BRICS now has its hands full
BRICS, or the renamed New Development Bank (NDB), has just admitted Saudi Arabia, the United Arab Emirates (UAE), Egypt, Iran, Ethiopia, and Argentina as member states. These new six member states formally become BRICS members on January 1, 2024, joining Brazil, Russia, India, China, and South Africa.
Ethiopia's largest challenge is balancing its impressive development, seen here in Addis Ababa's new, respectable CBD, with longstanding challenges of multidimensional poverty. (Creative Commons)
This is an interesting list of new inductees. Saudi Arabia is the second largest oil producer in the world, the UAE is the seventh largest, and Iran is the eighth largest. Egypt brings to BRICS a huge market of 107 million people, and both Ethiopia and Argentina, alongside Egypt, have the potential to be catalysts for global development.
All of the new NDB inductees have been growing rapidly, averaging annual GDP growth of 4.2 percent for the past half decade. But, putting aside Saudi Arabia and the UAE, the new non oil producing member states currently face significant economic challenges.
Iran, for one, is facing crippling sanctions and has been for decades. This is unlikely to change with Iran’s entry into the NDB as neither India, or China, wish to face their own sanctions from the West if they openly trade with Iran.
This is where the NDB can play a meaningful role in advancing Iran’s economic development by assisting it in the context of a sanctions regime. But, the NDB will have to tread carefully with the knowledge that Iran hasn’t been meaningfully able to borrow from the World Bank, or the IMF for decades. The NDB will have to prepare a variety of interventions to help Iran within the context of what’s both allowable and possible.
Argentina, another new NDB entrant, is the third-largest economy in Latin America, behind Brazil and Mexico. However, Argentina faces the challenge of significant unemployment, and has one of the highest levels of inflation in the world. Additionally, four in ten Argentines live below the national poverty line.
The US is Argentina’s largest foreign investor, with more than three hundred U.S. companies operating in the country. However, joining the NDB, and becoming part of the BRICS alliance, was necessary for Argentina because foreign investment has been on the decline since 2020. This is a result of the country’s ongoing recession. The overall economy has shrunk each year since 2018.
Argentina was once one of the 10 wealthiest countries per capita in the early twentieth century, but for the past half decade its finances and economy have been in turmoil. It has defaulted on its sovereign debt nine times, the most frequent country in the world to do so. For the NDB, helping Argentina meet its true economic potential will be a huge challenge.
Ethiopia, another new entrant into the NDB, also faces huge economic challenges. Despite impressive growth rates, annual per capita income is only USD 170. There are marked differences between rural and urban areas with households in rural areas living on less than USD 0.50 per day.
Ethiopia’s most serious economic challenge is multidimensional poverty. The NDB will need a new development approach to help Ethiopia get beyond its current economic hardships.
Egypt too has also witnessed high levels of economic growth over the past half decade, averaging out at about 5 percent of GDP. Egypt’s ability to translate these high rates of growth into higher GDP per capita is a development stumbling block, as it has been for both Argentina and Ethiopia.
What Argentina, Ethiopia, South Africa, and Egypt have in common is they have all been seriously damaged by a strong dollar. These four countries have seen the domestic financing of their external sovereign debt skyrocket with a strong dollar, against their ever depreciating currencies.
BRICS was right not to expand its membership beyond the countries they have now welcomed. With the four non oil producers that are now members the NDB has its hands full. (Simon Marks/Bloomberg)
However, BRICS, and the NDB, have no immediate plans to develop their own alliance currency. And, if they did have such a plan, like the Euro, it would be at least a decade in the making. Member countries would need to agree on eliminating their national currencies, and they would need to establish a common Central Bank that would control monetary policy for all member states. This isn’t just an economic minefield, it’s a political one as well.
The NDB will be best placed to focus its early development interventions by rolling out various debt relief facilities for select new non oil producing members. This can involve the use of vehicles like debt equity swaps that can lead to some quick wins for everyone.
The NDB must also be ready to help their new non oil producing members with novel approaches to development. The successful development experiences of India and China can help chart out a new development pathway that Argentina, Ethiopia, South Africa, and Egypt are desperate to find.
The NDB will have to help Argentina, Ethiopia, South Africa, and Egypt with their inability to manage external shocks, and to stabilize their currencies. The NDB will need to help these nations with FDI, indigenous private sector development, employment generation, rural development, promote exports, and grow personal incomes.
If the NDB is to be successful in helping Argentina, Ethiopia, South Africa, and Egypt to develop, they will need to guide these nations through much needed structural reforms.
If the NDB is to be a game changer, they will need to do what other MDBs have thus far failed to do. They will need to develop singular and unique development approaches for four ailing economies with huge potential and huge challenges. Providing development finance especially to new member countries struggling to service their external debt will accomplish very little.
BRICS was right not to expand its membership beyond the countries they have now allowed to join their ranks. With the four non oil producers that are now members, the NDB has its hands full.