BRICS Will Extend Its Boundaries to Become BRICSIK

BRICS Will Extend Its Boundaries to Become BRICSIK

The association of the emerging economies of Brazil, Russia, India, China, and South Africa continues to strengthen its position in the world. Membership in the BRICS is becoming a priority for other countries with stable economic growth. The analytic service of the World Organization of Creditors speculates that the union could take on a new name – BRICSIK – to include Indonesia and Kazakhstan. In the early 2000s, the BRICS countries were considered exclusively as suppliers for the G-7 countries. Developing countries supplied the G-7 with cheap food, raw minerals, labor and intellectual resources, and mass-consumption goods. But over the past decade, the economies of these countries have been able to change their role from “supplier” to that of “locomotive” of global economic growth.

Stable economic growth and high figures within the association have recently been hot topics of discussion among experts. The VI Astana Economic Forum was no exception, during which WOC President Robert Gubernatorov gave an analysis of the BRICS countries and suggested that the union could soon expand.

Successes of the Developing Union

According to WOC research, the BRICS countries increased their total GDP from $3 trillion to $15 trillion. 20% of the world’s GDP is claimed by the union. The average rate of economic growth in the BRICS countries for 2012 was 4%, while the G-7 countries only achieved 0.7%.

The global economy is still exposed to negative trends and in a few years another financial crisis could replace the current one. The economy’s main problem remains high sovereign debt. While developed countries continue increasing their debts, the BRICS countries are following a very different policy. In these countries, external debt is on average 10-25% of GDP, and none of these countries should have problems paying off their debts while also maintaining positive economic growth.

Expanding in Order to Strengthen

To give the BRICS more confidence on a global scale, new members may be sought and could include Kazakhstan and Indonesia.

Over the past several years, the Kazakhstani economy has been demonstrating strong growth and its investment policy is predictable and understandable to potential investors. Kazakhstan is rich in raw materials, quality of life is on the rise, and unemployment is declining. Its economic policy allows the country to achieve better ratings with each passing year in comparative rankings. Kazakhstan has already built close economic ties with two of the BRICS countries: It is tied to Russia through the Customs Union and the Common Economic Space, and is rapidly developing its economic partnership with China.

Nearly a decade ago, when a Goldman Sachs analyst came up with the BRIC abbreviation, he also identified a group of 11 countries that could potentially become “locomotives” of the international economic system. Given the economic crisis and changes in the political system in some of these countries, the list was halved. Indonesia is in a very fortunate position: It’s fourth in size of population, 14th in territory, and national revenues are above average. Moreover, Indonesia is part of the G20, a not-insignificant factor.

In recent decades, the country’s government has made serious efforts to strengthen external relations with leaders of the major developing countries, including the BRICS. The addition of Indonesia would widen the sphere of the BRICS’ influence across all of Southeast Asia.

Potential Members Under a Magnifying Glass

Kazakhstan and Indonesia have both seen steady growth over the past several decades. In terms of size of economy, Indonesia has a steady hold on its position among the top 20, with growth of more than 6% for three years in a row. While Kazakhstan’s economy is only in the top 50, it has been demonstrating dynamic growth for several years and is ahead of most BRICS countries in this indicator (with the exception of China).

The policy of Indonesia’s government in relation to debt as a whole is similar to that of the BRICS countries, with external debt slightly above 20% of GDP. This suggests that the issue of public debt is overall under control.

Kazakhstan’s external debt is slightly higher, at 55% of GDP. This ratio is somewhat disturbing, but dynamic economic development requires sufficient financial resources. The government can supply these in two ways: borrowing or attracting investors. Kazakhstani authorities make use of both to spur economic growth.

Both countries have international reserves, but their volume is enough to cover just half of their debts. Yet Kazakhstan, for example, increased the size of its reserve fund by 12%, while liabilities increased by only 2%.

With regards to foreign direct investment flows, potential investors were ready and willing to invest money into projects in Kazakhstan in 2012, contributing to a 13% increase in FDI flows compared with the year previous.

In Indonesia, FDI levels for 2012 remained the same as in 2011, but over the past 10 years, flow of foreign direct investment into the country has grown ten-fold. At the beginning of the 21st century, investors weren’t particularly interested in Indonesia, but over the past 10 years, the government has managed to create favorable conditions for them.

What’s to Be Expected from the BRICS

If you attempt to forecast the near-term prospects of the BRICS countries, then the total volume of the economies may surpass the U.S. by 2015 and their share of the global economy will exceed 20%.

It’s important to note that the financial services that usually create “bubbles” in the stock market are only a small proportion of the GDP in the BRICS countries, unlike in the G-7 countries. Emerging economies will also continue to increase their real production, and hence their economic potential. Within a short timeframe, a new phase of global development is quite possible, with a complete shakeup of the leading countries globally.

In the event of such major changes, the biggest challenge would be avoiding a third world war that could be unleashed in the Middle East and Central Asia. Any military actions near the borders of China, India, and Russia would reduce economic growth to null in these three countries. Indonesia, which is an active and influential member of the Organization of Islamic Cooperation, could help to deter the escalation of conflicts in a turbulent region. None of the five BRICS countries today has such an opportunity to influence the Islamic world.

Experts see no obstacles to such an expansion of the union. Thomas Helbling, Division Chief of the World Economic Outlook Department at the International Monetary Fund, told WEJ that he sees no reasons why Kazakhstan and Indonesia couldn’t join the BRICS: “The success of the BRICS depends on two things: integration into global society and global trade, and on structural reforms that affect the private sector of the economy. In particular, Kazakhstan is already integrated in global trade and has strong ties with several of the BRICS countries. We also see that Kazakhstan is demonstrating stable economic growth and development across various sectors.” In his opinion, Kazakhstan should improve in some areas: Stop the dependence on oil while strengthening agriculture, industry, and international trade.

Yet Kazakhstan’s government isn’t seriously considering joining the BRICS for now. As Deputy Prime Minister Kairat Kelimbetov previously stated, Kazakhstan does not formally meet all of the criteria laid out by Goldman Sachs analysts, in particular population size. He highlighted that the country has a significant fund of natural resources and arable land, making it possible to play an important role in providing the BRICS with energy and food. Thus, Kazakhstan is now playing the role of supplier to the BRICS, which are themselves still occupying this position in relation to the G-7. It is possible that in the near future, this situation could change.

Investors now point out that the two potential BRICS members are already cooperating among themselves: In 2014,/p Kazakhstan and Indonesia will open a joint factory to produce automobile tires. The raw rubber for the wheels will be supplied by Indonesia and Kazakhstan will handle the manufacturing. And this isn’t the only area for cooperation between the two countries, Rizal-Affandi Lukman, Indonesia’s Deputy Minister for International Economic and Financial Cooperation, told WEJ: “We can partner in the areas of food as well. Our company Indofood would like to open a plant for producing instant noodles in Kazakhstan, since this country is a major wheat producer. In addition, we will develop partnerships in the fields of engineering and energy.”

The Deputy Minister speaks positively on the issue of BRICS accession: “Indonesia is a developing country with impressive economic indicators: The country’s GDP is $1.3 trillion. We believe that developing countries should work together more often so that our economies become more open. Developing countries have to face similar issues and we should be discussing how to solve them together. Perhaps the most important issues today are maintaining stable economic growth and, of course, attracting and retaining investments in our countries. And Indonesia would be happy to discuss these issues within the framework of a partnership with the BRICS.”

Marc Uzan: “It isn’t necessary to be a member of a club”

Executive Director of the Reinventing Bretton Woods Committee Marc Uzan discussed with World Economic Journal the questions of BRICS expansion and the possibility of recovering from the crisis thanks to developing countries.

During the VI Astana Economic Forum, experts discussed the inclusion of Kazakhstan and Indonesia into the BRICS. How possible and necessary is this?
The BRICS is an interesting concept, but the countries are very different. It isn’t necessary to join a club to show that a country is developing. Kazakhstan already has a developing economy, and is a neutral country with good relations and dialogues with all countries. Yes, Europe and the U.S. are already worn out by the crisis, but the BRICS countries haven’t played a large role in the global economy: They are still in the early stages of development.

So countries, in particular Kazakhstan, shouldn’t strive to join the BRICS, but should focus on other things?
Kazakhstan should make sure that it will be able to join the international financial system. Among other things, Kazakhstan is very resource-rich, and so it is necessary for the government to diversify in order to ensure large-scale economic development. Everyone knows that resources are limited and they will eventually run out, which is why Kazakhstan should invest in various enterprises, in innovation, and create and strengthen ties with other countries. Growing an economy in no way requires uniting under the BRICS brand name.

Moving on to Kazakhstan’s contribution to resolving the crisis, what kind of role can the G-global platform play, which was proposed by the country’s President, Nursultan Nazarbayev?

Our main goal isn’t to just talk about the crisis, but to look for ways out of it. And this way out will most definitely be found because a political committee will be formed that will try to find the right balance between austerity and economic growth. In addition, we all see that emerging economies are growing, like China, Latin America, and Kazakhstan. We have to find opportunities for these economies to function as part of a single global economy. How does all of this relate to the G-global platform? Very simply. When politicians are trying to think through scenarios of their actions, they simply have to look to input from academics and experts from around the world. This is a good way for them to get new economic models and carefully prescribe steps. At the moment of transitioning to a market economy, it is difficult to prescribe a realistic scenario. That’s why it is important to understand how to balance the global economy and calculate how emerging economies will expand their markets.  We have already determined that the world is seeing a severe lack of investment and infrastructure. That’s why the G-global platform is needed, in order to set priorities and get expert opinions. Once there is a professional overview, then you can hold seminars and lectures to bring this expertise to politicians.

Is there any current risk that transnational capital, of which there seems to be a lot right now globally, could become a new financial bubble? How can this be avoided?
I am not a Central Banker, but if I were in their shoes, I would constantly be worried and they should be, too. They should disclose the system’s new capabilities, of which there are many today: We see high liquidity everywhere and it’s leaving the market. We see that countries like Zambia, Georgia, and Mongolia are entering the market with low prices. This is why each country should be prepared and develop its own protection mechanisms as well as find the correct political tools, since it is impossible to predict now what will happen in the future. But I personally worry a lot about how people are using the same policies and methods that were used in 2007, in spite of their failure and in spite of the numerous new capabilities.

Text: Valeriya Khamrayeva, Oxana Chaika