Just a day after the IMF said it was trimming its forecasts of economic growth for India, China and other Asian developing economies, the BRICS economies met in Washington to discuss ways to bail the Euro out. Consenting that each of the BRICS nations, would be able to solve the Euro debt crisis in their own way, Russia’s Deputy Finance Minister Sergei Storchak told reporters “our state procedures do not allow for that (buying Euro Bonds). We don’t have a mechanism (for that), not in Russia, not in China, not in India. We all have different ways of making decisions, we cannot syndicate our money.”
For most of the post-war history, Europe and the United States have led the world in economic development and growth. In recent times, pre the 2009, financial crisis, the IMF and World Bank always bailed the rest of the world out. However post the 1997, Asian Financial Crisis when Tiger economies learnt a hard lesson in finance, they have been prudent investors, critical in their investments and judicial of their spending.
As the world looks to China and India in particular to throw them a life ring and rescue their economies from drowning, both financial meta powers are practicing what they’ve always been preaching – a very Asian led philosophy of not interfering in another’s problems. Unlike America that invaded Iraq and Afghanistan to salvage the world from terrorists, India and China do not follow the policy of messing with another countries political or economic crisis. While both economies have agreed to help the Euro zone out, neither China nor India have promised to buy bonds or offer direct support.Rather they follow the policy of let my economy grow, and let me get my house in order, if then by chance it benefits the rest of the world then good.
Going forward, there is one thing that is predictable. The BRICS’ involvement in the world economy will enhance confidence within global financial markets. But Europe is too big to be rescued by outside resources. The BRICS will not save Europe. Any action taken by BRICS nations may result in limited and temporary impacts on the European debt crisis. The stock markets may surge on the prospect of the BRICS’ possible actions, but the European debt crisis was a long time in the making and it came from domestic and international financial imbalances. These cannot be remedied by the BRICS’ sole involvement.
Nevertheless, it seems that the BRICS countries are willing to play a larger role in the world. Not long ago, the BRICS nations challenged the International Monetary Fund’s leadership arrangement. The BRICS are seeking to reform the financial regime created in 1945, which they see as obsolete. In the past, there was an unwritten convention between the United States and Europe that resulted in a balance of power between the two. A European has always been selected as the head of IMF, and an American has always been selected as the head of the World Bank. This arrangement has driven the world economy for more than six decades.
As an increasing force in world finance, BRICS countries have a more crucial role to play in the future world financial regime. But there has been no political consensus within BRICS members, which has limited their influence. Every BRICS nation has its own national interests, and there are conflicts of interests between them.
While BRICS countries have seen strong economic growth in recent years, they all face domestic challenges, too. Some of these challenges are formidable. For example, China is facing a disturbing surge in inflation, an ever-increasing income disparity, and growing social instability. The Chinese government may have to focus on its domestic gains while pursuing more globalized goals.
Similarly, India’s central bank governor Duvvuri Subbarao said “There is (an) enormous amount of demand for resources at home for poverty reduction, so there is going to be a big, big tension between giving money to a multilateral institution for the purpose of restoring global stability and meeting our own aspirations at home.”
This is a dangerous time for global finance, so BRICS nations should expect more challenges ahead before really taking the lead within the global financial system. There is little doubt that the BRICS will be involved more in world’s economy, but, at the same time, we must expect them to face more challenges, too.