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What’s up with BRICS?

By Ian Lavis, Praxity Global Alliance

Brazil, China, India, Russia and South Africa (BRICS) joined forces to change the world. It hasn’t exactly gone to plan but this exclusive club of developing countries packs considerable punch. Can BRICS get back on track?

As South Africa prepares to host the next BRICS annual summit in Johannesburg later this year, there is a big question mark hanging over the ability of the five emerging countries to achieve what they set out to do.

When the four biggest members by GDP first got together in 2006, they sought to challenge the domination of the US and Europe, and the power and influence of the IMF and World Bank.

South Africa came on board in 2009 and the five nations demonstrated they meant business by setting up their own development bank and world summits to rival the G7 forum. It looked like BRICS had the genuine potential to influence and shape global governance and world banking. Then it all went pear-shaped due in part to economic crisis, recession and corruption.

The problems 

While China and India have fared well since joining BRICS, Russia and Brazil fell into recession. Brazil and South Africa in particular have been beset by high levels of corruption and political turmoil.  Huge differences exist between all five countries politically, economically and culturally, and cooperation is patchy.

On the bright side, there are signs the Brazilian and South Africa economies are on the up, India is undergoing widespread reform buoyed by a growing economy, and China – the world’s second largest economy by GDP – continues to grow.

But corruption is still prevalent throughout BRICS, there is little synergy between members and one of BRICS’ biggest projects, the creation of an alternative reserve currency to the US dollar, has failed to take off.

Are these just temporary set-backs or is the BRICS project doomed? The five developing countries boast 42% of the world’s population, 26% of the world’s land mass and 14% of the world’s GDP (US$ 15.8 trillion), according to figures from the World Economic Forum. They could yet dominate the twenty-first century world, but there are major challenges to overcome.

Brazil loses its voice

To understand the problems facing BRICS nations, it’s worth looking at the situation in Brazil. The world’s fifth largest country and eighth largest economy in terms of GDP had so much to bring to the table but economic crisis and corruption scandals have taken their toll on the Latin American nation

Brazil joined BRICS when the economy was growing and the Brazilian government was keen to demonstrate Brazil was growing economic power. “Brazil saw BRICS as a way to show its growing diplomatic influence in the international arena,” says Alexandre Almeida, Partner and Tax Services specialist at the São Paulo office of global accounting firm Mazars. Then came a massive economic and political crisis in 2015 and 2016, and Brazil “lost its voice”.

Ongoing corruption scandals led to the impeachment of former president Dilma Roussef while current President Michel Temer has also been implicated although he denies all corruption charges. The country as a whole is fighting hard through its judicial power to defeat corruption and establish transparency. For all this, it shouldn’t be forgotten that before the crisis, a combination of international growth and innovative social programmes helped lift 29 million Brazilians out of poverty and the country has vast natural wealth.

The Brazil situation has brought into sharp focus the difficulties of cooperation between BRICS nations with different levels of stability and at different stages of development. The lack of synergy between the five nations is a major inhibitor to BRICS-based economic development, according to Alexandre Almeida.

He says: “China is the exception because of its unique position as a global trader. It makes huge investments through its state-controlled companies in BRICS and has become the most important trade partner of Brazil, replacing the United States years ago. China targets land and real estate, metals, infrastructure and the automobile industries. We still don’t see Brazilian, Russian, Indian, South African companies investing heavily in each other’s BRICS jurisdiction. The business community appears disconnected. As such, BRICS seems more of a state and political initiative at this point.”

South Africa re-emerges

South Africa, by far the smallest member nation in terms of GDP, is another example of a country dogged by corruption which has contributed to a loss of impetus within BRICS.

Former president Jacob Zuma was forced to resign, or step down, due to his alleged involvement in large scale corruption. During his time in power, the economy struggled to grow above 1%, leading to a downgrading by credit rating agencies.

However, there is a renewed sense of optimism under new president Cyril Ramaphosa, according to Kariem Hoosain, Partner and Africa Regional Board Member at Mazars in Cape Town. He says: “We had a watershed stage in political and economic terms. We have gone through a really tough period through Zuma’s rule. I think the outcome of him leaving power will render us better. We will have a breath of fresh air. We will be able to be more meaningful in our contributions and we will have more constructive policies to contribute overall to BRICS growth.”

The Mazars Partner in Cape Town adds: “There is absolutely no doubt the new president, who is a fairly studious man, will want to maximise the benefits we can get out of BRICS involvement. South Africa has a relatively small role to play but will want to continue to play an active role in BRICS.”

However, he warns: “We need to get the economy working again. We need to increase foreign investment in the country and increase credit ratings. We need to achieve around 5 or 6% growth.”

South Africa mainly benefits from links with China and India, in terms of investment and trade respectively, but there is little collaboration with Brazil and Russia with the exception of a controversial Russian nuclear deal which may or may not go ahead.

Big progress

One area in which BRICS has defied its critics is in the creation of the New Developing Bank (NDB). Established at the sixth BRICS summit, the NDB was established to finance infrastructure and sustainable development projects in BRICS and other developing countries with an initial subscribed capital of US$50 billion. A Contingent Reserves Arrangement (CRA) was also set up, with US$100 billion of authorised capital, to help provide international stability and forestall short-term liquidity pressures. One aim of the new bank is to facilitate the exchange of local currencies as a way to weaken the use of currencies like the USD and the euro.

However, there is a long way to go before the bank can be seen as a serious alternative to the World Bank. For it to succeed, there needs to be a mix of “strong compliance, good practices, transparency and commitment to sustainable projects”, according to Alexandre Almeida.  He adds: “Non-sustainable projects and possible corruption associated with NDB would have a huge negative impact. In the case of Brazil, based on the current experience and past years, this is the kind of propaganda governments really don’t want.”

What next for BRICS?

Alexandre Almeida says the current BRICS agenda is to reform the IMF, UN and Security Council and democratise the different views of the world. What BRICS needs most, he says, is a strong brand so that each member nation can have more “soft power” in its area of influence. 

He explains: “A strong brand showing BRICS can set the example and deliver something better than the status quo is crucial. The current international economic, political, finance and international tax system was designed or reinforced at the end of WWII by the US plus countries that would form the OECD.”

Looking back, perhaps expectations were too high in some quarters when these five emerging nations got together. After all, the purpose of BRICS at its inception was “to form a convenient and pragmatic twenty-first century relationship that pools influence of its members in order to achieve objectives agreed by all five countries”, according to an article published by the World Economic Forum in October 2017. Its author, Samir Saran, Vice President of the Observer Research Foundation, says if BRICS is to succeed in influencing and shaping the norms of global governance, members will need to:

  1. reaffirm their commitment to a multipolar world that allows for sovereign equality and democratic decision-making.
  2. build on the success of the NDB and invest in additional BRICS institutions.
  3. consider a BRICS-led effort to meet their commitments under the Paris Agreement on climate change and the UN’s sustainable development goals.
  4. consider expanding the remit of their cooperation to address emerging areas of global governance.
  5. encourage direct interactions between their constituents.

This would seem quite a tall order, but then the US and Europe also have some way to go when it comes to working together effectively to create a better world. If BRICS can overcome the challenges it faces, and drive positive change, it may well succeed in providing something better than the status quo, or at least an interesting alternative.

What does BRICS mean for Praxity Global Alliance?

The greater the international collaboration within BRICS, the more opportunities it provides for Praxity participant firms to share expertise for the benefit of their clients.

As the world’s largest alliance of independent accounting firms, Praxity facilitates knowledge-sharing throughout the BRICS member nations, as well as other jurisdictions.

Alexandre Almeida, Partner and tax specialist at Mazars in São Paolo, says BRICS has helped forge new ties between advisors in Brazil and China. He explains: “China has become the most important trade partner and investor in Brazil. We have therefore been working extensively with our partners in China. The need for Chinese expertise has increased so much that we now have a China desk. This is where BRICS becomes more about experience in different countries and learning from each other.”

Similarly, BRICS collaborations enable Praxity participant firms to connect with firms in South Africa and neighbouring countries. Kariem Hoosain, Partner and Chief Operating Officer at Mazars in Cape Town, one of the lead coordinators, says: “When clients have a requirement to work in other countries, I make referrals. I connect them within the Alliance.”