ROLE OF BRICS IN GLOBAL ECONOMIC DEVELOPMENT

BRICS Ready For Cementing Position in Global Economic Landscape

Leaders from Brazil, Russia, India, China, and South Africa - collectively known as the BRICS - formally announced today their plans to launch a new development bank, in what analysts say is a move to reduce the group’s dependence on the Bretton Woods institutions. The two-day meet, held in Durban, South Africa, also raised issues such as the impact of developed country monetary policy on trade, and the importance of the next WTO chief being from a developing country.
The 26-27 March gathering - the fifth in as many years - led to the eThekwini Declaration, named after the municipality that includes Durban and its surrounding towns. The event marked the first time that the summit was held in Africa.
The final document outlines the importance of cementing the BRICS alliance further: aside from sharing an acronym, the five emerging economies have often found it difficult to reach common ground on various topics, and have varying political and economic characteristics. For instance, the inclusion of South Africa into the group just two years ago had been greeted with scepticism by some observers, as some noted that its size as an economy does not match up with its counterparts in the group.
“We aim at progressively developing BRICS into a full-fledged mechanism of current and long-term coordination on a wide range of key issues of the world economy and politics,” the final statement said, adding that today’s global governance architecture is run by institutions that were established during a different era.
“We meet during a critical time where stronger South-South trade is more compelling, with the most dynamic emerging economies leading a structural shift in the global economy,” South African President Jacob Zuma said during the event.
The BRICS together account for approximately a quarter of global GDP and 40 percent of the world’s population.
BRICS agree to establish development bank, disagree on details
The highlight of the two-day proceedings was the long-awaited announcement of whether the BRICS would be establishing their own development bank, after the group’s finance ministers were tasked last year with evaluating the idea’s feasibility.
The goal, leaders said at the time, would be for the bank to “[mobilise] resources for infrastructure and sustainable development projects in BRICS and other emerging economies and developing countries.” (See Bridges Weekly, 4 April 2012)
The planned development bank “is feasible and viable,” leaders confirmed in a statement on Wednesday. Such a bank would “supplement the existing efforts of multilateral and regional financial institutions for global growth and development.”
However, officials speaking earlier during the summit admitted that various key details remain to be worked out before the proposed bank can become fully operational - a process that is expected to take years. For instance, disagreements have already surfaced among the BRICS on the specifics of the bank’s mandate, and how exactly the institution would be financed.
While members ahead of the gathering had said that the five countries would together contribute a total of US$50 billion of capital into the proposed institution, that number has reportedly been scaled back, and how much each individual member would give was also left unclear. Where the bank will be located was similarly left undecided during this week’s meeting.
The proposed development bank is widely being seen as an effort by the BRICS to limit their reliance on the World Bank and International Monetary Fund (IMF). The five-country group has long argued that the two international finance institutions need a substantial overhaul with regards to their governance structure - a stance that BRICS leaders reiterated in Wednesday’s communiqué.
Some analysts suggest that establishing their own bank could also allow the BRICS to place added pressure on existing international organisations - such as the IMF and World Bank - to give them more weight in decision-making processes.
The plans for a BRICS development bank have so far been welcomed by the World Bank. “Establishing a development bank is a significant undertaking,” the Washington-based institution said in a statement. “The World Bank will stand steady and work closely to partner with regional development banks in a bid to enhance the effectiveness of our collective work.”

Trade
With regards to trade, the final statement focused largely on the ongoing preparations for the WTO’s upcoming ministerial conference, which is scheduled for 3-6 December in the Indonesian island of Bali. The global trade body’s 159 members are currently trying to negotiate a small package of deliverables from the broader Doha Round of trade talks in time for the high-level event, after the overall discussions were formally declared at an impasse in late 2011. (For more on the Bali preparations, see related article, this issue)
“We are committed to [ensuring] that new proposals and approaches to the Doha Round negotiations will reinforce the core principles and the developmental mandate of the Doha Round,” BRICS leaders said. “We look forward to significant and meaningful deliverables that are balanced and address key development concerns of the poorest and most vulnerable WTO members.”
The ongoing race to replace WTO Director-General Pascal Lamy, who steps down from his post at the global trade body in August, was also referred to in the final communiqué. BRICS leaders stressed that his successor will need to show a “commitment to multilateralism and to enhancing the effectiveness of the WTO, including through a commitment to support efforts that will lead to an expeditious conclusion of the [Doha Round].”
In addition, the new global trade chief should be from a developing country, the five leaders said, though they stopped short of jointly backing a particular nominee. Of the nine candidates currently lobbying for the WTO role, eight of them are from members that are self-designated as developing countries, and one of them - Brazilian WTO Ambassador Roberto Carvalho de Azevêdo - is from a BRICS country.
A separate statement by BRICS trade ministers released on Tuesday gave additional details on the group’s concerns for the multilateral trading system. For one, it reiterated the group’s worry over “initiatives that might undermine the coherence of the Doha Development Agenda and that deviate from the principles of multilateralism,” in an apparent reference to some efforts - such as the discussions among 21 WTO members over a possible plurilateral deal on services- that are being pursued among subsets of the global trade body’s membership.
In addition, the WTO’s “single undertaking” principle, and the development mandate of the negotiations, must be respected, trade ministers said, as the global trade body continues its efforts to move the Doha talks forward.
Rich country monetary policy draws fire

Developed country monetary policy also came under scrutiny during the Durban gathering. Central banks in the US, EU, and Japan have faced criticism from some trading partners in recent months over their decisions to undertake additional rounds of monetary easing, which have sparked fears of a “global currency war.”
Many have argued that the moves by these central banks can create exchange rate misalignments that can effectively make developed countries’ exports more competitive than those of their trading partners. Advanced economies, meanwhile, have noted that these efforts are aimed not toward bettering their terms of trade, but at advancing domestic policy objectives such as reducing unemployment or fighting deflation.
“Central banks in advanced economies have responded with unconventional monetary policy actions which have increased global liquidity,” the BRICS leaders said.
“While this may be consistent with domestic monetary policy mandates, major central banks should avoid the unintended consequences of these actions in the form of increased volatility of capital flows, currencies, and commodity prices, which may have negative growth effects on other economies, in particular developing countries.”
Foreign reserves, currency swaps
In another move ostensibly aimed at reducing dependency on the IMF in a crisis, the five-member group agreed to establish a “BRICS contingent reserve arrangement” - essentially an exchange pool of foreign reserves aimed at ensuring financial stability and dealing with short-term liquidity problems that might arise. The idea was first tabled in April 2011. (See Bridges Weekly, 20 April 2011)
Earlier this week, Brazil and China inked a deal that would allow them to conduct up to US$30 billion of trade in their local currencies, rather than having to use the dollar or the euro as they have done in the past. The deal would be valid for the next three years.
ICTSD reporting; “Group of Emerging Nations Plans to Form Development Bank,” THE NEW YORK TIMES, 26 March 2013; “Deal on development bank eludes BRICS nations at summit, REUTERS, 26 March 2013.

Indian Agriculture will continue to sustain more than half of India even after four decades from now

We need small farmers, shandies

S. GURUMURTHY

The HinDU BUsieness line 05.04.2013

The centuries-old shandies, entirely the show of small, marginal and medium farmers, are going strong. Yet, the government has little use for shandies or small farmers.

Recall two well-known facts about Indian agriculture. One, the share of agriculture in the nation’s GDP has come down from 56 per cent in 1950 to 14 per cent in 2011-12, but still, lot more than half of the nation’s working population lives on agriculture. And two, more than a quarter million farmers have committed suicide in the last 15 years. The policymakers are unable to face these two facts.

But the third fact — less known one — that even by 2051, less than half of India will live in urban areas [Twenty-first century India. Oxford University Press] makes a laughing stock of the current policies that assume rural India to be a passing phase. India will then be a strange nation — an emerging global super power with majority rural population.

So, agriculture will continue to sustain more than half of India even after four decades from now. These facts are a mere trailer. A closer look at the anatomy of the Indian agricultural economy will show how the policymaking, budgeting and national economic discourse are disconnected from reality.

LABOUR SHORTAGE

It needs no seer to tell that Indian farming is fundamental for the food security of 120 crore Indians — projected to rise to 170 crore by 2061. No country in the world has the land or labour to supply even a fraction of the food that India will need if it falls short in food production.

And, now look at how we are handling this critical segment of the economy. Discussion Paper No 2 of National Commission for Agricultural Costs and Prices [December 2012] says that cost of production of rice and wheat has gone up by 45 per cent for three years to 2012-13 — average of 15 per cent every year. The reason, says the paper, is the ‘sharply rising labour and energy costs’, adding that ‘acute shortage of labour has cropped up in the last three years’.

The paper says that labour costs have gone up 100 per cent in the last three years and margins of farmers have been declining for wheat and rice. This has led to average annual rise in procurement cost by 11 per cent for paddy and 8.6 per cent for wheat for five years from 2007-08 to 2012-13.

According to credible studies and reports, the rural employment guarantee scheme of the UPA government has contributed to labour shortage and high labour costs in agriculture, besides also in SMEs and construction sectors.

See how this scheme hits government finances twice over. First, employment guarantee handout costs the government over Rs 40,000 crore a year and it creates shortage of agriculture labour and pushes up cost and, next, that leads to higher procurement costs, which pushes up food subsidies.

But the Ministry of Rural Development [March 2012] gloats over the labour shortage saying that it will lead to “technology advances in agriculture like it happened all over the world”. Just a look at the Report of the Working Group on Agriculture to the Planning Commission [January 2007] would demonstrate how absurd is such a comparison of Indian agriculture with the world’s.

SMALL IS INDISPENSABLE

This is how the working group report presents Indian agriculture. Some 60 million small and marginal farming households [with over 33 crore dependents] cultivate 34 per cent of the land and produce 49 per cent of rice and 40 per cent of wheat and over half of fruits and vegetables. That is, they cultivate less land but produce more. Their productivity is 44 per cent more in rice, 18 per cent more in wheat and 47 per cent more in fruits and vegetables.

Their incremental contribution to national food production during the period 1971 to 1991 was 68 per cent for rice and 48 per cent for wheat — the incremental production of the rest, medium-large farms, being just 32 per cent for rice and 52 per cent for wheat.

Global studies [Dietrich Vollrath May 4, 2004] confirm that economies of scale do not operate in farming — small farms being more efficient than large ones. The Working Group says, “the small and marginal farmers are certainly going to stay for a long time in India — though they are going to face a number of challenges. Therefore, what happens to them has larger implication for the entire economy and people’s livelihood.” It is this small farmer who is hit by labour shortage and high labour costs caused by employment guarantee. He cannot go for mechanisation. He can only give up farming.

Imagine that all small farmers are replaced by large ones; theoretically, rice production will instantly fall by 15 per cent; wheat, by 6 per cent; and fruits and vegetables by over 16 per cent. Where will the nation go for food?

QED: nation needs small farmers. They are no waste — contrary to the popular view that they are wasting their life on small farms.

NEVER HEARD OF MSP

More. The basic facts about agricultural marketing in India will shock the urbanites. Out of the food production the farm family keeps 44.5 per cent for own consumption; sells 13.5 per cent within the village; and keeps 3.5 per cent in stock — all adding to 61.5 per cent. Therefore only 38.5 per cent of the production moves outside villages — which is the marketable surplus. See how this is marketed.

Some 90 per cent of the marketable surplus [38.5 per cent] is sold through some 47,000 haats [village shandies]. A study of 27,000 shandies shows that three-fourths of them meet once in a week; one-fifth, twice a week; one-twentieth daily. Half of them are held in villages with 5,000 plus population. Two-thirds of them are situated 16 km from the villages; a quarter of them 5-15 km; and a tenth of them within 5 km. Only a tenth of the market surplus [38.5 per cent] is directly taken to 6,359 wholesale markets.

According to Parliament's 19th Standing Committee Report [April 2007], an NSSO Survey has revealed that some 71 per cent of the farmers were unaware of the Minimum Support Price [MSP] which the governments announce with great fanfare and 81 per cent of those who have heard of MSP do not know how to use it. It is on the basis of these facts the Standing Committee recommended a ban on futures trading in foodgrains, as the farmers who are unaware of MSP could hardly benefit from the price determination by futures market.

DISCONNECT COMPLETE

For decades, government has been trying to wipe out the wasteful shandies through the wholesale marketing system and MSP mechanism. But the centuries old shandies, entirely the show of small, marginal and medium farmers, are still going strong.

Why? Says the Planning Commission working group, the farmers exchange social information at the shandies and also settle marriages. Far from being just markets for goods, they are a social and cultural institution.

With the shandies proving their durability, the Planning Commission working group suggests that the government work with, rather than ignore, them. It says that “with requisite technical support weekly shandies can also be efficient credit delivery, input marketing, procurement and other socio-economic activities”, adding that “by bringing such services to the rural and tribal haats, rather than waiting for the people to come, much more effective servicing can be provided”.

It concludes: “Under the changed economic environment rural and tribal market can be financially supporting unit and source of income to finance further developmental activities”. The nation needs shandies as much as it needs small farmers.

Yet, not a word on shandies and their intimacy with small and marginal farming brought out by the Planning Commission working group or in the Standing Committee report appears in any of the Budget speeches from 2008-09 presented after the working group report. Instead, the discourse is about connecting the farm-gate with the shop-gate through FDI in retail. The disconnect between the reality and discourse seems complete.

(The author is a commentator on political and economic affairs, and a corporate advisor) 
(As received from SMD email)

Every thing is not Good for Developing Countries in Global Economic Scenario

Every thing is not Good for Developing Countries in Global Economic Scenario
More than Four years have passed when Global Financial crisis disturbed not only the developed country but to developing countries seriously. But to day situation has not changed. High income countries have so many frnt to address their problems but developing countries generally fails to readdress the issue at its own level.The Human Development Report 2013 has focused on  vibrant south globes. But path ahead to developing countries is full with bumpers and challenges. Here I am submitting summary of latest report of World Bank related to the issue for your study..........Vidyanand Acharya

Last year developing countries recorded among their slowest economic growth rates of the past decade, partly because of the heightened Euro Area uncertainty in May and June of 2012. Since then, financial market conditions have improved dramatically. International capital flows to developing countries, which fell 30 percent in the second quarter of 2012, have recovered and bond spreads have declined to below their long-term average levels of around 282 basis points. Developing-country stock markets are up 12.6 percent since June, while equity markets in high-income countries are up by 10.7 percent. However, the real-side of the economy has responded modestly. Output in developing countries has accelerated, but is being held back by weak investment and industrial activity in advanced economies.
“From hopes for a U-shaped recovery, through a W-shaped one, the prognosis for global growth is getting alphabetically challenged. With governments in high-income countries struggling to make fiscal policies more sustainable, developing countries should resist trying to anticipate every fluctuation in developed countries and, instead, ensure that their fiscal and monetary policies are robust and responsive to domestic conditions,” said Kaushik Basu, Senior Vice President and Chief Economist at The World Bank.
The World Bank estimates global GDP grew 2.3 percent in 2012, compared with last June’s expectation of 2.5 percent. Growth is expected to remain broadly unchanged at 2.4 percent growth in 2013, before gradually strengthening to 3.1 percent in 2014 and 3.3[1] percent in 2015. Developing-country GDP is estimated to have grown 5.1 percent in 2012, and is projected to expand by 5.5 percent in 2013, strengthening to 5.7 percent and 5.8 percent in 2014 and 2015, respectively. Growth in high-income countries has been downgraded from earlier forecasts, at 1.3 percent for 2012 and 2013, firming to 2.0 percent in 2014 and 2.3 percent by 2015. Growth in the Euro Area is now projected to only return to positive territory in 2014, with GDP expected to contract by 0.1 percent in 2013, before edging up to 0.9 percent in 2014 and 1.4 percent in 2015. Overall, global trade of goods and services, which grew only 3.5 percent in 2012, is expected to accelerate, expanding by 6.0 percent in 2013 and 7.0 percent by 2015.
“The weakness in high-income countries is dampening developing-country growth, but strong domestic demand and growing South-South economic linkages have underpinned developing country resilience – to the point that, for the second year in a row, developing countries were responsible for more than half of global growth in 2012,” said Hans Timmer, Director, Development Prospects Group, the World Bank.
Downside risks to the global economy include: a stalling of progress on the Euro Area crisis, debt and fiscal issues in the United States, the possibility of a sharp slowing of investment in China, and a disruption in global oil supplies. However, the likelihood of these risks and their potential impacts has diminished, and the possibility of a stronger-than-anticipated recovery in high-income countries has increased.
Although fiscal sustainability in most developing countries is not an issue, government deficits and debt are much higher today than in 2007.
“To assure resilience to downside risks, developing countries need to gradually rebuild depleted fiscal and monetary buffers, and improve social safety nets and food security,” said Andrew Burns, Manager of Global Macroeconomics and lead author of the report.
Growth in the East Asia and Pacific region slowed to an estimated 7.5 percent in 2012, from 8.3 percent in 2011, largely due to weak external demand and policy actions in China to contain inflation. Growth in the region, excluding China, slowed less quickly due to robust domestic demand. Economic activity throughout the region accelerated toward the end of the year as global financial markets stabilized and policies in China became more accommodative. Regional GDP growth is projected to pick up to 7.9 percent in 2013 before stabilizing at around 7.5 percent by 2015, with China’s economy expanding at 8.4 percent in 2013, before easing to 7.9 percent by 2015. Ex-China, regional growth is forecast to average 5.9 percent over 2013-2015 on strong domestic demand and intensified global trade flows.
GDP growth in Europe and Central Asia is estimated to have slowed sharply to 3 percent in 2012 from 5.5 percent in 2011 as the region faced significant headwinds, including weak external demand, deleveraging by European banks, summer drought and commodity-price induced inflationary pressures. Growth slowed most in countries with strong economic linkages to the Euro Area, while it was relatively robust in resource-rich economies that have benefited from high commodity prices. GDP growth in the region is projected to rebound to 3.6 percent in 2013 and 4.3 percent by 2015. Medium-term prospects for the region will critically depend on progress in addressing external (large current account deficits) and domestic (large fiscal deficit, unemployment, and inflation) imbalances, lack of competitiveness, and structural constraints.
In the Latin America and the Caribbean region GDP declined to an estimated 3 percent in 2012 (from 4.3 percent in 2011) because of a marked slowdown in domestic demand in some of the largest economies in the region and a weak external environment. Growth in Brazil, the region’s largest economy, expanded only an estimated 0.9 percent in 2012. A more accommodative policy environment, stronger capital flows (notably FDI) and more robust external demand are expected to lift regional growth over 2013-2015 to an average of 3.8 percent. Labor and tax reforms underway in some of the larger economies, and a drive to boost infrastructure investment should help address some of the structural issues that have constrained growth in the region.
Growth in the Middle East and North Africa region continues to be affected by political uncertainty and unrest in several countries. Regional GDP is estimated to have grown by 3.8 percent in 2012 (following a 2.4 percent decline in 2011), mostly due to a pickup in Libyan oil output and continued robust expansion in Iraq. Growth among regional oil importers, however, remained sluggish at an estimated 2.5 percent in 2012 (2.4 percent in 2011) due to weak exports and tourism, together with country-specific problems, including a poor harvest in Morocco, fiscal difficulties in Jordan, and continuing uncertainty and weak reserves position in Egypt. Regional GDP growth is projected to slow to 3.4 percent in 2013, rising to 4.3 percent by 2015, assuming an easing of the current uncertainty and domestic unrest, a strengthening of tourism, and a recovery of the region’s exports as global demand continues to firm.
In South Asia, growth weakened to an estimated 5.4 percent in 2012 (7.4 percent in 2011), mainly due to a sharp slowdown in India, where GDP growth (measured at factor cost) is forecast at 5.4 percent in the fiscal year ending March 2013. Weak global demand exacerbated region-specific factors, including subdued investment growth, electricity shortages, policy uncertainties, and a weak monsoon. Regional GDP is projected to grow by 5.7 percent in the 2013 calendar year, and by 6.4 and 6.7 percent in 2014 and 2015, respectively, driven by policy reforms in India, stronger investment activity, normal agricultural production, and improvement in export demand. Growth in India (at factor cost) is projected at 6.4 percent in the 2013 fiscal year, rising to 7.3 percent by 2015.
Growth in Sub-Saharan Africa remained robust at 4.6 percent in 2012. Excluding South Africa, the region’s largest economy, GDP output expanded 5.8 percent in 2012, with a third of countries in the region growing by at least 6 percent. Robust domestic demand, still high commodity prices, increased export volumes (due to new capacity in the natural resource sector) and steady remittance flows supported growth in 2012. However, the expansion was curtailed by domestic factors, including earlier monetary policy tightening (Kenya and Uganda), protracted labor disputes (South Africa), and political unrest (Mali and Guinea Bissau). The region is projected to grow at its pre-crisis average of 5 percent during 2013-15.