy and put an end to these outrageous practices. The recent demonstrations on 28 and 30 March during the G20 summit were big ones, 40,000 people in London, thousands and thousands in Vienna, Berlin, Stuttgart, Madrid, Brasilia, Rome, etc. with the common motto Let the rich pay the crisis! The week of global action called for by the social movements from all over the world at the WSF at Belm last January thus had a gigantic echo. Those who had announced the end of the movement for another globalisation were wrong. It has proved that it is able to bring large crowds together, and this is only the beginning. The success of the mobilizations in France on 29 January and 19 March (three million demonstrators were in the streets) is confirmation that the workers, the unemployed and young people all want other solutions to the crisis than those which consist in bailing out bankers and imposing restrictions on the lower classes. The BRIC leaders must listen to those voices and act if they are keen on actualising another reality.