Friday, 19 April 2013 15:51

Jim O’Neill (Goldman Sachs) on BRICS Development Bank

Written by Jim O’Neill
flags of BRICS nations flags of BRICS nations

BRICS Development Bank. If they do, it could have important implications and certainly powerful symbolism about how the world of economics and finance is changing.


The BRIC economies have clearly slowed down from their remarkable pace of the 2001-2010 era of 8.1%, but as can be seen, collectively for the first 2 years of this decade, they have grown in line with our expectations. In this context, it is far too early and not particularly accurate to say that the BRICS have disappointed, unless one believed that the 8.1% collective growth rate was sustainable. As I have discussed on numerous occasions and in “The Growth Map, Economic Opportunities for the BRICs and Beyond”, their growth in 2001-2010 was considerably stronger than we expected, so it would not be surprising if their growth rates slowed during this decade. We have been assuming an approximate 6.6% growth rate for this decade because it was quite clear that China in particular would slow, not least because we expected that the Chinese authorities would want a somewhat slower and more balanced growth rate. It is impossible to exaggerate the importance of China in all aspects, including within a BRICs context. Its current size of $8.2 trillion at the end of 2012 is actually the same as the other BRICS (including the small sized South Africa around $400 billion), and since 2010, its $2.3 trillion increase is bigger than the actual size of India.


Not only have they been creating another Greece every 13 weeks in 2011, but they were creating another South Africa every 4 months. Relative to our assumed growth rate of 7.5% for the decade for China, they are still actually positively surprising, as over the first two years, they have grown by around 2 8.5% on average. Amongst other things this means that the influence of China within the BRICS group is key. This is probably true as well when discussing the creation of a BRICS Bank, and what form and substance it takes, although it is clear from my conversations that each of South Africa, India and Brazil have considerable views on these matters. Russia seems less interested and indeed seems to question its need, which is quite interesting given that according to my best knowledge the original BRIC political forum was their initiative.


While China is economically dominant, the scale of the others should not be dismissed. Brazil, India and Russia are all included in the world’s top 10 economies, and their combined $2.3 trillion increase in 2011 was equivalent to creating another Italy that year. While China contributed more than half of this, the others added an additional $1 trillion between them. Looking at the table, it is fair to argue that both Brazil and India are having relatively disappointing decades so far, 2012 being particularly weak, and in Brazil’s case, our assumption is their growth rate will accelerate this decade. So while it is not appropriate to assume the aggregate BRIC growth performance this decade is disappointing, it is certainly true so far for these two, and Brazil in particular. One would think that this might mean they will be looking for continued initiatives to boost their growth, including joining forces with the other BRICS leaders. On one level, I wonder whether this might explain the relative degree of eagerness about the formation of a BRICS Development Bank.


What Might a BRICS Development Bank Do?


National development banks are usually important in helping to provide finance for long-term economic projects deemed in the country’s national interests and ones that may be difficult for the private sector to initiate. Given the post-2008 ongoing traumas, there are some discussions about similar sorts of institutions within the so-called developed world. I have suggested on a number of occasions that due to the predictable  squabbles about where a BRICS Bank might be head-quartered, perhaps London might be a good choice.  Given the amount of newspaper print about a national bank in the UK, perhaps some of our policymakers could persuade them to concentrate on our infrastructure instead of theirs. However, I suspect BRICS leaders might not take overly kindly to this notion…


The main obvious purpose of a BRICS Bank would presumably be to help provide the capital for long-term infrastructure projects, especially between the countries, and perhaps also to support further efforts at deepening trade and financial links. Of course given the disparate geographies between some of them, it isn’t so easy to think of specific shared physical infrastructure projects, for example between Brazil and Russia. With that said, between China and India, and between China and Russia, the case is more than clear. And beyond that, given the huge resource constraints facing China and India, and the huge constraints around technology and infrastructure in Brazil, Russia and South Africa, there is quite a case to be made, especially if their advisors feel that neither the World Bank nor their own national development banks are sufficient. For South Africa, this issue is perhaps especially important within the BRICS context because it would justify its presence within the grouping, if it plays a role in helping the African continent to improve nfrastructure and trade between countries. South Africa is somewhat obligated in this regard, since without that, it is not clear why they warrant a BRICS inclusion. If they deliver, then the case has been made in my view despite narrow economic rationale of being too small an economy, as previously mentioned.

Jim O’Neill, Chairman Goldman Sachs Asset Management and Observer of global political economy.