HONG KONG – Last month’s summit of the BRIC countries, Brazil, Russia, India, China, now renamed BRICS with the addition of South Africa, announced with great fanfare that the group was determined to punch its new muscle on the world economic stage and no longer to be pushed around by the tired old powers. But you have to ask if it was worth the leaders making the long trek to China.
The BRICS account for 40 percent of the world population (though only 24 percent of global GDP), and have a legitimate complaint that the world has hitherto been dominated by a cozy club of rich countries with about 10 percent of the world’s population. The communique called for “a comprehensive reform” of the United Nations, including the Security Council, “with a view to making it more effective, efficient and representative” so that it can meet growing global challenges.
One key challenge is the fragile state of the global economy, finely imbalanced with a whole range of potential disturbances, from current account and huge budget deficits in the United States and other Western countries, to the rising price of oil and other commodities. Problems are exacerbated by unhealthy dependence on the U.S. dollar as the world’s effective reserve currency, something that Beijing has increasingly grumbled about with its huge but vulnerable $3 trillion pot of foreign exchange reserves.
BRICS’ leaders duly called for a broader based international currency system. According to Chinese officials, they steered away from the question of the renminbi exchange rate, but did discuss the role of the special drawing right (SDR) in the international monetary system, including the composition of the SDR currency basket.
Was all this useless posturing or merely bad theater? On the wider question of making the U.N. and the Security Council more representative, China’s opposition long stopped Japan from getting a permanent seat, and even at the Sanya summit, Beijing stopped short of giving its blessing to a seat for India.
On the vexed currency issue, China wants to have its cake and eat it. Dominique Strauss-Kahn, the managing director of the International Monetary Fund, pointed out that the renminbi had ticked all of the boxes for inclusion in the basket of currencies that comprise the SDR, except one: It is not “marketable.”
China is reluctant to surrender control which would be involved in convertibility or in letting its currency be part of the SDR basket (composed of 41.9 percent U.S. dollars, 37.4 percent euros, 11.3 percent pound sterling, and 9.4 percent yen).
Indeed, the preoccupation of China and the BRICS with the SDR is a distraction. The SDR is not a currency. It is a unit of account between the IMF and its 187 member countries and it cannot be used for international payments, even between IMF members. Changing the role of the SDR to make it a currency would be as messy as any of the leading issues that the IMF has yet to grapple with, including who will succeed Strauss-Kahn and what his or her revised job description should be.
China’s obfuscation may have been an attempt to hide differences between the BRICS members, continents apart, with real political and economic arguments between them, not least on the damage that the renminbi exchange rate has done to Brazil and India. The BRICS ought to be thinking of using some practical mortar to build their dream economic house.
Meanwhile, at the wider world of the IMF and World Bank spring meetings, held at virtually the same time as the BRICS’ summit, there was enough evidence that the world is facing a host of problems any one of which could tip it back into crisis.
Robert Zoellick, president of the World Bank, with a particular eye on rising food prices endangering the lives of hundreds of millions of the world’s poorest people, warned that, “We are one shock away from a full-blown crisis.”
High oil prices, encouraged by speculation on the political and economic uncertainty in the Middle East, are a constant threat to recovery in the West as well as to China’s own economic miracle. Too many countries in the West got fat and lazy on easy credit and now have to find ways of paying for their extravagant parties without making unemployment worse.
Tharman Shanmugaratnam, Singapore’s finance minister and chairman of the key IMF committee, summed up the economic situation, saying that “The recovery has gained headway, but there are significant vulnerabilities still in the global economic and financial system.” He cited the poor quality of public sector balance sheets, the need for bank recapitalization and the legacy of an international monetary system still not in satisfactory shape. He listed Middle East uncertainty, disasters in Japan and rising commodity prices as new vulnerabilities, to which Strauss-Kahn added unemployment that the old formula of growth alone cannot solve.
The world economy could be held hostage to power play between the old and the new great powers. Political Washington, only a few blocks from the IMF, is increasingly acrimoniously split over how to tackle the U.S. deficits. Some American economists call the U.S. a banana republic without the bananas.
It is not only the BRICS that don’t have a building plan, let alone bricks and mortar, to construct a modernized international economic order. When it comes to the IMF and World Bank, the preoccupation of the U.S. is to protect its veto, effectively 15 percent of the votes — it has more than 16 percent. The Europeans and Japan want to keep their seats at the top table, while China and the rising powers want more shout, more of their people in the top jobs.
The risk is both to the IMF and to the global system. The IMF has surveillance, reporting and monitoring roles involving the world economy that should be kept as professional as possible under the direction of the managing director. The board is the place for political decisions, such as arguments over shareholdings, whether the SDR should be turned into a currency, but IMF officials should be free to report on economies and currencies without worrying about whether they may upset Washington or Beijing or Timbuktu.
Dangers of politicization will increase when Strauss-Kahn steps down, possibly this year if he decides to challenge Nicolas Sarkozy for the French presidency. Although it has been agreed that the bosses of the IMF and World Bank should not be a European (IMF) and American (World Bank) preserve, and the fund is committed to “open and transparent” procedures, previous experience has been anything but. Expect a vicious struggle unless someone can persuade the U.S., China and Europe that internationalism, not nationalism, is what is needed.
Kevin Rafferty was managing editor at the World Bank 1997-99.