BRICS, the global alliance of emerging economies, grows stronger as six new nations join, expanding its influence and global impact. But what’s next?
Today, let’s start with the basics and get to know BRICS. Just like there is a club of seven powerful economies called G7, there is another group of five growing economies called BRICS. These countries are Brazil, Russia, India, China, and South Africa.
But how did this group come to be? Well, here’s an interesting story: In 2001, an economist named Jim O’Neill from Goldman Sachs noticed something. He saw Brazil, Russia, India, and China were growing fast. He called them the ‘emerging stars’. These were the countries that could shape the future of the global economy, and hence, they formed a group.
Then, in 2008, when a big financial crisis shook the world, people started doubting the American-led financial system. Two years later, South Africa joined these four, and that we got the group called BRICS.
Now, let’s look at some numbers. BRICS is home to 40% of the world’s population, and they consist of 26% of the world’s GDP, according to BQ Prime. BRICS wanted to challenge the financial system led by the United States. And now, they are inviting more countries to join BRICS.
So, the question for today is: Why is BRICS inviting more countries, and how will it affect the world economy?
Let’s find out.
What’s Happening?
In August 2023, the BRICS alliance made a profound decision that could have far-reaching effects on the global economy. They extended a formal invitation to Argentina, Egypt, Ethiopia, Iran, Saudi Arabia, and the United Arab Emirates, asking them to join the BRICS group.
However, that’s not all. It appears that BRICS has gained considerable international interest. Leaders from more than 60 countries attended the meeting, reflecting the growing importance and influence of BRICS on the world stage.
Why is BRICS Expanding Suddenly?
As mentioned earlier, BRICS had a clear goal: to challenge the dominance of the US-led financial system. To achieve this, they took two significant steps. Firstly, they sought reforms in international financial institutions like the World Bank and the International Monetary Fund (IMF). Secondly, they established their financial institution, the New Development Bank.
The New Development Bank of BRICS operates in a distinct manner. Unlike the IMF, which typically requires countries to implement significant reforms within their borders before providing financial assistance (as recently seen with Pakistan), the New Development Bank adopts a more flexible approach. It does not impose stringent conditions and allows member countries to use their domestic currencies while financing.
BRICS is also exploring the idea of conducting international trade using their domestic currencies, reducing reliance on the US dollar and minimising the risks associated with currency fluctuations.
Additionally, the idea of challenging the supremacy of the US dollar by introducing a new BRICS currency has been a topic of discussion among emerging-market nations for quite some time. But will this happen? That’s a question for some other day.
In short, BRICS seeks to expand its influence and position itself as a prominent player in the interests of developing nations on the global stage.
Why Do Other Countries Want to Join BRICS?
There are several reasons why countries wish to join BRICS.
Alternative to Western Dominance
Several countries, including Iran, Saudi Arabia, and the United Arab Emirates, view BRICS as an appealing alternative to international organisations traditionally controlled by Western nations. They are looking for a platform where they can exert more influence on shaping global policies and decisions.
Moreover, when we examine the new members of the group, UAE, Saudi Arabia, and Iran are all among the world’s top ten oil producers. On the flip side, China, Brazil, and India are major oil consumers. By becoming part of BRICS, which emphasises conducting trade using their currencies, there is an opportunity to reduce reliance on the US dollar for oil transactions.
This shift towards using local currencies can contribute to the process of de-dollarisation. For example, in August 2023, India successfully settled oil payments with the United Arab Emirates using their local currency, showcasing the potential benefits of this approach.
Unlocking Development
Joining BRICS is like getting a golden ticket for several countries. BRICS has a bank, the New Development Bank, that hands out capital for important things like infrastructure and development projects. New members want to be part of this club to tap into these financial resources.
Pressure on Petrodollar Recycling
Petrodollar recycling is done when countries that sell oil get paid in US dollars and then invest those dollars in the United States. This has made the US dollar very important worldwide and helps oil-exporting nations to generate extra returns on their oil revenues. However, when these countries opt to transact in their domestic currencies or alternatives rather than the US dollar, it places pressure on petrodollar recycling. Such a shift reduces the flow of dollars into the US financial system, potentially weakening the dollar’s demand and affecting its value.
According to Bloomberg, in June, Saudi Arabia made headlines by selling over $3 billion worth of US government debt. This marked the third month in a row that they sold these securities, bringing their total holdings of US government debt to $108.1 billion, according to data from the Treasury Department. The neighbouring United Arab Emirates also joined in, selling nearly $4 billion worth of US government debt during the same period.
What’s Next?
As reported by Firstpost, India has a chance to play a central role in an expanded BRICS group. Even though China still has a larger economy, India has been making significant progress in terms of GDP rankings. In 2014, India was the 10th largest economy, but by 2023, it had climbed to 5th. India even aims to become the 3rd largest economy in just a few more years.
In this regard, if China dominated the early 2000s, it seems like the 2020s could potentially be India’s decade to shine.
That’s it for today. We hope you’ve found this article informative. Remember to spread the word among your friends. Until we meet again, stay curious!
*The article is for information purposes only. This is not an investment advice.
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