Foreign and Military Affairs

BRICS to work together to reform world financial system

By Gao Changxin and Wang Xing (China Daily)
Updated: 2011-06-18 09:40

Shanghai / St Petersburg - Officials and economists from emerging countries said they will cooperate more to further reform the existing world financial system, since its instability has led to inflation and other troubles for such countries.

Speaking at an economic forum in St Petersburg on June 17, Alexei Ulyukaev, first deputy chairman of the Central Bank of Russia, said there are still disparities between the contributions made by emerging countries and the ways in which world financial policies are made.

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"Developing countries produce goods and services, while developed countries produce problems and headaches," Ulyukaev said, adding that emerging economies should work together to pursue common interests.

Luciano Coutinho, president of the Brazilian Development Bank, said developed economies have experienced slow growth for a long time and emerging economies are important drivers of the world economy's recovery and growth.

He said developing countries have the power to greatly change the world economy and that they should cooperate more on reforming the International Monetary Fund (IMF) and establishing a new global currency reserve system, which would replace the current system built on the US dollar.

According to a recent report from the World Bank, rapid economic growth in the developing world is greatly changing and redefining the world economy. By 2025, the growth in six prominent emerging countries - Brazil, China, India, Indonesia, South Korea, and Russia - is expected to account for more than 50 percent of world economic growth, the bank forecasts.

Dong Xiaojun, a senior professor at the Chinese Academy of Governance, said Brazil, Russia, India, China and South Africa - the BRICS countries - should work together to reform the world financial system and can start in that direction by using their own currencies for trade and investment.

"By doing that, the BRICS can reduce their reliance on the US dollar in trade settlements and investments, mitigating the effect on their economies brought about by the United States' unilateral monetary policy," Dong said.

To bring the US economy out of the recession it fell into during the 2008 world financial downturn, the Federal Reserve greatly loosened its monetary policy. Besides lowering its interest rate to nearly zero, the Fed introduced quantitative easing - buying US Treasury bonds to stimulate the domestic economy - which dragged down the dollar's value.

With a weak dollar, BRICS countries are now seeing inflation being passed on in the form of higher food and energy prices. BRICS leaders worry that a weakened dollar will lead to higher borrowing costs, which will ultimately stunt their economic growth, and higher food prices, which can lead to instability.

During the BRICS summit China held in April in Hainan, the BRICS said in a joint communique that "excessive volatility in commodity prices, particularly those for food and energy, poses new risks for the ongoing recovery of the world economy."

"We support the reform and improvement of the international monetary system, with a broad-based international reserve currency system providing stability and certainty."

In April, the five BRICS nations' development banks agreed to establish mutual credit lines denominated in their local currencies, not the US dollar.

The head of the China Development Bank, Chen Yuan, said in April that he was prepared to lend up to about 10 billion yuan ($1.5 billion) to members of the BRICS countries, and his Russian counterpart said he was looking to borrow the yuan equivalent of at least $500 million through the China Development Bank.

Wang Xing reported from St Petersburg and Gao Changxin reported from Shanghai.