BRICS change the world: doing development differently

A prospective new financial architecture promises to reform and improve development finance for the world.

FIVE countries came together during the week to grab international headlines over how they might, as a group, change the world: Brazil, Russia, India, China and South Africa (Brics).

And they would do so in the most tried-and-tested way imaginable: financially, as a single economic entity. As a bloc Brics may effect change on a global scale, but the grouping would still do so in the traditional way of flexing economic muscle.

The annual Brics summit held during the week in Durban, South Africa, focused on what that muscle can do – challenge the World Bank and the International Monetary Fund in the way development finance is conducted, as well as the Western dominance that has prevailed in both Bretton Woods institutions.

Those institutions were never meant to be that way, of course, as a reading of their founding texts would show. But any initial magnanimity soon gave way to self-interest: US and European dominance of the World Bank and the IMF respectively was to be a Western “consensus” imposed on the world like a global neo-colonial regime.

Interestingly, the original Bric as both a term and a grouping originated not in any of the initial four countries or the developing world, but in the US itself.

None other than Goldman Sachs’ Asset Management Chairman Jim O’Neill coined the term in 2001 for those countries he believed would outpace the US in total GDP by 2020.

At the turn of the century Brazil, Russia, India and China were merely regarded by some as emerging economies developing under their own steam.

After O’Neill’s coinage they held their first summit in 2009 and invited South Africa to join them a year later, and Brics was born.

Since then, Brics as both concept and entity has had vigorous growth and a vibrant youth. It compares favourably with the IMF and the World Bank, both pushing 70 years and weighed down by limiting conditionalities and outmoded economic ideology.

Both institutions typically adopt a cold, mechanistic approach to development that prioritises market interests over human needs. Their Western bias is also a throwback in a 21st-century world of shared global interests and aspirations, and a world in which Western economies themselves are in trouble.

In contrast, Brics as a bloc of emerging economies serves as a bridge between the developing Third World and the developed First World. It seeks to narrow that yawning chasm by focusing on reviving global growth and ensuring macroeconomic stability.

Those virtues that had once been the preserve of the West have become its elusive goals. The “developed” and the “emerging” (mostly, once “developing”) economies have traded places.

The new global bank that Brics wants to establish is expected to emphasise infrastructure development and trade. The first represents solid investment in development for the future, and the second works as an economic multiplier for further growth.

On paper, Brics countries account for almost half the world’s population and just over a quarter of world trade. But more important than these bare figures is how Brics economies have been driving global growth for years, as acknowledged by the World Bank itself.

The idea for a new global bank arose only last year. So how the measured progress at the Durban summit is perceived depends at least as much on the observer: is the glass half-full or half-empty?

Some of the most difficult decisions, such as financing modes, remain unresolved. Its primary purposes like the operation of funds in project financing and a contingency fund as crisis buffer will take more time to work out.

Pessimists may cite how the absence of agreement on even the quantum of fund contribution from each country bodes ill for Brics. Basing the contribution on economic capacity makes sense, but concerns were expressed over how that would inevitably make a hulking China dominant.

A standard sum of US$10bil (RM31bil) from each country as seed capital was then considered, following a Russian proposal, but the final decision was left until later.

Optimists would say that far from weak indecision, this showed an openness about not wanting any country to dominate, with agreement on equality with a fair and manageable quantum for all.

However, realists may say that in such financial matters China would still eventually dominate. To that, it can be said that dominance by a single country was never a problem before, given the prominent US role and influence in the World Bank and the IMF.

At this point some may say it was precisely because of single-power dominance that had compromised the work of the Bretton Woods institutions. It might then be observed that a new global bank dominated by China would only balance the World Bank (and the IMF), which it would complement rather than replace.

Some observers may see crippling incompatibility in the different political systems within BRICS.

But such diversity need not be an obstacle, particularly when all countries now work within a global capitalist system.

President Vladimir Putin, often cited in Western circles as a modern incarnation of the Soviet bear, even insisted that a new global bank “must work on market principles only.” And “communist” China is not only a major and enthusiastic player in global markets, but – to former British foreign minister David Miliband – has even acted as a saviour of Western capitalism.

What worries fans of the IMF and World Bank is not how a new global bank as competitor will “steal their business,” but how it may force both to be more democratic and more sympathetic to the developing world. Who else but those currently dominating them in Washington and Brussels would object?

Japan as an emerging economy itself decades ago had its chance to forge a new alternative in international finance with the Asian Development Bank, but blew it.

The former coloniser in Asia seeking to make good in its post-war period, with US partnership, soon settled into establishment mode alongside its Bretton Woods equivalents. A new global bank established by BRICS will be a welcome addition to the existing financial institutions.

Its continental and political diversity would also make a slide into betraying its noble purpose more difficult.

Late last year, Brazil suggested that the proposed bank should be modelled on Asean’s Chiang Mai initiative.

This is a time for a sharing of experiences when each can learn from the rest, not of jealous exclusion and unfounded fears of rivalry.

In time, perhaps even the World Bank and the IMF can find it in themselves to accommodate and welcome new financial institutions operating on their “turf”.

At least that would help them return to their initial noble calling.

Behind the Headlines
By BUNN NAGARA

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Financial crises a result of governance failures

ROMAN emperor Julius Caesar was famously warned by a seer about the Ides of March, traditionally March 15.

On March 15 this year, banks in Cyprus were closed to allow politicians time to decide how to raise 5.8 billion euros so that the country could qualify for 10 billion euros in bailout funds from the rest of eurozone and the International Monetary Fund (IMF). The solution suggested was to levy a tax on depositors, sparking a realisation that finally, the Europeans had decided to “bail-in” investors and depositors, rather than using public funds to “bail-out” everyone else.

The Cyprus crisis caused a stir in global financial markets, because it punctured expectations that the worst was over. Instead, it demonstrated another episode of muddling through.

Banks in Cyprus re-opened on Thursday with new capital controls on the amount depositors can take out. Larger depositors with over 100,000 euros would stand to lose up to 40% of their deposits. Of course, a significant portion of the deposits in Cyprus banks belong to Russians, who may suffer losses of 4 billion to 6 billion euros. For certain investors, this is the price of putting money in higher risk offshore financial centres. The price to Cyprus of operating as an offshore financial centre is likely to be a drop of GDP of more than 20% in the next couple of years.

The Cyprus outcome is not unexpected. If European governments are to be loaded with heavy debt burdens as a result of the crisis, they will be bound to start “taxing” offshore financial centres, where rich Europeans had been avoiding tax for years. If the eurozone banking union is to have any credibility, they will have to start controlling banking centres which operate largely on tax and regulatory arbitrage. Moreover, having banking assets seven to eight times GDP is no longer considered viable, whether for Cyprus or Iceland.

At the heart of such troubles lies the issue of governance. Financial crises are more governance failures than anything else.

Last week, The End of History philosopher and political scientist Francis Fukuyama published an important blog commentary on “What is governance?” This is the much-awaited part of his promised series on political governance, beginning with his 2011 book The Origins of Political Order. In that book, he looked at the three components of a modern political order a strong and capable state, the rule of law and accountability of the state to its citizens. Since the 2011 book stopped at the French Revolution, most readers would be curious to see how he handled the rise of China, which has a different political system from the West.

Fukuyama's new definition of governance is “a government's ability to make and enforce rules, and to deliver services, regardless of whether that government is democratic or not.” Notice that he has decided to remove any suggestion that democracy is automatically associated with good governance, appreciating that “an authoritarian regime can be well governed, just as a democracy can be mal-administered.”

Accordingly, he uses four approaches to evaluating the quality of governance: procedural measures, input measures, output measures and measures of bureaucratic autonomy. To put it into simple language governance should be measured according to how you govern (the processes); the efficiency of governance (how much tax or resources you need); the effectiveness (outcomes rather than objectives) and whether the bureaucracy is independent of politics or not (the autonomy question).

In dissecting governance into its different dimensions, Fukuyama has helped to clarify the methodology in thinking about the tradeoffs between the ability to have high discretion versus being bogged down by excessive rules, and high capacity to execute, versus low capacity to execute. Critics of that approach would argue that strong states with excessive discretion may not be sustainable. On the other hand, weak states with too many rules and no discretion may not be sustainable either.

Fukuyama is right to point out that the bureaucracy's interests may not be identical to those of the people. The bureaucracy is supposed to be agent of the people (the principal), but many bureaucracies serve their own interests, rather than the public to the extent that civil servants may be neither civil nor servants.

Indeed, the simplistic view that the state is deterministic versus the view of free market self-order misses the fundamental point that large bureaucracies also have self-order. Anyone familiar with working in large complex bureaucracies in China, India or the United States, with many layers of government, would recognise that it is not easy to implement policies from the centre. State or provincial governments have a mind of their own, with very different priorities from that of the centre.

Indeed, in the 21st century, many cities have become more effective instruments of state, and it is not surprising that effective mayors have become national leaders because they show a capacity to deliver close to the people.

The more interesting question about governance is: why are collective action traps so pervasive? In other words, it is understandable why ineffective and weak bureaucracies or political systems are unable to overcome gridlock in their systems, but it is common to see highly effective and capable bureaucracies also caught in gridlock.

These gridlocks are apparent in the resolution of the euro crisis, the stalemate in the Doha World Trade Organisation negotiations and the Durban climate change debates. In the first week of April, the Institute for New Economic Thinking, the Centre for International Governance Innovation and the Fung Global Institute will be hosting a major conference in Hong Kong on how creative and innovative thinking can open up new avenues of thinking on the solutions to global governance. As a respected member of the global economic community, Hong Kong should make its voice heard.

You can watch most of the podcasts on www.ineteconomics.org or www.fginstitute.org.

THINK ASIAN By ANDREW SHENG

Tan Sri Andrew Sheng is president of the Fung Global Institute. 

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US fiscal deficit position is cheating American Children

So, about that fiscal crisis — the one that would, any day now, turn US into Greece. Greece, I tell you: Never mind.

Over the past few weeks, there has been a remarkable change of position among the deficit scolds who have dominated economic policy debate for more than three years. It’s as if someone sent out a memo saying that the Chicken Little act, with its repeated warnings of a U.S. debt crisis that keeps not happening, has outlived its usefulness. Suddenly, the argument has changed: It’s not about the crisis next month; it’s about the long run, about not cheating our children. The deficit, we’re told, is really a moral issue.

There’s just one problem: The new argument is as bad as the old one. Yes, we are cheating our children, but the deficit has nothing to do with it.

Before I get there, a few words about the sudden switch in arguments.

There has, of course, been no explicit announcement of a change in position. But the signs are everywhere. Pundits who spent years trying to foster a sense of panic over the deficit have begun writing pieces lamenting the likelihood that there won’t be a crisis, after all.

Maybe it wasn’t that significant when President Barack Obama declared that we don’t face any “immediate” debt crisis, but it did represent a change in tone from his previous deficit-hawk rhetoric. And it was startling, indeed, when John Boehner, the speaker of the House, said exactly the same thing a few days later.

What happened? Basically, the numbers refuse to cooperate: Interest rates remain stubbornly low, deficits are declining and even 10-year budget projections basically show a stable fiscal outlook rather than exploding debt.

So talk of a fiscal crisis has subsided. Yet the deficit scolds haven’t given up on their determination to bully the nation into slashing Social Security and Medicare. So they have a new line: We must bring down the deficit right away because it’s “generational warfare,” imposing a crippling burden on the next generation.

What’s wrong with this argument? For one thing, it involves a fundamental misunderstanding of what debt does to the economy.

Contrary to almost everything you read in the papers or see on TV, debt doesn’t directly make our nation poorer; it’s essentially money we owe to ourselves. Deficits would indirectly be making us poorer if they were either leading to big trade deficits, increasing our overseas borrowing, or crowding out investment, reducing future productive capacity. But they aren’t: Trade deficits are down, not up, while business investment has actually recovered fairly strongly from the slump.

And the main reason businesses aren’t investing more is inadequate demand. They’re sitting on lots of cash, despite soaring profits, because there’s no reason to expand capacity when you aren’t selling enough to use the capacity you have. In fact, you can think of deficits mainly as a way to put some of that idle cash to use.

Yet there is, as I said, a lot of truth to the charge that we’re cheating our children. How? By neglecting public investment and failing to provide jobs.

You don’t have to be a civil engineer to realize that America needs more and better infrastructure, but the latest “report card” from the American Society of Civil Engineers — with its tally of deficient dams, bridges, and more, and its overall grade of D+ — still makes startling and depressing reading. And right now, with vast numbers of unemployed construction workers and vast amounts of cash sitting idle, would be a great time to rebuild our infrastructure.

Yet public investment has actually plunged since the slump began.

Or what about investing in our young? We’re cutting back there, too, having laid off hundreds of thousands of schoolteachers and slashed the aid that used to make college affordable for children of less-affluent families.

Last but not least, think of the waste of human potential caused by high unemployment among younger Americans — for example, among recent college graduates who can’t start their careers and will probably never make up the lost ground.

And why are we shortchanging the future so dramatically and inexcusably?

Blame the deficit scolds, who weep crocodile tears over the supposed burden of debt on the next generation, but whose constant inveighing against the risks of government borrowing, by undercutting political support for public investment and job creation, has done far more to cheat our children than deficits ever did.

Fiscal policy is, indeed, a moral issue, and we should be ashamed of what we’re doing to the next generation’s economic prospects. But our sin involves investing too little, not borrowing too much — and the deficit scolds, for all their claims to have our children’s interests at heart, are actually the bad guys in this story.

By Paul Krugman

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China's First Lady Peng Liyuan leading by example

China’s First Lady Peng Liyuan made a fashion statement during a recent visit to Russia and Africa. 

AS Xi Jinping continues his first official visit to African countries as the Chinese President, his wife Peng Liyuan is as much of a star attraction back in China.

The close attention on Peng is not so much due to her new role as China’s First Lady but rather the fashion statement she made during the trip.

Peng arrived in Moscow, Russia, on March 22 with her husband in a double-sided buttoned navy blue coat with a black handbag.

Her clothes matched perfectly with that of her husband’s.

She wore a jacket decorated with motifs of blue flowers and birds over a black dress and carried a black purse when attending an event at the MGIMO University in the Russian capital.

In Tanzania on Monday, she appeared in an all-white jacket and skirt.

The navy blue coat and black handbag she wore and carried in Russia started the “Liyuan-Style” mania.

Soon, word spread on the Internet that the coat and handbag were not from luxurious foreign brands but were made by Exception de Mixmind, a Chinese brand established in Guangzhou in 1996.

After confirmation of this by the Guangzhou City Administration of Quality and Technology Supervision on its microblog, many Chinese praised Peng for supporting local brands and for carrying the pride of China during her visit.

Some Netizens said Peng looked “elegant” and “nicely-matched” with her clothes, while many others started creating forum threads on what clothes the First Lady would wear next.

Beijing Institute of Fashion Technology art and design department head Xie Ping was quoted by Beijing News as saying that the coat was designed based on a classical Western army uniform.

Qingdao Municipal Textile and Fashion Association secretary-general Zheng Mingmei said that the coat and handbag that Peng used in Russia fitted her personality and character well.

“What the First Lady did by wearing a local brand has no doubt increased the reputation of China-made brands internationally and boosted the confidence of our fashion brands in Qingdao,” she told Qingdao Morning News.

According to reports in China, major search engines and online shopping websites have seen a significant increase in the number of search words such as “Liwai (Exception in Mandarin)” and “Wuyong (Useless which is the sister brand of Exception)”.

The Exception de Mixmind outlets in Chengdu and Qingdao have received more customers than before, with many asking about the navy blue coat and black handbag worn by the First Lady.

The staff at the outlets told customers that they did not sell models of the coat and handbag.

Despite that, many customers still walked away with handbags resembling that of Peng’s.

Prices of its spring collection cardigans and long cotton shirts ranged between 1,000 yuan and 2,000 yuan (RM490 and RM980) while new handbags were priced between 2,000 yuan (RM980) and 3,000 yuan (RM1,470).

Qingdao Morning News reported that Peng’s coat should belong to last year’s winter collection series and cost around a few thousand yuan while the handbag similar to that of Peng’s was estimated to have cost 5,000 yuan (RM2,450).

“Compared with other coats and handbags around the same range, design and craftsmanship, the coat and handbag used by her were not too pricey,” said a staff.

Even before the First Lady fashion mania, Exception de Mixmind had already been quite an established brand.

Chinese tennis star Li Na wore a stand-up collar white shirt with black motifs during her photo call after her triumph in the French Open in 2011, and that shirt was from Exception’s 2007 “Tea Energy” series.

At that time, Exception founder and chairman Mao Jihong quashed rumours that the company sponsored Li Na’s fashion wear, saying that she was never their brand ambassador but they were delighted to see her wearing their label.

Of course, this time, it’s a bit different.

With Peng’s stature as the First Lady and a celebrity (Peng is one of China’s top female sopranos who sings a repertoire of ethnic and patriotic songs), this gives the brand more recognition.

In its editorial, Beijing Morning Post said there were three reasons why Peng received so much attention from the people and media.

One was that she was using made-in-China goods, second the clothes and handbags were not from luxury brands and third being her poise in leading by example.

“Nowadays, luxury consumption has be­c­ome a trend to show off one’s wealth.

Peng’s handbag is in a way a wake-up call for many Chinese who pursue luxury goods.

“After the Chinese Communist Party’s national congress (last November), the government outlined eight guidelines on improving its working style.

“Peng showed an important detail which was advocating austerity and a frugal lifestyle,” it said.

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Chinese Navy defends South China Sea

Play Video A unit of the Chinese Navy has conducted a routine drill in the South China Sea to improve its combat capabilities.

An official with the fleet said missile-equipped vessels tested their capabilities, including emergency docking and undocking, over-the-horizon missile attack, joint air defense, and combined assault against enemy warships. On Tuesday, the fleet held an oath-taking ceremony at Zengmu Reef (James Shoal), the Southernmost part of China’s territory. They vowed to safeguard China’s sovereignty.

The Chinese navy has a right to patrol the South China Sea, a Foreign Ministry spokesman said at a daily press briefing on Thursday.

Hong Lei's remark came after a four-ship Chinese Navy fleet that has conducted patrol and training missions on the South China Sea over the past few days reached Zing Reef, the southernmost part of China's territory, on Tuesday.

The country's stance on the South China Sea is consistent and clear, Hong said, noting that China has played a vital role in keeping the region peaceful and stable.

  Zengmu Reef (James Shoal)

James Shoal underlined in red.

.

“The visit to James Shoal, known as Zengmu Reef to China, was unusual for the firepower brought to bear on a territory also claimed by Malaysia and Taiwan (a province of China).”

Depending on who you are speaking to at any given particular moment, these “islands” called:
“Zengmu Ansha [Chinese], James Shoal [English], Beting Serupai [Malaysian]“.

.
“James Shoal is a small bank in the South China Sea, with a depth of 22 metres (72 ft) is claimed by Malaysia, the People’s Republic of China, and the Republic of China (Taiwan).”

.
Claimed by three parties, China, Taiwan and Malaysia. These “islands” about fifty miles from the coast of what used to be called Sarawak, the James Shoal at the southern most point of the Nine Dash Line.

China will not be passive in sea disputes

Chinese naval fleets recently conducted patrols on the South China Sea, reaching as far as Zengmu Reef, the southernmost part of Chinese territory. In an oath-taking ceremony on board Tuesday, the troops and officials vowed to safeguard China's sovereignty.

Earlier this month, a Chinese vessel fired two warning signal shells into the sky to prevent illegal fishing operations by Vietnamese fishermen. Both showed China's firm determination to insist upon its stance amid the South China Sea disputes.

Washington expressed its concerns in both cases, reinforcing its attitude that the US can interfere in the South China Sea issue any time.

Despite the fact that John Kerry, the new US secretary of state, has stepped into office and some side effects brought by his predecessor's aggressive approach are in decline, the US stance on the South China Sea will not fundamentally change. Behind China's frictions with the Philippines and Vietnam is actually the rivalry between Beijing and Washington over the South China Sea.

After Hillary Clinton's four-year intervention into the South China Sea issue with her "smart power" diplomacy, and Manila and Hanoi's frictions with Beijing, all kinds of risks within the South China Sea issue have become evident. All parties involved now have a clearer understanding of each other's national strength and determination.

China, through powerful countermeasures against Manila and Hanoi's provocations, has changed its passive status. Beijing had been worried that frictions on the South China Sea would cause deterioration in its surrounding environment and thus undermine its period of strategic opportunities. Now most of its concerns have been dispelled.

Crises like the Huangyan Island standoff have made one thing explicit - those were, after all, conflicts between countries whose strength were unequally matched. Manila and Hanoi would not have any chance of victory if the South China Sea issue escalated into a confrontation of national strength.

China has no plan to wage a war and recover all the islands illegally occupied by the Philippines and Vietnam. However, China has become more resolute in terms of strikes against the two's provocations.

China's growing leverage over the South China Sea issue stems from stable domestic development. Meanwhile, Manila and Hanoi are witnessing a reduced ability to provoke Beijing over those disputes. Washington is also seeing an increasing number of restraints in its South China Sea policy. The Philippines and Vietnam would face more troubles if they choose to seek fierce confrontation with China.

China should focus on peaceful development. But meanwhile, it is not afraid of adopting resolute measures to protect core national interests. China should avoid external misjudgments toward it, which is pivotal to the nation's long-term strategic environment.

Sources: CCTV, Peace and Freedom, Global Times