The process of building international alliances has progressed inexorably throughout centuries to encompass the greatest possible number of cities, states, countries and regions. Almost invariably such pacts were predicated on a certain ideology, allegiance to a dynasty, or other unifying themes. In almost all cases such alliances were inward-oriented or exclusive, with value-based conditionality underpinning the allegiance to the block. But what if a new global platform for countries and regional groupings were open-ended, allowing for differing ideologies as well as political and economic systems? Would that not finally constitute the ultimate platform with the greatest flexibility and scope to attain development goals?
At first, the emergence of BRIC appeared to be yet another block seeking greater influence on the international arena. It was widely seen as yet another amalgamation of heavy-weights aspiring greater recognition. Then something started to change with the addition of South Africa and the formation of BRICS – this was no longer just about scale, but also the inclusiveness of the platform to comprise the main regional centers of the developing world. Next came the creation of BRICS+ and the possibility of the emergence of the most extensive platform for all of the Global South. This transformation from an introvert BRIC into an extrovert BRICS+ that is open to cooperation with all parts of the developing world triggered a whole series of requests from developing economies to join the platform.
But does this expansion process stop with BRICS+ or are there further possibilities to widen the scope of this platform? Indeed, the way to keep it in “ascension mode” is for the inclusiveness and openness themselves to become the subject of innovation. One possible further step in this direction may be to bring on board developed economies and their institutions. Indeed, some of the key elements for the dynamism of any modern platform such as innovation, technology, markets continue to be dominated by Western economies. And if the BRICS and BRICS+ principles of openness/inclusiveness are to be observed, it would be only logical for the BRICS to create a platform of outreach to the developed economies and their development institutions – something that could be undertaken via a “BRICS++” format. And in case criteria are advanced in the BRICS+ platform for the admission of new members from the Global South, there probably also need to be principles and criteria elaborated for the participation of developed economies and their development institutions in the BRICS++ platform.
Such criteria may include the standard set of principles (explicit and implicit) that are used in international economic organizations such as the WTO or the IMF. One such core principle is reciprocity, i.e. greater openness of western institutions and fora with respect to the BRICS in return for their participation in the BRICS++ format. Another principle is the de-politicization of discussions (with excessive politicization greatly undermining the progress in G20 discussions) and the prioritization of an economic/pragmatic agenda. Apart from the possible presence of Western leaders in future BRICS++ summits, the BRICS++ platform could involve the invitation of trade and regional integration blocks (with participation from developed economies) such as the EU or RCEP. It may also be possible to invite the representatives of regional development institutions from the West such as the EIB, EBRD and others. BRICS++ could also become a venue for not just reconciling, but mutually reinforcing the operation of such connectivity projects as the BRI, the Global Gateway and the B3W project.
Other possibilities for the BRICS++ platform may include discussions on the reform of global institutions such as the WTO. Environmental and green development priorities will also need to feature prominently within this North-South platform. Of notable importance for discussion may also be the issues of food and energy security. Another possible direction of development for BRICS++ could be the advancement of digital economy, AI regulations and the liberalization of North-South technology transfers in high-tech, IT as well as critical areas such as pharmaceuticals and health care. Debt relief as well as the modalities of ODA more broadly for the least developed economies will also need to be part of the agenda. Most importantly, BRICS++ will need to explore the possibilities for supporting the Global South and in particular Africa’s AfCFTA in obtaining greater market access in the developed as well as developing world.
As the gravity center of the global economy further shifts into the Global South, the role of BRICS/BRICS+/BRICS++ will increasingly grow in setting not only regional, but also global development goals. The BRICS+ platform may become the focal point for development efforts across the entire expanse of the Global South, while BRICS++ with time may represent a parallel/alternative/complementary track to global institutions or fora such as the G20 (where the inertia of the role of developed economies is slow to reflect the changing realities in the world economy). Rather than solely attempting to change the distribution of quotas and voting rights in the Bretton Woods institutions, creating platforms such as BRICS+/BRICS++ may allow the BRICS to facilitate a speedier and more organic adjustment of global decision-making to the rising prominence of the developing world.
After centuries of the shifting international alliances attempting to reach ever grander scale, it may be time for more inclusive and open-ended platforms to play a leading role in the global economy. The algorithm to attaining the greatest possible scale in building such platforms is for the largest members to temper the excesses of their Realpolitik and rise up to the shared responsibility for the future of the world economy. Could the BRICS++ as the new type of international alliance close the chapters of history aimed at global domination and open up the collaborative chapters of global development? Why not? – after all, ex oriente lux! And no, this is of course not another “end of history”. This is just the beginning.
The recession in the Eurozone continues for the second quarter in a row now. Even though the decline in terms of economic dynamics remains small – just about 0.1 percent of GDP, realistically minded experts believe this is the beginning of hard times waiting ahead. With foreign holders dumping the bonds of Greece, Italy, Spain and Portugal, the threat of a new Eurozone debt crisis may be closer than it seems.
Compared with the cost of borrowing in the Eurozone’s powerhouse, Germany, in Greece, Italy, Spain and Portugal it has slightly decreased from the peak values of the early summer of 2022. That said, each of these countries is still forced to pay over one percent more than Germany in order to take out a ten-year loan. Even France, the EU’s second-largest economy, is forced to offer investors yields of half a percent more. In June 2022, the ECB, just like it had done a decade before at the peak of the previous Eurozone crisis, promised to “do whatever is necessary” to prevent weak countries from sliding into default.
However, despite the ECB’s strong promise, it was met with a restrained reaction on the part of many investors and experts. First, because, in the long haul, a monetary union is unlikely to rely indefinitely on central bank coverage of new debt. Secondly, last fall, the ECB was forced to admit that its estimates of inflation dynamics had been seriously flawed. In fact, the ECB let the inflation out of hand. Since then, Christine Lagarde’s agency has been grappling with an almost impossible dilemma: to curb rising prices and, at the same time, avert debt and banking crises.
During the time of the COVID-19 pandemic, the EU spent more than two trillion dollars on economic support measures. As a result, the debt of a number of member countries has spiked to dangerous new highs. By the end of last year, Greece’s debt amounted to 171.3 percent of GDP, Italy – 144.4, Portugal – 113.9, Spain – 113.2, France – 111.6 percent. This is significantly higher than the 2010 crisis of the single European currency. Although high inflation somewhat eases the debt burden, depreciating liabilities, given the need for the ECB to raise interest rates to fight inflation, the cost of servicing the remaining debt will go up.
Debt crises are often triggered by the fear of a borrower’s default, when the cost of borrowing grows faster than his ability to service obligations already subjectively assessed by investors. Today, the world’s leading central banks are making titanic efforts to rein in the inflation that has gripped Western countries since the second half of 2021. Another factor is the rising cost of raw materials and food, caused by attempts to strangle Russia with economic sanctions. The policy of central banks leads to an increase in the real interest rates that governments pay on their debts, while inflation slows down the pace of economic growth. When real rates start to exceed the growth rate of the economy, governments quickly lose their ability to recklessly spend money and build up debt.
When rates exceed the growth rate of the economy, a primary budget surplus is the only way to keep debt stable. The higher the initial debt, the more you need to tighten your belts. Moreover, high inflation also pushes down real interest rates. However, even if the monetary authorities manage to achieve a steady reduction in inflation, which looks more and more doubtful now, interest rates will remain high and the Eurozone may face a repeat of the sovereign debt crisis.
First off, the situation in the countries we mentioned before causes a great deal of alarm. Their governments now pay on ten-year loans sums ranging from more than three percent in the case of Portugal, Spain and Greece, to almost four for Italy. Meanwhile, according to some experts, this summer in Europe may be at least as hot as it was last year, when, according to the European Commission’s Joint Research Center, “two-thirds of Europe faced the worst drought in the past five centuries.” The hotter the weather, the more acute the problem of energy supply. The negative effects of natural disasters are seriously exacerbated by political shortsightedness. Europe has already stopped buying Russian coal, trying to “punish Moscow for its actions in Ukraine.” Late last year, they banned the purchase of Russian oil and oil products. Finally, the sanctions imposed against Russia have led to a significant drop in natural gas supplies.
Heat and drought again promise a drop in crops, as well as electricity generation at hydroelectric and nuclear power plants. Hot and dry weather is often accompanied by long periods of no wind, which leads to a significant reduction in supplies from wind farms. Energy and food prices might go up again, leading to a new round of inflation. In June, the ECB raised its base rate to 3.5 percent, the highest since 2001. A combination of growing prices and rates unseen in Eurozone history promises to turn the threat of a new debt crisis into a “self-fulfilling prophecy.” More and more investors are waking up to this danger, as evidenced by the rising yields of Eurozone government bonds.
An increase in bond yields leads to a fall in their value. A decrease in government bond prices automatically means a decrease in the cost of collateral, which usually comes in the form of government bonds used for issuing corporate loans. As mentioned above, creditors are also losing confidence in the debts owed by the most problematic Eurozone countries. As a result, commercial banks in their respective countries are forced to seek additional collateral for the loans they take in their national central banks. With debt already exceeding hundreds of billions of euros, the problem becomes being felt down the chain for the national banking system – the national central bank – and then the regulator in the form of the ECB.
Optimists believe that the ECB is “used to walking the line between preventing default and incentivizing spendthrift countries to create debt at their own expense.” In addition, the increase in interest rates has a delayed (by several years) effect on national budgets. Another extremely difficult task the ECB is facing today is how to simultaneously fight inflation and support indebted countries. The main tool that the ECB used in tackling the previous crisis was the purchase of the bonds of the most problematic countries. Not everyone was happy about it, course, but the ECB managed persuade them by arguing that this would have stimulating effect on the EU economy as a whole, since inflation was then below the target level of two percent.
Today the situation is fundamentally different. Since success in the battle against inflation is not guaranteed at all, the ECB has to raise the rate with an inevitably decelerating effect on the economy. As a result, a growing number of EU countries are facing negative growth coupled with a cost-of-living crisis – social discontent is mounting and the people are demanding a rethink of their governments’ economic priorities. In this situation, there is a growth in the influence of right-wing parties, many of which favor an end to the current confrontation with Moscow. All these factors make it increasingly hard to justify interventions in the bond market by the mere need to prevent the financial fragmentation of the Eurozone.
The biggest threat is that containing the difference in sovereign debt rates between more and less successful members of the Eurozone, the so-called spreads, will not be enough to protect vulnerable economies. The ECB has already jacked up interest rates so much that even the Germans have to pay 2.4 percent on 10-year bonds – a significant increase from -0.5 percent less than two years ago. Small wonder that in the first half of 2023, the German economy shrunk by 0.3 percent, becoming “the main loser of the 20 Eurozone economies.”
Meanwhile, we should keep in mind that it was Germany that de facto “bought out” the Eurozone from the previous debt crisis. To combat the debt crisis that threatened to bury the single European currency, in March 2015, the ECB launched a quantitative easing program, which essentially meant to issue euros to buy government debt in order to maintain a balance of payments. An analysis of the mechanism for conducting settlements in euros between the ECB and the banks of Eurozone countries shows that, in the final account, it was Germany that paid for the purchase of obligations of all the other Eurozone countries. And on a larger and larger scale to boot.
As a result, “a colossal bubble of mutual settlements between countries has formed within the banking and financial sector of the European Union and it is ready to burst. A scheme that could solve the problems never appeared.” For example, the restructuring of Greece’s debt turned out to be more of a formality. De facto, even 12 years later, Athens is still unable to fully service its debts, including within the system of interstate banking settlements of the Eurozone. If rates rise further, the other three most vulnerable economies in the euro area, Italy, Spain and Portugal, will look unsustainable even if spreads can be kept at current levels.
Finally, the Eurozone’s ability to cope with the problem of the negative relationship between sovereign debt and the soundness of national banking systems remains a big question. For example, even if the banks of Italy or Greece are able to survive the default of their own governments, the contradiction between the monetary union and the member states’ ability to conduct their independent fiscal policy will not go anywhere.
“The financial sector in Europe is well aware that the debts of the southern inhabitants of the European home are almost irrecoverable,” since the quality of the collateral that commercial banks are required to provide to their national Central Bank in order to obtain a loan is doubtful. The “best-case scenario” is government bonds, which, given the current level of real interest rates, governments are highly unlikely to be able to service. “Thanks to this scheme, the troubled countries of Europe have been getting money from the ECB for a decade and a half on the security of obviously bad loans, and they use these funds to keep buying real goods in other countries.”
Experts argue about the ability of each of the four most troubled countries to borrow at rates above 4 percent. For a real reduction in demand, the rate must exceed the rate of inflation. However, if the rate passes this critical threshold, the goals of controlling inflation in the Eurozone and avoiding national defaults will become virtually unsolvable within the same period. In this case, the debt crisis of the Eurozone will become almost inevitable.
To top it all off, the EU faces a dilemma of reducing debt levels, which have skyrocketed during the pandemic and as a result of aggressive support for Ukraine, while at the same time allowing member countries to invest in their economies hit by the corona crisis. Since 2010, the European Central Bank’s fight for low inflation has already plunged a number of Eurozone countries into recession and sovereign debt crises. Given the situation at hand, the ECB and policymakers within the euro zone will have to make choices that are even more difficult. At the same time, as interest rates kept going up throughout the second half of last and the first half of this year, the Eurozone already looked as fragile as never before.
International Affairs
This year China’s economy is expected to recover, fueled primarily by a rebound in domestic demand. These improved near-term prospects offer an important opportunity for policymakers to refocus their efforts on achieving the country’s three long-term development objectives:
to become a high-income country by 2035 through productivity-led and environmentally sustainable growth;
to peak carbon emissions before 2030 and to achieve carbon neutrality before 2060; and
to spread wealth gains more equally among the Chinese people.
There are several key structural reforms that could support China’s transition from high-speed to high-quality development.
First, reviving productivity growth remains a central priority. China’s productivity growth has slowed from an average of more than 3 percent in the decade before the 2008 global financial crisis to about 1 percent in the decade after. Together with a shrinking workforce, this is weighing on China’s medium-term growth potential.
To revive productivity growth, policymakers have focused on fostering innovation. China’s innovation capacity has improved steadily in recent years, and the country is a global leader in e-commerce, financial technology, high-speed trains, electric cars, and other sectors.
Yet China’s average productivity level is still about half of the OECD average. This means China still has much to gain from catching up through adoption and diffusion of advanced technologies across the country.
Another source of productivity growth is more efficient resource allocation. This will require deepening reforms to increase the role of markets, the private sector and competition. Stronger institutions to manage insolvency, enterprise restructuring, and bankruptcy could facilitate more dynamic companies, enabling market entry and exit, and the reallocation of resources toward more productive enterprises.
Second, to reach its climate goals, China will need to transition faster to carbon neutrality than today’s advanced economies, and at lower levels of per capita income and emissions. This will require significant investment. According to World Bank estimates, China needs an additional $14-17 trillion — or 1.1 percent of GDP annually on average from now until 2060 — for green investment in the transport and electricity sectors.
However, investment alone will not be sufficient. Reforms will play a crucial role. Such reforms include an economy-wide use of carbon pricing, energy market reforms, and stronger incentives for low carbon land use in agriculture. Through innovation and investment, the private sector can play a vital role in the green transition, but it will need a predictable regulatory environment and a level playing field with access to finance and markets.
The transition to low-carbon and climate-resilient development will create economic and social risks especially for some of China’s less-developed interior provinces and communities, which are more dependent on coal and other carbon-intensive industries. These risks need to be managed to ensure the transition is not just fast but also fair.
Two years ago, China reached a remarkable milestone: eradicating extreme poverty (defined as those living on less than$1.90 per day). As China is set to become a high-income country, it will need to confront new inequality challenges. While declining in recent years, inequality in income and opportunity between coastal and interior provinces, and between rural and urban areas, remains a concern. We (at the World Bank) estimate that around 200 million Chinese continue to live on $6.85 per day or less — the standard the World Bank uses to measure poverty in upper middle-income countries. And these low-income households are particularly vulnerable to climate change, transition risks and other economic shocks.
More progressive fiscal policies and stronger safety nets could help stem inequality. On the revenue side, enhancing the role of progressive income and property taxes could contribute to lowering inequality. On the spending side, mobilizing public investment in health and education could help narrow the gap in access to quality education and health services across regions and between urban and rural areas. Progress toward establishing a unified, nationally funded social security system would equalize benefit levels while allowing workers to move across provinces without losing retirement or other social benefits.
Underlying these reform proposals is the ability of local governments to finance them. Greater revenue autonomy and predictability of inter-government transfers will ensure that local governments have the resources to expand social safety nets, improve the quality of public services, and invest in climate mitigation and adaptation.
Many of these reforms are already priorities in China’s 14th Five-Year Plan (2021-25). The recovery now offers a unique opportunity to redouble efforts to accelerate China’s transition to green, resilient and inclusive development. At the World Bank, we look forward to continuing our partnership with China to turn these economic shifts into growth opportunities that will benefit its people and contribute to a more sustainable future.
The World Economic Forum (WEF)’s 14th Annual Meeting of the New Champions, commonly known as the Summer Davos, was held in Tianjin, China from June 27 to 29 this year. The event brought together approximately 1,500 government officials, business leaders, and influential figures from diverse sectors representing over 90 countries. Themed “Entrepreneurship: The Driving Force of the Global Economy,” the forum centered around discussions aimed at fostering innovation, promoting economic growth, and shaping a more equitable, sustainable, and resilient global economy.
Entrepreneurship thrives on innovation and adaptability, enabling a wide range of products and services through free market competition. Sustainable growth opportunities are generated through competitive bids, contributing to market dynamism. In the competitive landscape, there are no permanent top players or fixed business models. Technological advancements further accelerate changes, as new competitors can emerge and succeed at any time and from anywhere.
In true free market competition, businesses have the freedom to enter the arena and embrace new challenges, much like participants in sporting events. While not everyone emerges victorious, it cultivates an appreciation for diversity and individual distinctions, promoting equality and communication. The dedication required in competition enhances productivity and drives societal evolution. Competition fosters ambition, encouraging collective growth and development through business collaboration, joint research, and vibrant urban interactions.
However, geopolitical conflicts are dividing the global community and eroding the trust and rule of law essential for market economies. Intense regional disputes have led to excessive expansion of executive and judicial powers, transforming market competition into a monopolistic game where manipulation takes precedence, restricting businesses’ participation. Unequal opportunities in competitions have resulted in employment difficulties, pushing individuals into poverty and impacting social welfare. Social inequality intensifies, leading to concerns about eroding freedoms.
Businesses today face increasing levels of distrust, insecurity, and hate speech, raising concerns about their mental well-being. Geopolitical conflicts, rising prices in various countries, declining living standards for ordinary people, and stagnant consumption markets hinder industry innovation, leading to pessimism about the global outlook.
Access to quality education, employment opportunities, and community safety are crucial for personal and family development. However, factors such as economic recession, disease outbreaks, and climate crises pose threats globally. Decision-makers from different countries must strengthen coordination and cooperation while restraining impulses to intervene in markets and businesses. Klaus Schwab’s words at the inception of the WEF still resonate – there is an urgent need for new mechanisms to enhance international cooperation in today’s world.
