The European Financial Review

Building the New World Order BRIC by BRIC

By Cynthia Roberts

hen Russian leaders converted the Goldman Sachs investment idea about the BRICs (Brazil, Russia, India, China), into a clever diplomatic strategy, international relations specialists and Western diplomats were dismissive, if they noticed at all. Diverse economically and politically, these four fast-growing giants are from different regions, geopolitical rivals, and unlikely to ally against the U.S. Russia, in particular, seemed a BRIC made of straw, an outlier suffering demographic decline, and an improbable champion of a transgovernmental network diplomacy to advance global governance. Already a member of the U.N. Security council, the G-8, negotiating to join the WTO, a partner in special relationships with Euro-Atlantic institutions, and a former superpower with the worlds largest nuclear stockpile, Russia is hardly a parvenue. So why would Moscow position itself among developing countries and risk being outshined and outmaneuvered by the rising Chinese behemoth?

BRICs diplomacy showcases Russia acting as a team player in an innovative network, making reasonable demands to reform international institutions while engaging in peer learning.
plomacy showcases a Russia acting as a team player in an innovative network, making reasonable demands to reform international institutions while engaging in peer learning. This image contrasts sharply with Moscows reputation for relying on hard power and coercive energy deals to dominate its neighborhood while enriching Russias rulers and their clans. To acknowledge that they are two sides of the same coin does not detract from the fact that for the first time in Russian history, economic power has trumped military power in the states priorities. BRICs diplomacy also cleverly leverages Chinas power to help lift the status of all four countries, particularly Russia, in the global rebalancing, highlighting its remarkable economic resurgence, and positioning it among the rising stars instead of the has-beens. In fact between 1999 and 2008 Russian economic growth soared, increasing by an annual average rate of 7.0 percent in real terms, leading to an

Moscows excellent BRICs adventure: Russia resurgent or eclipsed by China?

The Kremlin officials who launched a diplomatic spinoff of Goldmans Dreaming with the BRICs were probably opportunists and not motivated by a deep strategic vision. Nonetheless, the BRICs has proved to be a shrewd, cost-free display of soft power and nimble positioning between established and emerging economies, perhaps one of Moscows smartest foreign policy initiatives in recent years. BRICs di-

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expansion of Russian GDP by an average of 27 percent per year, from $196 billion in 1999 to $1.8 trillion in 2008. In this period Russia was the only BRIC that ran both a fiscal and a current account surplus. When the economy contracted 8 percent in 2009 in the worst downturn among the BRICs, unlike in 1998 there was no risk of default; the Kremlin put up about $200 billion in credits from its huge war chest ensuring that none of Russias 100 largest firms failed before Russia returned to growth in 2010. Russias rulers and elites acknowledge that to avoid stagnation and falling out of the BRICs, they will have to modernize the economy and society, gradually shifting away from reliance on rising oil prices for roughly one-third to one-half of economic growth. The trouble is they reap stupendous gains from the opaque and crooked status quo. External discipline and investment opportunities from WTO membership would help strengthen the private sector and boost growth. Russias future depends on developing a basis for greater innovation and higher total factor productivity, which require credible property rights, speeding further market reforms, access to advanced technology and management, and tackling endemic corruption, not greater centralization of the economy in the Kremlin.1

mize political and economic adjustment costs, and to ensure domestic stability. They have resisted many Western liberal policies from humanitarian interventions to financial liberalization, are prickly about American attempts to constrain their autonomy, and object to conditionality requirements imposed by Western institutions. Although wary about provoking a backlash from the United States, they seek dominance in their own regions, even as they tread on one anothers markets and spheres of influence, and generally aspire to be global rule-makers instead of rule-takers. Such preferences naturally dovetail with Moscows resistance to Western institutions that formalize international enforcement of rules and norms.

observers as inflated but by focusing on concrete policy issues, BRICs diplomacy started to emerge as a serious factor in international relations. Even Goldmans Jim ONeill, the BRICs originator, weighed in that they should play a larger role in global governance. By the time of their second summit in Brasilia in 2010, the global economic and financial crisis had created what Indian Prime Minister Manmohan Singh called a new relevance for BRIC. The Brasilia summit communiqu declared that the IMF and World Bank urgently need to address their legitimacy deficits, and called for changes in voting power and quota reform before the next G20 Summit in November. Despite intra-group differences, the statement also underscored

All four rising powers have resisted many Western liberal policies from humanitarian interventions to financial liberalization, are prickly about American attempts to constrain their autonomy, and object to conditionality requirements imposed by Western institutions.
So with no fanfare, Russia invited BRIC foreign ministers in 2006 to regular gatherings on the sidelines of the U.N. and other international fora. Two years later BRIC finance ministers, central bankers and other government officials began frequent meetings to discuss how to coordinate approaches to international problems, particularly the global financial crisis. Their appeals for reforms to better reflect emerging economies rising share of global output, trade, and financial flows helped elevate the role and authority of the G20 (in place of the Group of 7 rich countries) and include emerging economies in an enlarged Financial Stability Forum, renamed the Financial Stability Board. Then in June 2009, amid growing pressure from the quartet to reform the post World War II Bretton Woods monetary system, BRIC heads of state held their first summit in Ekaterinburg, Russia. Russian president Dmitry Medvedev described the inaugural BRIC summit as an outstanding or even historic event marking the emergence of a new format for addressing global problems, including the global financial crisis, whose resolution very much depends on the decisions made by these four countries. Such comments struck many their support for the aspirations of India and Brazil to play a greater role in the United Nations. The position of the dollar was still foremost in BRIC concerns but near-term moves to diversify would adversely affect their own substantial holdings. With their own bilateral trade rising, BRIC officials signaled an intention to experiment using their local currencies for trade settlements. In short order, the BRICs engineered agreement on a redistribution of IMF voting power, shifting more than 6 percent (slightly less than BRIC demands) of quota shares to emerging economies and 6 percent to under-represented countries. The new allocation, which is coupled with a doubling of subscriptions to about $755 billion, gives the ten largest voting shares to the United States, Japan, the four BRICs China, Brazil, India and Russia and France, Germany, Italy and Britain. China overtakes Germany, France and Britain to become the third most powerful member of the IMF, Russias representation remains the same while Europe, reflecting its over-represented positions, surrenders two seats on the fund's 24-strong Executive Board. Other reforms are inching forward to make the G20, IMF and World Bank more

BRICs: A limited but successful partnership

Given the built-in flexibility and limited aims of the BRICs partnership too much is made of their differences in regime types, production profiles, and internal rivalries. To be sure, Russia and China are authoritarian and practice variants of state capitalism while Brazil and India are large, fractious democracies. Brazil and Russia are commodities exporters, specializing respectively in agriculture and natural resources and benefit from high prices for their products. By comparison, China dominates global manufacturing and exports while India specializes in services; both depend on commodity imports. The BRICs have had trade, currency and security disputes. None of these factors, however, is uncommon in international coalitions. All four rising powers are sovereignty hawks, and face strong domestic impulses to shape and harness globalization, to mini-

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representative but there should be no illusions that the rearrangement of chairs and shares2 will reliably overcome traditional collective action problems and mitigate the influence of competing domestic interests to usher in improved global governance. In fact such progress has done little to dampen the currency wars involving Chinas renminbi exchange rate policy, which some observers consider equivalent to a 20-25 percent export subsidy, or the controversy over the Federal Reserves quantitative easing (QE2), which is criticized for steering the dollar artificially lower, not to mention Japans massive forex interventions to drive down the yen from a 15 year high and new capital controls on hot money flows into emerging economies such as Brazil and South Korea.3

According to 2010 IMF figures (PPP), China not only surpassed Japan to become the second largest economy and the worlds largest exporter; all four BRICs now rank in the top ten: China (2), India (4), Russia (6), and Brazil (7).
power now under wayroughly from West to Eastis without precedent in modern history. Focusing on three of the BRICs, the RICs, it concluded that [n]o other countries are projected to rise to the level of China, India, or Russia, and none is likely to match their individual global clout.4 Goldman Sachs and McKinsey & Company are among those who predict a tipping point this decade in fundamental rebalancing that will leave Western advanced economies with a smaller share of global GDP in 2050 than in 1700. The four BRIC countries stand out as the largest emerging economies and the only ones with annual economic output over $1 trillion. Second, despite three decades of phenomenal growth, the economic crisis and relative Western decline crystallize the enormity of Chinas rise, which dwarfs the other BRICs combined economic output. BRIC diplomacy as a result appears more purposeful to give China cover in a group of rising powers attentive to concerns of developing countries on issues ranging from climate change to rising food prices. Although created by the Kremlin, the BRIC bloc fits Deng Xiaopings strategic maxim, tao guang yang hui [hide brightness, nourish obscurity] meaning to hide ones capabilities and bide ones time. If China pivots from its strategy of peaceful rise and pragmatic engagement to a path of greater assertiveness, as in its recent clashes with Japan in the contested East China Sea, the BRICs may lose one of its principle raisons detre. Third, the BRICs rapid rise contrasts with the speed of Europes relative decline and near strategic irrelevance, as many European countries are shackled with ballooning debts and preoccupied by severe constraints on growth. Although Chinas economy remains only a third the size of the European Unions, it is booming and rapidly moving up the production cycle. Meanwhile America also struggles with a huge debt and competitiveness. The shock from the crisis that the west no longer holds all the cards5 is starkly reflected in the seismic shift of sovereign wealth empowering emerging non-Western countries in the 21st century.

BRICs rise into the top ten economies

The global financial crisis did not spawn the BRICs but it brought three developments into high relief: First there could no longer be any doubt that the quartet is riding the wave to a sea change in global economic power from advanced countries to fast-growing emerging economies, a group that also includes Turkey, Indonesia and South Korea (already a highincome near developed country). According to the U.S. National Intelligence Council, [i] n terms of size, speed, and directional flow, the transfer of global wealth and economic

The West no longer holds all the cards: Economic power shift to large fast-growing countries

Compared to 2000 when advanced economies dominated the international economy accounting for almost two-thirds of global GDP (in purchasing power parity), their share is now about half and is steadily declining. More than 85 percent of developing countries economies grew faster that the US economy from 2002-2008, helping emerging economies, including the BRICs, South Korea and others, to catch up with the developed world. Since the onset of the financial crisis in 2007, the BRICs as a whole contributed 45 percent to global economic growth. In the last decade, the BRICs alone among emerging economies contributed over a third of world GDP growth (PPP) and leaped from one-sixth of the world economy to almost one-fourth. Goldman Sachs projects that BRIC GDPs as an aggregate will surpass the US by 2018. By the start of next decade, the BRICs are forecast to account for a third of the global economy (PPP) and contribute about half of global GDP growth. According to 2010 IMF figures (PPP), China not only surpassed Japan to become the second largest economy and the worlds largest exporter; all four BRICs now rank in the top ten: China (2), India (4), Russia (6), and Brazil (7). China surpassed Germany in 2010 as the worlds largest trading nation and the BRICs also have increased trade with one another, so that in 2009 China replaced the US as Brazils largest trade partner and despite geopolitical rivalry became the leading trade partner of India and South Africa.

Money is power

For 65 years after the Second World War, the United States was simultaneously a system maker and a privilege taker. 6 With the

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dollar as the worlds principle reserve currency, the US built and maintained the liberal order that allowed widespread prosperity in the West and then emerging economies to exploit globalization and achieve phenomenal growth. Domestically, American hegemony involved conciliating key domestic interests and strengthening institutions like the presidency and the military essential to the projection of power without being constrained by the usual tradeoffs among guns, butter, and growth. In fact American preponderance and willingness to provide security for its allies allowed it considerable leverage in passing adjustment burdens to them. Now many of these allies face financial and economic crises of their own and America is less able to call the shots in the transition to multipolarity. Emerging economies account for twothirds of total foreign exchange reserves, which have grown from $1.3 trillion (5 percent of world GDP) in 1995 to $8.4 trillion (14 percent) in 2010.7 The BRICs account for about 40 percent of total global reserves with Chinas super-sized share of over $2.85 trillion dwarfing the rest, reflecting capital controls and an undervalued renminbi. The United States, by comparison, is the worlds largest debtor with a $14 trillion national debt and its net international investment position plummeted to $3.5 trillion in 2008 or about one quarter of GDP. According to the OECD, China holds more than one fourth of US Treasury securities and overall by the end of 2009 more than half were held by non-OECD member countries. Never before in the era of American primacy have the principal international creditors of the U.S. and some of its European partners been non-allied surplus countries outside the West.

How long can the worlds biggest borrower remain the worlds biggest power? 8

Former US Treasury Secretary Lawrence Summers query may turn on not just the size of the debt but whether particular American behavior provokes its creditors. Many American officials are confident that US creditors such as China have too much at stake to risk a dangerous spiral of miscalculations into mutual assured dollar destruction. Later on, however, if the US stagnates, it faces not only the risk of a sovereign debt crisis9 but also asymmetrical vulnerabilities, particularly if China has already taken steps to make its currency more flexible and its capital account more open. In a crisis, the U.S. could be subject to predatory currency manipulation similar to that Washington used against Britain during the Suez Crisis. In 2008 Russian officials suggested to the Chinese a joint sell off of large blocks of their Fannie Mae and Freddie Mac holdings in a bid to force a US bailout. According to

to replace it with the yuan, and had launched its first yuan-denominated bond on international markets in 2009. But Hu acknowledged that it would be a "fairly long process". The dollar still accounts for 60 percent of the currencies held in national reserves and remains the principal instrument for most commodity trade and global financial transactions, 88 percent of which are in dollars. However, given that the US accounts for only 24 percent of global GDP while its fast growing rival China is already at 13 percent the yuan looms on the horizon as a second significant reserve if China develops deep and liquid financial markets. American resilience, innovative capacity, and political will have repeatedly put to rest premature predictions of absolute US decline, but this time the global shift in wealth is inexorable. Although the implications are not yet clear, a recent book title paints an unenviable picture: The End of Influence: What Happens When Other Countries Have the Money.11

The BRICs countries have repeatedly called for diversifying global reserves away from the dollar towards a global currency or new basket of primary reserve currencies. They also started experimenting with using their own currencies for regional commerce.
then Treasury Secretary Henry Paulson, after China declined to embrace this disruptive scheme, which would have rocked the capital markets, Russia sold all $65.6 billion of its Fannie and Freddie debt in 2008.10 Signaling their preferences, the BRICs countries have repeatedly called for diversifying global reserves away from the dollar towards a global currency or new basket of primary reserve currencies. They also started experimenting with using their own currencies for regional commerce. In March 2009 Chinas Premier Wen Jiabao insisted that the U.S. maintain its good credit, honor its promises and guarantee the safety of Chinas assets. Then Chinese President Hu Jintao, in interviews ahead of his state visit to Washington in January 2011 declared China had determined that the international currency system dominated by the US dollar is a product of the past. Beijing was taking steps

Power and responsibility

The BRICs account for about 40 percent of total global reserves with Chinas super-sized share of over $2.85 trillion dwarfing the rest, reflecting capital controls and an undervalued renminbi.

Given that states tend to expand their interests and ambitions as their power rises, it is unsurprising that the BRICs would seek increased voice and decision-making roles. Global governance institutions lose legitimacy and credibility when powerful states, which enjoy rewarding outside options, go it alone or are excluded from positions of authority. That the BRICs could quickly kickstart long delayed changes in the composition of ruler-makers in international financial organizations indicates that the necessary adjustment process is under way. This does not prevent occasional irritating opportunism, such as Brazils schemes to support Irans nuclear enrichment program. More fundamentally, BRICs remain wary about becoming responsible stakeholders or partners in maintaining the Western order. It is doubtful they will invest significant resources

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Cynthia Roberts (Ph.D. Columbia) is an Associate Professor at Hunter College, City University of New York and an Adjunct Associate Professor and Senior Associate at the Saltzman Institute of War and Peace Studies at Columbia University. Her most recent study is a monograph on Russia and the European Union: The Sources and Limits of Special Relationships (2007). She also edited and authored two articles for a special issue of the U.S. journal Polity on Challengers or Stakeholders? BRICs and the Liberal World Order (January, 2010). Notes
1. For comparison of indicators from the World Bank and other organizations ranking BRIC countries on Ease of Doing Business, Regulatory Unpredictability and other measurements, see Cynthia Roberts, Russia's BRICs Diplomacy: Rising Outsider with Dreams of an Insider, Polity (2010) vol. 42, pp. 3873, Table 1. See also OECD, Innovation and Growth: Chasing a Moving Frontier (December 2009). 2. Edwin M. Truman, Rearranging IMF Chairs and Shares: The Sine Qua Non of IMF Reform, in Edwin M. Truman, ed., Reforming the IMF for the 21st Century, Special Report 19, Peterson Institute for International Economics, (April 2006), chap. 9. 3. See C. Fred Bergsten, We can fight fire with fire on the renminbi, Financial Times, October 3 2010; idem, Protectionism by China Is Biggest Since World War II, New York Times Economix blog, October 8, 2010. http:// economix.blogs.nytimes.com/2010/10/08/biggest-protectionism-sinceworld-war-ii/; and Interview With German Finance Minister Schuble, 'The US Has Lived on Borrowed Money for Too Long, Spiegel Online, November 8, 2010.http://www.spiegel.de/international/world/0,1518,727801,00. html 4. Global Trends 2025: A Transformed World (Washington, D.C.: U.S. Government Printing Office, 2008), iv-vii. See also Cynthia Roberts, ed., Polity Forum: Challengers or Stakeholders? BRICs and the Liberal World Order (2010) vol. 42. 5. Martin Wolf, The West No Longer Holds all the Cards, Financial Times, 23 September 2009. 6. Michael Mastanduno, System Maker and Privilege Taker: U.S. Power and the International Political Economy, World Politics 61, no. 1 (January 2009), pp. 12154. 7. The Economist, Nov. 4th 2010. 8. David E. Sanger, Deficits May Alter U.S. Politics and Global Power, New York Times, February 1, 2010, p. A1. 9. Carmen M. Reinhart & Kenneth S. Rogoff, This Time Is Different: Eight Centuries of Financial Folly (Princeton University Press, 2009). 10. Henry M. Paulson, Dan Woren, On the Brink: Inside the Race to Stop the Collapse of the Global Financial System (Grand Central Publishing, 2010). 11. Stephen S. Cohen and J. Bradford DeLong, The End of Influence: What Happens When Other Countries Have the Money (New York: Basic Books, 2010). See also OECD, Shifting Wealth. 12. In a bizarre twist of brand protection, Goldmans ONeill came out against including South Africa, suggesting Nigeria makes more sense. Goldman Sachs also proposed replacing the term emerging markets with growth markets declaring that this group should include the BRICs, plus a new list of four Indonesia, South Korea, Mexico and Turkey, but not South Africa.

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BRICs remain wary about becoming responsible stakeholders or partners in maintaining the Western order. It is doubtful they will invest significant resources for providing global public goods, except where their interests are concerned.
for providing global public goods, except where their interests are concerned. Thus, China moved to buy European debt to bolster an important trading partner and is likely to be dragged into a deeper intervention in Sudan to protect its investments. BRICs are willing to combat pirates and help with disaster relief but not shoulder the costs of climate change. Their primary focus is on domestic needs as their growing middle classes combined account for almost half of global consumption growth. Thus, China seeks raw materials in repressive African countries, India pursues energy deals with Iran, and Russia bans grain exports after severe drought, driving up world prices.

Five years since its start, the BRICs are a recognized diplomatic club with concrete achievements, growing network coordination, and aspirants in the wings, including Turkey and Indonesia. After much lobbying, China reportedly decided after consultations with BRICs governments to admit only South Africa at the annual summit this April in China. Although its population is dwarfed by the others and $286 billion GDP less than one fourth of Russias, expectations run high that it will be a BRICs gateway to 1 billion consumers on the continent and vast mineral resources.12 In a coincidence, all five BRICS now hold seats (three rotating) on the UN Security Council. The logical next move is for the BRICS to broker a deal on reforming the permanent membership of the Security Council.

BRICs enlarging and advancing

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