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UPSC MainsGeneral Studies Paper IIInternational RelationsPractice question

BRICS Role and Common Currency Challenges

Examine the need for BRICS in the evolving global order. Analyse the challenges associated with the proposal of a common BRICS currency in context of global financial stability.

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Introduce with the current demographic and economic footprint of the expanded BRICS+ bloc. Examine the geopolitical and economic necessity of BRICS in the contemporary international architecture. Analyse the macroeconomic and structural challenges confronting the proposal of a common BRICS currency, and conclude with the recent shift towards local currency settlements and payment systems like BRICS Pay.

Model answer

310 words

Introduction

With the expanded BRICS+ now representing approximately 44% of global GDP in purchasing power parity (PPP) and nearly 56% of the world's population, the bloc functions as a significant geoeconomic counterbalance to Western-dominated multilateralism in an increasingly fragmented global order.

Need for BRICS in the Evolving Global Order

  • Multipolarity and Strategic Autonomy: BRICS provides a premier non-Western platform for the Global South, shielding developing nations from unilateral sanctions, weaponised finance, and geopolitical hegemony while reinforcing consensus-driven multilateralism.
  • Democratising Global Governance: The bloc amplifies collective bargaining demands to reform the United Nations Security Council (UNSC) and restructure governance quotas at the Bretton Woods institutions (IMF and World Bank) to reflect 21st-century economic realities.
  • Alternative Financial Safety Nets: Institutional frameworks like the New Development Bank (NDB) and the Contingent Reserve Arrangement (CRA) offer vital development financing and liquidity backstops free from Western conditionalities and structural adjustment burdens.

Challenges of a Common BRICS Currency to Financial Stability

  • Mundell-Fleming Trilemma Constraints: Launching a single currency necessitates surrendering monetary policy sovereignty, depriving member central banks of independent interest rate and exchange rate tools crucial for mitigating localised macroeconomic shocks.
  • Violation of the Optimum Currency Area (OCA): Massive structural disparities—ranging from China’s high-tech manufacturing base to Ethiopia’s agrarian economy—generate asymmetric economic cycles. Without synchronised business cycles, a unified monetary stance could induce severe financial contagion akin to the Eurozone sovereign debt crisis.
  • Absence of a Fiscal Union: A viable currency union requires centralised cross-border fiscal transfers to redistribute surpluses from structural net exporters (such as China) to current-account deficit economies. In the absence of a supranational political authority, such chronic imbalances risk severe financial instability.

Conclusion

Recognising these structural impediments, the 2024 Kazan Declaration pragmatically bypassed a unified currency in favour of the BRICS Cross-Border Payment Initiative (BRICS Pay). Expanding local-currency trade settlements allows member nations to mitigate dollar dependency without jeopardising global and domestic macroeconomic stability.

Key facts to remember

statistic

The expanded BRICS+ represents roughly 44% of global GDP based on purchasing power parity (PPP) and approximately 56% of the world's population.

— International Monetary Fund (2024)
definition
Optimum Currency Area (OCA)

A geographical region where sharing a single currency maximizes economic efficiency, which requires high labor mobility, price flexibility, similar business cycles, and fiscal risk-sharing mechanisms.

definition
Mundell-Fleming Trilemma

An open-economy macroeconomic principle stating that an economy cannot simultaneously maintain a fixed exchange rate, free capital movement, and an independent sovereign monetary policy.

scheme
BRICS Contingent Reserve Arrangement (CRA)

A collective currency reserve framework established to provide mutual short-term balance-of-payments liquidity support, functioning as a non-Western alternative to IMF bailout arrangements.

Frequently asked questions

Why did the 2024 Kazan Summit move away from a single BRICS currency?

Due to major structural divergences among members and the lack of a centralized fiscal authority, the bloc shifted its immediate focus towards interoperable payment mechanisms (BRICS Pay) and local-currency settlements rather than creating a high-risk unified currency.

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