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Q&A: ‘Common Concern, Not Common Action’

Ranjit Devraj interviews SHYAM SARAN, top Indian diplomat.

NEW DELHI, Apr 19 2011 (IPS) - The summit of the BRICS (Brazil, Russia, India, China and South Africa) countries showed up both the strengths and the limitations of the caucus of emerging economies, says former Indian foreign secretary Shyam Saran in an interview to IPS.

Saran, who has served as India’s foreign secretary and climate negotiator and is currently chairman of the New Delhi-based Research and Information System (RIS) for developing countries, outlines the potential of BRICS’after the Apr. 15 summit at Sanya on the Chinese island Hainan.

Q: After the Sanya summit how closer have the BRICS countries come to being an effective emerging- market caucus that is capable of exerting pressure in international fora? A: There is no doubt that the BRICS together represent a potentially significant political and economic force on the international stage. They constitute 40 percent of the world’s population, 20 percent of its GDP and 40 percent of global international reserves. If they decide to act in concert on any major issue, say at the G-20, it would be difficult to resist them. However, the BRICS have spelt out common concerns rather than an agenda of common action. This is not surprising given the diversity of the group.

Q: There was unhappiness at Washington’s neglect in maintaining the dollar as reserve currency. But Sanya appears to have shown up the limitations? A: The fact is that the United States alone cannot fix the global financial system. The resolution of structural imbalances reflected in excess international balances maintained by countries like China, Germany and Japan and large deficits persistent in the U.S. requires coordinated action. The U.S. has no alternative but to devalue the dollar, by creating excess liquidity, as a means of reducing its trade imbalance, since China refuses to let its own currency appreciate.

Currently, there is no alternative to the dollar as an international reserve currency. Over 85 percent of international transactions are carried out in dollars, while virtually all oil related transactions are settled in that currency. Over 60 percent of international reserves are held in dollars. While the long-term trend is towards a decline in the dominance of the dollar economy, no other currency comes close to performing the role that this currency does today.

Q: What are the advantages of admitting the Yuan into the basket of currencies that support the special drawing rights (SDRs) system? Beijing is keen but balks at full convertibility or allowing the Yuan to appreciate. A: The currencies that are used to support the SDRs are all freely convertible and their value is market driven. That is not the case with the Chinese Yuan. There appears to be no economic justification for the inclusion of the Yuan in the SDR basket.

Q: BRICS pulled off a pact under which their own currencies can be used in issuing credits and grants to each other, circumventing the use of the dollar to that extent. China was quick with offering credit to BRICS countries, though there are implications. A: One should see this proposal in perspective. Intra-BRICS trade is estimated at 230 billion dollars, or only one percent of total global trade. Even if all the intra-BRICS trade were to be settled in the currencies of their members, it would hardly have any impact on the current trade finance system.

Furthermore, even this mechanism is, according to the Sanya Declaration, subject to national laws and regulations, which is another way of saying that the members of the group will keep all options open. Yuan bonds, or so-called “dim-sum bonds”, have been floated in Hong Kong and may soon be available in Singapore. However, their issue is tightly regulated and they have limited availability. Until a reasonably deep and relatively sophisticated Yuan market develops it is unlikely to rival the Western money markets centred in New York and London.

Q: Has BRICS improved its chances of growing beyond the synergies demonstrated at climate negotiations and at countering trade protectionism? Or are these “soft” areas that it should stick to? A: In climate change negotiations, Russia is the odd man out. Its interests are not aligned with Brazil, China, India and South Africa, the so-called BASIC countries. For example, while BASIC is adamant that the Kyoto Protocol must be complied with, Russia has announced that it does not consider itself bound by its provisions.

Yes, on trade BRICS do have a common concern over growing protectionism in Western economies, but Russia is not yet a member of WTO. The opportunity for common action is, therefore, limited.

These countries have a better chance of working together and making a difference at the G-20 on several issues relating to global economic governance such as reform of international financial institutions to give greater voice to developing economies, addressing the vulnerabilities of developing countries, in particular the least developing and African countries, evolving a regime of economic partnership with developing countries in place of the current donor-recipient aid regimes, and working towards the establishment of a truly multilateral, non-discriminatory and rule-based global economic order.

Q: One point of agreement was the “excessive volatility in commodity prices, particularly food and energy.” But what can BRICS do about it? Is there sufficient coordination? A: The ability of BRICS to make any significant impact in this area is frankly rather limited. India has proposed the maintenance of global reserves such as of oil and food to help developing countries ride out volatility in the prices of strategic commodities. One sees little beyond rhetoric in addressing these global challenges.

Q: Would it help for BRICS to expand by enrolling other emerging markets like Indonesia? A: Indonesia has better credentials to be part of an emerging economies grouping than perhaps South Africa, but then Asia would be over represented. To be effective, such groupings should have countries which share a common agenda going beyond generalities. BRICS is still at first base.

Q: Where does IBSA figure in the rise of BRICS? China has even suggested that IBSA, essentially democracies, be shut down in favour of BRICS (in which Beijing enjoys leverage). A: IBSA is a grouping of plural democracies which share certain political values. There is no justification for seeking its dissolution particularly by a country which is not represented there. IBSA has far greater substance to its cooperation than BRICS and such cooperation is gaining strength. There is enough place in the world for multiple coalitions of interest.