Jim O’Neill (Great Britain) / Give the BRICS more power: we need them on our side

Jim O’Neill (Great Britain) / Give the BRICS more power: we need them on our side

Jim O’Neill

«The launch of the BRICS Development Bank suggests that these countries have no intention of disappearing into economic and policy oblivion», - Jim O’Neill, chairman of the City Growth Commission and visiting research fellow at the Brussels-based think tank Bruegel.

There is a lot for business to catch up on as the summer holidays end and corporate decision-makers return to their desks this week.

First, economic data from around the world have been mixed. The world’s biggest economy is still showing signs of acceleration, with the all-important August ISM survey in the US coming in stronger than expected, which is good for us all and, to some extent, offsets weakness elsewhere.

Recent manufacturing data in Britain have been soft, while Brazil, large parts of the eurozone, Japan and Russia are encountering economic problems. Germany’s economy has been more regularly disappointing, and China’s acceleration in recent months seems to have stopped abruptly.

The key questions are whether this a new trend or temporary blip in the world’s second-largest economy, and perhaps most importantly whether it will affect the psychology of investors as we enter the final part of the year.

Beyond economics, there is plenty more to ponder, including the growing number of disturbances around the world, with the escalating crisis in Ukraine and the rise of the Islamic State in Iraq and the Levant in the Middle East the most concerning.

Closer to home, it is just a fortnight until the Scottish referendum on independence, and the most recent opinion polls suggest a much closer race than was expected even just a week or so ago. Are policymakers prepared for the consequences of the Scottish people voting to leave the UK? And, of course, what would such a monumental decision mean for more devolution in other parts of the UK, and our relationship with Europe?

I have thought recently whether there may be a connection with the broad slowing of economic growth and the growing evidence of just how difficult it seems to govern the modern world. It might not be the case everywhere, but you can certainly trace some of the recent economic weakness in Germany and Russia to the crisis in Ukraine.

As I have warned before, the flip side to Germany’s exports prowess is its vulnerability to external shocks, and certainly confidence surveys support what had been surprisingly soft real economic data recently.

Europe is likely to be one of the biggest sufferers of a deteriorating German economy.

Germany was reluctant initially to agree to tough sanctions on Russia early on in the crisis, but has since joined international efforts to contain president Vladimir Putin.

I recall participating in a Frankfurt business event very early in the year, when senior German policy advisers and business people told me that Berlin would move towards a tough stance on Russia only if it looked as though the Kremlin would try to partition off other parts of Ukraine as well as Crimea.

They either misread Russian intentions or were not bold enough to support tougher steps early on, as I have written about before, to really make Putin think differently. But to achieve this, the West will need to get China on board.

The government in Moscow, however, has been keeping channels open with Beijing. This week, Rosneft – the government-backed oil producer – encouraged Mr Putin to invite China to take a stake in a domestic oil company. When announcing this step, Putin said that Russia was normally very cautious in allowing foreign partners to participate in such ventures but “of course set no restrictions for our Chinese friends”.

In what could be interpreted as a worrying response, Zhang Gaoli, a Chinese vice-premier, said that China opposed the sanctions that the US and Western powers have imposed on Russia. Although it is hoped that European states will tighten the screw on Russia by reducing their dependence on Siberian natural gas, this strategy will fail if China steps in as an alternative energy customer.

As with so many other global developments, the role of China in the world economy continues to rise, and the need for Beijing to be given and accept a bigger role in global governance is only too clear.

In recent weeks, I have been sent a number of articles suggesting that the BRIC countries have lost their importance and influence. However, this is simply incorrect, as there is so much evidence to the contrary.

About the only thing that can be claimed to support such an idea is that both Brazil and Russia are currently experiencing economic weakness. Indeed, both have possibly entered modest recessions. But I don’t see any credible reason to support the idea that these economic circumstances are permanent.

Most regions experience economic cycles, and there is nothing to suggest these temporary downturns are otherwise. For example, China, which is one-and-a-half times the size of the other three BRIC economies combined, also reported a disappointing manufacturing PMI survey for August. However, the country could record 7.5pc real GDP growth in 2014, which will mean an average of 8pc growth in the first four years of this decade.

In addition, India is one of the few large economies to buck the slowing trend, with its second-quarter real GDP surprising on the upside amid a vastly improving mood under Narendra Modi, the new prime minister.

The launch of the BRICS Development Bank suggests that these countries have no intention of disappearing into economic and policy oblivion. Therefore, it would be wrong for Western observers to confuse an economic cyclical slowing with strategic decline. This view reflects the same narrow thinking as prevailed when I first thought of the BRIC acronym in 2001.

I am not sure that I have the answer to many of the current difficult questions, but I would argue that handing more power to the BRICS is a good place to start.

Оригинал публикации: http://www.telegraph.co.uk/finance/economics/11078396/Give-the-BRICS-more-power-we-need-them-on-our-side.html