BRICS Expansion: Economic Cooperation and Implications

February 02, 2024

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Skeptics and critics have not eased their attacks on the BRICS over the past 15 years since the group's first summit in 2009. Detractors argued that the BRICS represented a China-led, anti-West bloc, yet was simultaneously toothless.¹ They denied the significance of the BRICS, for it lacked a clear vision or substantive actions, as members had divergent ideologies and interests. However, 2024 witnessed the expansion of the group, adding five more members: Egypt, Ethiopia, Saudi Arabia, Iran, and the United Arab Emirates (UAE). The BRICS Plus now represents 45% of the world's population, 25% of global trade, 40% of global oil production, and 28% of the global GDP (in nominal exchange terms, or more than one third of global GDP in PPP terms).² In addition, 40 countries expressed interest in joining the BRICS Plus and over 20 countries have actively applied to join the group.³ That BRICS Plus has attracted broad interest from the Global South signifies its significance and potential. While the BRICS Plus is often portrayed as an anti-West (or anti-North) group that aims to challenge the Western world order, the collective group does not see itself as a rival to the West/North. Rather, the BRICS Plus positions itself as a contributor to a more inclusive and multilateral global system that addresses the needs, interests, and aspirations of the Global South. Indeed, the BRICS Plus group actively engages with G7 countries, but the bloc also advocates for a more inclusive governance system where the Global South's interests are better served.

 

What unites the BRICS Plus members, who have diverse political and economic configurations, is a shared interest in stability, sustainable development, and the realization of a collaborative multilateral system. The areas where BRICS Plus countries can cooperate are multifaceted, and include economics, social and cultural exchanges, technology, sustainable development, and security. Amongst all these areas, economic cooperation will likely lay the foundation and generate the most direct and immediate benefits for all member countries.

 

Intra-BRICS trade increased by 56% between 2017 and 2022 to reach 614.8 billion USD as of 2022.⁴ After the imposition of Western sanctions on Russia after the breakout of the Russia-Ukraine conflict, Russia's trade with BRICS countries surged. China's exports of industrial machinery, consumer electronics, and automobiles have increased significantly while Russia's exports of oil and gas to China and India also grew noticeably. With the addition of major oil producing countries like Iran, Saudi Arabia, and the UAE, and nations like Egypt that have a strategic geographic location as well as critical transport infrastructure, trade among BRICS Plus countries continued to grow. It is reasonable to project that, given the large population, growing middle class, and widening market within the bloc, intra-BRICS Plus trade will see further growth.

While currently there is no BRICS Plus free trade deal, members are working on establishing common standards for products, optimizing business methods, and removing barriers to market entry to facilitate trade. It is worth noting that BRICS Plus countries could leverage their connections with other free trade blocs they belong to. India plays a lead role in the South Asia Free Trade Area (SAFTA); Russia has common trade space within the Eurasian Economic Union (EAEU); South Africa participates in the African Continental Free Trade Area (AfCFTA); Brazil is a member of the Southern Common Market (MERCOSUR); and China takes part in the Regional Comprehensive Economic Partnership (RCEP). It is conceivable that the BRICS Plus might capitalize on these various connections to synergize trade deals and arrangements.

 

In tandem with trade growth, intra-BRICS investment has increased steadily since the 2010s. Total inward foreign direct investment (FDI) stock between BRICS countries grew from 27 billion USD in 2010 to 167 billion USD in 2020, a six-fold increase.⁵ Much of this investment flowed to important sectors, including natural resources, infrastructure, energy, technology, and manufacturing. These investments aimed to enhance economic ties, foster development, and improve cooperation among the member nations. As the United Nations Conference on Trade and Development (UNCTAD) pointed out, within BRICS, investment in manufacturing could be further strengthened, especially in processing activities to increase value added amongst member countries, as well as in complementary segments along the value chains of sectors such as renewable energy.⁶ Further, BRICS established a Task Force on Public-Private Partnerships and Infrastructure to promote investment in infrastructure. BRICS countries have actively coordinated their policies to provide a more favorable environment for foreign investment. They have also adopted several policy initiatives to strengthen cooperation promoting intra-group investment, which covered some key policy areas including investment facilitation, climate change, and sustainable development. From the Outlines for BRICS Investment Facilitation in 2017 to the most recent BRICS Initiative on Trade and Investment for Sustainable Development passed in 2022, the BRICS countries had kept on taking collective moves to strengthen investment cooperation to build infrastructure, promote digital economy, and improve the resilience and stability of global and regional supply chains.

 

The construction of an alternative financing and payment system looms at the forefront of the BRICS agenda. The current Bretton Woods financial system is dominated by the US dollar and operated by the Western-led International Monetary Fund (IMF) and World Bank. For decades, the World Bank had neglected infrastructure funding in favor of poverty relief and "good governance," whilst the IMF provided emerging market lending, but demanded counterproductive, one-size-fits-all structural adjustments for recipient countries. The BRICS Bank, or the New Development Bank (NDB) was established in 2015 to bridge the gap in infrastructure and development financing. It has approved more than 30 billion USD of loans for projects like water and transport infrastructure since its launch.⁷ In addition to the five founding members, the NDB welcomed four new members in 2021, including Bangladesh, Uruguay, Egypt, and the UAE.

 

The NDB provides much-needed infrastructure and development financing and makes several contributions to the current multilateral development bank (MDB) system. First, the NDB has issued local currency bonds on behalf of their member states. The first Chinese RMB bond worth 3 billion CNY (450 million USD) was issued in China's onshore interbank bond market in 2016.⁸ The NDB issued another 8.5 billion CNY worth of Panda bonds in May 2023, the largest CNY bond issuance to date.⁹ In August 2023, the NDB issued 1.5 billion ZAR bonds, which are oversubscribed, attracting 2.67 billion South African rand worth of bids. The NDB aims to increase local currency lending to 30% of total lending by 2026. As of Q1 2023, local currency lending accounted for 22% of its total lending. It should not be understated how important it was to boost local currency financing.¹⁰ For decades, developing countries have suffered from the "original sin," that is, they were not able to borrow in their local currencies on reasonable terms, as their currencies have been deemed less trustworthy by international investors. This resulted in 70-85% of the debt of the emerging and low-income countries being foreign currency debt.¹¹ Having to borrow foreign currency significantly hamstringed developing nations' capacity to take on and service debt, and exposed them to liquidity and credit risks. The NDB's lending has helped enhance member countries' external financing capacity and dilute the dollar dominance in international lending.

 

Second, the NDB adopts a different governance structure, where the initial subscribed capital and voting power is shared equally by members. The NDB's Articles of Agreement stipulate that ordinary matters are to be decided by a simple majority, while key decisions require "an affirmative vote by four of the founding members concurrent with two thirds of the total voting power."¹²

 

In such a framework, no single country has the veto power. This contrasts starkly with the IMF where the United States alone has a 16.5% share of the voting power and the right to veto, whereas BRICS countries combined have 15% of the voting share.¹³

 

Third, the IMF and the World Bank insist on Western-centric "best practices" and impose one-size-fits-all structural adjustment measures that feature privatization, liberalization, and austerity policies. These policies often worsen recipient countries' economies and cripple their public services and social programs without improving their ability to pay the debt, while ensuring international investors are first in line to receive payments or acquire fire-sale assets.

 

By contrast, the NDB brands itself as a borrower-led bank. It respects the sovereignty of borrowing countries and does not impose policy changes or attach political strings. It works with recipient governments and provides mostly sovereign and sovereign-guaranteed loans, which have the advantage of reducing default risks and giving borrower governments more influence in choosing which projects to fund. The NDB emphasizes the importance of using and strengthening existent country systems, the legal framework in the borrowing countries, for social and environmental protection. It also utilizes local financing resources and expertise by signing agreements and working with domestic development and commercial banks. These practices allow the NDB to address better the needs of the recipient countries and work more effectively with them. As NDB Vice President Leslie Maasdorp stated, soon after the founding of the NDB, "Beyond drawing on best practices, the NDB will aim, in a modest way, to build what is described in our founding principles as 'next practices.'"¹⁴

 

The rising influences of alternative MDBs, such as the NDB and the Asian Infrastructure Investment Bank (AIIB), have also led the Bretton Woods institutions to reexamine their own practices and emulate, to some degree, these alternative MDBs. The United States' Build Back Better (BBB) initiative and the European Union's Global Gateway initiative started to pick up the long-ignored infrastructure investment opportunity in the Global South. In addition, the US government recently pledged to bolster the financing capacity of the IMF and World Bank. As US National Security Advisor Jake Sullivan claimed, "Our IMF and World Bank proposals will generate nearly 50 billion USD in lending for middle income and poor countries from the United States alone. And because our expectation is that our allies and partners will also contribute, we see these proposals ultimately leveraging over 200 billion USD."¹⁵  The next step for the Bretton Woods institutions is to meaningfully increase the shares and voting powers of the developing South. A true multilateral system in today's world requires the inclusion of the Global South, not only as participants, but as partners.

 

The NDB has also established the BRICS Interbank Cooperation Mechanism (BICM) with various national development banks to facilitate payments in local currencies within the bloc. BRICS Pay, a multi-currency digital payments system, enables payment clearing among local currencies and eliminates the need for "vehicle currencies," such as the dollar or the euro, in transactions among member countries.

 

Lastly, the Contingent Reserve Arrangement provides liquidity support to member countries facing short-term balance-of-payment pressures or exchange rate volatilities. All this helps lay the foundation for an alternative regional financial architecture.

 

Some observers argue that building a true alternative financial system requires a common BRICS Plus currency to displace the US dollar, but they ridicule the possibility of dethroning the US dollar, which still accounts for 60% of international reserves and over 80% of international payments.¹⁶ However, while dollar dominance will not disappear overnight, its status is gradually eroding. More importantly, the BRICS Plus group does not need a common currency, but could still take measured and effective steps to reduce their reliance on the US dollar. First, efforts have been made to increase local currency financing, like local currency lending and bond issuance by the NDB, as discussed above. Second, BRICS Plus members have been increasingly using local currencies for trade. Since 2018, the share of Russia's dollar-invoiced exports to the other BRICS economies has fallen from 85% to 36%.¹⁷ Russia has accepted Chinese RMB and UAE dirhams in trades from India in some of its oil transactions. China and Brazil traded using the RMB for denomination, settlement, and financing, and directly exchanged RMB for reais. India and Saudi Arabia are mulling over rupee-riyal trade. The benefits of using local currencies in bilateral trade cannot be understated. It helps lower transaction costs and exchange rate volatility, eases the balance-of-payments constraint associated with dollar funding, and enables trade between countries who could be excluded from the dollar payment system.

 

There are limitations to the use of local currency when trade expands beyond the bilateral level, therefore developing a common vehicle currency for trade would be the next step for the BRICS Plus group. It would be entirely feasible to develop a common currency, parallel to but not substitutable for each country's own currency, for intra-group trade. The BRICS Plus currency could be created based on a basket of currencies from all member countries, weighted by their respective share of trade. Each country can convert its currencies at a certain exchange rate to the BRICS Plus currency to settle trade balances. Only central banks would be allowed to trade the common currency for clearing purposes, to prevent manipulation of the common currency by private investors. For countries that run trade surpluses and accumulate the BRICS Plus currency, their exchange rates would be revaluated and they should be incentivized to increase their imports within a set period of time before penalty interest payments are imposed on their common currency reserves. Like Keynes' "bancor" plan,¹⁸ this adjustment mechanism would help prevent significant trade imbalances and reserve buildup.

 

The expansion of the BRICS is a watershed for the global economy. The West/North-dominant international financial system has failed to provide sufficient financing to combat climate change and support sustainable development.¹⁹ It has produced recurring financial crises, widened economic and social polarization, and intensified geopolitical tensions. The BRICS Plus emerged to advance South-South cooperation on trade, finance, investment, supply chain, financial safety, and development, and to engage with the Global North with greater agency and power. The addition of the five new members, with more likely to come, signals that the BRICS Plus is acquiring more resources, undertaking more cooperative programs, and accumulating more influence. There is no doubt that the group will continue to make meaningful contributions to rebalancing the global economic order and to promote Southern-led development in a sustainable and inclusive manner.

 

 

1. Howard Chua-Eoan, "China Wants to Expand the BRICS but the Group Is More and More Artificial," Bloomberg, August 18, 2023, https://www.bloomberg.com/opinion/articles/2023-08-18/china-wants-to-expand-the-brics-but-the-group-is-more-and-more-artificial-llgkx21o.

2. "World Bank Open Data," World Bank, accessed January 27, 2024, https://data.worldbank.org/; Gregory Zerzan, "Ignoring BRICS Expansion Threatens America's Economic Security," Newsweek, January 12, 2024, https://www.newsweek.com/ignoring-brics-expansion-threatens-americas-economic-security-opinion-1859634.

3. "What Is BRICS, Which Countries Want to Join and Why?," Reuters, August 21, 2023, https://www.reuters.com/world/what-is-brics-who-are-its-members-2023-08-21/; Ruxandra Iordache, "Emerging Economies Group BRICS Invites 6 New Members, Including Saudi Arabia and Iran," CNBC, August 24, 2023, https://www.cnbc.com/2023/08/24/emerging-markets-group-brics-invites-6-new-members-including-saudi-arabia-and-iran.html.

4. Samantha Arias, "Intra-BRICS Trade Increased by 56% in 2017-2022: Media," Sputnik Africa, November 4, 2023, https://en.sputniknews.africa/20231104/intra-brics-trade-increased-by-56-in-2017-2022-reports-1063305496.html; "Gross Trade Flows within BRICS Countries and Other Selected Countries 2022," Statista, accessed August 31, 2023, https://www.statista.com/statistics/1404108/brics-trade-turnover-by-country/#statisticContainer.

5. United Nations Conference on Trade and Development, BRICS Investment Report, April 4, 2023, https://unctad.org/publication/brics-investment-report.

6. United Nations Conference on Trade and Development, BRICS.

7. Rachel Savage and Brenda Goh, "'BRICS Bank' Looks to Local Currencies as Russia Sanctions Bite," Reuters, August 10, 2023, https://www.reuters.com/business/finance/brics-bank-looks-local-currencies-russia-sanctions-bite-2023-08-10/.

8. Hongying Wang, "The New Development Bank and the Asian Infrastructure Investment Bank: China's Ambiguous Approach to Global Financial Governance," Development and Change 50, no. 1 (January 1, 2019): 221–44, https://doi.org/10.1111/dech.12473.

9. "New Development Bank Issues 8.5 Billion Yuan Bonds at China Interbank Bond Market," Global Times, May 30, 2023, https://www.globaltimes.cn/page/202305/1291620.shtml.

10. Rachel Savage, "'BRICS Bank' Issues First South African Rand Bonds," Reuters, August 16, 2023, https://www.reuters.com/markets/brics-bank-issues-first-south-african-rand-bonds-2023-08-16/.

11. Ruurd Brouwer, "It's the Currency, Stupid," Financial Times, January 18, 2023, https://www.ft.com/content/ef56e83b-4e6c-41b9-b404-ab84da34776f.

12. Wang, "The New Development Bank."

13. Nils Adler, "Can BRICS Create a New World Order?," Al Jazeera, August 22, 2023, https://www.aljazeera.com/features/2023/8/22/can-brics-create-a-new-world-order; David Lawder, "US Faces Pushback on Plan to Bolster IMF Funding Without Shareholding Changes," Reuters, October 6, 2023, https://www.reuters.com/world/us/us-faces-pushback-plan-bolster-imf-funding-without-shareholding-changes-2023-10-06/.

14. Wang, "The New Development Bank."

15. "BRICS Is Doubling Its Membership. Is the Bloc a New Rival for the G7?," Atlantic Council, November 29, 2023, https://www.atlanticcouncil.org/blogs/new-atlanticist/experts-react/brics-is-doubling-its-membership-is-the-bloc-a-new-rival-for-the-g7/.

16. Francesco Guerrera, "Why the Dollar Keeps Winning in the Global Economy," Reuters, March 1, 2023, https://www.reuters.com/breakingviews/global-markets-breakingviews-2023-02-28/.

17. Hippolyte Fofack, "Decolonizing Global Finance," Project Syndicate, February 17, 2023, https://www.project-syndicate.org/onpoint/making-global-monetary-system-work-for-global-south-by-hippolyte-fofack-2023-02.

18. Massimo Amato and Luca Fantacci, "Back to Which Bretton Woods? Liquidity and Clearing as Alternative Principles for Reforming International Money," Cambridge Journal of Economics 38, no. 6 (2014): 1431–52, https://www.jstor.org/stable/24694968.

19. Fofack, "Decolonizing."

 

 

 

Please note: The above contents only represent the views of the author, and do not necessarily represent the views or positions of Taihe Institute.

 

This article is from the January issue of TI Observer (TIO), which examines the dynamics of the BRICS expansion in a global context. If you are interested in knowing more about the December issue, please click here:

http://www.taiheinstitute.org/Content/2024/01-31/1604465221.html

 

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