(c) Michael Osbun

Goldman Sachs has had quite a year, one that's included a roller-coaster ride from near-death experience to record profits -- with public outrage at its management marking each twist and turn. But the firm hasn't gotten its fair share of credit (or blame) for its most remarkable achievement yet -- the creation of a political and economic juggernaut that some warn will remake the global political and economic landscape.

In 2003, a report authored by a team of Goldman Sachs economists popularized the term BRICs -- Brazil, Russia, India and China -- to describe a whole new category of emerging-market powerhouse. The report argued that with sound political leadership and relative international stability, the BRIC economies would together outpace the original G6 industrialized nations in dollar terms by 2040 -- a fundamental shift in the global balance of power. Since then, these four countries have assumed ever-greater importance in the international investment community's collective imagination.

Goldman Sachs didn't invent these four economies or generate their remarkable growth rates of the past decade. But its economists did, for better or worse, combine the four into a single group. Last month, leaders of the four countries gathered in Yekaterinburg, Russia, for the first ever BRICs summit, a signal they now hope to pool their growing political and economic power to get more of what they want from Western governments and U.S.- and European-dominated international institutions.

Their growing international leverage is real. In 2000, the BRICs accounted for 16 percent of global GDP. Today, their share is 22 percent, and that number is expected to rise sharply in years to come. The impact of the financial crisis and global recession on developed world economies has only magnified their importance.

Over time, the BRICs will exert more political influence, and their governments will cooperate on the (very few) issues that serve the interests of all four countries more or less equally. For example, the BRICs mean to increase their formal and informal influence within the IMF and World Bank. That's why Brazil and Russia have each pledged to buy $10 billion of IMF bonds, and China has signaled it might purchase $50 billion worth.

But the BRICs won't form a coherent bloc anytime soon, because considerable differences in their respective strengths, weaknesses and interests will limit their willingness to cooperate on the issues they say they care about.

Their differences are considerable. China and India are rebounding strongly from the global slowdown. The outlook for Brazil remains positive, if sluggish. Russia, on the other hand, may be in for a turbulent autumn. China's economy reportedly grew by almost 8 percent for the second quarter. Russia's contracted by more than 10 percent over the first half. This divergence in their economic performances will limit any convergence in their economic agendas.

Much of the divergence is explained by sharp differences in the structures of their economies. Russia and Brazil, which earn considerable cash from the export of energy and other commodities, would like their prices to rise. China and India, increasingly voracious consumers of these resources, want to see commodity prices fall. This limits the willingness within the group to agree on any initiative that would push oil and gas prices hard in either direction.

There are also important differences in their approaches to the United States. Russia is by far the group's most outspoken critic of U.S. foreign and economic policy. China and Brazil, which have much greater direct exposure to the U.S. economy, are more cautious. India's relations with Washington have warmed considerably in recent years, and its government won't join any effort to give the alliance an anti-U.S. focus.

Nor will they agree anytime soon on concrete steps to replace the dollar as the world's reserve currency. Russia has been much more outspoken than the others on the need to create a new "supranational" unit of exchange. Chinese central banker Zhou Xiaochuan recently proposed the formation of a global currency based on IMF Special Drawing Rights. But Chinese President Hu Jintao and Premier Wen Jiabao have given no indication that they plan to ignore China's massive exposure to dollar-denominated instruments.

Luiz Inacio Lula da Silva's Brazilian government generally favors the idea of reducing the dollar's status as a reserve currency, but his comments on the subject are designed to please Russia and China more than to outline a workable plan. India has indicated very little interest in this question, and the summit's final communiqué made no mention of it.

On trade, Brazil's energetic embrace of the Doha round contrasts with India's much greater skepticism, though the recently re-elected Congress Party promises greater flexibility on the question. China, an export powerhouse, continues to work quietly toward maintaining access to U.S. and European consumers. Russia's position on trade remains unpredictable and highly politicized -- as evidenced by contradictory recent comments from Russia's president and prime minister on plans to join the WTO.

Nor should we overlook the longstanding rivalries within the group. China and India, though their relations are much improved, remain regional competitors, particularly in the Indian Ocean. Beijing resolutely opposes any near-term Indian bid to claim a permanent seat on the U.N. Security Council. If India can't join the club, Brazil can't either. Despite deepening commercial ties between China and Russia, many senior Russian officials remain deeply suspicious of China's intentions toward Russia's sparsely populated far east, and they keep a wary eye on China's growing political and economic influence within the Central Asia states that lie between them.

Over time, the BRICs will exert increasing influence on global financial and political institutions. Their economies will continue to account for a sizeable portion of the increase in global GDP, and their political influence will grow as a result. But there will always be clear limits on the compatibility of their interests and the coherence of any collective plans. Critics of Goldman Sachs will have to return to complaints about bonuses.

(Ian Bremmer is president of Eurasia Group, a political-risk consultancy. He is co-author, with Preston Keat, of the book "The Fat Tail: The Power of Political Knowledge in an Uncertain World." He can be reached via e-mail at research@eurasiagroup.net.)

 

 

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