BRICS Summit Meeting of March 2013
The BRICS (Brazil, Russia, India, China, South Africa) summit meeting of March 2013 held in Durban, South Africa, which had an ambitious agenda which will have consequences for the world economy, has been all but ignored by the popular Western media. We could not find a word about it on CNN or Bloomberg News. The Washington Post had a small article hidden away which expressed skepticism about the partners’ ability to work jointly and proved their point by a quotation from an obscure London financial manager. The New York Times of 26 March stated that BRICS planned to set up a development bank to challenge the IMF and World Bank but cast doubts on their ability to work together and their professed support for developing countries in Africa. Only Der Spiegel, the German newsmagazine, had a good word for BRICS, also quoting a retiring top manager of Goldman Sachs, Jim O’Neill.
A Wall Street Journal article of 25 March had this comment: “Leaders from Brazil, Russia, India, China and South Africa hope to find ways to counterbalance western influence in the global economy, in part by swapping their currencies more efficiently and establishing a development bank to extend their influence in emerging markets”. The China Daily of 27 March 2013 stated: “He (Chinese Finance Minister, Lou Jiwei) also said the current global economic situation is very complicated, noting the debt crisis in Europe is not over yet, which along with the quantitative easing policy has created an unfavorable external environment for the BRICS nations”. The World Bank welcomed the establishment of a BRICS development bank and was “ready to work closely with the new bank to end poverty and build shared prosperity throughout the developing world”.
This is the crux of the matter. One of the most perceptive political philosophers of all time, V.I. Lenin, writing Imperialism, The Highest Stage of Capitalism, predicted in 1915, before it became a matured reality that finance capital would become the major instrument of imperial power in the future. It is financial power that enables the West’s supreme military and political power and allows it to dominate world politics, punish countries not aligned with them by destroying their economies and invading others with impunity.
It is worth recollecting how the world’s biggest economy and currently the world’s biggest debtor nation (national debt of US now $16 trillion or one fourth of the world economy) owns the main currency for world trade and the reserve currency of most nations. In the Bretton Woods Conference of July 1944, the 44 Allied nations (meaning those at war at the time with Nazi Germany and Japan and their allies) set out to restructure the world financial and trading system to prevent future wars. It set up the International Bank for Reconstruction and Development (IBRD) of which the most important components today are the World Bank and the IMF, The General Agreement for Trade and Tariff (GATT) which has now been succeeded by the World Trade Organization (WTO) and the basis of the new international reserve currency which was to be the US dollar. The USA was the world’s biggest creditor nation at the time and its GDP was equivalent to almost half that of the world due to the destruction of the powerful European nations during to the war. The caveat was that the dollar would be pegged to gold at $35 per ounce. Other nations’ currencies would be valued against the US dollar which would also be the most important reserve currency. John Maynard Keynes, the British representative and the most acclaimed economist of the time opposed this and suggested a neutral international currency, which he called Bancor, which would be operated by the International Clearing House that would settle currency exchanges for international trade. Keynes lost to strong
opposition by the USA. Having established the privileged position of the US dollar, in 1971 US President Nixon unilaterally abrogated the obligation to link the dollar value to gold. The USA now had acquired a licence to create money without external restraints and yet retained its privileged position due to its universal acceptance as the reserve currency and the currency of trade. Even before this, the USA was creating more money than was warranted by its gold reserves till President Charles De Gaulle called off this bluff by exchanging large volumes of dollars for gold.
This is why the US strenuously, yet unsuccessfully, opposed the creation of the euro currency by the EU in 1999.
This is not to deny the US role in fostering industrial development and modern management around the world. It offered the world financial stability at this stage. The post World War 2 (WW2) recovery of Western Europe owes much to the newly created Bretton Woods institutions and the export of technology and management from the USA. In Asia, Japan, Korea and Taiwan were the new leaders in industrialisation after WW2 but initially battled huge restrictions on the entry of their products to the USA and Europe. With the political changes and economic reforms in China and India, US and many European corporations discovered it was cheaper to manufacture in Asia and make bigger profits by marketing these back in their home countries. Asia has become the world’s premier workshop. An unintended consequence of this shift of manufacturing industries to Asia has been the loss of good manufacturing jobs in the West and mounting unemployment. To bridge this gap and maintain prosperity and dominant military power, the USA and the EU have resorted both to extravagant money creation and borrowing which has now become their biggest economic problem.
The extravagant creation of new money in the West and its international borrowings impacted adversely on developing countries which have to play by the rules and cannot expand their own money supply without either expanding their real economy of goods and services or by international borrowing, unless it wants to invite catastrophic inflation, as in Zimbabwe. On the other hand, the owners of reserve currencies, the dollar and the euro, can live well beyond the worth of their real economies. Developing countries are disadvantaged because the value of their currencies is still measured against the dollar and the euro. The developing world is hence paying rent to the powerful West to maintain its financial position. Due to their dependent position, the developing countries lacked the ability to challenge the situation. This is what this BRICS summit hopes to address, albeit cautiously. Among developing countries (though Russia cannot be classified as developing, it is still a victim of the system), it is only BRICS that can do it as it has a combined GDP amounting to a quarter of the world GDP and financial reserves of four trillion dollars.
The BRICS summit in Durban carried the theme: “BRICS & Africa: Partnership for Development, Integration and Industrialisation”. Twenty five African countries participated as observers. The main items approved at this meeting were these:
(1) Creation of a BRICS International Development Bank, (2) Creation of a
Contingent Reserve Arrangement, (3) Setting up of a BRICS Business Council (4) Setting up a BRICS Thank Tank Council.
Of these, the most significant is the BRICS Development Bank which will provide an alternative to the World Bank and IMF that are now controlled by the West and often supports Western political and economic agendas. The proposed bank will focus heavily on funding infrastructure in developing countries. It is a major new venture and will take a few years to become a reality. This proposal is what the West finds most irksome. But already many infrastructure projects in Africa are supported by China and to a lesser extent by India and Malaysia, projects that the other international agencies will not fund on advantageous terms. Chinese presence in Africa is already substantial with China being the main trading partner in the continent with a trade value of $198.4 billion in 2012.
The Contingency Reserve Fund is a protective measure to maintain adequate special reserve funds to protect countries from the type of financial crises that have occurred recently, such as the US originated crisis of 2008. The funds will be maintained by the Central Banks of the respective countries in the following volumes: China $41 billion, Russia, India and Brazil $18 billion each and South Africa $5 billion. The BRICS Business Council will seek to expand trade between these countries and the first meeting was held immediately. A Think Tank would regularly evaluate and develop new strategies. BRICS also agreed to set up a permanent headquarters.
The BRICS countries, together with many other developing countries in Asia, are developing currency swaps for their external trade to by-pass the US dollar and the euro. China, which plans to make the renminbi an international currency, has already established currency swaps for trading with Russia, Australia, Turkey, UAE, and recently with Brazil. The biggest currency swap will be between China and Japan, the world’s second and third largest economies and the biggest trading partners among nations. The ASEAN region also trades among themselves with currency agreements. The Japanese and Chinese currencies are traded in Shanghai and Tokyo on their own perceived value without reference to US dollars or euros. A new world financial structure that is more inclusive and fair by all nations is already on the way.
Kenneth Abeywickrama
06 April 2013.