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Can Sanya be the beginning for a new world order?

May 16, 2011 19:06 IST

BRICS should reinforce the actions of G-20 for creating a new world order. It will also be a good idea to attempt to get Security Council replaced by the G-20, says C M A Nayar.

Introduction

Ever since Jim O Neill of Goldman Sachs coined the acronym BRIC, questions were raised about the utility of such a grouping which, according to several experts, has no possibility of having an independent status in the World Order.

Jim O Neill's logic was based on the higher economic growth -- rate of these countries and the potential to sustain this growth for a few decades with certain complementarities for trade exchanges. Brazil and Russia could be the source of raw materials and India and China the centres for value addition. O Neill did not envisage this group as a pressure group for determining the future of the World Order although it was evident that higher economic power would bring in with it certain privileges. The experts who highlight the futility of this group seem to suggest that this group has more of divergences than convergences:

Russia and China are Permanent Members of the United Nations Security Council and Brazil and India are aspirants to become Permanent Members.

All these countries are members of regional groupings mainly meant for economic cooperation.

The relations between India and China are riddled with conflict of interests. Even in economic field, they appear to be adversaries rather than partners.

We have to analyse the Sanya declaration in this background and I will try to treat a few major points.

From BRIC to BRICS

BRIC unanimously agreed to co-opt South Africa as a member for making it BRICS. One plausible explanation will be the natural resources of South Africa for contributing to the overall growth of the Group. There will, certainly, be a hidden interest due to the capability of South Africa for playing a vital role in making the resource-rich African continent a preferred supplier of raw materials to this group.

As is generally accepted, the 21st century will be the century of Asia with India and China as key players. The US and Europe have played very important roles in making Asia the star of the 21st century. I feel that the 22nd century will be the century of Africa and Asia will have to play a similar role in making it happen in Africa. South Africa will be the key player and hence its presence in BRICS is important. Why did they not consider the inclusion of Mexico or South Korea in this grouping? South Korea has a well-developed manufacturing infrastructure and this may not be in the interest of the group.

The closer relationship between USA and Mexico under NAFTA could be the factor which prevented the group to consider Mexico. Russia has a different interest. Russia wants to regain its past glory and position in Europe and the only way to become powerful is to align with China and India.

Partnership in this group will automatically project Brazil as the undisputed leader in South America. In short, all the partners in BRICS have some vested interests which could be transformed into a convergence of interests for the benefit of all the partners. And the world in general

Trade

The declaration states: "Brazil, China, India and South Africa remain committed and call upon other members to support a strong, open, rule-based multilateral trading system embodied in the World Trade Organisation and a successful, comprehensive and balanced conclusion of the Doha Development Round, built on the progress already made and consistent with its development mandate. Brazil, India, China and South Africa extend full support to an early accession of Russia to the WTO."

This statement is more for the form than for the contents because there is nothing new in it. The real intention of BRICS should be to initiate concrete actions for promoting trade within the group in a manner advantageous to all the members with an equilibrium within the Group.

In 2009, the total import of BRICS was around $1,600 billion and total export around $1,750 Billion (around 17 percent of the total GDP of BRICS). However, the total export of BRICS within BRICS was only around $110 billion. India's export to other BRICS members was only around $21 billion representing a mere 1.3 percent of the total imports of BRICS.

India's import from other BRICS members was around $34 billion representing around 1.9 percent of the total export of BRICS. Around 80 percent of India's foreign trade within BRICS was with China. These figures demonstrate without any doubt the enormous potential for India for developing a flourishing trade with the BRICS partners.

The Indian govt and industry will have to develop a vision and work out a strategy and an action plan for multiplying exports within BRICS by at least 30 times within the next decade. In every likelihood, India's GDP will be around $5 trillion in 2020 and $600 billion worth of exports within BRICS will mean 12 percent of India's GDP in 2020.

We should also be open to have an equal amount of imports to India from BRICS for having a balanced trade within the BRICS community. Opening credit lines in local currencies as decided in the Sanya summit will be a great step in this direction. The success will depend upon the consensus within BRICS on the items to be imported by each partner in line with its growth strategy. BRICS represent about 40 percent of the world population and about 18 percent of the world GDP now but it is bound to go up to around 25 percent by 2020.

This could become the biggest market in the world which may not be easily accessible to the West. No doubt, there are deep divergences in the interests of these nations. Was it not true among the five after the Second World War? One thing which will unite BRICS nations will be trade. Russia, Brazil and South Africa will be the biggest sources of raw materials and China and India the leaders in manufactured goods. There will be competition among themselves but this could be managed.

UN reforms

The declaration states: "We reaffirm the need for a comprehensive reform of the UN, including its Security Council, with a view to making it more effective, efficient and representative, so that it can deal with today's global challenges more successfully. China and Russia reiterate the importance they attach to the status of India, Brazil and South Africa in international affairs."

The observation that the UN should be more effective, efficient and representative is nothing but common sense. However the support for the aspirations of India, Brazil and South Africa does not mean much. In my view, the real reform of the UN should be to make it more democratic in its functioning.

As is well known, the global order established after the Second World War was heavily in favour of the winning side represented by the P5 in the UN and Bretton Woods Institutions greatly influenced by the United States. The world today is far different and a transformation (not reformation) of these institutions is absolutely necessary and to that extent the assertions of the BRICS summit are valid.

It is highly improbable that the privileged five will surrender their rights particularly because of the big differences in their perceptions and consequent lack of trust. In fact, they will try to maintain status quo for ensuring the continuity of their supremacy. No doubt that China and Russia have these privileges but they are seeing the future evolution for reinforcing their place.

One has to see the formation of BRICS in this context. This is also an attempt to protect their self-interests in a widely west-oriented global order. In my view, no nation should have the privilege of veto power. The decisions should be taken with a qualified majority as is being done in European Union now (after the Lisbon treaty). The "assessed contribution" to UN budget should be more equitable. There is absolutely no reason why the US and Japan should finance 41 percent of the UN budget.

I would consider it as more appropriate if the Security Council members pay 70 percent of the UN budget and the remaining UN members pay the balance. I do not find any possibility of a reformation of the UN (not to talk about transformation) and I feel that the status quo will continue. India should take out from her head the obsession to become a permanent member of the Security Council

IMF and SDR

The declaration states: "We welcome the current discussion about the role of the Special Drawing Rights in the existing international monetary system including the composition of SDR's basket of currencies. We call for more attention to the risks of massive cross-border capital flows now faced by the emerging economies "

It is clear that this line is added to project the interest of China. However, India should see carefully the manner in which the Indian rupee also could be brought into the SDR along with the yuan.

The four currencies included in the definition of SDR with their relative importance are given below:

  • US dollar: 41.9 percent
  • Euro: 37.4 percent
  • Japanese yen: 9.4 percent
  • British pound: 11.3 percent

The IMF criteria for inclusion in SDR are:

  • Largest exporters of goods and services
  • Widely used currencies for international transactions. Widely traded in the principal
  • Foreign exchange markets
  • Amount of reserves in that particular currency held by other IMF members.

The yuan does not meet all these criteria as of now and hence will not find a place in the basket of currencies of SDR. "Free float" alone will not permit the yuan's entry into SDR. The situation could change on a future date. In fact, it could be true for India also.

India and China can not accept free flow of capital with speculative intentions into their markets. While it will be possible to introduce controls in stock market, it is almost impossible to introduce such controls in the currency market. It is recognised that around 70 percent of the currency trade is swap (speculation in simple language) and India and China should persuade the US and the EU to put an end to this dangerous situation. In any case, neither China nor India should accept this condition for entry into SDR.

Both China and India should start international trade in their respective currencies. The Sanya declaration is in the right direction for using local currencies for trade within BRICS. India should move further in this matter by making regional currency union with West Asian Countries and East Asian countries for popularising the rupee as an international currency.

This will automatically help India to meet the IMF conditions on 'reserves' held by other IMF members for entry into SDR. The composition of foreign currency reserves in SDR currencies in 2010 was as follows

  • Dollar: 61.4 percent
  • Euro: 26.3 percent
  • Pound: 4.0 percent
  • Yen: 3.8 percent

This would mean that India and China could easily qualify on this criterion if other IMF members build a reserve of around 4 percent of the total reserves in the yuan and the rupee. It should also be noted that dollar has lost about 8.5 percentage points between 1999 and 2010 and the Euro has gained about 6.4 percentage points during the same period.

However, I am not very sure whether IMF in its present form will survive another two decades.

Before I conclude, I would also like to make a reference to the Power Transition Theory developed by Professor A F K Organski and Professor Jacek Kugler.

Power in the global scenario is the capacity to influence international events. Power depends largely on the economical, political and military strength of a nation. The three key elements which would make a nation powerful are the GDP, endowment of natural resources, and politics.

GDP will depend on the population and productivity. Age pyramid of population also will have an influence on GDP. Politics will be characterised by the institutional innovation, political capacity and stability, political freedom and policy certainty.

Professor Yi Feng has analysed the scenario of the world in 2050 with China, India and the US as the key players in 2050 and comes to the following conclusion; Power parity provides the structural conditions for conflict or cooperation. While power is central to the deductions of balance of power and power parity, the conditions that lead to war and peace are very distinct. Moreover, each perspective provides different substantive policy advice. The parity approach allows contenders to anticipate the choice of peace or war through preference convergence or preference divergence.

It is my belief that China, India and the US will move towards preference convergence for avoiding conflicts for the benefit of the whole world.

Conclusion

The Sanya declaration concludes with a statement that: "We are determined to translate our political vision into concrete actions and endorse the attached action plan, which will serve as the foundation for future cooperation "

I would say that:

The Sanya declaration gives a new approach for creating a more equitable and fair world order. This would mean substantial modifications of the power- equations in the world. While the discussions on a probable bipolar world or even a unipolar world are interesting, the destiny of the world will be determined by the actions of China, India, the US in their conscious effort to prevent a direct conflict. This would lead to a multipolar world with China, India, the US and European Union as the principal actors.

The Sanya Summit paves the way for a new grouping which could challenge the existing West-led world order for making it more representative and meaningful. This will not be easy but is workable when the economic power shifts to Asia. The decision to have trade in local currencies within BRICS is a very important one. This could help the BRICS members to build 'reserves' in their own currencies.

This could also help BRICS to have trade with other nations in their respective local currencies. India has to work out some sort of a currency union arrangement with West Asian countries and East Asian countries for promoting trade. In my view, major part of India's trade in 2020 will be within BRICS, West Asia and East Asian followed by Europe and the US.

BRICS should create an ambiance conducive to peaceful coexistence for giving a new direction to G-20 ( or G --- ? in future ) for creating an equitable world. BRICS should reinforce the actions of G-20 for creating a new world order. It will also be a good idea to attempt to get Security Council replaced by the G-20

C M A Nayar is an IITian and a former corporate executive of a well-known transnational company based in Europe with vast experience in global sourcing, industrial strategy in the changing world and change management

C M A Nayar