It is here that BRICS (and now BRICS+) is maturing as a focal point for the nations and peoples of the developing world, long ostracized and left behind by the dynamics, institutions, and authority of great colonial powers. In this context, the capacity of BRICS to contribute to a new financial architecture will likely be one of its lasting legacies.
From the old comes the new
For about five centuries, the evolving global order has been shaped by English and European colonialism, and in more recent times, the spread of an American Empire. Undergirded by extractive financial systems, backed by the force of industrial militaries, colonialism saw wealth extracted from Africa, Greater Asia, and South America be transferred to the colonial powers representing emergent and powerful industrial capitalism. The de-colonialism in the decades after World War II may have seen the formal dismantling of colonies, as national independence - often with strings attached - was granted to erstwhile subordinates. But, despite formal independence, these newly formed nations often remained enmeshed and subordinated to global institutions and systems of wealth extraction, much as had taken place under the yoke of colonialism. The dismantling of the Soviet Union in 1991 amplified these economic and geopolitical forces, as the United States laid claim to what was seen to be unconditional zero-sum victory. The power and authority of global financial institutions, such as the IMF and World Bank, were amplified as History’s End was declared.
By 2008, the unchallenged dominance of the transatlantic economic model came crashing down as the North American subprime crisis spread across the Atlantic and elsewhere, exposing a financialised architecture dominated by an explosion of fictitious capital that had become increasingly detached from real economy valorisation. The Global South understood the problems of this detachment; this model of capital had dominated their existence for centuries. Global financing into developing nations has at best provided trade credit, but never enabled the development of local productive capacity. Periodic bouts of so-called Third World debt crises were common from the 1970s onwards, as cycles of indebtedness to the Bretton Woods institutions of the World Bank and IMF drove increasing national disempowerment of developing nations and wealth extraction by the powerful. The global financial architecture anchors uneven development and exploitative relationships between the developed and the developing worlds.
The United Nations Secretary General Antonio Guterres recently observed that the post-War international financial architecture, “has failed in its mission to provide a global safety net for developing countries.” He observed that it, “essentially reflects, even with some changes, the political and economic power dynamics of that time,” when three quarters of today’s nations weren’t around the table at Bretton Woods. His observations of the dominant global financial architecture are damning:
“Nearly 80 years later, the global financial architecture is outdated, dysfunctional, and unjust. It is no longer capable of meeting the needs of the 21st century world: a multipolar world characterized by deeply integrated economies and financial markets. But also marked by geopolitical tensions and growing systemic risks.”
BRICS is emblematic of this multipolar world, through which new architectures are being developed.
BRICS’ Emergence
Within a year of the so-called Global Financial Crisis, more aptly called the Western Financial Crisis, the first BRIC summit was held in Yekaterinburg, Russia on June 16, 2009. It involved participants from Brazil, Russia, India, and China. BRIC was renamed BRICS after South Africa was accepted as a full member at the BRIC Foreign Ministers’ meeting in New York in September 2010.
BRICS is a prominent element of the emergent network of new institutions that stand in stark contrast to the machinery that has shaped the dispensation of political, military, and economic power particularly in the post-World War II period. New institutions are necessary, as Guterres notes, to enable a constructive response to the legacies of colonialism, and to deliver patterns of economic development that empower rather than subordinate; that enrich rather than expropriate. New institutions that deliver more even development are needed.
As a platform, BRICS has afforded developing nations a voice; a vector to harness, coordinate, and amplify shared aspirations and common needs of the Global South. Its rising status and capacity in the approximate 15 years since its inception is made possible by the growing economic heft of its member nations, and their mutual intertwining through the expansion of trade and maturing financial interactions. Member nations now have a common currency reserve of about US$ 4 trillion. Intra-member trade reached over US$ 644.6 billion by 2022. Their collective GDP is now, on PPP terms, greater than that of the G7 economies. This is now set to grow to represent over 37% of world GDP on nominal USD terms (and even greater on PPP terms) as BRICS formally expands its membership.
For much of the post-World War II period, international trade has been denominated and facilitated by US dollars (USD). The USD progressively assumed the status of a global reserve currency, even after the suspension of redemptions for gold in 1971. That said, the USD has never achieved comprehensive ubiquity with national central banks holding a variety of currencies. Indeed, central bank USD reserves have been diminishing to around 50% of holdings globally, as currency diversification has picked up pace in recent years. The ongoing intensification of the weaponization of the USD has catalyzed a hastened diversification. The settling of cross-border trade transactions in national currencies, rather than USD, is a growing feature of the contemporary global commercial landscape.
Growing trade volume and diversity of trading partners and commodities create the foundation for successful de-dollarisation. These create the conditions necessary for national currency pairs that are relatively liquid within reasonable time cycles; put plainly, there’s plenty of things that they all need from each other to keep the currencies spinning around. Money’s principal function is as a medium of exchange and circulation; all other functions are dependent on its ability to fulfil this requirement. A store of value is meaningful only on the expectation that money can be exchanged for something of value in the future, and that the relationship of equivalence between money holdings and commodities (or services) remains relatively stable.
New financial architecture
BRICS doesn’t need to create a distinctive BRICS currency to enable effective de-dollarisation, especially as it’s trade that lays the foundation for currency utility. Trade finance can be provided with national currencies. The numeraire, if need be, could be an abstracted datum; for example, even the aggregated rolling average value of gold or a basket of globally traded commodities is denominated in USD, the USD does not ever have to be held by any party. The use of USD as numeraire is an enabler of equivalence, nothing more. Digitalisation of currencies makes this possible with little to no transaction costs or friction.
BRICS member nations have been independently progressing the digitalisation of payments and currencies. China’s digital currency project is now into its third year of real-world trial deployment with over 100 billion RMB worth of transactions made by August 2022, with use cases growing. The digital RMB is now officially recorded as part of China’s money supply (M0), and its growth will take place within the money supply policy envelope. The digital Rupee is also in deployment with 1.3 million consumers and 300,000 merchants testing the Central Bank Digital Currency (CBDC) as of June 2023. The digital Rouble is slated to be launched in late 2024 and is already in trial. Brazil’s central bank has recently announced that it plans to adopt a CBDC by the end of 2024. South Africa’s reserve bank has also completed technical proof of concept studies for a national CBDC. With all this activity, it is reasonable to expect that by 2025 all founding BRICS nations will have implemented digital currencies. Digitalisation enables equivalences (that is, exchange rates) to be calculated “in the moment” and to be executed in the software “back engine”. This is in effect what has been trialled in Hong Kong, where visitors from mainland China were able to purchase using eRMB from Hong Kong merchants who received payments in HKD. Yiwu Pay is another successful cross border payments system utilizing the digital RMB.
Aside from currency digitalisation, currency multipolarity also depends on an array of other factors. Payment mechanisms and platforms that effectively bypass the US-dominated SWIFT are particularly necessary. The SWIFT network operates via three data centers, located in the US, the Netherlands and Switzerland respectively. The ability to control these digital nodes confers Leviathan-like authority over global payments. Alternative architectures have thus emerged, such as CIPS, Mir and UPI, which enable bank-to-bank transfers to be made without SWIFT. Institutionally, bilateral swap arrangements between national central banks also support de-dollarisation. Such swap arrangements have been growing between BRICS members and other nation states.
Data integrity and digitalisation is a necessary precondition for 21st century cross-border financial solutions. China’s work in blockchain-enabled data networks will likely contribute significantly to the approaches adopted by BRICS+ nations (and those they interact with). Expanding the technological footprint of 5G networks, hastening the growth and maturation of open-source standards for network infrastructure access and development and achieving meaningful collaborative approaches to the governance of AI are part and parcel of global value flows re-engineering, in which financial architecture is one key piece. Interoperability over common standards, while recognizing national data sovereignty, will likely be a guiding design principle of global digitalisation with BRICS+ characteristics.
Uneven economic development creates imbalances between trading nations. The Bretton Woods negotiations were aimed at creating a system in which such imbalances could be corrected. The USD-dominated system was not the preferred model for British economist J.M. Keynes. Rather, Keynes’ ‘bancor’ proposal enabled adjustments between trade creditor and debtor nations, which incentivised creditor nations to actively reduce their surpluses by investing in capacity in debtor nations and growing their imports from the trade debtors. In other words, adjustment costs would be shared across the system, whereas in the final wash-up, with USD becoming the reserve currency, adjustment costs were borne disproportionately by trade debtors. The cycle of debt addiction and impoverishment associated with the World Bank and the IMF has been the result.
One of BRICS’ most significant contributions to global economic institution building is the launch of the New Development Bank (NDB) in 2014. In a separate agreement, the BRICS members also agreed to set up a reserve currency pool. This pool is now valued at about US$ 4 trillion. The NDB has progressively grown its role as financier to members to support the development of productive infrastructure. It has approved over 90 projects worth US$32 billion. It aims to increase the amount of finance it provides in national currencies from 22% to 30% by 2026. The NDB has announced that it will begin issuing finance in South African Rand and Brazilian Reai, to complement loans denominated in USD and RMB. This too represents a progressive de-dollarisation. In an environment of national currencies, the adjustments between trade creditor and debtor can conceivably be made via the NDB as it opens avenues for the provision of productive capital, rather than merely merchant capital.
Solid foundations
BRICS and its associated institutions like the NDB have much to do, but the foundations are solid. That as a group it has achieved so much in 15 years - a mere split second in the scheme of global institution building - is testament to the collective approach of its members. Common problems and challenges demand collective solutions. Finding commonality among ongoing differences is embodied by BRICS.
BRICS will matter more as it contributes to a radical and wholesale transformation of the structure of global finance, enabling the financing of national productive capacity in national currencies. Merchant capital will need to be buttressed by productive capital - denominated in national currencies - to facilitate more even global development. Institutionally, this means the development of national banking infrastructure, supported by a growing global architecture anchored by the NDB and an array of cross-border enabling digital technologies that distribute critical powers and authorities. Opportunities for the NDB to work with other global development finance providers will only enhance portfolio diversity and deliver greater opportunities for risk mitigation. The heart of global transformation will come as the elements of a 21st century cross-border financial architecture are bedded down. This means low-cost high-speed payments systems, the availability of merchant capital (including trade and supply chain finance), and ultimately provision of productive capital in risk-mitigated non-discriminatory ways. These elements are institutional and technical, many of which have been progressively designed, tested, and rolled out over the past decade or so. The ethos of BRICS and now BRICS+ - of commonality while recognizing difference - is critical to the expansion of this technical and institutional capacity.
