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Showing posts with label South Africa. Show all posts
Showing posts with label South Africa. Show all posts

Saturday, August 19, 2023

Emerging economies having bigger say in global affairs inevitable; G7 resurrection notion stupid: father of BRICS

 New cooperation path

Jim O'Neill, a renowned British economist Photo: Xie Wenting/GT


Editor's Note:

The 15th BRICS Summit will be held in Johannesburg, South Africa, from August 22 to 24, 2023. At this year's meeting, the feasibility of a common BRICS currency, the internationalization of the Chinese Yuan, the growth prospects of emerging economies such as China, and the role of the BRICS in global governance will be the focal points of discussion.

With these questions in mind, Global Times reporters Xie Wenting and Bai Yunyi (GT) recently interviewed Jim O'Neill (O'Neill), a renowned British economist and former commercial secretary to the UK Treasury, who is also known as the "father of BRICS." In 2001, O'Neill first proposed the concept of "BRICS" and predicted that the share of BRICS countries in the global economy would rise significantly, hence earning him his title. In the interview, the British economist told the Global Times that the idea of expecting the G7 to play a greater role in global governance is stupid. Despite facing geopolitical challenges, emerging economies will inevitably have a greater say in global affairs.

GT: You are widely viewed as the "father of BRICS" in China. As the 15th BRICS Summit is set to take place in South Africa, what are your expectations for the upcoming summit? How do you assess the future development of the BRICS?

O'Neill: There has been a lot of discussion about this BRICS Summit for several months. So they have allowed expectations to rise about, in particular, one thing, which is an expansion of the BRICS group into being BRICS plus.

The main issue will be how many countries will actually become members of the BRICS plus. But now it is not clear to me regarding the expansion and what are the [membership] criteria. At the summit, these questions may be addressed.

Sometimes people have said to me: Why did you create this acronym, because they [member countries] don't have anything in common. That's not true. They all have a huge number of people and a lot of challenges with infectious diseases. I think the BRICS countries should enhance cooperation in areas such as public health and climate change.

I am optimistic about the development of the BRICS because of its potential. Over the course of the nearly 40 years that I have been observing China, it usually ends up doing the right thing. Additionally, due to India's remarkable demographics, these two countries emerge as the most crucial components within the BRICS framework.

Ultimately, China's massive economic size looms prominently, being twice as large as the combined total of the others. Thus, the real determinant of aggregate growth performance resides in the trajectories of China and India.

Among the BRICS nations, Brazil, Russia, and South Africa face daunting challenges such as over-reliance on commodities. They must embark on reform initiatives.

GT: De-dollarization is currently a hot topic. How do you view the prospects of a de-dollarization in the world? How do you view the prospect of using RMB in trade settlements between the BRICS countries?

O'Neill: I do think it is the case and this discussion has been had for over 20 years. The world is too dependent on the dollar. Every country in the world has to suffer the consequences of the economic cycle. The Federal Reserve Board is grappling with monetary policy matters, which align with the Fed's responsibilities, given that its mandates pertain to domestic US policy. However, this approach may not always align with the specific domestic requirements of many emerging economies, potentially subjecting them to a cycle that doesn't suit their individual needs.

Hence, the case for having a more balanced monetary system is really quite strong. The obvious contender from the BRICS group to play a bigger role is the RMB. I think the idea of the RMB becoming a more prominent invoicing currency for trade and gaining increased status as a reserve currency within the BRICS holds significant merit. However, the realization of this notion hinges upon the willingness of Chinese policymakers, including the People's Bank of China, to make it happen.

The discussion of the internationalization of the RMB has been around for 20 years, ever since the early days of the BRICS and since China played a crucial role in bringing around the end of the Asian financial crisis in 1998. In fact, I admire the slowness in which the Chinese authorities have allowed the rise of the RMB. You want to make sure that your domestic financial markets are sufficiently developed, especially the interest rate market before you allow your currency to be traded a lot more around the world. China has to allow for the growth of the RMB financial markets based on its own domestic needs.

GT: You once argued that the G7 is a zero. You said that since its creation, the G7 has become increasingly irrelevant in a world of new emerging powers. An institution that excludes the BRICS while still including economic basket cases like Italy cannot possibly claim the legitimacy required to exercise global economic leadership. But some observers have noted that the role of the G7 in global governance is reemerging, while the influence of the BRICS and G20 is decreasing. How do you view this perspective?

O'Neill: I think it's a bit crazy. It is indeed the case that since US President Joe Biden came to power, the US has sought to elevate the role of the G7 among the so-called advanced countries. Therefore, there is greater enthusiasm among certain G7 members regarding their capabilities. They're all democracies, and they're all reasonably developed so they find it easy to meet and talk. However, the G7 faces numerous dilemmas stemming from a central issue: Their diminishing share in the global economy.

Japan and Italy have had hardly any growth for 20 years. Germany also doesn't grow very well. And the UK has hardly grown at all since the financial crisis. In fact, the G7 now is a club increasingly dominated economically by the US. Certainly, when it comes to global issues - be it global economic challenges, climate change, infectious diseases, or any other truly global concern - it is impossible for the G7 to effectively address these matters.

I am very disappointed that the G7 has developed this idea that it has resurrected itself, because it is stupid. What we need to do is to renew efforts to make the G20, which was a fantastic creation of the financial crisis because it has the BRICS and all the G7 in it to be the center of global policy-making again.


An aerial view of Johannesburg, South Africa Photo: IC

GT: Given the current geopolitical challenges, do you maintain your optimism that future organizations like the G20 will incorporate a greater representation of emerging economies and play a more influential role in global governance?

O'Neill: I am more optimistic because I think it's inevitable. If you look at the history of the world over the long term, usually the most important countries are the ones that have the biggest say about global affairs. I am from the UK, and in the century prior to the last 100 years, the UK held the most dominant influence in global affairs, a reflection of Britain's economic history. This shifted when the US grew significantly larger.

As more emerging economies become bigger and bigger, it seems inevitable that they will have a bigger say in global affairs, despite some of the geopolitical challenges that go with it.

GT: Do you believe that emerging economies have the potential to remain substantial drivers of the global economy, both now and in the future?

O'Neill: Yes is the answer. Currently, China holds the position of the world's second-largest economy in nominal terms and the largest in PPP (Purchasing Power Parity) terms. Over the next few years, India is poised to challenge Germany for the fourth-largest spot, having already surpassed France and the UK. The combined growth trajectories of China and India exert the most significant impact on global GDP.

Several other emerging economies, notably Indonesia and Vietnam, are also gaining prominence in Asia. In Latin America, Mexico, and in Africa, though from a significantly lower starting point, countries such as Nigeria, Ethiopia, and Egypt are steadily gaining importance in the global economy. However, among the five BRICS countries, three have not demonstrated strong economic performance for over a decade. I am skeptical that their fortunes will change unless they embark on substantial economic reforms aimed at diminishing their reliance on volatile commodity prices.

GT: What is your perspective on the role that China plays in the advancement of global economic growth?

O'Neill: As China is having grown so rapidly and substantially, the current situation underscores that what happens to China in the upcoming year holds significance for the global economy. Many countries worldwide are greatly influenced by China, from South Korea to developed Western countries like Germany.

I think the confidence of Chinese individuals is not as high as it was for the last three decades. Chinese policymakers need to listen, understand, and take action to specifically enhance the role of consumption. I read that there is discussion regarding additional policies which I hope could happen.

Chinese consumption, as a proportion of shared GDP, remains excessively low. But Chinese savings persist at levels that are disproportionately high. Chinese policymakers must identify the appropriate stimulus to instill greater confidence among the populace, thereby promoting increased spending.

GT: We seem to be entering an era of "tech decoupling" and "technological nationalism," with the US, for example, imposing restrictions on selling certain high-tech products to China. What impacts could this trend have on the global economy?

O'Neill: As an economist, I find it hard to take these populist measures very seriously. We all live on the same planet. The notion that the US and China could entirely decouple from one another is stupid. When considering balance of payments and countries' savings rates, if the US saves too little, it consequently needs to source capital from the international community. This situation inevitably leads to a trade deficit with the rest of the world, as dictated by the accounting identity of the balance of payments.

Consider the following theoretical scenario: If the US were to enact a prohibition on importing anything from China, for instance, the result would be the US importing those same items from other countries. Simultaneously, those other countries would import those goods from China.

In my opinion, the so-called decoupling is merely a populist political notion that lacks any logical basis.

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Monday, November 21, 2011

Is China still a developing nation?


Global Trends By MARTIN KHOR

Last week, US President Barack Obama said China has ‘grown up’ and must take on the responsibilities of a developed country. But is China already grown up – or is it still a developing country?

 China’s fight to retain its developing country status is of interest to other developing countries, for they will be next if China loses that fight

IS CHINA still a developing country, or has it joined the ranks of the advanced developed countries? This has become a topical question, especially after US Presi-dent Barack Obama reportedly told Chinese President Hu Jintao last week that China had to act more responsibly now that it has “grown up”.

This interesting conversation took place at the Asia-Pacific Economic Cooperation (Apec) Summit in Hawaii. And when Obama met Chinese premier Wen Jiabao at the East Asia Summit hosted by Asean in Bali last week, he must have said something similar, in between chiding him for not allowing the Chinese currency to shoot up.

By telling China that it has become a grown-up, Obama meant that China should now be treated just like the US or Europe in terms of international obligations – like taking on binding commitments to reduce greenhouse house gas emissions, cutting its tariffs to near zero and giving up its subsidies under the World Trade Organisation, giving aid to poor countries and letting its currency float.

This is what the US has been pressurising China to do in the recent negotiations in climate change, in the WTO’s Doha talks, at various meetings of the United Nations and at the Apec summit.

In fact, most of the important multilateral negotiations are stalled because the US (with Europe and Japan standing behind it) insists that China gives up its developing country status and takes on the obligations of a developed country.

It is not only China, of course. They also want India and Brazil to do likewise. And often also mentioned are South Africa and the wealthier or bigger Asean countries.

The main focus, however, is China. There has been growing respect for – or, rather, fear of – China, that it is growing so fast and has become so big and powerful it might swallow up the Western world in a decade or two.



So, the question is pertinent. Is China a developed country?

The answer depends on what criteria are used. In absolute terms, China is indeed a big economy. Its GNP is second only to that of the United States. It has become the biggest emitter of greenhouse gases, having overtaken the United States.

But this is mainly because China is a big country in terms of population. With 1.3 billion people, it is the world’s most populous country.

However, despite the mighty image it has been given by the world media, China looks like a very ordinary developing country once we look at per capita indicators.

Whether one is a developed or developing country is defined by the UN and by the IMF and World Bank, and the most important criterion is income per capita.

By that yardstick, China is very much a developing country.

The International Monetary Fund, in its latest World Economic Outlook, classifies China as a developing country, with a per capita Gross Domes­­-tic Product last year of US$4,382 (RM13,852), ranked a lowly 91 of 184 countries in the world.

Six African countries (Equatorial Guinea, Gabon, Botswana, Mauritius, South Africa, Namibia) had GDP per capita levels higher than China.

China’s GDP per capita was less than a tenth that of the United States, which had US$46,860 (RM148,129). Luxembourg had the highest ranking, US$108,952 (RM344,408). Ma­­laysia was No. 65 at US$8,423 (RM26,626) and Singapore No. 15 at US$43,117 (RM136,297).

Economists also use the measure of GNP per capita “in gross purchasing power” (GPP). This is to take into account the different costs of living in different countries. People living in countries with a lower cost of living could enjoy a higher li- ving standard than their country’s GNP implies.

Last year, in GDP (at GPP) per capita terms, China was lower still at No. 95 with US$7,544 (RM23,847), just below Ecuador and just above Albania, El Salvador and Guyana.

By contrast, Malaysia was at No. 58 with GPP per capita of US$14,744 (RM46,607) while Singapore was No. 3 with US$56,694 (RM179,295).

The UN Development Programme has a human development index (HDI) that measures quality of life in terms of income, schooling, life expectancy and so on.

The Human Development Report 2011 shows China at No. 101 of 187 countries with a HDI of 0.687 and in a category of “medium human development”.

What about climate change? China, again mainly because of its huge population, is the top greenhouse gas emitting country, with a total of 7,232 megatonnes of CO2 equivalent in 2005. The US is second with 6,914 Mtonnes. India was fifth with 1,859 Mtonnes.

But in per capita terms, China’s emissions level was 5.5 CO2-equivalent per person, ranked 84 in the world. By contrast, the US’ per capita emission was 23.4 CO2 equivalent, Australia’s 27.3, Russia’s 13.7, Ger­many’s 11.9, Japan’s 10.5, Singa­pore’s 11.4, Malaysia’s 9.2, South Africa’s 9.0, Brazil’s 5.4, Indonesia’s 2.7, India’s 1.7 and Rwanda’s 0.4.

Thus, as No. 91 country in the world in GDP per capita, No. 101 in human development index and No. 84 in per capita emissions, China is looking like, and is, a middle-level or even lower-middle level developing country, with not only all the developed countries ahead of it, but also many developing countries, too.

China also shares the same characteristics of many developing countries. More than 700 million of its 1.3 billion people live in the rural areas, and in 2008 there was a large imbalance, with the urban disposable household income 3.3 times bigger on average than in rural areas.

According to China’s own standard, 43 million Chinese are low-income (below US$160 (RM506) a year). By the higher UN standard, 150 million people are poor, living on less than US$1 (RM3.16) a day.

Each year, 12 million people are newly added to the job market, outnumbering the population of Greece, and it is quite a task to find them jobs.

This does not deny the fact that there are high points in China’s development: its big GNP in absolute terms, its high rate of economic growth, the foreign reserves of above US$3 trillion (RM9.5 trillion).

But the fact remains that while China has become a big economic power in absolute terms, it is still a middle-level developing country, with the socio-economic problems that most developing countries have.

And if China is pressurised to take on the duties of a developed country and to forgo its status and benefits of a developing country, then many other developing countries that are ahead of China (at least in per capita terms) may soon be also asked to do the same.

Thus China’s fight to retain its developing country status is of interest to other developing countries, for they will be next if China loses that fight.

Saturday, September 10, 2011

The BRICS are coming

The BRICS - Brazil, Russia, India, China and S...Image via Wikipedia



WHAT ARE WE TO DO By TAN SRI LIN SEE-YAN

THE term BRIC (Brazil, Russia, India, China) was first used in 2001 by economist Jim O'Neill (Goldman Sachs) to call attention to four rapidly rising large emerging economies considered able to play a significant role in global affairs, championing the interests of developing nations. Very much like what G-7 does for the developed world.

For years since, it was treated by investors and journalists as a shorthand for the big emerging markets. Adding South Africa to the group widens its focus to include more from outside fast-growing China and India.

The BRICs held its first summit in 2009 in Russia, discussing issues on international monetary reform, including the possibilities of a new dominant reserve regime to replace the US dollar-based system. This year, China played host and invited South Africa to join, formally naming the group BRICS. Together they exceeded three billion people, nearly 45% of the world, and about 25% of the world's 2011 gross domestic product (GDP) based on purchasing power parity.

China's total output is bigger than the other four put together. The economic clout of the BRICS is now growing as the developed world struggles to expand and pare debt. Indeed, they are starting to operate as a common bloc in the G-20, providing a counterpoint to the United States and Europe.

Building BRICS

But the group is vastly different. India, Brazil and South Africa are vibrant democracies in contrast to the more authoritarian Russia and China. They need to balance the interests of its members: three large commodity exporters and two huge commodity importers. For sure, they have to get used to obeying rules they played little part in shaping. China's economy, the world's second largest, is nearly three times the size of Brazil's, close on four times that of Russia and India, and 16 times that of South Africa.



They also differ on exchange rate policies. Brazil is vocal against China's tight management of the yuan's value, keeping its exports relatively cheap. China is becoming prominent in BRICS' trade already it is Brazil and South Africa's largest source of imports. Be that as it may, the group shares strong macroeconomic fundamentals going into 2012.

China and India will grow 8.5%-9% this year; Russia and Brazil, 4%-4.5%; and South Africa, 3.5%. Their structural budget deficits are well contained, with low debt/GDP ratios, highest being in India (68%) and South Africa (65%).

China continues to have a current balance of payments surplus (5.7% of GDP), while all the others' deficits are each less than 5%. But they share a common problem inflation: 6.5% in China, 9% in India, 9% in Russia, 7% in Brazil and 6% in South Africa. Containing inflation remains a top priority of public policy. Still, they continue to struggle to deal with this threat.

The 2nd BRICS Summit held in April 2011 reaffirmed the group's determination to transit from global pax americana to a new order in the “development of humanity.” The BRICS' emphasis on co-operation in their call for reform of the US-dollar dominated international monetary system and for tighter supervision of commodity derivatives and markets, and capital flows show the group is seeking to refrain from too much assertiveness. Still the desire to shake off the old hegemony is there; it calls for a larger role in international fora.

It condemns “the inadequacies and deficiencies” of global finance and the “excessive volatility in commodity prices.” The Sanya declaration underscored their concerns about underlying factors that fuel inflation and currency volatility in many emerging economies, as well as their strong desire to shift away from reliance on the US dollar.

“We call for more attention to the risks of massive cross-border capital flows now faced by the emerging economiesExcessive volatility in commodity prices, particularly for food and energy.”

The BRICS took a new step towards cementing their global influence by: (i) calling for a broad-based reserve currency system “providing stability and certainty”, one that is more reliable and stable; (ii) welcoming discussion about the global role of Special Drawing Rights (SDR), the International Monetary Fund (IMF)'s in-house accounting unit but a global reserve asset, and on the SDR's basket of currencies (now comprising the US dollar, the euro, yen and pound sterling); (iii) establishing mutual credit lines denominated in their home currencies among the state development banks of the group. To start the ball rolling, China Development Bank will issue loans worth 10 billion denominated in yuan this year to other BRICS nations, mostly to fund oil and gas projects; and (iv) forging a common emerging market negotiating stance on issues from climate change to world trade, and to act as a credible counterweight to the West in settings like the G-20.

BRICS & Asia

The Asian Development Bank (ADB) expects Asia to grow 7.5% this year (against 9.2% in 2010) and 7% in 2012. “If anything distinguished the region from the rest of the world, it is its strong macro fundamentals.”

However, a dark cloud in the horizon is the slowdown in exports to its traditional markets in the United States, Europe and Japan. Against this is the region's potential for rapid expansion in intra-regional trade, amid signs of rising domestic demand in Asia.

True, manufacturing and services-related activities stalled across much of the world in August, raising fears of another global downturn. True also, factory and services output throughout Asia, including China and India, slackened in August, pointing to growing evidence that weaker demand in the United States and Europe is weighing on Asia's export-driven economies.

Moreover, investor confidence dropped to the lowest in two years in September in the eurozone and the United States, and consumer confidence, already fragile, weakened further. Unfortunately, the United States' anaemic growth and Europe's worsening debt crisis have prompted governments to deepen budget cuts, undermining consumer demand and clouded growth prospects with uncertainty.

Barring a full-blown double-dip in the United States and Europe, Asia will still suffer significant bruising from deepened dashed expectations, with most of the pain centred on highly exposed nations Taiwan and South Korea. No doubt, the BRICS economies are bound to face clear challenges in responding to the angst over weakened global conditions.

Missing BRICS

O'Neill has since suggested his original four BRICs be expanded to include Turkey, Indonesia, Mexico and South Korea, to form the new “growth markets”. A fresh look is taken to measure exposure to equity markets beyond market capitalisation (GDP, corporate revenue growth and volatility of asset returns); any emerging market accounting for 1% or more of world GDP should be taken seriously. Mexico and South Korea each represented 1.6% of world GDP, Turkey, 1.2% and Indonesia, 1.1%.

Among them, I particularly favour Indonesia. Like Brazil, Indonesia's success is based on the commodities boom: gas and coal to China and India, and palm oil to the world. Investments are flowing in. With a population of 237 million (the world's largest Muslim nation), the country is in the midst of a consumer boom.

Indeed, it has the potential to become one of the world's biggest economies. But it has to get its act together. It will grow 6.2% this year (6.1% 2010) and hopefully 6.5% in 2012. South-East Asia's largest and fastest growing economy is firing on all cylinders. It is today rated a notch below investment grade and should be upgraded soon. It will become a credible 6th member of the BRICS.

What impresses is its growing middle class. World Bank puts private consumer spending at close to one-half of GDP. The middle class (disposable household income exceeding US$3,000 a year) numbered 1.6 million in 2004. Today, Japanese investment bank Nomura estimates it to be about 50 million, more than in India and larger than in any of its nine other Asean neighbours. By 2014-2015, Nomura thinks it could reach 150 million.

The country is growing so fast, especially in the urban areas, that inflation is a major political issue at 7.2% for 2011. But it's stable, bearing in mind the rupiah appreciated 5% this year. Affluent middle-class Indonesians are spending, mainly on motor cycles (eight million sold in 2010, dwarfing sales in the rest of South-East Asia), cars (750,000 in 2010) and smart phones.

Indonesia is reputed to be the world's No. 2 in Facebook members and world's No. 3 in Twitter users. But, Indonesia, to be frank, remains a difficult place to do business because of poor infrastructure (adding to production and distribution costs), and corruption (“non-transparent random regulations”). But there are signs things are changing for the better. It is still attractive to foreign investors: nowadays “if you are not here, you have to have a good reason.” Most new consumer desirables are still imported.

Wall of BRICS 

As a group, the BRICS are growing fast. China has surpassed Japan as the world's No. 2. India and Brazil are following fast behind. Catching-up is always much easier because the leader has already set the path and the pace. At some point, reliance on emerging nations as engines of growth begins to disappoint, as it becomes harder to sustain the pace. Growth will slow down (as did Europe, and Asian Tigers and Japan before them) or may even falter (as did Latin America in the 1990s).

There is a lesson from history. A recent study by three scholars Barry Eichengreen (University of California, Berkeley), Doughyun Park (ADB) and Kwanho Shin (Korea University) called the EPS study* attempted to draw potential warning signs by examining economies since 1957 whose GDP per capita (on a purchasing power parity or PPP basis) rose more than 3.5% a year for seven years, and then suffered a sharp slowdown when growth dipped precentage points or more.

The focus was on economies enjoying sustained catch-up growth. The common sense behind PPP is the same amount of money should purchase the same product in any two countries (hence, the term purchasing power parity). That is, the purchasing power of money, expressed in one currency, should change pari passu in different countries. If US$5 buys a cup of Starbucks coffee in New York and the actual cost of the same Starbucks coffee in KL is RM12, then the exchange rate should be US$1=RM2.40 according to PPP. But the actual exchange rate is close to RM3, or 20% cheaper. So, the use of PPP serves to neutralise any currency distortions.

What emerged was as follows: (i) growth slowdowns occurred when GDP per capita reached about US$16,740 per capita; and (ii) the average growth rate then falls from 5.6% per year to 2.3%. In the 1970s, growth rates in Western Europe and Japan cooled off at about the US$16,740 threshold, as did Singapore in early 1980s and South Korea and Taiwan in the late 1990s.

Thereafter, growth often continues and may even accelerate. Japan's boom lost momentum in early 1970s, then accelerated until it blew up in the 1990s. But, no one-size-fits-all depends on circumstances. When the United States passed its threshold, it kept on growing rapidly, consistent with its innovative prowess. Other risk factors matter, including openness to trade; lifting of consumption to beyond 60% of GDP; low and stable inflation; high ratio of workers to dependents. On the other hand, an under-valued exchange rate raises the risks of a slowdown.

* “When Fast Growing Economies Slow Down: International Evidence and Implications for China.” NBER, March 2011.

The EPS study does draw interesting parallels. China is destined to reach the US$16,740 GDP per capita threshold by 2015, well ahead of India and Brazil. Will it then slacken? The risk factors for China include: an ageing population, low consumption and an under-valued currency. On these alone, the study suggests high odds (over 70%) of a definite slowdown by then! But China is unique. These risks can be managed by shifting development inland, leaving the maturing urban centres room to innovate.

China is already reforming to become a more consumption-based economy, while its currency is being managed to reflect market considerations. Prompt structural reforms help cushion the effects of any slowdown. Even so, a percentage point drop in growth to 6%-7% does not sound so scary. For China, it should not really be such a big deal.

Former banker, Dr Lin is a Harvard educated economist and a British Chartered Scientist who now spends time writing, teaching & promoting the public interest. Feedback is most welcome; email: starbizweek@thestar.com.my