The future of the BRICs

Today while commuting to school I was browsing the internet searching for news about developing countries, when I saw this video about the BRICs and India’s status in it.

I thought it was very interesting, especially because years ago India was considered to be the most promising country of the BRIC group according to this publication.

It is a big problem because India is a huge country, extremely populated with a not so large infra-structure. As a emerging economy India still does not have a good transportation system, which does not allow a descent logistic for Indian goods to be transported.

India’s problems are the slow growth, a falling currency, high inflation and high interest rates, a bad combination for an emerging country, especially with such a large population of poor.It is such a delicate issue because India could be seemed and invested as an agricultural based country, but It might happen to India exactly what happens to Jamaica. If India produces something, it is probably going to be cheaper to buy it from China or Indonesia. This other article says more about the current disappointment with India in the BRICs.

The investments of companies, like Wal-Mart for example in India would most likely take away from the poor their chances to improve their lives, being that any multinational can sell imported goods for less than they would produce. The question is with problems like this how is the Indian population going to survive?

Bretton Woods and The Euro

One of the subjects we studied the most during the semester was The Bretton Woods agreement and its consequences to the world we live today. The Bretton Woods change the market with the newly instituted currency, the dollar after the gold.

The Bretton Woods is to this day very important and can be compared to many of the modern issues happening throughout the world. For example, Bretton Woods can be used to analyze the current problem with the euro. The following passage from an article explains very well the relationship between both systems:

"The euro can be considered a political attempt to recreate within Europe the effects of the 1944 Bretton Woods agreement that established a stable international monetary system from 1945 to 1971. The Bretton Woods system was complex, addressing every major currency issue to some extent while the euro clearly had holes in it that were never addressed. The biggest difference between the two may be that while the Bretton Woods system design was led by economists, the euro system was designed by politicians.

At Bretton Woods, currency systems designed by John Maynard Keynes (no introduction needed) and Harry Dexter White, chief international economist at the U.S. Treasury in 1942–44, were melded together in an effort to use the best economic thinking to achieve the best international economic outcome. The euro had only one goal: Achieving European currency unity. To achieve this political currency union, many political compromises were accepted that conflicted with both the best economic theory and real world experience.

Using Bretton Woods as an example of a workable real world currency system, we can explore what was missing from the euro when it was set up:

1. An adjustment mechanism for when intra-zone country costs and trade (the current account balance) get lopsided versus other countries, called “fundamental disequilibrium” in Bretton Woodese. In Bretton Woods, the adjustment mechanism was currency devaluation or revaluation upward. There is no adjustment mechanism at all in the euro. Members are expected to use fiscal constraint (AKA austerity) to achieve internal devaluation. In other words, undergo a recession to lower costs and imports.
2. A bank to lend (or give) currency to countries that are in fundamental disequilibrium. Bretton Woods set up the International Monetary Fund (IMF) for this purpose (there were other tasks for the IMF as well). The euro has the European Central Bank (ECB) but doing all the job of the IMF is specifically forbidden by the no-bailout clause in the euro Stability and Growth Pact.
3. A method of making sure that countries’ have enough currency to maintain international stability and trade. Bretton Woods only partially addressed this with the International Bank for Reconstruction and Development (IBRD), which today is part of the World Bank. Bretton Woods relied on countries and central banks (in reality, mostly the U.S. Federal Reserve) working in their own best interests to help achieve this. It was a different time when the belief was that strong international cooperation was needed to maximize growth. The Marshall plan was justified in part by the need to lower America’s balance of payment surplus and provide currency needed for international trade. Again, this seems to be specifically forbidden in the euro as the mandate of the ECB is to fight inflation."

From this article.

This is very interesting because it presents the differences between both programs and how the Euro was conceived with a lack of structure compared to the Bretton Woods, and today Europe is in crisis not knowing if the Euro is going to survive. Many of the causes of the Euro crisis could have been avoided if this program was more well structured, for example the European countries had easy credit conditions and were encouraged to practice high risk borrowing and lending money. Right now the Euro is failing and the ones trying to survive are having a hard time maintaining themselves, which makes it almost impossible to rescue the neighbor countries in a worse situation.

The article above explains all the issues with the Euro it uses the Bretton Woods examples from the past making it really easy to understand the intensity of the problem and how can Europe start to think about getting out oh this hole.