The Mechanics of BRICS+: A Tentative Blueprint

16 june 2017

Yaroslav Lissovolik - Programme Director of the Foundation for Development and Support of the Valdai Discussion Club, Chief Economist of the Eurasian Development Bank.

Resume: The current global setting characterized by waning integration and liberalization impulses in the developed world presents a possibility and a need for a renewed impetus towards economic integration in the world economy.

The current global setting characterized by waning integration and liberalization impulses in the developed world presents a possibility and a need for a renewed impetus towards economic integration in the world economy. The global integration process is in need of a sufficiently strong starting engine, a new platform of integration that can compensate for the lack of momentum coming from the “old platform” of the developed world. 

The BRICS grouping, being present in all the key regions/continents of the developing world, could serve as the basis for such a new comprehensive global platform of integration, but may encounter limitations in large-scale integration among its core heavy-weights. To overcome these limitations a wider context for the BRICS that may take on the form of BRICS+ would serve to broaden the possibility set of economic alliances that can be forged across a greater array of countries and regions. In this respect China’s BRICS+ initiative announced earlier this year is timely in terms of breathing new life into the evolution of the BRICS as well as delivering a new impetus to the process of global economic integration.  

  But rather than expanding the core set of BRICS members, the BRICS+ initiative seeks to create a new platform for forging regional and bilateral alliances across continents and aims to bring together the regional integration blocks, in which BRICS economies play a leading role.  Accordingly, the main regional integration blocks that could form the BRICS+ platform include Mercosur, South African Customs Union (SACU), Eurasian Economic Union (EAEU), South Asian Association for Regional Cooperation (SAARC), as well as the China-ASEAN FTA. Altogether in such a setting 35 countries form the BRICS+ circle:

  •   SACU: Botswana, Lesotho, Namibia, South Africa and Swaziland.

  •   SAARC (SAFTA members): Afghanistan, Bangladesh, Bhutan, India, Nepal, the Maldives, Pakistan and Sri Lanka

  •   China+ASEAN FTA: China, Indonesia, Malaysia, Philippines, Singapore, Thailand, Brunei, Vietnam, Laos, Myanmar, Cambodia

  •   Eurasian Economic Union: Russia, Kazakhstan, Belarus, Armenia, Kyrgyzstan

  • MERCOSUR (core members as well as acceding members): Brazil, Argentina, Paraguay, Uruguay, Bolivia, Venezuela

The main modalities of cooperation between BRICS+ countries could involve the following:

Platform for trade and investment integration:  in the trade and investment sphere the BRICS+ network could allow for expanding the set of FTAs/PTAs across individual countries or regional blocks of the BRICS+ grouping. Trade alliances do not have to follow the standard path of comprehensive FTAs, but could also involve targeted/limited liberalization via preferential agreements (PTAs). Investment alliances and liberalization measures could be concluded in the form of lowering barriers for FDI into strategic sectors or companies as well as via lowering capital controls in mutual transactions. One of the transmission mechanisms that could be employed to facilitate the propagation of trade and investment alliances within the BRICS+ framework could be via raising the priority accorded by BRICS+ economies to an alliance with a country that has become a member of one of the core RTAs within the BRICS+ network or that has concluded trade or investment alliances with an individual country or regional block from BRICS+. An FTA alliance forged by South Korea for example with the Eurasian Economic Union could improve the possibilities for that country to conclude alliances with other regional blocks or individual countries in BRICS+. 

Cooperation in international organizations, including the Bretton Woods institutions to increase the consolidated voting share. In the IMF the consolidated share of the BRICS is just below the 15% mark. The addition of BRICS+ partners would raise the consolidated share of the vote by 1-2 percentage points (depending on the exact composition of the BRICS+ circle) to more than 15%, which would enable the BRICS+ to have a blocking stake with respect to the key decisions of the Fund. BRICS+ countries could also form alliances in other international organizations, including the WTO, where a BRICS+ group in negotiations could complement other “South-South” alliances such as Asian developing members as well as G-20/G-33. 

Cooperation between the respective development banks and other development institutions formed by BRICS+ economies, namely the Eurasian Development bank (EDB), the Development Bank of South Africa (DBSA), the SAARC Development Fund (SDF), Structural convergence fund for MERCOSUR (FOCEM), China Development bank (CDB), the Inter-American Development Bank (IDB) and the New Development Bank (NDB). Within this group of development institutions the NDB could potentially perform a coordinating role with respect to BRICS+ initiatives, while there could also be a role for the Asia Infrastructure Investment Bank (AIIB), which could serve as a platform for bringing together the financing from developing and developed economies. Within this network of regional development institutions cooperation could be targeted towards co-financing investment projects as well as initiatives/programs aimed at fostering the attainment of key development goals (human capital development, ecology, financial sector integration/cooperation). 

Use of national currencies/payment systems: the BRICS+ circle could serve as an extensive platform for the creation of BRICS+ countries’ payment systems and the expansion in their use. It could also serve as a platform for extending the use of national currencies in mutual trade and investment transactions, thus reducing the dependency on the US dollar and the euro.   

Cooperation in establishing own reserve currencies/regional and global financial centers: the countries that form part of the regional blocks of BRICS+ could support each others’ efforts in promoting the creation of international financial centers (though admittedly there may be also competition, particularly in a regional context) via listing companies in the exchanges of BRICS+ economies. There may also be greater cooperation in advancing some of the BRICS+ currencies as reserve currencies that become part of gold and currency reserves of the respective Central Banks.

In effect closer cooperation between the regional blocks and the development banks in the BRICS+ circle is already taking place. In terms of the cooperation between the regional blocks Mercosur signed a memorandum of understanding with the Eurasian Economic Union and henceforth continued discussions on a possible cooperation agreement between the two blocks. In December 2004, MERCOSUR and the Southern African Customs Union (SACU) - composed of Botswana, Lesotho, Namibia, South Africa and Swaziland - signed a preferential trade agreement. The Preferential Trade Agreement between the Common Market of the South (MERCOSUR) and the Southern African Customs Union (SACU), was signed on 15 December 2008, in Salvador, Brazil; and, on 03 April 2009 in Maseru, Lesotho. After being ratified by all signatory parties, the Preferential Trade Agreement between MERCOSUR and SACU entered into force on 1 April 2016.

In terms of the cooperation between the development banks of BRICS countries in 2016, the Eurasian Development Bank (EDB) in cooperation with the New Development Bank, Nord Hydro and the International Investment Bank (IIB) reached an agreement on the construction of small hydropower plants in the Republic of Karelia. The BRICS countries’ New Development Bank (NDB) will fund the construction of the plants in Karelia with a total amount of USD 100 million, making it its first investment in the Russian Federation. The NDB will provide the IIB and the EDB with targeted financing of USD 50 million each for opening a credit line for Nord Hydro in Russian roubles. The maturity of the loan is 12 years, with the IIB and the EDB covering associated project risks. In April 2017 the Eurasian Development Bank (EDB) signed a memorandum on the cooperation with the New Development Bank.

In sum, the BRICS+ network offers possibilities for greater trade and investment integration as well as a supportive institutional framework of coordination among regional development banks and development of financial systems. The key principle in this process is to allow for substantial flexibility in the multilateralization of alliances to include trade and/or investment, as well as the possibility of regional and/or bilateral alliances. In this respect the pattern of BRICS+ integration is more akin to that of ASEAN and East Asia more generally which is characterized by the prevalence of bilateral alliances and variations in integration patterns as opposed to the pattern of the EU predicated on a set of uniform standards targeting the creation of one single block. Contrary to the core-periphery pattern prevalent in the preceding decades the BRICS+ model offers the possibility of open and diversified integration in the global economy. 

Valdai International Discussion Club

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