Who do they think they are, these upstart economies, Brazil, Russia, India, China and South Africa?
That might sum up the feeling in the U.S., Europe and Japan as the BRICS nations consider a new development bank that might challenge the World Bank and International Monetary Fund. The move brings to mind Alice Amsden, the Massachusetts Institute of Technology economist who died last year, and her 2001 book, “The Rise of ‘the Rest.’”
The richest nations can stew about this turn of events, as those on the periphery of the world economic system start seeing themselves as the core. Or developed countries can look in the mirror and consider how their actions have helped accelerate the shift.
Take Japan’s success in weakening the yen 17 percent in the past six months to help stimulate exports. It has prompted talk in China and elsewhere about a return to the currency wars. Concern about exchange-rate volatility that undermines trade and growth is a big reason the BRICS, the vanguard of “the rest,” want to use their combined $4.4 trillion of foreign-currency reserves to protect their economies and raise their international clout.
The yen’s plunge coincides with the contortions of the IMF as it twists every which way, and then some, to preserve the euro. Never mind that the euro zone may be too messy and incompatible to save. Forget that Cyprus never should have been included in the enterprise, or that Spain’s 50 percent youth- unemployment rate makes the euro area’s fourth-biggest economy a potential time bomb. The IMF, run by former French Finance Minister Christine Lagarde, is determined to make the unsustainable in Europe sustainable.
That has created a bigger perception problem than the IMF and World Bank realize. If you are a world leader, such as Dilma Rousseff of Brazil, Vladimir Putin of Russia, Manmohan Singh of India, Xi Jinping of China or Jacob Zuma of South Africa, do you want to support such a euro-centric arrangement? Is our Bretton Woods-derived system, one forged in the middle of the last century, really in the best interest of five still-developing nations with 43 percent of the world’s population? Will the IMF have anything left if, say, India experiences a crisis?
It hasn’t escaped notice that Europe is being treated very differently from Asia in 1997. Back then, the IMF browbeat Asia into harsh reforms that deepened its crisis. It demanded higher interest rates, stronger currencies and fiscal tightening while forcing Thailand, Indonesia and South Korea to let weak banks fail. When Malaysia imposed capital controls, it was demonized. Europe has gotten a pass on all of the above.
The same happened when Wall Street crashed a decade later. The U.S. Treasury Department stood by as regulators, banks and corporate leaders eschewed virtually every prescription it made to policy makers in Asia, Latin America and eastern Europe. That includes crony capitalism, as top bankers shift into senior roles in the federal government only to rotate back to Wall Street a few years later. As a remedy, Richard Fisher, the president of the Federal Reserve Bank of Dallas, has long recommended breaking up too-big-to-fail banks.
Why isn’t the IMF demanding as much from the Obama administration? Why is the IMF always backing bailouts of a Greek economy that has learned nothing from its failings? How come Cyprus, with an economy about the size of Vermont’s, has Lagarde’s undivided attention in a world awash in financial and political risks? Shouldn’t Group of Seven nations chastise Japan’s yen policies or Europe’s denial about the magnitude of its troubles? You can see why the BRICS want their own IMF, an institution that supports economies without the hypocrisy.
True, Brazil, Russia, India, China and South Africa are a long way from the viable economic bloc its members advertise. When investors talk about the BRICS, they often mean China’s cash and voracious appetite for the commodities of the others. Their political systems and economic philosophies are as wildly divergent as their immediate needs as nations.
That hasn’t stopped members from taking an acronym coined by Goldman Sachs Group Inc. economist Jim O’Neill so seriously that they are on their fifth summit meeting. Nor did it stop them from adding a fifth member. Oddly, it was South Africa, not, say, Indonesia or South Korea, both of which have much bigger economies.
Yet as these key emerging economies strike out on their own, rich nations bear some of the blame. Officials in the U.S., Europe and Japan talk a great game of rebalancing the global economy; of increasing the developing world’s say in decision making; of letting markets decide exchange rates; of lowering barriers to trade and capital; and of greater transparency. And then, at least since 2007, they more often than not played by other rules.
Trust is earned, even when your economy is among those that powered global growth for much of the last century. If G7 members want today’s upstarts to join them in the spirit of future prosperity, they must radiate sincerity. The BRICS must believe that the world’s economic mechanisms work for them. If not, those among “the rest” will create their own space.
By William Pesek
William Pesek is a Bloomberg View columnist. The opinions expressed are his own. ― Ed.