- December 22, 2023
Why expansion of BRICS is so profound for the global economy
The enlarged grouping accounts for almost 37% of world’s GDP if one uses the purchasing power parity measurement method, while the G7 represents just 30%.
And so, what much of the world was anticipating eventually came to pass on August 24. At the 15th BRICS Summit in Johannesburg, South Africa, six more nations were confirmed as full members of the burgeoning economic group. And although the exact identities of the new additions – Argentina, Egypt, Ethiopia, Iran, Saudi Arabia, and the United Arab Emirates – were more difficult to predict before the announcement, this 11-strong bloc of economic powerhouses is now being rightfully touted as a major disruptor of the international economy over the coming years.
January will see the new nations officially join the existing group of Brazil, Russia, India, China and South Africa. As such, 2024 will see a mighty economic force being unleashed on the world. It will also have profound implications for the rapidly shifting international economic order, one in which Beijing and Moscow are advocating alternative economic models that seek to dramatically lower reliance on Western-led systems and institutions.
Morevoer, these efforts should be taken seriously. For one, the enlarged grouping accounts for almost 37 per cent of world’s GDP if one uses the purchasing power parity (PPP) measurement method, while the G7 represents just 30 per cent. And with the world’s biggest economy in China (again, using the PPP measure) leading BRICS in broadening and diversifying its trading activity, the opportunities for turbocharging economic development for member nations are tantalising, and even more so if they can agree to preferential trade and investment terms between members.
Saudi Arabia is, economically, perhaps the most consequential of the new inclusions. An oil producing behemoth, the de facto leader of OPEC, and a country fixated on reducing its dependence on crude oil and diversifying its economy over the next few years, the potential trading benefits for the Kingdom of supplying two of the world’s three leading oil consumers in China and India cannot be underestimated.
And that’s not forgetting the UAE and Iran, the world’s seventh- and eighth-largest producing nations. In fact, US government data sees BRICS’ share of global oil production ballooning from 19 per cent to 41 per cent after the recent expansion.
Over in South America, meanwhile, Argentina’s addition looked set to be short-lived after the emergence of two staunchly anti-BRICS presidential contenders as the initial election favorites. But the October 22nd first-round victory by Sergio Massa from the ruling Peronist government strongly boosts the odds of long-term BRICS membership for Buenos Aires. And that means the perpetually beleaguered Argentine economy may well experience some much-needed respite via more opportunities with neighboring BRICS nation Brazil and other members.
But it is arguably the US dollar that BRICS expansion will most significantly impact. Existing members are making no secret of their desire to trade bilaterally in their respective currencies and seek non-dollar arrangements where possible. And South African President Cyril Ramaphosa even acknowledged during the Johannesburg Summit that there is “a global momentum for the use of local currencies, alternative financial arrangements, and alternative payments systems”.
Of course, there is little chance of dethroning the dollar as the world’s reserve currency any time soon. It still represents around 59 per cent of global foreign exchange reserves, and is also on one side of 88 per cent of all foreign exchange transactions, and it is the currency used to price over half of global trade.
Nonetheless, lowering exposure to a currency which has been increasingly weaponised via economic sanctions – and increasingly burdened by swelling debt and deficit spending – seems a more rational decision with each passing day. The dollar’s global hegemonic influence will also be irreconcilably eroded should the Saudi-led Gulf producer bloc facilitate the pricing of their oil barrels in other currencies. This isn’t entirely out of the question either, given the deteriorating Saudi-US relationship, as well as the warming ties between Riyadh and Beijing.
The BRICS’ pursuit of alternative mechanisms also extends to the multilateral development landscape, with the BRICS’ own New Development Bank proving an increasingly worthy champion of economic causes for developing nations. Of course, US-led development institutions such as the International Monetary Fund (IMF) and the World Bank continue to dominate this space at present – the IMF’s estimated financial backing of over $1 trillion easily dwarves the NDB’s initial capitalization of $50 billion.
But the BRICS bank’s laser-focus on infrastructure projects and sustainable development, as well as its ethos of inclusivity, equality and cooperative ownership, stands in stark contrast to its Western peers. A new model of multilateral financing thus awaits developing nations, one which could free them from the onerous requirements imposed by current market incumbents, and enable them to achieve greater economic influence in the world. And with the possible future integration of Saudi Arabia’s exceptionally strong balance sheet, the NDB has every chance of being able to offer terms that can position it as first-choice lender for much of the developing world.
That’s not to say it will be all plain sailing from here. After all, reaching consensus among just the current five members on certain issues has frequently proven difficult, let alone across an expanded 11-member group. Some BRICS nations also have economic interests more evenly split between Western and Eastern camps. As such, compromise and bargaining will be crucial in enabling this expanding bloc to move forward.
What can the West do in response to this expansion? Not a whole lot. But that may not be such a bad thing if it wants to prosper from this rising tide lifting all boats. China’s President Xi Jinping has often stressed his preference for win-win outcomes over zero-sum games, which means a distinctly cooperative posture with an expanded BRICS could yield substantial opportunities for the likes of the US and Europe.
Adversaries of the West undoubtedly exist within the group – namely Russia, China and Iran – but so too do friends and economic allies in the form of Egypt, the UAE, Saudi Arabia and India. And with 40 more countries interested in joining BRICS – 16 of which have reportedly applied already – it would be foolish to dismiss the immense potential presented by this new paradigm. As such, it would appear this economic juggernaut is only just getting started.
Akash Kalra, a Transfer Pricing and International Economics Consulting Expert, penned this piece for Business Today.
Views are personal and do not represent the stand of this publication.