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A change in the landscape

The break from the dollar gives BRICS a vital say in crafting a new world economic order.

india Updated: Apr 15, 2011 21:13 IST

Between 2000 and 2004, when BRIC was a piece of jargon doing the rounds of investment banks, Brazil, Russia, India and China produced 8.5% of the world’s output and had a 7.9% share of world trade. Today, every sixth dollar is generated and exported by BRICS (including South Africa) and by 2015 the International Monetary Fund expects these countries to be producing and exporting every fifth dollar on the planet.

The frenetic growth of these frontline emerging economies has thrown up the prospect of the developing world decoupling from the West as it tries to rebuild after the 2008 financial meltdown. A very visible event in this process is BRICS’s move away from the dollar to settle bilateral trade — although minuscule at $230 billion — in local currencies. Alongside, the proto-currency union proposes to broaden capital flows and deepen equity markets within the bloc.

It is far too early, however, to crow about the demise of the dollar as the currency the world does business in, or of the pretender euro. The IMF estimates by 2015 the United States and the European Union would still be producing 36.6% of the world’s output with a 42.6% share of world trade.

Besides, if you take China, the elephant in the room, out of the picture, the economic heft of the BRICS lightens considerably. The local currency trade is a thinly veiled effort by China to prop up the yuan to reserve currency status within the bloc.

For instance, India imports $3 worth of merchandise from China for every dollar it exports; it’s evident which will be the dominant currency in a rupee-yuan trading mechanism. BRICS will have to strenuously rebalance trade flows before they can hope to take the next steps towards greater economic integration.

The break from dollar-denominated trade does give this bloc a louder voice in wrangles over how the new economic order should be crafted on the planet. Washington accuses China, and to a certain extent the rest of emerging Asia, of suppressing their currencies in their effort to flood the world with their wares.

Beijing, in turn, points out that the US policy of printing dollars is fuelling inflation around the planet, especially in fast growing developing countries. The brinkmanship has broken down efforts by leaders of the group of 20 nations that produce nearly 90% of the world’s output to come up with markers to warn against the next crash.

Local currency trading within the fastest growing parts of the globe gives BRICS an extra handle in forthcoming negotiations over exchange rates and money supply.