BRICS: The Most Important Financial Summit of the Year Is Taking Place in Russia

BRICS, 28 Oct 2024

Hamish McRae | i News - TRANSCEND Media Service

The BRICS summit is a classic example of the observation attributed to Victor Hugo: ‘Nothing is more powerful than an idea whose time has come.’ (Photo: Alexander Zemlianichenko/AFP)

A Huge Shift of Economic Power Is Taking Place

23 Oct 2024 – This week brings the annual meetings of the International Monetary Fund and World Bank in Washington, DC, and Rachel Reeves, who travelled there today, has been given some modest cheer. The IMF has revised its forecast for UK growth this year up to 1.1 per cent from its previous projection of 0.7 per cent, and it expects things to pick up further to 1.5 per cent next year.

The Fund’s chief economist, Pierre Olivier-Gourinchas, did warn that she must tread “a narrow path” in framing her first Budget next week and that doing “too much too quickly” might damage growth. But the broad outlook from the financial markets seems reasonably positive, largely because of the relative fast growth this year.

However, if the Chancellor increases the fiscal deficit by a significant amount in the Budget, then expect higher borrowing costs not just for the Government but for all longer-term borrowers too. There has been some upward movement already in response to stories about the Budget plans. The yield on 10-year gilts has risen from under 4 per cent at the beginning of October to 4.2 per cent now. The endorsement of the IMF is helpful, but ultimately what will matter most to the UK’s borrowing costs will be the judgement of the markets.

That reflects a wider issue: where is economic power in the world, and how is it shifting?

The balance of economic power

The IMF/World Bank meetings look at the world economy from what is, inevitably, the perspective of the rich nations. These institutions were formed after the Second World War to give order to the financial system, promote freer trade, help international development and so on. While they encompass just about every country as members, the developed economies have most of the power.

Thus the US has 16.5 per cent of the votes in the IMF, Germany 5.3 per cent, the UK and France 4 per cent each. But China, the second-largest economy in the world, has just 6 per cent. India, now larger than the UK or France, has only 2.6 per cent.

Yet every year the balance of economic power shifts a little further from the West to the rest. You can see that in the IMF’s own forecast, which estimates that the world economy will continue to grow this year and next by 3.2 per cent. But within that overall total, the advanced economies will grow 1.8 per cent in both years, while the emerging and developing economies will grow by 4.2 per cent.

So it is hardly surprising that there should be some resentment in the emerging countries.

Political clout

It so happens that this week a rival international meeting is being held – in Russia. It is the Brics summit of government leaders taking place in Kazan, a city some 500 miles east of Moscow on the banks of the Volga River. It is a much higher profile event than the meetings in Washington, for China’s Xi Jinping, and India’s Narendra Modi have joined Vladimir Putin there today.

The Brics grew out of some research by Goldman Sachs in 2001. Its chief economist Jim O’Neill, now Lord O’Neill, coined the acronym to encompass what were then the four largest emerging economies. These were Brazil, Russia, India, and China, with the “S”, South Africa, joining the group a little later. The extraordinary consequence of that research paper has been to galvanise the emerging countries, led by China, into what has become a rival group to the IMF/World Bank nexus.

The Brics now include two dozen countries with 45 per cent of the world’s population and about a quarter of its economic output. New prospective members, including Malaysia, Thailand, and most recently Turkey, are lining up to join. The secretary-general of the United Nations, António Guterres, arrived in Kazan today to attend the summit, another statement of the group’s rising political clout. And all because of a little bit of economic research from the London office of an American investment bank.

So what should we make of all this – aside from it being a classic example of the observation attributed to Victor Hugo that “nothing is more powerful than an idea whose time has come”?

No complacency

Three things. For a start, the Brics are all very different – in size, economic systems, political governance and so on. This is not a coherent group of similar-minded nations. It’s true that there is a development bank and there are other financial initiatives, but this isn’t a single economic entity.

However, the fact that countries such as Turkey – a member of Nato with an economy closely associated with the EU – should want to join must give a jolt to any complacency in the developed nations about the way the rest of the world sees us.

Next, from our own narrow perspective, we should recognise that our influence will depend on running our own affairs, and especially our economy, in an efficient and successful manner. It is back to the judgement of the markets, in which the Brics are significant investors. So no complacency there either.

And third, we should be aware of the huge shift of economic power that is taking place, and be sensitive to the opportunities – and threats – that this shift will generate.

Need to know

The thing that fascinates me most about the whole Brics movement is the way in which a short piece of research, which actually got a lot of the detail wrong, has triggered such a huge response. After all, as noted above, all developed economies are more or less alike; the original four Brics and the new members are not.

So why has this been an idea whose time has come? There is a simple answer, which is that it has suited China to use the concept as a way to build a rival power bloc to the West, one which it can dominate in much the same way as the US has used the Washington-based institutions to cement its economic authority.

There is something in this, but it can’t be the whole explanation. Why should it have become so attractive to Middle Eastern and South East Asians nations, or to Turkey?

The motives will vary from country to country, but I think the best overall driver will be a desire to even up one’s bets about the direction of the world economy. Both the EU and the US can be very difficult trading partners. Even Canada, a country with a close relationship with the US, has run into all sorts of trading spats, notably over dairy and timber products. As the UK has discovered, the EU did not make the Brexit negotiations easy. You could ask, why should it? But actually it was and is in both sides’ self-interest to have as harmonious a long-term relationship as possible.

So for a country that finds relationships with the US and EU difficult, it makes sense to try to open up other options. China and India can be tough partners too, in some ways tougher than Western nations, but given the faster growth of the Brics it must make sense to see what deals are available.

I think there is also – dare I say it – a snootiness about rich countries when dealing with poorer ones. I can think of instances where Western advisers have not taken into account local knowledge or sensitivities. Negotiators show insufficient respect towards recipients in aid programmes. I was told by an African official (I won’t name the country) that they found it much easier to deal with the Chinese than they did with Europeans.

There is something else. Until recently, the Brics remained a tight group. But in the past couple of years its numbers have soared. (There is a timeline here.) It may well be that the combination of the Western response to Russia’s invasion of Ukraine, and its reaction to what has happened in Gaza, have led a number of countries to want to detach themselves a little from the West and assert their non-aligned status.

I remember being struck by this desire to put some distance between themselves and the West in conversations with economists in Abu Dhabi earlier this year. It was a sharp lesson for me, as Robbie Burns asked of some power, to be made to see ourselves as others see us.

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Hamish McRae is an award-winning business and economics journalist. He writes a weekly column for i.

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