Never underestimate the publicity value of a good acronym. Just consider 'Brics', an abbreviation lumping together the world's four largest developing economies, Brazil, Russia, India and China. The term was invented back in 2001 by Jim O'Neill, the head of global economic research at investment bank Goldman Sachs. At the time, Goldman was looking to pick up increasingly lucrative investment banking mandates in the developing world. To do that most effectively, however, it first needed to persuade investors to ramp up their allocations to developing-economy assets, despite the higher levels of volatility typically associated with emerging markets. The answer was a series of research reports that presented the very long-term ascendancy of the Big Four developing economies as an inevitability. Generally, they were illustrated with charts like the first of the two below, which shows China overtaking the United States to become the world's largest economy soon after 2040. It was a powerful message, and its brand name - Brics - was nearly perfect. It took four wildly dissimilar economies, each at a different stage of development and each with its own unique characteristics and problems, and cemented them together into a single compact word freighted with connotations of building up and of solidity. Brazil, Russia, India and China, it implied, made up a single coherent bloc that investors in search of a compelling but simple concept could regard as a single entity. Rich-world investors loved the idea. So too did political leaders in the developing countries, who were quickly seduced by the notion that they could band together and use their collective economic heft to reshape the world's financial system in their own image. The result is the first Brics summit, with the leaders of the Big Four developing countries meeting today in the Russian city of Yekaterinburg to discuss their common future. During the run-up to the meeting, expectations were high that it would result in an announcement of a move away from the US dollar as the world's main reserve currency. After all, speaking in Hong Kong earlier this year, Russian Finance Minister Alexei Kudrin blamed the economic crisis on global financial imbalances caused by excessive American borrowing facilitated by the dollar's status as a reserve currency. More recently, the idea of a shift away from the dollar has been endorsed by leaders from both China and Brazil as a means of righting economic imbalances. But, over the weekend, Mr Kudrin admitted that the dollar was still the only feasible option as an international trade and reserve currency, and that the Brics summit would not be calling for its replacement. 'It's too early to speak of an alternative,' he was quoted as saying. Part of the reason is that, despite a lot of talk, the Brics nations, and China especially, have shown little appetite recently for the economic upheaval that would be involved in shifting away from building big dollar reserves as a necessary step towards correcting the global imbalances. The disruption would be enormous. According to a recent research report from the Peterson Institute for International Economics, the yuan would have to strengthen by 40 per cent against the dollar to attain its 'fundamental equilibrium exchange rate': an exchange rate consistent with maintaining a sustainable current account balance and manageable capital flows. A yuan appreciation of such magnitude would mean a valuation loss of as much as US$300 billion on China's existing dollar reserve assets: a price Beijing is not yet prepared to pay to help rebalance the world economy. It appears that reshaping financial systems is a lot harder than coming up with snappy acronyms.
