By Kiru Sichoongwe
Email: sichoongwe2019@isscad.pku.edu.cn
BRICS is the acronym for the five major emerging economies: Brazil, Russia, India, China, and South Africa. In 2001, Jim O'Neill, a Goldman Sachs economist, introduced the term BRIC (without South Africa) in Building Better Global Economic BRICs . He predicted that by 2050, the four BRIC economies would dominate the world economy. He predicted that the BRIC could become a more remarkable force in the global economy and contribute to building it into a better structure. In 2010, South Africa was absorbed into this group.
Over the years, the BRICS have significantly driven global economic growth. They comprise 41% of the world population, generate 24% of the global world product (GDP) and more than 16% of the international trade. Apart from the economic and financial issues, the BRICS also conduct extended discussions and cooperation in many other fields.
In 2012, BRICS made a historic decision to build an exclusive finance mechanism, exerting a profound influence on the rest of the world. Two years later, the New Development Bank (NDB) was established to mobilize resources for infrastructure and sustainable development projects in emerging economies. After that, the Contingent Reserve Arrangement (CRA) was erected in 2015, aiming to provide support through liquid and precautionary instruments in response to the current or future short-term balance of payments pressures.
To make BRICS a substantial role in the world economic architecture, numerous pundits have urged the need to include more emerging markets in the BRICS group. The list of latent countries involves Bangladesh, Egypt, Indonesia, Iran, Korea, Mexico, Nigeria, Pakistan, Philippines, Turkey and Vietnam. Some countries have signaled their interest in joining the BRICS group. For instance, Argentina and Iran submitted membership applications in 2022.
What difference will these two nations make if they are admitted to the BRICS?
Argentina, a middle emerging economy, has been a member of the G-20 large economies and the second-largest economy in South America, with a GDP of around $490 billion. It holds abundant natural resources, a thriving agricultural sector, a diverse industrial base and renewable energy potential. As one of the major food producers, Argentina has developed large-scale livestock and agricultural sectors. Besides, the innovative services and manufacturing subsectors also contain massive potential.
As for Iran, it is classified as a lower-middle income economy by the World Bank. In 2017, the GDP of Iran accounted for $427.7 billion. Iran has a relatively diversified economic structure. In addition to oil-exporting, it has some traditional advantageous sectors, such as agriculture, hydrocarbon and service, composed of a vibrant financial and manufacturing service. It is ranked as the second-highest natural gas reserves country and the fourth-highest crude oil reserves in the world. However, the economic sanctions imposed by the United States caused a devastating blow to Iran’s economy with a dramatic slump and the flight of international investors.
Is it possible for the BRICS to de-dollarize the global financial system?
The BRICS group and other Global South nations can decide to de-dollarize and regain financial independence through reliable alternatives. Once it happens, the demand for U.S. dollars( same as “dollars” in the following article) will reduce in some countries. Gradually, the U.S. financial hegemony will lose its global dominance.
After World War II, the dollar became the dominant global reserve currency and the backbone of the global financial system. Dollars have become the price and currency in enormous global transactions. Resorted to such monetary hegemony, the United States and its allies often successfully implemented financial and other sanctions against other countries. According to International Monetary Fund (IMF), the dollar share of global foreign exchange reserves increased from 59% in 1995 to 59.02% in 2020. With its GDP reaching about $23 trillion, the US remains the world’s largest economy in 2021. Recently, the U.S.-based investment JP Morgan estimated that the end of the U.S. dollar hegemony would be brought by significant changes in the economic and financial power balance from the West to the East.
At a global level, many countries and central banks have been considering alternatives other than dollars to serve as their reserve assets, resulting from many factors, like the devastating effects of economic and financial sanctions. Some nations have tried to bypass sanctions with alternative sources of foreign currency as well as resist the dollar hegemony by using national currencies to support their economy. In addition, the Global Financial Crisis of 2008-2009 (known as “The Great Recession”), beginning with the housing market bubble in the US, has also explicated the necessity of de-dollarization. With the deepening of multipolarity, there is a fierce debate on the ongoing usage of the dollar in global trade, especially those of the global south.
However, uprooting from the dollar settlement and payment system can be demanding for many countries. Most countries around the world use the dollar. Only eight countries accept the US dollar as legal tender. These countries include; The United States of America, Ecuador, El Salvador, the Marshall Islands, Micronesia, Palau, East Timor and Zimbabwe. It is always challenging for individual countries to take coordinated (as a group) de-dollarization measures as they have varied interests. Those interests quite often border on economic and bilateral ties. A few examples include: in 2013, Australia and China agreed to trade in national currencies. That same year (2013), Brazil and China agreed to trade in Brazilian real and Chinese yuan. In 2011, Japan and China agreed to trade in national currencies. In 2022, Russia and Turkey agreed to partially trade natural gas for rubles. Venezuela announced in 2018 that it would price its oil in euros, Chinese yuan, Russian rubles, and other currencies. However, de-dollarization is possible to be realized through joint de-dollarization measures within groups like BRICS. For instance, the BRICS can develop a mechanism to facilitate non-USD and non-SWIFT transactions. Alternatively, they can come up with a financial transfer system, similar to SWIFT. To be mentioned, BRICS are supposed to overcome some significant obstacles before coming together as a single de-dollarization alliance. Notably, not having a common strategy based on the weight and interests of each BRICS country has possibly hampered the group’s expansion. To a greater extent, individual BRICS countries differ significantly on the demographic, economic and political front with respect to their global ambitions.
Furthermore, it is of vital importance for BRICS to deepen trade in their currencies. In order to facilitate enteral trade, tremendous practical proposals have been put forward. For example, the “R5 initiative”, namely Rouble (Russia), Rand (South Africa), Real (Brazil), Rupee (India) and Renminbi (China), is targeted at the use of the respective national currencies of BRICS countries within the BRICS+ circle and more broadly in the world economy. Once the program is successfully released, these de-dollarization measures can effectively safeguard the monetary sovereignty of member countries, dynamically improve the global financial system, as well as counter the effects of actual and potential financial sanctions.
Nowadays, more countries continue to proceed the currency diversification and de-dollarization. China has replaced the United States to become the largest trade country in the world. Considering the rising influence of China and other global south countries, the dollar's dominance and influence are likely to come to an end soon, ushering in a fairer and more balanced international economic and financial system where the global financial system will continuously be expanded and strengthened. However, it remains to be seen how this will work out. De-dollarization may not be realized in the short run, but perhaps in the long run.
Dr. Kiru Sichoongwe is a Zambian economist. His interest in global development includes climate change, economic development and public policy. He studied at ISSCAD from 2019 to 2022 and earned a doctoral degree in Economics.