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Thursday, 07 February 2013 18:47

BRICS Guide 7: Major Issues and Concerns Faced By BRICS

Written by Suresh P Singh (CUTS) and Memory Dube (SAIIA)

The BRICS group is rapidly consolidating and becoming a force to reckon with in global governance.

The March 2012 BRICS Summit in India also completed the hosting cycle of the original BRIC members and, with South Africa hosting the next BRICS summit in 2013, the hosting cycle will be complete for the entire group. If anything, this milestone is an indication of the group’s staying power. The 2012 BRICS summit, which was held under the theme of ‘BRICS Partnership for Global Stability, Security and Prosperity’, emphasised co-operation among BRICS countries on various economic and development issues, including trade and investment, food security, sustainable development and energy, health, terrorism, science, development, and technology and innovation, in addition to the global financial and economic management agenda.

This was in acknowledgement of common development issues and concerns faced by BRICS countries, and signifies a concerted effort towards a co-operative approach to development in the BRICS countries and regions.


Trade and investment

The fast-growing middle class in the BRICS countries has encouraged the expansion of trade among the BRICS countries, facilitating the radical transformation of global trade where significant trade volumes are bypassing the Western markets.Trade among developing countries generally is increasing at a fast pace. Among the BRICS in particular it has grown significantly, with China as the driver of this trade. Nevertheless, beyond the bilateral relationships with China, trade and investment linkages among the BRICS countries are fragile and disjointed.

The BRICS summit meetings have reiterated the importance of increased intra-BRICS trade and investment to facilitate growth and development of the BRICS economies as well as the world economy. The history of trade co-operation among all the BRICS countries is relatively weak [1] and, given the nature of their bilateral relations, improving on this state of affairs will be a tall order. Despite a fast growth rate in intra-BRIC trade, this has been mostly in the form of Russia, Brazil and South Africa supplying commodities to China and India, more so to China than India, while China is major exporter of manufactures to all the other BRICS.

The BRICS countries also have different economic growth strategies that determine their economic policies. China’s economy is driven by its exports of manufactures and central role in the global value chains; but its domestic consumption is still very limited, which creates a current account surplus for China. There is China’s currency manipulation, where the pegging of the renminbi to the US dollar gives China an unfair trade advantage by making its exports cheaper. This practice has been criticised openly only by Brazil. [2] The currency issue is and will continue to be a source of tension in the BRICS unless it is dealt with effectively. The above-mentioned factors have helped turn China into a net creditor on the international market. Nonetheless, there is a growing challenge to China’s role and position within the BRICS trade equation and its economic relationship with the rest of the world. The cost of production in China is increasing due to the rising cost of production inputs such as energy and land; increasing skilled labour shortages; and the rising wage cost and lack of adequate infrastructure to link production bases to consumption bases. Given these dynamics, China is working on changing its economic model to a consumption-led one, which would have significant impacts on the BRICS partners.

Russia’s economy is also export oriented, based on its energy resources. Russia acknowledges that this economic trajectory is unsustainable in the long run and is looking to diversify its export basket and to venture into manufacturing. Russia’s recent accession to the WTO is expected to boost inward trade and investment, but, given the state capitalism dynamics in the country, the future trade policy trajectory is not yet entirely clear.

India’s economy, on the other hand, is driven by strong capital imports and, because of its flexible exchange rate policy, it is plagued by current account deficits. Brazil and South Africa are also experiencing current account deficits. Brazil’s imports are aimed at boosting domestic demand while, in the case of South Africa, the deficits are also caused by its regional integration obligations which result in neighbouring countries investing their current account surpluses in South Africa. Brazil’s biggest exports are in agriculture and, although the country is consequently keen to see further market opening for processed agricultural exports, particularly under the Doha Round, Brazil is still keen on its industrialisation to promote manufacturing. Brazil’s huge domestic market and steady economic growth also work to ensure that the country remains an attractive investment destination. Despite these factors, currency appreciation remains a growth hurdle for Brazil and, consequently, the country is outspoken on currency manipulation issues, as discussed in the case of China.

South Africa is richly endowed with natural resources but is also keen to expand its manufacturing base and to export more value-added products. South Africa’s biggest challenge is that of inclusive growth and employment. As such, it is implementing policy measures designed to foster skills development, youth employment and industrial development, among other objectives. On a trade level, currently South Africa is focused on regional integration initiatives, based on the premise that an underdeveloped African continent is not conducive to South Africa’s own economic growth. These initiatives are also very important for the promotion of South Africa’s value-added goods.

Thus although the trading relationships can be said to be complementary, the commodity producers are keen to promote more value add to their products. It should also be kept in mind that the BRICS countries compete against each other on the international markets. In the WTO, the largest number of complaints against the Chinese have been initiated by Brazil, with India also seen as a threat to Brazilian producers in the steel and software sectors. The value to a country’s exports is in the added value to the products and not mere volume as the dynamics to the BRICS trading relationship demonstrate. This means that reaching the desired commitment of increased and integrated trading relationships among the BRICS will be achieved only through a process of confrontation, negotiation and co-operation. [1]

There does, however, seem to be progress in the area of facilitating trade among the BRICS. Two agreements were signed at the 2012 BRICS summit: the Master Agreement on Extending Credit Facility in Local Currency and the Multilateral Letter of Credit Confirmation Facility Agreement. These agreements were signed by the export–import banks of the five BRICS countries, namely the Brazilian Development Bank, Russia’s State Corporation Bank for Development and Foreign Economic Affairs, India’s Exim Bank, the China Development Bank Corporation and the Development Bank of Southern Africa.[1] These agreements will allow trade among the BRICS countries to be conducted in domestic currencies, thereby eliminating the use of the US dollar and reducing the risk of currency volatility, as well as promoting the internationalisation of BRICS currencies.

The real battle with trade and investment in the BRICS trade and investment arena lies in the ability to resolve bilateral trade tensions. Success in achieving this will help to strengthen the group’s standing in the international economic negotiations.


 

[1] Conçalves JB, ‘BRIC – Cooperation in trade and industry’, in Unnikrishnan N & S Saran (eds), BRIC in the New World Order. Perspectives from Brazil, China, India and Russia. India: Macmillan Publishers & Observer Research Foundation, 2011.

[2] Although the BRICS Delhi Declaration criticised developed economies over monetary policies that give them an unfair trade advantage, there was no mention of China, with the BRICS countries electing to close ranks around one of their own.


Infrastructure and industrial development

The BRICS share the challenge of infrastructure deficiency in their countries and regions. Infrastructure is particularly important for economic growth and, for emerging economies of the BRICS, in the age of globalisation infrastructure becomes important if they are to have a role in the global economy and participate in the global value chains. The key areas of infrastructure development needed in the BRICS countries are in energy; telecommunication; transport (particularly road and rail); and access to improved water and sanitation. Some of the BRICS countries have implemented or are in the process of implementing ambitious infrastructure plans. China has been making significant headway in its infrastructure development plans and has managed, in the past 20 years, to build ‘40 000 miles of expressways, the world’s most extensive high speed rail system, futuristic airport terminals, extensive urban subway systems and massive hydroelectric dams.’ The country still faces challenges, such as the July 2011 bullet train collision, which damaged its record for efficient high-speed rail systems; budget constraints are interfering with road construction across the country; and there are still challenges when it comes to the provision of water and potable water. As much as two-thirds of China’s cities are reported to be lacking in adequate water, while tap water in most parts of the country is not of drinking quality.

India, on the other hand, is busy constructing new ports and airports, subways, freight rail, power generation and tolled highways, and has devoted 8% of its GDP to infrastructure projects. The challenges that India faces in its infrastructure drive include a bourgeoning population, which puts pressure on infrastructure; and attracting investment in infrastructure, owing to a difficult investment environment fuelled by poor regulatory frameworks and bureaucratic red tape.

With Brazil’s hosting of the upcoming 2014 World Cup and 2016 Summer Olympics, the country is struggling to meet targets for the required infrastructure development projects. These projects include subway extensions, bus rapid transport routes, new highways, port upgrades and airport expansions. The high-speed rail system meant to connect the major cities of Rio de Janeiro and São Paulo has also faced challenges in selecting a contractor; and currently it is doubtful that this will be achieved in time for the Olympics.

Russia also suffers from serious underdevelopment in the infrastructure sector. Having inherited the bulk of its infrastructure from the former Soviet Union, harsh climatic conditions, inadequate investment from both the state and the private sector in the infrastructure sector, and corruption have left the country’s infrastructure in a state of severe disrepair. Consequently, Russia trails other developed countries in terms of infrastructure development. The Russian government has come up with an infrastructure development programme up to 2030 and plans on making significant investments into the infrastructure sector. In the past 10 years the government has spent RUB 1.9 trillion ($57 billion); but needs to spend an additional RUB 1.5 trillion ($45 billion) to ensure adequate maintenance of the infrastructure. The high cost of infrastructure development is another hurdle with which Russia has to contend, mostly because of corruption and a lack of competition in the sectors.

In South Africa, infrastructure is at the core of the government’s stimulatory fiscal package and a key component of the New Growth Path.[3] In his State of the Nation address for 2012, the president of South Africa, Jacob Zuma, outlined a very ambitious Strategic Infrastructure Plan. Estimates are that ZAR 4 trillion would need to be invested in infrastructure development in the next 15 years if the plan is to be fulfilled. The targeted sectors are in rail, ports, roads, electricity, water and telecommunications. In line with the renewed emphasis on infrastructure, the South African government has established several institutions designed to strengthen the state’s capacity to deliver on its infrastructure commitments, which are as follows [sourced from here]:

  • The Department of Performance Monitoring and Evaluation in the Presidency, tasked with facilitating delivery agreements for all infrastructure departments and monitoring their implementation;
  • The National Planning Commission, located in the Presidency, tasked with developing a long-term vision and strategic plan for South Africa, alongside advising Cabinet on cross-cutting issues that impact on South Africa’s long-term development. Infrastructure is one of the key issues addressed by the commission;
  • The newly created Presidential Infrastructure Coordination Commission headed by the President, that will co-ordinate and oversee the implementation of strategic infrastructure projects that stimulate social and economic growth;
  • The Presidential Review Committee on State-owned Enterprises (SOEs) that aims to align SOEs with the government’s development agenda, including that of infrastructure development.

 

South Africa’s infrastructure drive is linked closely to the theme of regional integration, based on the realisation that South Africa’s development and growth is also dependent on that of the region’s. The Strategic Infrastructure Plan therefore also touches upon regional infrastructure projects.

The challenge for these countries of course lies in financing and investment. The infrastructure challenge is also about infrastructure development in the various regions in which the BRICS countries are situated. To facilitate co-operation in this area, the BRICS countries could set up infrastructure funds to mobilise retail and institutional investors, as well as encourage public–private participation in the infrastructure drive. One of the potential ways in which the financing challenge is anticipated to be met is through the mooted BRICS Development Bank. The BRICS bank would be expected to fund development and infrastructure projects in developing countries; promote sustainable development; facilitate increased trade and trading opportunities; and offer support to the social development sectors. The New Delhi summit communiqué directed BRICS financial experts to undertake a feasibility study with regard to the establishment of the BRICS bank. Although currently details are sketchy, it is expected that the 2013 BRICS Summit in South Africa will provide more clarity on where things stand.


[3] The New Growth Path is a policy that was introduced by the Economic Development Department in 2010, and is aimed at creating and enhancing economic growth, employment growth and equity.


Food security

Agriculture has been high on the agenda of international institutions and country groupings since the global food crisis of 2008. The BRICS have been no exception, and from the very first summit in 2009 they have made pronouncements on food security. The BRICS countries can promote food security in their territories through initiatives that include [source here]:

  • the creation of a basic agricultural information exchange system in BRICS countries;
  • development of a general strategy for ensuring access to food for the most vulnerable section(s) of the population;
  • undertaking measures to reduce the negative impact of climate change on food security,
  • adapting agriculture to climate change;
  • and enhancing agricultural technology co-operation and innovation as well as [promoting] trade and investment in agriculture.

 

Such initiatives would require a strategic approach to agricultural development in all the BRICS countries, particularly taking into consideration the importance of the agricultural sector in some of the BRICS countries, for both food security and economic development purposes. The agricultural sectors in all the BRICS countries, however, face a few challenges. These include the impact of climate change on productivity; issues of water security; commodity price volatility, which leads to a rise in food prices; rising input costs and diverted agricultural land; and the challenge of promoting smallholder farming,[4] particularly in the face of other challenges such as urbanisation.

In terms of practical steps for co-operation in the area of food security, the BRICS countries agreed to the following in the Moscow Declaration of BRIC Ministers of Agriculture and Agrarian Development in March 2010:

  • to create an agricultural information-base system;
  • to develop a general strategy for ensuring access to food for the most vulnerable sections of the community;
  • to reduce the negative impact of climate change on food security and adapt agriculture to climate change; and
  • to enhance agricultural technology co-operation and innovation.

 

Following up on this, a BRICS Agricultural Co-operation Working Group was established, which formulated the Action Plan 2012–2016 for Agricultural Cooperation of BRICS Countries. This action plan laid out five co-operation activities, each to be co-ordinated by a different BRICS member. The first activity is the creation of a basic agricultural information system of BRICS countries, to be co-ordinated by China; the second is the development of a general strategy for ensuring access to food for the most vulnerable population, to be co-ordinated by Brazil; the third is the reduction of the negative impact of climate change on food security and adaptation of agriculture to climate change, to be co-ordinated by South Africa; the fourth is the enhancement of agricultural technology co-operation and innovation, to be co-ordinated by India; and the fifth is trade and investment promotion, to be co-ordinated by Russia. This approach by the BRICS countries is holistic and includes the trade, finance and technology aspects of food security.

Other recommendations on tackling the food security challenge in the BRICS countries include promoting agricultural growth and poverty reduction through the prioritisation of public spending on agricultural research and development (R&D), rural roads and education, as well as the reduction and elimination of input and output subsidies; improving access to markets for smallholder farmers, which includes both input and output markets; and scaling up productive social safety nets, which should be accompanied by improved targeting mechanisms. These actions ought to be prioritised by every BRICS country outside of the official co-operation mechanisms so as to enhance internal food security.

Peer learning and exchanging best practices is another way of dealing with the challenge of food security in the BRICS countries. Brazil provides the best learning example in this area through Embrapa, the Empresa Brasileira de Pesquisa Agropecuria or Brazilian Agricultural Research Corporation, which was established in 1973 to develop agricultural technologies through research and innovation. To date Embrapa has developed more than 9 000 technologies, reduced production costs, and increased food supply while being environmentally sustainable at the same time. In addition, some of Embrapa’s major accomplishments include turning an area previously considered uncultivable into an ‘agricultural frontier’; and turning soybean, a temperate climate crop, into a tropical crop. Embrapa could therefore play a major anchor role when it comes to food security co-operation among the BRICS.


[4] See Basu PK, ‘The role of BRICS countries in food and agriculture development’, in Larionova M & J Kirton (eds), BRICS New Delhi Summit 2012 – Stability, Security and Prosperity. London & Washington, DC: Newsdesk Publishers, 2012.


Research and development

R&D is a challenge that cuts across many different sectors in the BRICS countries. At the first Senior Official Meeting on Science, Technology and Innovation in 2011, various areas for co-operation among the BRICS were identified. These include the exchange of information on STI policies and programmes, promotion of technology transfer, new energy, renewable energy and energy efficiency, nanotechnology, basic research, medicine and bio-technology. One way of actualising this co-operation would be by taking advantage of the existing co-operation among think tanks in the BRICS. Different institutes specialising in different research areas could come together and share knowledge in the promotion of R&D. The BRICS New Delhi communiqué emphasised increasing research, development and innovation capacities in the areas of food, pharma, health and energy; as well as basic research in the emerging interdisciplinary fields of nanotechnology, biotechnology, and advanced materials science.

 


Cultural exchange and tourism

 

 

Even though some countries in the group, such as India and China, have had a cultural influence on each other for centuries, culture and tourism are two areas that have yet to find real common ground among BRICS countries. In other words, there is little commonality between these countries, primarily because of differing language, culture, living styles and food habits. This is reflected by the Delhi Declaration, which merely talks of encouraging and expanding the channels of communication, exchanges and people-to-people contact, including in the areas of youth, education, culture, tourism and sports.

Even at the bilateral levels, culture and tourism are hardly recognised as tools to facilitate deeper integration of BRICS economies. For example, the Chinese foreign policy instrument mentions tourism and the Brazilian one briefly refers to culture and tourism, but in no way do they reflect that culture and tourism can be a useful tool. The ‘Framework for Enhanced Cooperation between Africa and India’, however, is an exception. This agreement explicitly recognises the role culture can play in the development and integration of the two societies It also recognises the need to collaborate in the organisation of international training for trainers in the field of cultural goods protection. This emphasises the need for the use of creative and cultural industries, and calls for the development of cultural policies along with the exchange of experiences in the development of creative industries.

Culture and tourism will continue to remain a weak link in the overall co-operation and collaboration between the BRICS countries. Measures similar to those that India and the erstwhile USSR had in the 1970s and 1980s need to be introduced, when the two countries enjoyed a strong cultural, strategic, economic and diplomatic relationship. Such a move will not only further improve relationships between the member countries, but will also facilitate intra-group tourism.

 

Read on: BRICS Guide 8: Major Strengths and Commonalities Of BRICS

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