An agenda for the BRICS summit
An American construct…
In 2001, the economists at Goldman Sachs came up with BRIC. To be precise, the date was 30th November 2001 when Goldman Sachs published its Global Economics Paper №66, ““Building Better Global Economic Brics”. Originally, they did not come up with BRICS. It was a brilliant marketing success for the firm and for the countries (Brazil, Russia, India and China) involved. As per a report[1] in Financial Times published in 2010, “in May 2008, Russia hosted the first formal Bric summit, a meeting of BRIC foreign ministers in Yekaterinburg. In July 2009, it followed this with a formal gathering of all four BRIC heads of state.” South Africa became part of the group on 24 December 2010 and BRIC became BRICS.
After the end of the technology boom, the Wall Street firm was probably searching for the next big idea to peddle to their clients and they hit upon BRIC. Take demographics, throw in a bit of productivity improvement, mix with historical developments in East Asia on catching up and stir with some productivity improvement, one gets sustained economic growth that takes a country to the top of the heap. Whether the firm meant it or not, the countries took the view that all that they needed to do was to show up in 2050 and, voila, they would be developed nations. Linear extrapolations — you can plug in any growth number you like — put China at the top of the global economic league tables with India second or third depending on one’s assumption. This was a bit like how Wall Street firms justified the price of any company stock with earnings assumptions that validated the stock price.
… that morphed into a geo-political grouping
More interestingly, the countries in question saw in their unlikely group the potential to form an alliance against the Anglo-Saxon dominance of the world. Hence, an American construct became the trigger for the formalisation of an alliance that sought to replace American dominance or end the unipolar world. In terms of theories of optimal areas, the BRIC group was not an optimal area economically, geographically, historically and culturally. It was a contrived political alliance in which two of the members — Russia and China — had permanent seats in the U.N. Security Council and the other two — India and Brazil — were aspiring members. But, at least one of the members is lukewarm to the idea of either of them joining them in the Security Council as equals. China is blocking India’s entry into the Nuclear Suppliers’ Group and is also resisting India’s attempts to name a Pakistani based terrorist as a global terrorist. China claims that Brazil has brought the most number of anti-dumping cases against it followed by India. In turn, China blocks the entry of Brazilian meat and Brazil claims that Chinese made goods had destroyed many of their home-grown industries.[2]
It does not mean that members of the BRIC are ready to disband their group and go their own ways. Each one of them, for their own reasons, sees value in keeping it as it is. China sees it as another group that it can and does dominate thanks to its sheer economic size. It wants to add other members to the group. Not all BRICS members are enthusiastic about it. Also, China wants BRICS members to evolve a consensus. In the light of the above, it seems scarcely believable that they are serious about it. At a recent BRICS seminar organised by the Shanghai Institute of International Studies that Yours truly attended, a representative from one of the BRICS nations pointed out that it might be possible for BRICS countries to co-ordinate their positions but not possible to have a common stand or consensus on issues. For example, access to internet in China is severely restricted. Additionally, Brazil sees itself as part of the Western civilisation.
Neither the tangible conflicts nor these philosophical differences make the group any less relevant than it was before. China will be hosting the ninth BRICS summit in Xiamen, Fujian province in September this year. There are no apparent signs yet that China is tiring of BRICS. On the contrary, there are reasons as to why it finds the group valuable. The group consists of three genuine democracies — India, Brazil and South Africa. That lends the group a legitimacy that China and Russia lack. It is also easier for China to pursue bilateral agendas against advanced nations under the cover of BRICS. The actions would be seen as serving a larger cause than its own. So, BRICS is in no danger of self-destructing.
Multi-polarity is not a reality
Nor is the multi-polar world that BRICS nations are after is a fait accompli yet, notwithstanding the evident withdrawal of American leadership from certain issues such as climate change and free trade. For all the criticism of America’s isolation that President Trump’s policies are leading to, he has visited Europe thrice in the six month of his Presidency, visited the Persian Gulf and has hosted leaders from China, India, Germany and Britain and Israel among others. A recent Pew survey found that more people around the world still view the United States as an economic power more than they do China:
“Across 38 nations polled by Pew Research Centre, a median of 42% say the U.S. is the world’s leading economy, while 32% name China. Across all of the countries surveyed in Latin America, as well as most in Asia and sub-Saharan Africa, publics tend to believe the U.S. is the top economy.”[3]
The survey findings, in entirety, deserve careful study. There is more to it than these headline numbers. For example, although some European nations feel that China’s economic power is better than of America’s, their opinion of China and of its leadership is unflattering.
More importantly, empirical studies continue to point to the relevance and centrality of the United States for global demand. In its annual report for 2015–16, the Bank for International Settlements reminded[4] the world that the US economy mattered more for global economic growth than China did:
“In contrast to the significant rise in exports destined for China, the share of most countries’ exports to the United States has remained stable or declined a little over the past 15 years. Despite this, US demand is still more important than China’s for most countries’ exports. Trade spillovers can also occur through a third country that imports intermediate inputs used in the production of its own exports. As a result, for many advanced and commodity-exporting EMEs the indirect impact of a reduction in US imports is large relative to the direct effect.”
Economic cycles are still dependent on the American cycle. Financial markets are integrated with the US.
Effectively, there is one economy and one market — stocks or bonds. It has been the case since the end of the World War II. Indeed, the economic rise of China too has been due to the accommodation and support of the United States.
There are also other reasons as to why the multi-polar world is not at hand, yet. It is one thing for China to float its international financial institutions such as the New Development Bank or the Asia Infrastructure Investment Bank as alternatives to the institutions founded and dominated by western nations but it is another thing to govern those very institutions that represent western dominance. The latter signals the end of the dominance whereas the former could be construed as tilting at the windmills until, over time, the new institutions eclipse the reach, influence and dominance of the status quo institutions. This answers the question posed by C. Rajamohan[5] of whether the BRICS grouping remains relevant when multi-polarity has been achieved:
“It is the quest for a multipolar world that brought these geographically disparate states under one umbrella after the Cold War. But when the multipolar world is already upon us, can the BRICS hang together?”
What to do in a multi-polar world?
Not only has multi-polarity not been achieved yet but also that the relevance of the groups increases more after it is achieved. Once the western dominance has been ended, then these nations have to have a positive agenda. That is where much of the scepticism lies. Many reckon that these nations have come together to displace the West and once that is achieved, their differences would come into sharp relief and sink the group’s cohesion and relevance. But, it need not have to be that way, if the leaders of BRICS nations begin preparing for the day when they would be in a position to dictate the global agenda.
Financial globalisation
Over the last thirty-five years, the world has witnessed synchronised global growth for the most part but due, in large part, to the rise in debt levels, also synchronised across nations — developed and developing. Rising debt levels — both in the private and in the public sectors — constitute a large share of the explanation for global economic expansion in the last (nearly) four decades, alongside technological advancements, growth in international trade and freer movement of capital and even labour (or, jobs) across borders. The chart below captures this well. It shows the gross public debt ratio (to GDP) of advanced nations and the nominal GDP of OECD (Organisation for Economic Co-operation and Development) nations measured in dollars. Both the trends go together. Correlation is not causation but in this case, it is. Firms and governments do not resort to debt if it does not deliver growth.

Sources: IMF (Gross Public Debt Ratio) and World Bank (OECD Nominal GDP in US$)
The rising importance of finance, the financial sector and financial markets facilitated the growth in debt. Monetary and regulatory policies favoured financial sector and financial markets. Their robust health was deemed a pre-requisite for economic health even though causality was supposed to flow in the reverse direction. Prices of assets — stocks, bonds and real estate — became the unofficial target of monetary policy in many advanced nations. In turn, the financial sector, whose profits were boosted by policy, compensated its top management inordinately excessively. The practice spread to the non-financial corporate sector too and the ratio of executive compensation to median wages in the American corporate sector rose sharply from the 1970s.
“U.S. CEOs of major companies earned 20 times more than a typical worker in 1965; this ratio grew to 29.9-to-1 in 1978 and 58.7-to-1 by 1989, and then it surged in the 1990s to hit 376.1-to-1 by the end of the 1990s recovery in 2000. The fall in the stock market after 2000 reduced CEO stock-related pay (e.g., options) and caused CEO compensation to tumble until 2002 and 2003. CEO compensation recovered to a level of 345.3 times worker pay by 2007, almost back to its 2000 level. The financial crisis in 2008 and accompanying stock market decline reduced CEO compensation after 2007–2008, as discussed above, and the CEO-to-worker compensation ratio fell in tandem. By 2014, the stock market had recouped all of the value it lost following the financial crisis. Similarly, CEO compensation had grown from its 2009 low, and the CEO-to-worker compensation ratio in 2014 had recovered to 303.4-to-1, a rise of 107.6 since 2009. Though the CEO-to-worker compensation ratio remains below the peak values achieved earlier in the 2000s, it is far higher than what prevailed through the 1960s, 1970s, 1980s, and 1990s.”[6] Collectively, these constituted financial globalisation.
Addiction to debt
If the formation of the BRICS as a political grouping had to make sense, they have to break the paradigm of financial globalisation that has dominated Western thinking and policymaking over the last three decades and more. The place to start is by acknowledging that they have made some of the same mistakes as the West has done, including reliance on debt. None illustrates this error more than China. Its overall debt (non-financial debt, including that of the government) has ballooned since the new millennium while GDP has plateaued and flattened. The rise has been more dramatic since the onset of the financial crisis of 2008. Ironically, the crisis was supposed to be a crisis of western nations. Yet, China had to unleash a massive economic stimulus to bail its economy out. That confirms the dependence of these aspiring nations on western economies. The stimulus added greatly to China’s debt stock. The problem with debt is that more of it is a drag on economic growth. China is fast approaching that point, if not already there.

Sources: IMF World Economic Outlook database (April 2017) and BIS database on credit to the non-financial sector (up to end-2016). BIS database updated in June 2017 and accessed on 11th July 2017
Hence, addiction to debt has to be moderated at first and then reversed. It will have short-term growth consequences but it will make the economy healthier in the long-term.
Obsessing over stock markets
Second, the mistaken belief that stock market value connotes economic vitality must be shed. Stock markets are driven by money supply and short-term factors. Fundamentals influence them only peripherally and that too, over the long term. In other words, equity markets have come to resemble casinos more and more and less and less the mechanisms for efficient capital allocation that theory claimed them to be. The John Kay report on the equity market in the United Kingdom acknowledges this.[7] Hence, BRICS nations should stop obsessing over the stock market. In order to do, they should stop intervening in the stock market when it corrects and avoid resorting to bans on short-selling and witch-hunts on speculators. Short-sellers and speculators add information content to financial markets. If anything, speculative buying that feeds bubbles is more dangerous than short-selling that shines a spotlight corporate ill-health, malfeasance, malpractices and much else. Towards this end, BRICS nations should allow their central banks to incorporate financial stability considerations actively in their monetary policy and encourage them to use their best judgement to address nascent asset bubbles proactively and shield them from backlash that would inevitably arise from the financial sector.
Controlling and regulating capital flows
Since the 1980s, free movement of capital has been added to free trade as part of the policy prescription for developing world. However, not all capital is the same. Until recently, economists had ignored that distinction. The International Monetary Fund came close to adopting capital account liberalisation as one of its missions in 1997. But, the Asian crisis stopped it. Lately, the Fund had come around to accepting and even publishing research on evidence that capital flows can hurt economic and social stability in the developing world. For example, Davide Furceri and Prakash Loungani of the IMF[8] found that capital account liberalisation episodes were associated with a statistically significant and persistent increase in inequality. In particular, they found that, on average, capital account liberalization reforms have typically increased the Gini coefficient by about 0.8 percent in the very short term (1 year after the occurrence of the liberalization reform) and by about 0.7- 2½ percent in the medium term (5 years after). This outcome was due to the effect that capital account liberalisation had on the labour share of income. Labour share of income declined after liberalisation.
Therefore, it is essential for BRICS countries to stand up to pressure on capital account liberalisation and, more importantly, not impose that condition on smaller developing nations, on their part, either bilaterally or through lending institutions such as the New Development Bank. NDB had clearly vowed not to interfere with sovereign rights to make policies of their choice at their own pace, by not attaching conditions to loans. That should continue.
Taxing financial transactions
Fourth, closely related to the third agenda item above is the treatment of financial transactions. America and the United Kingdom have resisted European proposals[9] to levy a tax on financial transactions that add no economic value. Such a tax would throw sand under the wheels of short-term trading that adds noise and not information to asset prices. Germany and France are in favour. Given the importance and the clout of the financial sector to their economies, America and Britain have resisted it. If BRICS nations lend their weight to the European proposal, it would gain traction and move financial markets in the direction of becoming a mechanism for efficient long-term capital allocation.
Guarding against financial innovations
Fifth, financial innovations have added little to economic welfare. Even where they appeared to do so, their eventual costs proved too high for economies to bear. That is what the crisis of 2008 demonstrated unmistakably. Financial derivative products did not help eliminate or diversify risk away but they helped hide risk away from regulators. When the tide of rising asset prices receded, several financial market participants were found swimming naked, leaving their economies on the verge of collapse. Iceland, Britain and America were notable examples. BRICS nations can develop a more informed attitude towards approving financial innovations, such as derivatives and algorithm-driven trading, assessing their risks and contribution to economic welfare. They can strengthen the hands and powers of their financial regulators much more than what western nations have done. They must show courage to stand up to the lobbying of the financial industry by placing the onus of demonstrating economic utility of financial innovations and practices on the industry.
Executive compensation, listing and real investments
Sixth and finally, BRICS nations should marshal evidence that has emerged in America that listed companies invest far less in real assets than unlisted companies.[10] Public listing and executive compensation practices that reward executives for short-term stock price performance have combined to discourage companies from undertaking real investments. Stock price appreciation has become an end in itself. With the possible exception of China, other BRICS nations need more investments in physical assets for the next decade or two if their economic promise is to become reality. Hence, as they begin working on defining the agenda for the next decade and more, this item must be firmly on their agenda. There are signs in India, for example, that the ratio of executive pay to median worker pay in listed companies is higher than it is in the U.S.![11]
BRICS nations should put in place regulations and guidelines that keep executive compensation on a leash and executives accountable for the long-term performance of their companies with provisions for clawback of compensation awarded for profits should they turn into losses later. It is complex work that requires stakeholder consultations and preparation. All the more reason for BRICS nations to begin working on it before such corporate management behaviour become entrenched. Aspiring nations can ill-afford to let their physical investment rates slow down and decline even as their capital markets expand.
In short, BRICS nations can and should present a viable alternative to ‘financialisation’ and ‘financial globalization’ that have created so many problems for the world in the new millennium. That would demonstrate that the group was not a mere anti-western alliance but a genuine, viable and durable alternative to the western economic paradigm that has outlived its utility and purpose. If they can agree on this agenda at their ninth summit in September, it would be a fitting start to the second decade of BRICS making it a more meaningful one than the first.
[1] Gillian Tett (2010): ‘The story of BRICS’, Financial Times, 16 January 2010 (https://www.ft.com/content/112ca932-00ab-11df-ae8d-00144feabdc0?mhq5j — accessed on 16 July 2017)
[2] See, for example, Alexandre de Freitas Barbosa (2009): Brazil: Dances with Dragon, 1 December 2009 (http://yaleglobal.yale.edu/content/brazil-dances-dragon — accessed on 16 July 2017)
[3] “Globally, More Name U.S. Than China as World’s Leading Economic Power’, Global Attitudes & Trends, PEW Research Center, 13 July 2017 (http://www.pewglobal.org/2017/07/13/more-name-u-s-than-china-as-worlds-leading-economic-power/)
[4] Source: 86th Annual Report (1 April 2015–31 March 2016) of the Bank for International Settlements — verbatim extract from page 56 (http://www.bis.org/publ/arpdf/ar2016e3.htm — accessed on 17th July 2017)
[5] C. Rajamohan (2016): ‘BRICS Summit: Putin, Xi, Modi’, ‘Indian Express’ on Oct. 15, 2016 (http://carnegieindia.org/2016/10/15/brics-summit-putin-xi-modi-pub-64876)
[6] “Top CEOs Make 300 Times More than Typical Workers”, Economic Policy Institute, 21 June 2015 (http://www.epi.org/publication/top-ceos-make-300-times-more-than-workers-pay-growth-surpasses-market-gains-and-the-rest-of-the-0-1-percent/ — accessed on 17th July 2017). A recent report (6 July 2017) in the Wall Street Journal puts the ratio of CEO pay to median worker pay in 2015 at 276 times.
[7] The report can be accessed here: http://www.ecgi.org/conferences/eu_actionplan2013/documents/kay_review_final_report.pdf
[8] Davide Furceri and Prakash Loungani (2015): ‘Capital Account Liberalization and Inequality’, IMF Working Paper WP/15/243, November 2015 (https://www.imf.org/external/pubs/ft/wp/2015/wp15243.pdf — accessed 17 July 2017)
[9] See, for example, ‘German Courting of London Banks May Falter on Tobin Tax Pledge’, 24 January 2017 (https://www.bloomberg.com/news/articles/2017-01-23/eu-s-courting-of-london-banks-may-derail-5-year-tobin-tax-drive — accessed on 17 July 2017)
[10] John Asker, Joan-Farre Mensa and Alexander Ljungqvist (2014): ‘Corporate Investment and Stock Market Listing: A Puzzle?’, Review of Financial Studies 28, no. 2 (February 2015): 342–390 (https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1603484 — accessed 17th July 2017)
[11] See ‘Pay gap: Indian CEOs earn up to 1,200 times more than the average employee’, Business Standard, 24 July 2017 (http://www.business-standard.com/article/companies/pay-gap-indian-ceos-earn-up-to-1-200-times-more-than-the-average-employee-117072400066_1.html)
