The BRICS grouping in the G20: A Hedging Strategy

In the Delhi Action Plan, devised at the 4th BRICS Summit in March 2012 in India, the BRICS members committed themselves to coordinating their positions at G20 Summits. What has been the role of the 5 BRICS countries in the context of the G20 since then?

 

 

 

Rising Powers

To answer that question, it is worth keeping in mind that the BRICS countries have experienced vastly differing economic trajectories since 2012. China and India have exceeded the projections articulated by Jim O’Neill in 2001, when he first coined the BRICS term. O’Neill expected the combined GDP of the four economies to amount to about $8.7 trillion in 2013. Largely due to China and India, the reality was far rosier: even with the lower growth rates that followed the global financial crisis, the combined GDP of the BRICS amounted to over $15 trillion. In 2015, China alone was responsible for 35% of global economic growth – a greater share than US, EU and Japan combined. India, though still far smaller than China, is now the world’s fastest growing major economy, contributing to the broad shift of economic power away from the West to Asia.

Bad Performers

Brazil, Russia and South Africa, by contrast, are undergoing crises of historic proportions. The three have been the G20’s worst performing economies over the past years, leading several Western observers to question the continued utility of the BRICS term. Yet, to the surprise of many, the BRICS not only continued to exist but also started a process of institutionalization, establishing regular ministerial meetings in areas such as education, health and national security, frequent encounters between presidents and foreign ministers and – perhaps most importantly – the creation of the BRICS-led New Development Bank (NDB), headquartered in Shanghai, and the contingent reserve agreement, a financial safety net for times of financial crisis. The BRICS summit is now a major pillar of the yearly travel schedule of the nations’ presidents, irrespective of ideology.

BRICS representatives now regularly convene on the margins of G20 meetings to better coordinate their positions. The most tangible result of cooperation has been two-fold – partial reform of the IMF, thereby reducing the institution’s Western-centeredness (the BRICS’ countries greatest grievance) as well as the creation of new institutions that are set to become key pillars in the landscape of global economic governance.

Reform of existing institutions

After waiting for the implementation of IMF quota reforms for more than five years, the BRICS grouping achieved one of their major goals in the realm of global economic governance in early 2016. Now fully implemented, this reform saw six percentage points of total IMF quota-shares shift to developing countries. With its own share lifted to 6%, China is now the third largest quota-holder at the Fund (second only to the US and Japan), and Brazil, Russia, and India (whose share increased from 2.3% to 2.6%) all become top-ten quota-holders, alongside the US, Japan, France, Germany, Italy and the U.K. US voting power decreased slightly, but Washington retains its veto. In addition, in reforming the Fund’s Articles of Agreement, two of the 24 IMF directorships have shifted from European to developing countries.

And yet, the BRICS‘ victory was incomplete, as their key demand to democratize the IMF remains unanswered. At the G20 Summit in 2009, global leaders announced that the heads of international financial institutions „should be appointed through an open, transparent, and merit-based selection process.“ In 2011, however, European leaders failed to honor their promise and insisted a European should replace Dominique Strauss-Kahn as director of the IMF – at the time, using the spurious argument that a European would be most adequate to address the financial crisis in Europe.

The IMF under Christine Lagarde

With Christine Lagarde leading the IMF for a second 5-year term, European governments have effectively maintained the ‘gentleman’s agreement’, in existence since 1946, that a European should always lead the Fund. A French man or woman has been at the IMF helm for 41 of its 69 years of existence. Unless Lagarde stumbles over a scandal at home (Lagarde has been called upon to answer allegations she had improper dealings with a now-convicted businessman in 2008), France will hold on to the IMF directorship until 2021. Aware of this anomaly, Lagarde has actively defended emerging powers‘ interests at the Fund. Most notably, she built consensus for China’s yuan to be added to the major reserve currencies that are used by the IMF in calculating the value of Special Drawing Rights (SDRs), the IMF’s chief financial instrument for lending to member countries.

The emergence of new BRICS-led institutions

Partly as a response to the slow pace of reform of existing institutions, the BRICS countries have become institutional entrepreneurs. The BRICS-led NDB, the group’s most visible achievement so far, will seek to address the major bottleneck in emerging markets – lack of infrastructure. Perhaps even more importantly, it may increase emerging powers’ capacity to gain privileges of international leadership – the NDB will soon lend to non-member countries, potentially reducing the West’s institutional centrality and associated diplomatic privileges.

Installing a parallel order

The other key initiative is the launch of the Asian Infrastructure Investment Bank (AIIB), the most visible Chinese-led institutional initiative and most explicit Chinese attempt to project international economic influence. The large number of countries that applied for founding membership status of the AIIB – against Washington’s advice – also enhanced interest in the NDB, which is now seen to be part of a far broader development: the emergence of what some call a „parallel order“, which will allow China to engage in „competitive multilateralism“ – i.e., to pick and choose institutions on a case-by-case basis, according to Bejing’s interests. Notably, the BRICS countries all decided to be founding members of the AIIB, even though three of them are facing severe economic difficulties. Brazil and South Africa are the only countries to have joined in their respective neighborhoods. As part of this hedging strategy, it seems the BRICS emerging powers will continue to invest in existing institutions, recognizing the strength in today’s order, but they are also unafraid to challenge the prevailing hierarchy within global economic governance and the institutional privileges that have historically only been enjoyed by established powers.

At the same time, the individual interests of the BRICS members continue to diverge on several issues – as would be expected from five countries on different continents with economies in different development stages. Whenever they can align, however (as has been the case with the two themes described above), a joint BRICS voice is bound to have a key influence on future G20 summits.