BRIC Up a New Monetary System

This article provides great insight into the alliance known as BRICS

On April 15, 2011, leaders of Brazil, Russia, India and China met in Brasilia to continue talks on what these countries want to see happen, which is a multi-polar world with a multi-currency international monetary system. This multi-polarity is aimed at interdependence among countries, without the hegemony of any country as the most powerful one. The five-country group of BRICS, with South Africa as the new member that came aboard this year, proposes to function as a network of equals rather than a pyramid with a hierarchical order. The movement for a united Europe is almost as old as the serious divisive propensities and nationalistic animosities betwixt European nations. Nevertheless, the current financial crisis and rebalancing of global power seems to be applying the much-needed glue for forging a possible united front.

Simultaneously, efforts are on for a future Euro-BRICS summit, which would bring together at least the core of the European Union, namely Euroland countries on the one hand and Brazil, Russia, India, China and South Africa on the other. Such a formidable combination of three and a half billion people will, directly or indirectly, bring together four continents. In general, the current global financial crisis is being observed to mark the end of the systems and power relationships that have dominated the world since the end of the Second World War. Also as a fallout of the crisis, international relations in areas as diverse as finance, trade and strategic diplomacy have been subjected to unprecedented rebalancing too. Of course, an overhaul of international financial structure is advocated as part of a wider institutional reform in governance at the global level.

It is now acknowledged without exception that one important reason for the global financial crisis is that the international monetary system has been dollar-centric for too long. As a result, the domestic financial crisis of the US turned into a global crisis. The huge current account deficit of the US and the various fluctuations in the US economy following the onset of the crisis, in fact, make the change in the international monetary system imperative. In November 2010, the World Bank President Robert Zoellick suggested an international monetary system that better reflects the emerging economic conditions of today. Along with the dollar, euro, yen, pound and renminbi should all be used as international reference points of market expectations about future currency values. This will set in motion the process of recognition of these currencies as future reserve currencies.

In the meantime, the European Union and BRICS have scaled new heights with respect to their share in the world GDP and world exports. The share of the European Union in world GDP in 2010 is the highest at 25.99% while the figure for the US is 23.6%, and for BRIC excluding South Africa, it is 17.8%. In respect of percentage share in global exports in 2010, the European Union is at 36.6%, BRIC at 16.51% and the US at 8.51%. These data clearly indicate that through time, and especially after the current crisis set in, there is a decisive change in the international economic scene, which calls for a change in the international monetary system.

BRICS countries as such are regional leaders in their own right. These countries represent different civilisations but have similarity of views on international economic issues. No country among the BRICS pursues hegemonistic policies. The current global crisis did not dent the economic fortunes of BRICS the way it influenced the fortunes of the European economies. All the same, Europe has many strengths. It is the world’s largest trading block, thanks to the high creativity of its people and a strong industrial base. The proposed Euro-BRICS summit could herald the unfolding of a host of opportunities, including registering progress towards a multi-polar international monetary system. For that to happen, the currencies that are to be potential reserve currencies have to be completely convertible. And, more importantly, countries like China, for example, will have to codify their civil laws with respect to property rights and also make these laws subservient to international property rights.

The author is Reserve Bank of India Chair Professor, ICRIER, New Delhi