The BRICS bloc, a group of developing countries seen as seeking to counter the United States and the West, agreed at a summit last week to admit six new countries — Argentina, Egypt, Ethiopia, Iran, Saudi Arabia, and the United Arab Emirates.
The new members will make BRICS a commodities powerhouse, accounting for a substantial portion of global exports of oil, corn, and wheat. BRICS — which stands for Brazil, Russia, India, China, and South Africa — now accounts for 40 percent of the world’s population, a share that will increase when the others join next year.
At the summit, Brazilian President Luiz Inacio Lula da Silva called for the BRICS countries to create a common currency for trade and investment as a way to reduce the dominance of the U.S. dollar. In the days that followed, Russian state media played up the idea of a common BRICS currency and what they told audiences would be the decline of the dollar and of U.S. economic influence.
While BRICS members could make progress on cutting the share of the dollar in their bilateral trade, it will be tougher to get away from it as a reserve currency due to the far greater ease of buying and selling it, Gian Maria Milesi-Ferretti, a senior fellow in the Brookings Institution’s Hutchins Center on Fiscal and Monetary Policy, told RFE/RL in an interview on August 29.
Milesi-Ferretti, who previously served as deputy director of the International Monetary Fund’s research department, said that the prospect of a BRICS common currency is scarcely credible, pointing to the wide disparities in the structure of members’ economies, in their level of development, in the openness of their financial markets, and in the management of their currencies.
If the dominance of the U.S. dollar fades substantially in the future, it will likely have more to do with poor management of the U.S. economy, such as ballooning deficits, than with any BRICS efforts to dethrone it, he said.
The following are excerpts from the interview:
RFE/RL: BRICS has been in existence for almost 13 years. How would you compare this bloc to the G7?
Gian Maria Milesi-Ferretti: In my view, the BRICS so far has been more of a talking forum for some of the largest emerging economies rather than a structured entity with a complete commonality of views on the fundamentals of economics.
I think there are clearly elements that are common to these countries. But there are very substantial differences in the structure of the economies, in the level of development, in politics, in many respects, that go way beyond the dissimilarities across the G7, which tend to be countries with a common set of overall values, a similar general structure of the economy, and a similar level of development.
Of course, some are richer than others but overall, there is clearly more homogeneity in the G7 group than there is in the BRICS.
RFE/RL: BRICS will expand to include six more countries: Argentina, Egypt, Ethiopia, Iran, Saudi Arabia, and the United Arab Emirates. Will this make the organization stronger?
Milesi-Ferretti: I don’t see this as making the group more homogeneous. It will add a trillion-plus dollars in overall GDP, but the differences in structure and economic challenges are massive. Think of Argentina fighting very high inflation and having a dramatic budget situation and compare that with Saudi Arabia splurging on the most expensive soccer players in the world with a level of disposable income, certainly for people born in Saudi Arabia, that is very elevated.
Even currency-wise, the Saudis have a peg to the dollar while Argentina has capital controls and a heavily managed exchange rate. And others have a float, like Brazil. It’s just a very different set of economic circumstances and even institutions and policies as well.
RFE/RL: Following the BRICS summit in Johannesburg, Russian state TV has been making bold claims about the decline of U.S. global economic influence. What is your view?
Milesi-Ferretti: If you look at the share of GDP accounted for by the U.S., I think the evidence of decline is not there. It is true that on average, emerging economies have grown faster than advanced economies. China and India played a big role in that, and hence, the share of GDP accounted for by these economies has risen, compared to the share of the G7. But that is due to China and India. Not to Russia. Its growth rate has been quite modest for a number of years. Not for South Africa. It has horrible economic woes, falling GDP per capita. And certainly not for Brazil, which also had a middling growth rate, with some good years, but then a terrible recession in 2015-16. So just a lot of differences in economic performance.
But if you look at the role played by the U.S. in global financial markets, you will certainly not say that there is any evidence of a decline. U.S. firms have done incredibly well over the past decade and a half or so. Particularly companies linked to tech — but if you look at stock-market capitalization, if you look at the performance of stocks overall, it’s clear that U.S. companies have done extremely well.
If you focus more over the short term — so the recovery from COVID — also the U.S. economy has done extremely well. It was helped by a lot of stimulus, but it has done extremely well. So, I would certainly not agree with the statement that there is an overall decline, especially in recent years, in the weight of the U.S. economy.
RFE/RL: Russian state media has also talked about the prospects of a BRICS currency to counter the dollar. Is that a realistic proposition?
Milesi-Ferretti: I see that as a very far-fetched notion. As I was mentioning before, these are countries with incredibly different exchange-rate regimes, with obviously one country [China] that is extremely large and very reluctant to surrender any portion of sovereignty and control over its economy and its financial markets. So, there is a gradual opening [in China], but adopting something resembling a common currency implies some element of shared sovereignty, which is what you have in the eurozone, for instance, certainly on monetary policy. And it’s just something I just don’t see happening given these countries’ preferences.
Let’s also not forget China and India had border skirmishes relatively recently. From what I understand, the relations are improving, but we’re not talking about long-standing allies, for sure. And you’ll need quite a bit of commonality to share something as important as a currency.
RFE/RL: So, there is a lot of work to be done if they want to set it up?
Milesi-Ferretti: Setting up something like the euro, a true common currency, is something that requires a lot of preparation, a lot of similarities across countries. It is just unthinkable, again, that these countries would relinquish monetary sovereignty to a common authority, a common central bank, or a common issuer of the currency given the stark differences in economics, in politics, in history, everything. It is just very hard to see [happening]. One could think of something much more limited in scope but then it is not really a common currency. So, some common unit of denomination for trade.
But again, I don’t quite see how you actually achieve that. Do you just construct a basket that is a weighted average of the currencies? That is not really a new currency. Is it just purely denomination of trade [in a BRICS currency basket]? Do you want to create financial instruments denominated in that basket? Who is going to invest in that? There’s just a lot of question marks there.
So, it’s very hard to make an assessment. The one I feel quite confident making is that a common currency in the literal sense of the term — which is they get rid of the national currencies and adopt a common one — seems to me completely out of the question.
RFE/RL: What are other risks involved with a common currency?
Milesi-Ferretti: A classical one, when you tie your currencies together, is the problem of so-called asymmetric shocks. So, shocks that affect one country differently from others. In general, exchange rates are a good way to absorb these shocks….
If you move to the BRICS, and you have exporters of commodities versus exporters of manufactured goods, the degree of difference is just very, very large. Think of oil prices. They go up, Russia is happy, Saudi Arabia is happy, but China is an oil importer, South Africa is an oil importer. India is a big oil importer. So, there you have a classic asymmetric shock. And, when oil prices go up, typically the ruble used to go up and Indian rupee would depreciate. With a common currency, you cannot have that.
RFE/RL: What about BRICS’s talk of cutting the dollar out of bilateral trade?
Milesi-Ferretti: The objective of reducing reliance on the dollar is something I put more credence in — in terms of intentions. How is that achieved is going to be a big question mark.
I think one issue is the currency you adopt for denomination of the trade, for settlement, but there is an overall question as to how you manage your external finances. What currency do you put your foreign-exchange reserves [in]? Which currency is used by your firms to finance themselves on international markets? On all those grounds, it is much more difficult to avoid the centrality of the dollar.
I think, again, it is possible that in certain domains you will see some erosion in the role of the dollar in some aspects of international trade. But that is very different from adopting a financial strategy that avoids the dollar altogether.
RFE/RL: With respect to financial strategy, Russia has increased the share of the Chinese yuan in its foreign-currency reserves. Why wouldn’t more countries follow Russia’s path? What are the risks countries face in holding yuan as opposed to dollars?
Milesi-Ferretti: Well, one issue is the safety and tradability of the financial instruments you use. China has still pervasive capital controls, and hence the trading of financial instruments denominated in yuan does not guarantee the same degree of immediate liquidity and flexibility to trading instruments denominated in dollars. You also have a financial system that is definitely more opaque and with a heavier public hand, in terms of how the system is managed and how it evolves over time.
China has had historically low inflation, the currency has been overall quite stable, and given the size of the Chinese economy and its track record, it is not surprising that you have some share of reserves that are denominated in [Chinese currency]. But again, in a global financial system where the country still retains a lot of restrictions on the ability of nonresidents to invest in or trade financial instruments in China, it is hard to envisage a central role for the [Chinese] currency with the same order of magnitude as the dollar.
And I presume also — if you think about geopolitical concerns — it is not just the U.S. that has strong international preferences on what countries are allies and [what] countries it considers more as challengers. That holds for China as well. So, I would assume that even [foreign-currency] reserve managers would not consider that if they put money in U.S. treasuries, then there is a risk of some U.S. response if they don’t do what the U.S. wants, but that [this] is not going to happen if they put the money in China.
RFE/RL: What is the best BRICS can achieve?
Milesi-Ferretti: We have a lot of evidence in general that more integration can help efficient use of resources. So, reducing trade barriers among them would certainly be helpful. You could think of some aspects of financial integration, too — easing financial transactions among them, even though I would say the potential for this to have large benefits across the group is probably more limited, considering that they punch above their weight in trade — particularly China for manufacturing and the others for commodities — but in financial markets they still have a more limited role.
So those two aspects — reducing trade barriers, fostering trade integration, technology transfer — all those things could be potentially beneficial. But I presume some of the driving forces may go beyond the economics I mentioned.
RFE/RL: Is there anything the United States can or should do to maintain dollar dominance?
Milesi-Ferretti: I would say that is a side benefit of good macroeconomic management. So, if I can flip your question, it would be how to avoid what could lead to a decline, an erosion, in the role of the dollar that goes beyond a natural, healthy process whereby other countries gradually converge income levels. That will be bad macroeconomic management in the U.S.
We have objectively daunting fiscal challenges coming in the U.S. We are at full employment, but the budget deficit is not just large, but projected to remain large for a number of years, and [there is] not much agreement on how to bring it down — rather, no agreement on how to bring it down. It is an issue that eventually the U.S. is going to have to face.
It is not the only country facing these challenges, but not dealing with those in a timely fashion is the type of mistake that has a repercussion that could also affect the overall status of the dollar on international markets. I’m not talking about any short-term dramatic change, but more about accelerating a longer-term process. The health of the economy, the health of financial markets, good macroeconomic management — these are the sort of fundamentals that sustain the role of the dollar as a safe asset and currency.