The BRIC grouping’s mutually beneficial policies: A macro-modeling test

Abstract

The BRIC grouping’s outstanding growth before the 2008 crisis, coupled with China’s ascension to becoming the second largest economy in the world, has been hailed as the evidence that the developing world could counterpoise the West’s economic and political clout. Even so, the business press in the West has always dismissed the BRIC grouping as a composite entity of dissimilar economies. Hence its conclusion that Brazil, Russia, India, and China could not complement one another, let alone result in a whole bigger than its parts through collective actions beneficial to each of them. This claim regarding the BRIC grouping is what this paper puts to the test. The test consists of evaluating the impact on each BRIC country of the following collective policies: 1) trade diversion from G7 countries, 2) policy alignment with China’s interest and exchange rates, and 3) creation of a common reserve arrangement. The impact on each BRIC country is determined through simulating the aforementioned policies within an econometric model (OEF model) of the global economy from 2000 to 2009. The OEF model has the features of a new Keynesian model in its modeling of OECD countries. Its modeling of developing countries captures the fact that those countries must minimize their country risk to attract external financing and lessen the cost of servicing their external debts. This paper’s main finding is that there is a collective action benefiting all BRIC countries. This collective action is the creation of a common reserve arrangement predicated on the idea that BRIC countries should stop accumulating foreign reserves and spend a fraction of their future reserves to boost their public consumptions, enlarge their public investments, and pay down their public debts. The other collective actions fail the test of being beneficial to all BRIC countries. Trade diversion from G7 countries is suicidal: it would depress the level of activity in each and every BRIC country. Alignment with China’s interest and exchange rates is incompatible with the interests of Brazil, Russia, and India due to its depressive effects. In March 2013, the BRIC heads of State decided to create a $100 billion contingency reserve arrangement (CRA). This CRA should be used as much as possible, if not ramped up, to address the current problems (slowing GDP growth in China and recession in Brazil) of BRIC countries.