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THE POLITICAL ECONOMY
OF THE BRICS COUNTRIES
 BRICS: The Quest for
Inclusive Growth
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This page intentionally left blank
Editors-in-Chief
Edward D. Mansfield
University of Pennsylvania, USA
Nita Rudra
Georgetown University, USA
 BRICS: The Quest for Inclusive Growth

Editors
Biju Paul Abraham

Indian Institute of Management Calcutta, India
Partha Ray
Indian Institute of Management Calcutta, India
World Scientific
NEW JERSEY • LONDON • SINGAPORE • BEIJING • SHANGHAI • HONG KONG • TA I P E I • CHENNAI • TOKYO
11330_9789811202186_TP.indd 6 3/2/20 10:08 AM

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Library of Congress Cataloging-in-Publication Data

Names: Abraham, Biju Paul, editor. | Ray, Partha, editor. | Kim, Soo Yeon, editor.
Title: The political economy of the BRICS countries / editor-in-chief: Edward D Mansfield
(University of Pennsylvania, USA) and Nita Rudra (Georgetown University, USA); edited by
Biju Paul Abraham (Indian Institute of Management Calcutta, India), Partha Ray (Indian Institute of
Management Calcutta, India), Soo Yeon Kim (National University of Singapore, Singapore) and
Santiago López-Cariboni. (Universidad Católica del Uruguay, Uruguay).
Description: New Jersey : World Scientific, [2019-] | Includes bibliographical references and index.
Contents: v.1.BRICS: The quest for inclusive growth -- v.2. BRICS and the global economy --
v.3. Political economy of informality in BRIC countries.
Identifiers: LCCN 2019011951| ISBN 9789811202179 (set : alk. paper) |
ISBN 9789811202186 (v. 1: hc : alk. paper) | ISBN 9789811202193 (v. 2: hc : alk. paper) |
ISBN 9789811202209 (v. 3: hc : alk. paper)
Subjects: LCSH: Economic development--BRIC countries. | BRIC countries--Economic conditions. |
BRIC countries--Economic policy. | BRIC countries--Social policy. | BRIC countries--Foreign relations.
Classification: LCC HD82 .P5485 2019 | DDC 330.9172/4--dc23
LC record available at https://lccn.loc.gov/2019011951
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“6.5x9.75” b3508_V1 BRICS: The Quest for Inclusive Growth
Preface
Over the last two decades the economies of Brazil, Russia, India, China, and South
Africa (BRICS) have emerged as a major source of global economic growth. All these
countries are part of the G-20 group and are increasingly seen as playing a significant
role in global political and economic affairs. However, the growth pattern in these
countries have not been always inclusive. There are two broad aspects of growth in
the BRICS economies that are worth noting — their heterogeneity and their lack of
inclusivity. The edited book, BRICS: The Quest for Inclusive Growth aims to expose
the reader to the quest for inclusive growth in these countries. Specifically, the
chapters in this volume discuss economic growth in the BRICS countries with a view
to understanding whether the nature of their growth is such that it is broad-based
and leads to equitable economic/social outcomes.
The objective of the volume is not to look at each economy exhaustively across
different dimensions of growth. The chapters analyze specific dimensions of growth
in these five economies that constrain their ability to act effectively and cohesively
in international affairs. The nine chapters in this volume address different aspects
of economic growth in the five economies.
We would like to thank Professor Edward Mansfield, Professor of Political
Science at the University of Pennsylvania and Professor Nita Rudra, Professor of
Government at Georgetown University, the Editors-in-Chief of the three-volume
study of the The Political Economy of the BRICS Countries for inducting us into this
effort and for including this volume in the three-volume study.
Some of the papers in this volume were initially presented at an International
Conference on The Political Economy of Emerging Market Countries: The Challenges
of Developing More Humane Societies in December 2016/January 2017 jointly organ-
ized by Princeton University, Georgetown University, USA, and Indian Institute of
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b3508_V1 BRICS: The Quest for Inclusive Growth “6.5x9.75”
vi Preface
Management Calcutta in Kolkata and Santiniketan in West Bengal, India. Hence

the information base of most of the papers pertain till that period. We would like to
thank Princeton University, Georgetown University and the Management Centre
for Human Values at the Indian Institute of Management Calcutta for their funding
support for the Conference.
Biju Paul Abraham and Partha Ray

Kolkata, March 2019
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About the Editors-in-Chief
Edward D. Mansfield is the Hum Rosen Professor of Political

Science and Director of the Christopher H. Browne Center
for International Politics at the University of Pennsylvania.
His research focuses on international security and interna-
tional political economy. He is the author of Power, Trade,
and War (Princeton University Press, 1994); Electing to Fight:
Why Emerging Democracies Go to War (with Jack Snyder)
(MIT Press, 2005); Votes, Vetoes, and the Political Economy
of International Trade Agreements (with Helen V. Milner)
(Princeton University Press, 2012); and The Political Economy of International
Trade (World Scientific, 2015). He is also the editor of 14 books and journal special
issues, and has published articles in the American Political Science Review, British
Journal of Political Science, Comparative Political Studies, International Organization,
International Security, International Studies Quarterly, Journal of Conflict Resolution,
World Politics, and various other journals and books. The recipient of the 2000
Karl W. Deutsch Award in International Relations and Peace Research, Mansfield
has been a National Fellow at the Hoover Institution and his research has been
supported by grants from the Harry Frank Guggenheim Foundation, the Mershon
Center, and the United States Institute of Peace. He is the co-editor of the University
of Michigan Press Series on International Political Economy and was the Vice
President of the International Studies Association. He has been a Term Member of
the Council on Foreign Relations, a member of the Graduate Record Examination
Political Science Committee, Associate Editor of International Organization, and
Program Co-Chair for the 2001 annual meeting of the American Political Science
Association. Mansfield received his BA, MA, and PhD from the University of
Pennsylvania; and before joining the faculty there, he taught at Columbia University
and Ohio State University.
vii
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viii About the Editors-in-Chief
Nita Rudra is a Professor in the Department of Government

at Georgetown University. Her research interests include the
politics of globalization, trade, foreign investment, develop-
ment, democracy, inequality, taxation, and redistribution.
Her works appear in the British Journal of Political Science,
Journal of Politics, American Journal of Political Science,
Comparative Political Studies, International Organization,
and International Studies Quarterly. Her most recent book
with Cambridge University Press is entitled Democracies in
Peril. She has been a recipient of the Woodrow Wilson International Center for
Scholars Fellowship, the Fulbright–Nehru Foundation Academic Fellowship, and
the International Affairs Fellowship by the Council on Foreign Relations.
b3508_V1_FM.indd 8 11-02-2020 13:06:49

About the Editors
Biju Paul Abraham is currently a Professor of Public Policy

at the Indian Institute of Management Calcutta. His primary
teaching and research interests have been in the area of public
systems and policy, particularly national and international
regulation and its impact on investment and firms. He has
also been part of consulting teams that have carried out
strategic reviews of organizations and assessment of program
implementation for various ministries of the Government of
India as well as the Planning Commission. He was the co-
editor of the book Good Governance, Democratic Societies and Globalization (2004)
published by Sage and co-author of the book The Intelligent Person’s Guide to Good
Governance (2009) also published by Sage. His articles have been published in both
national and international journals such as Technovation, the International Journal
of Electronic Business, and the Journal of Rural Development.
Partha Ray is currently a Professor of Economics at the

Indian Institute of Management Calcutta, where he teaches
Macroeconomics, Global Political Economy, and Issues in
Monetary Policy. During 2007–2011, he was an Adviser to
the Executive Director (India) at the International Monetary
Fund, Washington, D.C. Earlier, he was working in the
specialist cadre of Economists in Reserve Bank of India’s
Economic Research Department during 1989–2006 in various
capacities; his last position was as the Director, Department
of Economic and Policy Research, RBI. During 1985–1989, he taught Economics in
ix
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x About the Editors
Calcutta. He has written extensively on issues relating to global financial crisis, global
economy, monetary policy, banking, and finance. His recent publications include
Macroeconomic Policies for Emerging and Developing Economies (with A. Vasudevan;
Sage Publications, 2018), Financial and Fiscal Policies: Crises and New Reality (with
Y. V. Reddy and Narayan Valluri; Oxford University Press, 2015), and Monetary Policy
(Oxford University Press, 2013).
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About the Contributors
Achin Chakraborty is a Professor of Economics and Director of the Institute of

Development Studies Kolkata (IDSK), specializing in welfare economics, devel-
opment economics and methodology of social science. He obtained his PhD in
Economics from the University of California at Riverside, USA. He has published
widely in such journals as Economic Theory, Social Indicators Research, Journal of
Quantitative Economics, Environment and Development Economics, Economic and
Political Weekly, and others. He has co-edited with Anthony D’Costa the recently
published book The Land Question in India: State, Dispossession and Capitalist
Transition (OUP, 2017).
Anup Sinha was Professor of Economics at the Indian Institute of Management

Calcutta. He earlier taught in Presidency College Calcutta and has been a Visiting
Professor at the University of Southern California and the University of Washington
at St. Louis. His primary research interests are in the areas of sustainable develop-
ment, where he has contributed a number of papers and books. His recent publica-
tions include Another Development: Participation, Empowerment and Well-Being in
Rural India (with Runa Sarkar) published by Routledge in 2015. He also serves as
the Chairman of the Bandhan Bank, which provides banking products and services
which are often overlooked by the formal banking systems.
Aparajita Gangopadhyay is the Director of the UGC Centre for Latin American
Studies at Goa University, Goa, India. Her areas of specialization are India–Latin
America relations, India’s foreign policy, and regional integration in South
America. She has been a Visiting Faculty at the Chengchi National University,
Taiwan, the Marie Curie Sklodowski University, Lublin, Poland, and Vilnius
University, Lithuania. She has also delivered lectures in many universities like the
Argentine Institute of International Relations (CARI), University of Salvador, La
xi
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xii About the Contributors
Plata University, Universidade Siglo 21, Universidade Nacional Rosario and the
Universidade Nacional de Rio Cuarto, Argentina. She was also a member of the
Indian Delegation to Brazil as part of India–Brazil 1.5 Dialogue in 2013. She has
attended many national and international conferences and seminars, and widely
published in Indian and international journals. She is also a member of the Academic
Council of the Indian Studies Programme, USRJ, Brazil and an Advisory Council
Member on Centre on Studies and Services on Contemporary India and Southern
Asia, Universidad Externado de Colombia, Bogota.
Indrani Gupta is Professor and Head, Health Policy Research Unit (HPRU) at the
Institute of Economic Growth, Delhi. She received her PhD in Economics from
the University of Maryland, USA in 1992. Her work experience has been varied,
including working at teaching and academic institutes, the World Bank, and the
Government of India. She has been instrumental in setting up a center for health
economics and policy research at IEG, which remains one of the few places in India
that undertakes policy-oriented research on the health sector. Her areas of interest
cover a wide range of topics, and include demand for health and health care, health
insurance and financing, poverty and health, costing and cost-effectiveness, econom-
ics of diseases, and international agreements and their impact on public health.
R. Nagaraj is currently a Professor at the Indira Gandhi Institute of Development

Research, Mumbai. He did his PhD from Centre for Development Studies,
Trivandrum. He has been a Visiting Professor, Woodrow Wilson School,
Princeton University and at the Indian Institute of Management Calcutta. He was
a member of a working group on the Index of Industrial Production, constituted
by the Central Statistical Organization, Government of India and a member
of the subcommittee on private corporate sector, set up by advisory committee
on National Accounts Statistics.
Saibal Ghosh is an Expert to the Qatar Central Bank in Doha. He was earlier
a Director in the Centre for Advanced Financial Research and Learning of the
Reserve Bank of India in Mumbai. Prior to that, he worked in several areas in the
Reserve Bank including banking, monetary policy, and international relations. He
did his PhD from the Indira Gandhi Institute of Development Research (IGIDR),
Mumbai. His research interests are primarily in the areas of banking and finance.
His recent interest is in the areas of financial inclusion and gender diversity in
emerging economies.
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About the Contributors xiii
Samik Chowdhury holds a PhD in Economics from Jawaharlal Nehru University,

New Delhi. He teaches at Ambedkar University, Delhi. Prior to this, he was with
the Health Policy Research Unit, Institute of Economic Growth (IEG), Delhi. His
primary area of research is health policy in India with particular focus on health
financing. His other research interests include public policy and governance.
Simantini Mukhopadhyay is an Assistant Professor at the Institute of Development

Studies, Kolkata. She obtained her PhD in Economics from University of Calcutta
in 2015. The topic of her PhD thesis was Aspects of Child Undernutrition in India.
She has presented her work in many national and international conferences and has
published papers in various international journals including BMJ Global Health, BMJ
Open, Journal of Biosocial Science, Asian Population Studies, and Journal of Human
Development and Capabilities.
Sripad Motiram is an Associate Professor at the University of Massachusetts,

Boston. He works in the areas of development economics, welfare economics, politi-
cal economy, and microeconomics. His recent research focuses on urbanization,
inequality, and poverty in developing countries, particularly India. He has recently
co-edited a volume on the Political Economy of Contemporary India published
by Cambridge University Press. His articles have been published in journals like
Review of Development Economics, Economic Development and Cultural Change,
and Economic and Political Weekly.
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Contents
Preface v
About the Editors-in-Chief vii
About the Editorsix
About the Contributorsxi
Introduction xvii
Chapter 1 BRICS: The Political Economy of Non-Inclusive Growth 1

Biju Paul Abraham
Chapter 2
Future of BRICS as an Economic Block: Does Macroeconomic
Heterogeneity and Unshared Political Mandate Stand in
Its Way? 19
Partha Ray
Chapter 3
China’s and India’s Economic Performance After the Financial
Crisis: A Comparative Analysis 39
R. Nagaraj
Chapter 4
Inter-Group Disparities in Growing Economies: India Among
the BRICS 61
Achin Chakraborty and Simantini Mukhopadhyay
Chapter 5
Inequality and Poverty in India and Brazil Since the 1990s:
A Comparative Analysis 79
Sripad Motiram
xv
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xvi Contents
Chapter 6 Sustainable Development and BRICS: Unity Amid Diversity? 99

Anup Sinha
Chapter 7
Universal Health Coverage in BRICS: What India Can Learn
from the BRICS Experience? 113
Indrani Gupta and Samik Chowdhury
Chapter 8 Inclusive Finance: India Through the BRICS Lens 143

Saibal Ghosh
Chapter 9 Gender, Education, and Programma Bolsa Familia in Brazil 197

Aparajita Gangopadhyay
Index217
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Introduction
The rapid growth of emerging economies, and their increasing global influence, has
been one of the major features of the post-Cold War world. Countries in Asia, such
as China and India, have ‘reemerged’ to become two of the largest economies of the
world, reclaiming positions they held before the advent of the colonial era brought
about their relative economic decline. Brazil in Latin America and South Africa
have also achieved high rates of economic growth that have made them significant
players in the global economy. Russia has emerged from the ruins of the former
Soviet Union and reestablished itself as a major oil producer and political power on
the international stage.
Despite these changes, the nature of international political and economic
institutions such as the UN, the IMF, and the World Bank has not changed sig-
nificantly to reflect the new realities. This slow pace of reform, and the reluctance
of major global powers, particularly those belonging to the G7, to restructure
international institutions has forced newly emerging economies to act collectively to
bring about this change. The formation of the BRICS group of countries, comprising
Brazil, Russia, India, China, and South Africa as a counterweight to groupings such
as the G7 is one such attempt.
While the genesis of the BRICS group may be sought in an internal report
of Goldman Sachs in 2001, over the last decade and half the group has emerged
as an economic powerhouse. After all, the BRICS group of countries together
comprise 2.8 billion people — over 40% of the world’s population — cover more
than a quarter of the world’s land area, and currently account for about 25% of
the world’s GDP. The five countries are undoubtedly major powers regionally, and
at least one of them, viz., China, globally. But how effective are they as a group?
Will they be able to work together effectively and achieve for themselves a more
influential position in world affairs? Or will they be constrained in their ability
to act abroad by domestic instability arising from growth that is iniquitous and
xvii
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xviii Introduction
non-inclusive? What are the different dimensions of such non-inclusivity? Will

the dominance of China be counterproductive in making the group effective?
Without any claim of completeness, these are some of the questions that this
volume seeks to address.
The chapters in this volume discuss economic growth in the BRICS countries
with a view to understanding whether the nature of their growth is such that it is
broad-based and leads to equitable economic/social outcomes. The objective of the
volume is neither to look at each economy exhaustively across different dimensions
of growth, nor do we have a standard template to do so. What we do is analyze
specific dimensions of growth in these five economies that constrain their ability
to act effectively and cohesively in international affairs. The nine chapters in this
volume address different aspects of economic growth in the five economies. The first
two chapters discuss the political-economy of growth in BRICS and the economic
heterogeneity of the five countries that constrain their ability to act as a cohesive
international group. The third chapter discusses the growth experience of India and
China after the global financial crisis. Two chapters analyze inequality and inter-
group disparities in growth in BRICS economies. The remaining four chapters look
at different socio-economic dimensions of growth, such as sustainable development,
health care, financial inclusion, and social welfare programs.
In Chapter 1, Biju Paul Abraham looks at the economic development of the
five BRICS economies from a political-economy perspective. He argues that while
all five economies are increasing their share of the global economy, their ability to
act externally is undermined by domestic weaknesses, in particular by iniquitous
and non-inclusive growth. Such growth could potentially undermine both political
and economic stability. The chapter analyzes three aspects of economic growth in
the five countries that leads to this non-inclusiveness — their initial growth paths,
development of socio-economic inequity in growth outcomes, and corruption and
political capture of economic policy. It argues that in four of the five economies, the
initial growth paths were such that they excluded large sections of these countries’
populations from effective participation in the growth process. The only excep-
tion was China, where, in the initial decade of Communist Party rule, there was
significant growth in food production in rural areas, as well as improvements in
health care and education through the commune system. However, both in China
and the other four BRICS countries the evolution of growth policy was such that it
fostered non-inclusive growth, which deepened socio-economic inequities. Policy
reform in all five countries is hindered by the capture of economic policy by elites
and that makes it unlikely that there will be significant improvement in equity
and inclusivity in growth. The chapter concludes that this failure to reform means
that all five countries are vulnerable to domestic instability. This is likely to have a
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Introduction xix
significant impact on their ability to act cohesively as a group and constrain their
international influence.
Tracing the formation of the block in the original 2001 report of Goldman
Sachs Global Economics, titled Building Better Global Economic BRICs, Partha Ray
in Chapter 2 notes that the BRICS has emerged against the backdrop of the global
financial crisis. In deciphering the economic momentum, the chapter takes a look at
trajectories of various macroeconomic variables (such as economic size, monetary,
fiscal, and exchange rate policies) across the BRICS countries. His analysis indicates
that while the Goldman Sachs report has stood the test of time and generated a
movement toward economic cooperation among these nations, there are issues of
heterogeneity among the constituent countries. Illustratively, in terms of economic
size when measured as per GDP (at PPP) in 2017, as against a USD 23 trillion econ-
omy of China, India stood at USD 9.5 trillion, the sizes of Russia, Brazil, and South
Africa stood at USD 4 trillion, USD 3.2 trillion, and USD 766 billion, respectively.
There are differences in their underlying economic models as well. While Chinese
growth seems to have been driven primarily by exports and investment, in case of
India, growth momentum has been dominated by domestic consumption; for Russia
and Brazil, coil and commodities played leading roles. Such differing economic
models got reflected in their economic policy configuration. In foreign trade, while
BRICS accounts for roughly 20% of global exports and 15% of global imports,
China alone accounts for nearly 14% of global exports and 10% of global imports.
Notwithstanding the establishment of the New Development Bank (popularly called
the BRICS Bank) in 2015, he concludes that the Chinese dominance coupled with
lack of any binding force of history, politics or shared identity could come in the
way of effective emergence of BRICS as a block.
In dealing specifically with China’s and India’s economic performance after the
financial crisis, Nagaraj notes that economic growth in China and India (together
accounting for about 18% of global GDP in 2015) decelerated sharply after the
financial crisis. As the export-led boom for both the economies ended in 2008, they
are now faced with a severe demand constraint. China’s sustained rise in investment
and decelerating output growth has led to a fall in productivity; India witnessed
a sharp decline in investment demand. Both the countries are now saddled with
bloated private corporate debt due to credit binge during the boom. Nagaraj feels
that if China can avoid (potential) debt deflation and a bubble-like situation in the
property market, reorient investment toward social infrastructure, and consumption,
economic growth could possibly turn around. On the contrary, India probably needs
to revive demand by stepping up public infrastructure investment to release critical
supply bottlenecks, redirect bank credit for agriculture and small- and medium-sized
enterprises to stimulate agriculture growth and labor-intensive manufacturing.
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xx Introduction
China’s constraints to shift the policies appear more political-economic; India

perhaps needs to reconfigure the fiscal rules for a more active role of the state in
promoting investment. While there was recovery until 2011–2012 on account of
monetary and fiscal stimulus, and resumption of capital inflows on account of the
QE, with modest recovery of developed economies, the widely asked question is this:
Can these giant domestic-oriented economies help revive global economic growth?
Achin Chakraborty and Simantini Mukhopadhyay look into a particular aspect
of inclusive growth, namely inequality between groups, rather than interpersonal
inequality. In the process, they reexamine some of the issues in the measurement of
inter-group inequality and tried to relate changing interpersonal and inter-group
inequality to the fact that some of these countries have been growing at a much
faster rate compared to others in the developed world. They find that while in the
1970s and the 1980s Brazil was seen as a case of ‘un-aimed opulence’, since 1988
when Brazil made the transition to a regime of democratic governance, a number of
radical pro-poor measures have been undertaken, which have had visible impacts
on the overall inequality as well as inequality between the racial groups. In India,
by contrast, overall inequality has increased in the past two decades, and the recent
evidence suggests that the degree of inequality in the space of income and wealth is
no less in India than that in China and the Latin American high-inequality countries.
Brazil’s transition from ‘un-aimed opulence’ to a more inclusive approach based on
active social policies can be a lesson for India, which is clearly faltering in the task of
making the growth process inclusive. They note that while there are some similarities
among the three countries — India, China, and Brazil — in their policies over the
last 15 years (such as attaining macroeconomic stability associated with high growth
and low inflation), there are big differences in the roles played by policies directly
aimed at redistributing incomes. Looking more closely at their histories and policy
regimes, they arrive at the conclusion that Brazil and India seem to have more in
common with each other than with China.
In comparing inequality and poverty in India and Brazil since the early 1990’s,
Sripad Motiram noted that while India has been one of the fastest growing countries
in the world, disparities have increased on many dimensions and progress on the
front of poverty reduction has been disappointing. While growth in Brazil has been
less impressive, considerable progress has been made in the reduction of inequality
and poverty. After documenting findings on inequality and poverty from India and
Brazil, this chapter discusses the explanations for these findings. The chapter argues
that a crucial difference between the two countries has been in the implementation
of public policies, particularly policies oriented toward the social sector.
Anup Sinha in his chapter compares the performance of the five BRICS
countries on three parameters of sustainable development, economic, social, and
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Introduction xxi
environmental growth. He concludes that the five countries vary, not just in terms of
their geo-political and socio-cultural features, but also in terms of performance on
sustainable development indicators. He considers studies of their performance on
the basis of three indicators — basic needs, well-being, and opportunities — which
reveal that Brazil is the best performer among the BRICS countries followed by
Russia, China, and South Africa. India performs the worst on these parameters.
The analysis reveals that per capita income and levels of development are closely
linked to sustainable development in BRICS economies. China and India which face
major challenges of increasing growth rates and lifting people out of poverty ignore
environmental concerns, while relatively more prosperous countries like Brazil
are more willing to make voluntary efforts to ensure more sustainable growth. He
concludes that none of the BRICS economies is likely to target sustainable growth as
a priority, since they are more preoccupied with increasing economic growth rates.
This choice, he feels, is likely to have a domestic political impact in these countries,
with those affected by the negative impact of maintaining high growth rates like to
raise their voices and protest at the nature of economic policies.
Indrani Gupta and Samik Chowdhury consider Universal Health Coverage in
the BRICS economies. They attribute improvements in universal health coverage to
two factors — the time period for which health has been a priority sector for national
governments and the level of public funding for health care. China and Brazil have
significantly improved health coverage by increasing spending. China, however,
has performed better than Brazil because it has focused on health care for a longer
period of time and also devoted significant resources to improve universal health
coverage. Though Brazil has significantly improved health coverage, focused atten-
tion and greater resources for health care is a more recent phenomena in Brazil, and
this is reflected in much poorer health indicators when compared to China. Though
Russia has benefited from the health care infrastructure created under Communist
rule, significant improvement in health indicators has not been observed in recent
years, when compared to resources invested. This, the authors feel, can be attributed
to the lack of focus on health care reform during the transition from Communist to
democratic rule. South Africa has also not been able to reduce differences in cover-
age between the rich white and relatively poorer black population in the country.
This is again attributable to lack of sufficient funding and lack of targeted reform.
The authors conclude that India, the worst performer among the five countries, can
improve access to health care only by increasing funding and extensive reform of
existing health care programs.
Saibal Ghosh has analyzed a particular aspect of inclusive growth, namely
financial inclusion with particular reference to India. In a fairly detailed empirical
analysis, Ghosh finds that at a broader plane, driven by manifold developments,
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xxii Introduction
including technological advancements, there has been a marked progress in financial

inclusion in the BRICS that can be traced in both economic and structural factors.
To examine financial inclusion in the BRICS countries, he takes three main indica-
tors, viz., ownership of account at a financial institution, the saving behavior at a
formal financial institution, and the use of bank credit. He finds that between 2011
and 2017, most of these measures have witnessed a discernible rise. Illustratively,
66% of Chinese individuals had a formal finance account in 2011, which increased
to nearly 80% by 2014 and has remained at that level. Only 56% of individuals in
Brazil and 54% in South Africa had a formal account in 2011, which increased by
nearly 14 percentage points in both countries in 2017. The situation is very much
different as regards the use of formal credit. Just around 14% of the individuals in
Russia reported having obtained formal credit in the past year in 2017 (the highest in
the sample), the global average being 11%. In India, only 7% of individuals borrowed
from a financial institution in 2017, the lowest among the BRICS. In his econometric
analysis, he finds that GDP per capita and domestic credit to private sector turn out
to be significant determinants of access to formal finance.
In the final chapter of the volume, Aparajita Gangopadhyay considers the case of
social programs in Brazil, particularly the Bolsa Familia program, a conditional cash
transfer program, which is often held out as an example of successful government
intervention to reduce inequality and improve health and education outcomes. She
finds that though the amounts transferred are low, it has guaranteed a minimum
quality of life for its recipients. However, it has not been successful at moving them
out of poverty. She also points to a major factor that has enabled the program to con-
tinue despite the dominance of elites in the Brazilian political system. The amount of
resources that is spent on these programs does not threaten the entitlements of the
rich or the middle class, and this reduces elite opposition to such resource transfers.
She concludes that unless the political system evolves to such an extent that this elite
dominance of the Brazilian political system can be effectively countered, the future
of these programs will always remain uncertain.
The chapters in this volume discuss different dimensions of the political
economy, economic growth, and its inclusivity across various matrices. While being
exuberant about the growth potential of these countries, all the chapters remain
skeptical about two aspects of this growth process — the internal cohesiveness of
BRICS as an economic and political bloc, and concerns regarding the inclusiveness
of the growth process. How these five countries resolve their internal contraction in
future years remains to be seen. Unless they address the various challenges described
in the chapters, the effectiveness of BRICS as a bloc will be seriously constrained.
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CHAPTER 1
BRICS: The Political Economy

of Non-Inclusive Growth
Biju Paul Abraham
Public Policy and Management Group,

Indian Institute of Management Calcutta, Kolkata, India
Introduction
The growth of the BRICS group of emerging economies (comprising of Brazil,
Russia, India, China, and South Africa) as a power bloc, similar to the G7 and G20,
in global politics has been one of the most important geo-political developments
in international affairs since the 2008 financial crisis. At first glance, these five
countries might seem unlikely partners in a bloc. They vary widely in geographi-
cal size, size of their GDPs, internal political systems, and international influence
(Armijo, 2007: 8–9). However, what seems to unite them is their belief that they are
‘punching below their weight’ in international affairs and are thus being prevented
from playing a more influential role globally by existing great powers, particularly
the G7 countries, which remain deeply reluctant to accommodate emerging powers
meaningfully in the existing international system. This new bloc could be seen as
a symbol of assertion by countries who feel marginalized in global politics despite
their strong economic growth and future potential. The group’s declared objective
of reshaping the existing international political and economic order, by significantly
reforming the ‘Bretton Woods’ institutions, is undoubtedly an attempt to challenge
the dominance of the G7 in international political and economic affairs (Hou, 2014).
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2 B. P. Abraham
While the declared objective of reshaping the international political and

economic order might seem a natural demand from a group of countries whose
economic growth has made them a significant part of the global economy, the
achievement of these objectives depends on four critical factors — maintenance of
relatively higher rates of economic growth when compared to the G7 economies,
much deeper integration into the international economic and trading system,
greater cohesion among members of the bloc in both articulating and pressing their
demands for significant reform of international economic institutions, and finally
domestic political stability that would underpin greater assertiveness abroad.
This chapter will consider the last of these critical factors from a political
economy perspective. It will be argued that while all five economies are undoubtedly
becoming more significant in the global economy, their ability to exert greater global
influence is undermined by critical domestic fault lines. In particular, the political
economy of growth in these countries has led to inequitable and non-inclusive growth
that could potentially undermine both political and economic stability. This is likely
to have a significant impact on their ability to act cohesively as a group and bring
about significant changes in the way international institutions and agencies work.
The chapter is divided into five parts. The first part looks at the emergence of
BRICS within the context of international relations theory. It will be argued that rather
than neo-realist approaches, neo-classical realist approaches which consider domestic
factors that could undermine states’ ability to act decisively abroad might be better at
explaining both the emergence and future potential of BRICS. This is followed by a
discussion of three aspects of the growth strategy followed by the BRICS countries
which make their growth non-inclusive. These three aspects are critical for understand-
ing both their current status and the hurdles to them fulfilling long-term potential.
First, the initial growth paths that all five countries followed is discussed to explain the
different contexts within which each of these five emerging economies have developed.
The persisting social and economic inequalities in all five countries is discussed next.
The third part discusses the impact of corruption and political capture on growth
policies and how they hinder radical shifts in growth policy. A concluding section will
consider the impact of non-inclusive growth on domestic stability and its impact on
the ability of BRICS countries to play a more influential role in international affairs.
Domestic Stability and International Influence

International relations theory has for long tried to explain differences in state
behavior within the international political system. The attempt has been to identify
factors that would explain differences in the behavior of states.
Three approaches have dominated such analysis. The first is Innenpolitik which
seeks to explain state behavior as being affected by domestic political ideology as
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BRICS: The Political Economy of Non-Inclusive Growth 3
well as domestic economic and social interest groups (Zakaria, 1992). This approach,
for example, suggests that democracies will not go to war with each other because
democratic states are primarily interested in peace and stability (Ray, 1998).
However, the major criticism of this approach has been that it does not explain why
countries with similar domestic systems behave differently abroad (Rose, 1998: 148).
The second analytical approach, neo-realism, postulates that international
relations is an ‘autonomous realm’ where states leverage their capabilities to seek
greater recognition and influence within the international system (Koslowski and
Kratochwil, 1994). This approach does not concern itself with domestic politics
in these countries or its impact on their domestic stability. Neo-realists argue that
in an international system that is anarchic, states make choices in terms of their
international behavior based on their belief that they can survive only if they follow
patterns of behavior set by existing major powers. The limitations of this approach
was most evident in neo-realist analyses of the Soviet Union’s behavior before its
collapse in 1991 which failed to take into account the impact of domestic economic
decline and could not foresee its longer term implications for Soviet influence abroad
and also global power politics (Wohlforth, 2001).
The third approach, neo-classical realism, while accepting that emerging states
do try to imitate existing great powers to increase their influence in world affairs
also takes into account domestic factors which might constrain emerging powers
in their ability to achieve their goals (Ziegler, 2014: 592–593). Rather than see state
behavior either as a function of domestic politics, or a single-minded pursuit of
greater international influence, neo-classical realists see state behavior as being
affected by relative changes in power. With increasing relative power comes a desire
to gain more influence internationally. When relative power decreases, the desire
for greater international influence is concomitantly reduced (Rose, 1998: 151–152).
This implies that any decline in relative power, caused by domestic factors, could
seriously undermine a states’ ability to seek greater power and influence abroad.
Most studies of the emergence BRICS have focused on a neo-realist approach
to understanding their motivations in joining hands to gain for themselves a more
influential role in international affairs. Seen from this perspective, the attempt by
the BRICS countries to bring about changes in the international system is based on
their belief that their economic strength vis-à-vis the G7 had increased since the
2008 financial crisis and therefore necessities their recognition as major powers
in the international system through structural reform of existing international
institutions — the UN, the IMF and the World Bank (Stuenkel, 2014; Hou, 2014).
However, it is also apparent that BRICS countries have not been very successful
in molding the direction of international debate on reform of international political
institutions in a manner that is favorable to them. Reform of the UN continues to
remain stalled, the reform of the IMFs quota system still does not adequately reflect
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4 B. P. Abraham
current realities in terms of economic strength, and the Doha Round of Trade
negotiations at the WTO remain deadlocked with differences between developed and
developing countries over the future direction of trade reform. Domestic problems
such as inequality, corruption, lack of skills, and environmental issues mean that the
BRICS countries seem destined to focus more on internal problems rather than on
cohesive action abroad. In the words of one analyst, BRICS seems more of ‘marriage
of convenience’ than a lasting relationship (Kralikova, 2014).
Seen from this perspective, the path to economic growth chosen by the five
BRICS countries and the impact these choices have on internal stability and regime
legitimacy will determine the ability of the BRICS bloc to exert enough influence
internationally to bring about significant changes in the international system.
Initial Growth Paths

Identifying initial growth paths for the five countries that comprise BRICS can be
difficult given their diverse histories. However, it is relatively easier to establish the
dates of regime changes that led to significant changes in growth policies that impact
the nature and quality of economic growth at present. India and China gained the
ability to develop autarkic development policy in the 1940s — India when it gained
independence from Britain in 1947 and China when the Communist Party captured
power in 1949. Democratic governments were established in Brazil in 1985, in Russia
in 1991, and in South Africa in 1994. Economic policy under new regimes in all
five countries were designed with the objective of achieving rapid and equitable
economic growth. However, the outcome of policy has been varied, and these could
be traced back to the initial growth strategies adopted by these five countries.
India and China demonstrate most vividly how differences in initial growth
paths can affect the nature and quality of long-term economic growth. Both were
predominantly agrarian economies with an abundance of agricultural labor as well
as a rapidly growing population. Both countries realized that the long-term chal-
lenge was to develop both agriculture as well as industries that would absorb the
surplus labor which was unemployed or underemployed in agriculture. However,
differences in political ideologies played a key role in the two countries choosing
differing paths to achieve the same economic objectives. China under the Chinese
Communist Party placed considerable emphasis on effective land reform and rural
development through workers communes. The landlords and ‘middle peasants’ were
almost completely eliminated, and their land distributed among landless laborers.
The land was farmed by agricultural communes which, at least in the initial decade,
addressed some of the critical problems that China faced. Collective land owner-
ship by the communes, an effective taxation system, local mechanisms to share
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agricultural machinery, development of irrigation systems, and the setting up of

rural banks were all critical in substantially increasing agricultural production in
China in the late 1940s and early 1950s (Studwell, 2013: 14–16). However, it was not
just in agricultural production that the communes played a positive developmental
role. They ensured limited industrialization within the commune and provided
basic health care, education, and food security (Saith, 2008: 735). The significant
progress that China achieved in literacy levels, life expectancy, and other social
indicators of development can be traced back to the development of communes
which provided basic social security and created the conditions for later social and
economic development. Significant poverty reduction had happened by the time the
Chinese economy began to liberalize in the 1980s (Bardhan, 2006: 2). The high levels
of literacy and life expectancy also laid the foundations of rapid economic growth
and industrialization from the 1980s onward, when China abolished the communes,
allowed private ownership of land, and liberalized foreign investment. The roots of
the ‘Chinese miracle’ after Deng Xiao Ping opened up the Chinese economy in 1978
is traceable to policy in the late 1940s and early 1950s.
It needs to be recognized that China’s initial path to economic development was
the consequence of a revolution in China that brought a Communist Party, com-
mitted to elimination of landlordism and capitalist modes of production, to power.
China’s relative homogeneity, provided by the dominance of the Han Chinese in its
population, also ensured domestic stability (Saith, 2008: 726). In India, by contrast,
the government that came to power in 1947, though democratic and socialist in
orientation, was dominated by urban elites, indigenous industrialists, and rural
landowners. It placed greater emphasis on developing agriculture by incentivizing
higher levels of production within existing rural land-ownership structures and
in rapid industrialization through a process of planned economic development
(Patnaik, 2000). The economy was also affected by violence that accompanied the
partition of the sub-continent into two states, India and Pakistan. Land reform
measures, though enacted were never implemented, except in a few regions,
because of strong organized resistance from rural landlords who were often local
leaders of the ruling Congress Party (Kaviraj, 2000: 50). Lack of access to economic
resources meant that the vast majority of rural landless peasants were dependent
on the rural landowning classes for their survival. This dependence reduced their
ability to influence government policy through the democratic political process.
It is ironic that this failure of government to ensure basic levels of social security
and economic empowerment happened in a liberal democracy which held regular
elections, and relatively greater success was achieved in China under a Communist
regime that was not faced with the prospect of loss of power through democratic
processes.
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6 B. P. Abraham
Brazil and South Africa transitioned to democratic governments under condi-

tions that were far more peaceful and orderly than either India or China. However,
initial economic policies in both countries were unsuccessful in laying the founda-
tions of strong, inclusive growth. The 1985 transition to a democratic government
in Brazil happened in the midst of an economic crisis. Military governments which
had ruled Brazil between 1964 and 1985 had ensured rapid economic growth in the
1967–1973 period. However, when growth slowed as a consequence of the oil price
shock of 1973 the government responded by resorting to heavy borrowing abroad.
This contributed to a debt crisis and a decline in economic growth in the 1980s that
finally forced the military to hand over power to a civilian democratic government.
The restoration of democratic government posed unique challenges to Brazilian
policymakers. Groups that felt alienated from the government under military rule
began to demand greater resources and attention, and in a democratic environment,
this led to populist responses (Kingstone, 2009: 108). ‘Social inclusion’ of groups that
had been marginalized under military government was given priority over stable
economic growth (Alston et al., 2016: 208). The use of economic stabilization plans
for garnering greater political support was successful electorally for the ruling party
in mid-term elections in 1987, but it had a catastrophic impact on the economy with
inflation touching astronomical levels by the end of the 1980s. The government
began to monetize fiscal deficits to fulfil populist promises, and by the early 1990s
annual inflation rates was 3,000% (Sweetwood, 2002: 54–56). It required a period
of economic austerity and the ‘Real Plan’ of 1994 to stabilize the economy and put
it on a more stable growth path. This decade of lost growth was to have an impact
on the quality of growth in later decades as well.
The nature of transition from apartheid government to a stable democracy in
1994 marked South Africa as one of the few countries that had managed change
peacefully. While economic inequalities brought about by apartheid policies had
impoverished large sections of the black population in South Africa, the newly
democratic country had the benefit of strong institutions, such as an independent
judiciary, an efficient civil service, and a modern industry with good infrastructure.
However, what it lacked was good local-level ‘micro-institutions’ that could convert
political freedom to economic opportunity. While good macroeconomic manage-
ment stabilized the economy, it was not accompanied by a push for economic and
social development in black townships. This failure was partly the consequence of a
leadership vacuum that was created in black townships when many of the more capa-
ble local workers and activists left the townships to take up jobs in the provincial and
national governments (Mangcu, 2012: 482). The focus of the national government
was more at the macro-level on the policy of Black Economic Empowerment (BEE)
meant to give the black population a share in ownership of firms and employment.
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This increased the representation of blacks at top levels of enterprises, but, in the
absence of significant investments in education, did little to secure stable and well-
paying jobs for black workers (Horwitz and Jain, 2011).
Though considered a developed state, Russia inherited an economy from the
former Soviet Union that was suffering from problems of underinvestment, inef-
ficiency, and relative backwardness when compared not just with the more advanced
Western economies but also with many of the more dynamic East Asian economies
(Robinson, 2011: 9). Initial economic policy in the post-Soviet era was based on
stabilization of the domestic economy by cutting budget and trade deficits, remov-
ing price controls, liberalizing the internal market by throwing it open to foreign
competition, and privatizing state-owned enterprises. However, the process was
deeply flawed and led to a period of economic crisis and declining economic output
that lasted for the rest of the 1990s. The successor state to the USSR, which was the
second largest economy in the world when it collapsed in 1991, became the twelfth
largest by 1998 (Intriligator, 1998: 242–243). Economic decline was accompanied
by a steep decline in living standards and growing criminalization of the economy
(Zhuravskaya, 2007).
Persisting Social and Economic Inequalities

Countries that suffer from socio-economic inequalities face two significant chal-
lenges. The first is to raise total income levels of the population, and the second
to ensure that it is more equitably distributed. The first is achieved by attaining
high rates of economic growth and the second by socio-economic interventions,
including taxation and welfare spending, that ensures that income is more equitably
distributed. The varied paths that the five countries have followed is reflected in any
current evaluations of the nature of economic growth and socio-economic outcomes
in the five BRICS countries (Ardichvili et al., 2012; Arrighi et al., 2010). India, Brazil,
South Africa, and Russia, despite having enjoyed periods of high-economic growth,
continue to experience persistent inequality in income distribution. China, which
was relatively more successful in achieving both high growth and greater income
equality in the early years of its development, has seen inequality rise since the
liberalization of the economy in 1978.
The Global Inequality Report which tracks inequality around the world by
measuring the percentage of national income accruing to the top 10% of the popula-
tion of each country ranks BRICS countries as being among the most unequal in the
world. In India and Brazil, the top 10% get 55% of total national income. In Russia,
it is 46% and in China 41% (World Inequality Lab, 2018: 9). In South Africa, the
top 10% accounted for 66% of national income (World Inequalities Report, 2018:
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8 B. P. Abraham
146). All five countries have seen this disparity increase since 1990. The growth in
inequality comes despite the fact that three of these countries, India, South Africa,
and Brazil, have programs specifically aimed at more inclusive growth and a more
equitable distribution of national wealth. Equality is one of the core tenets of the
ruling Communist Party in China. Russia too sees reduction of inequality as a policy
goal and has reformed its wage regulation to ensure greater distribution of wealth
(World Economic Forum, 2017).
India presents a paradox as far as equitable growth is concerned. Since liber-
alization in 1991, it has enjoyed very high rates of growth. The GDP has increased
more than nine-fold from US $275 billion in 1991 to US $2.3 trillion (Turaga et al.,
2018: 26). During this period, the government has enacted legislations to imple-
ment a number of welfare schemes to ensure greater growth equity. It has also
implemented programs for providing employment, food security, and access to
education. India also put in place, soon after Independence, a program of reserva-
tions (affirmative action) that is intended to overcome the inequities imposed on
large sections of its population because of rigidities in its caste system. Yet, both
in terms of wealth distribution and in terms of social indicators, its performance
has been poor compared to many developing nations at similar stages of develop-
ment, in some respects even worse than Least Developed Countries (LDCs) in
sub-Saharan Africa. In health care, while there have been improvements in health
indicators, inequalities between different regions has increased since 2001 (Goli and
Arokiasamy, 2014: 162). In 2014, the UNDP Gender Equality Study ranked India
135 out of 187 countries, In addition to barriers to social mobility imposed by the
caste system, social exclusion and low levels of human development seem to be major
detriments to inclusive growth (Onis, 2016).
There are two major problems that negatively affect the effectiveness of welfare
programs in India. The first is lack of adequate resources. India spends only about
8% of its GDP on social services, which is not just behind OECD countries which
spend 20%, but also behind countries like Brazil and South Africa which spend more
about 16% of their GDP on social welfare schemes. The second is the inefficiencies
in implementation with actual income transfers to those targeting being much less
than funds allocated because of very high transaction costs (Jha, 2014).
South Africa reflects a similar pattern. Efforts to remove inequalities in growth
inherited from the apartheid government have been hampered by inefficiencies in
implementation of equitable growth policies and also by lack of resources. When the
new democratic government came to power in South Africa in 1994, it had the task
of reducing inequalities in a country that was deeply divided, not just economically
but also spatially. The black townships were separated from white areas, and these
townships lacked the basic resources and infrastructure needed to ensure a basic
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minimum standard of living. Thus, the problem of equitable development was not
just related to equitable distribution of wealth but also to balanced development of
regions which had developed unequally (McDonald and Piesse, 1999). However,
equitable growth policies that were enacted by the government primarily focused
on overcoming inequalities brought about by decades of white apartheid government
by bringing more blacks into employment and firm ownership through the BEE
program. The Broad-Based Black Economic Empowerment (BBBEE) legislation
emphasized black participation in ownership and management, increasing the
number of blacks in the workforce and increasing indirect benefits to the black
population through preferences in procurement contracts and enterprise develop-
ment (Horwitz and Jain, 2011: 302). What was required, but was lacking, was greater
investment in sectors that would have increased productivity in the economy, such
as education and health care, better physical infrastructure, and access by providing
rural workers with access to productive land. South Africa continues to perform very
poorly in most socio-economic indicators. Income inequality remains high, with 60%
of the population taking in 10% of national income. Lack of access to basic educa-
tion hampers access to higher education, with only 1.5% of the population having a
degree in 2012. Land distribution remains skewed, with 8% of the population owning
70% of the land, after almost two decades of post-apartheid governments (Omilola
and Akanabi, 2014: 566). Poverty continues to remain widespread, with inequality
hindering poverty reduction efforts across South Africa (Barros and Gupta, 2017: 29).
Brazil is unique among BRICS countries in terms of both improvements in
income equality and socioeconomic indicators since 2000. Brazil was the only BRICS
country which saw its Gini coefficient decrease between 1990 and 2010. The other
four BRICS nations saw income inequality increase with an increase in economic
growth. Brazil also saw the steepest decline in infant mortality (69%) and child
mortality (71%) among the BRICS countries (Mujica et al., 2014: 406).
This divergence from other BRICS countries is not surprising given significant
shifts in political power that occurred in Brazil since 2000. The government of
President Luiz Inácio Lula da Silva of the Brazilian Workers Party, which came to
power in 2003, was left-wing in orientation. It laid considerable stress on reducing
income inequality and implemented income transfer schemes to help poor Brazilians
get access to health care and education. Brazil also spends about 23.7% of its GDP on
direct transfers, pensions, education, and health (Lustig, 2016: 26), one of the highest
among BRICS countries, and the impact of this is reflected in sharp improvements
in socio-economic indicators that Brazil has demonstrated.
The income transfer schemes of the Brazilian government had two significant
effects on the quality of economic growth. Some of the schemes, such as the Bolsa
Famila scheme, were conditional transfer schemes which meant that the money
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10 B. P. Abraham
transferred was used only for intended objectives — to ensure that expectant moth-
ers visited antenatal clinics regularly and ensured that their children were properly
vaccinated and attended school regularly. Other schemes such as the Continued
Provision Benefits were unconditional transfer schemes which increased purchasing
power among the poor. There is evidence to prove that such transfers led to increased
private sector investment in underdeveloped regions of Brazil, particularly the
North-East (Limoeiro, 2015). Brazil under the Workers Party government provides
evidence, just as the Chinese case in the late 1940s and early 1950s, that targeted
government intervention can have a significant positive impact on income equality
and socio-economic development. However, as the experience of China demon-
strates, such interventions can lose momentum as a result of significant changes in
government policy leading to a reversal of policy gains.
China, despite its significant achievements in poverty reduction, gender equal-
ity, health care, and education, has experienced higher levels of inequality since
beginning the process of liberalization and opening of its economy to Foreign
Direct Investment (FDI). Household income inequalities have increased to levels
which are considered ‘moderately high’ by international standards (Li and Sicular,
2014: 35). The disparities increased after the government established control after
the Tiananmen Square uprising and focused on achieving rapid economic growth.
Rising prosperity was not equally shared, and a society that was once largely egalitar-
ian in character began to experience higher levels of inequality comparable to many
of its East Asian neighbors. The increase in disparities was largely brought about
by price reforms which increased costs to consumers. Reduction of government
funding for health care and education, and introduction of user fees and higher
charges has meant increasing disparity in access to them, especially in rural regions
(Saith, 2008: 749). A second factor was the shift from a focus on agriculture to
development of industries both through support for state-owned enterprises and
FDI-led coastal industrial development. These coastal provinces were given benefits
by way of tax concessions, regional autonomy, and the right to lease and sell land to
foreign nations (Yao and Zhu, 1998: 146–148). The coastal development policies and
the opening up to FDI in the 1990s led to mass migration of workers from rural to
urban coastal cities, leading to greater inter-provincial inequalities in growth (Wei,
1999: 51). Inland regions were not given similar benefits. Provinces which are open
to international trade and have seen increases in investment have also seen increases
in income inequality (Chen, 2015).
Russia experienced a period of rapid economic growth after recovering from the
initial phase of economic and social disruption caused by the collapse of the Soviet
Union. This enabled the country to reduce poverty, which had sharply increased
during the initial phase of the transition. However, one of the major problems that
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Russia has faced in ensuring greater equity in growth outcomes has been persistent,
and increasing, income inequality (Benini and Czyzewski, 2007: 131–36). This makes
poverty reduction and improvement in other social indicators dependent on govern-
ment social sector spending. High commodity prices since 2000 helped the Russian
government to increase spending on ‘populist’ social welfare programs aimed at
increasing domestic political support. However, income inequality has increased,
and in recent years when economic recession has forced cutbacks in government
spending, there has been an increase in people living below the poverty line (Popova
et al., 2018: 3). Wealth inequality has also increased quite substantially with levels of
concentration of wealth increasing between 1995 and 2015 (Novokmet et al., 2017:
39). The share of national income of the top 50% of the population has increased
to over 80% today from 70% in 1989. The share of the top 1% has increased to 45%
(World Inequalities Report, 2018: 113).
Corruption and Political Capture

All five BRICS economies show high levels of income inequality and poor socio-
economic indicators despite periods of high growth. In China, Brazil, India,
and South Africa, income inequalities and levels of development are such that
government intervention and subsidies are required to ensure maintenance of even
minimum living standards among the poorest sections of society. Even Russia,
relatively the most developed of the five economies with the highest per capita
income, is impacted negatively by reductions in government spending on social
welfare programs in times of economic crisis. What explains the high levels of
income inequality and the failure of all five countries to ensure more sustained and
inclusive economic growth? While there are undoubtedly country-specific reasons
for this failure, there is one factor that is common to all five countries — high levels
of corruption and political capture of government policy which impedes both the
effectiveness and inclusiveness of growth. Political capture and corruption lead to
non-inclusive growth in diverse ways. Political capture often leads to governments
taking decisions which benefit a few firms or individuals to common detriment. It
often leads to significant loss of government revenue as natural resources or assets
are transferred at less than its true value. Corruption leads to inefficiencies in imple-
mentation of social welfare programs and raises social welfare costs significantly.
In India, the nature of state–society relations is such that personal relationships,
particularly those related to caste, kinship, and social class, play an important role in
government decision-making (McCartney and Roy, 2016: 589). This often leads to
political capture of government policy that has a detrimental impact on the quality
of growth. An analysis of the rise in the number of billionaires in India illustrates
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12 B. P. Abraham
the effect of political capture on income inequality. The number of billionaires in

India increased from two in the mid-1990s to 46 in 2012. Of these, 20 billionaires
controlled firms involved in sectors considered ‘rent-thick’. Between 2003 and 2008,
the share of national wealth held by these billionaires increased from 0.9% to 9.9%.
These sectors included mining, infrastructure, telecom, media, and real estate, all of
which were heavily regulated. Most of these billionaires were from social groups who
were traditionally associated with business and none from groups which were at the
lower end of the caste spectrum (Gandhi and Walton, 2012: 10–11). These are also
some of the sectors where numerous instances of corruption in award of licenses,
which led to significant revenue losses, have been detected by the national auditor.
Corruption has also been one of the biggest problems which has hindered effective
implementation of social welfare programs in India, especially in the provision of
subsidized food (Jha, 2014: 228).
China, because of Communist Party rule, has not developed formal legal and
market institutions that limit government power through review by an independent
judiciary. Personal relationships, the guanxi, still play a major role in government
decision-making process, making policy vulnerable to political capture (Li, 2008).
With the advent of economic reform, the instances of ‘high-level’ corruption spread
to higher levels of the Chinese government while corruption at lower levels remained
more or less then same as before (Wedeman, 2004: 920–921). The process of liber-
alization and opening up also brought it with the rise of ‘princelings’ in China, the
children and sons/daughters-in-law of high ranking officials who came to occupy
high positions in the Chinese Communist Party (Choi, 2012: 971). The current
anti-corruption campaign by the Chinese President Xi Jinping has stressed the
importance of the drive to achieve economic objectives. It was driven in large part
by a realization that public perceptions of corruption were affecting the legitimacy
of the Communist Party. A PEW Poll in 2016 found that corruption ranked higher
in the public’s concerns than income inequality, crime, food adulteration, and pol-
lution (Chen and Zong, 2017). The anti-corruption campaign has resulted in 9% of
the membership of the Central Committee of the Chinese Communist Party being
detained on corruption charges between December 2012 and October 2017. More
than 150 top-ranking officials in the bureaucracy, military, and private-sector busi-
nesses have lost their jobs because of the campaign (Mitchell, 2017). In particular,
the campaign is likely to help small entrepreneurs increase their investment since
corruption is often one of the biggest hurdles to additional investment for them
(Gianetti et al., 2017).
Brazil and South Africa are countries that have long suffered from political
capture of economic policy by the elites. Brazil — even when it was modernizing
and industrializing — still remained dominated by feudal structures centered on
b3508_V1_Ch01.indd 12 11-02-2020 13:00:02

agricultural landownership. The political culture that developed enabled elites to

influence the direction of economic policy and maintain their dominance over the
poor. Prolonged periods of military rule and the lack of an effective party system
meant that the political system was always dominated by the elites (Wilkin, 2008: 99).
The mechanisms of economic policymaking that developed revolved around distri-
bution of patronage. This did not change significantly even when military rule was
replaced by democratic governments. Federal fund transfers to the regions, especially
to the poorest communities, remain prone to such capture, further skewing resource
distribution and entrenching income inequalities (Mendes, 2005: 440–441). Though
the Brazilian Workers Party of President Lula came to power promising an end to
elite domination and corruption, it too soon found itself mired in accusations of
corruption in government programs and procurement contracts (Michener and
Pereira, 2016: 480). Given the fragmented nature of the Brazilian Parliament, the
government could effectively function only by distribution of government patronage.
The impeachment of Lula’s successor as President, Dilma Rousseff, and Lula’s own
imprisonment on corruption charges illustrate the enduring power of such patron-
age systems in Brazil. The collapse of the Brazilian Workers Party government has
also raised concerns about the continuation of many of the social welfare programs
that they had implemented. It also illustrates how persistence of political capture can
destabilize governments and threaten even successfully functioning social welfare
programs.
South Africa inherited a deeply flawed economic system when it became a
democratic country in 1994. Poverty was widespread, society was deeply divided,
and the government bureaucracy and infrastructure that the new government inher-
ited were designed to serve only a minority of the population (Pillay, 2004: 588).
Policies enacted to address the problems of economic inequality afflicting the
country further entrenched rather than reduced inequality. Government policy
initiatives stressed a system of racial preferences in ownership and employment
that easily lent itself to political capture. An increase in black ownership of firms
was achieved through debt-funded purchases of equity by a small number of black
entrepreneurs (Handley, 2005: 220). Many of these entrepreneurs were closely con-
nected to the ruling African National Congress. In the absence of sufficient number
of blacks with the requisite skills to take advantage of the opportunities provided
by BEE legislation, the positive impact has been more in terms of number of blacks
in senior board positions rather than in employment. The major benefits in terms
of BEE legislation have accrued to a newly emerging ‘black middle class’, which has
benefited from increased opportunities for employment, rather than to poorer blacks
(Horwitz and Jain, 2011: 314; Iheduru, 2004).
b3508_V1_Ch01.indd 13 11-02-2020 13:00:02

14 B. P. Abraham
Russia presents a broadly similar picture. The privatization of state enterprises

by the government of Boris Yeltsin following breakup of the Soviet Union was
marked by the sell-off of state assets cheaply to crony capitalists. About 34 of the
84 Russian billionaires earned their wealth through the privatization in the 1990s
(Triesman, 2016: 238). This period of ‘chaotic capitalism’ was replaced by the
‘state-led capitalism’ of Yeltsin’s successor, President Vladimir Putin, under whom
many of these assets were renationalized. Putin stressed political centralization,
seeing nationalization of previous privatized assets as a means of reasserting state
control and eliminating the political threat posed by the ‘Russian Oligarchs’ who
had b enefited from the privatization. Centralization of political power has not
resulted in an increase in the efficiency of state agencies. On the contrary, it has led
to persistence of corruption and continuing low levels of efficiency in the govern-
ment (Robinson, 2011: 13–14).
Conclusion
It is not surprising that the BRICS economies would seek to play a much greater role
in global politics, given the rapid growth of their economies, and their increasing
share of global economic output. With international political and economic institu-
tions still structured to reflect immediate post-World War II economic realities, it is
also clear that international reform of these institutions is long overdue. The ability
of the BRICS economies to influence the G7 to initiate these reforms is, however,
constrained both by differences between them and also by their domestic vulner-
abilities. While all the five BRICS economies have seen periods of rapid economic
growth, continuing income inequalities and the non-inclusive nature of their
growth make them susceptible to domestic instability. Rising economic inequality
could undermine domestic stability, further reducing their ability to work together
internationally. The effectiveness of BRICS as an emerging power bloc might be
more apparent than real.
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CHAPTER 2
Future of BRICS as an Economic Block:

Does Macroeconomic Heterogeneity and
Unshared Political Mandate Stand in Its Way?
Partha Ray
Economics Group, Indian Institute of Management Calcutta,

Kolkata, India
Introduction
Economic blocks are normally the outcome of certain historical and political
process.1 One can discern the birth of G7 in the pre-Cold War days when France,
Italy, Japan, the UK, the US, and West Germany formed the Group of Six in 1975
and Canada joined the following year. Effectively, it emerged as a forum for the non-
Communist powers to address pressing economic concerns such as inflation and
the recession sparked by the OPEC oil crisis and dominated by Cold War politics.
Or take the case of the euro area, which was born in the aftermath of the Cold War
perhaps motivated by a search to question the hegemony of the US dollar. From that
standpoint the genesis of the BRIC block, having emanated from the research report
of a global investment bank, was indeed unique.
Research reports of global investment banks are perhaps more known for their
topicality and contemporary policy relevance rather than analytical rigor. After all,
these reports are primarily meant for assistance of their clients’ investment strategy.
1
The term economic block is used generically — hence, it includes regional trade blocks,
customs unions, or currency areas.
19
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20 P. Ray
Thus, it may not be an exaggeration to say that these reports are typically known to
have a relatively short shelf life. But when the Goldman Sachs Global Economics
Paper No.: 66, titled Building Better Global Economic BRICs, was brought forth by the
London-based Goldman Sachs Economic Research Group (led by Jim O’Neill, M.D.
& Head of Global Economic Research) in 2001, the authors of the report also might
not have realized that they were about to create history. From the vantage point of
2018, it seems that the report has stood the test of time and generated enormous
research output and a movement toward economic cooperation among these nations.
Initially the focus of the analysis was confined to four economies, viz., Brazil,
Russia, India, and China — thus giving birth to the acronym of ‘BRIC’ economies. In
projecting future GDP trends in BRIC economies, the Goldman Sachs 2001 report
considered a number of scenarios.2 The report arrived at a startling result: “Over the
next 10 years, the weight of the BRICs and especially China in world GDP will grow,
raising important issues about the global economic impact of fiscal and monetary
policy in the BRICs” (Goldman Sachs, 2001). In particular, in all four scenarios, the
relative weight of the BRICs rises from 8.0% at present (in current USD) to 14.2%,
or from 23.3% to 27.0%, converting at purchasing power parity (PPP). Subsequently,
in a sequel to the original report, Goldman Sachs argued: “If things go right, the
BRICs could become a very important source of new global spending in the not
too distant future. … India’s economy, for instance, could be larger than Japan’s
by 2032, and China’s larger than the US by 2041 (and larger than everyone else as
early as 2016). The BRICs economies taken together could be larger than the G6 by
2039” (Goldman Sachs, 2003). Such discussion has been the subject of a number of
academic studies as well.3
Interestingly, the discussion was not limited to academic research or research
reports of investment banks. In due course, BRIC economies emerged as a formal
group after the meeting of the leaders of Russia, India, and China on the margins
of G8-Outreach Summit in July 2006 in St. Petersburg. The grouping was formal-
ized during the first meeting of BRIC Foreign Ministers on the margins of the UN
General Assembly in New York in September 2006 (Government of India, 2016).
2
The following four scenarios were considered in particular: (a) future nominal GDP pro-
jections are converted at end-2000 exchange rates; (b) future nominal GDP projections are
converted using their fair value exchange rate estimates; (c) future nominals are converted
at end-2000 exchange rates, but assume that the 2001/2002 nominal GDP paths continue
for 10 years; and (d) projected GDP trends are arrived at using PPP conversions rather than
estimated end-2011 current USDs.
3
See for example, Baracuhy (2012) and Glosny (2010). Even Goldman Sachs came out with
a volume on articles on BRICS and other emerging economies; see Goldman Sachs (2007).
b3508_V1_Ch02.indd 20 11-02-2020 13:00:30

Future of BRICS as an Economic Block 21
Later, in the aftermath of the global financial crisis, the BRICS block got a shot in
the arm and the first BRIC Summit was held in Yekaterinburg, Russia, in June 2009.
Subsequently, the foreign ministers of BRIC nations, at their meeting in New York in
September 2010, agreed that South Africa may be invited to join BRIC. Accordingly,
the group of ‘BRIC countries’ was extended as ‘BRICS countries’ so as to include
South Africa, and South Africa formally joined the group in April 2011.
More recently, following the report from the Finance Ministers at the fifth BRICS
summit in Durban (2013), the BRICS leaders signed the Agreement establishing the
New Development Bank (NDB) (formerly referred to as the BRICS Development
Bank) which is expected to, ‘strengthen cooperation among BRICS and will sup-
plement the efforts of multilateral and regional financial institutions for global
development, thus contributing to collective commitments for achieving the goal
of strong, sustainable and balanced growth’.
Are all these developments pointers toward the emergence of BRICS as a new
kid on the global economic power block? Are these five countries going to pose
a threat to G7 economies in the years to come? This chapter argues that there are
ample dampeners in the way of this expectation turning out to be true. While such a
possible outcome could be reasoned out using differing viewpoints, viz., economic,
social, or political, my focus here is somewhat limited. In particular, I will argue that
the differences in macroeconomic structure and economic policies could make the
BRICS block (and not necessarily individual countries) fragile with little cohesion.
The rest of the chapter is organized as follows. First, I look into select metrics
of economic importance of BRICS economies. This is followed by a discussion of
three aspects of macroeconomic policies, viz., monetary, fiscal, and exchange rate.
The trade pattern of the BRICS block is discussed next. Before I conclude, the case
and future of economic cooperation between these countries is explored.
Size of the BRICS Economies and Their Growth Trajectory

The first element of heterogeneity is perhaps reflected in the differing sizes of the
BRICS countries. In 2017 in terms of GDP (at PPP), as against the US $23 trillion
economy of China, India stood at US $9.5 trillion, and Brazil, Russia, and South
Africa stood at US $3.2 trillion, US $4 trillion, and US $766 billion, respectively.
Put differently, in 2017, the size of the Chinese economy was roughly 2.5 times
of that of the Indian economy, while it was nearly 7 times and 6 times for Brazil
and Russia, respectively, and for the South African economy it was 30 times! This
is more effectively demonstrated in these countries’ share in global GDP at PPP
(Figure 1(a)), where China clearly, as the biggest economy in the world (in terms
of PPP), emerged much bigger vis-à-vis other partners. Moreover, as China has
b3508_V1_Ch02.indd 21 11-02-2020 13:00:30

22 P. Ray
20 50
45
15
% of Global GDP
40
% of Global GDP
10 35
30
5
25
0 20
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
15
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
Brazil China
India Russia
G7 BRICS
South Africa
(a) Share of BRICS in Global GDP (b) Share of BRICS versus G7 in Global GDP
Figure 1: Share of the BRICS economies and G7 block in global GDP (at PPP).
Source: Calculated from World Economic Outlook Database, April 2018, IMF.
surpassed the US economy in terms of share in global GDP (at PPP), the share of
BRICS has surpassed that of the G7 economies (Figure 1(b)). Thus, by 2016, BRICS
emerged as the biggest economic power in terms of share in global GDP (at PPP).4
Of course, this does not mean that the extent of well-being across these econo-
mies is so different. Differing population size is the key to understand trends in per
capita GDP. After all, in 2017 in terms of population, China (1.4 billion) and India
(1.3 billion) were far above Brazil (207 million), Russia (144 million), and South
Africa (57 million). Thus, effectively, the economic sizes of the BRICS countries are
at variance with average well-being (Figure 2). Illustratively, in 2017, in terms of
per capita GDP, Russia at nearly US $28,000 was way above Brazil (US $15,600) or
China (US $16,660), while India’s per capita GDP at nearly US $7,000 was the lowest.
The growth performance of the BRICS countries also differed considerably.
Notwithstanding recent deceleration, China grew at about 10% for nearly 25 years.
Indian growth too has registered a steady acceleration since the initiation of its
reform program in the early 1990s. After tumbling in the 1990s, Russian growth
experienced a roller roaster movement in sync with petroleum prices. Brazil and
South Africa too experienced lower growth rates in comparison with China and
India (Table 1).
More importantly, the economic drivers varied grossly across these economies.
While over the years China has become a global manufacturing hub, India’s growth
has been driven primarily by domestic consumption and its vibrant services sector.
4
At market exchange rate, the sizes of the BRICS economies are, however, much smaller.
b3508_V1_Ch02.indd 22 11-02-2020 13:00:31

30,000
25,000
20,000
US$
15,000
10,000
5,000
2010
2011
2012
2013
2014
2015
2016
2017
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
1990
1991
1992
1993
1994
1995
1996
1997
1998
Brazil China India Russia South Africa
Figure 2: Per capita GDP of the BRICS economies (US$).

Table 1: Decadal growth rates of the BRICS economies (%).

1990–1999 1.8 10.0 5.7 –3.8 1.4
2000–2009 3.4 10.3 6.9 5.5 3.6
2010–2017 1.4 7.9 7.3 1.8 2.0
Russian growth has been the outcome of its oil and gas opulence; in the case of
Brazil and South Africa, commodities played major roles. The BRICS report of the
Government of India has aptly noted,
“Each of the BRICS countries has multiple and different attributes and thus each
has a huge potential to develop. Brazil is extremely rich in resources such as coffee,
soybeans, sugar cane, iron ore, and crude oil, with around 60 million hectares of
arable land (just 7 per cent of its land area) but with an agricultural area of 31.2 per
cent of the total land area. Russia is noted for its massive deposits of oil, natural gas,
and minerals. India is a strong service provider with a rising manufacturing base,
while China is seen as the manufacturing workshop of the world with a highly
skilled workforce and relatively low wage costs. South Africa is … . It is a medium-
sized country with a total land area of slightly more than 1.2 million sq. km and
around 12 per cent arable land area. It is the world’s largest producer of platinum
and chromium and holds the world’s largest known reserves of manganese, plati-
num group metals, chromium, vanadium, and alumino-silicates” (Government of
India, 2012: 3).
b3508_V1_Ch02.indd 23 11-02-2020 13:00:32

24 P. Ray
But do these differences in economic size, population, and growth drivers get
reflected in their macroeconomic policies?
Macroeconomic Policies in BRICS

We discuss the macroeconomic policies under the three broad heads of monetary
policy, exchange rate regime, and fiscal policy.
Monetary Policies
At the current juncture, out of the five BRICS countries, three economies (viz.,
Brazil, India, and South Africa) have adopted inflation targeting as the framework
of the monetary policy. This is in sync with the global fashion of adoption of infla-
tion targeting in order to rein in inflation and fiscal profligacy as well as to assert a
certain degree of independence of central banks. While for the most part, the Bank
of Russia has had several goals for its policy, there was a gradual shift toward full-
fledged inflation targeting since early 2015, abandoning the exchange rate targets
in November 2014 (Korhonen and Nuutilainen, 2017). China is perhaps the only
country in the block which continues to adopt a multiple indicator approach but an
implicit exchange rate targeting (Table 2).
In the context of monetary policy, a discussion on inflation is in order. There
are several difficulties in comparing inflation rates across the BRICS countries. First,
inflation numbers for the Russian Federation are not available till 1993. Second, both
Brazil and Russia had experienced astronomical inflation rates during the 1990s.
Illustratively, during 1990–1995 Brazilian inflation rate was 1,400%, and it started
tapering off since the mid-1990s; similarly, inflation for Russia during the 1990s was
more than 200%. In fact, Brazil had yearly inflation rates well above 1,000% from
1989 (except 1991) until the Real Plan stabilized inflationary momentum (Garcia
et al., 2019).5 While such a hyperinflationary trend in Brazil was reflective of unbri-
dled monetary expansion, in the case of Russia, removal of long-maintained price
controls and dismantling of the erstwhile socialist regime seemed to have played
major roles. Figure 3 plots inflation rates for India, China, and South Africa since
1991 and for Russia and Brazil since 2000. It appears that at least in the recent past
inflation did not turn out to be a major problem in these countries.
5
In 1994, the Real Plan introduced a new currency, the Real. One real was valued at 2750
Cruzeiros Reais (the short-lived currency of Brazil between August 1, 1993 and June 30,
1994). The plan imposed restrictions on fiscal and monetary expansions and introduced
price freezing.
b3508_V1_Ch02.indd 24 11-02-2020 13:00:32

b3508_V1_Ch02.indd 25
“6.5x9.75”
Table 2: Monetary policy framework in BRICS countries.
Monetary Policy
Country Framework Key Monetary Policy Tools Objectives
Brazil Inflation targeting Interest rate (Selic rate): interest rate on overnight Inflation — point target of 4.5% with ± 2
interbank loans collateralized on federal debt percentage points for headline CPI.
instruments.
b3508_V1 BRICS: The Quest for Inclusive Growth

South Africa Inflation targeting Key policy rate: repurchase rate Inflation target range for headline CPI of 3–6%
combined with financial stability objective.
India Inflation targeting Repo rate and CRR In May 2016, the Indian Central Bank adopted
the flexible inflation targeting framework
whereby the Central Bank is mandated
to target 4% Consumer Price Index (CPI)
inflation from August 5, 2016 to March 31,
2021 with ± 2% band.
China Multiple indicators Reserve requirement ratio, Central Bank base Maintain the stability of the value of the

approach interest rate, rediscounting, Central Bank currency and thereby promote economic
lending, open market operation, and other growth.
policy instruments specified by the State
Council
Russia No single target Refinancing rate, Reserve requirements To ensure stability of national currency.
indicator
• Inflation (CPI) target
for a 3-year period
• Managing floating
exchange rate regime
Source: Khundrakpam (2012) and respective central banks’ websites.
11-02-2020 13:00:32
26 P. Ray
30
25
20
15
10
5
0
−5
2015
2016
2017
2010
2011
2012
2013
2014
2005
2006
2007
2008
2009
2000
2001
2002
2003
2004
1995
1996
1997
1998
1999
1990
1991
1992
1993
1994
China India South Africa Russia Brazil
Figure 3: Consumer price inflation in the BRICS economies (% per annum).
Table 3: Exchange rate and monetary policy regimes in BRICS countries.
Monetary Policy
Monetary Aggregate Inflation Targeting
Exchange Rate Arrangements Target Framework Framework
Other Managed Arrangement China —
Floating Exchange Rate — India, Brazil, South Africa
Free Floating — Russia
Source: IMF (2016).
Exchange Rate Regime
A related issue in this context is the choice of exchange rate regime in these countries.
The IMF’s exchange rate classification system groups India, South Africa, and Brazil
under the floating exchange rate regime while that of the Russian ruble is branded
as free floating (Table 3). Although Chinese RMB is classified by the IMF as ‘other
managed arrangement’, China has been seen widely as a currency manipulator by
the global community. A recent report of the US Treasury commented:
“(A)fter engaging in one-way, large-scale intervention to resist appreciation of the

renminbi (RMB) for a decade, China’s recent intervention in foreign exchange
markets, tightened capital controls, and increased discretion over setting the daily
fixing rate of the RMB have likely prevented a disorderly currency depreciation
that would have had negative consequences for the United States, China, and the
global economy” (US Treasury, 2017).
Exchange rate movements are reflected in Table 4. While both South African
rand, and Indian rupee showed two-way movements, the Russian ruble has bouts
b3508_V1_Ch02.indd 26 11-02-2020 13:00:33

Table 4: Exchange rate movements and current account balances in BRICS countries.
Exchange Rate Depreciation (−)/
Appreciation (+) (Percentage Variation Current Account Deficit (−)/
Over the Previous Year) Surplus (+) (% of GDP)
South South
China Brazil India Africa Russia China Brazil India Africa Russia
2000 0.0 −0.5 −4.2 −11.9 −12.5 1.7 −3.8 −0.6 −0.1 16.3
2001 0.0 −22.2 −4.7 −19.3 −3.6 1.3 −4.2 0.7 0.3 9.7
2002 0.0 −19.5 −2.9 −18.1 −7.0 2.4 −1.6 1.2 0.9 7.4
2003 0.0 −5.0 4.4 39.2 2.1 2.6 0.7 2.3 −0.8 7.2
2004 0.0 5.1 2.9 17.3 6.5 3.5 1.7 −0.3 −2.8 9.2
2005 1.0 20.2 2.9 1.3 1.9 5.7 1.5 −1.2 −3.1 10.3
2006 2.8 12.0 −2.6 −6.0 4.0 8.4 1.2 −1.0 −4.5 8.7
2007 4.8 11.7 9.7 −4.0 6.3 9.9 0.0 −1.3 −5.4 5.2
2008 9.5 6.2 −5.1 −14.6 2.9 9.1 −1.8 −2.3 −5.5 5.8
2009 1.7 −8.3 −10.2 −1.9 −21.7 4.8 −1.6 −2.8 −2.7 3.8
2010 0.9 13.5 5.9 15.0 4.5 3.9 −3.4 −2.8 −1.5 4.1
2011 4.7 5.2 −2.0 0.9 3.4 1.8 −2.9 −4.3 −2.2 4.7
2012 2.4 −14.4 −12.7 −11.6 −4.7 2.5 −3.0 −4.8 −5.1 3.2
2013 2.6 −9.4 −8.8 −15.0 −3.1 1.5 −3.0 −1.7 −5.9 1.5
2014 −0.2 −8.3 −4.1 −11.1 −17.0 2.2 −4.2 −1.3 −5.3 2.8
2015 −1.9 −29.5 −4.9 −15.1 −37.0 2.7 −3.3 −1.1 −4.4 5.0
2016 −5.4 −4.2 −4.5 −13.1 −9.1 1.8 −1.3 −0.7 −3.3 2.0
2017 −1.7 9.2 3.2 10.4 14.9 1.4 −0.5 −2.0 −2.3 2.6
Note: For the purpose of calculating exchange rate movements, exchange rates have been calculated with the home
country’s currency as the numeraire; e.g. in calculating Yuan’s exchange rate, it is expressed as USD per one RMB.
Source: Calculated from exchange rate data available from Federal Reserve Bank of St. Louis (https://fred.
stlouisfed.org).
of instability. Of late, Brazilian real too showed volatility. The Chinese yuan after
remaining almost constant for a long time started appreciating slightly during
2006–2013; since then, however, it has stared depreciating.
A key difference between these economies is the extent of current account bal-
ance. Three countries, viz., Brazil, India, and South Africa, have been consistently
having current account deficit since 2008. China and Russia, on the contrary, have
been experiencing current account surplus. Of course, in case of Russia the extent
of current account surplus has come down in tune with fall in oil prices. In the case
of China too, the amount of surplus has come down since the global financial crisis
b3508_V1_Ch02.indd 27 11-02-2020 13:00:33

28 P. Ray
and associated efforts toward ‘rebalancing’, whereby China has been repeatedly
counseled by the global community to increase its consumption and reduce savings.6
Former US Fed Chairman Ben Bernanke is the chief exponent of this view, who in
a lecture delivered Chinese Academy of Social Sciences in 2006 commented,
“China today is running substantial trade and current account surpluses.

These external surpluses are caused in part by China’s remarkably high saving
rate. Because China›s national saving rate is even higher than its rate of domestic
investment, the country has excess funds to lend in the global capital m arket; it
follows from the balance-of-payments accounts that China›s net lending abroad
(or its acquisition of foreign assets) equals the country›s current account sur-
plus. A large portion of this lending finances foreigners› purchases of Chinese net
exports (the trade surplus). High household saving and the corresponding low
level of consumption in China contribute to the trade surplus by depressing the
demand for imports and by forcing domestic firms to look abroad for markets”
(Bernanke, 2006).
This has profound implications for the trade cooperation among the BRICS
countries.
Fiscal Policies
The heterogeneity is reflected in fiscal positions of the governments as well.

Depending on oil prices, Russia has been the only economy in this block that had
experienced fiscal surplus during the first of the first decade of 2000s (Figure 4(a)).
The fiscal situation seemed to have deteriorated both in South Africa and China;
India continued to remain at the bottom in terms of general government borrowing.
While public debt has not been a cause of concern in all these five countries, due
to presence of petroleum resources Russian debt is least among them (Figure 4(b)).
In terms of a timeline, Brazilian fiscal policy is often tracked in terms a shift from a
6
Since the macroeconomic identity can be written as, Y = C + I + G + X − M (where Y =
GDP, C = Consumption; I = Investment; G = Government Consumption; X = Exports,
and I = Imports), one would get, (Y − C − G) − I = X − M, so that it can be written as, S − I =
X − M (where S = Savings). Since at a global level, aggregate exports have to be equal to
global exports, current account balance at the global level has to be zero. By the mid-2000s,
while the US and a few European countries had substantial current account deficits, this
was matched by the surpluses of number of Asian economies led by China and oil export-
ers. See Ray and Nag (2017) for details.
b3508_V1_Ch02.indd 28 11-02-2020 13:00:33

10
100
5
80
0 60
–5 40
–10 20
–15 0
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2000
2002
2004
2006
2008
2010
2012
2014
2016
Brazil China Brazil China
India Russia India Russia
South Africa South Africa
(a) General government net (b) General government gross

lending/borrowing (% of GDP) debt (% of GDP)
Figure 4: Fiscal position in the BRICS economies.

period of fiscal consolidation (1999–2005) to a phase of fiscal expansion (2005–2014)

(Octavio and Gobetti, 2017).
Foreign Trade
What has been the pattern of foreign trade in these countries? We have already seen
that in terms of current account balance, China and Russia are the surplus countries
while India, Brazil, and South Africa are deficit ones. Thus, there is a differing degree
of openness among these countries. Illustratively, while the rank of China in terms
of merchandise exports is first, the closest next Russia is at seventh (Table 5).
As a group, while BRICS account for roughly one-fifth of global exports, its
share in global imports is about 15%. But China alone accounts for nearly 14% of
global exports and 10% of global imports. This disproportionately higher share
of China in global trade has its implications. Who are the major trading partners
of BRICS? More importantly, among the BRICS countries while China appears to
be among the top five export destinations for all the BRICS countries no other BRIC
countries are in the top five export destination, implying that trade relations among
the BRICS countries is hugely dominated by China (Table 6). Interestingly, China
also dominates for all the countries’ import destination as well (including China,
because of round tripping from Hong Kong). This dominance of China in trade
relations almost makes the BRICS group as a sub-loop where all the four countries
are in one group and China in another. In fact, there are adverse implications of this
b3508_V1_Ch02.indd 29 11-02-2020 13:00:33

30 P. Ray
Table 5: Trade profile of BRICS economies.

China Russia Brazil India South Africa
1. Some trade indicators
Current account balance (% GDP, 2016) 1.8 1.7 −1.3 −0.9 −3.3
Trade per capita (USD, 2014–2016) 1,601 2,622 1,192 369 1,813
Trade (% GDP, 2014–2016) 20.0 24.0 12.1 22.4 31.2
2. Rank in world trade, 2016: Exports
Merchandise 1 17 20 25 38
excluding intra-EU trade 1 11 14 18 24
Commercial services 5 25 8 32 49
3. Rank in world trade, 2016: Imports
Merchandise 2 14 28 24 34
Commercial services 2 10 21 18 46
Source: World Trade Organisation, available at http://stat.wto.org/CountryProfile/WSDBCountryPFView.aspx.
supremacy of China even within the BRICS block. Illustratively, there are reports of
India banning select items of Chinese imports and Chinese officials terming such
acts as reflective of Indian jingoism (Hindustan Times, 2016).
But why does the trade performance differ so much across the BRICS nations?
What are the drivers of export growth? Econometric analysis of growth drivers
across emerging market economies tends to focus on the following variables: (i) real
effective exchange rate change; (ii) growth of real non-oil goods import demand of
trading partners; (iii) change in most favored nations’ (MFN) tariff rates; (iv) inflow
of foreign direct investment (FDI); (v) change in export diversification; (vi) change
in manufacturing export quality; (vii) number of documents required for export;
and (viii) change in good market efficiency score (IMF, 2017). In terms of export
diversification, while China, India, and South Africa are fairly diversified, expectedly,
exports of Russia and Brazil are far more concentrated.
In terms of the determinants mentioned above, the situation in China seems
to be grossly distinct from its other BRICS partners. In fact, Chinese trade is com-
parable to other advanced countries — its share in global exports is higher than
countries like the US, Japan, France, and Germany. Mathai et al. (2016) have noted:
“China has become the world’s largest trading nation and the center of the global
supply chain. A negligible player in global trade just a few decades ago, China
b3508_V1_Ch02.indd 30 11-02-2020 13:00:34

Table 6: Major trading partners of BRICS.

Share in Country’s
Top 5 Export Share in Country’s Top 5 Import Imports, % in
Destinations Exports, % in 2015 Sources 2015
Brazil World 100.0 World 100.0
China 18.6 China 17.9
USA 12.7 USA 15.6
Argentina 6.7 Germany 6.1
Netherlands 5.3 Argentina 6.0
Germany 2.7 Korea 3.2
Russia World 100.0 World 100.0
Netherlands 11.7 China 19.3
China 8.2 Germany 10.4
Italy 4.7 USA 6.3
Germany 4.6 Belarus 4.4
Japan 4.2 Italy 4.3
India World 100.0 World 100.0
USA 15.2 China 15.8
UAE 11.3 Saudi Arabia 5.5
Hong Kong 4.6 Switzerland 5.4
China 3.6 USA 5.2
UK 3.4 UAE 5.2
China World 100.0 World 100.0
USA 18.0 Korea 10.4
Hong Kong 14.6 USA 9.0
Japan 6.0 Chinese Taipei 8.6
Korea 4.4 China* 8.6
Germany 3.0 Japan 8.5
South Africa World 100.0 World 100.0
China 8.3 China 18.3
USA 7.5 Germany 11.8
Germany 6.1 USA 6.7
Namibia 5.5 Nigeria 5.8
Botswana 5.4 India 5.0
Notes: *China’s imports from China can be explained by the reimport activity. It is related to processing trade. More
than 90% of China’s imports from China are produced in China, exported to Hong Kong, and then reimported to
China. 73% of products reimported are used as inward processing materials and 70% are imported by the province
of Guangdong, due to the geographic and logistic convenience of Guangdong with Hong Kong. Goods entering for
processing trade are exempted from import duties. The business management of multinational enterprises and their
distribution centres are often based in Hong Kong.
Source: Exim Bank (2016).
b3508_V1_Ch02.indd 31 11-02-2020 13:00:34

32 P. Ray
now accounts for more than 12 percent of world exports and 10 per cent of world
imports, more than any other single country. Nominal exports grew by 17 per cent
on average each year from 1990 to 2012, receiving a particular boost after China’s
accession to the World Trade Organization in 2001. … China is now the world’s
largest importer of intermediate goods and the anchor of the global supply chain
trade. The number of China’s major trading partners rose several-fold over the
same period …, and as trade grew, so also did foreign direct investment, of which
China is now the world’s largest recipient (as well as an increasingly important
source)” (Mathai et al., 2016: 6).
Future of BRICS Cooperation

Having discussed the extent of heterogeneity among the BRICS, this penultimate
section looks at the possible vistas of economic cooperation among BRICS.
BRICS summit declarations and official statements are normally euphoric and
may not reflect compulsions of reality. Illustratively, the Government of India
(2012) enumerated 13 fields of economic cooperation among the BRICS block;
these include the following: (i) Intra-BRICS Trade and Investment Cooperation;
(ii) Cooperation in Infrastructure Financing; (iii) Industrial Development
and Cooperation; (iv) Cooperation in Transportation; (v) Cooperation in
Food Security; (vi) Cooperation in Technical Education; (vii) Cooperation in
Financial Market Development; (viii) Cooperation in Research and Development;
(ix) Cooperation in Area of Culture and Tourism; (x) Cooperation in International
Issues; (xi) Cooperation in Energy Security; (xii) Cooperation to Build Effective
Institutions; and (xiii) International Development Bank for Fostering South–South
Investment. While the list may appear to be quite exhaustive — the current experi-
ence tends to indicate differing degrees of success across these fields. Also, some of
the developments in this regard seem to be symbolic in nature. Illustratively, there is
a BRICS business council that was established in March 2013 during the Fifth BRICS
Summit held in Durban, South Africa. The BRICS Business Council aims to facilitate
cooperation between the five countries in various sectors as well as promote trade
and industry amongst them. In its Report on the BRICS Business Council Meeting
in India (held during October 12–16, 2016), the Council went over the board and
recommended 16 areas of cooperation.7 Many of these areas have, till date, remained
more of intention rather than of actualization.
7
The areas of cooperation include: (1) BRICS Social Security Agreements; (2) Financial
Framework for Sustainable Development; (3) BRICS Infrastructure Project Preparation
Facility; (4) Local Capital Markets development through NDB; (5) BRICS Angels Network
b3508_V1_Ch02.indd 32 11-02-2020 13:00:34

In fact, in terms of specific instances, there are a number of issues between China
and Russia on the one hand and between China and India on the other that could
hinder the future of BRICS cooperation. It has been rightly observed that
“Strategic tensions between the Asian BRICS are a key factor in their relations.
As Chinese economic and strategic influence increases in Asia and further afield,
especially Africa and South America, these strains might increase. … Tensions
also exist in China’s relations with India, partly due to growing competition
between them for economic influence in states such as Nepal, Burma/Myanmar,
and Cambodia. … Some Indian security analysts perceive a growing Chinese
encirclement of India through its maritime influence in the region. … These
tensions persist despite their involvement in the Shanghai Cooperation Organi
zation, of which China and Russia are full members and India has observer status.
Another key contemporary issue on which the BRICS have different priorities is
climate Russia. … Russia has diverged from the other BRICS on key aspects of
‘post-Kyoto Protocol’ environmental negotiations in calling for binding targets for
everyone, something the Chinese and Indian governments in particular reject”
(Luckhurst, 2013: 257).8
Hence for the sake of tractability and focus, this section will discuss a specific
issue where there has been some apparent progress, viz., the NDB.
The NDB was conceived in the fourth BRICS Summit in New Delhi (2012).
Later, following the report from the finance ministers at the fifth BRICS summit
in Durban (2013), the leaders agreed on the establishment of the NDB, and finally
during the sixth BRICS Summit in Fortaleza (2014), an agreement establishing the
NDB was signed. In the Fortaleza Declaration, the leaders stressed, “The NDB will
strengthen cooperation among BRICS and will supplement the efforts of multilateral
and regional financial institutions for global development, thus contributing to
(for start-ups); (6) BRICS Trade Settlement in Local Currencies; (7) BRICS coopera-
tion in Agri-business; (8) BRICS cooperation in Energy; (9) BRICS cooperation in Skill
Development; (10) BRICS cooperation in Manufacturing; (11) BRICS Trade Facilitation
Network; (12) BRICS Standardization Research Framework; (13) Advisory role and
observer status for BRICS Business Council in NDB; (14) Cooperation and Facilitation of
intra-BRICS Investments; (15) BRICS Rating Agency; and (16) New International Payment
Card System for BRICS.
8
Lieber (2014) was more critical and went on to say, “Other than where clear and unam-
biguous self-interest is present, the actual record of BRICS cooperation on a wide range of
international collective action problems thus provides limited evidence of positive engage-
ment let alone embracing of a ‘stake-holder’ role” (p. 143).
b3508_V1_Ch02.indd 33 11-02-2020 13:00:34

34 P. Ray
collective commitments for achieving the goal of strong, sustainable and balanced
growth”.
There are at least two distinct ways in which one can see the genesis and rationale
of the NDB. The first is clearly the dissatisfaction of the emerging economies with
the governance of the Bretton Woods institutions, like the International Monetary
Fund and the Word Bank, which are quota based as the quotas tended to represent
an archaic global economic power structure.9 All the BRICS countries on different
occasions have expressed dissatisfaction over the state of governance and demo-
cratic deficit in the IMF or World Bank. Second, and more importantly, almost all
the BRICS countries have accumulated some foreign exchange reserves which are
normally investment in safe assets, primarily in the form of securities of governments
issuing four major currencies, US dollar, Euro, Pound Sterling, and Japanese Yen
(of course, led by US dollar). Admittedly, there are differences in foreign exchange
holding across BRICS countries. Illustratively, in 2017, China’s forex reserves stood
at nearly US $3 trillion, as compared with little more than US $360 billion for both
Brazil and Russia, little over US $400 billion for India, and around US $42 billion
in South Africa. More interestingly, all these countries have experienced a steep
and steady rise in their forex reserves from the late 1990s to early 2010s (Figure 5).
The presence of such substantial forex reserves made the establishment of the NDB
comparatively easier for the BRICS countries.
Thus, the NDB was founded during the fifth BRICS Summit in Fortaleza in
July 2014 and launched on July 7, 2015, with an initial authorized capital of US
$100 billion and initial subscribed capital of US $50 billion, equally shared among
founding members. Effectively, it functioned as a multilateral development bank
with the “objective of financing infrastructure and sustainable development projects
in BRICS and other emerging economies and developing countries, complementing
the efforts of multilateral and regional financial institutions toward global growth
and development”.10 The professed main objectives of NDB operations are four-fold:
(a) fostering development of member countries; (b) supporting economic growth;
(c) promoting competitiveness and facilitating job creation; and (d) building a
knowledge-sharing platform among developing countries. In 2016–2017, the NDB
approved loans involving financial assistance of over US $3.4 billion for projects in
the areas of green and renewable energy, transportation, water sanitation, irriga-
tion, and other areas. In particular, as per the NDB’s General Strategy Document,
9
In fact, notwithstanding their economic status, quotas of the BRICS block in the IMF have
been meagre and stood as per the current quota formula as follows: Brazil 2.32%, China
6.41%, India 2.76%; Russia 2.71%; South Africa 0.64%; see https://www.imf.org/external/
np/sec/memdir/members.aspx for details.
10
https://www.ndb.int/about-us/essence/our-work/.
b3508_V1_Ch02.indd 34 11-02-2020 13:00:34

600 4,000
500 3,500
400 3,000
300 2,500
2,000
200
1,500
100
1,000
0
500
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
0
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
Brazil India
Russia South Africa
(a) Forex Reserves of Brazil, India, Russia (b) Forex Reserves of China
and South Africa (USD Billion) (USD Billion)
Figure 5: Foreign exchange reserves of BRICS countries (USD billion).

Source: World Bank.
sustainable infrastructure development is at the core of NDB’s operational strategy

of 2017–2021, and it is going to dedicate about two-thirds of its financing commit-
ment to this area.
Has the NDB been effective in its operations? One may note its sharp contrast
to the Asian Infrastructure Investment Bank (AIIB). With its headquarter in Beijing,
the AIIB commenced operations in January 2016 and has now grown to more than
50 approved members from around the world. Has the NDB got the attention it
deserved? It has been aptly noted:
“The launch of the NDB has been over-shadowed by the China-backed Asian
Infrastructure Investment Bank (AIIB). While the AIIB is consistent with a model
of structural-driven change in global politics, the NDB necessitates a more nuanced
analysis around collective agency. With 26.06 per cent of voting rights and a 30.34
per cent … stake of the US$100 billion capital base …, China possesses a de facto
veto in the AIIB. In sharp contrast the initial subscribed capital of US$50 billion
in the NDB is equally shared among its ﬁve members … While the NDB has so far
restrained from expanding beyond the BRICS, the AIIB opened up to 57 founding
members thereby driving a wedge between those countries willing to follow
Beijing’s lead and those (notably the United States and Japan) resistant in doing
so. Although the extent of the global reach of the NDB is still very much in doubt,
the AIIB is tied more explicitly to the ‘One Belt One Road’ (OBOR) … designed to
advance infrastructural development both on the westward land route from China
through Central Asia and on the southerly maritime routes from China through
Southeast Asia and to South Asia, Africa, and Europe” (Cooper, 2017: 275).
b3508_V1_Ch02.indd 35 11-02-2020 13:00:35

36 P. Ray
Thus, it appears that the spirit of multilateralism in the NDB could have been
a laggard in comparison with the AIIB that has been dictated by Chinese interest.
Concluding Observations
Having described the genesis and establishment of the BRICS block, this chapter
has tried to gauge different elements of heterogeneity. Such heterogeneity exists
in terms of different matrices, such as size of the economy, operation and state
of monetary and fiscal policies, exchange rate flexibility, and quantum of foreign
exchange reserves. The presence of such heterogeneity is accentuated by the pres-
ence of China whose size tends to overshadow all other economies in the block.
Perhaps the effective emergence of the BRICS block purely in terms of economic
multilateralism without any binding force of history, politics, or shared identity is
difficult.11 On the contrary, the presence of complex political issues among the three
major partners of the block (viz., China, Russia, and India) could have made the
BRICS block suffer from blue baby syndrome, thus bringing into question its healthy
existence (if not the longevity).
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11
Lindsay and Van Rossem (2014) argued from a neo-Weberian perspective that power in
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india-s-boycott-of-chinese-goods-akin-to-jingoism/story-RKHO4ls9hggRfkmq7YNLrO.
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38 P. Ray
Ray, P. and B. Nag (2017). “Two Crises Separated by Two Decades: Savings Glut and
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2017).
b3508_V1_Ch02.indd 38 11-02-2020 13:00:35

CHAPTER 3
China’s and India’s Economic

Performance After the Financial Crisis:
A Comparative Analysis
R. Nagaraj
Indira Gandhi Institute of Development Research, Mumbai, India
Introduction
In 2015, as per IMF data, nominal GDP in current dollar terms, China and India
are world’s second and seventh largest economies, at $11 trillion and $2.25 trillion,
respectively. In per capita terms, in global ranking, China stood 74th with $8,141,
and India at 141th position with $1,604. In geo-political terms, though China carries
considerable heft, it is as yet an emerging market economy (EME) as per the Morgan
Stanley index for emerging market index (MSCI). These countries are the leading
members of the ‘BRICS’ economies — a short hand for fast growing industrializing
nations accounting for a quarter of world’s land mass and 40% of population — a
grouping of non-western nations that Goldman Sachs created in 2001 for the pur-
pose of developing financial products. Though the financial firm ceased to use the
country grouping for selling financial products, BRICS as a category has stayed in
policy discourse and in financial markets.
Just prior to the global financial crisis (GFC) in 2008–2009, China was world’s
fastest growing large economy expanding annually at 9–10 for over 20 years; India
was seen as a close second growing at about 9% annually (though for just 3 years).
If China had emerged as world’s factory, India was getting to be reckoned (at least
39
b3508_V1_Ch03.indd 39 11-02-2020 13:01:43

40 R. Nagaraj
for a while) as its back office. The GFC and the great recession thereafter probably
hit China much harder, given its much higher export/GDP ratio (at 30.7%) in 2008,
compared to India’s share at 23.6%. Moreover, financial flows into China were much
higher than in India. As part of the G20 initiative, both the countries undertook
fiscal and monetary stimulus to prevent a repetition of the great depression — China
did it on an enormous scale compared to India, given its greater external exposure,
and to prevent large-scale unemployment and the potential political backlash
domestically.
Economic growth in both the countries recovered quickly, giving rise to (instant)
theorizing of ‘de-coupling’ of the EMEs (especially BRICS countries) from the devel-
oped economies, signifying the autonomous nature of their growth. Soon, it was real-
ized that growth in China and India were sustained by large-scale short-term capital
inflows on account of the QE in the advanced economies, that is, capital flowing into
these economies in search of higher yield (or rate of return). However, the hint of a
tapering off of the QE in August 2013 led to panic known as ‘taper tantrum, putting
breaks on the capital inflows, adversely affecting growth in these countries. Thus,
China’s annual growth rate got nearly halved, from 13% to 14% immediately prior
to the financial crisis to less than 7% last year. In a slight contrast, India’s growth rate
which also went down sharply to less than 5% in 2013–2014, has reportedly climbed
back to over 7% — now claiming to be world’s fastest growing large economy. Among
the BRICS nations, China and India are perhaps the only ones to maintain positive
growth in the last few years.
With the advanced economies still gripped by the great recession (despite
visible signs of improvement in the US), and a bleak IMF growth forecast for 2017
at 3.4% (as per July 2016 report), global economic performance seems to hinge on
how these two large economies perform. Can China and India — accounting for
18% of global GDP in 2015 and one-third of population — emerge as a significant
node for global economic recovery? This short chapter seeks to offer a tentative and
speculative answer. The chapter is structured as follows.
Careful scholarship on Chinese economy has long been concerned about the
quality and veracity of official economic statistics. Hence, it is useful to briefly review
the data concerns to be able to make a reasonable assessment of its economic perfor-
mance and prospects. Indian macroeconomic statistics have lately come under cloud
with the latest revision of the base year of GDP in 2015. So, the chapter will begin
in Section 1 with an assessment of the economic statistics of both the countries.
Section 2 will briefly review China’s and India’s the economic performance after the
financial crisis. Section 3 will make a comparative assessment of the prospects their
economic revival — necessarily a speculative effort. Section 4 will conclude the study
summarizing the main findings.
b3508_V1_Ch03.indd 40 11-02-2020 13:01:43

China’s and India’s Economic Performance After the Financial Crisis 41
Section 1: Concerns About Quality of Macroeconomic Data

Chinese official statistics are widely believed to overstate economic growth rate
systematically. One of the known inconsistencies is that the sum of the provincial
output is systematically higher than national GDP estimates. Apparently, the
overestimation happens because the official have an incentive to record the plan
targets as achievements, since their career prospects often depend on performance
as measured by output growth (Wu, 2002).
The long-held scepticism about Chinese the growth value got confirmed in
WikiLeaks by Li Kequing, when the then Party Committee Secretary of Liaong
province in 2007 told the US Ambassador in Beijing that Chinese GDP numbers
are for reference only (NYT, February 26, 2016). The true measures of Chinese
economic growth are rail cargo volume, electricity consumption, and bank credit.
Taking cue from this, private financial firms (including The Economist) have created
a Li Kequing index as a proxy for Chinese GDP growth.
Questioning of the Chinese official growth estimates intensified after the
financial crisis, when critics claimed that growth could be considerably lower than
official estimates (Figure 1).1 There are also concerns about the true state of the real
estate economy with questions about the accuracy of property price index, bank
credit accruing to the sector, and data on sale of property.
The scepticism got recently confirmed when a top Chinese official admitted to
data falsification. To quote the official: “Currently, some local statistics are falsified,
and fraud and deception happen from time to time, in violation of statistics laws
and regulations,” Ning Jizhe, director of the National Bureau of Statistics, wrote in a
column for Communist Party mouthpiece the People’s Daily on December 8, 2016
(as quoted in The Financial Times, December 12, 2016). All this goes to show the
need for caution in using Chinese official statistics.2
India’s macroeconomic statistics has come under cloud after the recent revision
to the new base year in (2011–2012) in 2015, when the growth rates got inflated
compared to the previous series (Figure 2). Since the revised growth estimates
are quite at variance with other macro correlates — such as flow of bank credit or
industrial capacity utilization — there is a growing scepticism of the new series of
1
Harry Wu of the Conference Board has been a long-time critic of the official statistics.
More recently, Christopher Balding of HSBC Business School in Shenzhen has written
extensively on the issue.
2
More recently, officials at one of the provinces, Potemkin, admitted to falsifying output
data “A big Chinese province admits faking its economic data” (The Economist, January 28,
2017).
b3508_V1_Ch03.indd 41 11-02-2020 13:01:44

42 R. Nagaraj
Figure 1: A comparison of China’s official GDP growth with Li Keqiang index.
Source: China GDP Delate gate, by Tom Orlik, Bloomberh Intelligence Economist, September 15, 2015.
Agriculture
Mining
Manufacturing
Elec gas and water
Industry
Construction
Trade, hotel and restaurants
Transport and communication
Financial services
Community,
Commun ity, social and personal
Total GVA
–4 –2 0 2 4 6 8 10 12 14 16
Per cent
NAS 20011–12 base year series NAS 2004–05 base year series
Figure 2: Disaggregated GDP growth rates for 2013–2014.

Source: http://www.ideasforindia.in/article.aspx?article_id=1728.
b3508_V1_Ch03.indd 42 11-02-2020 13:01:45

National Accounts Statistics (NAS).3 The problem can be illustrated with respect to
manufacturing sector growth. Since 2013–2014, while GDP manufacturing steadily
rose from 5.6% per year in 2013–2014 to 9.3 cent per year in 2015–2016, the Index
of Industrial production (IIP, the leading indicator of physical output) shows
dismal improvement — from (−) 0.1% per year in 2013–2014 to 2.4% per year in
2015–2016. Surely, IIP is underestimating the growth as its base year is outdated
(2004–2005), yet the gap between the two series is too wide to be attributed only to
the dated base year. The change in the methodology of estimating gross value added
in manufacturing in the new series is probably responsible for the discrepancy in
considerable measure (Nagaraj, 2015).
Considering the foregoing evidence on the scepticism of China’s and India’s
output estimates, a reasonable view about the recent growth rates may be as as follows:
1. In the last 3 years or so, China and India have probably been growing roughly at
the same rate.
2. The view that India has overtaken China to become world’s fastest growing
economy may be an overstatement. Such euphoria in India ignores the fact that
the level of China’s GDP per capita was five times that of India’s in 2015 (as noted
above).
3. Growth rates of both the economies have decelerated after 2011–2012: China
very dramatically, and India somewhat modestly.
4. China’s claim that its economy is getting rapidly rebalanced in favor of the
consumption and services sector output may be suspect given the data issues.
The major part of services growth in China is claimed to be due to the stock
market and financial sector, which could be suspected. The reports that there
are long queues at quality public hospitals tell us about the shortages of these
services in China (even in Beijing), and hence the argument that the rebalancing
is happening rapidly seems questionable.
Section 2: Policy and Performance After the Financial Crisis

China
China’s party-state draws its political legitimacy by delivering consistently ris-

ing living standards with employment generation. While the political power is
3
For a synoptic view of the debate between the official position and the critics’ viewpoints,
see http://www.ideasforindia.in/article.aspx?article_id=1728; or, refer to the symposium.
For details refer to Nagaraj (2015).
b3508_V1_Ch03.indd 43 11-02-2020 13:01:45

44 R. Nagaraj
concentrated in the central government (and party apex), economic decision-making

is decentralized at the level of provinces and cities, with the centralized party, army,
and bureaucracy forming the glue that binds the large, unevenly developed country.
The party-state sets the national economic goals via 5-year plans, the achievement
of which becomes the target for the provinces. Provincial bureaucracy and the
party-state are incentivized to achieve the plan targets and maintain social harmony
(proxied by employment generation locally).
Fiscal decentralization without an institutional mechanism of devolution of
financial resources from the center to the provinces (perhaps after abolition of
agricultural taxes) seems to have compelled provinces to depend on land sale and
property sale and long-term lease as means of raising fiscal resources. This is pos-
sible in China because land, by definition, belongs to the state. However, Chinese
provinces cannot raise public debt, but they get access to bank credit for capital
investment as long as they support economic growth (via local party-bureaucracy’s
influence on the banking system, which is almost entirely state-controlled).
Further, state-level party and bureaucracy seem to have an incentive to prioritize
economic growth (over other socioeconomic objectives) because their profes-
sional upward mobility seems contingent upon delivering output growth and
employment generation in their territory. Similarly, provincial statistical offices
have an incentive to show that the targets are met, which is said to be a reason
for the overestimation of provincial output growth and an underestimation of
unemployment rates.
Given the incentive structure, and political legitimacy derived from generat-
ing growth and employment, the aftermath of the financial crisis posed a major
challenge to Chinese policymakers. China, therefore, undertook massive fiscal and
monetary stimulus measures — perhaps the largest among G20 countries — to
prop up domestic demand in the face of collapse of the external markets [need to
quantify these measures as GDP%]. Most of these resources went into infrastructure
and urban housing. Urbanization therefore became a policy goal it itself.4 Though
such a policy did not revive economic growth to pre-financial crisis level, it perhaps
prevented a collapse of domestic demand and employment. Investment levels were
maintained (or even surpassed the pre-crisis levels), and the best evidence of it is
the rise in debt/GDP ratio from about 160% of GDP before the crisis to the current
level of 230–260% of GDP (Figure 3).
4
Uprooting rural settlements to house them in multi-storied apartments seems to have
caused considerable dislocation in rural economic activity and rural way of life.
b3508_V1_Ch03.indd 44 11-02-2020 13:01:45

Figure 3: China’s debt–GDP ratio.

Source: Goldman Sachs: Walled in: China’s Great Dillemma (2016).
Composition of Debt
Incremental debt largely accrued to the private corporate sector (PCS),
which is mostly associated with provincial governments, which use local
government financial vehicles (LGFVs) to draw credit from the banking system
to promote local infrastructure and housing investment. This is evident from an
IMF study:
“A significant part of corporate borrowing in reality financed off-budget fiscal

spending. Off-budget local government borrowing has increased substantially
since the GFC. It was undertaken by LGFVs; as local governments were not
allowed to borrow explicitly. The loans typically financed infrastructure proj-
ects and repayment was covered by future disbursements from local governments
(e.g., in a form of service fees). The ‘augmented’ deficit, which LGFV spend-
ing given the fiscal nature of such operations, thus jumped from the average of
around 4 percent of GDP before 2008 to about 10 percent in 2015” (IMF, 2014;
Maliszewski et al., 2016: 20).
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46 R. Nagaraj
Figure 4: Rising share of shadow banking in China’s credit growth.

Source: Maliszewski et al. (2016).
Another reason for the rapid rise in debt–GDP ratio is the growth in shadow banking
institutions, often sponsored by regular financial institutions to circumvent strict
regulation and offer higher rates of return to its savers (Figure 4).
The above-mentioned debt ratio may be an underestimate as private sector firms
have substantial overseas borrowings undertaken by their foreign subsidiaries. Such
borrowings do not get registered as China’s external debt as they is recorded by the
residency of the issuing entity, not by their nationality. If such borrowing is used
to finance capital expenditure in China, then it could cause currency and maturity
mismatch, increasing the cost of such borrowing and leading to a rise of financial
fragility. Further, in the event of rising international interest rates (as is the case now
with the Fed raising the rates) such a hidden debt could add to the external instability
(Shin and Zhao, 2013) (Figure 5).
China has also sought to rebalance the economy away from manufacturing to
services, and away from investment-led economy to consumption-driven economy
(Figure 6). On the face of it, looking at the official numbers, there is a change in the
desired direction, in particular in the rise of financial services. But how much of it
represents expansion of genuine financial services and how much of it is statistical
illusion caused by over blown shadow banking seem to be open to question.
b3508_V1_Ch03.indd 46 11-02-2020 13:01:46

Figure 5: International debt securities outstanding for non-financial corporate by nationality
and by residence.
Source: Shin and Zhao (2013).
Figure 6: Rising share of services in China’s GDP.

Source: Steve Johnson, “Old economy focus ‘understates’ Chinese growth”, FT, December 9, 2015.
b3508_V1_Ch03.indd 47 11-02-2020 13:01:47

48 R. Nagaraj
That China has made excessive investment in physical infrastructure and in

urban housing — relative to effective demand — is a widely accepted fact (based
on innumerable news reports about ‘ghost’ towns, unused roads, and bridges).
Rising credit and debt growth (as GDP%) after the financial crisis and decelerating
outgrowth has resulted in rising incremental capital output ratios (ICORs), or credit
intensity of output.
Rising Real Estate Prices

While the rate of investment in real estate seems to be decelerating lately, property
prices seem to continue to rise (Figure 7).
The usual official defence of such an investment strategy is two-fold: (1) it is wise
to build infrastructure ahead of demand to avoid short-run bottlenecks (as exempli-
fied by Indian experience), as recommended in development literature (à la Arthur
Lewis); (2) as capital stock per head in China is way below that in the developed
economies, China has to invest more, and not less, quickly if it is to graduate to the
status of a developed economy.
But there has been a growing concern about China’s debt sustainability, and the
potential instability that could follow. There are apprehensions that the magnitude
of debt could, if it crosses the tipping point, potentially lead to Japanese-style debt
deflation, or a real estate bubble burst.
Figure 7: Rising real estate prices.

Source: The Economist (2016).
b3508_V1_Ch03.indd 48 11-02-2020 13:01:48

There are other concerns about potential capital outflows on account of global
financial instability or domestic political consideration (in particular the on-going
anti-corruption drive) that could lead to capital flight (as evident from depreciation
of yuan, or due to capital market gyrations last year).
Given China’s huge foreign exchange (forex) reserves, prima facie, external debt
crisis seems to be ruled out. Moreover, since the majority of China’s private sector
debt is in domestic currency, it is argued that the Chinese government can reschedule
the debt without destabilizing its external sector. But the question of whether China
can avoid getting into Japanese-style debt deflation is hard to speculate. Similarly,
the Chinese central government seems unable to regulate housing investment
adequately as much of it seems to be financed by shadow banking driven by interests
at the provincial level. So, whether China can avoid a real estate crash remains an
open question.
One is inclined to argue that the outcome would ultimately depend on political
economic factors. Apparently, China is a strong state (yet brittle state?) with the
capacity to carry through its political mandate (even if it means high social and
economic costs). But if there are serious fissures in the state apparatus, as seems to
be emerging after the crackdown on corruption under the present regime (which
is apparently hurting many powerful political actors as evident from their efforts to
hide their investments abroad), the outcome could be unpredictable.
India
India witnessed a decade-long cycle of boom and bust, starting in 2003. During
the boom, the Indian economy grew close to 9% annually, led by IT services and
exports. This was accompanied by a rapid rise investment to GDP ratio (to 38–89%
of GDP) largely in the PCS financed by rising domestic saving rate (35–36% of
GDP), and supplemented by a flood of foreign private capital peaking at 10% of
GDP in 2007–2008. This was accomplished under benign macroeconomic condi-
tions, especially with stable fiscal balance as the state withdrew from infrastructure
investment in favor of PCS to reduce fiscal deficit.
After the GFC in 2008, economic growth recovered quickly on the strength of
capital inflows caused by QE in the advanced economies and fiscal stimulus and
monetary easing undertaken to stimulate domestic demand to compensate for
the loss of external markets. However, the high growth rate could not be sustained
beyond 2011–2012, when the macroeconomic conditions changed quickly. GDP
growth rate plummeted below 5% in 2013–2014, but recovered somewhat thereafter,
though it is hard to be sure of the strength of the recovery.
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50 R. Nagaraj
After the boom went bust, India is now saddled with excess capacity in manu-
facturing due to lack of investment demand and plummeting external demand for
both services and manufacturing. A large number of infrastructure projects under
private–public partnership (PPP) remained incomplete, as the cost of financing shot
up and legal and technical issues bogged down their completion. This non-financial
PCS is saddled with an unprecedented amount of unserviceable debt, which has
turned into banking sector’s non-performing assets (NPAs), pulling down its profits
and thus adversely affecting fresh lending. This is associated with a sharp fall in
domestic saving and investment rates. The problem of bad debt is unprecedented,
but seems quite in line with many EMEs currently, but it is smaller than that of
China’s.
With poor economic recovery from the great recession (Nagaraj, 2013), India’s
external market for services and its capital- and skill-intensive manufacturing have
dwindled — with explicit protectionist law such as ‘Buy America’ enacted by the
Obama administration and the Trump administration’s explicitly protectionist poli-
cies, along with the threat of automation. India as well as China have the advantage of
a large domestic market. Yet the PCS is not in a position to step up investment given
the high debt ratios and declining profitability. Therefore, the way out of the present
impasse is to step up public infrastructure investment to ease demand constraint
for capital and intermediate goods industries and supply cheap credit to agriculture
and small-scale sector so as to augment food production and to labor-intensive
manufactures.5
In political economic terms, unlike China, India is a liberal democracy, with
reasonable political stability, with well-defined separation of powers between politi-
cal executives, legislators and judiciary, well-developed market-based institutions
such as capital markets, a strong domestic PCS, and market regulators (Huang and
Khanna, 2003).
Section 3: A Comparison between China and India

Similarities
Both the economies slowed down after the financial crisis and both lost their export
markets; thus, they face excess capacities, high-corporate debt, and corporate invis-
ible debt via subsidiaries.
5
This is a gist of the India’s story of “Dream Run” of 9% growth rate. For a detailed account
of the boom and bust, and policy options to revive growth, refer to (Nagaraj, 2013, 2014).
b3508_V1_Ch03.indd 50 11-02-2020 13:01:48

Differences
China is an investment-driven economy, and household consumption is just one-

third of GDP; India’s investment rate is lower than China’s, and it further declined
rapidly after the financial crisis. The consumption/GDP ratio in India is over 60%,
with supply constraint still a matter of long-term concern. China’s debt is 260% of
GDP; the ratio for India’s is just about 60%. Excess capacities in India are probably
modest compared to China’s. China is over-invested in infrastructure and housing,
whereas India suffers from shortages in these areas.
Question 1: Can China avoid further deterioration of growth rate, given the debt
overhand and the limits of further debt-led growth? Can India engineer a turna-
round with more reforms and FDI without public investment (as envisioned by
current policymakers) — given the overhang corporate debt on the banking sector?
Answer 1: In both China and India, after the financial crisis, growth was sus-
tained by easy credit extended to PCS by domestic banks and by foreign capital
inflows (facilitated by QE) — China much more than India. Growth in China’s
debt/GDP ratio is unprecedented; in India, the rise in the ratio has been modest
(if at all).
It is a question of degree, not kind: External debt in both the countries is higher
than officially reported because of debt taken on by subsidiaries of private corporate
firms (as highlighted by Shin of BIS).
Can China avoid a debt crisis? Given China’s huge foreign exchange reserves,
the possibility of external debt crisis seems remote. But if there is panic, no amount
of reserves probably matter, as evident from last year’s episode when China almost
lost $1 trillion in no time at all.
However, since the majority of China’s private sector debt is denominated in
domestic currency, which in principle can be rescheduled without destabilizing the
external sector, the question arises if China can avoid getting into Japanese-style
debt deflation, which is another matter entirely. Japan’s debt was (and continues to
be) mostly in the domestic currency, more so than China today.
Similarly, China’s real estate market seems to be in the bubble territory. The
Chinese government seems unable to regulate it adequately since much of it seems
financed by shadow banking. So, whether China can avoid a real estate crash remains
an open question. Admittedly, Chinese authorities are tightening the rules for real
estate lending by increasing the equity or the contribution of the buyer.
India’s external debt is modest in a comparison to most EMEs, and especially
China. Even if the global interest rates rise, India is unlikely to face a debt crisis,
though there could be instability in the foreign exchange market in the short run.
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52 R. Nagaraj
But the question of whether India can avoid a prolonged period of slow growth
(without a change in policies) is another matter.
Question 2: Can China change its debt and investment-led growth, given the incen-
tive structure of local governments and their access to bank credit? In other words,
can China disembark its credit-led investment growth strategy to keep employment
growth going without causing political unrest? In other words, is it a case of Chinese
policymakers riding the political tiger?
Answer 2: Given China’s seemingly solid macro foundations, there is no apparent
reason why the government cannot shift public investment away from physical infra-
structure (road, rails, bridges, and urban housing) to schools and hospitals, and make
them available for free for poor. Descriptive accounts show how Chinese struggle
to get treated in good public hospitals (Burkitt, 2012). The answer probably lies in
China’s contradiction between centralized politics and the decentralized economy.
India, on the other hand, may find it hard to reverse the declining domestic
investment rate given: (i) the NPAs of the banking system, (ii) reluctance of foreign
private capital to step up investment given the debt situation of the PCS, and
(iii) government’s reluctance to raise public infrastructure investment given its
commitment to fiscal orthodoxy.
Question 3: Can China embrace consumption-led growth given the interests of
local state for revenue from land sale and property development? Can India curb
its consumption-led growth towards public investment- and capital good-led
industrialization?6
Answer 3: It is well known that China’s social infrastructure and personal consump-
tion growth are modest, though claimed to be improving. These need to be stepped
up and physical infrastructure growth needs to curtailed if China is to change its
growth pattern. But very little of it seems evident on the ground (despite avowed
objective). China’s disposable income is just 44% of GDP. Why? (comparable figure
for India is 86%). The answer, perhaps lies in the incentive structure of the local
party-state. Building public hospitals and better schools or providing better facilities
does not seem to bring in revenue for the local governments and the private benefits
to party-bureaucracy in the same way as infrastructure and real estate investments do.
Question 4: Housing starts and sales are declining, but prices continue to rise. Why?
Access to non-bank credit (shadow banking) seems to be a cause for concern. Will
6
Disconcertingly, much of the so-called FDI into India lately represents import-led growth
financed by private equity funding of e-commerce companies.
b3508_V1_Ch03.indd 52 11-02-2020 13:01:48

the inflated real estate prices deflate gently as demand grows, or could it result in a
burst causing a disruption?
Answer 4: Could China’s high-debt ratio trigger a financial crisis is the million dol-
lar question among China watchers, but the answer is anybody’s guess. Economic
literature provides very little guidance in this matter.7 Those raising a red flag about
it are mostly guided by the debt–GDP ratio and its steady rise since the GFC in 2008.
The ratio is among the highest in the world. My cautious answer to the question is
as follows: Though very high, China’s debt is mostly domestic, and China’s domestic
saving and investment ratios are also very high by any standards. Moreover, the party
state has enough instruments (though some of them blunt) to quell any financial
meltdown. However, Japanese-style prolonged deflation or stagnation cannot be
ruled out if return on investment falls drastically, and the state is unable to stimulate
domestic consumption faced with an aging population.
India, on the other hand, needs to get its fixed investment rate back to 38–39%
of GDP (to secure East Asian-like economic outcomes). Given the current levels
of bad debts, it is really wishful to expect PCS to resume a fresh investment cycle,
unless the government writes off loans (or socializes their costs). Perhaps a better
option would be to step up public infrastructure investment by adopting a flexible
fiscal deficit targets. The ‘Priority sector’ lending for agriculture and SMEs needs to
be revived, boosting capital formation in the unorganized or HH sector, implying a
stronger role of the state in steering the economy. Correspondingly, the objective of
FDI needs to be to augment capacity expansion to meet ‘make in India’ campaign,
not for augmenting import-led consumption growth (as mentioned above).
If India cannot get its policy act right, the reasons for this would be policy
makers’ commitment to fiscal orthodoxy not the economy’s objective conditions.
Section 4: Summary and Conclusion

Both China and India are still poor countries with low per capita income — with
the average of OECD member countries being $38,423 as of 2014. There is a need
(and a potential) for substantial growth of China and India that can help revive
global economy. Both countries have large domestic markets that are their biggest
advantages in present times, which can help withstand external demand shocks.
China needs to move away from housing and infrastructure investment to social
7
Before the 2008 financial crisis, very few really believed that there was a bubble in the
sub-prime market in the US. There was an oblique hint of it in Raghuram Rajan’s paper in
the 2006 Jackson Hole conference, a suggestion that Lawrence Summers rejected outright.
b3508_V1_Ch03.indd 53 11-02-2020 13:01:48

54 R. Nagaraj
sector investment and consumption-led growth — though widely admitted, it finds

it hard to change the policy gears apparently due to political economic reasons.
Rules governing the distribution of fiscal resources between the center and provinces
perhaps need to be redrawn to reduce the incentive for provinces to rely on land
sale and real estate.
India perhaps needs to make a move in the opposite direction of regaining
the investment-led growth witnessed during the last decade to improve not just
physical infrastructure but social infrastructure to stimulate private investment and
improve human resources. This is urgently needed if India has to seize the one time
opportunity offered by potential demographic dividend.
Critical questions: Will China succumb to Japanese-style debt deflation? It is
a difficult question to answer. India does not seem to face a similar fragility; it may
be growing slowly and its growth numbers may be suspect, but the prospect of mac-
roeconomic crisis seems remote relative to China. India’s external financial position
is not very sound, but in a comparative EME perspective, the risks do not seem large.
Though India’s corporate debt is very large compared to its past levels, it is not high
by the contemporary levels among EMEs. India also has greater political stability
and certainty, its market institutions are more rule-based and hence supportive of
market economy. China on the other hand is far more state dominated; though it
may appear strong, it is in fact brittle.
I suspect a contradiction could emerge in China between the center’s desire to
stabilize the economy on to a more sustainable path, whereas the provinces may
continue to pour money (via bank credit) into fixed investments and shadow banks
would continue to finance real estate investment. (This is evident from the fact that
when the central government decides to scrap excess capacity in manufacturing
or close down unsafe mines, the efforts are thwarted by local interest groups who
tacitly oppose it, because such efforts are not in the interests of provisional party-
state in terms of keeping peace and generating employment and earning tax revenue
for provinces.) Then, at some point, the economy risks spinning out of control of
the central government and monetary authorities, unless the rules of engagement
between the center and provinces are amicably changed with an alternative political
incentive structure in place.
Acknowledgments
The author is grateful to Lynette Ong and Yue Zhang for the comments and sugges-
tions on an earlier draft of the chapter and to the participants of the Conference on
‘Political Economy of Emerging Market Countries: The Challenges of Developing
More Humane Societies’ held during January 2–4, 2017, in Santiniketan, West Bengal.
b3508_V1_Ch03.indd 54 11-02-2020 13:01:49

b3508_V1_Ch03.indd 55
Appendix 1: China’s Economic Indicators (Source: IMF’s country report, 2016).
“6.5x9.75”
China: Selected Economic Indicators
2016 2017 2018 2019 2020 2021
2011 2012 2013 2014 2015 Projections
NATIONAL ACCOUNTS
Real GDP 9.5 7.9 7.8 7.3 6.9 6.6 6.2 6.0 6.0 5.9 5.8
Total domestic demand 10.7 7.9 8.1 7.2 7.2 7.2 6.5 6.2 6.1 6.0 5.9

Consumption 12.2 8.7 7.2 7.2 8.3 7.8 7.7 7.1 6.8 6.6 6.4
Investment 9.2 7.1 9.1 7.1 6.1 6.4 5.2 5.2 5.3 5.3 5.3
Fixed 8.8 9.0 9.3 6.8 6.8 6.6 5.3 5.3 5.4 5.4 5.4
Inventories (contribution) 0.4 -0.7 0.1 0.3 -0.2 0.0 0.0 0.0 0.0 0.0 0.0
Net exports (contribution) -0.8 0.2 -0.1 0.3 -0.1 -0.5 -0.2 -0.1 0.0 0.0 0.0
Total capital formation (percent of GDP) 48.0 47.2 47.3 46.7 45.0 43.9 43.3 42.8 42.2 41.6 41.0
Gross national saving (percent of GDP) 49.8 49.7 48.8 49.3 47.9 46.3 44.9 44.1 43.2 42.4 41.6
LABOR MARKET
Unemployment rate (annual average)a … … 5.0 5.1 5.1 5.1 5.1 5.0 5.0 5.0 5.0
Wages 16.7 14.0 12.9 10.0 9.9 9.0 8.7 8.5 8.5 8.3 8.1
PRICES
Consumer prices (average) 5.4 2.6 2.6 2.0 1.4 2.1 2.3 2.4 2.6 3.0 3.0
GDP Deflator 8.1 3.2 2.4 1.2 0.4 0.7 0.9 1.4 1.6 2.0 2.1
FINANCIAL
7-day repo rate (percent) 6.4 4.6 5.4 5.1 2.5 … … … … … …
10-year government bond rate (percent) 3.4 3.6 4.6 3.7 2.9 … … … … … …
Real effective exchange rate (average) 2.8 5.6 6.3 3.1 10.1 … … … … … …
11-02-2020 13:01:49
(Continued)
b3508_V1_Ch03.indd 56
56 R. Nagaraj

Appendix 1. (Continued )
China: Selected Economic Indicators
2016 2017 2018 2019 2020 2021
2011 2012 2013 2014 2015 Projections
Nominal effective exchange rate (average) 0.1 5.0 5.3 3.1 9.5 … … … … … …
MACRO-FINANCIAL
Total social financingb 18.1 19.1 17.5 14.3 12.4 12.7 11.9 11.4 11.0 10.3 10.1

In percent of GDP 157.9 169.0 180.0 189.5 198.4 208.3 217.4 225.1 232.0 236.9 241.6
Domestic credit to the private sector 16.2 19.8 16.6 13.5 14.7 14.7 13.4 12.1 10.9 9.9 9.7
In percent of GDP 124.8 134.3 141.9 148.2 158.3 169.2 179.0 186.5 192.1 195.5 198.7
House pricec 5.7 8.7 7.7 1.4 9.1 8.9 7.3 7.0 7.3 6.9 6.8
Household disposable income (percent of GDP) 58.3 59.4 60.0 60.7 62.2 63.2 63.6 63.9 64.2 64.2 64.2
Household savings (percent of disposable income) 41.0 40.8 38.5 37.9 37.4 36.9 35.8 34.7 33.7 32.7 31.7
Household debt (percent of GDP) 27.8 29.6 33.0 35.3 38.4 41.8 45.5 49.1 52.4 55.3 57.5
Nonfinancial corporate domestic debt (percent of GDP) 97.0 104.7 108.9 112.8 120.0 127.4 133.5 137.5 139.7 140.2 141.2
GENERAL GOVERNMENT (Percent of GDP)
Net lending/borrowingd -0.1 -0.7 -0.8 -0.9 -2.7 -3.0 -3.1 -2.9 -2.9 -2.8 -2.7
Revenue 26.9 27.8 27.7 28.0 28.6 27.8 28.1 28.0 27.8 27.7 27.5
Expenditure 27.0 28.4 28.5 28.9 31.3 30.8 31.2 30.9 30.7 30.4 30.2
Debt e
15.2 15.2 15.9 38.5 38.3 38.6 39.1 39.3 39.3 39.2 39.0
Structural balance -0.1 -0.5 -0.5 -0.5 -2.4 -2.9 -3.1 -2.9 -2.9 -2.8 -2.7
BALANCE OF PAYMENTS (Percent of GDP)
Current account balance 1.8 2.5 1.5 2.6 3.0 2.4 1.6 1.3 1.0 0.8 0.6
“6.5x9.75”
Trade balance 3.0 3.6 3.7 4.1 5.1 5.1 4.5 4.3 4.0 3.8 3.7
11-02-2020 13:01:49
b3508_V1_Ch03.indd 57
“6.5x9.75”
Services balance -0.6 -0.9 -1.3 -1.6 -1.6 -2.0 -2.3 -2.6 -2.7 -2.9 -2.9
Net international investment position 22.4 21.8 20.7 15.2 14.3 16.5 16.9 16.7 16.3 15.5 14.8
Gross official reserves (bn US$) 3,256 3,388 3,880 3,899 3,406 3,181 3,064 2,993 2,890 2,813 2,740

MEMORANDUM

Nominal GDP (bn RMB)f 48,604 54,099 59,696 64,849 69,630 74,715 80,118 86,159 92,834 100,244 108,246
Augmented debt (percent of GDP) g
45.8 47.1 51.0 51.8 55.8 60.4 64.5 67.8 70.4 72.2 73.5
Augmented net lending/borrowing (percent of GDP)g -6.0 -5.1 -7.6 -7.2 -7.8 -8.4 -8.2 -7.8 -7.4 -7.0 -6.6
Augmented fiscal balance (percent of GDP)h -8.2 -7.8 -10.3 -9.8 -9.5 -10.1 -9.8 -9.3 -8.8 -8.4 -8.0
Sources: CEIC Data Co., Ltd.: IMF, Information Notice System; and IMF staff estimates and projections.
a
Surveyed unemployment rate.
b
After adjusting local government debt swap, staff estimate that TSF stood at 203 percent of GDP in 2015.
c
Average selling prices estimated by IMF staff based on housing price data (Commodity Building Residential Price) of 70 large and mid-sized cities published by National
Bureau of Statistics (NBS).
d
Adjustments are made to the authorities’ fiscal budgetary balances to reflect consolidated general government balance, including government-managed funds, state-
administered SOE funds, adjustment to the stabilization fund, and social security fund.
e
Estimates of debt levels before 2015 include central government debt and explicit local government debt (identified by MoF and NPC in Sep 2015). The large increase in
general government debt in 2014 reflects the authorities’ recognition of the off-budget local government debt borrowed previously. The estimation of debt levels after 2015
assumes zero off-budget borrowing from 2015 to 2021.
f
Expenditure side nominal GDP.
g
Augmented fiscal data expand the perimeter of government to include local government financing vehicles and other off-budget activity.
h
“Augmented fiscal balance” = “augmented net lending/borrowing” — “net land sales proceeds” (in percent of GDP) as we treat net land sales proceeds as financing.
11-02-2020 13:01:49
58 R. Nagaraj
Appendix 2: India’s Economic Indicators
II. Economic Indicators
2015/16 2016/17
2011/12 2012/13 2013/14 2014/15 Proj. Proj.
Growth (in percent)
Real GDP (at market prices)a 6.6 5.1 6.9 7.3 7.2 7.5
Industrial production 2.9 1.1 -0.1 2.3 … …
Prices (percent change, period average)
Consumer prices- Combined 9.5 9.9 9.4 5.9 5.0 5.3
Saving and investment (percent of GDP)
Gross savingb 34.7 31.5 30.8 30.2 29.8 29.6
Gross investmentb 38.9 36.3 32.5 31.6 31.1 31.1
Fiscal position (percent of GDP)c
Central government deficit -6.1 -5.1 -4.6 -4.2 -4.2 -4.0
General government deficit -8.1 -7.4 -7.6 -7.0 -7.0 -7.0
General government debtd 68.1 67.5 65.8 66.1 66.3 65.7
Structural balance (% of potential -8.4 -7.3 -7.5 -6.9 -6.9 -6.9
GDP)
Structural primary balance -3.9 -2.8 -2.8 -2.2 -2.3 -2.1
(% of potential GDP)
Money and credit (y/y percent change,
end-period)
Broad money 13.5 13.6 13.4 10.8 11.1 13.6
Credit to private sector 17.8 13.5 13.7 9.2 11.1 13.7
Financial indicators (percent,
end-period)
91-day treasury bill yield 9.0 8.2 8.9 8.3 7.2 …
(end-period)e
10-year government bond yield 8.6 8.0 8.9 7.8 7.7 …
(end-period)e
Stock market (y/y percent change, -10.5 8.4 18.7 24.9 -9.1 …
end-period)f
External tradeg
Merchandise exports (in billions of 309.8 306.6 318.6 316.5 277.9 280.1
U.S. dollars)
(Annual percent change) 20.9 -1.0 3.9 -0.6 -12.2 0.8
Merchandise imports (in billions of 499.5 502.2 466.2 461.5 429.8 449.3
U.S. dollars)
(Annual percent change) 30.3 0.5 -7.2 -1.0 -6.9 4.5
Terms of trade (G&S, annual -6.1 -0.3 2.3 3.5 7.0 1.8
percent change)
(Continued)
b3508_V1_Ch03.indd 58 11-02-2020 13:01:50

Appendix 2. (Continued )
II. Economic Indicators
2015/16 2016/17
2011/12 2012/13 2013/14 2014/15 Proj. Proj.
Balance of payments (in billions of
US dollars)
Current account balance -78.2 -88.2 -32.4 -26.7 -27.7 -34.8
(in percent of GDP) -4.2 -4.8 -1.7 -1.3 -1.3 -1.5
Foreign direct investment, net 22.1 19.8 21.6 31.3 34.2 37.4
Portfolio investment, net (equity 17.2 26.9 4.8 42.2 -6.8 12.4
and debt)
Overall balance -12.8 3.8 15.5 61.4 22.7 40.8
External indicators
Gross reserves (in billions of U.S. 294.4 292.0 304.2 341.6 364.3 405.1
dollars, end-period)
(In months of imports)h 6.1 6.4 6.7 7.9 8.0 7.9
External debt (in billions of U.S. 360.8 409.4 446.3 475.2 513.3 550.4
dollars, end-period)
External debt (percent of GDP, 19.6 22.3 23.8 23.2 24.0 23.6
end-period)
Of which: Short-term debti 7.5 9.0 9.8 9.0 9.6 9.7
Ratio of gross reserves to short- 2.1 1.8 1.7 1.9 1.8 1.8
term debt (end-period)h
Debt service ratioj 6.0 5.9 5.9 7.5 7.1 7.8
Real effective exchange rate -3.4 -2.3 -2.4 7.3 6.0 …
(percent change)k
(based on annual average level)
Exchange rate (rupee/U.S. dollar, 50.3 54.4 61.0 62.6 66.8 …
end-period)e
Memorandum item (in percent of GDP)
Fiscal balance under authorities’ -5.8 -4.9 -4.3 -4.0 -3.9 -3.8
definition
Sources: IMF Country Report, 2016, based on data provided by the Indian authorities; CBC Data Company Ltd; Bloomberg LP.;
World Bank, World Development Indicators; and IMF staff estimates and projections.
a
Data are for April–March fiscal years.
b
Differs from official data, calculated with gross investment and current account. Gross investment includes errors and omissions.
c
Divestment and license auction proceeds treated as below-the-line financing.
d
Includes combined domestic liabilities of the center and the states, and external debt at year-end exchange rates.
e
For 2015/16, as of 6 January 2016.
f
For 2015/16 year-to-date as of 6 January 2016.
g
On balance of payments basis.
h
Imports of goods and services projected over the following 12 months.
i
Short-term debt on residual maturity basis, including estimated short-term NRI deposits on residual maturity basis.
j
In percent of current account receipts, excluding grants.
k
For 2015/16, year-to-date as of November 2015.
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60 R. Nagaraj
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b3508_V1_Ch03.indd 60 11-02-2020 13:01:50

CHAPTER 4
Inter-Group Disparities in Growing Economies:

India Among the BRICS
Achin Chakraborty and Simantini Mukhopadhyay
Institute of Development Studies Kolkata, India
Introduction
Discussions on economic inequality by scholars, policymakers, and others had
never attained such visibility as they have in the recent years. “It’s a golden age for
studying inequality”, commented The Economist (2016). Publication of a series of
important, well-researched books by reputed economists in the recent years has
triggered further interest in the issue of inequality and its different aspects.1 In spite
of the renewed interest in the problem of inequality across the world, discussions on
inequalities based on ethnic, racial, or caste groups have been less visible than general
or interpersonal inequality. However, in contrast to this general neglect of inter-group
inequality by economists in the context of the rest of the world, there has been a grow-
ing scholarly interest in assessing inequalities between the social groups (Scheduled
Castes, Scheduled Tribes, and others) in India in the past two decades or so.
Even though a common characteristic of all the BRICS countries now is that the
degree of inequality in interpersonal income distribution is rather high, Brazil stands
out as it has experienced a decline in inequality in the past two decades unlike others.
In this chapter, our focus is on inequality between groups, rather than interpersonal
inequality as the former is less discussed in the context of BRICS.
1
To name a few, Stiglitz (2013), Piketty (2014), Atkinson (2015) and Milanovic (2016).
61
b3508_V1_Ch04.indd 61 11-02-2020 13:02:27

62 A. Chakraborty & S. Mukhopadhyay
The complex social stratification along the lines of caste, tribe, religion, and
gender has been a persistent feature of the Indian society for very long time. In
the heyday of positivist thinking in social sciences, it was generally presumed
that inequalities due to race, gender, and even class background were all forms of
ascription that would go away with the development of impersonal market forces.
The protagonists of this view shared the same belief in the rationalizing logic of
modernity as propounded by the development economists of the earlier generation,
even though they differed significantly on whether the market or the central planner
would be the agent of modernity. The subsequent rise of neo-Marxian scholarship
restored class analysis to a central position. It was then assumed that class-based
loyalties were in the end fundamental. In recent decades, however, social science
disciplines have turned full circle. The class-centered approach has given way to
new multi-dimensional accounts of identities that include ethnic, caste, religion,
and gender categories, and thus social identities seem to have come to the centre-
stage. In India, popular discourses show an overwhelming presence of issues around
identities. However, on the changing salience of caste-based differences in the Indian
context, there is a counter-position as well. Beteille (2012), for example, criticizes the
‘pre-occupation’ with caste that he observes among the experts who express opinions
in the media on Indian affairs. He has argued that “rapid economic growth and the
expansion of middle class are accompanied by new opportunities for individual
mobility which further loosens the association between caste and occupation”. In
other words, Beteille questions the material basis of the presumed persistence of
caste-based differences in a rapidly changing Indian economy. Some of the recent
studies have documented how the role of caste has been weaker than before in shap-
ing economic well-being. Migration, expansion of lower and middle castes in non-
traditional occupations, changes in agriculture, and most importantly affirmative
action have all led to improvement in the relative position of the Scheduled Castes
in India (Kapur et al., 2010). Yet, the political salience of the caste issue has hardly
weakened. In the context of limited opportunities, overall and growing aspirations
for upward mobility, competitively assertive caste identities for distributional gains
continue to dominate the political discourse in India, the connection of which with
the so-called material basis has been changing as a consequence.
Given the diversity of opinions regarding the importance of caste and other
social groupings in Indian society, the question still remains what exactly has
been happening to the distributional outcomes across social groups as a result of
economic progress. Beteille (1983) made a useful distinction between two aspects
of inequality — the relational and the distributional aspects. While sociologists and
political scientists are mostly concerned with the first kind, economists are generally
concerned with the second. In the first case, inequalities are seen as built into the
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Inter-Group Disparities in Growing Economies 63
social structure in the form of relations of super-ordination and sub-ordination,

i.e. the patterns of privileges, rights, and obligations. An economist, on the other
hand, sees inequality in the distribution of wealth or income, or, as Sen (1980) has
proposed, in the distribution of human “functionings’ such as health or educational
status. Why has the economist been rather less concerned about inequality across
racial, ethnic, or caste groups? The answer probably lies in the methodological
preference of the economist for a depersonalized agent as the unit of analysis. The
agent acts independently to choose the best course of action given the opportuni-
ties. This way of thinking has definitely been fruitful in illuminating a variety of
problems. It cannot, however, fully capture the ways inter-group inequality persists
over time. There is no point in denying that one’s location within the network of
social affiliations substantially affects one’s access to resources.
While the inter-relationship between economic development and economic
inequality has long been explored by economists, and the earlier belief in an inverted
U-shape between the two has been questioned in the light of extensive cross-country
data for longer periods, there is very little analytical exploration into what might
happen to inter-group inequality in course of rapid economic development. In this
chapter, we first assess changes in measured inequalities between social groups in
India in both income and non-income dimensions. In the process, we re-examine
some of the issues in measurement of inter-group inequality, which would help us
relook at inter-group disparities in other countries as well. Finally, we try to relate
changing interpersonal and inter-group inequality to the fact that although some
of the countries, such as Brazil, have not grown as fast as the Indian economy has
grown, their record of reduction in inter-group inequality has surpassed India’s by
a wide margin.
Why Between-Group Inequality

Relative disparities in well-being are often the concerns of the policymakers since
sharpening disparities have the potential for creating conflicts in societies. Inequality
between socially identifiable groups of people is considered ‘politically more salient
and consequential than interpersonal comparison’ (Subramanian, 2011). Besides
being considered intrinsically bad from an ethical standpoint, inequality between
groups, what is often called ‘horizontal inequality’, has also been seen as having nega-
tive consequences on social coherence and peace (Stewart et al., 2005), even though
the relationship between such inequality and the outbreak of violent conflict is not
straightforward. There is perhaps an inverted U-shaped relationship between the
two. When there is a large gap between the privileged and the disadvantaged groups,
the disparity is either accepted with resignation or the privileged group might show
b3508_V1_Ch04.indd 63 11-02-2020 13:02:27

some amount of magnanimity towards the less privileged so long as there is little
threat from the bottom. The potential for conflict intensifies as the gap between the
groups diminishes. While analyzing the occurrence of communal riots in India,
Mitra and Ray (2014) find evidence in support of this hypothesis.
Between-group inequality also has an important bearing on the concept of
inequality of opportunity. One way of assessing inequality of opportunity is the
one that relies on the distinction between ‘circumstances’ and ‘effort’. While the
unequal distribution of outcome across individuals may result from the differential
efforts they put in to better their lives, it could also be due to the unequal circum-
stances they are in. The circumstances are defined to be those conditions which are
beyond the control of the individual. In this conceptualization, individuals within
a group are assumed to share the same circumstances and groups differ in terms of
circumstances. If there was a systematic disparity between the average achievement
levels of two different groups, it could be attributed to differences in circumstances,
and as the argument goes, the focus of public policy should be on reducing the
disparity due to circumstances.
In a society where individuals participating in the economic process are
endowed with unequal quantities not only of economic assets but also of social
assets, exclusion takes different forms. By social assets, we mean those ‘goods’ that
belong to the realm of rights and entitlements. The fact that unequal access to
publicly provided goods cannot be explained by the market process calls for such
categories as social assets that include both political (e.g. citizenship rights) and
cultural assets (i.e. ethnic markers such as ethnicity, religion, language, and so on).
Access to employment, education, and productive assets, which is considered to
be crucial in determining economic circumstances, varies across social groups in a
manner which lies outside the control of an individual. Racial or caste identification
of workers can interact with the social processes of human capital accumulation
in communities and human capital valuation by employers in ways that generate
externalities. In the presence of such externalities, as economic theory suggests,
market processes may not lead to efficient outcomes. In the new economics of race,
there is an emphasis on the links between under-investment in human capital due
to circumstances and labor market outcomes.
Issues in Measurement
There has been a long stream of literature that has attempted to measure inequality
across identifiable sub-groups using the method of ‘decomposition’. This approach
views total inequality in personal income distribution as the sum of ‘between-group’
and ‘within-group’ components, and following this approach the between-group
b3508_V1_Ch04.indd 64 11-02-2020 13:02:28

component is expressed as a percentage of the total inequality to reckon the

contribution of between-group inequality to total inequality. Among the inequality
measures, Theil’s entropy measure is commonly used for this purpose as it is read-
ily decomposable, unlike the Gini coefficient — by far the most popular inequality
measure — which is not decomposable in the way Theil’s measure is.
The general entropy class (Cowell and Jenkins, 1995) of measures is given by
1  y  c 
GE (c ) = (c − 1) ∑  i  − 1 for c ≠ 0, 1
nc i  µ  

1 µ
= ∑
n i
log  
 yi 
for c = 0
1  yi  y 
= ∑ 
n i µ  log  i 
µ
for c = 1,
where n is the total population, yi is the outcome (in our case income) of individual
i, µ is the mean income, and c is a parameter chosen by the researcher.
As the value of c increases, the sensitivity to inequality among those in the upper
end of the distribution increases. While Theil entropy measure is obtained from a
c-value of 1, a c-value of 0 gives Theil L or mean log deviation. GE (2) is ordinally
equivalent to the squared coefficient of variation (Elbers et al., 2008).
The general entropy class of measures can be conveniently decomposed into
between-group and within-group components (Shorrocks, 1984) as follows:
1   µj 
C
  µj 
C
GE = (c − 1)  ∑g j   –1 + ∑GE j g j  µ  for c ≠ 0, 1

c
 j  µ  j
  µ 
=  ∑g j log    + ∑GE j g j for c = 0
 j  µ j   j
  µj   µj    µj 
=  ∑g j   log    + ∑GE j g j   for c = 1,
 j µ  µ  j µ
where j is the population sub-group, gj is the population share of the jth subgroup,
and GEj is the inequality within the jth subgroup.
b3508_V1_Ch04.indd 65 11-02-2020 13:02:29

While the first term measures the between-group component of total inequality,
the second term denotes inequality within the subgroups. The between-group
component gives the level of inequality pertaining to a distribution where everyone
within each sub-group has the same outcome µj. The between-group component can
be summarized as
I B (Π )
RB (Π) = ,
I
for any population partition ∏, where IB(∏) is the between-group component and
I is total inequality.
Empirical applications of decomposable measures to the data on income
distribution typically do not find significant inter-group inequality. For example,
one of the earliest studies in this direction which made significant impact on the
subsequent empirical literature was done by Anand (1983) on Malaysia, who found
that inequality between the native Malays and Chinese Malaysians accounted for
only 15% of the overall inequality in the country in the early 1970s. Based on this
finding, he recommended that the strategy of the government should be directed
to the sources of inequality among the people within the same ethnic group rather
than focus on between-group inequality. Studies in India have also found a small
contribution of between-group inequality to total inequality, where the groups are
SCs, STs, and others. Mutatkar (2005) found less than 5% contribution of inequality
between groups in three rounds of National Sample Survey (NSS) data in the 1980s
and 1990s. Using data from the 1993–1994 round of NSS, Deshpande (2000) finds
an even lower contribution between these three social groups in Kerala. Part of the
reason for this observed low between-group inequality is inherent in the nature
of the standard inequality decomposition method itself. The paper by Elbers et al.
(2008) points out that the standard procedure for decomposing inequality into a
between-group and a within-group component fails to capture the true extent of
between-group inequality as it is compared with the overall inequality which can be
seen as inter-group inequality when each individual constitutes a group. Therefore,
overall inequality tends to be way above between-group inequality as in the former
the number of groups is exactly equal to the number of individuals, which is large.
In the standard procedure, between-group inequality tends to increase as the
number of groups increases, and such inequality is also sensitive to the relative popu-
lation composition of the groups. Ray Chaudhury (2014) finds that in 2009–2010
the shares of inequality in the distribution of consumer expenditure attributable
to the differences between two broadly defined social groups — SC/ST (compris-
ing Scheduled Castes and Scheduled Tribes) and non-SC/ST (comprising ‘other
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backward castes’ and ‘others’) — in two Indian states of Kerala and Punjab were
1% and 3.1%, respectively, even though there was no significant difference in the
relative disparity in mean expenditures between non-SC/ST and SC/ST in these two
states. Therefore, the difference in the degree of between-group inequality in these
two states, as measured by the between-group component of the overall inequality,
might largely be due to the difference in the population shares of the social groups
(non-SC/ST and SC/ST), rather than the difference in relative mean expenditures
of these social groups.
We first use the traditional method of inequality decomposition and find out
how the between-group component differs when we consider different groupings,
namely caste, class, and religion. However, since the traditional method of inequal-
ity decomposition is sensitive to the relative sizes and the number of groups under
question, the decompositions are not comparable across alternative groupings. For
instance, by the conventional method, the shares of between-group inequality in
income (groups defined in terms of racial identities) in three countries infamous for
racial inequality (namely United States, Brazil, and South Africa) have been shown
by Elbers et al. (2008) to be 8%, 16%, and 33%, respectively. They question if ‘these
numbers provide a good yardstick with which to judge the relevance of race to an
understanding of inequality in these countries’. They further point out that while
the mean difference in income between the white and non-white groups is stark in
all three countries, the population shares of the white versus non-white groups vary
widely (with non-whites comprising 80%, 50%, and 28% of the population in South
Africa, Brazil, and the United States, respectively). Furthermore, the number of racial
groups is also not invariant across the countries (four for Brazil and South Africa and
five for the United States). Elbers et al. (2008) illustrate that the difference in the share
of the between-group component may not be reflective of the differences in relative
mean incomes alone, since it is not normalized for differences in the number and
the relative size of groups. As we indicated above, the share of the between-group
component in total inequality, as decomposed by the traditional method, has been
typically low since it is taken to be the ratio between observed group inequality and
total (or interpersonal) inequality.
The latter may be looked upon as a particular type of between-group inequal-
ity, where every household (or individual, depending upon the unit of analysis)
constitutes a separate group. Elbers et al. (2008) argue that it is perhaps unrealistic
to compute the share of observed between-group inequality against the benchmark
of total interpersonal inequality, since the actual number of social groups considered
in a decomposition exercise is too small compared to the total population. They
suggest an alternative measure of the share of between-group inequality that is
normalized with respect to the number and relative size of groups. They replace
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total inequality in the denominator of the conventional ratio with the ‘maximum
between-group inequality that could be obtained if the number of groups and their
sizes were restricted to be the same as for the numerator’.
Elbers et al. (2008) compare the extent of between-group inequality with a dif-
ferently constructed benchmark, which is obtained by partitioning the individual
incomes into two non-overlapping groups. If there are two groups are of sizes n1 and
n2, the incomes are rearranged in such a manner that the richest person of the poorer
group is poorer than the poorest person in the richer group. The between-group
inequality between these reconstructed groups can now be seen as the maximum
possible between-group inequality given the relative sizes of the groups. The modi-
fied measure allows meaningful comparison of between-group inequality across
different social settings, where the number and relative size of groups are different.
Thus they propose a seemingly small adaptation of the conventional procedure
to produce an alternative statistic that overcomes some of these limitations of the
conventional decomposition procedure. Elbers et al. (2008) illustrate this point with
reference to South Africa. They show that when inequality is decomposed by racial
group defined in terms of a ‘white/non-white’ classification, the conventional decom-
position suggests that only about 27% of inequality is attributable to between-group
differences. Their alternative statistic, on the other hand, shows that two groups are
80% of the way towards a completely partitioned South African income distribution.
The alternative index proposed by Elbers et al. (2008) is given by
B (Π) = I B (Π) {I | Π( j (n), J )} = R (Π ) I {I Π( j (n), J )},

R B B B
Max Max
where the denominator gives ‘the maximum between-group inequality that could
be obtained by reassigning individuals across the J sub-groups in partition ∏ of
size j(n)’.
Data and Results

We apply the idea drawn on Elbers et al. (2008) to the data collected from two
rounds of the India Human Development Survey (IHDS) conducted in 2004–2005
and 2011–2012. The National Council of Applied Economic Research (NCAER)
collaborated with the University of Maryland to collect this unique data set on
India. The survey covers almost all the states and union territories of India (except
Andaman and Nicobar Islands and Lakshadweep). Using stratified random sampling
technique, 27,010 rural households from 1,503 villages and 13,126 urban households
from over 971 urban blocks were surveyed in 2004–2005. In the second round,
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Table 1: Changes in income inequality in India by

different measures.
IHDS Round Log MD Theil GE(2)
Round 1 (2004–2005) 0.51535 0.55455 1.36538
Round 2 (2011–2012) 0.53376 0.57783 1.50460
Source: Calculated from IHDS data.
conducted in 2011–2012, around 83% of the households were reinterviewed, which

also include split households located within the same village or town. Altogether,
42,152 households were surveyed in the second round.
First, we take a look at the changes in overall inequality in household per capita
income in India during the period between 2004–2005 and 2011–2012. Strikingly,
no matter which measure we use, income inequality has unambiguously worsened
in India during this period (Table 1).
The belief that estimates of inequalities in reported consumption expenditure,
which are usually made on the basis of different rounds of National Sample Surveys
(NSS), grossly underestimate the true extent of economic inequality in India is
somewhat vindicated by this finding. This is no more than reconfirmation of
Amaresh Dubey’s finding, based on the same IHDS data, that Gini coefficient for
income is around 0.55 in India as compared to that of consumption, which is 0.37
(cited in Dev, 2016). Studies based on NSS data have also shown that inequality in
consumption expenditure has increased in the post-reform period, but the increase
has been more in urban than in rural areas.
Does the higher level of overall interpersonal inequality necessarily imply higher
inter-group inequality? Even though it is conceivable that the higher the overall
inequality, the greater is the inequality between groups, the decomposition formula
is also consistent with the scenario when overall inequality is rising while between-
group inequality is declining or not changing. We now examine the contribution
of the between-group component to total inequality following the conventional
method of decomposition and with four mutually exclusive and exhaustive categories
across the religious and caste divides, viz., Muslims, SCs, STs, and Hindu others. The
last category is the residual category excluding the SC and ST households from all
Hindu households. We find that the general entropy measures for c = 0, 1, 2 — all
show declines in the contributions of between-group components to total inequality
(Table 2). It can also be observed that the contributions seem rather low because of
the reason explained earlier.
As discussed earlier, the conventional method is sensitive to the number of
groups considered as well as the relative composition of the groups. We check this
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Table 2: Contributions of between-group component (conventional

decomposition) (with four social groups).
IHDS Round Mean log Deviation GE(0) Theil Measure GE(1) GE(2)
Round 1 5.6% 4.9% 1.9%
Round 2 4.6% 4.0% 1.5%
Table 3: Contributions of between-group component (conventional

decomposition) (with six social groups).
Round 1 10.6% 10.6% 4.7%
Round 2 7.9% 7.7% 3.3%
Table 4: Shares of between-group component (Elbers et al.) (with four groups).
Round 1 8.7% 11.8% 13.6%
Round 2 6.9% 9.5% 10.8%
point with six mutually exclusive groups, splitting the Hindu others category into
Brahmins, high castes, and Other Backward Castes (OBC). As expected, the contribu-
tions of between-group inequality to overall inequality increase, and the contribution
of between-group inequality declines between the two survey rounds (Table 3).
On application of the modified decomposition method as suggested by Elbers
et al. (2008), we find some interesting differences as far as the GE family of measures
is concerned. Clearly, the contributions of between-group inequality at both the time
points have increased, as expected. The contribution of between-group inequality
by applying GE(2) in 2004–2005 turns out to be as high as 13.6%. Yet again, the
between-group contributions are all found to have declined in this period (Table 4).
Interestingly, in this modified approach, the contribution of between-group
inequality does not necessarily increase with increase in the number of groups,
unlike in the case of the conventional approach. A comparison between Tables 4
and 5 illustrates the point. However, what stands out is that, no matter whether we
apply the conventional decomposition method or the method suggested by Elbers
et al., the contribution of between-group inequality to total inequality between the
two rounds of IHDS shows a decline.
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Table 5: Shares of the between-group component (Elbers et al.) (with six
groups).
Round 1 11.6% 12.2% 8.9%
Round 2 8.6% 8.9% 6.2%
Table 6: Income shares and population shares of four social groups in the two rounds of IHDS.
Round 1 Round 2
Income Population Income Share/ Income Population Income Share/
Share Share Population Share Share Share Population Share
Muslim 0.100 0.122 0.818 0.096 0.123 0.784
SC 0.153 0.218 0.701 0.173 0.220 0.787
ST 0.042 0.065 0.652 0.040 0.068 0.595
Hindu others 0.705 0.595 1.185 0.691 0.591 1.170
This takes us to a further limitation of this way of looking at inequality between

groups. Even though the decomposition methods give the quantitative contribution
of between-group inequality in an overall sense, which in our case has declined, it
does not allow us to say anything about the relative attainments of different groups
among the four groups considered. In order to examine this further, we look at
the respective income shares and population shares of four mutually exclusive
and exhaustive social groups, viz., SC, ST, Muslims, and Hindu ‘others’. This is one
of the simplest approaches toward assessing inequality between groups — called
‘representational inequality’ by Reddy and Jayadev (2011) — which substantially
differs from the commonly used approach that views inter-group inequality as a
constituent part of overall interpersonal inequality. Table 6 allows us to compare the
changes in the respective shares, which shows that among the four groups, only the
SC households as a group have been able to improve their income share vis-à-vis
their population share, which is reflected in a higher ratio of the two shares in IHDS
round 2. This is at the expense of the declining ratios for other three groups.
The category Hindu others in Table 6 includes a wide range of sub-categories
with significant differences. We, therefore, further split this category into Brahmins,
high castes, and Other Backward Castes (OBC) in order to see if significant dif-
ferences exist. Now, with six mutually exclusive categories, we find that SCs and
OBCs have experienced improvement in their respective income shares vis-à-vis
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Table 7: Income shares and population shares of six social groups in the two rounds of IHDS.
Round 1 Round 2
Income Population Income Share/ Income Population Income Share/
Share Share Population Share Share Share Population Share
Brahmin 0.099 0.055 1.808 0.085 0.052 1.633
High caste 0.263 0.164 1.601 0.251 0.163 1.538
OBC 0.343 0.376 0.913 0.356 0.376 0.946
SC 0.154 0.220 0.701 0.174 0.221 0.786
ST 0.043 0.065 0.651 0.040 0.067 0.597
Muslim 0.099 0.120 0.821 0.095 0.121 0.785
Table 8: Growth in per capita household incomes of six different

groups
Round 1 Round 2
Per Capita Income Per Capita Income Growth (%)
Brahmin 23065 34954 52
High caste 24117 36297 51
OBC 13953 22183 59
SC 11724 19255 64
ST 11103 16575 42
Muslim 12915 19081 48
population shares, but the ratio of the income share to the population share for each
of the other four categories, viz., STs, Muslims, Brahmins, and other high castes, has
declined (Table 7).
This can be supported by an alternative way of looking at the data as well. If
we look at the average per capita incomes of the households belonging to different
categories, our finding on STs is further strengthened. Among the six groups, STs
have experienced the smallest growth (in percentage terms) in their average per
capita income during the period between 2004–2005 and 2011–2012 (Table 8).
The unfair disadvantage that certain castes and tribes experience in terms of
opportunities in the education and labor market can be viewed as the culmination
of the discriminatory social practices that prevailed in the past. The Constitution of
India mandated punitive action against all forms of discrimination and, at the same
time, adopted the policy of reservation in public employment and publicly funded
b3508_V1_Ch04.indd 72 11-02-2020 13:02:30

educational institutions. Even though questions can be raised about the efficacy of
the kind of affirmative action policy that has been in place in India for long, it is
generally acknowledged that without such policy the erstwhile disadvantaged groups
could hardly move up to the level they have succeeded to reach so far. However, the
larger question of whether the reservation policy with respect to public sector jobs
and admission to higher education has succeeded in reducing the gaps between the
most marginalized group in the Indian society (i.e. the STs) and others still remains.
Similar findings on the relative attainments of SCs and STs and OBCs in the context
of poverty have also been noted by others. Poverty declined much faster for all the
social groups during the period 2004–2005 to 2011–2012 as compared to the period
1993–1994 to 2004–2005. However, the rate of decline in poverty is the highest for
SCs and lower than the national average for the STs, even though STs show a much
higher level of poverty (Panagariya and More, 2013).
India Among the BRICS

Dreze and Sen (1995) made a distinction between two alternative paths of develop-
ment — growth-mediated and support-led. While the development experience of
the East Asian countries, especially South Korea, could be seen as manifestation
of growth-mediated development, Sri Lanka, Costa Rica, and the Indian state of
Kerala could be seen as examples of support-led development, according to their
characterization. In this context, they also discussed the pitfalls of what they called
‘un-aimed opulence’, which aptly characterized Brazil in the 1980s. In the 1960s and
1970s, Brazil was one of the fastest growing countries in the world. But the country
could hardly be seen as an example of growth-mediated development. As a matter
of fact, Dreze and Sen expressed the fear that unless serious attention is paid to the
persistent deprivation of basic necessities of life by large sections of the population,
India might be in danger of ‘going Brazil’s way, rather than South Korea’s’. While
their apprehension has been vindicated to a great extent by the experience of India,
Brazil meanwhile seems to have changed its course so that ‘un-aimed opulence’ can
hardly be used now to characterize Brazil.
If we compared the levels of well-being among the BRICS countries, we wouldn’t
miss the fact that India turns out to be an outlier. While every country in the group
has achieved universal literacy in the younger age groups, India lags far behind
others. All of them also embarked on programs of market-oriented economic
reforms, China was the first where the process started in 1978. Then it was Russia,
after the disintegration of the USSR, and finally Brazil and India followed, embarking
on the path of reform in the early to mid-1990s. In terms of the pattern of growth
and distributional change, China and India have had more in common; both have
b3508_V1_Ch04.indd 73 11-02-2020 13:02:30

seen rapid growth, but with rising inequality (with more of both in China). Brazil
has seen moderate growth, lower in the post-2000 period compared to what was
achieved in the 1980s and 1990s. But falling inequality from 2000 onwards is what
makes the Brazil case most remarkable among the BRICS. As a matter of fact, falling
inequality has been the most common feature across most of the Latin American
countries in this period.2
As the principal focus of this chapter is inequality between social groups, rather
than interpersonal inequality, it would be worthwhile to compare the Indian scenario
with some other BRICS countries, namely, Brazil and South Africa, drawing on the
secondary literature. Fortunately, we can draw on at least one paper that has its focus
on racial/ethnic inequality in India, Brazil, and South Africa, among others. Table 9
draws on Elbers et al. (2008). Theil’s GE(0) measure has been applied to consumption
expenditure data roughly pertaining to the year 2000.
Clearly, overall inequality turns out to be rather low in India3 compared to
the other two countries. We have shown earlier that income inequality in India
estimated from IHDS data is not so low. What is to be noted from Table 9 is that
the contribution of between-group inequality in India also turns out to be low. The
modified formula, as proposed by Elbers et al. (2008) and discussed in the earlier
sections, shows higher values for all three countries, but India’s between-group
inequality figure is still much lower than that of the other two (see the last column
in Table 9). Post-apartheid South Africa is known to have one of the most unequal
income distributions in the world, and racial disparity in income remains at the
core of this high inequality. Recent evidence suggests that Brazil has been able to
reduce racial inequality in the post-2000 years. Affirmative action was introduced in
Brazil in 2002, and the Secretary of Policy for the Promotion of Racial Equality was
established in 2003. Disparities between the racial groups, viz., black (preto), white
(branco), mixed-race (pardo), Asian (amarelo), and Indigenous (indígena), have
declined in several respects. Marteleto (2012) has shown that racial gap in schooling
has been bridged. Yet, between 1980 and 2008, there was no visible downward trend
in the difference in life expectancies of whites and non-whites in Brazil (Table 10).
This is surprising since a number of initiatives in the health care sector have been
taken since the country made the transition from the military rule to a democratic
regime in 1988. The democratic constitution of Brazil included the right to health as
2
Cornia (2015) observes that between 2002 and 2010 inequality fell, although to a different
extent and with different timing, in all the Latin American countries except Nicaragua and
Costa Rica.
3
Here they have taken only rural India, which held roughly three-fourths of India’s popula-
tion at the beginning of this millennium.
b3508_V1_Ch04.indd 74 11-02-2020 13:02:30

Table 9: Contributions of between-group inequality to overall inequality.

∧
Country Groups GE(0) RB RB
India SC, ST, Others 0.136 5.1 10.1
Brazil ‘White’, ‘Black’, ‘Pardo’, ‘Indigenous’ 0.404 15.8 21.6
South Africa ‘White’, ‘African’, ‘Colored’, ‘Asian/Indian’ 0.607 33.3 56.4
Sources: Elbers et al. (2008).
Table 10: Life expectancy at birth by race (1950–2008) in

Brazil.
1950 1960 1980 1991 2008
White 47.5 54.7 66.1 70.8 73.1
Non-white 40.1 44.7 59.4 64.0 67.0
Difference 7.4 10.0 6.7 6.8 6.1
Source: Bucciferro (2017).
a justiciable right. The ‘Unified Health System’ aimed at providing free health care
to everyone without discrimination. While all this led to a significant improvement
in the health outcome in general, it seems that the gap between the racial groups
in terms of such a long term indicator as life expectancy at birth would take a bit
longer to go away.
Conclusion
In this chapter, we have focused on a particular aspect of inequality, namely inequal-
ity between socially identifiable groups, which is believed to have implications for
the socio-political dynamics of a country. In the 1970s and 1980s, Brazil was seen as
a case of ‘un-aimed opulence’, the consequence of which was accentuating inequality
in income and wealth. Since 1988 when Brazil made the transition to a regime of
democratic governance, a number of radical pro-poor measures have been under-
taken, which have had visible impacts on the overall inequality as well as inequality
between the racial groups. In India, by contrast, overall inequality has increased in
the past two decades, and recent evidence suggests that the degree of inequality in
the space of income and wealth is no less in India than that in China and the Latin
American high inequality countries. Brazil’s transition from ‘un-aimed opulence’ to
a more inclusive approach based on active social policies can be a lesson for India
which is clearly faltering on the task of making the growth process inclusive.
There are some similarities among the three countries — India, China, and
Brazil — in their policies over the last 15 years, notably in the importance attached
b3508_V1_Ch04.indd 75 11-02-2020 13:02:30

to macroeconomic stability, especially bringing inflation under control. But there

are some big differences too, such as in the role played by policies directly aimed at
redistributing incomes. When one looks more closely at their histories and policy
regimes, Brazil and India seem to have more in common with each other than
with China, particularly when we consider the more recent phase of constitutional
democracy in Brazil. However, at the risk of sounding cliché, one can say that
each of these countries has something to teach the others. And other developing
countries that have been less successful against reducing inequality and deprivation
can learn from both the strengths and weaknesses of the approaches taken by the
BRICS countries.
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CHAPTER 5
Inequality and Poverty in India and Brazil

Since the 1990s: A Comparative Analysis*
Sripad Motiram
Department of Economics, University of Massachusetts, Boston, USA
Introduction
This chapter deals with inequality and poverty in India and Brazil in roughly the past
two-and-half decades. Apart from being members of the BRICS group that is playing
an important role in the world today, there are two other similarities between these
countries that make their comparison interesting. First, as described below, both
India and Brazil underwent cataclysmic changes during the past two to three decades
which have radically restructured their economies and societies. Second, both India
and Brazil are complex and diverse societies that are characterized by disparities on
several dimensions. Following Stewart (2001), it has become customary to distin-
guish between vertical (interpersonal) and horizontal (group-based) inequalities.
Studies on interpersonal inequality have mostly focused on income or consumption,
whereas those on horizontal inequality (which is essentially multi-dimensional), have
* This is a revised version of a paper presented at the conference: Political Economy of

Emerging Market Countries: The Challenges of Developing More Humane Societies orga-
nized by Niehaus Center for Globalization and Governance at Princeton University, India
Initiative at Georgetown University, and Indian Institute of Management Calcutta in
January 2017. For their comments on a previous version, I thank the discussants Hema
Swaminathan and Emilie Hafner-Burton and participants of the conference.
79
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80 S. Motiram
focused on both income and non-income dimensions (Stewart, 2001, 2010). Despite
its importance, horizontal inequality has been relatively under-researched, although
the situation has been rectified to a certain extent in recent times. Interpersonal and
class-based inequalities are important in both countries. In addition, caste-based
and ethno-racial inequalities are important in India and Brazil, respectively. This
chapter is motivated by the idea that a comparative analysis of India and Brazil can
provide insights into the interrelationship between inequalities and development
and also shed light on policies that can ameliorate inequality.
In light of the above, in the second and third sections, I examine inequality and
poverty in India and Brazil, respectively. I draw upon secondary literature to do so,
including several of my own contributions on India. In the fourth section, I provide
an explanation for the trends documented and present a comparison of the India
and Brazil. The final section concludes.
Inequality and Poverty in India Since the Onset

of Economic Reforms
After following a model of planned development for almost four and half decades,
in the wake of a serious balance of payments crisis, India embarked upon a set of
economic reforms in the early 1990s.1 These reforms aimed to radically restructure
the Indian economy. Broadly speaking, the role of the state was reduced, and markets
(both national and global) were provided a larger role. 2 India has been growing
rapidly since the early 1990s after these reforms were initiated. Nagaraj (2013) has
argued that the best growth phase for India was during the period 2003–2008,
when the average annual growth rate of real gross domestic product (GDP) was
8.9%. During the period 1991–2008, the corresponding figure was 6.5%. There is
considerable debate on the reasons for accelerated growth and when Indian growth
really took off, in particular whether it took off in the 1980s or after the reforms.3
There is also a recent controversy on the new estimates put forward by the Central
Statistical Office (CSO) which has rendered the official growth figures problematic.4
In my opinion, these debates and controversies do not distract from the broad idea
1
India attained independence from British colonial rule in 1947. For an overview of India’s
planned development, see Chakravarty (1987).
2
On these reforms and their impact, see, e.g. Bhadhuri and Nayyar (1996), Joshi and Little
(1996), Srinivasan (2000), and Dreze and Sen (1995, 2013).
3
For an analysis of Indian growth since independence and a discussion of these issues, see
Balakrishnan (2010).
4
See Nagaraj (2015) and the ensuing debate in the pages of the Economic and Political
Weekly.
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Inequality and Poverty in India and Brazil Since the 1990s 81
that Indian economy has displayed unprecedented growth by its own historical
standards and has been one of the fastest growing economies in the world in recent
decades. Also, what is relevant for us is the distributional changes associated with
this growth process. We will first focus on changes in the interpersonal distribution.
Many scholars and policymakers have used the surveys on consumption
expenditure conducted by the National Sample Survey Organization (NSSO) to
understand the Indian interpersonal distribution.5 These are large, nationally
representative surveys that are cross-sectional in nature (i.e. not panels) and usu-
ally conducted every five years, in various rounds. The relevant rounds for us are:
50th (1993–1994), 55th (1999–2000), 61st (2004–2005), 66th (2009–2010), and
68th (2011–2012).6 The limitations of these surveys are well known and have been
discussed in the literature (e.g. Jayadev et al., 2007; Motiram and Vakulabharanam,
2012) viz., the rich are underrepresented and their consumption is undervalued.
These limitations are likely to result in an underestimation of the level of inequality
and its increase over time. The consumption expenditure survey in 1999–2000 (55th
round) differed in its methodology from previous surveys, and therefore many recent
studies ignore it.7
Most studies of inequality in India have used relative measures of inequality (e.g.
the Relative Gini (RG) or Theil). These measures are unaffected if the consumption
expenditure of every one is scaled up or down by the same factor (e.g. doubled or
halved). This requirement, referred to as scale invariance, facilitates comparisons. An
important insight provided by Kolm (1973a, 1973b) is that while relative measures
have the virtue of convenience, they come with their own ethical baggage. He termed
these as ‘rightist’ measures and compared them with ‘leftist’ (absolute) measures
and illustrated his point by considering the case of strikes by workers in France in
the late 1960s. An analogous hypothetical example can be given from the Indian
context: suppose the daily wages of workers and managers, which stand at Rs. 100
and 1000, respectively, are doubled. Inequality, as measured by a relative measure
remains unchanged, but since the managers are earning much more than the workers
now, some could argue that inequality has actually increased.8 Although still sparse,
5
There is a lack of reliable income data on India, although recently (in 2004–2005 and
2011–2012) the India Human Development Survey conducted by National Council for
Applied Economic Research and University of Maryland collected data on incomes.
6
In a departure from past practice, a large survey was conducted in 2011–2012, just two
years after the previous one.
7
Before data from the 61st round was released, several studies attempted to make the data
from the 55th round comparable to data from previous rounds. See, e.g. Himanshu and Sen
(2004a, 2004b) and the references therein.
8
The difference in wages has increased from Rs. 900 to 1800.
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82 S. Motiram
a recent literature has emerged in the Indian context that draws upon these insights
and goes beyond relative measures. I will draw upon Motiram (2013) to provide
a brief and non-technical description of the relevant concepts and ideas. A more
elaborate and technical description is presented in Kolm’s work cited above and
Subramanian and Jayaraj (2013). Let ci denote the consumption expenditure of an
individual i (= 1, 2, … , N) and μ denote the mean consumption. The RG is as follows:
N N
1
RG =
2μ N 2
∑∑ c
i =1 j =1
i − c j  . (1)
Note that the RG is unit-less. Absolute inequality measures embody the principle
of translation invariance, which requires that they are unaffected if all incomes
increase or decrease by the same amount. Examples of absolute inequality meas-
ures are the Absolute Gini (AG) and Standard Deviation. The AG is calculated as
follows:
N N
1
AG =
2N 2
∑∑ c
i =1 j =1
i − c j  . (2)
For the above hypothetical example, it is quite easy to see that the AG increases when
the incomes of the workers and managers double. However, the AG is not unit-less.
Can we preserve the convenience of relative inequality measures while avoiding
the ethical problem that they embody? Intermediate measures try to achieve this
trade-off by incorporating the principle of unit consistency, which requires that
inequality ranking between two distributions is unaffected if both are scaled by the
same factor, i.e. inequality comparisons do not depend upon the units in which
distributions are expressed. Examples of intermediate measures are the Intermediate
Gini (IG) and the product of Standard Deviation and Coefficient of Variation. The
IG is determined as follows:
2
1 1 N N 
IG = RG ∗ AG = 
μ  2N 2
∑∑
i =1 j =1
c i − c j  .

(3)
Note that IG satisfies unit consistency since RG is unaffected by scaling, and if

distributions are scaled by a factor, AG simply gets multiplied by this factor.
In my opinion, it is useful to examine inequality using different measures, and
I therefore present various estimates in Tables 1 and 2. As we can observe (from
column (1)), RG for nominal consumption expenditure has increased in both rural
and urban areas, although the increase in urban areas is more pronounced. Column
(2) presents the RG for real consumption expenditure, and the trends are roughly
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Table 1: Inequality in Monthly Per-Capita Expenditure (MPCE), rural India.

Year RG (Nominal) RG (Real) AG IG W
1993–1994 0.286 0.2844 6.998 1.998 0.222
2004–2005 0.305 0.2997 8.629 2.630 0.227
2009–2010 0.300 0.3059 9.353 2.798 0.223
2011–2012 0.311
Notes: RG: Relative Gini, AG: Absolute Gini, IG: Intermediate Gini, W: Wolfson Index.
Table 2: Inequality in Monthly Per-Capita Expenditure (MPCE), urban

India.
Year RG (Nominal) RG (Real) AG IG W
1993–1994 0.344 0.3448 13.551 4.664 0.284
2004–2005 0.376 0.3757 16.870 6.342 0.317
2009–2010 0.393 0.4015 21.504 8.455 0.326
2011–2012 0.390
Notes:
1. Estimates for RG (Nominal) are author’s computations from NSS data.
2. Estimates for RG (Real) are from Dubey and Thorat (2012).
3. Absolute and IG are from Subramanian and Jayaraj (2013). These are for real MPCE
computed by using Consumer Price Index for Agricultural Laborers (CPIAL) in
rural areas and Consumer Price Index for Industrial Workers (CPIIW) in urban
areas.
4. Estimates for Wolfson Index are for nominal MPCE and from Motiram and Sarma
(2014).
similar. Both AG and IG show increases in rural and urban areas. India is a large
country with substantial variation in prices that different households face. Mishra
and Ray (2011) take this into account and show that inequality has increased even
after doing so.
A growing body of research has emerged recently that argues that we should
move beyond traditional notions and measures of inequality, particularly if we want
to understand conflict. This literature on ‘polarization’ is discussed in greater detail
in Chakravarty (2009) and Motiram and Sarma (2014). One important concept
in this literature is ‘bipolarization,’ which is based upon the understanding that
a decline in the share of the middle could have negative implications for stability
and could accentuate the possibility of conflict. Measures of bipolarization are
derived by conceptualizing the middle in terms of the median and replacing the
Dalton–Pigou principle used in traditional measures of inequality (e.g. RG) with
two other principles: Increasing Spread and Increased Bipolarity. The Dalton–Pigou
principle holds that a regressive transfer (from a poorer to a richer person) should
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84 S. Motiram
increase inequality and a progressive transfer should decrease inequality. The

principle of Increasing Spread holds that bipolarization increases under the follow-
ing circumstances: a rich person becomes richer or a poor person becomes poorer
with the median being unaffected; or a transfer occurs from a poor person to a rich
person across the middle (median). On the contrary, Increased Bipolarity holds that
bipolarization increases if a richer and poorer person on the same side of the median
are brought together due to a transfer from the former to the latter — this process is
linked to the formation of poles on either side of the median. One popular index that
has been proposed in the literature is the Wolfson Index. Let m and L(0.5) denote
the median and the share of consumption held by the bottom half of the population,
respectively.9 The Wolfson’s index is denoted as follows:
4μ  1 RG 
W=  − L(0.5) − . (4)
m 2 2 
From Tables 1 and 2, we can observe that bipolarization has been stable in rural
areas, but increased in urban areas since the 1990s.
While the above measures are based upon consumption expenditure, the NSSO
also conducts an All-India Debt and Investment Survey, which can be used to esti-
mate inequality in wealth. This survey is conducted at less frequent intervals, and for
the period that we are interested in, three years are relevant: 1991, 2002, and 2012.
Despite the availability of these data, wealth inequality in India has been underex-
plored (particularly compared to consumption expenditure inequality). Jayadev et al.
(2007), Subramanian and Jayaraj (2013), and Anand and Thampi (2016) are some
exceptions. Anand and Thampi (2016) present the most recent analysis and show
that the RG of wealth as measured by total assets has increased from 0.65 to 0.74.
If wealth is measured in terms of net worth, the RG increased from 0.66 to 0.75.
Having examined interpersonal inequality, we will now move to group-based
inequality. Caste is one of the important forms of social stratification in the Indian
context. The ‘caste system’ is incredibly complex, defying easy understanding and
generalization, and continues to be the subject of considerable debate and contro-
versy today. In the interest of space, it is not possible to go into these debates, but
readers can refer to the following studies (and the references therein): Chatterjee
(1998), Gupta (2000), Dirks (2001), and Rawat and Satyanarayana (2016). I will
examine the broad caste groupings that secondary statistical data like the NSS allow
us to analyze: Scheduled Castes (SC), Scheduled Tribes (ST), Other Backward Classes
(OBC), and Others. The first three groups (particularly SCs and STs) have been
9
L(0.5) is nothing but the ordinate of the Lorenz curve at 50% (or 0.5).
b3508_V1_Ch05.indd 84 11-02-2020 13:03:05

historically disadvantaged against and lag behind on many dimensions: income,

education, etc. In fact, the scheduled groups are referred to in this manner because
they are given a special place (schedule) in the Indian constitution. Motiram and
Naraparaju (2015) presented the cumulative distribution functions (CDFs) of
consumption expenditure for these four groups in 2011–2012 and showed that the
CDFs of the disadvantaged caste groups lie above that of Others in both rural and
urban areas. The average consumptions are lower for the scheduled groups compared
to OBCs, who themselves have lower average consumption compared to Others.
A serious controversy has erupted in recent times on poverty measurement
in India. The official poverty lines recommended by two official committees
(Tendulkar and Rangarajan to be artificially low and based upon methodologies
that are indefensible.10 However, as the CDFs discussed above reveal (and as noted
by Motiram and Naraparaju, 2015), irrespective of the poverty line one uses, there
was an unambiguous ranking of poverty rates in both rural and urban areas in
2011–12.11 The Head Count Ratio (HCR) of poverty for the scheduled groups is the
highest, followed by the same for OBCs, and then for the Others. Studies that have
examined poverty in previous years using official poverty lines (e.g. Motiram and
Vakulabharanam, 2011) have come to a similar conclusion.
What about poverty of the entire population? In Table 3, I present (from
Motiram and Naraparaju, 2015) the various quantiles of real consumption and
their growth in the period 2004–2005 to 2011–2012. As we can observe, all the
quantiles, including the poorest, have experienced growth. This implies that pov-
erty has fallen, irrespective of the poverty line that is used. However, the poorer
groups have grown at slower rates compared to the middle and richer groups; this
is particularly pronounced in the urban areas. Motiram and Naraparaju (2015) also
show that the poor among disadvantaged caste groups have grown at slower rates
compared to the overall average person (median). Motiram and Vakulabharanam
(2012) carry out a decomposition exercise to examine whether inequality between
scheduled and non-scheduled groups in consumption has increased or not.12 In
this exercise, an inequality measure that belongs to the single-parameter entropy
family of inequality indices (e.g. Log-Mean Deviation or Theil, see Shorrocks and
Wan, 2005) is decomposed into two components: inequality between groups and
10
For a discussion of debates and controversies on Indian poverty, see Subramanian (2012,
2014), Vakulabharanam and Motiram (2012), and the references therein.
11
Technically, this is an instance of first order stochastic dominance.
12
Prior to 1999–2000 (55th Round), the NSS surveys did not enumerate OBCs separately,
but combined them with the Others. So, it is only possible to examine the inequality
between scheduled and non-scheduled groups.
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86 S. Motiram
Table 3: Growth of rural and urban quantiles between 2004–2005 and 2011–2012, India.
Rural (Real) Urban (Real)

2004– 2011– Growth of the 2004– 2011– Growth of the
Percentile 2005 (Rs.) 2012 (Rs.) Quantile (%) 2005 (Rs.) 2012 (Rs.) Quantile (%)
5 432.53 525.80 21.56 586.92 726.50 23.78
10 497.70 598.80 20.31 691.62 861.00 24.49
15 549.05 665.30 21.17 774.68 983.50 26.96
20 591.58 721.63 21.98 854.60 1089.00 27.43
25 632.44 772.25 22.11 935.56 1191.50 27.36
30 675.18 826.00 22.34 1015.25 1296.00 27.65
35 714.80 877.17 22.72 1093.67 1397.89 27.82
40 757.16 923.25 21.94 1184.75 1510.25 27.47
45 802.36 976.00 21.64 1285.65 1633.33 27.04
50 849.49 1035.50 21.90 1389.92 1758.00 26.48
55 898.71 1099.63 22.36 1505.73 1905.40 26.54
60 952.26 1167.20 22.57 1626.67 2070.00 27.25
65 1013.08 1248.50 23.24 1783.85 2236.00 25.35
70 1083.05 1335.86 23.34 1936.06 2459.33 27.03
75 1170.16 1447.60 23.71 2145.05 2717.25 26.68
80 1281.28 1582.70 23.52 2415.98 3068.00 26.99
85 1431.20 1771.75 23.79 2762.24 3510.50 27.09
90 1668.92 2053.67 23.05 3313.48 4280.60 29.19
95 2174.28 2626.25 20.79 4446.99 6014.40 35.25
Notes: Data are expressed in 2011–2012 prices. Real values are computed using price indices implicit in official
poverty lines.
Source: Motiram and Naraparaju (2015).
inequality within groups. The former, and its contribution to overall inequality, can
be used to understand whether group-based inequality has increased. After rising
during the period 1993–1994 to 2004–2005, inequality between scheduled and
non-scheduled groups has fallen since.
Class is another important cleavage in the Indian context. Motiram and
Naraparaju (2015) use the NSS data on consumption expenditure to divide rural
India into seven classes based upon their ‘household type’13 and land possessed:
Rural households are divided into five types based upon their main source of livelihood,
13
Self-employed in agriculture, Self-employed in Non-agriculture, Agricultural Laborers,

Other Laborers, and Others (a residual category).
b3508_V1_Ch05.indd 86 11-02-2020 13:03:06

Large farmers (greater than 10 hectares), Medium farmers (between 2 and 10 hec-
tares), Small farmers (between 1 and 2 hectares), Marginal farmers (between 0 and
1 hectare), Self-employed in non-agriculture, Agricultural and other laborers, and
Others. They show that the rankings of poverty rates and average consumption are
as expected, with the lower classes characterized by higher poverty rates and lower
average consumption. In urban areas, Motiram and Naraparaju (2015) use the house-
hold type (Self-employed, Regular Wage, Casual Labor, and Others) to divide the
population. They show that the poverty rates show a clear ranking from highest to
lowest: Casual Labor, Self-employed, and Regular Wage. Average consumption shows
the reverse ranking. They also show that consumption of the poor among Casual
Laborers has grown at a slower pace compared to the overall average (median).
Vakulabharanam (2010, 2014) developed a rigorous class-schema based upon
landownership and occupations to classify the Indian population into various classes.
He used NSS consumption data and performed a decomposition exercise based on
the Gini index to show that class-based inequality has been rising since the 1990s.14
Overall, during the high-growth period since early 1990s, India has witnessed an
increase in interpersonal inequality in consumption and wealth. This is robust to
the way we conceptualize and measure inequality (traditional: relative, absolute, and
intermediate; polarization) although the results look much stronger with absolute
and intermediate measures. We should also appreciate the (highly likely) possibil-
ity that the real increase in inequality is starker than what the data reveals, given
the limitations that we discussed above. Class-based inequality has also increased.
Caste-based inequality has come down in consumption and other domains (e.g.
education) although there are still stark differences among caste groups.15 Having
examined the Indian context, we now move to the Brazilian context.
Brazil in the Age of a Second Democratization

In the following discussion, I will draw upon secondary literature to examine inequal-
ity and poverty in Brazil in recent decades. Before doing so, it would be worthwhile
to provide some background.16 The period since the mid-1980s saw a transition from
a military regime and has been described as a phase of “modernization” within a
14
This decomposition is similar to one based upon the single-parameter entropy family of
indices discussed above, except for an overlapping component in addition to the between
and within components.
15
On the reducing gap in illiteracy, see Nagarajan (2013). Motiram and Sarma (2014) present
differences in average consumptions.
16
I will draw upon Ferreira de Souza (2012) and Fausto and Fausto (2014, Chapter 10).
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88 S. Motiram
democratic framework (Fausto and Fausto, 2014) or ‘redemocratization’ (Skidmore,

1996).17 Despite the end of military rule and the emergence of a constitution (in
1988), the 1980s and early 1990s saw enormous political and economic turmoil.
Fernando Collor de Mello, the elected president resigned in 1992; the rate of infla-
tion kept increasing throughout the 1980s (Baer, 1995 as cited in Skidmore (1996:
194)) and was as high as 2500% in 1993 (Ferreira de Souza, 2012); and five different
plans were implemented during the period 1986–1991. The Real Plan (Plano Real)
implemented in 1994 tried to control inflation through a new currency, tighter
monetary policy, trade liberalization, and privatization. Although this plan was suc-
cessful in controlling inflation, the Brazilian economy came under stress due to the
two crises that hit the world in the late nineties, viz, East Asian and Russian, which
led the Central Bank to adopt inflation targeting. In the 2000s, Brazil benefited from
Chinese growth, which fueled a rise in the prices of Brazilian exports (commodi-
ties) and from increased foreign direct investment. The Brazilian government took
advantage of better economic conditions to increase spending on social programs
(more on this below). During the period 1998–2007, Brazilian real GDP grew at the
average annual rate of 3.0%. In the subsequent years, it displayed high growth rates
in 2008 (5.1%) and 2009 (7.5%).18
Given this background, we now turn to an examination of inequality in Brazil.
Latin America has historically been characterized by very high levels of inequality.19
In a comparison to various regions of the world in 2004, Lopez-Calva and Lustig
(2010, Figure 1-1) show Latin America to be characterized by the highest level of
inequality. Latin America has an RG of about 55%, whereas the corresponding figure
for South Asia and East Asia are about 40%. Brazil is no exception to this Latin
American feature, and has typically been characterized by high levels of inequal-
ity, e.g. second highest in the world in 1984 (Ferreira et al., 2008). To understand
Brazilian inequality, scholars have used various household surveys, but the Pesquisa
Nacional por Amostra de Domicílios (PNAD) is quite popular (Ferreira de Souza,
2012). Like the surveys conducted by NSSO in India discussed earlier, these are large
17
Fausto and Fausto (2014) divide Brazilian history prior to 1985 into the following phases:
1500–1822, 1822–1889, 1889–1930, 1930–1945, 1945–1964, and 1964–1984. On the con-
trary, Skidmore (1996) divides it into eight phases: 1500–1750, 1750–1830, 1830–1870,
1870–1910, 1910–1945, 1945–1964, and 1964–1985.
18
These figures are from the Statistical Appendix of the latest World Economic Outlook of
the International Monetary Fund (IMF, 2016, Table A4).
19
Cornia (2015) discusses the colonial origins of high inequality in Latin America and
shows that Latin American inequality has grown since the nineteenth century.
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Table 4: Inequality in household per-capita

income, Brazil, 1993–2009.
Year Relative Gini
1993 0.60
1995 0.60
1997 0.60
1999 0.59
2001 0.59
2003 0.58
2005 0.57
2007 0.55
2009 0.54
Source: 1993–2007 estimates are from Barros et al. (2010).
2009 estimate is from Ferreira de Souza (2012).
cross-sectional surveys. However, unlike the Indian surveys, these are conducted at
more frequent intervals, almost annually.
To the best of my knowledge, the literature on Brazilian inequality has focused
upon relative measures (e.g. RG) and ratios of income shares of rich and poor
quantiles (e.g. richest 20% to poorest 20%) to estimate inequality. I will therefore
(and unlike in the discussion on India in the second section) only discuss relative
measures for Brazil. Barros et al. (2010) present the RG of income inequality using
the PNAD surveys for the 30-year period 1977–2007. Inequality reached its peak
level (about 63%) in 1989 and its lowest level (about 55%) in 2007. In Table 4, I pre-
sent inequality estimates for the period since 1990s from Barros et al. (2010) and
Ferreira de Souza (2012). From this table, it is clear that inequality has been falling
steadily since the 1990s, although it continues to be high compared to international
standards. Among Latin American countries, Brazil is not unique in this regard.
Lopez-Calvo and Lustig (2010, Figure 1-2) consider 17 countries in Latin America
and show that during 2000–2006, inequality fell in 12 of them, with Ecuador
registering the sharpest fall.
Several scholars (e.g. Ferreira de Souza, 2012; Soares et al., 2016) have pointed
out that poverty has been falling in Brazil in recent times. The Brazilian govern-
ment has suggested two different thresholds of household per-capita income, one
for poverty (100 Real) and the other for extreme poverty (50 Real) (Soares et al.,
2016). Both poverty and extreme poverty have decreased sharply. During the period
2004–2013, the former fell by about 14 percentage points (22.4% to 8.9%) and the
latter fell by about 4 percentage points (7.6% to 4%) (Soares et al. 2016). Average
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90 S. Motiram
income has been rising in Brazil since the mid-1990s, particularly since 2003. The
mean real income (household income per-capita, in US dollar Purchasing Power
Parity (PPP) terms) grew from $221 in 1995 to $245 in 2003 and then to $372 in 2009
(Ferreira de Souza, 2012, Figure 1). What is more interesting is that the income of
all the centiles, including the poor, grew. In fact, the incomes of the poor grew at a
much faster rate than those of the middle and richer groups. The growth incidence
curve from Ferreira de Souza (2012, Figure 2) has a distinctly downward slope.
Moving from interpersonal to group-based considerations, Soares et al. (2016)
classify Brazilian households into four groups based upon occupations: agricultural,
pluriactive, non-agricultural rural, and non-agricultural urban, based upon source
of income and official designation (of rural or urban).20 In the early 2000s, the rank-
ing of deprivation of these groups (highest to lowest) was as follows: agricultural,
pluriactive, non-agricultural rural, and non-agricultural urban. Soares et al. (2016,
Figure 1A) show that poverty has fallen steeply during 2004–2013 for all the groups;
except for Pluriactive households, extreme poverty has also fallen for all groups
(Soares et al., 2016, Figure 1B). The performance for the most deprived group, agri-
cultural households, is particularly impressive — poverty has fallen from almost 50%
to about 25%, and extreme poverty has fallen from about 20% to about 5%. The share
of agricultural households has been falling, whereas the share of non-agricultural
urban households has been rising (as is expected from the perspective of structural
transformation). On the contrary, the shares of Pluriactive and Non-agricultural
rural households have been stable (at about 8% and 4%, respectively). Soares et al.
(2016) argue that the stability of the share of pluriactive households, combined
with the lack of progress in eradicating extreme poverty among them, is a cause for
concern and that these households should be the target of specific policies.
Inequality based upon race and ethnicity is also of considerable interest in
the case of Brazil and has in fact attracted attention in the media recently, e.g. The
Economist (2008) and Barbara (2015). Racial/ethnic inequality has deep historical
roots going back to the colonial period and slavery. In the interest of space, I will not
20
“1. Agricultural households are defined as any household in which at least one mem-
ber is employed in the agricultural sector, and 67 per cent or more of the household
income comes from agricultural activities. 2. Pluriactive households are defined as
those in which at least one member is employed in the agricultural sector, but less than
67 percent of the household income is derived from agriculture. 3. Non-agricultural
rural households are defined as households located in areas officially designated as
rural, but without any household members working in agriculture. 4. Non-agricultural
urban households are defined as those located in official urban areas, without any
household members working in agriculture” (Soares et al. 2006, p. 3).
b3508_V1_Ch05.indd 90 11-02-2020 13:03:06

go into these details and instead refer the readers to Skidmore (1996) and Bucciferro
(2017). Bucciferro (2017) presents a comprehensive analysis of the evolution of racial
inequality on many dimensions: education, life expectancy, occupation, and income.
In general, racial differences have narrowed over time, but continue to be high. In
the period of concern to us, progress was modest, e.g. the difference between years
of education of whites and non-whites has fallen from 2.1 years in 1998 to 1.8 years
in 2008. Bucciferro (2017, Figure 5) presents the evolution of incomes of various
groups (Black/Pardo, Black, Indigenous, Asian, Pardo (Brown)) relative to that of
whites since the 19th century. The ratio of average non-white to white earnings rose
from 0.417 to 0.505 during 1998–2008.
We now move to a comparison of India and Brazil and some explanations for
their different performance.
Comparison and Explanations

Over the past two-and-half decades or so, India has grown rapidly, but dispari-
ties have also grown. Interpersonal inequality has increased, in whatever way we
conceptualize and measure it, particularly in urban areas. Class-based disparities
have also increased. One idea that has captured the imagination of both scholars
and policymakers in India is ‘inclusion’ or ‘inclusive growth’. In fact, inclusive
growth was made an objective by the erstwhile Planning Commission, although
its conceptualization was too broad and not operationalized. Several scholars have
tried to operationalize the idea of inclusion and examine whether Indian growth has
been inclusive. Motiram and Naraparaju (2015) use a framework developed in the
literature on pro-poor growth to argue that Indian growth in the 2000s has not been
inclusive. They do so by examining whether the growth of quantiles of the poor is
adequate or not (in comparison to the growth of the average person). They find that
poverty has declined, but the poor have grown at slower rates compared to the mid-
dle and richer groups. The shortfall in the growth of the poor is particularly severe in
urban areas. They also extend this framework to examine subgroups of the popula-
tion and find that growth of the poor belonging to disadvantaged groups (castes
and classes) has been inadequate. Other scholars (e.g. Jayaraj and Subramanian,
2012a, 2012b; Suryanarayana and Das, 2014) have used other methodologies to
assess inclusion, and come to the same conclusion. I have discussed the details of
these studies in Motiram (2015), so I will provide only a brief summary here. Jayaraj
and Subramanian (2012a, 2012b) draw upon the literature on the “Talmudic Estate
Problem” (that concerns the division of an estate among heirs) and the allocation
of a poverty alleviation budget. They employ various fairness criteria and use NSS
data on consumption expenditure to examine how the pie of Indian growth has
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92 S. Motiram
been divided among various quantiles of the population and among socioeconomic
groups. They conclude that the actual allocation among these sections of the popula-
tion falls short of even the minimally fair criterion. Suryanarayana and Das (2014)
examine two different elasticities (mean consumption with respect to mean income,
median consumption with respect to mean consumption) and an “inclusive coef-
ficient,” which depends upon the share of the population that has less than 60% of
the median consumption. The above elasticities have to be greater than unity and the
inclusive coefficient needs to be high for growth to be considered broad-based. They
consider the entire population and disadvantaged caste groups and use NSS data on
consumption expenditure to conclude that this is not the case — in fact, they find
that the inclusive coefficient has fallen during the period 1993–1994 to 2011–2012.
Why has high growth in India not translated into inclusion? Why has Indian
inequality increased? First, policies followed since the early 1990s (of course, in
conjunction with other factors) have benefited the richer groups disproportionately.
In particular, remunerative jobs that can absorb the rural or urban poor have not
been created adequately. Creation of jobs in labor-intensive manufacturing would
have gone a long way toward alleviating poverty and increasing the incomes of the
poor. However, this has not occurred and manufacturing has been quite sluggish.
Instead, jobs have been created in sectors like construction — in particular, rural
construction — these jobs are not remunerative.21 To explain this, some have
focused on labor regulations as the culprit, but this is in my opinion a red herring.22
Paradoxically, the nature of the growth process itself, and increasing inequality, is
likely to be responsible for this. The growth process has disproportionately benefited
the rich and created a demand for goods (e.g. foreign vacations, iPhones) that do not
give a fillip to investment and job-creation in labor-intensive sectors.23 Second, poli-
cies toward the social sector and social welfare have been inadequate. The Mahatma
Gandhi National Rural Employment Guarantee Act (MNREGA) (an employment
guarantee scheme in rural India) put in place by the United Progressive Alliance
government that came to power in 2004 elections has undoubtedly contributed
to improvement in rural areas, but its implementation has varied across states.
No comparable scheme exists in urban areas, where the fight against poverty has
seen serious setbacks.24 Moreover, some of the welfare schemes suffer from poor
21
For details of jobs created since 1993–1994 in various sectors, see Thomas (2014).
22
See Papola and Pais (2007) and Papola (2013) for an extensive discussion of labor regula-
tions and their reform.
23
See Kotwal et al. (2011) for a detailed discussion.
24
See Mishra and Ray (2011), and Vakulabharanam and Motiram (2012) for a discussion
of this issue.
b3508_V1_Ch05.indd 92 11-02-2020 13:03:06

implementation, e.g. Construction Worker Welfare Boards have been put in place,
and money has also been allotted to them, but many construction workers are not
even aware of their existence (e.g. see Naraparaju, 2015, for an example from Navi
Mumbai).
Coming to Brazil, inequality continues to be high, but has fallen substantially.
Both poverty and extreme poverty have fallen. Some studies that have rigorously
examined whether Brazilian growth has been pro-poor or not have concluded in the
affirmative, e.g. Kakwani et al. (2010) for the period 2001–2004. Why has inequality
fallen and growth been pro-poor? Several studies shed light on this question. Barros
et al. (2010) use a decomposition analysis to understand the various proximate fac-
tors that have contributed to the reduction in inequality. A major contribution has
been made by change in the distribution of labor income per adult, which has in turn
been driven by a reduction in skill premium and decrease in educational inequal-
ity. A second important component is the change in the distribution of non-labor
income per adult. Non-labor incomes have increased considerably due to public
transfers — pensions, social security benefits, and conditional cash transfers (Bolsa
Escola and Bolsa Familia). Ferreira et al. (2009) provide evidence from several studies
to show that social policies and their effective targeting have played a major role in
reducing inequality and poverty.25 They also document expenditures on the social
sector since the 1980s (Ferreira et al., 2009, Figure 1) showing that there is a sharp
increase after 1988, when the constitution came into effect, e.g. during the period
1991–1998, the monthly benefit bill increased by more than four times ($180–750
million). Ferreira de Souza (2012) points out that social security and pensions com-
prised about 11% of the GDP in 2006. He also highlights the crucial role played in
the reduction of inequality and poverty by the minimum wage, which is also linked
to government benefits. Since the constitution came into effect, the minimum wage
has increased considerably — in real terms it more than trebled (US $PPP 83 to
US $295) during the period 1995–2011 (Ferreira de Souza, 2012, Figure 6). Cornia
(2015, Table 8) also documents a substantial increase in real minimum wage in Brazil
as well as in some other Latin American countries.
The comparison of India and Brazil illustrates the key role of social policy
in the reduction of inequality and poverty — the success of Brazil despite much
lower growth can be attributed largely to this. It is also worth commenting briefly
about the role of ideology and the different political regimes that India and Brazil
have witnessed. Indian state and elites have displayed only a lukewarm commit-
ment toward the social sector and poverty alleviation. Rubrics like neo-liberal,
25
Kakwani et al. (2010) have also highlighted the crucial role that social policies have played
in protecting the poor from adverse shocks and delivering pro-poor growth.
b3508_V1_Ch05.indd 93 11-02-2020 13:03:06

94 S. Motiram
pro-business, and predatory that have been applied to the Indian state in recent
times are quite suggestive.26 By the standards of even developing countries, Indian
public expenditure on the social sector is abysmally low. A good illustration of this
can be provided by examining public expenditure on health, which in 2013 stood at
1.2% of GDP, much lower than the same for Brazil (4.2%), Mexico (2.9%), and China
(2.7%).27 On the contrary, the Brazilian state (at least in some phases) has shown a
more social democratic character. In this regard, Brazil has not been an exception,
and many Latin American governments, which have been left-wing have shown a
more serious commitment toward redressing inequality and alleviation of poverty.
Cornia (2015) classifies Latin American countries in the decade of 2000s into four
groups based upon the ideological profiles of the governing parties: Radical Left,
Social Democratic Left, Centrist, and Center Right and Right. He shows that the
sharpest decreases in inequality per year have been experienced by the countries
ruled by the Social Democratic Left, followed by the Radical Left, Centrist, and
Center Right and Right. He classifies Brazil under Social Democratic Left and shows
that it experienced a decline of 0.65 percentage points per year in its Gini index
during the period 2003–2009. He also conducted a regression analysis for the entire
Latin American region to show that the nature of the regime (social democratic and
radical populist) and quality of democracy are significantly associated with lower
inequality.
Discussion and Conclusions

In the analysis above, I have provided an overview of changes in inequality and
poverty in India and Brazil in roughly the past two and half decades. In India,
inequality has increased, and although poverty has decreased, the reduction has
been disappointing given the high growth. On the contrary, in Brazil, inequality
and poverty have both reduced substantially, although inequality still continues to
be quite high. This chapter highlights the crucial role played by social policies in
these differential outcomes.
Before concluding, it is important to make two caveats. First, as we have
discussed above, Brazil has made only modest progress in the reduction of ethnic/
racial inequality. While social policy has been effective in reducing interpersonal
26
For a recent survey of conceptualizations of the Indian state, see Nagaraj and Motiram
(2017).
27
The comparison with developed countries is even starker: US — 8.5%, UK — 8.0%, and
Norway — 8.1%. These figures are taken from the Economic Survey of India, Government
of India (2013). Also see Kohli (2002) and Dreze and Sen (2013).
b3508_V1_Ch05.indd 94 11-02-2020 13:03:06

and class-based inequalities, it did not contribute much on this front. Based upon
a rigorous methodology and after considering various types of fiscal measures,
Pereira (2016) concludes that: “Fiscal interventions did not have a significant impact
in reducing the divide between whites and non-whites in Brazil.” Brazil therefore
serves as a good example of why horizontal inequalities merit serious attention and
are distinct from vertical inequalities. Second, scholars have argued that some of
the Brazilian policies have reached their limits, e.g. see Ferreira de Souza’s (2012)
discussion on the minimum wage. This issue and the fiscal concerns involved in
sustaining the social programs currently in place, require further discussion.
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CHAPTER 6
Sustainable Development and BRICS: Unity

Amid Diversity?
Anup Sinha
Heritage Business School, Kolkata, India
Introduction
Sustainable development is about ensuring that the current generations of human
beings live in such a fashion that all other living beings, including future genera-
tions of human beings, can live within the limited resources available on the planet
earth. Human development, with amazing growth in material goods and services
aided by technology as well as the energy obtained from fossil fuels, has been quite
dramatic in the last 200 years or so. However, it is being increasingly realized that
in the process of material growth and development, human beings have wrought
severe damage on the physical and natural environment. Some of the damages have
been considered to be irreversible and global in nature, such as climate change and
its effects.
Hence, sustainable development is a global problem that must be tackled
through an international consensus on strategies and policies. Within this bigger
rubric of global interventions, there are some problems that are local in character
and require national or even municipal interventions. For instance, the preservation
of biodiversity or some endangered species may be a national problem requiring
national policies for conservation and protection. Another example of a local
problem could be a factory emitting noxious fumes that cause some serious lung
diseases. This is a problem with limited effects around the physical neighborhood
99
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100 A. Sinha
of the factory. A simple solution would be to close it down, or force it to change its
technology, or at least pay a price for the social health costs its pollution creates.
Given the way our modern societies are organized, nation states do have an
important role to play in ensuring the world moves on to a sustainable development
path. First of all, when a global problem is being tackled, say for instance global
warming and climate change, a global consensus on the policy or actions that are
to be taken is required. However, nation states have to agree to the solution and
undertake their own parts of the action, consistent with the global decisions. Second,
their own national policies can go a long way in efficiently tackling local problems
of environmental conservation and protection. Third, a government can play a very
critical role in creating an enabling atmosphere where individuals and communities
make plans and undertake innovative solutions at the grassroots level. Fourth, the
nation state can create social features of sustainable living in terms of improved well-
being measured in terms of more employment, higher incomes, higher educational
attainments, and better health and sanitation facilities. Finally, the nation state
might influence, through mass communication techniques, a better sensitization of
citizens to the importance of sustainable development. This in turn would nurture
an individual’s commitment to changing one’s own lifestyle and consumption habits.
Hence even though sustainable development is a global issue, national policies and
interventions are an important part of any solution that will drive the world economy
on to a sustainable pathway (Sarkar and Sinha, 2018).
In the next section, we discuss some of the sustainability issues that are germane
to a nation state and its governance. This will give us a better understanding of the
importance of the nations referred to as BRICS — Brazil, Russia, India, China, and
South Africa.
Environmental Issues, the Nation State, and BRICS

Nation states, defined territorially in terms of political boundaries, face a variety
of environmental problems (United Nations, 2013). The most common of these
problems are air pollution and carbon dioxide emissions, water pollution, loss of soil
fertility due to overuse of fertilizers and pesticides, and the presence of chemicals in
everyday life such as those found in food, toiletries, and cosmetics. Loss of biodiver-
sity and interrupted bio-geo-chemical cycles like the nitrogen cycle and phosphorous
cycle are also present in many nations. Along with these ‘bads’ (opposite of economic
goods), there are problems of depletion of resources necessary to support life like
fresh water, marine stocks, and the fertility of the top soil (without which food
would not be available). The extent of these problems varies from nation to nation,
depending on the level of effective government policies, overall economic develop-
ment, educational attainments, and the geography of the place. For instance, a nation
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Sustainable Development and BRICS: Unity Amid Diversity? 101
like Saudi Arabia that is dependent heavily on a finite stock of oil for development,
may face one set of problems related to a non-renewable resource for sustainable
development, while another nation like Bolivia may face problems related to cutting
down of rainforests for timber and fuel without an adequate pace of replenishment
of trees and biodiversity. Other nations like China or India may face problems from
a burgeoning population requiring more thermal power and urban space along with
the rapidly growing number of cars and trucks. Hence, each country needs to address
its own specific set of problems, yet be consistent with global goals and targets.
BRICS is not one nation. It is a set of five countries that are quite diverse and
spread over four continents — Brazil in South America, Russia in Europe, India
and China in Asia, and South Africa in Africa. BRICS was born out of a changing
political world order. The unipolar world after the Cold War with US hegemony gave
way to a multipolar system after the great financial crisis of 2008. The BRICS nations
were growing rapidly and collectively constituted a significant share in the global
economy. Goldman Sachs conducted a study which claimed that these economies
would be the fastest growing ones and by 2050 would provide leadership to the
world economy. In the report, O’Neill (2001) claimed that these nations, especially
China, would affect the rest of the world through their domestic policies, particularly
fiscal and monetary policies. It was only after the publication of the report that the
BRICS began to be considered together and aroused new interest in their progress.
In data collected by Santana et al. (2014) Brazil, Russia, India, and China together
accounted for 28.9% of the world’s land area, 43.2% of the world’s population, and
20.6% of crude oil production and even generated about 27% of the world’s gross
domestic product (GDP). In 2010, South Africa was added to the BRIC acronym.
It is quite clear that though these countries are treated as one block, their political,
social, cultural, and economic features are quite diverse.
Despite their diversity in many respects, they were still treated as one for many
other reasons of similarity. It was considered that these nations would comprise
the largest economic block by 2050 because of their tremendous growth potential.
The similarities were attributed to the presence of fertile land, abundant natural
resources, and the large low-cost labor force. This combination of factors, along with
good infrastructure, made these nations attractive to foreign direct investment. These
features of infrastructure were telecommunications, which was growing rapidly,
sharp rise in electricity consumption, increased access to water and growing urbani-
zation, better sanitation, and improved road and rail connectivity. In terms of social
and environmental development, all these countries had been successful in pulling a
significant number of people out of poverty, allowing for greater consumption levels.
All the BRICS are committed to a better environment and have preemptive as well
as corrective policies in place to protect and conserve the natural environment. They
all share the common aspiration to achieve a better quality of life for their citizens.
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102 A. Sinha
However, despite these positive features, BRICS do have problems that need
quick and systematic remedies. These pertain to economic inefficiencies; lack of
education, sanitation, and health facilities; and depletion of resources along with
very alarming levels of urban pollution. Many of these problems have been a result
of rapid economic growth that these nations have experienced in the recent past.
Global Citizen (2016) computed a People’s Report Card 20161 grading nations
in terms of their performance in relation to the Sustainable Development Goals that
replaced the Millennium Development Goals of the United Nations. The report took
2030 as the target date within which the goals were to be achieved. If all the goals
were to be achieved, the world would get an A grade. This would be the benchmark,
and then 2016 data would be compared to the ‘perfect’ grade, and a relative grade
assigned to a nation for 2016.
The report computed three sets of indicators: basic needs, well-being, and
opportunities. Basic needs included nutrition, medical care, water and sanitation,
and shelter and personal safety. The world grade was a C. Well-being included access
to basic knowledge, access to information, communications, health and wellness,
and the quality of the physical environment. In this category, the world’s grade was
slightly better at C+. Finally, the set of opportunity included personal rights, freedom
of choice, tolerance and inclusion, and access to advanced education. Here the global
grade was C once again. The three sets of measured characteristics were aggregated
into a Social Progress Index and the world’s grade was marked as C+ in 2016.
The social progress index was computed for a number of countries. Ten nations
received an A grade. These included Canada, United Kingdom, Sweden, Finland,
and Austria. The worst performers with a grade of D− included Afghanistan, Angola,
Central African Republic, Chad, and Yemen. The BRICS were not too good. Brazil
was the best with a grade of B−, Russia, China, and South Africa received a grade
of C+ which was at par with the world grade. India was the worst performer at D+.
These results, though only indicative to a large extent, and perhaps not exhaustive,
do reveal that the BRICS may have a long way to go before they can claim to have
achieved some important goalpost for sustainable development.
BRICS: The Emerging Superstars of Growth

In the BRICS countries, the market-friendly model of development has made
them the emerging superstars of world economy, but they have experienced rising
inequality and unacceptable levels of poverty and serious environmental damage
1
http://www.globalcitizen.org/ People’s Report Card (2016) (accessed June 3, 2018).
b3508_V1_Ch06.indd 102 11-02-2020 13:04:11

as a consequence. The real challenge is whether these nations, if they are to lead
the world economy in 2050, attain a path of sustainable development? What might
be needed is a new model of development that consciously cooperates in changing
the energy portfolio to a substantial degree, lowers the ecological footprint, redefines
innovations in terms of eco-efficiency, and significantly reduces carbon dioxide
and other green-house gas emissions. Brazil is still plagued by drought (through
deforestations in the Amazon) and urban pollution, Russia is considered to be
terribly inefficient and unsustainable in its energy use patterns. India is marked by
large-scale urban pollution and is the third largest emitter of carbon dioxide. China
is similarly affected by the consequences of rapid economic growth. Air pollution is
markedly high, and China has achieved the dubious distinction of being the highest
polluter in the world in terms of carbon dioxide emissions. It may be noted that
as per the agreement of the Kyoto Protocol in February 2005, the task of reducing
green-house gases and mitigating the effects of global warming were differentiated
across developed and developing nations. The Annex I developed countries were
accountable for their emissions and expected to reduce them in a systematic way.
The Non-Annex I nations on the other hand (mostly developing countries) were not
required to reduce emissions except as a voluntary measure. Russia is in Annex I
while the other BRICS are in Non-Annex I.
Would it be possible to put some numbers to the trends that are observed in
terms of economic efficiency, social progress, and environmental improvements?
A few studies have been done (Mizhou Research Institute, 2005)2 to try and put
comparative values on the three important aspects of sustainable development,
namely economic, social, and environmental aspects. Also, it is important that the
BRICS show signs of innovative strategies toward sustainability. Exclusive focus
on economic growth (from where the concept of BRICS began) will not suffice.
The damages from very high rates of growth are well known and noticeable in the
BRICS. In a way, what made BRICS a center of attention is exactly the opposite of
what is required to keep it in the limelight as global leaders in 2050. The next section
discusses some of the important empirics of BRICS success or failure to live up to
the expectations it originally generated.
What the Data Suggest

This section draws on the results obtained by Santana et al. (2014) in a study done on
the BRICS nations. The study is based on real data from 2000 to 2007 using the Data
http://www.esri.go. Comparative Analysis of the BRICS: Report prepared by the Mizuho

2
Research Institute Ltd. For the Commission of the Economic & Social Research Institute (2005).
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104 A. Sinha
Envelope Analysis (DEA) technique. The study measured the efficiency of economic,
environmental, and social processes where inputs considered were gross fixed capital
formation, expenditures on research and development, and employed population.
The outputs considered were GDP for economic efficiency, carbon emissions for
environmental efficiency, and life expectancy at birth for social efficiency.
The following table shows the mean total efficiency results, according to each
country. The higher the number, the more efficient is the process.
Country Economic Environmental Social

South Africa 0.66 0.99 0.76
Brazil 0.98 0.90 0.99
China 0.65 0.21 0.56
India 0.49 0.81 0.49
Russia 0.51 0.78 0.89
If one considers the ranks, and the sum of ranks, we get the following:
Country Economic Environmental Social Sum of Ranks

South Africa 2 1 3 6
Brazil 1 2 1 4
China 3 5 4 12
India 5 3 5 13
Russia 4 4 2 10
There are a few obvious features of the results that emerge. The countries con-
sidered within the block called BRICS are quite heterogeneous, not only in terms
of geo-political and other socio-cultural features but also in terms of economic,
environmental, and social efficiencies. Overall, Brazil is the best performer given the
lowest sum of ranks. India followed closely by China, being the giants in the group,
are significantly less efficient that Brazil or South Africa. If we go by environmental
efficiency alone, then again Brazil and South Africa perform better than the others,
and China is by far the worst.
China
Even though China is the largest economy in BRICS and the second largest in the
world, with the highest fixed capital, its overall performance leaves much to be
desired. China’s argument against cutting down of carbon emissions has been that it
needs to grow fast for a longer period of time to remove poverty and unemployment.
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Hence, its performance cannot be expected to be moving to a sustainable path, at

least in terms of carbon emissions. China has the highest carbon dioxide emissions
in the world, and its economic efficiency (despite phenomenally high growth rates)
has been poor. It implies that energy efficiency would be low, and the ability to use
resources well, including labor, would be below par. This is revealed in the value
for social efficiency too. Despite having the highest input value, its mean efficiency
is only 56%. Poverty reduction, energy efficiency, creation of greater equality, and
better management of urbanization remain challenges that will hold back China
from transitioning to a sustainable development path in the near future.
China’s sustainable development strategy covers four broad areas. They are
overall macropolicies, social development, sustainable economic development,
and protection of natural resources. These four areas are further divided into nine
priority areas covering capacity building, sustainable agriculture, cleaner industry,
cleaner energy, conservation of nature, pollution control, poverty reduction, popu-
lation control, and biodiversity conservation. These broad goals and priorities are
embodied in the 5-year plans of China as formulated by the national government.
China faces a severe resource shortage, and in important resources such as land,
water, and petroleum its per capita resource base is far lower compared to the global
average. Also, many of the natural resources are distributed unevenly across China,
leading to problems of demand and supply in regions. China’s environmental and
ecological damage is quite severe. In some cities, air pollution has marked negative
health effects on citizens. Water shortage in many regions has compromised the qual-
ity of drinking water for residents. The desertification of land and grassland has been
occurring at an astonishing pace. China has realized that it requires substantial legal
reforms to ensure that its sustainable development strategies can be implemented
without too many legal hurdles and costly litigation. China has also taken initiatives
to report on a regular basis to the United Nations Framework Convention on Climate
Change (UNFCCC). Hence, its emissions and sinks of green-house gases would be
known publicly: the steps taken as well as the results arising from them.
India
India is the second largest economy in BRICS with high amounts of fixed capital
and investments in technological innovations. Yet its economic efficiency is low.
India ranks last in both economic efficiency and social efficiency. Even in terms
of environmental efficiency, though ranked fourth, the mean efficiency in India is
much higher than that of China, at 81%. However, despite this, India is now the
third largest emitter of carbon dioxide in the world after China and USA. On this
count itself, India, with its excessive dependence on coal, needs to do much better
in terms of energy efficiency.
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106 A. Sinha
Like in China, the reduction of poverty remains the key challenge. Associated
with this issue of poverty, there are deep rooted issues of unemployment, low
income, low levels of educational attainment, and poor health infrastructure. Like
China, India too has argued in international fora that it needs to grow faster for a
longer period of time to reduce poverty, and hence may not be able to bring down
its emission levels in the near future.
The strategy for sustainable development in India is contained in a detailed
study ‘Empowering People for Sustainable Development’ (EPSD). There was no
separate plan for sustainable development. Details of projects would be contained
in the nation’s 5-year plan documents, until recently when formal planning was
discontinued altogether. The EPSD has four main objectives. They are combating
poverty, empowering people, using core competence in science and technology,
and setting environmental standards, conservation of natural resources, and
improving the core sectors of the economy. There is a sectoral thrust in the EPSD
document. While the natural environment’s importance is acknowledged, there is
an equal importance assigned to the growth of the energy sector, transportation, and
manufacturing industry. Separate targets are set and monitored such as the poverty
rate, gender gaps, increase in forest cover, reduction in population growth rate, and
increased access to education.
According to the Ministry of Environment and Forests, the economy is consid-
ered as a sub-system of the regional ecosystem. Hence, a large number of legislations
and regulations have been enacted since the 1980s covering air, water, biodiversity,
forests, pollution control, and waste management. There are a number of specialized
institutions as well that provide research and knowledge for policymakers to take
more informed decisions, like the Centre for Environment Education and the Tata
Energy and Resource Institute and a number of other civil society organizations.
Brazil
Brazil, in the set of BRICS, is the most efficient economy. Brazil is the leading
economy in South America and contains rich resources in the form of good agri-
cultural land, mines, as well as developed manufacturing and services sectors. Its
per capita income is much higher than that of China or India. Its macroeconomic
policies have resulted in low inflation and low public debt. Brazil’s environmental
performance is creditable, despite its constant pressure to preserve and maintain its
large rainforest terrain. Its environmental efficiency value at 90% is quite good in this
regard. Brazil is one of the leaders in climate negotiations by voluntarily pledging to
cut emissions. The challenges Brazil face pertain to deforestation, soil degradation,
oil spills, water pollution, and loss of biodiversity. In terms of social efficiency, Brazil
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ranked first. Brazil’s stable economic growth (until the recent slowdown) improved
social welfare outcomes, and programs designed to lower inequalities have all gone
well for the economy.
Brazil’s strategies to combat unsustainable development focus on the following
broad areas: the transition to a knowledge society, social inclusion for solidarity, rural
and urban sustainability, strategic use of natural resources like water, forests, bio-
diversity, and improved governability and ethics to promote sustainability. Brazil,
however, does not embed its sustainability strategy as a national policy objective,
though policy objectives do include economic development, social upliftment, and
environmental protection. While the concept of responsibility to the future is not
a central theme in its policies, the reduction of social and economic inequalities is
a top priority. This is done through a twin approach. A federal agency is assigned
the task of distributing free food and making compensatory redistributive policies.
The government also promotes a variety of specific partnerships among civil society
organizations, private sector companies, and government departments to design and
support programs for poverty reduction.
In terms of selected initiatives of interest, Brazil has come up with an innovative
law that defines and penalizes a set of activities dubbed as environmental crimes,
which include many infractions from killing of wild animals to creating industrial
pollution. Brazil is home to the largest part of the Amazon rainforest, and its destruc-
tion often catches the attention of the world simply because of the sheer magnitude
of natural wealth contained in the rainforest. A special control program has been
designed by the Brazilian government to limit deforestation and unauthorized
exploitation. A special commission has also been set up to coordinate the sustainable
development presided over by the nation’s Minister of the Environment.
Russia
Russia has undergone many changes since the collapse of socialism. It is now market
based, participating in the global economy. Russia, however, has been depending
heavily on the exploitation of its natural resources like oil, and hence its economic
efficiency has suffered. In the BRICS group, Russia has the second lowest GDP after
South Africa. Russia’s carbon dioxide emissions remain high as well. Russia has
experienced growth in manufacturing industries and services, but still continues
to remain vulnerable to global oil price fluctuations. Russia is also exposed to local
and regional strife that often attracts international sanctions. On the social efficiency
score, Russia is ranked second after Brazil. A large part of this social development
is a remnant inherited from the socialist past — especially in the areas of education
and health. Russia has had a relatively high per capita GDP and strong growth in
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108 A. Sinha
wages and incomes. However, there remain disagreements about the source of this
recent growth: whether it is from a strong economic base of industrialization, or
whether it was due to the rising prices of oil and natural gas.
Russia is no longer a superpower and its economy has been slowing down in
the recent past, primarily due to the sanctions against the nation imposed by EU as
well as USA after the Ukraine crisis and the annexation of Crimea. Environmental
problems like the melting of the permafrost and the sudden drought that decimated
the wheat crop in 2010 and sent global wheat prices soaring are somewhat in line
with the kind of problems faced by the other BRICS nations. However, political
challenges are much more complex than those faced by the others in BRICS. Russia
has also cracked down on NGOs doing work for social upliftment and environmental
protection, treating them as foreign agents if they received international grants.
However, some good news still emerges out of Russia on the purely environ-
mental front. Russia houses some of the world’s most important fisheries. The
Walleye Pollock Fishery in the Sea of Okhotsk has earned the Marine Stewardship
Council Sustainability Certification, and the cod fishery in the Barents Sea is being
considered as a model of international cooperation. Forestry is another area that
makes Russia particularly vulnerable to environmental degradation. About 45%
of land in Russia contains 22% of the world’s total forest cover. Of this, 33 million
hectares of forests have earned the Forestry Stewardship Certification for responsible
forest management.
South Africa
South Africa is the smallest of the BRICS nations. On the economic efficiency front,
it is quite modest with a mean efficiency of 66%. It was only quite recently that the
nation embarked on a comprehensive policy plan to promote inclusive growth,
infrastructure, food security, education, rural development, and improved public
services especially in the area of health. South Africa is yet to emerge from its history
of violence and oppression. As far as environmental efficiency is concerned, South
Africa ranks at the top. Since industrial activity is low and level of inputs is the lowest
among the BRICS nations, it has the lowest carbon dioxide emissions. In the social
efficiency index, its performance is not good. It has the lowest life expectancy at
birth within this group at 51.4 years. Health problems widely prevalent in this nation
also contribute to a low social efficiency index. These problems not only pertain to
violence but also to high incidence of HIV and tuberculosis. South Africa also suffers
from very high unemployment rates.
Given South Africa’s natural resources and scenic beauty, tourism is a major
industry, and ecotourism has become a focus area of business. The industry drives
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economic growth and job creation. The nation attracts more than 10 million tourists
annually. The problem is to ensure that while this industry grows, congestion and
pollution created by tourists do not erode the quality of the natural environment
and the extent of biodiversity. South Africa’s coast is also a valuable resource for the
economy. Coastal ecosystems provide natural erosion control and waste manage-
ment. The economy’s coastal and marine resources are under threat mainly because
of excessive urbanization around the major coastal ports and heavy shipping traffic.
Fishing is another major activity in South Africa. However, over-harvesting has led
to an increased stress on marine life.
There is some good news too. The Cape Town City Council in partnership
with a non-profit development organization South South North, developed a low-
income energy-efficient housing project in Kuyasa. The housing project focused on
energy efficient lighting, insulated ceilings, and solar-powered water heaters. The
development project is a model that can be imitated in other countries. It has been
recognized by the United Nations as a gold standard clean development project.
There are less than 50 such projects in the world. There are over 1.5 million low-
income houses in South Africa with this design.
Is BRICS Important at All?

Thus far, we have argued that two important aspects of BRICS and sustainable devel-
opment. The first was that sustainable development is a global issue and the ultimate
success or failure of sustainable development depends on a global consensus on a fea-
sible plan that has to be implemented by all. Each nation or region on the other hand
has a role to play too. National problems vary from region to region and from country
to country. These specific problems have to be tackled locally or at the national level.
However, national-level policies must be consistent with globally arrived at solutions
and pathways. The second aspect discussed has been the fact that BRICS represent
a wide and diverse set of nations covering four continents. Each nation has its own
problems. Degrees of success on the broad measures of sustainability vary within
BRICS. So do the policy framework and priorities. The only overarching feature of
BRICS that might be considered important would be its size and growth potential
which would, in the foreseeable future, make it a formidable block with global eco-
nomic and political influence. The first feature is a matter of fact and evidence. The
second feature of size leading to influence and importance is a matter of conjecture
and forecast. The answer to the second question will remain contested, but a quick
look at the history of BRICS might give us a better clue about the future.
The global sustainable agenda was born in 1992 at the Earth Summit. Two
questions emerged from the summit: how to make sustainable development a reality,
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110 A. Sinha
and who would provide the leadership? The contemporary UN agenda for meet-
ing the sustainable development goals (SDGs) is a reflection of the Earth Summit
outcomes. Today’s answers require actionable targets and a new mindset for those
actions. Sustainability issues have more often than not been cast in two distinct sets
of problems: one for the mature market economies already enjoying a high material
standard of living and the other for the poor developing nations of the world with
large-scale poverty and unemployment. The BRICS nations provide a midway solu-
tion to this dichotomy. The five nations together constitute a block which is neither
very poor nor very rich, but growing at impressive rates.
BRICS can be considered to have the political potential as a coalition to provide
leadership on sustainable development on a global scale (Papa, 2017). The wide
diversity of these nations also allows new and distinct lessons to be learnt about
solutions and making things work toward desired targets and priorities. The sheer
geo-political weight of this group can help mobilize a diverse set of agents and
organizations. Yet, the small number of governments involved can make consensus-
building easier. Since the first BRIC summit in 2009, with South Africa joining the
following year, the group has made some common progress in terms of cooperation
and consensus. BRICS has established several common institutions, including a
New Development Bank (NDB) with authorized capital of US $100 billion for
infrastructure, and sustainable development projects (Kweitel, 2017).
The BRICS group has established strategic and political dialogue within itself
and conducts joint programs through its institutions. The biggest contribution
BRICS has been making is that it is setting the common goals for sustainable
development for all, not only developing, nations. In this sense, it is providing the
global leadership it was supposed to. BRICS has also increased its cooperation with
the UN, UNESCO, WHO, and UNIDO. This would help build knowledge as well
as share experiences about success stories and best practices.
However, there are many problems that remain in the still-embryonic coalition.
Some criticism has come from the perception that the BRICS economic credentials
are waning with the recession in Russia and the serious slowdown in Brazil and
South Africa. Even the stars as far GDP growth is concerned, China and India,
are marginally slowing down. The group’s environmental ambitions are limited,
at least in the short term, when looking at the trade-offs between environmental
management and rapid economic growth. Finally, it is argued that the political
leverage of the block is also declining. Indeed, a new movement called ‘BRICS from
below’ started in South Africa, has been claiming that BRICS is promoting ‘malde-
velopment’ based on elitism, consumerism, and eco-destructive corporate-friendly
policies. Other critiques have pointed out that though all the BRICS nations clearly
have sustainable development as a priority of government policies, the group did
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not speak in one voice during the Open Working Group debates on SDGs set by the
UNDP. The lack of progress of sustainability indicators in the BRICS has remained a
cause of concern. A 2016 publication by the UN Sustainable Development Solutions
Network and Bertelsmann Stiftung found that BRICS nations’ rankings on a sustain-
ability index were very poor. Among 149 countries studied, Russia was ranked 47th,
Brazil 52nd, China 76th, South Africa 99th, and India 110th.
Concluding Remarks
The world has been changing with regard to the distribution of economic power. The
USA, Europe, and Japan have all been caught in low growth traps. The powerhouse
of economic activity has been shifting discernibly to countries like China and India.
In such a world, it is important that global leadership in diplomacy and policy
debates be provided by new nations. Arguably, in terms of the future, the problem
of sustainable development remains on the top of the list of concerns. Acceptable
solutions are hard to find. Implementing them is a further challenge. It calls for a new
kind of thinking that approaches economic wealth creation, innovations, and new
ideologies that define the ‘good life’ for future generations in a way that is different
and fit for the future. The BRICS group fits the bill in many ways. However, despite
the advantage of size and geographical dispersion, they have too many problems of
their own. The global consensus and the shared vision necessary are still indistinct.
There is an opportunity for BRICS to take up global leadership in this context.
Whether they succeed or not remains to be seen. It might be a tough ask. If they
fail, however, the result may be costly for the future of humanity.
References
Kweitel, J. et al. (2017). “The BRICS Bank Needs a Bold & Participating Strategy
for Sustainable Development”. Available at: http://www.opendemocracy.net (accessed
May 23, 18).
O’Neill, J. (2001). Building Better Global Economic BRICS, New York: Goldman Sachs.
Papa, M. (2017). “Can BRICS lead the way to Sustainable Development?” Available at: http://
www.sustainable goals.org.uk (accessed May 23, 2018).
Santana, N. B. et al. (2014). “Sustainable development in BRICS countries: An efficiency
analysis by data envelopment analysis”, International Journal of Sustainable Development
& World Ecology, 21(3): 259–272.
Sarkar, R. and A. Sinha (2018). Economics of Sustainable Development, NY: Business Expert
Press.
United Nations (2013). World Economic & Social Survey: Sustainable Development Challenges,
New York.
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CHAPTER 7
Universal Health Coverage in BRICS: What

India Can Learn from the BRICS Experience?
Indrani Gupta* and Samik Chowdhury†
*Health Policy Research Unit, Institute of Economic Growth, Delhi, India

†
Ambedkar University, New Delhi, India
Introduction
Universal Health Coverage (UHC) has been a major topic of discussion and debate
in the recent past globally, especially since the passage of a UN General Assembly
resolution on UHC in December 2012.1 While global organizations such as the WHO
and the World Bank have defined UHC, it is still not apparent whether all countries
interpret UHC in a similar fashion. It has been argued that UHC has been labeled in a
variety of ways and implemented based on the interpretation by countries, indicating
the need for a global operational definition (O’Connell, 2014). Evidence does exist,
however, to indicate that broader health coverage generally leads to improved health,
especially for the poor via better access to services (Rodrigo and Smith, 2012).
The first Global Monitoring Report on Tracking UHC, brought out jointly
by WHO and the World Bank,2 defines UHC thus: all people receiving the health
1
Meetings Coverage of the Sixty-seventh General Assembly of the United Nations. Adopting
Consensus Text, General Assembly Encourages Member States to Plan, Pursue Transition
of National Health Care Systems towards Universal Coverage. Available at http://www.
un.org/press/en/2012/ga11326.doc.htm.
2
World Health Organization and The World Bank 2015, Tracking universal health coverage:
first global monitoring report.
113
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114 I. Gupta & S. Chowdhury
services they need, including health initiatives designed to promote better health
(such as anti-tobacco policies), prevent illness (such as vaccinations), and to provide
treatment, rehabilitation, and palliative care (such as end-of-life care) of sufficient
quality to be effective, while at the same time ensuring that the use of these services
does not expose the user to financial hardship. The Sustainable Development Goals
(SDGs) also contain a specific goal for UHC, making progress towards UHC a global
as well national imperative.
Over the last decade or more, India has also been articulate about the country’s
need to have UHC. However, the recent history of the country’s attempt at greater health
coverage raises the issues of interpretation of UHC specifically, as well as prioritization
of health in general. The BRICS countries as a whole are not necessarily the best exam-
ples of how UHC is to be implemented. The group is small, the economic and political
situations are somewhat different, and the experiences are diverse. Nevertheless, this
diversity of experiences is possibly sufficient to understand the “do’s and don’ts” in the
path to UHC, and would contain important lessons for India. There are earlier analyses
on this subject as well where a slightly different set of indicators have been used to look
at the progress towards UHC (Marten et al., 2014). We aim to expand the analysis sub-
stantially with more recent data and also use a slightly different approach to understand
where India’s position vis-à-vis the other BRICS countries in the context of UHC.
We start by laying out a framework to understand how one might measure pro-
gress towards UHC in the second section. In the third section, we look at the health
status and disease profile in these countries, which is important to understand priori-
ties within any UHC package. In the fourth section, we look at selected indicators
discussed in first section to understand the countries’ progress towards UHC. Fifth
and sixth sections analyze governance and health reforms, respectively. In the last
section, we present our conclusions based on the analysis on how countries have fared
and what India might take away as valuable lessons from these varied experiences.
Understanding UHC in BRICS Countries: A Framework

The World Health Report of 2010 (Evans and Etienne, 2010) laid out a simple
list of three questions that countries need to take into account to frame policies
around UHC:
•• Who in the population is covered?

•• What services are they covered by?
•• What level of financial protection do they have when accessing services?
First, these three questions are critical to ask while planning for UHC and
require an evidence-based analysis of the current situation. This in turn requires
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Universal Health Coverage in BRICS: What India Can Learn from the BRICS Experience? 115
that a vision document or a blueprint of intent is drawn up within countries that

visualize the various steps that are required to move towards UHC. Whether and
to what extent the steps are adhered to subsequently is important, but the intent
document is a key indicator of the government’s prioritization and sincerity in
implementing UHC.
Second, it is now well-established that UHC works well with predominantly
compulsory financing mechanisms like taxes or social health insurance contribu-
tions (Kutzin, 2016). This makes public finance critical, and evidence exists to show
that OOPS is inversely related to government spending (Kutzin, 2016). Therefore,
public finances on health are important indicators of a government’s prioritization
of the health sector.
Yet a third criterion to understand progress towards UHC is to what extent
countries have been able to consolidate and merge fragmented pools. It has been
argued that fragmented coverage tends to be ineffective, inefficient, and inequitable,
and countries should aim for full population coverage from the very beginning
(Nicholson et al., 2015). For example, basing priority-setting on socio-demographic
characteristics like gender, ethnicity, religion, etc. may not be the most efficient way
of progressing towards UHC (Norheim , 2016).
The WHO proposes three criteria that countries can consider in evaluating
which services to cover: cost-effectiveness, priority to the worse off, and financial
risk protection.3 By these criteria, primary health care services are at the top of
the list, since these reach the widest of populations and are the first contact point
between the patient and the health system. Access to medicines also seems to be
high on the list of services that people care about (Wirtz et al., 2016). Thus, coun-
tries that have been able to make primary health services accessible and available
for their populations can be said to have taken a significant step towards a UHC:
a more comprehensive approach can only be built on a functional primary health
care system.
There is some debate and differences among experts on whether or not cost-
effectiveness should be given an equal weightage as a criterion for giving priority to
the worse off (Norheim et al., 2014). There may be services that are not high up on
the cost-effectiveness chart but are mostly targeted at the worse off, and therefore
improve utility significantly. In fact, priority to the worse off and financial risk
protection may relatively be more important, and within these interventions one can
choose the most cost-effective one. Thus, this criterion is not separately evaluated in
the country context. Instead, we use the more standard way of looking at financial
3
World Health Organization (WHO). Making fair choices on the path to universal health
coverage. Final report of the WHO Consultative Group on Equity and Universal Health
Coverage, 2014.
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protection by analyzing trends in OOPS and impoverishment, both of which would

give a clear indicator of the extent of protection offered to population in general and
to the poor in particular.
There are two other parameters that are important in the context of UHC: the
first one is to study the reform process that precedes and accompanies the rolling out
of the UHC. While many of the indicators mentioned above are relevant to analyze
reforms, we study here the presence or absence of continuous and incremental
reforms in these countries, to understand the intent to stay on course for reaching
the objectives laid out in the vision document. Whether the reforms were reforms
in the true sense and were successful are not the main questions: it is whether the
countries could monitor and evaluate their policies around UHC and attempt
course-correction if required.
The second parameter has to do with governance; do countries with better
governance perform better to improve access to health services? In fact, governance
could also influence the body of reforms and their implementation. While govern-
ance is a difficult and different area of enquiry, some summary measures might be
helpful to understand where the BRICS countries stand and to understand their
performance in the context of UHC.
Finally, an important objective is to see how India has fared in improving access
to health services for its population and whether there are lessons that it can learn
from the experiences of the other countries within the BRICS. The study necessarily
draws heavily from existing literature on individual country analyses. Comparable
data is sparse, but wherever possible, we have used existing data to make our points
and arrive at conclusions.
Health Status and Disease Burden in BRICS

Do the countries have a similar disease burden? Table 1 gives the top 10 causes of
deaths across the BRICS countries and changes between 2005 and 2015 from the
2015 Global Burden of Diseases.
On the whole, non-communicable diseases (NCDs) dominate the top 10 causes
of mortality in these countries. Ischemic heart disease, cerebrovascular diseases, and
COPD are the three common causes within the top 10 causes of mortality in BRICS
nations. Some other relatively common causes of mortality in the top 10 are road
injuries, diabetes, and Alzheimer’s disease. Among communicable diseases, lower
respiratory infections are common across countries as a major cause of deaths. South
Africa is the only country to have as many as four communicable (and preventable)
diseases among the top 10 causes of mortality, viz., HIV/AIDS, lower respiratory
infections, tuberculosis, and diarrheal diseases. India follows closely with three
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Table 1: Burden of disease in BRICS.
“6.5x9.75”
Brazil Russia India China South Africa
Top 10 Causes % Change Top 10 Causes % Change Top 10 Causes % Change Top 10 Causes % Change Top 10 Causes % Change
Rank of Death, 2015 2005–2015 of Death, 2015 2005–2015 of Death, 2015 2005–2015 of Death, 2015 2005–2015 of Death, 2015 2005–2015
1 Ischemic heart 18.8 Ischemic heart −12.0 Ischemic heart 16.7 Cerebrovascular −8.9 HIV/AIDS −50.1%
disease disease disease disease
2 Cerebrovascular 13.3 Cerebrovascular −24.3 COPD 4.3 Ischemic heart 19.0 Ischemic heart −5.5
disease disease disease disease

3 Lower 19.3 Cardiomyopathy −15.5 Cerebrovascular 7.3 COPD −27.1 Cerebrovascular −13.1
respiratory disease disease
infection
4 COPD 19.3 Alzheimer 42.6 Lower −22.6 Lung cancer 15.2 Lower −22.8
disease respiratory respiratory
infection infection
5 Diabetes 15.9 Lung cancer −9.7 Diarrheal −31.7 Liver cancer −5.4 Diabetes −0.3
diseases
6 Interpersonal −2.1 Self-harm −30.0 Tuberculosis −30.7 Stomach cancer −14.8 Tuberculosis −24.8
violence
7 Alzheimer 35.5 Colorectal −0.6 Diabetes 34.8 Road injuries −19.7 Interpersonal −16.8
disease cancer violence
8 Road injuries 45.8 Lower −17.8 Chronic kidney 20.6 Alzheimer 38.8 Road injuries −16.6
respiratory disease disease
infection
9 Chronic kidney 32.7 COPD −19.6 Neonatal −39.5 Hypertensive 29.8 COPD −7.6
disease preterm birth heart disease
10 Lung cancer 25.3 Stomach cancer −23.7 Road injuries −2.7 Lower respiratory −14.3 Diarrheal −47.0
infection diseases
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Source: Global Burden of Disease 2015, Institute of Health Metrics and Evaluation.
(barring HIV/AIDS) of these diseases being the main causes of mortality. The
decadal change in the share of each disease in total mortality shows a mixed picture,
except for communicable diseases, which show a decline for all countries barring
lower respiratory infections in Brazil. The top 10 causes of mortality that register
the highest decadal growth are road injuries (Brazil), Alzheimer disease (Russia and
China), chronic kidney disease (India), and diabetes (South Africa). On the other
hand, top mortality causers with lowest decadal growth are interpersonal violence
(Brazil), self-harm (Russia), neonatal pre-term birth (India), COPD (China), and
HIV/AIDS (South Africa). The increasing burden of NCDs in BRICS countries is a
very important challenge with implications about out-of-pocket spending (OOPS)
on the one hand and response of the health system — including UHC — on the other
(Jakovljevic and Olivera, 2015). In fact, countries with significant dual burden of
diseases face more challenges of investing limited funds across competing uses.
A set of four basic health indicators have been presented in Table 2 to show
how the countries are faring in terms of specific health outcomes, and a summary
outcome index has been constructed to make the comparisons easier.
The difference between the highest (China) and the lowest (South Africa) life
expectancy at birth is as high as 19 years. The low LEB in South Africa is primarily
on account of the HIV/AIDS epidemic because of which it declined from 62 years in
1992 to 52 in 2005. Russia currently is the best performer in basic outcome indicators
Table 2: Health outcomes in BRICS.

Maternal Outcome
Mortality Index
Ratio (Modeled (Using Life
Estimate, Per Infant Mortality Under-5 Expectancy
Life Expectancy at 100,000 Live Rate (Per 1,000 Mortality Rate at Birth,
Birth, 2014 Births), 2015 Live Births), 2015 (Per 1,000), 2015 Maternal
Mortality
Trend Trend Trend Trend Rate, and
Growth Growth Growth Growth Infant
2000–2014 2000–2015 2000–2015 2000–2015 Mortality
Countries Level (%) Level (%) Level (%) Level (%) Rate)
Brazil 74.4 0.44 44 -2.39 14.6 -4.67 16.4 -4.74 0.620
China 75.8 0.39 27 -5.59 9.2 -8.12 10.7 -8.41 0.925
India 68.0 0.63 174 -5.23 37.9 -3.87 47.7 -4.47 0.194
South Africa 57.2 0.48 138 3.97 33.6 -3.97 40.5 -5.18 0.026
Russian 70.4 0.72 25 -6.14 8.2 -6.17 9.6 -6.19 0.903
Federation
Note: The index for a country is an average of its normalized score in each indicator. The process of normalization
is (X−Xmin)/(Xmax−Xmin), where X is the indicator.
Source: World Development Indicators, World Bank and World Health Statistics, WHO.
b3508_V1_Ch07.indd 118 11-02-2020 13:05:08

of maternal and child health. India fares the worst with child mortality rates more
than four times and maternal mortality rate close to seven times that of Russia. When
compared with the other most populous country, China, India’s maternal and child
health outcomes are alarming — a fact that underlines the importance of provision
of and access to primary care.
Russia has made the highest improvement in life expectancy at birth over time
(2000–2014), as exemplified by the trend growth rate, followed by India. However,
for child health outcomes, India shows the least improvement in these 15 years while
China shows the maximum improvement. Russia registers the largest decline in
maternal mortality in this one and half decades, while South Africa actually shows an
increase in maternal mortality. China achieves the top position in the overall index
of health outcome, followed by Russia, Brazil, India, and South Africa. Needless
to say, country-level aggregates conceal the disparities in health outcomes across
gender and socio-economic groups, which is an important indicator of equitable
health outcomes and access to services.
Progress Towards UHC: Selected Indicators

Access to Primary and Basic Care
While summary statistics are available that indicate what percentage of population
is covered, these are slightly misleading as indicators of UHC coverage because
these include different programs and schemes, many of which may not be what the
country needs or aligned to the philosophy of UHC. Instead, we use access to quality
services for primary health care needs of the population along with a set of recom-
mended indicators for monitoring progress towards UHC, but mainly to understand
access to primary care across countries. Health MDG-related UHC indicators or
tracer indicators (Marten et al., 2014) include demand for family planning met by
modern methods, antenatal care visits, skilled attendants at birth, immunization
coverage, improved water and sanitation, access to antiretroviral (ARV) therapy, and
TB treatment. Further, Sustainable Development Goal 3.8 specifically mentions the
importance of access to “safe, effective, quality and affordable essential medicines
and vaccines for all”, making access to medicines an important indicator as well
(Wirtz et al., 2016).
However, in the absence of data on all the indicators, we select the ones with
data for all the five countries and construct an index based on these indicators given
in the last column (Table 3).
The country with the best access to basic services is Brazil, followed by China
and Russia, respectively. South Africa and India trail behind, with India being at
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Table 3: Access to primary and preventive care in BRICS.

Immunization, Births Married or In-Union Improved
DPT (% of Tuberculosis Attended by Women of Reproductive Improved Sanitation
Children Ages Case Detection Skilled Health Age with Need for Family Water Source Facilities
12–23 Months), Rate (%, All Staff Planning Satisfied with (% of Population (% of Population Access
Countries 2014 Forms), 2014 (% of Total) Modern Methods (%) with Access), 2014 with Access), 2014 Index
Brazil 93 82 99.1 89.3 98.1 82.7 0.873
China 99 88 99.9 96.6 94.8 75.4 0.868
India 85 74 74.4 63.9 94.1 39.5 0.177
Russia 97 85 99.6 72.4 96.9 72.2 0.760
South Africa 70 68 81.1 81.1 92.8 65.8 0.233
Notes: The family planning indicators are for the years 2006 (Brazil), 2001 (China), 2008 (India), 2011 (Russia), and 2004 (South Africa). The skilled birth attendance
indicators is for the years 2013 (Brazil and India), 2014 (China), 2008 (Russia), and 2004 (South Africa). The source for both is World Health Statistics, WHO. The index
for a country is an average of its normalized score in each indicator. The process of normalization is (X−Xmin)/(Xmax−Xmin), where X is the indicator.
“6.5x9.75”
11-02-2020 13:05:08
the bottom of the ranking for these indicators. The most alarming status is that of
sanitation in India. Only 40% of Indians have access to improved sanitation. In
fact, while India is certainly an outlier in this respect, other BRICS countries too
are noticeably short of universal access to improved sanitation. This is applicable to
tuberculosis case detection rate as well.
Financial Protection
Next, we look at the second dimension of path to UHC — financial protection.

The share of out-of-pocket expenditure in total health expenditure of a country is
a commonly used indicator of the need for financial protection — especially of the
poor — from the costs of health care.
Figure 1 presents a 15-year trend in this indicator for BRICS. India has the
highest share of OOP in total health expenditure, while South Africa has the
lowest. In fact, India is the only country in this group to have more than half of its
health expenditure financed out-of- pocket. All the countries except Russia show a
decline in the share of OOP over the years, although the rate of decline varies. The
most significant decline has happened in the case of China where the share of OOP
declined by 27 percentage points in 15 years, the same being only 6 percentage points
for India. Russia presents a peculiar case where the share of OOP in total health
expenditure has increased by 16 percentage points in the last 15 years.
The immediate fallout of a high-OOP share in total health spending is the risk
of catastrophic expenditures and impoverishment. The only indicator for which data
was available to measure catastrophic expenditure was for surgical care (Figure 2).
80
70 68
62 South
60 59
Africa
50 Brazil
46
38
40 Russian
32
30 Federation
30 25
India
20
14
10 6 China
0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Figure 1: Out-of-pocket expenditure (OOPS) as % of total health expenditure (THE).

Source: Global Health Expenditure Database, World Health Organization.
b3508_V1_Ch07.indd 121 11-02-2020 13:05:10

South Africa 25.5
China 45.6
India 59.6
Russia 43.7
Brazil 37.4
0 10 20 30 40 50 60 70
Figure 2: Risk of catastrophic expenditure for surgical care (% of people at risk), 2014.
Note: Catastrophic expenditure is defined as direct out-of-pocket payments for surgical and anesthesia
care exceeding 10% of total income.
Source: World Development Indicators, World Bank.
1000 947
893
800
570
600
391 414 420
400 314 311
277
200 113 81 75
21 16 31
0
1995 2005 2014
Figure 3: Health expenditure per capita (current US dollar).

India is the most vulnerable by this measure of financial vulnerability from OOP
health care expenses. Needless to state that data for the entire spectrum of health
services (not only surgical and anesthetic) would have given a more nuanced picture,
but would probably not have altered India’s ranking.
Financing for UHC
How do the countries compare in terms of how much is spent on health? Figure 3
gives the total per capita expenditure, which includes both public and private
finances.
Per capita health expenditure in 2014 was the highest ($947) in Brazil (see
Figure 3), 13 times that of India at $75. However, the per capita GDP of Brazil was
only five times that of India. Brazil has historically been the bigger and the most
consistent health spender among BRICS. Between 1995 and 2005, the highest
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increase (20 times) in per capita health spending, however, happened in China
followed very distantly by South Africa (eight times). Viewed in conjunction with
Figure 1, it can be stated that except Russia, the share of private OOP expenditure
had an increasingly marginal contribution to this increase in total expenditure over
time. In other words, much of this increase in per capita total health expenditure in
China has been on account of increased government spending on health.
While not measured as an indicator of UHC, government health finances
remain a critical component of UHC, whether spent on expanding its own services
to provide access or to expand a social health insurance program, primary care, or
pre-payment systems. Higher GDP going into the health of a country has been seen
as an important indicator of political commitment (Gottret and Schieber, 2006;
Stuckler et al., 2010).
Table 4 presents the performance of BRICS nations in some of the key indicators
related to public financing of health — total health expenditure in GDP, general
government health expenditure in GDP, general government health expenditure
in total health expenditure, and general government health expenditure in general
government total expenditure.
Table 4: Public financing of health in BRICS.

Health Expenditure, Health Expenditure,
Total (% of GDP) Public (% of GDP)
Countries 1995 2005 2014 1995 2005 2014
Brazil 6.5 8.3 8.3 2.8 3.4 3.8
China 3.5 4.7 5.5 1.8 1.8 3.1
India 4.0 4.3 4.7 1.1 1.1 1.4
Russia 5.4 5.2 7.1 4.0 3.2 3.7
South Africa 8.3 7.8 8.8 3.4 3.3 4.2
Health Expenditure, Health Expenditure,
Public (% of Total Health Public (% of Government
Expenditure) Expenditure)
Countries 1995 2005 2014 1995 2005 2014
Brazil 43.0 41.5 46.0 8.4 5.0 6.8
China 50.5 38.8 55.8 15.9 9.8 10.4
India 26.2 26.5 30.0 4.5 4.5 5.0
Russia 73.9 62.0 52.2 9.1 11.7 9.5
South Africa 41.4 42.7 48.2 13.0 13.0 14.2
Notes: THE: Total Health Expenditure, GGHE: General Government Health Expenditure,
GGE: General Government Expenditure.
Source: Global Health Expenditure Database, World Health Organization.
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The first aggregate gives the proportion of GDP spent on health and is inclusive of
private health expenditure as well. South Africa and Brazil spend more than 8% of their
GDP on health. While Brazil, China, India, and Russia have incrementally enhanced
their health share of GDP over the 20 years, South Africa has been steadily spending
around 8 percent during the same period. India spends less than 5% of its GDP on
health and displays one of the lowest percentage point increase between 1995 and 2014.
How much do governments spend on health out of total income? For this, the
second aggregate — general government health expenditure as a share of GDP —
is useful, and it shows that South Africa spends the most with Brazil, Russia, and
China following closely. India’s government spending on health is very low, around
1% of GDP. Governments of all the other BRICS nations spend more than double
the amount as share of their respective GDP’s. The highest increase in the share of
public expenditure on health between 1995 and 2014 happened in China, followed
closely by Brazil. The lowest increase in this share was evident in the case of India,
while in case of Russia the share actually declined.
This pattern is sharper when one looks at how much of the health spending is
from government sources, the third column. All the countries, with the exception
of India, spend almost half or more of their total health spending from government
sources. Except Russia, all the nations increased their share of public finance in total
health spending during the 20-year period. This is significant since in the nineties,
close to three-fourths of health spending in Russia came from the government, way
above the other BRICS nations. The biggest turnaround in this indicator appears
to have happened for China, which saw a significant decline in the share of public
spending in total health spending between 1995 and 2005, but thereafter increased
by 17 percentage points between 2005 and 2014. Currently, China has the highest
share of public spending in total health spending among BRICS, at 56%.
Finally, the last column shows how health is prioritized by Governments f acing
competing claims on its resources; general government health spending as a per-
centage of total government spending is highest in South Africa. This is followed by
China and Russia and Brazil. Here again, India ranks low as it spends just 5% of its
total government expenditure on health. However, for China and Brazil the share
has declined from their 1995 levels.
Overall, the three indicators above indicate that China and Brazil have done
consistently the best in terms of moving towards UHC, especially if one considers
the changes in terms of public spending on health in the recent past. Russia and
South Africa are also not doing too badly and often have interchanging places in the
rankings among these five countries. However, the gap between the performance
of these countries and that of India is often quite stark when we look at the body of
evidence presented.
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Enabling Environment: Governance and Reforms

Governance
There are two important angles to the UHC process that are often overlooked, one
more than the other. These are reforms and governance. While reforms are often
talked about, there are few studies that have looked at the comparative picture of
reforms in the health sector in countries to see why countries have such uneven
records in terms of progress towards universal access. We deliberately mention
health sector reforms rather than reforms for UHC, because to achieve good out-
comes in the health sector requires much more than merely putting in place UHC
systems. In fact, for UHC to work, one needs a series of incremental reforms — big
or small — happening steadily over time.
Mere allocation of public resources does not always yield the desired outcomes.
This is primarily due to the quality of governance, a concept that is elusive and,
therefore its measurement, very often subjective. An indistinct relationship between
public spending and outcome is often related to the aspect of governance (Pritchett,
1996). There have been a number of studies linking overall governance performance
with health outcomes. Some studies (Kaufmann et al., 1999, 2004; Gupta et al., 1999)
have found governance indicators like voice and accountability, political stability and
violence, government effectiveness, regulatory burden, rule of law, and graft to be
significantly negatively related to infant mortality. Also, investment patterns have
been seen to change with significant corruption, with investments being dispropor-
tionately more on physical infrastructure rather than health and education (De la
Croix and Delavallade, 2006). Other studies show that greater citizen participation
and better governance can lead to greater efficacy in government action in general
(Isham et al., 1997). Also, political commitment, higher tax revenues, and greater
democracy are associated with a higher share of GDP going to public health spend-
ing (Stuckler et al., 2010). Differences in the efficacy of public spending have been
attributed to mainly the quality of governance, with better health outcomes from
public spending reported from countries with better governance (Rajkumar and
Swaroop, 2008). WHO defines governance in the health sector to mean “a wide
range of steering and rule-making related functions carried out by governments/
decisions makers as they seek to achieve national health policy objectives that are
conducive to UHC”.4
4
World Health Organization. Governance. Available at http://www.who.int/healthsystems/
topics/stewardship/en/.
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South Africa 0.32
Russia 0.59
India 0.17
China 0.61
Brazil 0.52
0.00 0.10 0.20 0.30 0.40 0.50 0.60 0.70
Figure 4: Governance Index.

Notes: The index for a country is an average of its normalized score in each indicator. The process of
normalization is (X−Xmin)/(Xmax−Xmin), where X is the indicator.
Source: Raw indicators (World Development Indicators, Transparency International).
The idea of ‘governance’ ranges from a simple statist interpretation that gov-
ernance is what governments do, to a much wider interpretation of governance
as the way in which individuals, groups, and institutions, both public and private,
manage their affairs and resolve conflicts of interest in an orderly manner (Weiss,
2000; DARPP, 2009; Shome, 2012). In this work, we adopt a mixed interpretation
of governance whereby good governance pertains to (1) delivery of services (banks,
electricity, water, sanitation, physicians, and teachers) of good quality and (2) general
governance indicators (ease of doing business, corruption, unemployment, gender
equality, and sustainability). We constructed an index for governance based on 11
selected indicators representing these aspects (Figure 4).
China appears to be the best governed country, while India lies at the bottom,
with a substantial difference in their respective governance indices. Overall, China,
Russia, and Brazil seem to have better governance indicators in the group.
These findings are consistent with findings on progress towards UHC, especially
if one notes that South Africa spends substantially on public financing on health but
has not made similar progress on some of the other indicators of UHC, indicating the
possibility of governance playing a role — one would expect health spending to be
more efficient in the better governed countries generally. While no firm conclusions
can be drawn from such a small sample size, it does seem to confirm that better
governance and better health coverage would probably go together.
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The indicators of governance and performance of these countries on each of

them is given in Table A.1.
Health Sector Reforms
The most important piece of the puzzle is the role played by reforms in the health
sector, specific to UHC or otherwise. We analyze the role of reforms in each of the
countries in this section.
Brazil
Prior to 1988, social security institutions, especially the National Institute for Social
Medical Assistance (INAMPS), formed the cornerstone of the health system. In
1988, the new constitution of the country established health as a fundamental right
and duty of the state, which started a process of health system reform which was
spread over many years. However, the process of reforms can be said to have started
somewhat earlier though not in such fundamental form. Brazil’s health coverage was
run on a model of social security based on compulsory contributions by employers
and employees, leaving a large section of informal and agricultural sector workers
uncovered until the 1970s, when it was expanded to include particular services
(Elias and Cohn, 2003). It has been argued that the movement for Brazilian health
reform involved various segments of society right from the middle of the 1970s, and
principles of universality and equality formed the basis of much of the discourse
on reforms (Gragnolati et al., 2013). With the constitutional reform, the Unified
Health System (SUS) was set up and many administrative and organization changes
were effected in the health system in the subsequent years, including a significant
expansion of capacity of the system, decentralization for service delivery, measures to
address regional disparities among others. The Family Health Program or the FHS is
a key part of the national Unified Health System funded primarily through taxes, and
it offers free primary care to a majority of Brazilians. It is a cornerstone of the public
health delivery system in the country (Bulletin of the World Health Organization,
2008). In addition to the SUS, the country has the Complementary Medical Care
System or the SSAM, which caters to a limited segment of the population.
According to a World Bank assessment, one of the major accomplishments of the
SUS has been to unify and integrate several independent systems of financing and
service provision into a single publicly funded system covering the whole population
(Gragnolati et al., 2013). Also, all three tiers of the government — federal, state, and
municipal — have participated in the reforms, making the vision of reforms quite
a unified one.
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There are some issues that remain critical in the Brazilian health system. There
are distributional access issues mirroring socioeconomic determinants of health,
and inequity in access remains a critical area of concern. While public financing
seem high compared to some of the other BRICS countries, funding has remained
a challenge, and Brazil’s share of public spending in GDP has remained somewhat
low, placing Brazil far below the OECD average for government share of health
expenditures (Macinko and Harris, 2015). This is surely going to impact a faster
pace of UHC due to the rapidly rising NCDs. Also, the rapid expansion of the FHS
has led to a physician shortage, resulting in the controversial Mais Médicos (More
Doctors) program (PAHO, 2015) which involved importing doctors from other
countries. This has resulted in quality concerns. The quality of health services and
inputs are deemed quite uneven at the municipal levels. Also, the non-poor often
prefer to seek services in the private sector due to overcrowding and waiting time,
though they also visit the public sector to get costly treatments, again leaving the
poor to use the SUS (Khazan, 2014).
Despite these challenges, Brazil is an example of a country that has carried
out incremental reforms in the health sector and has shown sincerity in course
correction over the years. The second feature of the Brazilian reforms is the earnest
engagement of a wider network of stakeholders and civil society, who took — and
continue to take — an active interest in reforms. For example, there have been public
protests regarding the need for greater public investment in health care, which could
have partially triggered the launch of its pay-for-performance scheme within the
FHS (Macinko and Harris, 2015), one of the largest such schemes in the world. Also,
by design, FHS is run with community participation and, therefore, is truly based
on community participation.
Finally, evidence-based policymaking is another feature of the Brazilian system
which has helped it continually evolve and make changes, resulting in course
corrections as and when required (Elias and Cohn, 2003).
China
China’s success in UHC has been hailed as extraordinary, and China has been the
focus of many studies since it started its reform process in 2009 (Yip et al., 2012;
Yu, 2015), when it announced its Health Care System Reform. The Implementation
Plan for the Recent Priorities of the Health Care System Reform visualized the
provision of affordable medical care for all its citizens by 2020.5 The reform envis-
aged a complete overhaul of China’s healthcare system, and addressed all aspects of
5
WHO Representative Office-China. Factsheet on Health sector reform in China. Available
at http://www.wpro.who.int/china/mediacentre/factsheets/health_sector_reform/en/.
b3508_V1_Ch07.indd 128 11-02-2020 13:05:12

the health system. Particular focus was given to the grassroots medical networks,
infrastructure, personnel, hospital reforms, and drugs and medicines.
Earlier, China had a well-performing system of rural health care, and the Rural
Cooperative Medical Schemes (RCMS) was seen as a success. Social insurance and
barefoot doctors made the rural health system a sturdy one (Wan and Wan, 2010).
However, the move towards market economy resulted in major reversals and the
system witnessed high OOPS, stemming mainly from the government’s omission to
address the health system while it transited to a market economy (Yip et al., 2012).
Currently, China operates a three-level medical service system: national level,
province level, and county level. It has three main coverage systems: the Urban
Employee Basic Medical Insurance (UEBMI), the New Cooperative Medical
Scheme (NCMS), and the Urban Resident Basic Medical Insurance (URBMI). These
programs are run in a parallel manner, without resource or service pooling. It also
has an essential drug program which has resulted in significant reduction in OOPS.
One main feature of the reforms was to double annual public health spending,
which was necessary to achieve the goals set out in its vision for health sector reform.
Thus, unlike Brazil, China has moved towards reforms by greatly augmenting its
current level of spending. It has also managed to strengthen the primary health
care system and bring down OOPS in a relatively short time (World Bank, 2016).
However — as in the case of Brazil — China also is facing challenges in terms
of rising costs due to shift in disease patterns and others concerns like quality of
services and provider incentives. It has been argued that China’s health system is
hospital-centric and volume-driven, with quality concerns (World Bank, 2016).
However, these concerns have been recognized by the government, and in 2015 a
national strategy named “Healthy China” was endorsed which will guide the next
phase of reforms (World Bank, 2016). China is an example of a country that has
given serious prioritization to health, as displayed by the huge investment made in
the health sector and the series of reforms that continues to take place in the country.
Russia
After the collapse of Soviet Union, the Russian Federation continued with a universal
system of basic health care that was state run and free at point of access (Linda,
2015). This system helped to improve and stabilize health outcomes over the years to
a large extent, though there remained problems of access to non-basic care. However,
during 1980s and 1990s, lack of reforms led to a deterioration of the health system
and even basic health outcomes worsened significantly. Lack of personnel and mod-
ern equipment were some of the major concerns for the ailing health s ector. To this
was added the problem of huge influx of migrant workers resulting in deepening of
inequality in access and outcomes (Linda, 2015).
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The 1993 Health Insurance Law introduced the legal framework for the health
insurance system (Danishevski et al., 2006). In 1996, the Russian Constitution
provided all citizens right to free healthcare under Mandatory Medical Insurance in
1996. The National Priority Project in Public Health came into being in early 2000s.
With this came a series of reforms and changes in the health system — introduction
of medical insurance, competitive contracting, co-payments, and privatization —
that resulted in rapid and “massive destatization” (Judyth, 1998). The system did not
perform as expected mainly because it was not preceded by administrative, regulatory,
and legal reforms. OOPS increased and state finances declined sharply. Two chan-
nels of government financing were created, one based on wage taxes and the other
on general tax revenues, the latter being the more unstable source (Danishevski et
al., 2006). The underfunding of inputs, including that of personnel, created “shadow
commercialization”, which essentially meant that government-appointed medical per-
sonnel used informal shadow payments for their services (Blam and Kovalev, 2005).
In 2010, the law on Federal Mandatory Insurance Fund (FOMS) was introduced
in Russia, In 2012, a set of measures was announced designed to overhaul the health
care system in Moscow, and some major proposals around personnel and equipment
were made that caused a significant level of controversies and protests in the country.
The Russian system of decentralization has raised many concerns; the three tiers of
the system — federal, regional, and municipal — each have their revenue-collecting
and service-providing functions, but the management and regulation of the entire
system remains complex (Danishevski et al., 2006). The chronic deficit of FOMS,
mismatch between fixed rates for medical services and actual costs, centralized
administration of an attempted decentralized system, and chronic personnel short-
age have led led to a situation which has often led to alarmist conclusions (Epple ,
2015) and a cry for real reforms.6
With relatively high health spending, Russia is a case of substantial inefficiencies
in spending which translates into suboptimal health outcomes, high OOPS, and
significant inequalities in access and financing across regions and economic and
social classes (Linda, 2015; Gordeev et al., 2011). Private health insurance has
increased over the years in Russia (Popovich et al., 2011). While its health outcomes
are close to that of China and Brazil, in comparison to OECD countries, Russia
does not perform that well. However, there is evidence of sincerity in health sector
reforms, and evidence does suggest that incremental changes have been taking place,
though a much more evidence-based approach is required to yield superior results.
6
Russia’s Healthcare System: Current State of Affairs And The Need For Reforms. Report
by the Institute of Modern Russia (Open Russia). Available at http://imrussia.org/images/
stories/Reports/Healthcare/IMR_Russia-Healthcare-Reform_10-2016.pdf.
b3508_V1_Ch07.indd 130 11-02-2020 13:05:13

South Africa
The post-Apartheid period in South Africa saw a number of incremental reforms
in the health sector to address the immense inequalities in access and outcome that
was the norm during the apartheid regime. This included public health legislation
and policies and a unified national health system, increasing infrastructure at the
primary care level and removing user fees for maternal and child health services
to name a few (Schaay et al., 2011). Despite this, the country saw unprecedented
worsening of burden of disease, with HIV and TB wiping out much of the gains
achieved through development.
To tackle the worsening health situation, in 2008, the government brought
out the Health Sector Road report which resulted in the 10-Point Plan, which
was intended ‘to guide government health policy and identify opportunities for
coordinated public and private health sector efforts, in order to improve access to
affordable, quality health care in South Africa’ (Schaay et al., 2011). A performance
agreement between the President and the Minister of Health was signed in October
2010 for the implementation of the Negotiated Service Delivery Agreement (NSDA)
for the Health Sector. The NSDA process requires that government departments
harmonize the implementation of their respective service delivery agreements so
as to facilitate delivery of the 12 key outcomes.
In 2011, the Green Paper on National Health Insurance was brought out which
contained the principles for developing National Health Insurance (NHI). The objec-
tives were to improve access to quality healthcare services and provide financial risk
protection against health-related catastrophic expenditures. The proposal visualized
the development of comprehensive healthcare to be provided through accredited and
contracted public and private providers, with a strong focus on health promotion
and prevention services at the community and household level. The proposal also
contained a realistic target timeline, with the first 5 years to be used to strengthen
the public sector in preparation for new NHI systems. The plan was to launch the
new central NHI fund in 2014/2015 (National Health Insurance, 2013).
However, the NHI did not quite take off, and in 2015 the government released
the White Paper on NHI. The paper proposed that NHI will be made compulsory
and will be introduced in three phases over a 14-year period. In Phase I, focus will
be on strengthening the public sector. In the second phase, population registration
and creation of a transitional fund to purchase non-specialist primary care would
be the focus. Finally, in Phase III, the aim will be to operationalize the NHI fund
fully and make it a strategic purchaser and single payer of comprehensive health
services, including specialist services (Gray and Vawda, 2016).
While it is early to comment on the progress and implementation of the NHI,
there is some concern that the necessary homework to make NHI a reality remains
b3508_V1_Ch07.indd 131 11-02-2020 13:05:13

to be done. For example, there have been delays in operationalizing the independent
Office of Health Standards Compliance, necessary for ensuring compliance with
standards laid down for treatment. Some of the changes envisaged in the White paper
require far-reaching legislative changes as well, in for example, the National Health
Act and the Medical Schemes Act, but details are not laid out in the White paper on
how exactly such changes should be brought about (Gray and Vawda, 2016).
India
The constitution of India considers the ‘right to life’ to be fundamental and obliges the
government to ensure the ‘right to health’ for all, without any discrimination. The
Constitution indicates the government’s role in the health sector and lays down
obligations on the Central Government, but makes health a State subject. To a
significant extent, India’s health sector has been shaped by the federal structure of
the country and center–state divisions of functions, responsibilities, and financing.
The total health expenditure in India for 2013–2014 was 4.02% of the country’s
GDP, with government expenditure at 1.15% of GDP (National Health Accounts,
2013–2014), which is lower than the average for low-income countries (National
Health Profile, 2016). Out of total health expenditure in India, household out-of-pocket
expenditures are 69.1%. The high OOPS and low public investment have remained
more or less the main features of the Indian health care system over many years.
There have been a few attempts at moving towards a wider health coverage system,
notably the High-Level Expert Group set up by the Planning Commission, which
brought out a blueprint of the possible ways India could move towards UHC. With
a change in the government at the Center, a National Health Assurance Mission was
set up as well, which submitted another blueprint of UHC to the government. The
recommendations of these committees were not implemented. Apart from these, there
have been two major programs which can be thought of as highlights of India’s health
sector journey over the years. These are the National Rural Health Mission (NRHM)
launched in 2005 and the Rashtriya Swasthya Bima Yojana (RSBY) launched in 2008.
The NRHM — now called the National Health Mission or NHM — can pos-
sibly be called a true health sector reform in that it changed in some fundamental
ways the workings of the health systems in the country. The aim of NRHM was to
‘carry out necessary architectural correction in the basic health care delivery system’
(Government of India, 2005) mainly to improve access by strengthening health sys-
tems especially in the rural areas. There have been numerous studies on the NRHM,
and while some argue that it may not have improved the situation like envisaged
initially, it has led to improvements in parameters like immunization, institutional
deliveries, and antenatal care (Hussain, 2011). Like most programs that are across the
health sector, the NHM may have played a relatively greater role in national program
priorities like disease control programs of the government. While the changes were
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not uniform across states, the NRHM did usher in some significant process changes
and strengthened health systems considerably in many states of India.
The RSBY is one of the largest social welfare schemes that provides health
coverage to poor informal sector workers and currently covers more than 41 million
poor families. It is a hospitalization scheme that was launched by the Ministry of
Labor and Employment (MOLE); and only 2017, it was transferred to the Ministry
of Health and Family Welfare (MOHFW). The RSBY is seen by some as the most
successful health sector reform — and not merely a program — in India. There is
little doubt that enrolment into the program is massive, but whether it has achieved
its objective of reducing OOPS on hospitalization and improving access is still
being contested. Few studies exist that look at the impact of health insurance on
out-of-pocket spending (OOPS), and the evidence seem to be mixed on whether or
not coverage for hospitalization like the RSBY reduces OOPS (Seshadri et al., 2012;
Selvaraj and Karan, 2012; Fan et al., 2012; Shahrawat and Rao, 2011). Nevertheless,
some argue that the mere fact that RSBY happened on such a massive scale was
because of strong political will to make a difference in the social welfare situation in
India, and it has the potential to move the UHC agenda forward (Zubin et al., 2015).
The reason why RSBY cannot be called a health sector reform in the true sense
of the term, especially in the context of UHC, is because RSBY happened in isolation,
as a scheme and not as a part of a coherent well-planned UHC strategy. RSBY was
not based on the principle of risk and income pooling, was not comprehensive, and
did not fit into any broader plan for UHC.
More worrying is the widespread trend across states to replicate the RSBY
model, without paying attention to its merits and demerits and with very little
evidence-based understanding of whether or not it will improve access and reduce
costs in the system. In the last budget, the Prime Minister announced a National
Health Protection Scheme, which is essentially RSBY in a scaled up fashion for the
entire BPL population with a higher ceiling amount of Rs. 1,000,00.7
A set of health sector reforms for UHC has yet to take place in India, and it is
yet to draw up a blueprint of a comprehensive UHC program. As for incremental
reforms, there have not been that many over the years, evidenced by a poorly per-
forming primary health care system, almost totally unregulated private market for
health, and lack of comprehensive coverage for the majority of the population. The
significant inequity in access and financing situation has remained somewhat the
same over the years, and the government’s priorities in the health sector (MOHFW,
2015) can be further questioned based on its very low investment in the sector.
7
National Health Protection Scheme: Health Insurance Cover of upto Rs. 1 Lakh to the poor
and BPL. Available at http://www.pradhanmantriyojana.co.in/national-health-protection-
scheme-insurance-cover-rs-1-lakh-poor-bpl/.
b3508_V1_Ch07.indd 133 11-02-2020 13:05:13

UHC in BRICS: Takeaways for India

The experiences of the four countries in improving access to health services in their
countries towards universality offer valuable insights and lessons that India can learn
from. In Table 5, we summarize the key points that emerged from the four-country
(excluding India) analysis above.
The last column in Table 5 indicates that the two countries that have made sub-
stantial progress towards UHC are Brazil and China, with almost all the parameters
showing positive results. While both the countries are struggling with concerns
like shortage of physicians made worse by increasing NCDs, Brazil in particular
has some way to go in raising the share of health in total government expenditure.
Nevertheless, Brazil’s attempt at consolidation and pooling is commendable, because
it uses general tax revenues to give similar services to all its population groups.
All the countries except India have a vision document for UHC, though Russia
and South Africa have yet to translate all the stated objectives into action. Both
Russia and South Africa could not implement all the administrative and legal
reforms, and as a result these countries are struggling with complex and sticky
issues of operational inefficiencies. Russia’s is a unique case because of its politi-
cal economy legacy, but abrupt changes in policies and programs without proper
groundwork have delayed and arrested progress towards UHC. As a result, Russia
has been struggling with high OOPS. The only two countries with proper reforms
and implementation are Brazil and China, despite the varied concerns with the
current situation. The governance results indicate that with Brazil and China, Russia
has also done well, and it may not be very difficult for it to turn things around with
proper planning and foresight.
What Lessons Can India Draw from These Experiences?
While both Brazil and China have been able to make serious progress towards
UHC, the differences between the two are quite stark. Brazil’s reforms were truly
incremental, undertaken gradually over many years; China had a much faster
process. Also — and this may be related to the previous point — the investment by
the government in Brazil has been steady and has grown modestly, while China saw
a sharp increase in government expenditure on health. If India wants to fast-pace
its move towards UHC, it might want to consider China’s model and immediately
prioritize health by moving from the very low expenditure levels to a level that can
at least make it possible to take the initial steps towards UHC. Otherwise, if it wants
to take it slow — the better model might be that of Brazil’s with numerous reforms
preceding the actual UHC roll out and then working incrementally thereafter. The
latter is in some ways superior because unless one is absolutely sure of what is
b3508_V1_Ch07.indd 134 11-02-2020 13:05:13

b3508_V1_Ch07.indd 135
“6.5x9.75”

Table 5: Key parameters in the progress towards UHC in BRICS nations.
Blueprint Increased Functional
or Vision of Share of Public Primary Health Major OOPS Declined Progress
UHC Funding Care System Pooling Regulation Reforms Over the Years Towards UHC
Brazil Yes Yes, but low Yes Yes, unified Yes Yes Yes ++++
services
Russia Yes No, declined Yes No No No No, it has risen ++
somewhat
India No No No No No No Yes, marginally +
China Yes Yes, marginally Yes Few separate Yes Yes Yes, sharply +++
pools
South Africa Yes Yes No No Incomplete No Yes +
11-02-2020 13:05:13
being implemented, sudden and abrupt changes might not be the best way for-
ward. The experiences of Russia and South Africa indicate that some legal and
administrative reforms are absolutely necessary before making major changes in
the architecture of health financing and service delivery.
The other important fact that emerges from these country experiences is the
importance of strengthening primary care. In fact, while Brazil and China have been
able to do so, Russia is another example of a country that is able to offer some basic
services to its population, due to its historical legacy. While Russia has not done as
well in UHC despite fairly high investments, given its positive governance outcomes,
a moderately well-functioning primary health care system, and fairly high health
expenditure levels, it has the potential to rectify the various inefficiencies that have
befallen the health care system — calling for yet another round of well-directed
reforms. India has the option of either moving towards a comprehensive UHC
program or investing on primary care for now, and building UHC on a strong health
system subsequently. While improving social determinants of health would go a
long way to improve inequities in the system — as is clear from the case of South
Africa — this is a broader developmental issue that can happen simultaneously, and
should not stop specific health sector reforms from happening.
While India’s poor governance record puts up a natural constraint on any fast-
paced reforms, it needs to at least acknowledge the country’s need for comprehensive
health coverage and draw up a vision document that can be used as a benchmark
to tally progress. Clearly, such a document can only be drawn up with serious
prioritization of health, which is not evident yet from its public financing patterns.
Also, it would require wider consultation with multiple stakeholders, backed up
by solid evidence-based research, as has been happening in Brazil. Civil societies
have been able to work with the government in Brazil, and to a much lesser extent
in South Africa, but not so much in China and Russia.8 Wider consultations and
inputs from civil societies are critical for reality checks. So far, in India, the health
sector programs, including the launch of various health insurance schemes, has
happened in a very centralized manner without wider stakeholder participation in
the processes. This has meant that neither criticisms nor constructive suggestions
have been taken on board before launching new schemes or scaling up old ones.
A very important issue that emerges from the analysis is the issue of decentraliza-
tion and regional factors. All the BRICS countries have federal structures where the
structure of decentralization has played a key role in access to health services. In fact,
8
Eduardo J. Gómez, International Development Institute, King’s College London.
Confronting Health Inequalities in the BRICs and other emerging economies: International
Politics, Institutions, and Civil Society. Available at http://gomez.madebypixel.com/wp-
content/uploads/2015/01/ConfrontingHealthInequalitiesBRICS.pdf.
b3508_V1_Ch07.indd 136 11-02-2020 13:05:13

much of the complexity in delivering equitable and efficient health services has to
do with the tiered federal structures in these countries. While South Africa grapples
with intense inequalities in access between poor and rich areas and populations,
China’s fiscal decentralization has often led to uneven outcomes, and the matching
funds arrangement has meant many facilities are dependent on their local govern-
ments’ fiscal capacities. Russia has inequalities in human resources and infrastructure
across regions, and despite increased funds at the center, the allocations of finances
have been quite uneven. Also, it has a very complicated system of federal and regional
health budget financing and health insurance funds. While Brazil is also dealing
with uneven quality and availability of infrastructure and personnel, it is nowhere as
stark as in some of these other countries, and higher spending on health and better
allocations with enhanced funds might be able to improve the situation.
India on the other hand, has yet to articulate its own vision of UHC and financing
in the context of its federal structure, where health is a state subject and the state gov-
ernments are the major spenders. It makes little sense then for the central government
to plan UHC on its own, when neither service provision nor significant financing come
from it. The Fourteenth Finance Commission has decreed that a greater part of the
divisible pool taxes would now go to the states, making the states squarely responsible
for prioritizing health. In this scenario, India would need very careful planning around
the center and states’ roles in financing and provisioning of health services. Should
there be one consolidated scheme or should each state decide on how it wants to design
a UHC package? Given that there are significant personnel and infrastructure gaps
currently in many states, and states have historically not prioritized health in the sense
of higher spending, what role can the central government play? Here, the Brazil model
is useful, and evidence-based planning around UHC is the first step India should take.
The planning would also require understanding where reforms are absolutely necessary
and which reforms can happen during the course of the roll out.
A key area requiring focus is the public–private split in financing and provision.
This is going to be a key issue in India where the private providers are the major
players. Each of the BRICS countries has had their own private sector issues. Brazil’s
private health insurance sector has emerged as a very important player though within
rules set out by the relevant federal government institutions. China has been actively
encouraging private players and has taken steps to remove regulatory barriers for
greater ease of entry and stay; in fact, selected private hospitals are now eligible
to provide reimbursable treatment for patients funded through social healthcare
insurance.9 South Africa already has a large private provider and insurance sector.
9
White paper — China’s emerging private healthcare sector. The Economist. March 10th
2016. Available at http://www.eiu.com/industry/article/1954017979/white-paper---chinas-
emerging-private-healthcare-sector/2016-03-10.
b3508_V1_Ch07.indd 137 11-02-2020 13:05:13

India will have to understand how lack of proper regulation in some of these coun-
tries has increased inequalities and decide how long it should wait before putting
in place a series of regulation that would curb malpractices and economic burden
on households. Whether or not it decides to have UHC, regulation is an area where
reforms have been long overdue.
In sum, lessons from BRICS countries indicate that since India has yet to
articulate a plan or vision for UHC, it can prepare itself better by learning from
experiences of other countries, including BRICS. Such experiences are, after all,
the best evidence base that the country can have in hand, to plan better for a future
where a majority of Indians can access health services that they require at costs that
they can easily bear.
Appendix
Table A.1: On governance indicators.
Russian South
Indicators and Index Brazil China India Federation Africa
Commercial bank branches (per 100,000 47.3 8.1 13.0 37.0 10.9
adults), 2014
Ease of doing business index rank (1 = most 123.0 78.0 130.0 40.0 74.0
business-friendly), 2016
Electric power transmission and distribution 16.4 5.8 18.5 10.1 8.5
losses (% of output), 2013
Improved sanitation facilities (% of population 82.8 76.5 39.6 72.2 66.4
with access), 2015
Improved water source (% of population with 98.1 95.5 94.1 96.9 93.2
access), 2015
Physicians (per 1,000 people), 2011 1.9 1.5 0.7 4.3 0.8
Research and development expenditure 1.2 1.9 0.8 1.1 0.7
(% of GDP), 2012
Unemployment, total (% of total labor force) 4.8 4.1 4.9 5.2 24.9
(national estimate), 2014
Proportion of seats held by women in national 9.9 23.6 12.0 13.6 42.0
parliaments (%), 2016
Pupil–teacher ratio in primary education 21.2 16.2 32.3 19.8 32.3
(headcount basis), 2014
Corruption Perceptions Index Rank (1 = least 76 83 76 119 61
corrupt), 2015
GOVERNANCE INDEX 0.52 0.61 0.17 0.59 0.32
b3508_V1_Ch07.indd 138 11-02-2020 13:05:13

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CHAPTER 8
Inclusive Finance: India Through the

BRICS Lens
Saibal Ghosh
Qatar Central Bank, Doha, Qatar
Introduction
In the post-crisis world, the role and relevance of finance for economic growth has
gained increasing attention. The reasons for this focus are not too far to seek. Access
to finance, especially to the poor, is essential for promoting inclusive economic
growth and eradicating poverty. A significant body of research has identified the
beneficial impact of access to financial services on all aspects of social and economic
outcomes at the household, industry, and firm levels (King and Levine, 1993; Levine,
2005a, 2005b; Demirguc Kunt et al., 2008, 2017; Demirguc Kunt and Levine, 2008;
Rajan and Zingales, 1998).
Notwithstanding its beneficial effects, finance does not appear to have adequately
permeated vast segments of the population. To exemplify, according to the World
Bank’s Global FINDEX, although 700 million adults became first-time account
holders between 2011 and 2014, only 62% of adults globally had an account with a
formal financial institution in 2014. The recently released global FINDEX (World
Bank, 2018) finds that although account ownership had increased to 69% (3.8 billion
adults) in 2017, the number of unbanked still stood at 1.7 billion (as compared with
2 billion in 2014). In the case of India, 175 million adults became been added into
the fold of account holders during the period 2011–2014. Even more impressive
143
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144 S. Ghosh
has been the subsequent progress. In particular, of the 514 million bank accounts
opened globally during 2014–2017, around 55% were from India. As a consequence,
the extent of financial inclusion, which was 53% in 2014, jumped to 80% in 2017.
And yet, close to 50% of the bank accounts witnessed no transactions in the past
1 year. What this suggests is a discernible gap between the availability of finance and
its accessibility and use.
Both the Government and the Reserve Bank have undertaken significant steps in
the recent past to improve financial access. Several strategies have been undertaken
including lending to a designated sector and even earlier, selective credit controls.
Banks and other smaller financial entities were given targets to open savings bank
accounts and provide micro-insurance policies, respectively. The Self-Help Group-
bank linkage program (SHG-BLP), Kisan (meaning, farmer) Credit Card scheme
for farmers, Atal Pension Yojana (meaning, scheme), financing and refinancing of
cooperative banks, regional rural banks that extend credit to rural clientele, and
various state-level credit programs for provision of credit to the rural population
are examples of more direct efforts.
Advancing the process forward, the Reserve Bank has granted ‘in principle’
approval to a multitude of players in the financial eco-system. At the same time, with
the rapid expansion of information technology and communications networking,
the need to harness technology to reach out to the vast sections of the unbanked
populace, incorporating related benefits such as social security transfers, and
insurance, has improved further. Other newer forms of digital technology, such as
biometrics, including eye scanning and finger printing, have come to occupy an
important place in the government’s financial inclusion agenda. In this context,
the analysis indicates that access to mobile communications plays a key role in the
financial inclusion drive.
The Pradhan Mantri Jan Dhan Yojana (literally translated as, Prime Minister’s
Mass Money Scheme) of the Government launched in August 2014 marks a land-
mark effort in the quest for universal financial access. The scheme had set ambitious
targets, such as providing access to formal finance to every household within a
stipulated period of its introduction. The government is also focusing to pay benefits
directly into these accounts (Pickens et al., 2009). This will also ensure that a big
chunk of the accounts opened under various schemes, which were earlier dormant,
witness ‘movement’, thereby integrating access with use. We analyze the impact of
the scheme on the access to and use of finance by households and find that while
there has been a perceptible increase in the former, the evidence regarding use is
less compelling.
Issues of gender have gained currency in the backdrop of the financial inclusion
debate. According to the Global Findex 2017, of the unbanked worldwide, 59% or
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Inclusive Finance: India Through the BRICS Lens 145
1 billion are women. In the Indian case, the number of female savings bank accounts
per thousand of the female population was around 570 in 2016 as compared with less
than half that number 5 years ago. This is consistent with research which suggests
that, on average, among adults the number of females with an account at a formal
financial institution is significantly lower as compared with males (Demirguc Kunt
and Klapper, 2012). With the G20 and, more recently, the Sustainable Development
Goals (SDG-5) of the United Nations advocating the need for greater participation
of women in the developing world, there is a greater need to promote women
entrepreneurs in the quest for inclusive growth. Our analysis with regard to gender
shows that both the access to and use of a bank account is significantly lower for
females as compared with males.
Against this backdrop, the purpose of the chapter is to analytically assess the
financial inclusion process in India, drawing upon international experience and
the Indian evidence. Toward this end, the rest of the analysis unfolds as follows.
First, we provide a background of financial inclusion in India, encapsulating the
philosophy, rationale, and the process. In the subsequent section, we dwell on the
international experience, highlighting the key takeaways and providing evidence as
to how well India matches up in its financial inclusion efforts in the cross-country
sample. Next, we explore how the global financial crisis reshaped the financial
inclusion agenda. Fifth section discusses the Indian experience, emphasizing some
of the key initiatives that have been undertaken in recent times, supplemented with
empirical evidence, as appropriate. The penultimate section syncopates the role
of central banks in the financial inclusion drive, and the chapter ends with some
concluding remarks.
Inclusive Finance: Philosophy, Rationale, and Process

Inclusive finance is as much about protecting customer interests as it is about ensur-
ing the availability of essential financial services to all strata of society at a reasonable
and affordable cost (Reddy, 2012). Accordingly, financial sector regulation has
endeavored to ensure that these needs are met, while at the same time advocating
the need for financial literacy to ensure that customers do not fall prey to financially
disquieting credit arrangements.
In the Indian context, the role of the financial sector in promoting financial
inclusion can be traced to the 1960s. The overarching emphasis of the Reserve
Bank was towards channeling the flow of credit to the productive sectors of the
economy and hitherto unserved sections of the populace. Starting with the two-
phase bank nationalization process, major initiatives such as priority sector lending
requirements, establishment of development banks and Regional Rural Banks, and
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146 S. Ghosh
SHG-BLP were initiatives aimed at expanding banking services to the grass-root

level. While critics have been agnostic of the efficacy of this approach, research
appears to suggest that such a bottom-up strategy made a significant dent in rural
poverty (Burgess and Pande, 2005).
Notwithstanding these initiatives, ensuring full-fledged financial inclusion
continued to elude the policymakers. While it is difficult to conclude with certainty
the reasons thereon, a few broad generalizations can be made.
First, the rapid expansion of low-documentation lending within an insufficiently
developed legal and institutional framework in the credit market exerted a dampen-
ing effect on the process.
Second, the lack of reliable credit reporting systems that could have limited
problems of overindebtedness and of borrowing from multiple lenders were not in
place. These problems were aggravated by the absence of well-functioning personal
bankruptcy laws that hindered the orderly discharge of excessive debts.
Third, the sector was affected by non-economic interventions in the credit
market: MFI clients were implored to stop repaying their loans ahead of elections.
The politicization of the process turned it into a tool for rent-seeking and led to a
shift away from its primary purpose.
Fourth, it was recognized that to hasten the process brick-and-mortar branching
needed to be complemented with affordable technological innovations. However,
the costs of technology proved prohibitive and impeded large-scale penetration.
These considerations led the Reserve Bank to reorient its emphasis towards
financial inclusion with a more micro-centric focus. With banks being the mainstay
of the financial system, it has emphasized a bank-led model for financial inclusion,
although it has also permitted non-bank entities to partner banks in their financial
inclusion drive. This contrasts with the widely cited experience of Kenya, which
employed a non-bank-led model to drive its financial inclusion agenda (Aker and
Mbiti, 2012). Besides, banks were provided the flexibility to determine their own
strategies for rolling out financial inclusion plans, based on their business philosophy
and risk appetite, within an overall time-defined target. The idea inherent in this
strategy was to refocus the perspective of banks towards financial inclusion from
mere social obligation to a viable business opportunity.
As the concept of inclusive growth came to the forefront of policy agenda,
the agenda of financial inclusion assumed even greater prominence (Government
of India, 2008). In November 2005, a new concept of basic banking ‘no-frills’
account with nil or very low minimum balance was introduced to make such
accounts accessible to vast segments of the population. The nomenclature was
subsequently changed in 2012 to Basic Savings Bank Deposit Accounts (BSBDAs)
for all individuals with zero minimum balance and the facility to use an ATM
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card/Debit card. Also, to facilitate easy opening of accounts especially for small
customers, Know Your Customer (KYC) guidelines were greatly simplified. The
process has been fine-tuned, with gradual improvements in the modalities and
logistics.
At the same time, the branch authorization policy was also relaxed. To further
step up the opening of branches in rural areas, commercial banks were directed
to open at least a quarter of their total branches in hitherto unbanked areas of the
country.
However, the difficulty of opening brick-and-mortar branches in all remote
corners of the country necessitated the search for innovative solutions. In this con-
text, banks have been encouraged to improve banking penetration through Business
Correspondents (BCs)/Business Facilitators (BFs). Contextually, such a ‘correspond-
ent’ banking approach has also been adopted in countries like Brazil to distribute
welfare grants to the unbanked, with great success. The list of correspondents has
expanded over time, enabling banks to provide doorstep delivery of services, thereby
addressing the ‘last mile’ problem. Riding on technological advancements, banks
have leveraged on mobile network providers to make available banking services to
the lowest common denominator. This hybrid model finds echo in the experience
of Philippines wherein a combination of the brand and execution of the service by
a mobile network operator in partnership with a commercial bank substantially
improved access to finance for households. Besides, other countries have also
adopted several out-of-the-box ideas for financial inclusion (Box 1).
Box 1: Innovative ideas for financial inclusion
Out-of-the-box ideas have been employed by several countries in order to increase

banking penetration in un- and under-served areas, often leading to very encouraging
results.
In Chile, for instance, supermarket chains have started writing credit histories
for their unbanked clients, by means of extending small store credit, which can be
expanded based on positive repayment records and which can then translate into
broader access to credit. This is financial empowerment in action — especially when
combined with consumer protection measures and financial education for preventing
over-indebtedness.
In Brazil, lottery kiosks, pharmacies, supermarkets, and other retailers are used
as business correspondents for banks. Upon launching Bolsa Familia, a conditional
(Continued )
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148 S. Ghosh
Box 1: (Continued)
cash transfer programmer in 2003, the government determined that all benefits would
be paid through Caixa Econômica Federal, Brazil’s public sector bank. However, as
many beneficiaries lived in remote areas, without access to banking services, Caixa
Econômica had to transport cash for the distribution of monthly benefits at very high
costs. Therefore, Caixa started employing correspondents in municipalities where
the costs of distribution were particularly high and started to administer the sales
of Brazil’s wide-ranging lottery program. This led to a large network of small lottery
stores called Lotéricas that began accepting bill payments and the distribution of
social transfer payments besides offering additional financial services from Caixa. In
many areas, as many as 55% of the households pay their bills through these lottery
shops.
In South Africa, television and radio have been used for the delivery of financial
literacy training. One such project, involved the distribution of financial inclusion
storylines through a popular soap opera called Scandal!. The program was aimed at
enhancing knowledge, attitudes, and behavior for making sound financial decisions,
with a focus on debt management. An impact evaluation of the soap opera showed that
its audience exhibited content-specific improvement of financial knowledge, a greater
affinity for formal borrowing, reduced use of hire-purchase deals, and reduced inclina-
tion for gambling (World Bank, 2013).
Early on in the process, it was recognized that the process of financial inclusion
would need to be buttressed with demand-side measures in order to gain traction.
In this context, financial literacy emerged as a crucial cog-in-the-wheel in promoting
universal financial inclusion and ensuring consumer protection.
A two-pronged approach has been adopted in this regard. First, efforts have been
directed towards dissemination of simple messages of financial prudence in vernacular
languages. To this end, the Reserve Bank website created a link for financial education,
containing material in several vernacular languages, messages on financial planning,
games on financial education, and a link for accessing the Banking Ombudsman
Scheme for customer grievance redressal. In addition, tailored financial literacy
content for target groups have been developed that can be used by financial literacy
trainers. Second, a National Strategy for Financial Education was enunciated for the
medium term. Besides establishing initial contact with adults and educating them on
key saving, protection, and investment-related products, it has also been engaging
with curriculum-setting bodies to embed such concepts in the school curriculum.
Despite these measures, large sections of the population continue to remain
financially excluded. Although these measures resulted in impressive gains in rural
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outreach and volume of credit, the structure suffered from weak governance. It was
‘quantitatively impressive but qualitatively weak’. The main reason was that, due to
the target-driven approach to social banking, these initiatives were not seamlessly
integrated into the business strategy of individual banks. Later in the analysis, we
take a closer look at certain demand-side considerations.
Cross-Country Experience
Although financial inclusion is a buzzword worldwide, when looked at from a
global perspective, India stands out as one of the BRICS economies in which the
government has a documented financial inclusion strategy containing specific
commitments (Figure 1).
Financial Access and Use
To carefully examine financial inclusion in the BRICS, we look at measures of

financial inclusion from two different perspectives. Accordingly, we focus on three
main indicators, in line with Demirguc Kunt and Klapper (2013) and Demirguc
Kunt et al. (2015). The first and most traditional one is the ownership of account at
a financial institution. This measure focuses on financial access; it does not consider
whether the account has been used or not. To rectify this shortcoming, we buttress
this with two additional measures focusing on use: first, the saving behavior at a
formal financial institution and, second, the use of bank credit. The former captures
the willingness of savers (asset side of their balance sheet) to save at a formal financial
institution relative to alternate forms of savings. The second looks at their liability
side and examines their willingness to borrow bank finance. In essence, these
measures comprise the basic triad of financial inclusion: a formal account serves
as an entry key to the banking industry because it enables the individual to open a
savings account and apply for a loan.
Between 2011 and 2017, most of these measures have witnessed a discern-
ible rise (Table 1). To illustrate, 66% of Chinese individuals had a formal finance
account in 2011; this increased to nearly 80% by 2014 and has remained at that
level since. Only 56% of individuals in Brazil and 54% in South Africa had a formal
account in 2011; these increased by nearly 14 percentage points in both countries
in 2017.
In terms of use, the picture is much less persuasive. On average, 14% of Indian
individuals saved at a financial institution in the past 12 months in 2014, up just
2 percentage points since 2011. By 2017, this had increased to 20%. The figure is
however much lower than the global average of 27%.
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b3508_V1_Ch08.indd 150
150 S. Ghosh

The government has a documented financial The government has a documented The government has a documented financial
inclusion strategy, but it does not contain financial inclusion strategy containing inclusion strategy containing specific
There is no strategy for financial
specific commitments OR there is no specific commitments that have been commitments and it has been substantially
inclusion OR recent activities
documented strategy but there are recent partially implemented implemented
in 2 or more areas of financial
activities in 2 or more areas of financial
inclusion
inclusion
Figure 1: Geographic distribution of countries with financial inclusion strategy.

Notes: The map is for illustration purposes only. The actual geographical boundaries are not confirmed.
Source: Economist Intelligence Unit, London.
“6.5x9.75”
11-02-2020 13:05:46
Table 1: Key indicators of financial inclusion for BRICS (Age 15+).
Account at a Financial Saved at a Financial Borrowed from a
Institution Institution Financial Institution
2011 2014 2017 2011 2014 2017 2011 2014 2017
Brazil 0.56 0.68 0.70 0.10 0.12 0.14 0.06 0.12 0.09
China 0.64 0.79 0.80 0.32 0.41 0.35 0.07 0.09 0.09
India 0.35 0.53 0.80 0.12 0.14 0.20 0.08 0.06 0.07
Russia 0.48 0.67 0.76 0.11 0.15 0.14 0.08 0.10 0.14
South Africa 0.54 0.69 0.67 0.22 0.33 0.22 0.09 0.12 0.09
Global 0.51 0.62 0.69 0.22 0.27 0.27 0.09 0.11 0.11
Total (billion) 2.6 3.3 3.8 0.6 0.9 1.0 0.2 0.3 0.4
The situation is very much different as regards the use of formal credit. Just
around 14% of the individuals in Russia reported having obtained formal credit in
2017, the highest in the sample, with the global average being 11%. In India, only
7% of individuals borrowed from a financial institution in 2017, the lowest among
the BRICS.
On the whole, the evidence is consistent with the view that financial access is a
necessary but not sufficient condition to ensure financial inclusion.
Mobile Money
When we look at a disaggregated level and especially on mobile money, the picture
is even starker and widely uneven across these countries. More specifically, over 80%
of individuals in South Africa used ATM for transactions purposes and well over
50% had a debit card (Table 2). In contrast, these figures were substantially smaller
for India. In Russia, close to 20% of individuals used mobile phone/internet for
transactions; this number is a mere 1% for India. Overall, the evidence highlights the
fact that the wide divergence in the use of finance is, to a large extent, the outcome
of the low use of mobile technology.
When we look at access to technology for financial inclusion, we find that, as of
2014, there were only nine ATMs per 100,000 adult population in India, against 59 in
South Africa, and over 150 in Russia. Similarly, only 2% of individuals aged 15 years
and above had made payments through electronic means against approximately 7%
in China (Figure 2).
In terms of remittances send by mobile phones, Kenya has a leading position. In
2017, 63% of its adult population had used mobile phones to send money vis-à-vis
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152 S. Ghosh
Table 2: Disaggregated indicators of financial inclusion for BRICS.

ATM Is the Main
Use Mobile Phone to Mode of Withdrawal
Has Debit Card Pay Bills (% with Account)*
2011 2014 2017 2011 2014 2017 2011 2014 2017
Brazil 0.41 0.59 0.59 — 0.01 0.04 0.58 0.75 —
China 0.41 0.48 0.67 — 0.01 0.17 0.33 0.51 —
India 0.08 0.22 0.33 — 0.00 0.01 0.18 0.33 —
Russia 0.37 0.44 0.57 — 0.01 0.10 0.65 0.68 —
South Africa 0.45 0.55 0.34 — 0.03 0.07 0.89 0.82 —
Global 0.31 0.41 0.48 0.02 0.08 0.40 0.52
Note: *The 2017 Global Findex database defines account ownership as having an individual or jointly owned account
either at a financial institution or through a mobile money provider.
160 ATMs/ 100000 adults Used electronic modes to make payments

(Age: 15+)
140
120 70
60
100
Number
Percent
50
80
40
60 30
40 20
20 10
0 0
Brazil
Kenya
South Africa
United States
Russian Federation
Germany
China
India
Indonesia
United Kingdom
Brazil
Kenya
South Africa
Russian Federation
Germany
China
India
Indonesia
United Kingdom
Figure 2: Use of technology in financial inclusion.
1% in India. Similarly, only 1% of the rural population in India had directly received
public sector wages into their accounts in the past 1 year, against 8% in Brazil and
nearly 11% in Russia (Figure 3).
Barriers to Financial Inclusion
Individuals often might be financially excluded owing to the presence of several

barriers. In Table 3, we look closely at such possible barriers. We find that lack of
money is cited as the major reason for not having a formal account. Although the
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Mobile phone used to send money, Used an account to receive public wages,
older adults rural
65 50
55 40
45 30
Percent
Percent
35 20
25 10
15 0
Russian…
5
United Kingdom
United States
Indonesia
Brazil
China
India
Germany
Kenya
South Africa
-5 Federation
Indonesia
China
India
Kenya
South Africa
Russian
Figure 3: Remittances and wage payments.
Table 3: Barriers to financial inclusion in the BRICS.

Lack of Lack of Lack of
Distance Cost Documentation Trust Money Religion Others
Year: 2011
Brazil 0.16 0.48 0.24 0.22 0.67 0.01 0.29
China 0.16 0.10 0.09 0.05 0.61 0.01 0.34
India 0.23 0.24 0.17 0.09 0.63 0.08 0.45
Russia 0.13 0.20 0.11 0.43 0.75 0.05 0.21
South Africa 0.34 0.43 0.24 0.20 0.73 0.03 0.11
Average 0.20 0.29 0.17 0.20 0.68 0.04 0.28
Year: 2014
Brazil 0.08 0.24 0.09 0.08 0.66 0.01 0.36
China 0.15 0.11 0.08 0.07 0.50 0.03 0.42
India 0.21 0.25 0.22 0.09 0.49 0.05 0.43
Russia 0.06 0.22 0.07 0.35 0.53 0.02 0.23
South Africa 0.24 0.24 0.30 0.12 0.58 0.05 0.26
Average 0.15 0.21 0.15 0.14 0.55 0.03 0.34
Year: 2017
Brazil 0.11 0.20 0.07 0.09 0.21 0.02 0.18
China 0.06 0.04 0.03 0.02 0.17 0.01 0.10
India 0.05 0.06 0.05 0.04 0.11 0.01 0.11
Russia 0.06 0.14 0.04 0.14 0.21 0.01 0.13
South Africa 0.12 0.16 0.09 0.11 0.24 0.04 0.14
Average 0.08 0.12 0.06 0.08 0.20 0.02 0.13
Notes: Average = Simple average of the figures under each head for BRICS. Others include reasons such as family
member already having an account, difficulty in operating the account, etc.
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154 S. Ghosh
importance of this factor has diminished between 2011 and 2017, it nonetheless
remains substantial, averaging 20% in 2017. The evidence is consistent with that of
Allen et al. (2016), who report similar results after examining cross-national data.
Among others, individuals report the high costs to be an overwhelming con-
sideration: the reason was extremely important in Brazil in 2011 wherein 48% of
respondents cited it as important, although its relevance has since declined signifi-
cantly. Distance was an important consideration inhibiting financial inclusion in
both South Africa and India, although its importance has since declined substantially
in case of the latter. The role of religion in influencing financial inclusion was most
important in India among the BRICS, with 1% of respondents citing it as relevant
in 2017, a decline from 8% in 2011.
On a related note, the motives for involuntary exclusion are no less compelling:
lack of trust and high cost are still important in several countries, most notably in
Russia, with 35% of individuals citing it as important in 2014. It still remains an
important concern in the country. This is consistent with Fungacova and Weill’s
(2013) results which show that these factors have appeal in a country characterized
by several bank failures and, more generally, financial instability.
Alternative Sources of Borrowings
Given the evidence on financial exclusion, it therefore remains to be examined as to

what alternative sources of credit are relevant, apart from credit from formal sources.
In Table 4, we depict these sources of borrowings. The evidence suggests that, on
average, ‘family/friends’ typically dominate, with 26% of individuals having accessed
credit from these sources in 2017. This factor overwhelms every other consideration
in South Africa with closer to 40% of individuals relying on this method for access-
ing finance. Reliance on private lenders is much more prominent in India, with 4%
of individuals having accessed such finance, whereas formal finance is much more
important in Russia, its importance having increased from 8% to 14% during this
7-year period.
While the evidence is consistent with the fact that financial access is a necessary
but not sufficient condition to ensure financial inclusion, a much more rigorous
analytical framework is necessary to clearly discern this relationship. We turn to
this aspect in what follows.
Determinants of Financial Inclusion
When looking at what drives financial inclusion across countries, past evidence
highlights several determinants. Among others, Sarma and Pais (2011), for instance,
show that income, inequality, adult literacy, and urbanization can be considered
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Table 4: Alternative sources of borrowing in the BRICS.

Store Family/Friends Private Lender Any Credit Formal Finance
Year: 2011
Brazil 0.04 0.15 0.01 0.24 0.06
China 0.03 0.21 0.01 0.26 0.07
India 0.07 0.19 0.07 0.29 0.08
Russia 0.05 0.25 0.02 0.33 0.08
South Africa 0.11 0.36 0.07 0.48 0.09
Average 0.07 0.23 0.03 0.32 0.08
Year: 2014
Brazil 0.05 0.06 0.01 0.22 0.12
China 0.03 0.25 0.01 0.33 0.09
India 0.05 0.32 0.14 0.47 0.06
Russia 0.08 0.17 0.01 0.32 0.10
South Africa 0.20 0.71 0.07 0.86 0.12
Average 0.08 0.30 0.05 0.44 0.11
Year: 2017
Brazil NR 0.14 0.00 0.18 0.09
China NR 0.25 … 0.27 0.09
India NR 0.33 0.04 0.35 0.07
Russia NR 0.23 0.00 0.22 0.14
South Africa NR 0.38 0.09 0.71 0.09
Average 0.26 0.03 0.35 0.09
Note: NR = Not Reported; Average = Simple average of the figures under each head for BRICS.
important factors for explaining the level of financial inclusion in a country. Physical
and electronic connectivity and information availability have also been found to play
an important role. Ardic et al. (2011) found GDP per capita and population density
to be both significantly and positively associated with deposit account penetration.
The number of outstanding loans, on the other hand, was found to be negatively
correlated with inflation. Kendall et al. (2010) found that bank branches per 100,000
adults seem to be a significant determinant of the number of deposit accounts in
commercial banks, while inflation was also found to act as a constraint.
To investigate this carefully, we conduct a cross-country analysis of 32 emerging
market and developing economies (EMDEs) for 2017, using the recently released
FINDEX database. We use the following dependent variables: (a) the percentage of
the population having account at a formal financial institution (age 15+), and (b)
the percentage of the population that had saved at a financial institution (age 15+).
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156 S. Ghosh
Without loss of generality, the former is used as a proxy for access to finance and the
latter is a proxy for the use of finance. In addition, we control for the overall country’s
economic development by using GDP per capita. Inflation is taken as a proxy for
macroeconomic stability and domestic credit to private sector as percentage of
GDP, and commercial bank branches (per 100,000 adults) are taken as proxies for
financial development and financial infrastructure, respectively. Besides, internet
usage (per 100 people) is considered to capture the technological infrastructure and
educational attainment (captured by the net primary enrolment ratio) as a proxy for
human capital. Our focus is on the coefficient for the India dummy.
The results in Table 5 show that GDP per capita and domestic credit to private
sector are significant determinants of access. Inflation was negative and significant,
indicating that in an inflationary environment, people prefer to hold real assets in
Table 5: Determinants of financial inclusion in EMDEs.

Access Use
Dependent Variable: % of Adults Dependent Variable: % of Adults
(age 15+) with Account at a (age 15+) Who Have Saved at a
Explanatory Variables Financial Institution Financial Institution in Last 1 Year
1 2 3 4 5 6 7 8 9
Log per capita income, 2005 0.34** 0.23 0.30 0.21 0.10 0.05 0.06 0.07
USD (0.16) (0.16) (0.19) (0.24) (0.11) (0.08) (0.10) (0.16)
Population/1000 sq. km 0.10 0.06 0.06 0.19 0.08 0.07 0.08 0.06
(0.12) (0.13) (0.11) (0.16) (0.07) (0.06) (0.07) (0.09)
Inflation (CPI) −1.93* −1.69** −1.57** −1.10 −0.35 −0.12 −0.12 −0.33
(0.99) (0.71) (0.70) (0.82) (0.83) (0.8) (0.74) (0.81)
Private credit/GDP 0.24*** 0.25*** 0.23*** 0.16*** 0.19*** 0.17***
(0.08) (0.09) (0.08) (0.05) (0.06) (0.06)
Log net primary enrolment 0.04 0.05 0.003 0.004
(0.06) (0.08) (0.01) (0.02)
Log commercial bank 0.02 0.07 −0.05
branches/100,000 adults (0.11) (0.13) (0.07)
Log Internet users/100 0.29 −0.06
(0.33) (0.30)
India dummy 0.21** 0.19** 0.18** 0.18** −0.06 −0.07 −0.05 −0.02
(0.09) (0.08) (0.08) (0.08) (0.05) (0.05) (0.04) (0.03)
Intercept −0.80 −0.62 −0.65 −1.39 −0.54 −0.36 −0.39 -0.21
(1.19) (1.05) (1.19) (0.85) (0.52) (0.51) (0.61) (0.63)
N.countries 32 32 32 32 32 32 32 32
R-squared 0.40 0.59 0.58 0.59 0.11 0.42 0.43 0.44
Note: Robust standard errors in parentheses.

***p < 0.01; **p < 0.05; *p < 0.10.
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place of nominal assets. Other variables such as population density, enrolment in

primary school, and number of bank branches were also found to positive but not
significant. The coefficient of interest — India — was positive and statistically signifi-
cant, indicating that India fares better than the average EMDE with respect to access
to formal finance. On average, access to finance is anywhere between 0.18 and 0.21
percentage points higher in India as compared with other EMDEs. However, when
it comes to use, the evidence is less convincing. In other words, having successfully
ensured access to finance, the policy needs to reorient itself towards incentivizing
people into using these accounts.
Financial Crisis and Financial Inclusion

The global financial crisis compelled policymakers to take a fresh look at the financial
inclusion initiative. Policymakers have often endorsed marketing to subprime bor-
rowers as a means of ensuring financial inclusion. With the benefit of hindsight, it
appears that such over-extension entailed adverse selection, in turn compromising
the quality of the credit portfolio of financial entities and sowing the seeds of finan-
cial fragility. The position was further exacerbated by regulatory or governmental
forbearance which vitiated the overall credit culture.
With regard to financial inclusion, the crisis provided several lessons.
First, financial inclusion helps provide a more stable retail base of deposits.
Overt reliance on borrowed funds, as was manifest during the crisis, greatly eroded
the soundness and resilience of financial institutions. During periods of stress,
low-income clients exhibit much more stickiness in their deposit behavior, even as
other sources of funds become difficult to roll over. Ratnovski and Huang (2009),
for instance, note that the relative resilience of Canadian banks during the crisis was,
in large part, driven by their reliance on retail deposits.
Second, financial inclusion can lead to enhanced financial stability by improving
the financial health of the household sector. Lack of access to formal finance can impair
the ability of households to receive government transfers, to make payments, or to
accumulate cash surpluses for planned expenses or emergencies. In addition, high and
usurious interest rates in the informal sector can lead households into a debt trap, with
adverse economic and social consequences. Besides lowering both transactions cost
and interest burden, such access also entails social benefits such as protection against
loss due to theft, improved mechanisms for social transfers, and better economic
linkages for the rural and deprived communities. Gine et al. (2012) find that the use
of biometric identification in Malawi led to a significant lowering of loan default rates.
Empirical evidence for India shows that targeted distribution of LPG subsidy benefits
entails a cost saving of US $1 billion a year to the exchequer (Barnwal, 2015).
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158 S. Ghosh
Third, the small business is also a beneficiary of financial inclusion. This is

driven not only by their improved access to finance as banks have large quantum of
lendable resources but also better price (e.g. competitive interest rates) and non-price
(e.g. quality and cost of service) terms. In this milieu, increased formal savings can
lower the cost of credit and facilitate business expansion, which in turn can have
collateral benefits by not only improving the resilience of small businesses but also
exert multiplier effects on large businesses through forward and backward linkages.
A significant body of research has persuasively documented that finance is a key
constraint to SME growth, both in cross-country (Beck et al., 2006, 2008) as well as
within-country (Zia, 2008; Banerjee and Duflo, 2014) studies.
Fourth, efforts to include an increasingly larger section of the population within
the fold of formal finance can engender the deployment of innovative solutions
and outsourcing arrangements. Such financial innovations have the potential of
reducing costs and thereby enhance financial stability. Muralidharan, Niehans,
and Sukthankar (2016) show that the introduction of biometric smart cards in the
distribution of social benefits to intended beneficiaries in India reduced leakages by
40 % and improved household income by over 10 %.
Finally and from a macroeconomic standpoint, financial inclusion can help
facilitate reduction in income inequalities and, by bridging the gap between the haves
and the have-nots, promote social and political stability. Both theoretical (Aghion
and Bolton, 1997; Galor and Zeira, 1993) as well as empirical research (Demirguc
Kunt and Klapper, 2012) point to the fact that inequality in financial inclusion is
correlated with the overall income inequality within a country.
Amid this changed environment, it would be useful to highlight the role played
by the G20 in fostering the cause of financial inclusion. Even though the initiative
towards enhancing financial inclusion was put on the G20 agenda in November
2008, its roots pre-dated the crisis. While the liberalization policies undertaken by
EMDEs were successful in addressing many of the problems of mismanagement
that plagued the financial sector, it proved less than adequate in increasing access
by households and firms to financial services. On the contrary, the search for profits
led to a gradual withdrawal of services to the poor to the extent these were provided
by erstwhile state-owned banks that were re-oriented after liberalization.
Recognizing financial inclusion as one of the main pillars of the global devel-
opment agenda, the G20 Summit in Toronto in June 2010 articulated a set of nine
principles to guide governments that seek to make financial services more inclusive.
Encouraged by the response, the 2010 Seoul Summit endorsed a concrete Financial
Inclusion Action Plan (FIAP). It also committed to launch the key implementation
mechanisms for the Action Plan — the Global Partnership for Financial Inclusion
(GPFI) — to institutionalize and continue the work begun by the Financial Inclusion
Experts Group regarding furtherance of financial inclusion through better national,
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regional, and international coordination, including support for capacity building

and training and an SME Innovation Fund, focused on improving finance for small
businesses.
The G20 initiatives regarding financial inclusion have been a welcome develop-
ment. On the positive side, greater financial inclusion, which was ostensibly missing
from the global policy agenda prior to the crisis, came to occupy center stage. It also
heightened the appreciation of financial inclusion among policymakers, practitioners,
as well as global standard-setting bodies. A new forum — the Alliance for Financial
Inclusion — with over 100 members was created to advance the development of
smart financial inclusion policies in developing and emerging countries. The German
Presidency of G20 in 2017 provided a fillip to the process by updating the FIAP and
developing High-Level principles for digital financial inclusion. With the arrival
of mobile telephony and other forms of branchless banking, new technology has
enhanced the possibilities of maintaining safe and dependable bank accounts for
poor households. Most significantly, it has redirected attention to the huge financing
gap for SMEs, straddling the ‘missing middle’ between MFIs — which have neither
the balance sheet strength and risk appetite to meet SMEs’ financial needs — and
commercial banks — for which SMEs are perceived as too small and risky. In a recent
report, the Reserve Bank of India (RBI, 2015) had made several recommendations
to address these challenges, such as those relating to certification and training of
BCs and a new breed of professionals who would evaluate the financials of SMEs to
ascertain their creditworthiness before these being forwarded to banks for subsequent
analysis and examination. These recommendations are being closely examined.
These advancements at the international also have their echo in India. The
Financial Stability and Development Council (FSDC), the apex body tasked with
macroprudential oversight of the financial sector was established in December 2010.
Chaired by the Finance Minister, the FSDC is vested with two major responsibilities.
The first is to function as an apex level forum to strengthen and institutionalize
the mechanism for maintaining financial stability. The second is to enhance inter-
regulatory coordination and promote financial sector development in the country.
To ensure that the financial sector development is addressed in a holistic manner,
a sub-Committee has been established which meets more often than the full Council.
A key technical group under the aegis of the sub-Committee is the Technical Group
on Financial inclusion and financial literacy to deliberate on issues related to this area.
This is not to deny that many a times, an excessive penchant for financial
inclusion might not necessarily be congruent with financial stability (Ghosh, 2010;
Hanning and Jansen, 2010; Khan, 2011). One has to look no further than the
recent subprime episode and earlier, the US savings and loan crisis in the 1990s, to
appreciate this fact. More generally, it is worthwhile keeping in view the following
considerations.
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160 S. Ghosh
First, financial inclusion often involves venturing into new business segments or
markets. Not only does this involve substantial upfront costs, but also the attendant
risks of lending to new segments that are difficult to ascertain, a priori.
Second, the potential risks of lending to households with low and uncertain
income are difficult to establish. Besides involving high operating costs, the infor-
mational inefficiencies and lack of credit history often put enormous burden on loan
officers to judge a good credit risk. Since banks have to make provisions for loans
gone bad based on defined criteria, erratic or irregular repayment schedules can
increase the fragility of banks’ balance sheets.
Third, there are also systemic as well as concentration risks for the banking
industry relying on a few vendors to address the ‘last mile’ problem.
Fourth, the pursuit of financial inclusion through innovative financial products
needs to be carefully and thoroughly understood. As was the case with Collateralized
Debt Obligations (CDO) during the US subprime crisis, during times of stress, the
risks inherent in such products can magnify as market players run for cover to shield
themselves from the excesses committed in good times.
Finally, several of the smaller entities involved in financial inclusion often suffer
from poor governance and correlated risks emanating from lending to same set of
clientele as commercial banks. While commercial banks might have the balance
sheet strength to shield themselves from the vicissitudes of adverse economic out-
comes, these smaller entities might find it difficult to successfully withstand serious
market upheavals, jeopardizing financial stability.
Emerging Areas of Focus

In this section, we focus on several areas of financial inclusion that have assumed
prominence in recent times. Salient among these include issues relating to gender,
emerging role of technology, Pradhan Mantri Jan Dhan Yojana, Government-to-
Person (G2P) payments, and new institutional initiatives. On a related note, we also
touch upon some of the demand-side factors such as financial literacy and customer
protection. We discuss each of these in turn.
Gender and Financial Inclusion
Gender disparity is commonplace in most economic and social spheres. Evidence

suggests that on average, women earn 10–30% less than men for comparable work
and have labor force participation rates of 55% as compared with 82% for men
(World Bank, 2014a, 2014b). Not surprisingly, gender disparity is also quite pervasive
with a view to access to finance. Globally, out of the 1.7 billion adults without a bank
account, roughly 1 billion are women.
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Evidence proffered by Demirguc-Kunt et al. (2015) from the FINDEX 2014

database suggests that 58% of women as compared with 65% of men worldwide have
an account at a formal financial institution such as bank, credit union, cooperative,
post office, or microfinance. Even the more recent FINDEX 2017 database docu-
ments a 7 percentage point gender gap (72% for men vs. 65% for women) across
countries in 2017. These numbers mask the wide difference across countries. By
way of example, the gender gap in account ownership is negligible in high-income
OECD countries. In developing economies, however, 67% of men have an account,
as compared with 59% of women.
Lower use of financial services by women can be explained by other gender-
based differences. Men are likely to be in better-paying jobs, and hence more
likely to require savings accounts. Female entrepreneurs may also choose to enter
less capital-intensive industries which require less debt and therefore less finance.
Legal and cultural norms also have a big impact on women obtaining equal
(or any) access to financial services. For example, dissimilar gender treatment
under law or customs may constrain women from entering into contracts under
their own name, including the opening of a bank account (International Finance
Corporation, 2011). Even after controlling for a host of individual characteristics
including income, education, employment status, rural residency, and age, gender
remains significantly related to access and usage of financial services (Demirguc-
Kunt et al., 2013).
A number of studies show that some microfinance programs can have a positive
impact on women’s empowerment (Mayoux, 2006). Recent randomized evaluations
in South Africa (Karlan and Zinman, 2009) and India (Banerjee et al., 2015) for
instance indicate that microfinance schemes can positively improve both women’s
economic situation and indicators of broader empowerment. Studies in Peru
(Trivelli, 2009) and the Philippines (Ashraf et al., 2009) demonstrate how savings
schemes can improve women’s purchasing power, confidence, and decision-making
power in the household, as well as reduce their vulnerability.
In India, evidence from the global Findex suggests that in 2017, 83% of men had
an account at a financial institution as compared with 77% of women. The govern-
ment has undertaken various steps to eliminate gender-based financial exclusion. As
a step forward, loans to women (up to INR 50000) were placed under priority sector
lending; also, to better cater to the needs of women, the Bhartiya Mahila Bank was
established in November 2013. Notwithstanding these efforts, evidence from the
All India Debt and Investment Survey (AIDIS) data published by the Government
of India (2014c) suggests that women in urban and especially in rural areas are in a
disadvantaged position with regard to the interest rates paid (Table 6).
Illustratively, the simple interest rate paid by female-headed households in rural
areas is 25.3%. This is 3.5 percentage points higher as compared to males, and the
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b3508_V1_Ch08.indd 162
162 S. Ghosh

Table 6: Interest rate paid by male and female headed households.

Rural Urban
N. Households HH-head, HH-head, t-test of HH-head, HH-head, t-test of
(HHs) Total Female Male Difference Total Female Male Difference
N.households 73362 41763 4093 37670 31599 3444 28155
Interest rate, overall 15.2 15.8 16.7 15.8 2.98*** 14.3 14.6 14.3 1.19
N.households 20204 10297 855 9442 9907 902 9005
Interest rate, compound 15.4 16.4 17.7 16.3 1.96** 14.2 15.8 14.1 3.54***
N.households 39807 23473 1995 21478 16334 1813 14521
Interest rate, simple 22.3 23.0 25.3 22.8 5.59*** 21.2 21.9 21.2 1.40
N.households 22452 13460 1440 12020 8992 1097 7895
Interest rate, others 1.1 1.4 1.0 1.4 3.28*** 0.7 0.5 0.8 2.05**
Note: Others = Free/ Concessional; ***p < 0.01; **p < 0.05; *p < 0.10.
Source: Computed based on AIDIS (2012).
“6.5x9.75”
11-02-2020 13:05:49
Table 7: Access to and use of finance.

Use
Formal Informal
Access Double Hurdle
Variable Bank Stage Stage Stage Stage
Estimation Formal Probit Informal I II I II
Technique (1) (2) (3) (4A) (4B) (5A) (5B)
Female −0.23*** −0.09 0.29*** 0.03 −0.20*** 0.05 0.05
(0.05) (0.14) (0.11) (0.09) (0.04) (0.12) (0.09)
Controls YES YES YES YES YES YES YES
Household size FE YES YES YES YES YES YES YES
Pseudo R2/log-likelihood 0.085 0.104 0.102 −4065 −2610
Observations 74,742 52,257 52,257 16,778 8,888
Note: Standard errors (clustered by state) within parentheses. ***p < 0.01; **p < 0.05; *p < 0.10.
difference is statistically significant. Although these differences are much lower in

urban areas, in several instances, they are nonetheless quite compelling.
Table 7 reports the multivariate regression results regarding access to and use of
finance (Ghosh and Dharmarajan, 2017). With regard to access to formal finance,
female-headed households (FHHs) are less likely to have access to formal finance as
compared with men. Disaggregating by access to bank finance and informal finance
shows that FHHs are more inclined to access the latter.
Looking at the use of finance, we find that even though female-headed house-
holds are less likely to borrow cash, in case they do so, their borrowings are 20%
lower as compared to male-headed households.
To sum up, the evidence for India is in line with the international evidence which
suggests that the gender gap in access to finance remains quite significant.
Pradhan Mantri Jan Dhan Yojana (PMJDY)
The approach of the State towards financial inclusion in recent times has been based
on two major planks. First, setting up of new institutions and, second, provision
of policy guidance for existing institutions to actively participate in the inclusion
process. The launch of PMJDY was different in the sense that not only was the focus
on access to institutional credit by unbanked households, but unlike prior attempts,
was also combined with social security through insurance. More specifically, the idea
was to ensure that every household in the country has access to a bank account. This
account was bundled with an insurance cover, a debit card, and an insurance facility.
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164 S. Ghosh
Every household opening an account was also provided with personal accident
insurance as well as life insurance of INR 30000, including an overdraft facility after
a few months following a credit review.
In turn, these were bundled with biometric identification (Aadhaar) mobile
phone number, thereby ensuring the operationalization of the JAM (Jan Dhan-
Aadhaar-Mobile) trinity to provide subsidies to the poor in a targeted and less
distortive manner (Government of India, 2016).1 As of May 2018, a total of 316
million beneficiaries have been opened under PMJDY; the total balance in these
accounts stands at INR 812 billion. In 2014–2015, an amount of INR 440 billion was
provided by expanding this trinity to 296 million beneficiaries (roughly a quarter
of India’s population).
In order to ensure a broad perspective of the JAM trinity, we model PMJDY
account, Aadhaar cards, and mobile telephony within a simultaneous equation setup
(see, for example, Ghosh, 2017b). Accordingly, we estimate a three-equation model
for household h in district d at time t:
PMJDYh ,dt = α 0 + β1 Aadhaarh ,dt + β 2 Mobile h ,dt + χ 1X1h ,dt + µ 1d + ε 1h ,dt (1a)
Aadhaarh ,dt = α 1 + γ 1PMJDYh ,dt + γ 2 Mobile h ,dt + χ 2 X 2h ,dt + µ 2d + ε 2h ,dt (1b)
Mobile h ,dt = α 2 + δ 1PMJDYh ,dt + δ 2 Aadhaarh ,dt + χ 3 X 3h ,dt + µ 3d + ε 3h ,dt (1c)
where the left-hand side variables are all dummy coded equal to 1 if the respondent
has/uses the account (e.g. PMJDY) or the facility (e.g. Aadhaar, mobile); the vector
X is a set of explanatory variables; µ are district fixed effects, and ε is the error term.
We estimate the equation set separately for financial access and use and, likewise,
separately for 2014 (short-run) and 2015 (long-run). This enables us to ascertain
the short- and long-term impact of the JAM trinity. Each equation includes an
appropriate set of control variables that enable us to clearly identify the equation,
while allowing for possible interdependencies across equations.
The results are set out in Table 8. In Panel A, we find that individuals with
Aadhaar cards were less likely to have a PMJDY account in the short run, although
the reverse was the case for individuals with mobile phones. These findings are rein-
forced in column 3 where we find a positive and statistically significant coefficient on
1
The Aadhaar (Targeted Delivery of Financial and Other Subsidies, Benefits and Services)
Act, 2016 was passed by the Indian Parliament in March 2016. The Bill aims at providing
statutory backing for targeted government subsidies and benefits by integrating them with
Aadhaar numbers (Government of India, 2016).
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Table 8: 3SLS estimation of JAM Trinity.

Panel A [Year: 2014] Access Use
PMJDY Aadhaar Mobile A_PMJDY Aadhaar Mobile
Stage (1) (2) (3) (4) (5) (6)
PMJDY −0.576 0.295 0.488** −0.599
(0.411) (0.182) (0.214) (0.513)
Aadhaar −0.010*** 0.203** 0.205*** 0.191
(0.004) (0.089) (0.043) (0.318)
Mobile 0.119*** 0.325*** 0.459*** −0.047
(0.009) (0.047) (0.059) (0.203)
Household controls YES YES YES YES YES YES
District controls YES NO NO YES NO NO
District FE NO YES YES NO YES YES
N.Obs 44,173 2,263
Chi-sq. (p-Value) 826 26568 24557 438 1570 1369
(0.00) (0.00) (0.00) (0.00) (0.00) (0.00)
R-sq. −0.0206 0.2631 0.3421 0.1015 0.2318 0.1373
Panel B [Year: 2015] Access Use
PMJDY Aadhaar Mobile A_PMJDY Aadhaar Mobile
Stage (1) (2) (3) (4) (5) (6)
PMJDY 2.570*** −0.261*** 0.032 0.433
(0.384) (0.087) (0.150) (0.402)
Aadhaar 0.067*** 0.324*** 0.048 0.607
(0.009) (0.091) (0.046) (0.435)
Mobile 0.031*** 0.074 0.310*** 0.124
(0.012) (0.080) (0.042) (0.105)
Household controls YES YES YES YES YES YES
District controls YES NO NO YES NO NO
District FE NO YES YES NO YES YES
N.Obs 44,096 5,436
Chi-sq. (p-Value) 493 11539 17387 794 1487 2637
(0.00) (0.00) (0.00) (0.00) (0.00) (0.00)
R-sq. −0.0127 0.1387 0.2244 0.0960 0.1995 0.1479
Note: Standard errors in brackets. ***, **, and * denote statistical significance at the 1, 5, and 10%, respectively.
Aadhaar. In other words, in the immediate post-PMJDY phase, Aadhaar and mobile
telephony were complementary, with each reinforcing the other. However, there was
not much effect of Aadhaar on the ownership of PMJDY accounts; if anything, the
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166 S. Ghosh
relationship was the opposite, suggesting that individuals with Aadhaar cards were
not inclined to open such accounts.
These findings broadly carry over to the use of accounts, except for the fact that
we find two significant differences. First, individuals with Aadhaar cards are more
likely to use PMJDY account, contrary to the results obtained in case of account
ownership.
On the other hand, the results for 2015 show that individuals with Aadhaar
cards are more likely to own PMJDY accounts, contrary to the findings for 2014
where the coefficient had a negative sign. This finding can be explained by the fact
that the passage of the Aadhaar (Targeted Delivery of Financial and Other Subsidies,
Benefits and Services) Act in March 2016 provided statutory backing for targeted
delivery of government subsidies by integrating them with Aadhaar numbers and,
as a result, made it incentive-compatible for individuals with Aadhaar cards to use
PMJDY accounts. In addition, individuals with PMJDY accounts are less likely to
own a mobile phone, presumably reflecting the fact that having a mobile phone is
not necessarily to having such an account.
The PMJDY approach was based on the twin strategies of a push and a pull.
The former entails leveraging the banking architecture to address the ‘last mile’
challenge by imaginatively exploiting the use of Business Correspondents (BCs) as
well as recruiting fresh BCs with adequate incentives. This is complemented with
exploiting the telecommunications network in order to fast-forward the growth
of mobile banking. The infrastructure includes the Intermediate Payment System
(IMPS) for which standards and protocols are already in place.
The pull strategy comprised three elements: massive media campaign creating a
buzz around the program; offer of accidental death insurance on all accounts that are
opened under the scheme; offer of a potential overdraft facility; and finally, making
application process and logistics simple and easy.
In order to address the challenges related to information gaps, Aadhaar has
been made an essential piece of the PMJDY campaign. In effect, it has been stated
that, to the extent possible, Aadhaar numbers will be used as e-KYC for opening
bank accounts and when Aadhaar enrollments are lagging, the Unique Identification
Authority of India (UIDAI) will coordinate with banks to ensure that such enrolment
takes place at the time of account opening itself.
This holistic approach towards exploiting innovations to further the cause of
financial inclusion also seems beneficial. They have enabled to build up the credit
profile of individuals or firms, which can subsequently be used as the basis for
obtaining loans even in the absence of collateral, in turn moderating the transactions
costs of gathering information about these borrowers, who have no or limited credit
history. The technology is also proving to be a boon for a method of alternative
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credit scoring, such that information about bill payments and deposits is collected
and used, possibly in the context of big data, to determine the likelihood of a person
being a good credit risk. In addition, it can also provide a mechanism for easily
collecting data about access to and patterns of usage of financial services.
To examine the effect of PMJDY on the access to and use of accounts by
households, we use the three waves of Financial Inclusion Insights Survey (FIIS)
by InterMedia, a private company focusing on mobile money and supported by the
Bill and Melinda Gates Foundation. The survey is not a panel but cross-sectional
data representative at the state level.2 Using this database, we extract information
on the variables of interest such as whether the respondent has a bank account and
whether the active is used actively (i.e. used to conduct financial transactions in
the past 90 days). We also take into account other individual and household deter-
minants, such as the gender (female vs. male), location (rural vs. urban), income
profile (based on the Progress out of Poverty Index, PPI),3 work status and education
status, marital status, holding of Aadhaar card, and receiving G2P payments in the
account. We also take into account the district domestic product to control for the
demand-side conditions and the number of bank branches per 1000 persons as a
proxy for financial infrastructure.
For purposes of brevity, we report only the coefficients of interest and, more
specifically, how the access to and use of accounts played out during the pre- and
post-PMJDY periods. With access as the dependent variable, we use the Probit
model, whereas when use is the dependent variable of interest we use the Heckman
two-stage model. Accordingly, in stage 1, the dependent variable is a dummy
depending on whether the household has access to bank account, else zero, and
in stage II, the regression is estimated only for non-zero numbers. The results are
shown in Table 9.
We find that access to finance in the rural areas has improved in the post-
PMJDY period. To illustrate, in column 1, the coefficient on Rural * Pre-PMJDY
equals −0.12, and the coefficient on Rural * Post-PMJDY equals 0.23. Both these
coefficients are statistically significant at the 0.01 level. In addition, the p-value of
the t-test shows that the differences between these coefficients are also statistically
significant. In other words, access to finance in rural areas has become reliably higher
2
The survey excludes the state of Jammu & Kashmir and two union territories (Andaman
Nicobar and Lakshadweep).
3
The PPI index is made up of 10 questions on household size, assets, education and cooking
sources, and can take a value of 0 to 100 (zero being the lowest). Households scoring less
than 54 points are classified as Below Poverty Line (BPL) (living below USD 2.50). In 2015,
the median (mean) score was 38 (39.7).
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168 S. Ghosh

Table 9: All accounts with pre- and post-PMJDY effects.
Access Use
Probit Probit Heckman Probit Heckman Probit Heckman
District Controls YES YES YES YES YES YES YES YES YES
2014 YR Dummy YES YES YES YES YES YES YES YES YES
Individual and HH YES YES YES YES YES YES YES YES YES
(1) (2) (3) (4) (5) (6) (7) (8) (9)
Rural 0.058 −0.024 −0.036
(0.037) (0.059) (0.059)
Rural * Pre-PMJDY −0.124*** −0.095 −0.092
(0.040) (0.063) (0.062)
Rural * Post-PMJDY 0.228*** −0.047 −0.044
(0.042) (0.062) (0.062)
Female −0.037** −0.066*** −0.066***
(0.019) (0.024) (0.024)
“6.5x9.75”
Female * Pre-PMJDY −0.187*** −0.016 −0.017
19-02-2020 16:03:10
b3508_V1_Ch08.indd 169
“6.5x9.75”
(0.022) (0.031) (0.031)
Female * Post-PMJDY 0.188*** 0.048 0.051*
(0.023) (0.030) (0.030)
BPL −0.139*** −0.044 −0.076**
(0.029) (0.033) (0.033)
BPL * Pre-PMJDY -0.142*** -0.051 -0.052
(0.036) (0.042) (0.042)

BPL * Post-PMJDY 0.220*** 0.000 -0.003
(0.036) (0.042) (0.042)
Intercept -1.815 -1.173 -2.518 -1.272*** -0.980*** -1.289*** -1.269*** -1.319*** -1.019***
(3.105) (3.097) (3.113) (0.322) (0.325) (0.323) (0.323) (0.322) (0.324)
t-test of difference (p-value)

Rural * YR 2013 = Rural * YR 0.000 0.191 0.186
Female * YR 2013 = Female * YR 0.000 0.044 0.033
BPL * YR 2013 = BPL * YR 0.000 0.107 0.128
No. Observations 132,193 132,193 132,194 73,529 73,495 73,529 73,495 73,529 73,495
Notes: Standard errors in parentheses. ***p < 0.01; **p < 0.05; *p < 0.10.
11-02-2020 13:05:50
170 S. Ghosh
in the post-PMJDY regime. We also find similar evidence in case of access to bank
accounts for females and for persons below the poverty line (BPL). However, when
we look at use of bank accounts, the evidence is less convincing, corroborating the
prior cross-country evidence.
Technology and Financial Inclusion
A key element of the inclusion story is the use of technology. Three major develop-
ments have brought technology in a big way into the inclusion initiative. The first is
the decision by the Reserve Bank to appoint Business Correspondents — extension
agents of the banks to deal with small-ticket transactions and reach out to people
in rural and remote areas. On the one hand, the Reserve Bank allowed banks to
appoint agents, and on the other, mandated banks to have a point of presence in all
locations with a minimum threshold population. The second initiative has been the
use of biometric identification (Aadhaar). This has enabled the provision of a unique
identity to each individual. The third is the mapping of Aadhaar numbers to the
bank accounts, thereby becoming a base for technology-enabled banking. This has
permitted two significant value additions. First, it has lowered the transaction costs
of delivering targeted benefits by the government: the PAHAL scheme of transferring
LPG subsidies has already reduced leakages by 24%; the potential annual savings is
expected to be roughly of the order of INR 127 billion (Government of India, 2016).
Second, the process has permitted to eliminate ‘ghost’ and duplicate households from
Box 2: G2P payments: Evidence and practices
In a number of countries, governments have sought to increase the use of electronic

means for government payments and to promote greater financial inclusion Government
of India (2014b). While the two agendas have by no means converged yet, in practice
they have often been translated into a single objective i.e. to increase the proportion
of recipients of government social cash transfers who receive payment directly into a
bank account. On the one hand, such payments are seen as likely to reduce the cost of
payment for government and make delivery more convenient for recipients, compared
with the prevalent cash-based schemes, which could entail significant transactions costs.
On the other hand, a bank account has been seen as the means to enter into the wider
world of formal financial services (Bold, Porteous and Rotman, 2012).
The empirical literature is fairly unambiguous that digital payments provide huge
development gains. In the African country of Niger, researchers found that making
social safety net payments via mobile phones versus having to go in person reduced
(Continued )
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Box 2: (Continued)
overall travel and waiting time by 75 %, providing people with the flexibility of time
in attending to more productive tasks (Aker, Boumnijel, McClelland and Tierney,
2016). Mexico’s shift to digital payments cut spending on wages, pensions, and social
benefits by 3.3 % annually, or almost $1.3 billion (Babatz, 2013). When Argentina
moved payments for a large national social program from cash into accounts, demand
for kickbacks virtually disappeared (Duryea and Schargrodsky, 2008).
Similar evidence is also in evidence in the Indian context. Evidence proffered by
Muralidharan, Niehans, and Sukthankar (2016) shows that digitizing social security
transfers caused demands for bribes to drop by 47%, and led to beneficiaries receiving
higher payments. Barnwal (2015) estimates that better targeting of LPG subsidies
would entail a saving of about US $1 billion for the Indian government.
Not surprisingly therefore, the federal government has been switching to digital
modes of transfer of subsidies and other benefits to the intended beneficiaries. Direct
benefit transfer (DBT) has been introduced by the central government in January
2013 in select districts encompassing 26 central sector (CS) and centrally sponsored
schemes (CSS). Presently, 34 CS and CSS schemes and three subsidy-related schemes
are being covered under DBT. A total amount of INR 134 billion was disbursed at the
end of March 2015, encompassing manifold programs in areas as diverse as public
works (e.g. Mahatma Gandhi Rural Employment Guarantee), women welfare (Janani
Suraksha), and LPG benefits (PAHAL).
Akin to the Federal government, state governments also offer several schemes for
the intended beneficiaries Government of India (2014a). To illustrate, the government
of West Bengal runs a conditional cash transfer scheme, Kanyashree Prakalpa, for the
empowerment of adolescent girls. Under the scheme, zero-balance bank accounts
are opened in the name of the girls through simplified account opening procedures.
A total of INR 1848 million was spent under the scheme 2014–2015. In a similar vein,
Telangana government has introduced an AASARA pension scheme for disabled, old
age persons and widows, wherein the monthly pension amount is remitted into the
bank/post office account of the pensioner. During 2015–2016, INR 25670 million
has been provided for the scheme. The Government of Madhya Pradesh started the
Laadli Laxmi Yojana in 2007 with an objective of women empowerment through
improvements in their educational and economic status. Under the scheme, National
Savings Certificates worth INR 6,000 are purchased by the State Government in the
name of a girl every year after she is born till the amount reaches INR 30,000. The
government allocated INR 7,780 million for the scheme in 2014–2015. The government
of Tamil Nadu runs a maternity benefit scheme for pregnant woman of below poverty
line (BPL) group, wherein cash assistance of INR 12,000 is given to pregnant women.
While in some cases the state governments have been resorting to electronic modes
for payments, it has not yet gathered sufficient momentum.
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172 S. Ghosh
beneficiary rolls. Contextually, it may be mentioned that G2P payments have been
extensively employed across countries, with varying degrees of success.
Second, the recently introduced Unified Payments Interface (UPI) is expected to
revolutionize the way retail payments are made in the country. The system permits
a one-click, two-factor authentication on mobile phones across bank accounts,
based on the Immediate Payment Service (IMPS) platform. Unlike the IMPS which
requires details such as Mobile Money Identifier — a seven-digit number issued by
a bank — mobile and account numbers to complete a transaction, UPI will require
only one identification and does not necessitate information regarding the bank
account details of the parties.
One aspect of ICT which has attracted the attention of researchers is the use-
fulness of mobile telephony in enhancing financial inclusion and thereby, via the
finance-growth interlinkage, augmenting economic growth (Levine, 2005). Several
studies have empirically examined this issue. Using cross-national data, studies have
found that cellular services contribute significantly to national output (Waverman
et al., 2005). In the case of India, Kathuria et al. (2009) show that mobile penetration
in Indian states was associated with a positive and statistically significant improve-
ment in output. Recently, Ghosh (2019) shows that the complementarities of mobile
telephony with biometric identification is manifest primarily in case of financial
access as compared with use of finance.
We explore the impact of mobile telephony on state income. Accordingly,
we combine information on mobile telephony with state per capita income and
financial inclusion. As for the latter, following Beck et al. (2007c), we consider six
indicators: two each relating to penetration, access (deposit and loan accounts), and
use (deposit-to-income and loan-to-income). For 32 states and Union Territories
(excluded ones are Daman and Diu, Dadra and Nagar Haveli, and Lakshadweep,
owing to paucity of data), we normalize these indicators using a max–min strategy
and take a simple average of these indicators to arrive at a financial inclusion index
(OECD, 2008; Government of India, 2013). We classify states as having high or low
financial inclusion (based on the in-sample median index value) and juxtapose it
with (log of) state per capita NSDP and fraction of persons in the state using mobile
telephony (Fr_Mobile). The evidence appears to suggest that states with higher
proportion of mobile users (triangles) have higher per capita NSDP, after controlling
for financial inclusion.
To further understand whether mobile telephony is a key factor driving financial
inclusion, we exploit data on mobile penetration from IndiaStat and combine it with
estimates of financial inclusion using the RBI database to estimate an empirical
specification as in equation below for state s at time t:
FI s ,t = α 0 + α 1 y s ,t + α 2 Mobile s ,t + γ X s ,t + µ s + ε s .t ,
b3508_V1_Ch08.indd 172 11-02-2020 13:05:50

where FI is the indicator of financial inclusion, represented alternately by the number

of deposit and loan accounts and number of bank branches; X is a vector of state-
level controls such as per capita income, education, and number of mobile network
operators; μ is the state-fixed effect; and ε is the error term.4
DELHI
GOA
5
PUD
SIK A&N
4.8
MAH
TN HARY
KER GUJ HP UTTK
NAG AP PUN
pc NSDP
ARUNP KARN
4.6
TRI MIZ
MEG
WB J&K
RAJ
CHHTS JHK
4.4
ASM MAN
ODIS MP
UP
4.2
BIH
4
.2 .4 .6 .8
Fr_Mobile
95% CI Fitted values

log PCNSDP log PCNSDP
Based on the empirical evidence presented in Table 10, the following observa-
tions can be made. First and more generally, the impact of mobile penetration on
financial inclusion is quite substantial, although the effect differs across various
measures. Second and more specifically, the biggest impact of mobile penetration
is manifest on use and, more specifically, on the use of deposit and loan accounts
(columns 3 and 4).
New Institutional Initiatives
In addition to products, processes, and logistics, a key development has been

the licensing of new institutions in the private sector. This further opens up the
space for financial inclusion and, in effect, raises the overall level of competition
in the banking sector. Three sets of institutions have been permitted. Establishing
new institutions, however, is not unique to India, but has been practiced in other
countries as well (Box 3).
The first is the license given to two new banks in the private sector. Accordingly,
two new banks — IDFC bank and Bandhan Bank — started operations from 2015.
4
The empirical analysis is based on Ghosh (2016a).
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174 S. Ghosh
Table 10: Financial inclusion and mobile telephony.

Access Use
Log Log Log Log
(Bank Office/ (Bank Office/ (Deposit (Credit
100,000) 1,000 sq. km) Ac/1,000) Ac/1,000)
Dep. Var (1) (2) (3) (4)
Real per capita NSDP, lagged −0.576 −1.312 −0.659 −0.679
(0.439) (1.533) (0.771) (0.693)
Mobile 0.386* 0.114 0.935** 1.467**
(0.169) (0.399) (0.257) (0.254)
State controls Yes Yes Yes Yes
Merger dummy Yes Yes Yes Yes
No. observations 125 125 125 125
No. states 14 14 14 14
R-squared 0.581 0.325 0.826 0.913
Note: Standard errors (clustered by state and year) in brackets. *p < 0.05; **p < 0.01.
Second, the Reserve Bank permitted Small Finance Banks (SFBs) to operate in
the banking space. As compared to the microfinance institutions which also typically
operate within small jurisdictions, these banks are differentiated in terms of three
factors: (a) a lower start-up equity as compared to comparable newly established
private banks, (b) a much higher proportion of priority sector lending requirements,
and (c) restricting a minimum proportion of loans as not to exceed a threshold level.
Ten such SFBs have been granted ‘in principle’ approval.
Third is the permission given to Payments Bank (PBs) to also operate in the
financial space. The idea of a PB was that they would accept small savings, particularly
of low-income households, manage remittances which would be of particular use to
migrant workers, and distribute third-party products. These banks are expected to
operate with cutting-edge technologies so as to leapfrog the technological content of
banking operations. After scrutinizing the applicant list, ‘in-principle’ licenses were
awarded to three distinct types of players: telecom players with a strong distribution
network, technology players, and traditional finance companies with a strong retail
presence Since it is envisaged that the maximum balance in any account will never
exceed INR 100,000 at any point in time, this initiative is expected to reach the smaller
segment of the customers. Moreover, the guidelines also specify that these banks are
not expected to adhere to the quota of 25% branches in villages with less than 9,999
inhabitants but instead, at least a quarter of its access points should be in such loca-
tions, thereby placing a greater emphasis on vertical specialization and technology.
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Box 3: New banking institutions
In many countries, innovative institutions have been instituted in order to

improve financial access. In the Philippines for example, entry into the banking
system for microfinance units was liberalized, permitting the establishment of
new banks that are licensed and regulated as regular banks but have to dedicate
at least 50% of their loan portfolio to microfinance. In 2009, Mexico permit-
ted the establishment of a new specialized intermediary — a so-called niche
bank — that could gather funds from the public, access the payment system,
and be subject to the same regulatory standards, but with lower minimum
capital requirement. In India, besides new banks in the private sector and
other such dedicated institutions, the Micro Units Development and Refinance
Agency Bank (MUDRA) has been established in 2015. Beginning with a corpus
of INR 200 crore, the entity will focus on lending to micro/small business
entities engaged in manufacturing, trading, and service activities.
While all these technological developments can enable to leapfrog and provide
financial solutions for the unbanked, it needs no gainsaying that there is always
a critical need for a balance between embracing its advantages and maintaining
the personal contact that is often vital to gaining customer trust, the exchange of
information about unique customer needs, and the absorption of financial capability.
A proactive focus on the Business Correspondent Model, addressing its weaknesses
while buttressing its benefits, appears to hold considerable promise. The Reserve
Bank is examining the modalities to ensure a certification program for BC in order
to bring greater discipline in this sector.
Government-to-Person (G2P) Payments
World over, governments have been switching to G2P payments in order to reach
the targeted beneficiaries in a cost-effective and less distortive manner. According to
Pickens, Porteous, and Rotman (2009), as many as 49 social transfer scheme presently
deliver payments in 33 countries for a total of 125 million recipients; the total gains
to the government from such targeted transfers amount to US $12.6 million. The
empirical evidence suggests that G2P payments entail significant development gains,
as in case of Mexico (Babatz, 2013) and Argentina (Duryea and Schargrodsky, 2007).
In the Indian context, the government has begun exploiting the JAM trinity
towards less distortive way of reaching out to intended beneficiaries. Payments
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176 S. Ghosh
under the flagship Mahatma Gandhi National Rural Employment Guarantee Scheme
(MGNREGS) have since 2009 begun to be credited directly to the bank accounts. The
PAHAL scheme of transferring LPG subsidies to the poor has already reduced leak-
ages to a significant extent; the potential annual savings is expected to be of the order
of INR 127 billion (Government of India, 2016). Empirical evidence conclusively
suggests that G2P payments are able to better target the intended recipients and
entail significant cost reduction. Using data for the Indian state of Andhra Pradesh,
Muralidharan, Niehans, and Sukthankar (2016) find that digitizing social security
transfers lower the demand for bribes and raise the payment in the beneficiaries
account. Barnwal (2015) estimates that better targeting of LPG subsidies by the
Indian government would entail a saving of about US $1 billion.
To examine the impact of MGNREGS on financial inclusion for India, follow-
ing Ghosh (2016), we use the InterMedia data and exploit the staggered timing of
implementation of MGNREGS across certain districts and estimate the following
specification for household h in district d at time t as5:
SBFDhdt = α + β MGNREGSdt + γ X hdt + µ d + η t + ε hdt .
In the equation above, SBFD (Savings Bank Fixed Deposit) is the outcome variable
of interest, alternately defined in terms of financial access and use and X is a vector
of individual and household determinants such as gender (female vs. male), loca-
tion (rural vs. urban), income profile (based on the Progress out of Poverty Index,
PPI)6, work status and education status, marital status, holding of Aadhaar card, and
receiving G2P payments in the account. We control for the non-random rollout of
the program by including the interaction of the ‘backwardness’ index (BI) as devised
by the Planning Commission (Government of India, 2003) with year dummies
(Dasgupta et al., 2017). The index served as a basis for allocating districts to differ-
ent phases of the program rollout. The district-level controls (μ) include domestic
product per capita (DDP) and number of bank branches per 1000 persons as a proxy
for financial infrastructure.
5
The program was initially rolled out in 200 districts in February 2006 and subsequently in
130 districts in April 2007 and finally, in the remaining districts in April 2008. To under-
stand the effect of the program on financial inclusion, we compare the impact of the imple-
mentation of MGNREGS in the first two sets of districts vis-à-vis the third set of districts.
6
The PPI index is made up of 10 questions on household size, assets, education and cooking
sources, and can take a value of 0–100 (zero being the lowest). Households scoring less than
54 points are classified as Below Poverty Line (BPL) (living below USD 2.50). In 2015, the
median (mean) score was 38 (39.7).
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Table 11: Impact of MGNREGS on financial access and use.

Access Use
Dummy = 1 if Dummy = 1 if
Respondent Has SBFD Respondent Has Active (#)
Dep. Var. Account, Else Zero SBFD Account, Else Zero
(1) (2) (3) (4)
MGNREGS 0.121** 0.101 -0.096** -0.115**
(0.015) (0.216) (0.016) (0.020)
MGNREGS * Female 0.041** 0.043*
(0.019) (0.024)
District controls YES YES YES YES
Household controls YES YES YES YES
Year fixed effects YES YES YES YES
No. observations 128615 128615 66232 66232
F-test (p-value) 248.3 240.7 80.6 79.3
(0.00) (0.00) (0.00) (0.00)
Notes: # An account is defined as active if the respondent has conducted any financial transactions
in the past 90 days. Standard errors in brackets. *p < 0.01; **p < 0.10.
The variable MGNREGS equals 1 if the program was implemented in district d

(d = 1, 2) at time t, else zero (Imbert and Papp, 2015). The coefficient of interest is β,
which estimates the impact MGNREGS on financial inclusion.
Table 11 shows that access to SBFD account increases by 12.1 percentage points
owing to the implementation of the MGNREGS in these districts. In addition, we
find that MGNREGS did not perceptibly increase use; in fact, there is a decline in
the likelihood of use of SBFD accounts.
We also consider the interaction of MGNREGS * Female to ascertain the dif-
ferential impact. The results show that access to finance increases by 4.1 percentage
points in districts where MGNREGS is introduced early. To understand its economic
significance, we look at a change in the average proportion of females from 0.49 (as
in case of Rajasthan, the lowest in the sample) to 0.66 (as in case of Uttarakhand, the
highest in the sample). The estimates in column 2 indicate that such a change leads
to an additional 140 percentage point increase in the probability of access to bank
account, quite a significant jump. In case of use, the magnitudes are a tad higher.
Before we conclude, it would be worthwhile to mention two sets of studies which
have a bearing on the G2P initiative. The first set of studies explore the relevance
of public works program for financial inclusion in the presence of gender-related
violence. To provide some examples, Amaral et al. (2016) show that Indian dis-
tricts which implemented the MGNREGS program early witnessed an increase in
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178 S. Ghosh
domestic violence. Earlier to that, Chin (2012) had demonstrated that female labor
force participation is associated with a reduction in domestic violence. More recently,
Ghosh and Gunther (2018) showed that households in states with gender-related
violence are less likely to own a bank account, notwithstanding the fact that districts
in these states were early implementers of the public works program.
The second set of studies examines the interface between public works program
and left-wing extremism (LWE) violence and its interplay with financial inclusion.
Employing an OLS framework, Barooah (2008) finds that LWE-conflict violence
across districts increases with poverty and declines with literacy. Dasgupta et al.
(2017) find that the effect of LWE-violence is mitigated by the roll-out of a large
public works program (MNREGS) in Maoist-affected states. Using survey data,
Ghosh (2019) shows that MGNREGS leads to an improvement in financial inclusion,
notwithstanding the deleterious effects of higher LWE-violence.
Our findings therefore suggest that public work programs do play a role in
significantly influencing financial inclusion.
Financial Literacy and Customer Protection
Efforts at financial inclusion need to be strengthened on the demand side by ensur-

ing significant investments in financial literacy. This assumes relevance if the poor
are to make effective use of various initiatives towards fostering financial inclusion.
This should include not only basic financial literacy, but also sector-focused financial
literacy or, even for that matter, product-driven financial literacy so that the poor
are not short-changed. Efforts to promote financial literacy need to start early and
include both conventional (e.g. school curriculum, dedicated websites, self-help
groups) and unconventional (e.g. time slots during high-impact TV programs,
toll-free helpline) delivery channels. The funds set aside by various regulators for
this purpose need to be seamlessly integrated as part of the overall agenda.
Grievance redressal for customer complaints in banks also need imaginative
thinking. Despite repeated exhortations, banks often penalize customers for minor
violations, whereas any deficiency in service on their part are often not addressed
expeditiously. The challenges in decoding and understanding the fine print from
the large volume of convoluted information leads to an unequal relationship where
the principal (i.e. the depositor) is actually far less powerful than the agent (i.e. the
bank). The significant volume of complaints received by banks in regard to basic
areas such as deposit accounts and even failure on non-observance and non-
adherence to defined practices is ample testimony in this regard. As of end-March
2017, a total of 119678 complaints were received at Banking Ombudsman Office,
of which 68 % pertained to public sector banks. Across ownership, issues relating
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to ATM/Credit and Debit cards were the most common, accounting for 13% of the
complaints in public banks and 7% in private banks. The problem is all the more
imposing for less sophisticated rural consumers, who are often unaware as how best
to quickly and efficiently obtain a fair and cost-efficient solution to their grievances
(Box 4).
Box 4: Consumer protection and financial literacy: What does global

evidence suggest?
In collaboration with FinCoNet, an international cooperation platform for supervi-
sory agencies in the area of financial consumer protection, the World Bank in 2013
conducted a Global Survey on Consumer Protection and Financial Literacy for 114
economies. The Report was published in 2014. India was not included in the Survey.
The survey covered four main areas: (1) legal and regulatory framework, (2)
institutional arrangements, (3) disclosure practices, and (4) financial education.
Regarding the legal and regulatory framework, five areas were addressed: whether
a country has a general consumer protection (CP) law, whether the CP law has explicit
reference to financial services, whether the country has separate financial consumer
protection (FCP) law, whether CP regulations exist within the framework of financial
sector legislation, and finally, whether there exists other FCP laws. While only 35% of
the 114 countries had a separate FCP law, the overall evidence indicated that a basic
legal framework for consumer protection was in place in most countries, although it
might not be very pertinent in terms of its coverage of the issues relevant to financial
services.
As many as 29 items were included under institutional arrangements (Table). The
evidence indicated that in countries with broad consumer protection legislation in
place, the agency responsible for implementing this legislation also had the responsibil-
ity for consumer protection in financial services.
The survey examined 28 facets of disclosure practices, including among others,
general disclosure requirements at the account opening stage, regardless of account
type, including: (1) plain language, (2) local language, (3) a standardized format for
disclosure, and (4) disclosing recourse rights and processes. There were also questions
on the annual rate or yield, the method of compounding, minimum balance require-
ments, fees and penalties, and early withdrawal penalties (for deposit services). For
credit services, among the included categories were annual percentage rate, fees, and
computation method regarding the average balance and interest. Overall, disclosure
requirements at opening of loan and deposit accounts are focused on rates and fees,
and to a lesser extent on the manner in which these rates and fees are computed.
(Continued )
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180 S. Ghosh
Box 4: (Continued)
As regards financial education, a major focus was to understand whether there
existed any dedicated agency to implement/oversee financial education. More than
half (55%) of the countries had an agency that had the responsibility to implement/
oversee any aspect of financial education/literacy.
The findings suggest that although some form of consumer protection legislation
is in place in most countries, it does not necessarily include provisions specific to the
financial services industry. Vast differences can be detected for the different income
groups. Second, enforcement powers of supervisors are often limited, especially in
lower middle-income and low-income countries. Third, regulations on financial
consumer protections are of recent origin, and several countries of all income groups
are pursuing this area with great vigor.
High Upper Lower Low

Item Income Middle Income Middle Income Income
Countries 32 34 18 15
Legal and regulatory framework
Sub-categories (5) 3 3 2 2
Institutional arrangements
Disclosure practices
Financial education
Notes: Numbers in brackets under each head indicate the number of included sub-categories.
Numbers in each column indicate the number of countries complying with at least 50% of the
subcategories.
We classify the countries based on their income as per the World Bank meth-
odology. The analysis provides several insights. First, as one moves from high- to
low-income countries, the proportion of countries compliant with the various sub-
categories declines. Second, while higher income countries have, on average, achieved
a higher levels of consumer protection and financial literacy (measured in terms of
coverage of all sub-categories), this does not necessarily imply a causal relationship.
This calls for greater research in this area, particularly concerning which item is
inducing higher levels of financial inclusion, in order to inform policymaking on
financial inclusion.
b3508_V1_Ch08.indd 180 11-02-2020 13:05:52

Although there is a lot of discussion on financial literacy in India, evidence on

the ground is quite limited. The recent Financial Inclusion Insights (FII) survey of
more than 45,000 respondents across 22 states in India provides some initial insights
as to the status in this regard (Box 5).
Box 5: Financial literacy in India: What is the evidence?
The Financial Inclusion Insights (FII) survey contains a section on financial lit-
eracy, although the survey focused mainly on access to finance and mobile money
(Intermedia, 2014). The Survey focused primarily on financial knowledge (Panels A
and B) and financial behavior (Panel C), but did not touch upon the issue of financial
attitudes (see Box 6). Considering the expected divergence in the extent of financial
inclusion in urban and rural areas, the analysis differentiates between the rural and
urban areas.
Panel A, which asks questions about basic knowledge of calculus that is needed
for financial matters, indicates that India’s urban population performs slightly better as
compared to their rural counterparts. Yet, people appear to be financially less literate
when asked a three-fold set of questions on how interest rates impact their money over
time, especially when taking into account the inflation aspect.
Item %
Panel A: Financial knowledge — Calculus Location Refused Incorrect Correct
Division Rural 17.4 0.4 82.2
Urban 9.9 0.3 89.8
Calculation of interest rate Rural 39.6 14.8 45.6
Urban 24.9 17.7 57.4
Calculation of interest earnings Rural 32.6 8.5 58.9
Urban 19.9 10.5 69.6
Calculation of real interest rate Rural 49.6 18.9 31.5
Urban 32.1 27.4 40.5
Panel B: Financial knowledge Location Refused Don’t know Know
Interest paid on current loan with a formal Rural 0.0 13.1 86.9
financial institution (Bank, MFI, Post Urban 0.0 20.6 79.5
Office Account etc.)
(Continued )
b3508_V1_Ch08.indd 181 19-02-2020 16:01:32

182 S. Ghosh
Box 5: (Continued)
Interest paid on current loan with a semi- Rural 0.0 36.3 63.7
formal/informal financial institution Urban 0.0 43.4 56.6
(Lending and Savings Groups,
Private Money Lender, Loan through
Community)
Rarely/
Panel C: Financial behavior Location Always Sometimes Never
I pay my bills on time Rural 31.7 23.3 45.0
Urban 41.0 21.9 37.0
I spend less many than I make each month Rural 28.4 29.7 41.9
Urban 30.0 32.3 37.7
Set aside money for unplanned expenses/ Rural 10.9 23.1 66.0
emergencies Urban 13.4 25.3 61.2
I make a plan for how to spend my income Rural 21.6 34.4 44.1
Urban 25.4 35.1 39.5
Panel B enquires about financial knowledge by asking respondents who currently

have a loan (formal or semi-formal/informal) whether they know what interest
rate they pay. While the results could be driven by a rural bias in the data (69% of
respondents are defined as rural dwellers), the interviewed rural population performs
noticeably better. Informal financial services still seem to dominate, consistent with
the AIDIS data.
Finally, Panel C indicates that the surveyed urban respondents have adopted a
slightly prudent financial behavior, or in other words, are better at managing income
and expenses and take long-term financial considerations on board. This emphasizes
the fact that access to finance in rural areas might not alone suffice but behavioral
constrains also need to be considered in order to achieve greater progress on the
financial inclusion front.
Utilizing data from the survey, Gunther and Ghosh (2018) focus on evaluat-
ing financial literacy in India. They categorize financial literacy into three sub-
components — financial knowledge, financial attitude, and financial behavior — akin
to the procedure followed by Atkinson and Messy (2011) in their cross-national study.
The authors construct an index of financial literacy, which ranges from a minimum
of zero (i.e. when the respondent does not provides a correct response to any of the
questions) to a maximum of 15 (when the respondent provides a correct response to all
the questions). The findings show that at the all-India level, the average (resp., median)
financial literacy score is 6.8 (resp.,7), with large and significant variation across states
(Continued )
not only in terms of overall financial literacy, but also in terms of its sub-components.
b3508_V1_Ch08.indd 182 11-02-2020 13:05:53

Box 5: (Continued)
15
12
9
6
3
0
Uttarakhand (55%)
Tamil Nadu (48%)
Karnataka (45%)
Punjab (38%)
Delhi (35%)
Maharashtra (32%)
Kerala (32%)
Rajasthan (32%)
West Bengal (31%)
Assam (27%)
All India (26%)
Orissa (25%)
North East (25%)
Haryana (24%)
Gujarat (21%)
Andhra Pradesh (20%)
Chhattisgarh (17%)
Uttar Pradesh (17%)
Jharkhand (15%)
Goa (13%)
Madhya Pradesh (11%)
Bihar (11%)
Himachal Pradesh (77%)
FK Score FB Score FA Score FL Score
Since financial literacy comprises a mix of several attributes, being financially

literate therefore does not necessitate a perfect financial literacy score. Based on this
logic, we consider an adult as being financially literate if the literacy score is at or above
the 75th percentile of the literacy distribution. Using this criteria, we find that 26.2%
of the adult population is financially literate. To put it differently, nearly three-quarters
of the adult population do not possess sufficient financial literacy competencies.
Advancing the process further, a multivariate regression exercise is undertaken
wherein for respondent i belonging to household HH in district D, the baseline
regression is of the form:
Yi ,HH ,D = α i + m D + β X i ,HH ,D + β Z HH ,D + ε i ,HH ,D ,
where Y is the normalized financial literacy score, mD are the district fixed-effects
which absorb any variation at the district level that can impact financial literacy, x is
a vector of variables that capture the respondent’s demographic and socio-economic
characteristics such as gender, location, age, educational and employment status, z
represent characteristics of the household to which the respondent belongs, and finally,
ε is the random error term.
(1) (2) (3) (4) (5) (6) (7)

Gender (Control: Male)
Female -0.056*** -0.056*** -0.057*** -0.038*** -0.023*** -0.015*** -0.014***
(0.001) (0.001) (0.001) (0.001) (0.002) (0.002) (0.002)
Location (Control: Urban)
Rural -0.019*** -0.018*** -0.014*** -0.016*** -0.015*** -0.015***
(0.002) (0.002) (0.002) (0.002) (0.002) (0.002)
(Continued )
b3508_V1_Ch08.indd 183 19-02-2020 16:02:02

184 S. Ghosh
Box 5: (Continued)
Age 0.011*** 0.011*** 0.011*** 0.011*** 0.011***
(0.000) (0.000) (0.000) (0.000) (0.000)
Squared Age -0.0001*** -0.0001*** -0.0001*** -0.0001*** -0.0001***
(0.000) (0.000) (0.000) (0.000) (0.000)
Education (Control: Illiterate)
Literate - no Edu 0.025*** 0.025*** 0.024*** 0.023***
(0.003) (0.003) (0.003) (0.003)
Standard 8 0.065*** 0.064*** 0.060*** 0.058***
(0.002) (0.002) (0.002) (0.002)
Standard 12 0.106*** 0.105*** 0.098*** 0.094***
(0.002) (0.002) (0.003) (0.002)
Tertiary education 0.134*** 0.134*** 0.125*** 0.119***
(0.003) (0.003) (0.004) (0.003)
Employment (Control: Housewife)
Employed 0.028*** 0.025*** 0.026***
(0.003) (0.003) (0.003)
Self-employed 0.031*** 0.029*** 0.028***
(0.003) (0.003) (0.003)
Occasional work 0.005** 0.004 0.005**
(0.003) (0.003) (0.003)
Looking for a job -0.003 -0.002 0.006
(0.004) (0.004) (0.004)
Not working 0.002 0.003 0.005
(0.004) (0.004) (0.004)
Student 0.004 0.006* 0.021***
(0.003) (0.003) (0.004)
Technological Aptitude (Control: No mobile)
Owns mobile 0.029*** 0.027***
phone
(0.002) (0.002)
Indebtedness (Control: Savings never larger than debt)
Savings > debt: 0.043***
Rarely
(0.002)
Savings > debt: Sometimes 0.094***
(0.002)
(Continued))
(Continued
b3508_V1_Ch08.indd 184 19-02-2020 16:02:02

Box 5: (Continued)
Savings > debt: 0.106***
Never
(0.003)
Intercept 0.237*** 0.252*** 0.223*** 0.144*** 0.162*** 0.153*** 0.127***
(0.013) (0.013) (0.014) (0.014) (0.015) (0.015) (0.014)
HH Yes Yes Yes Yes Yes Yes Yes
Characteristics
District FE Yes Yes Yes Yes Yes Yes Yes
No. obs 42,696 42,696 42,696 42,679 42,679 42,679 42,679
R-squared 0.389 0.390 0.397 0.429 0.433 0.437 0.479
Notes: Standard errors in parentheses. ***, **, and * denote statistical significance at the 1, 5, and 10%,
respectively
The findings point to large and statistically significant gender-, location-, employ-
ment-, education-, technology-, and debt-driven differences in financial literacy. To
provide some examples, the coefficient on Female (in col. 1) indicates that female
respondents display 5.6% lower financial literacy as compared with their male coun-
terparts, and the finding is remarkably robust and consistent related research (Hsu,
2011; Lusardi et al., 2014). In column 4, when we include education as a control, it is
observed that higher the levels of education, the greater the financial literacy. As we
move up the education scale, the magnitude of the point estimates increases and they
are statistically significant as well. Thus, respondents with tertiary education exhibit
14% increase in financial literacy, five times the number obtained from the lowest
category (see, for example, Christiansen et al., 2008; Gerardi et al., 2013; Klapper et al.,
2013). The final column looks at household debt profile. Debt literacy — defined as
the ability to make simple decisions regarding debt contracts — has gained relevance
in recent times, because individuals with inadequate understanding of such contracts
are often found to engage in higher-cost borrowing (Calcagno and Monticone, 2015),
sloppier financial behavior (Gathergood and Weber, 2017), or less advantageous finan-
cial contracts (Van Ooijen and van Rooij, 2016). On balance, our finding suggests that
less indebted households are financially more literate as compared with those who are
more indebted. This is in conformity with prior research (Lusardi and Tufano, 2010)
and highlights the risk of potential ‘debt traps’ in the Indian context (Reserve Bank
of India, 2017). To see this, note that the coefficient on Savings are larger than Debts:
Never equals 4.3%, whereas that on Savings are larger than debts: Always is 10.6%,
nearly two-and-a-half times as large.
Around the world, people with access to formal finance are being asked
to assume greater responsibility for their financial well-being. With financial
b3508_V1_Ch08.indd 185 11-02-2020 13:05:56

186 S. Ghosh
products and services becoming increasingly sophisticated, consumers are con-

stantly challenged to read the fine print to decode the inherent risks embedded
in financial products. Rules and conditions for credit cards, mortgages, lines
of credit, and other vehicles for borrowing have significantly altered over time,
substantially raising the risk exposure of customers. In this changed milieu,
financial literacy is being increasingly advocated by regulators as a first line of
defense for consumers (Box 6).
Central Banks and Financial Inclusion

Our previous discussion suggests that while significant progress has been made on
the supply side of financial inclusion, there is still distance to cover on the demand
Box 6: Financial literacy around the world
While stating the need for financial literacy is easy, it is often challenging to clearly
define what constitutes financial literacy. Based on 14 countries across four continents,
Atkinson and Messy (2012) surveyed the financial landscape with regard to consumer
understanding of financial literacy. On average, 1000 adult individuals (i.e. age 18+),
both male and female across different income classes, were interviewed face-to-face
regarding their financial knowledge, financial behavior, and attitudes and preference
towards finance, and the results were summarized and collated. The results indicate
important variations across countries. Illustratively, in several countries, a larger
proportion of the population achieved a higher knowledge score than a high behavior
score, indicating that levels of financial literacy in these countries are higher in terms
of knowledge than behavior. Conversely, in several others, financial literacy levels were
observed to be higher in terms of behavior. The relevant questions are highlighted in
the table below.
Items Refused Don’t Know Incorrect Correct

Panel A: Financial knowledge
Division
Time value of money
Interest paid on a loan
Panel B: Financial knowledge
Calculation of interest plus principal
Definition of inflation
(Continued )
b3508_V1_Ch08.indd 186 19-02-2020 16:02:23

Box 6: (Continued)
Diversification
Yes No
Compound interest AND correct response
to previous question
Refused Sometimes Always Never
Panel C: Financial behavior
Before I buy something, I carefully
consider whether I can afford it
I pay my bills on time
I keep a close watch on my financial affairs
I set long-term financial goals
Refused Sometimes Agree Disagree
Panel D: Financial attitudes
Money is there to be spent
I find it most satisfying to spend money
than to save it for the long-term
I tend to live for today and let tomorrow
take care of itself
side. This raises the question as to how far central banks have a role to play and
how has it changed in the new milieu. It has been argued that financial inclusion is
a means and not the end of economic development, and as a result, there is a need
to clearly demarcate the relative roles of the central bank and the government in
achieving this objective (Reddy, 2015).
There are several reasons why increased financial inclusion may support the
central bank’s task of safeguarding financial stability. First, consumers gaining access
to the formal financial system are likely to increase aggregate savings and diversify
the banks’ depositor base (Aghion et al., 2009). Any increase in savings has the
potential to improve the resilience of financial institutions, given the stability of
retail deposit funding, as was evidenced during the crisis (Ratnovski and Huang,
2009; Raddatz, 2010; Cornett et al., 2011).
Second, by improving firms’ access to credit, financial inclusion can enable
financial institutions to diversify their loan portfolios. Moreover, lending to firms that
were previously financially excluded may also reduce the average credit risk of loan
portfolios. Evidence suggests that an increase in the number of borrowers from small
and medium-sized enterprises is associated with a reduction in delinquent loans and
a lower probability of default by financial institutions (Bayoumi and Melander, 2008).
b3508_V1_Ch08.indd 187 11-02-2020 13:05:56

188 S. Ghosh
Third, financial inclusion facilitates greater participation by different segments of

the economy in the formal financial system. The presence of a large informal sector
can impair the transmission of monetary policy as a significant segment of financially
excluded households and small businesses make financial decisions independent
of, and uninfluenced by, the monetary policy actions. As the share of the formal
financial sector increases through greater financial inclusion, it yields an important
positive externality by increasing the efficacy of the monetary transmission process.
Financial inclusion also has important implications for the transmission of
monetary policy. It helps consumers to smooth their intertemporal consumption
pattern. This could potentially influence basic monetary policy choices, including
which price index to target. Empirical research appears to suggest that inflation
measures excluding food prices may be a poor guide to policy for economies with
low levels of financial inclusion. This is the outcome of Engel’s law which states that
at low levels of income, expenditure on food often dominates the budget of low-
income households. When food prices rise, these households, lacking access to the
financial sector, do not save the extra income, but instead increase consumption, in
turn raising inflationary pressures.
Fifth, greater financial inclusion also strengthens the case for the interest rate
channel of monetary policy. When financial inclusion is low, a large share of the
money stock is typically accounted for by currency in circulation, with cash being
the dominant mode of savings by households. As financial inclusion improves,
consumers relocate their savings away from cash and into deposits. Given that the
rewards for saving are affected by interest rates, greater financial access implies that a
bigger share of economic activity comes under the purview of interest rates, making
them a more potent tool for policymakers (Cecchetti and Kharroubi, 2012).
As governments become more actively involved in the financial inclusion
agenda, a key challenge is defining roles for government in creating the broader and
interconnected ecosystem of market actors needed for safe and efficient product
delivery to the poor. The IMF (2014) has identified three major roles that have the
potential for significant impact: (i) promoting healthy competition (promoter),
(ii) creating an enabling regulatory environment (enabler), and (iii) strengthening
financial infrastructure and driver of transaction volume (developer). While each
of these roles can have significant impact, the application of these roles in any given
jurisdiction will depend on country-specific factors, such as customer demand,
market structure and maturity, and government policies.
Concluding Remarks
The goal of financial inclusion which is being currently pursued in India is a
challenging one. Considerations of regulation, competition, and ownership in an
b3508_V1_Ch08.indd 188 11-02-2020 13:05:56

integrated manner, enhanced oversight of financial markets, and a proactive focus

towards financial infrastructure are all working together to help achieve the task of
furthering financial inclusion in the country.
At a broader plane, driven by manifold developments, including technological
advancements, there has been a marked progress in financial inclusion in the BRICS.
The progress is far more in regard to account ownership as compared with use. Some
of the reasons are economic, while others are more structural in nature. Newer
and innovative ways of addressing these challenges are emerging, which holds the
promise of greater financial inclusion, going forward. The FINDEX 2017 notes that
two-third of unbanked adults have a mobile phone. While this holds the promise of
reaching out to the unbanked in a cost-effective manner, it also raises the possibility
of cyber risks that can impede the financial inclusion momentum. Addressing the
challenges involved while reaching out to the last mile holds the promise of a greener
tomorrow for the unbanked populace.
Acknowledgments
A part of the work was done when the author was working with the Centre for
Advanced Financial Research and Learning, Mumbai, India. Useful suggestions
from Partha Ray on an earlier draft are gratefully acknowledged. Needless to state,
the views expressed and the approach pursued in the paper are strictly personal.
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CHAPTER 9
Gender, Education, and Programma Bolsa

Familia in Brazil
Aparajita Gangopadhyay
Centre for Latin American Studies, Goa University, India
Introduction
In Latin America, poverty and inequality run parallel. Every state in Latin America
mirrors this reality. Also, the contours of inequality run broadly along racial and
ethnic lines. Data on racial and ethnic minorities in Latin America are poor, and the
criteria for classification of minorities vary. Estimates suggest that indigenous groups
account for about for 10% (50 million) of the region’s population, while groups of
African descent account for 30% (150 million).1 Indigenous and Afro-descendent
people are, when compared to the ‘whites’, as a rule, are less educated, less healthy,
and have lesser access to such basic institutions like the justice system. They face
greater difficulties in transforming educational and occupational achievements
into income, generally earning considerably less for the same number of years of
schooling.
Brazil is known for its striking levels of destitution and poverty. However, in the
last few decades, democracy has promoted poverty alleviation and equity-enhancing
1
Indigenous people constitute a majority of the population in Bolivia and Guatemala
and a significant minority in Ecuador and Peru. Afro-descendants are a majority in the
Dominican Republic and Panama; they form 45% of the population in Brazil and more than
10% of the population in Colombia, Venezuela, and Nicaragua.
197
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198 A. Gangopadhyay
reforms. Since, the initiation of the redemocratization process in 1985, voting rights
have been restored to the ordinary people; the constitution of 1988 was one of the
most progressive constitutions of Latin America and reflected the activism by the
social movements in advocating the rights of the poor. The role played by the center-
left and left governments in Brazil since the late 1980s have extended such programs
to previously excluded or marginalized peoples. They implemented new programs
which were aimed at ensuring the most basic levels of social protection. Spending
increased and the social protection programs have definitely reduced poverty, but
the reduction is not commensurate with the resources spent. Socioeconomic equal-
ity remains acute; notwithstanding this, there have been modest improvements in
income distribution over the last few years. However, reforms that systematically
restructured the existing benefits toward equity enhancements have continued on
in a laggard fashion over the years (Hunter and Sugiyama, 2009).
Despite recent increases in financing for education, the population as a whole
remains poorly educated, especially in relation to Brazil’s overall levels of develop-
ment. Educational mobility is exceedingly low. Social mobility in Brazil remains
closely tied to family background. Brazil’s high incidence of poverty, low educational
achievement, and middling health indicators explain its low ranking in overall
human development indicators (Hunter and Sugiyama, 2009, p. 32).
The access to education, social security, healthcare, and housing are the core
social sectors where the governments in Latin America, and Brazil, have tried to
implement reforms for the marginalized. Of all the marginalized, the women suffer
a kind of ‘double discrimination’.2 For instance, indigenous girls’ performance in
school contrasts sharply with the rule that throughout the region girls do as well
and even better than the boys. In Guatemala, for instance, indigenous girls complete
fewer than two years of schooling on average. Indigenous girls start school later and
drop out earlier. For Afro-Brazilian women in urban labor markets in São Paulo in
the 1990s, a lower return in their education and age, compared with ‘white-men’,
accounted for 50% lower overall wages (Naercio and Scorzafave, 2012). In regard to
physical violence statistics, the World Health Organization (WHO) surveys of 1999
and 2000 indicated that, for instance, in Nicaragua 27% of women had reported
being physically abused (in Quito, 37%; in Lima, 31%; in Colombia, 1 out of 5 in
1995, which has since risen to 27%) (Naercio and Scorzafave, 2012). Social surveys
also show that for instance, in urban households in 1999, poor and younger women
with fewer years of schooling were likely victims of domestic violence than wealthier,
older, and more educated women. Each year of schooling reduced the probability of
2
Double discrimination is when a person or a group is targeted for more than one form of
discrimination. In Brazil, women face discrimination for being women, poor, and/or being
of say Afro-descent or belonging to the indigenous groups.
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Gender, Education, and Programma Bolsa Familia in Brazil 199
victimization by 1.4% (World Bank, 2007). In order to deal with the issues related to
race and identity, countries in the region, like Peru and Honduras, have established
mechanisms for the promotion of racial and ethnic equality.3 In contrast, Panama,
Venezuela, and Dominican Republic although having significant Afro-descendants
have failed to advance policies and address racial discrimination. Indigenous
representation rose in Bolivia, Ecuador, and, to a lesser degree, in Argentina and
Colombia. By 2004, 11 countries had instituted quotas establishing a minimum
level of representation (20–40%) for women in political parties. The overall quotas
increased women’s presence in legislatures, but there was significant variation in
the law. For example, whether it was obligatory, whether it only reserves a slot as in
Brazil, or if it required a slot to be filled by a woman, or whether a woman must be
placed in an electionable position, like in Argentina, also depended on the country’s
electorate system (Htun, 2003).
More than 15 countries have been collecting information on ethnicity through
the census, but only a few, Brazil and Colombia, collect data on Afro-descendants.
Peru and Guatemala follow the same for indigenous peoples. In Brazil, minorities
like Afro-descendants account for 45%, Japanese 1%, and indigenous groups like
Yanomami, Tukano, Urueu, Wau-Wau, Awa, Arara, Guarani (0.2–2.4%), and Jews
0.00056%. Brazil currently has 197 forest-dwelling indigenous groups (Telles, 2015).
In Brazil, nearly 80% of Afro-Brazilians live below the nation’s poverty line
compared to the ‘whites’. Only 4% of Afro-Brazilians between the ages of 18 and
24 are in universities, compared to 12% of the ‘whites’. Three-fourths of all Afro-
Brazilians have not completed secondary school, and 40% do not complete elemen-
tary school. In the UNDP’s Human Development Index, Brazil’s rank continued to
stay at 79 among 159 odd countries (HDI Ranking, 2017). In 2007, Afro-Brazilians
earned 50% less than the national average income. Afro-Brazilians suffer from the
highest homicide, poverty, and illiteracy rates in the country. They are seriously
under-represented in professional positions and in middle and upper classes and
over-represented in prisons (56%). The situation is similar among the indigenous
peoples in the region. FUNAI’s data (National Foundation for the Indigenous)
showed that the indigenous people continue to suffer from disease, poor healthcare,
loss of native culture, and recurring incursions, especially in rain forests (National
Native News, 2017).
3
Judith A. Morrison in her article entitled “Behind the Numbers: Race and Ethnicity in
Latin America” in the Americas Quarterly (2016) examines the conditions of the indigenous
and ethnic groups from Latin America and the initiatives made by various organizations
and governments to deal with them. She further delineates the success and the failures of
these groups to find a voice for themselves within these countries. www.americasquarterly.
com.
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200 A. Gangopadhyay
Historical Antecedents of the Racial Issue

Often contrasted with the United States, Brazilian post slavery race relations were
said to be harmonious, tolerant, and devoid of prejudice or discrimination. The
image of presumed equality was based primarily on Brazil’s unparalleled level of
miscegenation among European, African, and indigenous peoples. Widespread
intermixing of the population gave rise to a unique pattern of social differentiation
in which, allegedly, ‘racial appearances’ (phenotype) rather than ‘origin was key’. Due
to the resulting ambiguity of racial identity, many Brazilians denied the existence of
race or racism in their country. Race relations in Brazil, as a result, received much
less attention among social scientists in Brazil. However, recent empirical research
has amply documented the persistence of racial prejudice and discrimination. Brazil’s
image of racial equality has eroded greatly over the past two decades.
Today, vigorous public debate over Brazil’s image of racial equality has dis-
placed the ideology of ‘racial democracy’.4 The overwhelming evidence makes it
clear that racial inequality, prejudice, and discrimination are Brazil’s social reality.
Scholars have often argued that one of the basic determinants of contemporary
racial inequality is the geographic polarization of Brazil’s economy and population
4
The term “racial democracy” refers to a certain pattern of race relations in Brazil.
Specifically, it suggests that Brazilian race relations have developed in a tolerant and
conflict-free manner, in contrast to the presumed hostile form of race relations that evolved
in the United States. The concept of racial democracy had at one point received such wide-
spread acceptance that it was regarded as an essential component of Brazilian national
identity. Brazilians distinguished themselves as unique for having achieved a level of racial
tolerance that few other societies had attained. The origin of the term racial democracy
remains unclear. António Sérgio Guimarães, a Professor at the University of São Paulo,
suggests that its usage goes back to the 1940s, when the Brazilian anthropologist Arthur
Ramos and the French sociologist Roger Bastide employed the term to link this pattern
of race relations to Brazil’s postwar democracy, which began to emerge at the end of the
dictatorship of Getúlio Vargas (1937–1945). However, the concept is more generally associ-
ated with the work of Gilberto Freyre (1900–1987), who proposed the idea in the 1930s in
a daring departure from the scientific racist thinking that had prevailed within Brazilian
intellectual circles since the beginning of the 20th century. Freyre stood the scientific racist
thinking of the day on its head by arguing that Brazil’s pervasive mixing of the races was
not a factor in Brazil’s failure to develop, but instead was testament to the achievements
of a Brazilian civilization that had encouraged a pattern of tolerant race relations that was
unique in the world. Freyre urged Brazilians to take pride in this, as well as in the displays
of Afro-Brazilian culture that were prevalent throughout Brazil. https://www.encyclopedia.
com/history/encyclopedias-almanacs-transcripts-and-maps/racial-democracy-brazil.
b3508_V1_Ch09.indd 200 11-02-2020 13:06:23

(Andrews, 1992, Figueiredo, 2015; Skidmore, 1992). Of the total population, it

was found that Afro-Brazilians lived in the impoverished and underdeveloped
Northeast, while the white population (52%) was concentrated in the industrialized
Southeast (Instituto Brasileiro de Geografia e Estaistica, IBGE, 1996). Thus, because
of locational disadvantages, Afro-Brazilians are said to be handicapped as they are
concentrated in regions where there are fewer social and economic opportunities.
Unequal regional development and population distribution has characterized
Brazilian society since colonial times (Merrick and Graham 1979; Wood and de
Carvalho 1988).
Population and regional imbalances are the legacy of the boom and bust cycles
of three colonial export commodities: sugar, gold/rubber, and coffee. The scarcity of
labor to fuel sugar plantations during the 16th and 17th centuries was the impetus for
importing African slaves into the Northeast. In the 18th century, with the discovery
of gold/rubber and the concomitant decline in sugar production, the economic and
population center of gravity shifted to central and southern Brazil. This shift left
the once wealthy northeastern plantation economy in ruins, and from this point on
development favored southern Brazil.
It was the southern expansion of coffee exports during late nineteenth and early
20th centuries that led to the incipient industrialization of São Paulo, built first
on slave and later subsidized European immigrant labor. Following the abolition
of slavery in 1888, southeast coffee growers used the tax revenues from the great
fortunes accumulated from coffee exports to provide the foundation to build São
Paulo’s industrial economy and attracted roughly 3.5 million European immigrants.
By the 1920s, São Paulo became the most advanced region of the country, and by
the 1940s the state had the largest concentration of manufacturing in all of Latin
America (Wood and Carvalho, 1988).
The predominantly white regions of São Paulo and the southeast remained the
nation’s locus of manufacturing and finance (Kowarick and Campanario, 1986). Over
time, the consequence of such cumulative effects was the sharp spatial disparities.
Continued growth and diversification of the Brazilian economy lessened but did not
eliminate the unequal distribution of wealth and population. From the 1950s, indus-
trialization in south-central Brazil lured Afro-Brazilian migrants from the Northeast
and rural areas to the dynamic urban metropolises, especially São Paulo. This was
accompanied by notable gains in Afro-Brazilian urban employment. Between 1950
and 1980, the proportion of individuals of African descent employed in cities rose
from 36% to 62% (Oliviera et al., 1985). Yet, at the same time, the occupational
structure moved toward more skilled jobs.
As a result, in 1991, Afro-Brazilians continued to be disproportionately con-
centrated in agriculture, construction, and personal services, particularly domestic
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202 A. Gangopadhyay
employment, and the lowest paid and most onerous jobs (Lovell, 1998). Brazil’s
four decades of rapid economic expansion and substantial social and demographic
change erased neither unequal population distribution nor unequal regional
development. Sharp inequalities thus remained between the north and south and
between the blacks and whites.
In Brazil, affirmative actions have been more successful relatively when com-
pared with Colombia. Nationally, the Federal Supreme Court, in its effort to reduce
racial discrimination, established a 20% quota of job openings for Afro-descendants
by service suppliers, in addition to another 20% of public service positions to be
held by Afro-descendants in the Ministries of Justice, Culture, and Agricultural
Development. Nevertheless, the issue has its shortcomings as equality by law is no
guarantee of equality of opportunities for Afro-descendants; also, as there is a huge
gap between what is decreed on paper and what is implemented.5
One of the most important sectors where the government in recent years has
focused its attention has been on education. Ensuring high-quality mass public
schooling, especially at the primary and secondary levels, historically has not been
a central concern of the Brazilian governments, either democratic or authoritarian.
For instance, according to the HDI statistics, the average mean years of schooling
for women in Brazil is 8.1 years. The Gender Inequality Index places Brazil at the
abysmal rank of 92 among 160 odd countries (HDI, 2017). Brazil spends a reasonable
amount of its GNP on education. In comparison to its expenditure on education
(primary and secondary schooling), Brazil ranks below that of most Latin American
countries expenditure (Hunter and Sugiyama, 2009, p. 37).
In the 1990s, after all other factors were accounted for, racial differences
accounted for one-fourth of poverty and inequality. Brazil’s 1990s educational
reforms were extending schooling rates for Afro-Brazilians between 7 and 13 years
of age, which was more than for the ‘whites’. But Afro-Brazilian students continued
to record a higher repetition and dropout rates. At school, their exams results were
worse than that of the ‘whites’, highlighting the socio-economic variables in the
society (Telles and Paixao, 2013). In an ongoing effort to provide equity in educa-
tion, the Brazilian government recently introduced Affirmative Action Program
that includes the use of quotas in public university systems and in new scholarship
5
See the report by the Organization of American States in IACHR, The Situation of People of
African descent in the Americas, OEA/Ser.L/V/II, Doc. 62, 5 December 2011, p. 76. In Human
Rights in Latin America: The Case of Women and People of African Descent Robert Owoo
http://www.e-ir.info/2016/07/19/human-rights-in-latin-america-the-case-of-women-and-
people-of-african-descent.
b3508_V1_Ch09.indd 202 11-02-2020 13:06:23

programs designed to encourage low-income and marginalized students to enroll

in public and private universities.
In 2001, Racial Admission Quotas were introduced in 70 public universities. In
the state of Rio de Janeiro, 20% was set aside for Afro-Brazilians who needed to pass
the entrance exams. Also reserved was a further 25% for ‘social quotas’ for those
students whose parents’ income is less than twice the minimum wage. Through its
ProUniv Program, the Brazilian government also encourages private universities to
offer scholarships to low-income students with a share reserved for Afro-descendants
(especially women) and indigenous students, in exchange for tax breaks. The share
allotted to each minority group is proportionate to its representation in the popula-
tion of each state.
On the issue of the ‘Race Quotas’ in 2012, the Supreme Court Tribunal of Brazil
unanimously ruled that these quotas in public universities were constitutional. The
Race Quotas were hotly debated and challenged the Brazilian ideal of ‘racial democ-
racy’. These affirmative laws were aimed at combating discrimination and education
for the historically marginalized Afro-Brazilian population (Telles and Paixao, 2013).
It was an attempt to broaden opportunities for minorities in Brazil.
In the case between Acao de DEM party vs. Cotas da UNB e no Brasil (Action
of Brazilian Democratic Party vs. Quotas of the University of Brasilia) which
reserved 20% of its enrolment spots for Afro-Brazilian, mixed races, and indigenous
students, the Tribunal passed its judgment.6 The Tribunal of the Supreme Court
stated that the quotas are the best methods to remedy the racial inequalities that were
confronted after the abolition of slavery in Brazil in 1888 (Brazil was the last coun-
try in the Western hemisphere to abolish slavery). The racial quotas are the best
transitory option to close the inequality gap in the realm of higher education. The
Tribunal stated that the gap is a critical issue as a large section of the Afro-Brazilians
continue to live in Favelas and earn a fraction of salaries enjoyed by the prominent
Caucasian class.7
6
The Democratic Party claimed that this policy of the Universidade de Brasilia unconsti-
tutional under Article 5 of the Brazilian constitution which protects equality of all citizens
regardless of race.
7
The Tribunal claimed that the Brazilian policy is in accordance with Article 1 (a) and (b)
which calls for implementing a national policy that promotes more equality in educational
opportunities. Article 1 Section 4 on the Convention on Elimination of Racial Discrimination
states race will not be the primary factor in determining access to higher education, but
rather a factor taken into consideration, which complies with Article 13 Section 2 (c) of the
International Covenant of Economic, Social and Cultural Rights. The Brazilian policy enables
the universities to serve the most vulnerable groups without discrimination.
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204 A. Gangopadhyay
On 29 August 2012, President Dilma Rousseff signed the Lei de Cotas (Law of
social quotas) which instructed the federal universities in 4 years to ensure that half
of the incoming class came from public schools. The spots reserved for the marginal-
ized students will be in accordance with the percentage of the minority population in
the state where each public university is located. Only 2.2% of the 70% of the Afro-
Brazilians living below the poverty line access higher education. The lower echelons
of the socio-economic sectors of the country also receive poor education in public
primary schools. Of late, Brazil boasts one of the largest increases in expenditure on
education between 2000 and 2009 among the countries for which data are available.
Even though Brazil’s spending on education as a percentage of GDP is below the
OECD average, there has been a steady increase in the percentage of GDP invested
in education, particularly between 2000 and 2014. Brazil increased public spending
on education from 10.5% of total public expenditure in 2000 to 14.5% in 2005,
and 16.8% in 2009 — one of the steepest rates of growth among the 33 countries
for which data are available. Brazil ranks fourth in this out of the 32 countries
for which data on public spending on education is available, and it is fairly above
the OECD average of 13%. The next section will focus on female education,
discrimination, and the visible success of the Programma Bolsa Familia (PBF) in
approaching these multiple issues of gender, education, income, and equity.
Racial Identity, Women, and Education

Demographic census and annual household surveys are the only sources of national
level information on the color composition of Brazil’s population. According to
estimates, the 1991 census reported that nearly half of the 147 million population was
either ‘pardo’ or ‘preto’. This large proportion of Afro-Brazilians (pardos — were not
necessarily blacks but could be referred to the Mulattos and pretos) was the result of
the approximately 3.6 million Africans that were brought to the Portuguese colony
during the three and a half centuries of the slave trade.8
The racial terminology of the census is a defined system of skin color and ethnic
identity: branco (white), pardo, preto (blacks), amarelo (yellow), and indigena
(indigenous). The color terminology used by the Brazilian census leaves no doubt
that the categories reflect social definitions of skin color rather than biological
definitions of race. There is controversy regarding the validity of the census bureau’s
color classification scheme. The indigenous category was not used in the 1980
8
Brazil was the last country in the Americas to end slavery, and the Portuguese were the
largest importers of slaves, bringing to Brazil 38% of the approximate 9,500,000 Africans
forcibly transported to the Americas.
b3508_V1_Ch09.indd 204 11-02-2020 13:06:23

census. Brazil, as a member of the UN, has repeatedly stated that it wanted to for-
mally achieve the Millennium Development Goal of Universal Primary Education
(UPE) by 2015. Fundamental education in Brazil is divided in two stages, Ensino
Fundamental I (years 1–5) and Ensino Fundamental II (years 6–9). Enrolment rates
are high, and Brazil seems to be speedily catching up with the average for OECD
countries (OECD 2008). Many children are enrolled in pre-primary school facilities,
including day-care facilities. This increased in 2007 to 70% of the 4–5-year-olds, of
which 97.2% were girls (Klaveren et al., 2009).
The net enrolment in primary education in 2000–2007 of children aged 5-to-14
was 94% overall, with 95% for girls, bringing girls to boys parity to 102% (WHO,
200920). For the last few years, a gender division of secondary education enrolment
was unavailable. Though recent statistics are lacking, dropout rates of girls from
public schools seem considerable. The increasing adolescent fertility rates are high,
especially among the poorest sectors. One of the most cited negative consequences
is low school attendance. It has been argued that the Brazilian educational system
has no special programs for young women who become pregnant; therefore, if a
pregnant student chooses not to abort, the most probable outcome is that she will
quit, this likelihood being higher among the poorer classes.
In 2000, the total enrolment rates of girls in school varied from over 95% of the
population between ages 10 and 14 to nearly 50% of the 18–19-year-olds. By contrast,
the enrolment rate of young mothers was 18–22 % in all age groups. Controlled by
other factors, a childless girl was eight times more likely to be enrolled at school
than a young mother with at least one child (Klaveren et al., 2009). The findings
of Cardoso and Verner (2006) confirm that early parenthood has a strong impact
driving teenagers out of school; they stress that extreme poverty is also lowering
school attendance and that reducing the costs of school, such as transportation,
could improve the record of school attendance.
In addition, students must pass the vestibular, a public open entrance exami-
nation; competition is fierce for places in public universities, since education in
these universities is totally free of charge. Female participation in regular tertiary
education continued to exceed male participation by far. In 2007, 68% of all students
enrolled in tertiary education were women, bringing the women to men parity in
tertiary-level enrolment to 206% (Klaveren et al., 2009, n. 24). In the population
aged 20–29, in 2006, 21% were still being educated. Among the population aged 30
and over, relatively many were — either full time or part time — enrolled in public
and private institutions. This called for a serious introspection and suitable action
on the part of the federal government in Brazil.
Despite the enormous reforms made in the education sector, women continue
to remain marginalized and discriminated in Brazil, especially those who are of
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206 A. Gangopadhyay
Afro-descent or indigenous. The next section focuses on female education, dis-

crimination, and the visible success of the social reform programs such as the PBF
in approaching multiple issues of gender, education, income, and equity.
Female Education in Brazil: A Synoptic Overview

The Brazilian colonial economy, founded on large rural properties and slave labor,
paid little attention to formal education for men and none whatsoever for women.
Isolation, social stratification, and patriarchal family relations favored a power
structure based on the limitless authority of landowners. According to Ribeiro
(2000), the Iberian cultural tradition, transposed from Portugal to its Brazilian
colony, considered women as inferior beings who had no need to learn to read and
write. The educational work of the Jesuits significantly contributed to strengthening
male predominance; its priests had a liking for dogmatic forms of thinking and
preached the maximum authority of Church and state (Heime, 1975).
With the arrival of the Portuguese royal family in Brazil and Independence in
1822, Brazilian society began to have a more complex structure. International immi-
gration and economic diversification increased the demand for education, which
started being seen as an instrument for rising socially through the intermediary social
strata (Beltrao and Diniz Alves, 2009). In this new context, the country’s leaders
voiced their concern with female education for the very first time. The Empire’s first
legislators established that primary school education should be the responsibility of
the state and open to girls, who were primarily schooled by female teachers. But due
to a lack of qualified female teachers and lack of interest in the parents, education did
not reach a significant percentage of female students (UNICEF, 1982).
In the first part of the 19th century, the first institutions aimed at educating
women began to appear, although in a dual teaching picture, with clear gender
specializations. Generally speaking, primary education, with its strong moral and
social content aimed at strengthening the role of the woman as wife and mother,
was meant only for females. Female high school education was largely restricted to
teacher training, or in other words, preparing female teachers for the primary school
courses. Women were still excluded from higher levels of education during the 19th
century. The first school was set up in Niterói, in 1835, followed by another in Bahia,
in 1836. Until the final years of the empire, normal schools were few in number and
almost insignificant in terms of student enrolment (Hahner, 1981).
If females found it difficult to have access to elementary education, the situation
was more dramatic when it came to higher education, which was completely and
unmitigatedly male dominated. Women were excluded from the first courses in
medicine, engineering, and law that sprang up in the country. The imperial decree
b3508_V1_Ch09.indd 206 11-02-2020 13:06:24

that gave women the right to enroll in a university course dates back to 1881.
However, it was difficult to overcome these barriers because high school studies
were essentially male-oriented, in addition to being expensive, and normal courses
did not qualify women for entry to universities. It is important to note that during
the 19th century and the first half of the 20th century female exclusion from high
school courses made it unfeasible for women to enter university. So, duality and
gender segmentation were present in the Brazilian educational system since the
beginning, with women having lower literacy rates and restricted access to higher
levels of education (Romanelli, 2001).
The Brazilian Constitution of 1891 sanctioned the decentralization of educa-
tion into a dualist scheme: the federal government was responsible for creating and
controlling higher and secondary school educational institutions and the states
were responsible for setting up schools and monitoring and controlling elementary
education, as well as high-school-level professional education. It included normal
schools for girls and technical schools for boys (Beltrao and Diniz Alves, 2009, n. 34).
While the educational system expanded quantitatively at this time, there was little
by way of qualitative change.
The literacy rate of the Brazilian population grew during the Old Republic
(1889–1930), despite the continuing high levels of illiteracy. Educational exclusion
was obviously always greater for Afro-Brazilians (Beltrão and Novellino, 2002). The
enrolment rates of Brazilian women in secondary and higher education increased
at the beginning of the 20th century, but by much less so than those of men. For
instance, between 1907 and 1912 in the Federal District, female presence in high
school courses corresponded to less than a quarter of all students and in university
courses it did not reach 1.5% (see Table 1). It is worth remembering that Rio de
Janeiro had one of the best rates of education in the country (Beltrao and Diniz
Alves, 2009, n. 34).
The reasons why the level of Brazilian investment in education was low owes
its origins in the primary products export-driven economic model that had been
Table 1: Number of people enrolled in high schools and universities

in the Federal District — 1907–1912.
High School Level University Level
Year Men Women % Women Men Women % Women
1907 3,721 1,221 24.7 2,455 32 1.3
1909 4,596 1,460 24.1 3,323 39 1.2
1912 7,165 2,145 23.0 3,630 53 1.4
Source: Statistics of the 20th century, IBGE (2003).
b3508_V1_Ch09.indd 207 11-02-2020 13:06:24

208 A. Gangopadhyay
based on slavery. While the population remained in the countryside, with its archaic
means of production, schools exercised no important role in qualifying human
resources, being merely an agent for educating people on how to enjoy their leisure
time or for preparing for self-employed professional careers, in the case of men, or
for being primary school teachers or housewives, in the case of women (Beltrao and
Diniz Alves, 2009).
By redirecting Brazilian development toward the domestic market and to the
urban, industrial sector, the Revolution of 1930 led to the first public policies for the
masses, especially for those who lived in urban areas. The new demands made by
industrialization and urban services had an influence on the content and expansion
of education. But, as the expansion of capitalism was not homogenous all over Brazil,
most of the expansion demanding for schools occurred in regions where capitalist
relations were more advanced (Beltrao and Diniz Alves, 2009).
During the period of the so-called Populist Pact (1945–1964), despite popular
pressure for the democratization of education, the ‘aristocratic’ character of schools
was maintained with the agreement of the ruling elite, making the expansion of
schools occur in a manner that was unplanned and inadequately financed. It is
important to point out that only in 1961, with the Guidelines and Bases of Brazilian
Education Law (LDB) (Beltrao and Diniz Alves, 2009), was the equivalence of all
high school courses guaranteed, thus opening up the possibility for women who were
doing teacher training to sit for university entrance exams. So, it was from the 1960s
that Brazilian women had a bigger possibility of attending university, and it was
only in the 1970s that the reversal of the gender gap in university education began.
As industrialization and urbanization in the country began to intensify, the edu-
cational system grew both horizontally and vertically. The military governments that
came to power after 1964 drew their inspiration from the North American model.
They took measures to meet the growing demand for places and professional quali-
fications, which was also in accordance with their international commitments. The
alliance between military and techno-bureaucracy made it possible for large growth
in the number of postgraduate courses. The objectives were to produce competent
teachers for the universities themselves, stimulate development of scientific research,
and ensure the formation of intellectuals who were qualified to respond to the
needs of national development (Cunha, 2000). The expansion of education in Brazil
continued with the process of redemocratization in the country, with installation of
the ‘New Republic’ in 1985. In the 1990s, public policies were developed that were
aimed at maintaining children in school (School Scholarship Scheme) and making an
effort at providing universal basic education (Beltrao and Diniz Alves, 2009, n. 34).
In the higher education sector, there was major growth in private universities,
and the number of students enrolled in them greatly exceeded the number in public
b3508_V1_Ch09.indd 208 11-02-2020 13:06:24

universities. This general expansion of places in Brazilian education particularly

favored women. In the second half of the 20th century, women managed to reverse
the gender gap in education at all levels. They knew how to take advantage of the
opportunities created by the social transformations that were occurring in the
country (Beltrao and Diniz Alves, 2009, n. 34). For instance, in 2007 53.3% of newly
enrolled university students were women and 55% or more of first-year students had
been women for the last 15 years. Therefore, all the levels of education sector were
dominated by women who were in majority at every level in Brazil, and thus the
average rate of schooling among Brazilian women became more than 1 year higher
than that of men. However, women still earned 30% less than men for the same
work, and even in the Brazilian congress they occupied less than 10% of the seats.9
The absence of gender equity had extended to education itself. School curricula,
textbooks, and teaching methods reinforced stereotypes that devalued the role of
women and confined them to the home and to low-status jobs and careers. It also
projected ‘hard’ science and technology education at the universities to be a male
domain. The non-governmental Human Development Network of Brazil pointed
out that despite the superior education achievements made by women, it had no
impact on their treatment on the workforce, where they continued to face major
disadvantages when it came to employment conditions, negotiations, and promo-
tions (Beltrao and Diniz Alves, 2009, n. 34).
The Organization of American States (OAS) on its ‘Brazil Report’ in the
framework of the Non-Sexist and Anti-Discrimination Education Campaign by
the Acao Educativa Organization in collaboration with ECOS — Communication
and Sexuality part of the reference Centre for the victims of violence of the Sedes
Sapientiae Institute of Sao Paulo (CNRVV) coordinated by CLADEM (LAC
Community for the Defence of Women’s Rights) — are attempting to deal with chal-
lenges of social gender relations in guaranteeing human rights in education. They
are critical of the Brazilian state’s reports which speak of gender equity (between
men and women) in education. These mostly emphasize the increasing literacy and
better performance of women in education. The OAS Report puts forth the persistent
inequalities among the Brazilian women. The progress in indicators of access and
performance is marked by inequality among women according to income, race,
ethnicity, and residence (rural/urban), especially Afro-Brazilian and indigenous
women. These women also face unequal access to quality education and livelihood
(Beltrao and Diniz Alves, 2009, n. 34).
But above all, the reversal in the gender gap has been a triumph that resulted
from a historical effort by the women’s movement as part of a more general struggle
9
Currently, they occupy about 10.38% of the seats.
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210 A. Gangopadhyay
for equal rights between the sexes that involved countless social players. This did
not only happen in Brazil, but was part of a worldwide change whereby the role
of women in society was being redefined (Therborn, 2004). The introduction of
the various social programs in education, employment, health, and housing by
the government produced various levels of success. PBF is considered to be one
of the most successful social initiatives undertaken by the successive governments
of Cardoso, Lula, and Dilma.
Conditional Cash Transfers and Women’s ‘Empowerment’:

Programma Bolsa Familia
The presidencies of Henrique Cardoso and Ignacio Lula and their administrations
along with that of Dilma Rousseff had embraced a more integrated approach by
bundling disparate programs and targeting benefits to families in extreme poverty.
Conditional cash transfers represented a modest share of overall government
expenditure and reinforced the trend of incremental expenditure rather than sub-
stantial reallocation of public benefits. It began with the innovative program of Bolsa
Escola in Brazil. Aiming to enhance educational attainment and alleviate poverty at
the same time, the Bolsa Escola (School Income Subsidy) was introduced and was
arguably one of the best programs. The Bolsa Escola gave a small income subsidy
to needy families, provided that they kept their children aged 7–14 in school. The
program’s design addressed the opportunity costs of education, discouraged child
labor, and created a demand for education on the part of the parents. The Lula
government subsequently folded the federal Bolsa Escola together with other poverty
alleviation programs to form the Bolsa Familia, which is based on a single registry of
poor families (Hunter and Sugiyama, 2009, n. 2, p. 46). Advocating the PBF, Wendy
Hunter and Stugiyama point out, the Brazilian democracy has succeeded in adding
new programs to the social agenda that provide minimal social protection. “These
programmes further basic education and health among marginal populations as
long as they are kept within reasonable financial limits and do not upset important
stakeholders. A key factor in the Bolsa’s political appeal is that it does not challenge
enshrined social protections to the upper and middle classes” (Hunter and Sugiyama,
2009, n. 2, p. 46).
The Brazilian government’s strategy to positively impact on the lives of so many
women through initiative such as Bolsa Familia, Brazil without Extreme Poverty,
the National Documentation Program, My House, My Life, Brasil Carinoso, Light
for All, Social Assistance Network, Pro-Gender and Racial Equality in Business
Program, Continuous Loan Benefits, and through policies were geared toward
population aging and care.
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The Brazilian representative for UN women, Nadine Gasman, expressed that

the publication by the government of Brazil of “More equality for Brazilian Women:
Pathways for Social and Economic Transformation” presented the Brazilian govern-
ments’ responses to women’s rights. She further added that although Brazil was a
country with structural gender, racial, and ethnic inequalities, the positive experi-
ence of the Brazilian public administration needed to be amplified. These could be
achieved by similar responses through the affirmation the rights of women, those
of African descent, and the indigenous populations. According to the 2010 census,
women constituted 51 % of the Brazilian population (Beltrao and Diniz Alves, 2009,
n. 34).
However, critical questions have been raised about the nature and methodology
adopted for the conditional cash transfers. For instance, questions are raised as to
whether the conditional cash transfers are an effective way to address poverty and
build human capital in the long term, or if they allow governments to avoid making
difficult decisions to restructure education and health in ways that would have a
more fundamental and enduring impact (Hunter and Sugiyama, 2009, n. 2, p. 39).
Other critics point out to the political dimensions that are in play here. Critics
state that by handing over cash to such poor families, political parties like the PT
(Workers’ Party) are building a strong political support base which will benefit
the political party in the long run. Examples are forwarded of this, as support is
continuously outpouring for the former president Lula who is in prison on charges
of corruption. The poor in the cities and slums continue to support PT despite Lula’s
jail term.
The PBF, currently reaches approximately 13.8 million households, correspond-
ing to 25 % of the poorest population of Brazil. Its primary goals remain efforts at
fighting hunger and poverty; strengthening access to the public service network,
especially education, health, and social assistance; promoting inter-sectoral inte-
gration and public policy synergy; and an anchorage-sustained empowerment of
beneficiary families. The Ministry of Social and Agrarian Development (Mininsterio
do desevnvolvimento social e agrario-MDSA), the governing body for the PBF at
the federal level, uses three broad activities to try to achieve these goals: direct cash
transfer, conditionalities in the areas of health and education, and coordination
with other public policies that increase socio-economic opportunities for targeted
families.
In any case, federal efforts have been made to target public policies at PBF
beneficiaries. In the context of the ‘Brazil without extreme poverty’ plan (Brasil
seem Miseria-BSM) launched in 2011 and coordinated by the former Ministry of
Social Development and Fight against Hunger (Ministirio do Desenvolvimento
Social e Combate a Fome — MDS), various social programs began to prioritize
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212 A. Gangopadhyay
assistance for these families. For example, The National Programme for Access to
Technical Education and Employment (Pronatech), established in October 2011 was
coordinated with the BSM, and openings in professional training courses targeted
young people and adults under the PBF — with guidance from teachers and the
adaptation of course material to promote learning among low-income populations.
In this manner, called Pronatech BSM, 600,000 PBF beneficiaries enrolled in the
courses, of which 66% were women. In case of extreme poverty, in 1992 the percent-
age of families of African descent in extreme poverty was 30%, approximately 15%
in 2002, and reduced to 1.3% in 2014, which points to an important development
in the reduction of inequalities for this social group.
The Pronatech has broadened the opportunities for social inclusion, professional
development, and incursion to former labor markets. Between 2011 and 2014, the
program’s audience involved women, those of African descent, and youth for the
most part. Of the population formally enrolled in education, 53% of the women
were of African descent and 45% were between 18 and 29 years of age. As far as the
Single Registry goes by 2014, 88% of all families registered in the countries social
programs were run by female heads, 73% were families of African descent and run
by women. In the context of housing, women represent about 80% of all contacts
signed in the My House, My Life program (UN women).10
The design of the PBF determines that the cash be transferred preferably to
women, which is the case for 12,677,749 (or 92%) of the targeted families. Although,
this is not explicitly geared toward addressing the issue of gender roles, it produces a
gender bias in the program. Thus, researchers have often sought to address whether
(and how) the PBF influences gender relations. A closer examination reveals that
10 years after BF, Brazil more than halved its extreme poverty — 9.7% to 4.3%
of its population. Income inequality has also fallen: BF reaches 14 million house-
holds — 50 million people or about one-fourths of the population — and is widely
seen as a success story. Qualitative studies have shown that regular cash transfers
from the program have helped promote the dignity and autonomy of the poor. And,
importantly, women account for 90% of the beneficiaries.
The modalities include a single registry called the ‘Cadastro Unico’ which
covers 40% of the Brazilian population (the most vulnerable part) and has, since
2011, emerged as the axis of public policies focused on people living in poverty,
used by more than 20 federal programs (Bartholo, 2016). The Cadastro Unico
was the essential tool that allowed PBF to achieve these successes. It provided the
basis of targeting PBF benefits, but is linked to numerous other social programs
and services. It not only serves as the backbone for effective administration of the
10
See http://lac.unwomen.org/en/noticias-y-eventos/articulos/2016/05/mujeres-brazil.
b3508_V1_Ch09.indd 212 11-02-2020 13:06:24

BF but also as a tool for coordinating social policy and facilitating rapid scale-up
of additional efforts such as the Brasil Carinhoso program. PBF has also helped
build the base for the ambitious programs such as Brasil sem Miseria and the Busca
Ativa effort, include those who had been left out of these programs in the past
(Wetzel and Economico, 2013).
Primarily to the woman of the house, ‘the state tends to believe women are
more reliable than men’ emphasized Sergio Faust, ex-Director, Instituto Fernando
Henrique Cardoso (Bartholo, 2016, n. 55). By giving women a guaranteed
paycheck, however meagre, the Brazilian government aims to help them break
free of bad marriages or take charge of household decisions. ‘Money empowers
women’ to more likely be involved in decision-making and grants them higher
self-esteem. Less women feel like they are owned. The number of households
headed by women is increasing, but Brazil is one of the lowest ranked countries
on global female empowerment scales. In Bolsa Familia, more women make
decisions regarding their children’s schooling and their own welfare. However,
the broader question is: Is the PBF truly resolving poverty or fostering a culture
of dependency? The success of the program in Brazil has led to its replication in
Mexico and Colombia.
Although the PBF and many other CCT programs do not explicitly focus
on influencing gender relations, feminist criticism is often indicated that such
programs tend to reinforce social roles traditionally played by the sexes — as the
focus is on women as the primary person responsible for mediation between the
program and the family, thus always stressing on their material responsibilities.
This is claimed to result mainly from the definition of women as the grant holders,
the conditionality requirement, and the programs’ inability to expand women’s
individual choices (Molyneux, 2006; Bartholo, 2016, n. 55). In the context of the
conditionalities, the feminist criticism tends to be based on the interpretation that
when such conditions are met in the areas of health and education, it would lead
to more time spent by women in caregiving activities, reinforcing, once again, the
link between female identity and mothering (Molyneux, 2006; Bartholo, 2016,
n. 55).
Second, all compliance with the conditionalities is checked through the public
system in each area, for example, public health and education, where officials in each
municipality verify compliance and then record and send the data to the national
level. Furthermore, there is no penalty for justified failure to comply, such as illness
or lack of available transportation to get to school. Finally, the family will only be
removed from the PBF after repeatedly failing to comply with the conditionalities,
in a process that requires the municipalities’ public social assistance to follow-up
with the family (Molyneux, 2006; Bartholo, 2016, n. 55).
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214 A. Gangopadhyay
Therefore, as designed, the PBF does not exclusively set out to increase the
amount of time women dedicate to their family as a result of the conditionali-
ties, and there is no nationally representative data to identify to what extent this
actually occurs. However, considering the effects of the PBF in reducing mal-
nutrition and infant mortality, an alternative hypothesis is that women perceive
the program as allowing them to devote less time to child care due to a possible
decrease in children’s susceptibility to diseases. Additionally, such programs are
concerned with keeping younger women in school, but not adult women. In
particular, it is claimed that these programs provide no support for women to
choose to dedicate time to more empowering productive work (Molyneux, 2006;
Bartholo, 2016, n. 55).
The PBF cannot evade the criticism that it uses women as mediators between the
state and the family, but it seems reductionist to interpret it simply as a materialistic
program that does not offer to choices to adult women. The structural improvement
of the choices available to poorest women involves access to the PBF but is not lim-
ited to it. It requires the understanding that gender equality is a long-term process
of change that depends on changing public policies in various areas. Moreover,
perhaps the best that PBF can offer to improve women’s living conditions and
choices is its social information platform, which includes identification data about
the socio-economic characteristics of almost half of the country’s population. Any
other responsibility attributed to the PBF to expand women’s choices seems to be
beyond the scope of its goals and mandate (Bartholo, 2016, n. 55, p. 4).
By Way of a Conclusion
PBF has substantially reduced the severity of the recipients’ poverty but brought
comparably few Brazilians out of poverty completely. This is not surprising given
the small amounts of money being transferred, but it represented a significant
accomplishment on the path toward a Brazil that guarantees basic human needs.
Bolsa Familia is cited widely as an exemplary social policy that illustrates Brazil’s
commitment to social inclusion and expansion of citizenship rights (de la Briere
and Rawlings, 2006). At the same time, conditional cash transfers exemplify the
claim that the Brazilian democracy has succeeded in adding new programs to
the social agenda that provide minimal social protection and that further basic
education and health among marginal populations as long as they are kept within
reasonable financial limits and do not upset important stakeholders. A key factor in
the Bolsa’s political appeal is that it does not challenge enshrined social protections
to the middle and upper classes. Although Brazil’s post-authoritarian governments
have devoted new attention and resources to the social area, they have done little to
b3508_V1_Ch09.indd 214 11-02-2020 13:06:24

narrow the stark differences in people’s effective access to public entitlements and
social programs. One implication is that poorer groups with little political influence
may be left without a strong political voice to defend the services or tracks that they
alone occupy, while their better-off counterparts will have the means to defend
their own spear of entitlements. For Brazil’s democracy, overcoming this historical
division is an essential step toward providing meaningful citizenship to all.
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b3508_V1_Ch09.indd 216 11-02-2020 13:06:24

Index
A Bolsa Familia, xxii, 9, 93, 147, 210, 213

Aadhaar, 164–167, 170 Brasil Carinhoso, 213
Acao Educativa Organization, 209 Brazil, xvii, xix–xxii, 1, 4, 6–9, 11–12,
Access to medicines, 115 20–27, 29–31, 34, 79–80, 87–91, 93–95,
Affirmative Action Program, 202 118, 120, 124, 127–128, 130, 134–135,
AIIB, 36 137, 147, 149, 151, 153, 155, 197–206,
Alzheimer disease, 117–118 208–212, 214
Apartheid, 131 Brazilian Workers Party, 9, 13
Argentina, 175, 199 Bretton Woods, 1
Asian Infrastructure Investment Bank, 35 BRICS, xvii–xix, xxi–xxii, 1–4, 7, 9, 14,
Atal Pension Yojana, 144 19, 21–24, 29–30, 32, 34, 36, 39–40, 61,
73–74, 76, 79, 114, 116, 118, 121, 124,
B 128, 134, 136, 138, 149, 151, 154, 189
Bandhan Bank, 173 Britain, 4
Banking Ombudsman Scheme, 148 Business Correspondents, 147
Basic Savings Bank Deposit Accounts Business Facilitators, 147
(BSBDAs), 146
Bernanke, Ben, 28 C
between-group inequality, 63–68, 70–71, Cadastro Unico, 212
74–75 Caixa Econômica Federal, 148
Bhartiya Mahila Bank, 161 caste, 61–64, 67, 69
Bill and Melinda Gates Foundation, caste-based inequality, 87
167 Central Statistical Office (CSO), 80
biodiversity, 99 Chile, 147
bipolarity, 84 China, xvii–xxi, 1, 4–8, 11–12, 20–25,
bipolarization, 83 27–31, 33–34, 36, 94, 118–121, 123–124,
Black Economic Empowerment, 6, 9 128, 130, 134–135, 137, 151, 153, 155
Bolivia, 199 Chinese Communist Party, 4, 12
Bolsa Escola, 93, 210 CLADEM, 209
217
b3508_V1_Index.indd 217 11-02-2020 13:08:42

218 Index
class-based disparities, 91 FINDEX, 143, 155, 161, 189

class-based inequalities, 80, 87 Fiscal Policies, 28
climate change, 100 Foreign Direct Investment (FDI), 30
CNRVV, 209 Fourteenth Finance Commission, 137
Collateralized Debt Obligations (CDO), France, 19, 30
160 FUNAI, 199
Colombia, 199, 202, 213 future generations, 99
Communist Party, 8, 12
conditional cash transfer, xxii, 93 G
Congress Party, 5 G7, xvii, 1–3, 14, 19, 22
Construction Worker Welfare Boards, G8, 20
93 G20, 1, 145, 158–159
consumption-led growth, 52, 54 GDP, 125, 132
corruption, 11–12, 125 general entropy class of measures, 65
current generations, 99 Germany, 30
Gini coefficient, 9
D Gini index, 94
da Silva, Luiz Inacio Lula, 9 global burden of diseases, 116
Data Envelope Analysis (DEA), 103 global financial crisis, 39
decomposition, 64 global inequality report, 7
de-coupling, 40 Global Partnership for Financial Inclusion
diabetes, 117–118 (GPFI), 158
Dominican Republic, 199 global warming, 100
Goldman Sachs, xvii, xix, 20
E governance, 100, 125–126
Earth Summit, 109 guanxi, 12
East Asia, 88 Guatemala, 198–199
ecological footprint, 103
economic inequality, 61, 63, 69 H
ECOS, 209 Head Count Ratio (HCR), 85
Ecuador, 199 Health Sector Road, 131
environmental crimes, 107 HIV/AIDS, 116, 118, 131
Honduras, 199
F Hong Kong, 29
Federal Mandatory Insurance Fund horizontal inequality, 80
(FOMS), 130
Financial Inclusion Action Plan (FIAP), I
158 IDFC, 173
Financial Inclusion Insights (FII), 181 IMF, xvii, 3, 26, 34, 188
Financial Inclusion Insights Survey (FIIS), Immediate Payment Service (IMPS), 172
167 inclusive finance, 145
Financial Stability and Development inclusive growth, xxi
Council (FSDC), 159 income inequality, 11
b3508_V1_Index.indd 218 11-02-2020 13:08:42

Index 219
India, xvii–xxii, 1, 4–8, 11, 20–27, 29–32, MNREGS, 178

34, 36, 79–80, 91, 93, 114, 118–121, 124, monetary policies, 24
134–136, 138, 151, 153–155, 157 Most Favoured Nation (MFN), 30
inequality, 79 MSCI, 39
inequality decomposition, 66–67
Innenpolitik, 2 N
inter-group inequality, 61, 63, 66, 69, 71 National Foundation for the Indigenous,
International Monetary Fund, 34 199
interpersonal inequality, 91 National Health Act, 132
Italy, 19 National Health Assurance Mission, 132
National Health Insurance (NHI), 131
J National Health Mission (NHM), 132
JAM, 164–165, 175 National Programme for Access to
Japan, 19, 30 Technical Education and Employment,
Jinping, Xi, 12 212
National Rural Health Mission (NRHM),
K 132–133
Know Your Customer (KYC), 147, 166 National Sample Survey Organization
(NSSO), 81, 84, 88
L National Strategy for Financial Education,
LAC Community for the Defence of 148
Women’s Rights, 209 nation state, 100
Latin America, 197–198 natural environment, 101
least developed countries, 8 Negotiated Service Delivery Agreement
Lei de Cotas, 204 (NSDA), 131
Li Kequing index, 41 neo-realism, 3
local government financial vehicles, 45 New Cooperative Medical Scheme
(NCMS), 129
M New Development Bank (NDB), xix, 21,
Mahatma Gandhi National Rural 33–34, 36, 110
Employment Guarantee Act Nicaragua, 198
(MNREGA), 92 non-communicable diseases, 116
Mahatma Gandhi National Rural non-performing assets (NPAs), 50, 52
Employment Guarantee Scheme
(MGNREGS), 176–177 O
Malawi, 157 OECD, 8, 130, 204–205
Medical Schemes Act, 132 Office of Health Standards Compliance, 132
Mexico, 94, 175, 213 O’Neill Jim, 20
Millennium Development Goal, 102, 205 OOPS, 115–116, 121–123, 129–130,
Ministry of Health and Family Welfare 132–133
(MOHFW), 133 OPEC, 19
Ministry of Labor and Employment Organization of American States (OAS),
(MOLE), 133 209
b3508_V1_Index.indd 219 11-02-2020 13:08:42

220 Index
P S
PAHAL, 170, 176 Sedes Sapientiae Institute of Sao Paulo,
Pakistan, 5 209
Panama, 199 Small Finance Banks (SFBs), 174
Payments Bank (PBs), 174 SME, 158–159
Peru, 161, 199 social groups, 61–64, 66–67, 70–74
Pesquisa Nacional por Amostra de social health insurance, 115
Domicílios (PNAD), 88–89 social progress index, 102
Philippines, 147, 161 South Africa, xvii, xix, xxi–xxii, 1, 4, 6–9,
Ping, Deng Xiao, 5 11–13, 21–32, 34, 116, 118, 120–121,
Planning Commission, 91, 132, 176 123–124, 131, 134–137, 149, 151,
political capture, 11 153–155
Portugal, 206 South Asia, 88
poverty, 79 Soviet Union, 3, 7, 10, 129
Pradhan Mantri Jan Dhan Yojana sustainable development, xx, 99
(PMJDY), 144, 160, 163–169 Sustainable Development Goals (SDGs),
primary health care, 115 102, 114, 119, 145
primary health services, 115
private corporate sector, 45 T
Programma Bolsa Familia (PBF), 204, 206, taxes, 115
211–214 TB, 131
Progress out of Poverty Index, PPI, 167 Tiananmen Square uprising, 10
Pronatech, 212 tuberculosis, 116
Putin, Vladimir, 14
U
R UK, 19
Racial Admission Quotas, 203 UN, xvii, 3, 113
Rashtriya Swasthya Bima Yojana (RSBY), UNDP, 199
132–133 UNDP Gender Equality Study, 8
real plan, 6, 24, 88 Unified Payments Interface (UPI), 172
regulatory burden, 125 Unique Identification Authority of India
Relative Gini, 81 (UIDAI), 166
Reserve Bank, 144–146, 148, 159, 170, United Nations Framework Convention
174–175, 185 on Climate Change (UNFCCC), 105
Rousseff, Dilma, 13, 204 United States (US), 19, 30, 200
rule of law, 125 Universal Health Coverage (UHC), xxi,
Rural Cooperative Medical 113–116, 119, 121, 125, 128, 132, 134,
Schemes (RCMS), 129 138
Russia, xvii, xix, xxi, 1, 4, 7–8, 10–11, 20–23, Urban Employee Basic Medical Insurance
25, 27, 29–31, 33–34, 36, 118–121, (UEBMI), 129
123–124, 129–130, 134–137, 151, 153, 155 Urban Resident Basic Medical Insurance
Russian Constitution, 130 (URBMI), 129
b3508_V1_Index.indd 220 11-02-2020 13:08:42

Index 221
V Word Bank, 34
Venezuela, 199 World Bank, xvii, 3, 34, 113, 143
World Health Organization (WHO), 113,
W 115, 198
Wealth inequality, 11 World Health Report, 114
West Germany, 19 WTO, 4
b3508_V1_Index.indd 221 11-02-2020 13:08:42

 BRICS and the Global Economy
11330_9789811202193_TP.indd 5 3/2/20 10:11 AM

Editors-in-Chief
Edward D. Mansfield
Nita Rudra
 BRICS and the Global Economy

Editor
Soo Yeon Kim

National University of Singapore, Singapore
World Scientific
11330_9789811202193_TP.indd 6 3/2/20 10:11 AM

Published by



the publisher.


“6.5x9.75” b3508_V2 The Political Economy of the BRICS Countries
Editor’s Note and

Acknowledgments
BRICS and the Global Economy is the brainchild of a book conference on the
same theme held at the National University of Singapore in March 2017. It is part
of a larger project — ‘From Emerging Markets to Rising Powers? Power Shift in
International Economic Governance,’ funded through a Tier 2 Academic Research
Fund Grant (MOE2014-T2-2-157) from Singapore’s Ministry of Education. I thank
the colleagues who have contributed to this volume and travelled far to participate
in the conference at the National University of Singapore. The larger project owes
an intellectual debt to my collaborators on the report Global Shift: How the West
Should Respond to the Rise of China (2011), co-authored with Daniel Deudney, James
Goldgeier, Steffen Kern, Hanns W. Maull, and Iskander Rehman. It was supported
by a fellowship from the Transatlantic Academy, led by Stephen Szabo and located
at the German Marshall Fund in Washington, DC.
I am most grateful to Giulia Mennillo for the extensive management not only
of the preparation of this edited volume but also of the project overall. As the pro-
ject’s postdoctoral fellow for 2 years, Giulia contributed important and innovative
research on the rise of new credit rating agencies in China. Giulia also took on a
key role in managing the various practical aspects of the project. From coordinat-
ing personnel to organizing workshops and talks, all the while pursuing her own
independent research, Giulia has been an invaluable colleague, and I remain deeply
grateful for her tireless efforts to bring the highest quality of academic scholarship
and management to this project.
I also thank the Editors-in-Chief of this three-volume project The Political
Economy of the BRICS Countries, Ed Mansfield and Nita Rudra. They first
approached me to undertake this project, and I am grateful for the opportunity they
b3508_V2_FM.indd 5 11-02-2020 13:21:05

b3508_V2 The Political Economy of the BRICS Countries “6.5x9.75”
vi Editor’s Note and Acknowledgments
have provided to gain greater visibility for this research project and to contribute
to the advancement of knowledge about emerging markets and their roles in global
economic governance.
Thanks are also due to our very able Research Assistants from the National
University of Singapore, who assisted with the preparation of this volume: Veronica
Koh, Lam Wai Ni, Olivia Lim, Samuel Lim, and Jacelyn Tay. All are students from
the Department of Political Science.
Last but not least, the staff at World Scientific have been professional, patient,
and prompt in bringing this volume as well as the other two volumes in this series
to press.
b3508_V2_FM.indd 6 11-02-2020 13:21:05


vii
b3508_V2_FM.indd 7 11-02-2020 13:21:06


b3508_V2_FM.indd 8 11-02-2020 13:21:07

About the Editor
Soo Yeon Kim is an Associate Professor and the Head of

Department of Political Science at the National University
of Singapore. She is a former Fellow of the Transatlantic
Academy, based at the German Marshall Fund of the United
States (Washington, DC), and of the Niehaus Center for
Globalization and Governance, Woodrow Wilson School
of Public and International Affairs, Princeton University.
Soo Yeon Kim holds a Ph.D. in Political Science from Yale
University and B.A. in Political Science and International
Relations from Yonsei University. Her current research focuses on production
networks, multinational firms, and the politics of free trade agreements in Asia; the
politics of compliance in WTO disputes; and rising powers in the global economy.
Soo Yeon Kim’s recent publications include “Global Value Chains and the Political
Economy of WTO Disputes” (with Gabriele Spilker), The Review of International
Organizations, 2019; “The Regime Complex for Investment Governance: Overlapping
Provisions in PTAs and BITs” (with Clara Lee), in Manfred Elsig, Michael Hahn,
and Gabriele Spilker, Eds., The Shifting Landscape of Global Trade Governance,
(Cambridge University Press, forthcoming); and “Yin and Yank: Public Opinion in
Europe Toward the United States and China” (with Sophie Meunier and Zsolt Nyiri),
Comparative European Politics, 2016.
ix
b3508_V2_FM.indd 9 11-02-2020 13:21:08

Gerda Asmus is a Ph.D. candidate in Economics at Heidelberg University, Germany.

Previously, she has earned her master’s degree in Public Policy from Maastricht
Graduate School of Governance. Her research centers around two fields. The first
focuses on the analysis of international development finance. She is particularly
interested in emerging donor countries, such as India and China. Her second field
is devoted to the effects of historical events on regional differences in economic
development. For both fields, she generates spatial data and makes use of modern
spatial econometric techniques in her analyses.
Thilo Bodenstein is an Associate Professor at the School of Public Policy, Central

European University, Budapest and Vienna. His research interests are comparative
and international political economy. He is the author of several papers and a book
on the post-communist countries’ integration into the world market, on policies in
the European Union and development studies. His area of expertise covers politics
and economics of Central and East European countries, EU public policies and
economic crisis management of EU member states, and public and economic policies
in developing countries.
Tanja A. Börzel is the Professor of Political Science and holds the Chair for
European Integration at the Otto-Suhr-Institute for Political Science, Freie
Universität Berlin. She is the Director of the Cluster of Excellence “Contestations of
the Liberal Script”, together with Michael Zürn, as well as the H2020 Collaborative
Project “EU-LISTCO — Europe’s External Action and the Dual Challenges of
Limited Statehood and Contested Orders”. She also directs the Jean Monnet Center
of Excellence “Europe and its Citizens”. Her recent publications include The Oxford
Handbook of Comparative Regionalism (co-edited with Thomas Risse, Oxford
xi
b3508_V2_FM.indd 11 11-02-2020 13:21:08

University Press, 2016), Governance under Anarchy: Effective and Legitimate in Areas
of Limited Statehood (with Thomas Risse, Cambridge University Press, forthcom-
ing), and A Theory of Non-Compliance: Power, Capacity, and Politicization (Cornell
University Press, forthcoming).
Cristiane L. Carneiro is an Associate Professor at the International Relations

Institute, University of São Paulo. She holds a Ph.D. in Politics (New York University),
an M.A. in Political Science, and a B.A. in Law (UFPE). She has published on state
compliance, with a focus on the WTO and human rights. Her most recent publica-
tion is an edited volume, The WTO Dispute Settlement Mechanism — A Developing
Country Perspective (with Alberto do Amaral Junior and Luciana Oliveira, Springer,
2018).
Andreas Fuchs is Professor of Development Economics at the Faculty of

Business and Economics, University of Goettingen, Germany. His research ana-
lyzes the political economy of aid, trade, and investment using quantitative methods
with a special focus on China and other emerging economies. Andreas Fuchs is one
of the developers of AidData’s Global Chinese Official Finance Dataset. His research
papers have been published in the Journal of the European Economic Association,
Journal of Development Economics, Journal of International Economics, and the
Journal of Conflict Resolution, among others. Before joining HSU Hamburg and
IfW Kiel, Andreas Fuchs was a researcher at Princeton University and Heidelberg
University. He defended his Ph.D. dissertation at the University of Goettingen in
August 2012.
Matteo Fumagalli is a Senior Lecturer in the School of International Relations at

the University of St. Andrews in Scotland, UK. He previously taught at Central
European University, University College Dublin, and the University of Edinburgh.
Matteo’s interests lie at the intersection of the study of ethnic conflict and violence
and the politics of natural resources, especially in authoritarian settings in Central
and East Asia. He has published on various aspects related to energy politics and the
international relations of natural resources, including the rise of resource national-
ism in the small but resource-rich economies at China’s borders, and the resource
nexus. His publications include articles in Democratization, East European Politics,
the International Political Science Review, Ethnopolitics, and Asian Politics and Policy.
Matteo’s most recent work revolves around the study of Asian inter-connectedness
in the form of aid, logistics, trade and investment, across East-Central Asia and
Northeast and Southeast Asia.
b3508_V2_FM.indd 12 11-02-2020 13:21:08

Julia Gray is an Associate Professor of Political Science at the University of

Pennsylvania. Her research focuses on international political economy and
international organizations, with a particular focus on how institutions work in
emerging markets. Her first book, The Company States Keep: International Economic
Organizations and Investor Perceptions, won the 2013 Lepgold Prize.
Yoram Z. Haftel is an Associate Professor and the Giancarlo Elia Valori Chair in
the Study of Peace and Regional Cooperation in the Department of International
Relations at the Hebrew University of Jerusalem. He received his Ph.D. from Ohio
State University and had taught at the University of Illinois at Chicago. His research
agenda touches on the sources, design, and effects of regional economic organiza-
tions and international investment agreements (IIAs). His recent work examines
the relationships between international investment arbitration and state regulatory
space in IIAs worldwide. He has published a book and numerous articles on this
and other topics.
Ayse Kaya is the Associate Professor of Political Science at Swarthmore College

(in Swarthmore, PA, USA), where she also co-directs the Global Studies Program.
She researches and teaches on globalization and international political economy,
particularly multilateral economic institutions with a focus on the International
Monetary Fund and the World Bank, the impact of the large emerging economies
(BRICS) on the multilateral system, global inequality and poverty, and the interna-
tional political ramifications of the 2008 global financial crisis, and more recently
global environmental governance. She has published in a range of peer-reviewed
journals, and her book on global economic institutions, Power and Global Economic
Institutions, was published by Cambridge University Press (2015/2017).
Rajesh Kumar works at the intersections of political theory, international political

theory and political economy, and on citizenship and migration. He has been asso-
ciated with the Rising Power and Emerging Markets project of the Department of
Political Science, NUS as a graduate researcher, where he worked on India’s status as
a rising power and as a member of the BRICS group. Currently, he teaches Political
Science at the Delhi College of Arts and Commerce, University of Delhi.
Andrew X. Li is an Assistant Professor of International Relations at Central

European University, Budapest and Vienna. He earned a joint Ph.D. from National
University of Singapore and King’s College London. Prior to joining Central
European University, he worked as a research fellow at Nanyang Technological
b3508_V2_FM.indd 13 11-02-2020 13:21:08

xiv About the Contributors
University, taking part in a project on talent migration in Singapore. His research

focuses on the political economy of international finance, migration and develop-
ment as well as foreign policy (re)alignment and global power shifts. His works
have been published in journals such as Economic & Politics, Journal of International
Relations and Development, and Science and Public Policy.
Giulia Mennillo is the Deputy Academic Convenor for the Global Studies
Program and Visiting Fellow at the Department of Political Science at the National
University of Singapore. Previously, she was a postdoctoral fellow for the research
project “From Emerging Markets to Rising Powers? Power Shift in International
Economic Governance” at National University of Singapore. Her research interests
are in the interdisciplinary field of International Political Economy, particularly
Global Finance. Her research agenda deals with credit rating agencies — private
actors that play a fundamental role in the governance of today’s global financial
markets. She holds a Ph.D. in International Affairs and Political Economy from
the University of St. Gallen. She held research appointments at the Weatherhead
Center for International Affairs at Harvard University, the Watson Institute
for International and Public Affairs at Brown University, and the University of
Warwick.
Axel Michaelowa has a Ph.D. in Economics and works on international and national
climate policy instruments and the UNFCCC process since 1994. He is a part-time
researcher at the University of Zurich and senior founding partner of the consultancy
Perspectives since 2003. Axel has written over 200 research articles and studies and
consults private, governmental, and public institutions in over 50, mostly developing,
countries on climate policy instruments, particularly market mechanisms. Axel was
the IPCC lead author for the chapter on policies and measures in the fourth and
fifth Assessment Report.
Katharina Michaelowa is Professor of Political Economy and Development at the

University of Zurich and at the Center for Comparative and International Studies
(CIS), ETH and University of Zurich. Her research focuses on policies and politics
in developing countries, international development cooperation, and international
climate policy, and led to over 100 publications including several books and articles
in journals such as International Organization, International Studies Quarterly, the
Review of International Organizations, World Development, Climate Policy, and
Climatic Change. Before joining the University of Zurich, she held positions at the
Hamburg Institute of International Economics and at the OECD.
b3508_V2_FM.indd 14 11-02-2020 13:21:08

About the Contributors xv
Angelika Müller is a Ph.D. candidate at Heidelberg University (Germany). She holds

an M.Sc. in Environment and Development from the London School of Economics
and a B.A. in Philosophy and Economics from Bayreuth University. Before starting
her Ph.D., Angelika has worked in applied research with different international and
non-governmental organizations, for instance, with the European Commission
and the International Red Cross (IFRC). Her research focuses on the economics
of financing sustainable development, including the question how the domestic
political regime type affects the decision of countries to join the club of aid donors.
Philip Nel is a Professor in the Department of Politics, University of Otago,

Dunedin, New Zealand. He received his D.Phil. in Philosophy from the University
of Stellenbosch, South Africa in 1984. He has been a visiting professor in Germany
and Japan, and is a Professor Extraordinaire at the University of Stellenbosch, South
Africa. Philip Nel was one of the founding editors of the International Studies
Association journal Foreign Policy Analysis, and serves on the editorial boards of
Global Society and Review of International Studies. His publications include edited
and single-author volumes on income inequality in developing countries, South
African foreign policy, rhetoric and the social sciences, Soviet politics, and a textbook
on international relations, aimed at African students.
Michal Parízek is an Assistant Professor of International Relations and member of

the Peace Research Center Prague, Charles University, Prague, Czechia. His research
focuses on the design and performance of international institutions and international
administrations. Empirically, his research deals with the World Trade Organization
and other global economic governance bodies as well as the United Nations system.
His texts were recently published, among others, in The Review of International
Organizations, New Political Economy, World Trade Review, Comparative European
Politics, and Global Policy.
Thomas Risse is the Professor of International Politics at the Otto-Suhr-Institute of

Political Science, Freie Universität Berlin, Germany. His latest publications include
the Oxford Handbook of Governance and Limited Statehood (ed. with Tanja A. Börzel
and Anke Draude, Oxford University Press, 2018), Domestic Politics and Norm
Diffusion in International Relations (Routledge, 2017), and the Oxford Handbook
of Comparative Regionalism (ed. with Tanja A. Börzel, Oxford University Press,
2016). Risse received his Ph.D. in Political Science in 1987 from the University of
Frankfurt, Germany. During his career, he has taught in the U.S. at Cornell, Yale,
Stanford, and Harvard universities as well as the University of Wyoming, in Europe
b3508_V2_FM.indd 15 11-02-2020 13:21:08

xvi About the Contributors
at the University of Konstanz, Germany, and the European University Institute,

Florence, Italy.
Matthew D. Stephen is an Interim Professor of International Relations and Regional

Governance at the Helmut Schmidt University Hamburg and a Senior Researcher
at the German Institute for Global and Area Studies (GIGA). His research focuses
on the interaction between international power shifts, legitimacy, and interna-
tional institutions. He has published in journals such as the European Journal of
International Relations, Global Governance, the Chinese Journal of International
Politics, and the Review of International Studies. He is the editor, together with
Michael Zürn, of Contested World Orders, Oxford University Press, 2019.
Ka Zeng is the Professor of Political Science and Director of Asian Studies at the
University of Arkansas. Her research focuses on China’s role in the global economy,
in particular Chinese trade policy, China’s role in global economic governance, and
China-related trade dispute dynamics. Ka Zeng’s books include Trade Threats, Trade
Wars (Michigan, 2004), Greening China (Michigan, 2011), and Global Value Chains
and the Politics of Trade Liberalization (Michigan, under contract). She is also the
editor or co-editor of China’s Foreign Trade Policy (Routledge, 2007), China and
Global Trade Governance (Routledge, 2013), and Handbook on the International
Political Economy of China (Edward Elgar, 2019). Ka Zeng is currently a senior
research fellow at the Wong Center for the Study of Multinational Corporations.
b3508_V2_FM.indd 16 11-02-2020 13:21:08

Contents
Editor’s Note and Acknowledgmentsv

About the Editors-in-Chiefvii
About the Editorix
About the Contributorsxi
Introduction xix
Part I Understanding the BRICS Phenomenon 1

Chapter 1 Brazil as a BRICS Country 3
Cristiane Lucena Carneiro
Chapter 2 Russia in Global Economic Governance 17
Thilo Bodenstein
Chapter 3 India and Global Governance 33
Rajesh Kumar
Chapter 4 China and Global Economic Governance 55
Ka Zeng
Chapter 5 S outh Africa, BRICS, and Global Governance: How SA
Tried to Change the World and Succeeded in Changing Itself 83
Philip Nel
Part II Regionalism and Foreign Aid 113

Chapter 6 E
merging Economies — But Regional Powers?
The BRICS and Regionalism 115
Tanja A. Börzel and Thomas Risse
xvii
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xviii Contents
Chapter 7 BRICS and Foreign Aid 139

Gerda Asmus, Andreas Fuchs, and Angelika Müller
Part III Investment and Finance 179

Chapter 8 BRICS and the Global Investment Regime 181
Yoram Z. Haftel
Chapter 9 Exchange Rate Policies of the BRICS 207
Andrew X. Li
Chapter 10 H
e Who Pays the Piper Calls the Tune: And the
“Relocation of the World’s Credit Rating Center” Goes To? 229
Giulia Mennillo
Chapter 11 T
reaty Shopping and Unintended Consequences:
BRICS in the International System 259
Julia Gray
Part IV Climate Negotiations and Energy Governance 287

Chapter 12 BRICS in the International Climate Negotiations 289
Axel Michaelowa and Katharina Michaelowa
Chapter 13 The BRICS, Energy Security, and Global Energy Governance 307
Matteo Fumagalli
Part V Representation, Fragmentation, and Legitimacy 335

Chapter 14 B
RICS and the International Financial Institutions:
Voice and Exit 337
Ayse Kaya
Chapter 15 Th
e Representation of BRICS in Global Economic Governance:
Reform and Fragmentation of Multilateral Institutions 361
Michal Parízek and Matthew D. Stephen
Index391
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Introduction
Brazil, Russia, India, China, and most recently South Africa — collectively known
as the BRICS countries — represent an emergent group whose actorness in the
present and future global economy is a central point of debate. The BRICS label
has been around since the beginning of the 21st century, but as a political force,
the BRICS countries were catapulted to the center stage with the outbreak of the
global economic crisis of 2008 and the subsequent emergence of the G20 as the
“steering committee” for the global economy. While the BRICS countries remain
at the core of this group, more broadly it includes other countries known as
emerging market countries, which have exhibited strong economic growth and
increasing voice in the international arena. Together, they are emblematic of the
“rise of the rest” (Zakaria, 2011) and a tectonic shift in power in the international
system toward greater inclusiveness of new actors from the developing world
(Kahler, 2013).
How have the BRICS, and more broadly the emerging market countries, shaped
the functioning and governance of the global economy? This volume features our
current state of knowledge concerning the BRICS and emerging markets in the
discourses over global economic governance, rising powers in international politics,
and the international political economy. We analyze the role of BRICS countries
both as individual actors and interrogate their group dynamics in the governance
of trade, investment, finance, the environment, and foreign aid. We also identify
research frontiers that call for further scholarly attention.
From BRIC to BRICS: Origins and Evolution

In 2001, Goldman Sachs’ chief economist Jim O’Neill (2001) introduced the BRIC
acronym in the Goldman Sachs Global Economics Paper No. 66, “Building Better
xix
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xx Introduction
Global Economic BRICs” to highlight the economic dynamics of the larger emerging
economies of Brazil, Russia, India and China. The paper proffered projections of the
BRICs countries’ share of world gross domestic product (GDP) in the next decade,
in which all four scenarios pointed to an upward trend with China taking up the
lion’s share of this growth. The report’s projections on China were indeed borne out
when in 2010, just 2 years after the outbreak of the global financial crisis (GFC),
China overtook Japan as the world’s second largest economy.
O’Neil’s paper also recommended an “upgrade” of the G7 group toward greater
inclusiveness of the BRICs countries in global economic policymaking. While
recognizing the economic heft and potential of these larger emerging market
economies, the report noted the heterogeneity of this group and was markedly
ambivalent on whether the BRICs countries would be inclined to join the G7
(or eight including Russia at this time) club of advanced industrial countries.
The paper was prescient as it highlighted the political, economic, and social
heterogeneity of this group of countries. It retained a strong skepticism about
the willingness and compatibility of this motley group in joining the traditional
leaders of the global economy.
While the BRICs label originally included only the four countries, following the
two BRIC summits in Russia in 2009 and in Brazil in 2010, South Africa in 2011
joined this group to form the BRICS at the summit in Sanya, China.1 South Africa’s
participation in the BRICS Business Forum and the BRICS Banking Cooperation
Mechanism on the sidelines of the summit solidified its position as a full-fledged
member of this influential group of developing countries. The BRICS as five have
since then continued on their path of cooperation and institution building.
Beyond BRICS
Although the BRICS countries have been the most prominent actors among emerg-
ing markets (Narlikar, 2010), in recent years, the acronyms have gone beyond the
BRICS to the N11 (Goldman Sachs, 2007), the MINT countries (Durotoye, 2014),
and others found in academic and policy-related publications.2 These countries are
visible as new actors transitioning from their previous roles as largely rule-takers to
1
South Africa’s joining of the BRIC group began in 2010 at the summit meeting in Brazil.
It was formally invited to join this group in December 2010. Attending the third BRICS
Summit in April 2011, South African President Zuma confirmed South Africa’s BRICS
membership.
2
For a list of acronyms to describe emerging market country groupings, see: Amarendra
Bhushan Dhiraj, “What’s Next: The List Of Catchy Acronyms For Emerging Market
b3508_V2_FM.indd 20 11-02-2020 13:21:08

Introduction xxi
potential rule-makers that will shape the governance of the international economy.
Moreover, their location in the developing world, i.e. outside the OECD group of
countries, injects diversity and heterogeneity into the group of leading economies.
This is likely to have ramifications for the functioning, regulation, and management
of international economic exchange (Stewart, 2010). Existing scholarship suggests
this is indeed a heterogeneous group of countries. They have taken different paths
to power and influence in global economic governance (Hopewell, 2015), and they
hold varying worldviews about their role in international politics (Nau and Ollapally,
2012). Some of these new groups have included the following:
•• BICSAM (Outreach 5): This group includes the BRICS countries, excluding
Russia but including Mexico. Brazil, India, China, South Africa, and Mexico,
which were courted as the “Outreach 5” in the early 2000s by the G7 countries.
Dialogue between these five countries and the G7 was extended beyond its initial
2 years and institutionalized as the “Heiligendamm Process” by 2009.
•• BASIC: This group, formed in November 2009, includes Brazil, South Africa,
India, and China. These countries organized to cooperate in international climate
negotiations.
•• BICS: Investors and analysts in the private sector employ this acronym, which is
a variant of the original BRIC group. It includes Brazil, India, China, and South
Africa as emerging markets, leaving out Russia.
•• BRIICS: This grouping expands the BRICS group to include Indonesia.
•• CIVET: This label includes countries that have been identified as potential
second-generation emerging economies following the BRICS group. Coined
by Robert Ward of the Economic Intelligence Unit, this group is comprised of
Colombia, Indonesia, Vietnam, Egypt, and Turkey.
•• E7: This grouping of seven emerging market economies includes China, Russia,
India, Indonesia, Mexico, Brazil, and South Korea. Coined in 2009 by Price
Waterhouse Coopers, these economies together are projected to surpass the G7
countries in economic size by 2020.
•• Gulf Cooperation Council (GCC): A long-standing organization established in
1981 with six Middle Eastern countries, GCC is a regional intergovernmental
organization and trade bloc. Members include Bahrain, Kuwait, Oman, Qatar,
Saudi Arabia, and the United Arab Emirates. The GCC was formed to promote
political and economic cooperation among states in the Persian Gulf.
Economies”, CEO World Magazine, 14 October 2014, available online at: http://ceoworld.
biz/2014/10/14/whats-next-list-catchy-acronyms-emerging-market-economies/.
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xxii Introduction
•• IBSA: The India−Brazil−South Africa (IBSA) Dialogue Forum brings together

the three major democracies among emerging market countries to promote
greater cooperation in the international arena.
•• MINT: Coined by Fidelity Investments, this group includes Mexico, Indonesia,
Nigeria, and Turkey. As the most populous non-BRIC countries among emerging
market economics, they are regarded as potential economic powerhouses of the
future.
•• N-11: Jim O’Neill’s update in 2005 in a follow up paper, “How Solid are the BRIC?”
featured the Next Eleven to follow in the ranks of the four original BRICs econo-
mies. The paper identified Bangladesh, Egypt, Indonesia, Iran, Mexico, Nigeria,
Pakistan, Philippines, Turkey, South Korea, and Vietnam as having “BRICS-like
potential” (7). Of these, the study argued that only Mexico and South Korea have
the capacity to achieve global importance on par with the original BRICS countries.
Conceptualizations: BRICS as Emerging Markets

and Rising Powers (with Rajeev Arumugam, Manali Kumar, and
Florian Winkler)
As indicated by the earliest formulation of the BRICS idea, the concept of the BRICS
began in the private sector, positioned in the broader category of emerging markets
as an investment category that has existed since the 1980s. Investment portfolios
with emerging market equity and debt funds tapped fast-growing economies with
prospects of strong investment returns. These countries included not only the BRICS
but many others as well. Under the label of emerging markets, these investment
destinations have captured the interest of private economic actors, such as invest-
ment firms, financial market index providers, and consulting firms.
Private sector classifications of emerging market economies such as the BRICS,
which vary widely in the level of transparency, breadth and depth of their clas-
sifications, are most clearly defined by emerging market index providers, whose
publication of market classification matrices provide transparent and measurable
criteria for identifying the countries that come under this label. Index providers
include the Financial Times Stock Exchange (FTSE) Emerging Index, the Morgan
Stanley Capital International (MSCI) Emerging Markets Index and the Standard and
Poor (S&P) Emerging Broad-Market Index. FTSE, MSCI, and S&P indices measure
equity market performance in emerging countries worldwide that are frequently
adopted as benchmarks in the emerging market funds offered by investment firms.
They combine a range of qualitative and quantitative indicators, including but not
limited to economic factors such as the size of economy and market, credit ratings,
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Introduction xxiii
and liquidity requirements but also political stability, property rights and the regula-
tory environments in these countries.
International organizations have also contributed significantly to the defini-
tion and classification of emerging markets, going beyond the BRICS five. The
International Monetary Fund (IMF) definition of emerging markets refers to “the
capital markets of developing countries that have liberalized their financial systems
to promote capital flows with non-residents and are broadly accessible to foreign
investors”.3 The World Economic Outlook (WEO 2015) specified features, such as per
capita income, export diversification, and level of global financial integration.4 The
World Bank employs a classification of “Country and Lending Groups” based on
income levels, which scholarship in economics has employed to identify emerging
markets (Gimet, 2011; Rocha and Oreiro, 2013).5 The IMF definition and the World
Bank’s classification of “low-income” to “middle-income economies”, in particular,
provided the basis for Goldman Sachs, Deutsche Bank and Citigroup’s classification
of emerging market countries. Banks such as Barclays include investability criteria
and the presence of capital controls in addition to the World Bank and IMF clas-
sifications, while J.P. Morgan Chase’s Emerging Markets Bond Index Global (EMBI
Global) also considers each country’s debt-restructuring history.
Scholarship in economics has both engaged and problematized the classifications
of international organizations. Frankel and Poonawala’s study (2010) employs the
IMF’s classification of emerging markets in the WEO, emphasizing the inclusion of
newly industrializing economies (NIEs). Cuadro-Saez et al. (2009) also adopt the
IMF definition in its analysis, with the exclusion of Hong Kong and Singapore as
these are more developed and their economies marked by greater financial market
depth. Interestingly, Siddiqui (2010) notes that the IMF classification does not
distinguish between emerging and developing economies, which suggests that all
emerging market economies originate from the developing world and, perhaps more
important, continue to be identified and affiliated with this group of countries.
Liberalization: An important conceptual feature of emerging markets such as
the BRICS countries is economic liberalization. Hoskisson, Eden, Lau, and Wright
study (2010), for example, defines emerging markets as “low-income, rapid-growth
countries using economic liberalization as their primary engine for growth” (249).
Based on these criteria, a later study identifies 64 emerging market countries
(Hoskisson et al., 2013). The studies by Hoskisson et al. (2010, 2013), developed
further in Danis et al. (2011) and Chari and David (2012) emphasize liberalization
3
International Monetary Fund, “Glossary of Selected Financial Terms”, 2006.
4
International Monetary Fund, World Economic Outlook, 2015.
5
World Bank, “Country and Lending Groups”, 2016.
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xxiv Introduction
as the adoption of pro-market reforms and/or the promotion of the private sector.
Economic openness, more broadly, is a strong feature of these liberalizing economies
(Choi and Williams, 2013).
Transition: BRICS and other emerging market economies are also characterized
by elements of transition, or movement from one state to another in economic gov-
ernance and influence. This can refer to the transformation of the domestic economy
from a centrally planned to a market economy in some cases (Freeman et al., 2012).
More frequently, especially as concerning the BRICS countries with the exception
of Russia, emerging markets are countries in transition between the developing and
developed country groups (Zashev and Ehrstedt, 2010). The transitional nature of
these economies indicates that the applicable pool of actors excludes the least devel-
oped countries (LDCs) and the advanced industrialized countries such as those of
the G7. Rather, greater attention is drawn to low- and middle-income countries that
either possess or have the potential for “emergence” in the global economy through
economic liberalization and sustained high-growth.
BRICS as Rising Powers
The scholarship in International Relations provides an especially compelling exami-

nation of the BRICS and emerging markets and their role in the global economy.
Studies on emerging markets problematize their role as “rising powers”, which
overlaps with the existing scholarship in economics and also the features of emerg-
ing markets identified in indices originating from the private sector. The concept
of “rising powers”, alternatively expressed as “emerging powers” (Hurrell, 2000) or
“middle powers” (Dauvergne and Farias, 2012), is central to debates on the role of
the BRICS and emerging markets in shaping economic governance. Studies that
advance the concept of rising powers rely both on the material bases of these actors’
capabilities (Florini, 2011; He and Feng, 2012; Kahler, 2013) and, perhaps more
important, the political will and ambition to affect outcomes in international politics.
A consistent theme articulated in conceptualizations of rising powers is the
combination of material capabilities to wield influence and a significant measure
of political will or aspiration to do so. That is, studies suggest strongly that material
factors alone do not qualify these new actors as rising powers. Cornelissen (2009), for
example, refers to rising powers with attributes that include economic factors such
as sustained economic growth and population size and also political factors such as
their growing influence through new diplomatic alliances, their identity as a member
of the global South, and growing state capacity through internal consolidation.
Others point to the ability to exercise agency (Narlikar, 2010), aspirations toward
greater international prominence (Erthal Abdenur, 2014; Hurrell and Sengupta,
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Introduction xxv
2012), and generally greater “influence and stature” (Mittelman, 2013: 24) in the
shaping of the global order (Chu et al., 2015).
Veto Players to Agenda Setters: Scholarship on BRICS and emerging markets
as rising powers emphasizes the potential political strength of these emerging actors,
which indicates the possibility for greater influence in international politics but that
remains as yet unrealized. Subacchi (2008), for example, stresses the BRICS coun-
tries’ “potential to influence international relations” and “a belief in their entitlement
to a more influential role in world affairs” (492−493). Indeed, the breakdown of the
Doha Round negotiations in 2008 indicates that countries such as China and India
can function as veto-players in international fora. At the same time, however, these
emerging actors have yet to attain “agenda-setting power” (Narlikar, 2013: 561−562)
that enables them to actively shape the international order in the way that major
powers have done in the past. While Stuenkel (2013) argues that the BRIC group did
collectively assert a role as agenda-setters in the wake of the global economic crisis
of 2008, this claim does not find much corroboration. Rather, international relations
scholarship more broadly emphasizes the relatively limited leverage and influence
of these countries as “emerging” but not yet major powers (Hart and Jones, 2010).
Providers of Global Public Goods: Another dimension to consider in concep-
tualizing the BRICS and emerging markets is their sense of identity as both leaders
and great powers that are able to provide global public goods, and how much this
aspect of their actorness is recognized by the international community (Lebow,
2010). Mielniczuk’s (2013) analyses of BRICS countries’ opening speeches at the
United Nations General Assembly from 1991 to 2011 capture the transformation of
these countries’ identities to rising powers and perhaps new leaders as they address
the most pressing issues of international security in our time. Studies advance both
criticism and skepticism about the political will of rising powers as stake-holders
that are willing to contribute to the provision of global public goods (Pant, 2013;
Lieber, 2014). Among the few studies that focus on BRICS countries participation
to this end, Medcalf (2012) finds that both India and China are increasingly more
active and involved in anti-piracy operations, humanitarian assistance, disaster
relief, and peacekeeping. Nevertheless, scholarship is lacking that systematically
examines the contribution of the BRICS countries and other emerging markets to
global governance and does so in a large-scale study covering a wide range of issue
areas. This volume is an effort to remedy this gap for the case of global economic
governance.
China and BRICS Leadership: Last but certainly not least, perhaps the most con-
tentious and broad discussion of the role of BRICS countries and emerging markets in
international relations is centered on China. India and Brazil also figure as important
actors from the BRICS group; however, their potential and actual impact has received
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xxvi Introduction
much less attention. India and Brazil’s democratic political systems are regarded as
an important reason why the rise of these actors is less likely to pose a threat to the
existing international order (Fontaine and Kliman, 2013) but rather figure, in Brazil’s
case, as an “emerging soft power” (Bertazzo, 2012) or even peacekeeper (Kenkel, 2010).
Studies frequently invoke power transition theory to examine the rise of
China and its implications for global order (Schweller and Pu, 2011; Foot, 2014).
Scholars also frame the debate in terms of whether China is a “status quo” actor
that essentially benefits and therefore supports the current international order or
a “revisionist power” that seeks to overturn it through reform or the formation of
alternative institutions (Kastner and Saunders, 2012). The debate over the rise of
China exhibits a clear divide between two contending views: China as a “threat”
and “opportunity”, with policy prescriptions that stress, respectively, competition
in the international arena or engagement (Etzioni, 2011) and socialization into the
existing system (Johnston 2001, 2007).
This volume is devoted to examining the BRICS as emerging markets and ris-
ing powers in the context of global economic governance. We focus on individual
countries that make up the BRICS five: the domestic drivers of their identity
and behaviors as emergent actors in the international arena; the extent of their
leadership in their regional neighborhoods; and more broadly their influence in
shaping outcomes in major international institutions for economic governance.
We examine not only individual behaviors but also group dynamics, specifically
the extent to which the BRICS countries, sometimes joined by other emerging
market countries, can overcome collective action problems and advance unified
and coherent positions.
Organization of the Volume

The 15 chapters in this volume are the result of an international conference on
“BRICS and the Global Economy” held in March 2017 at the National University
of Singapore. The conference brought together specialists across countries and
academic disciplines, all devoted to examining how this emergent group of actors
are shaping governance in diverse areas of the global economy.
The chapters, summarized below, are organized under four main sections,
examining in turn the scholarship on individual countries of the BRICS group; and
thematic areas including regionalism and foreign aid, trade and investment, and
representation and legitimacy. These themes represent the balance of individual
and collective interests of the BRICS countries as they navigate their paths in the
global economy, especially in the areas in which they have been most visible and
perhaps even influential in their actorness.
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Introduction xxvii
Understanding the BRICS Phenomenon
We begin our examination of the BRICS by looking at the individual countries.

Individual chapters are devoted to Brazil, Russia, India, China, and South Africa.
In each, authors focus on their respective country’s domestic politics, regional roles,
and prospects for leadership in governing the international economy.
In “Brazil as a BRICs Country”, Cristiane Lucena Carneiro characterizes Brazil,
one of the original members of the BRICS club, as a “democratic, non-intervention-
ist, middle power”. Within the context of the BRICS group, Carneiro discusses the
importance of international trade and its governing institutions, in particular the
World Trade Organization (WTO), on Brazil’s critical transition towards political,
economic and social development between 1995 and 2015. Carneiro argues that
Brazil’s commitment to multilateralism, combined with its self-identification as a
middle power and non-interventionist democracy, provided a strong foundation
for assertiveness in the WTO. In doing so, Brazil rose in prominence as a “southern
hegemon” to represent developing countries’ disappointment with the Doha Round
negotiations and the WTO system as a whole.
According to Carneiro, Brazil’s engagement of the WTO has two main features:
first, an assertiveness — participation that is both proactive and defensive — that
involves heavy use of the WTO dispute settlement mechanisms’ third-party provi-
sions and notifications of trade defense measures; and second, a selective approach
to regional and preferential trade agreements that has clearly signaled Brazil’s
preference for multilateralism. Together these features constitute evidence of a new
set of beliefs in Brazilian trade diplomacy that emphasizes the role of the WTO
in facilitating the country’s “critical transition” from a limited-access order to an
open-access order (North et al., 2006).
Thilo Bodenstein’s examination of Russia in the BRICS in the chapter “Russia and
Global Economic Governance” emphasizes that Russia is a founding member of the
BRICS and regards the BRICS as an important group for advancing its role in global
economic governance (GEG). At the same time, Russia has only a middle range posi-
tion in terms of global economic power compared to China. Also, Russia’s economic
ties to its fellow BRICS members, with the exception of China, are weak. Since its
independence, Russia has followed a double strategy for integration in GEG. It negoti-
ated WTO membership for 19 years before it became a member in 2012 and it tried to
integrate the post-Soviet countries into a regional free trade agreement (FTA), which
became effective in 2015 with the creation of the Eurasian Economic Union (EAEU).
Both integration attempts, however, have had only limited success in securing
a place for Russia in GEG. The economic benefits of Russia’s WTO membership are
small because of its foreign trade structure, which is based on commodity exports
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xxviii Introduction
that do not fall under WTO law. At the same time, it faces economic sanctions over
the conflict in Ukraine. The EAEU, on the other hand, currently falls short of its
expectations, as it faces commitment problems from its smaller members that are
reluctant to deeply integrate with Russia. Against this background, Russia’s close
cooperation with the BRICS looks as a promising alternative to find its place in GEG,
but Russia needs to further improve its global and regional role in GEG.
In the chapter “India and Global Governance”, Rajesh Kumar challenges conven-
tional readings of India’s position in global governance that present it as a reactive
power, one which adopted a defensive attitude on economic and political issues since
independence and until the 1980s. The low levels of economic growth, as well as
India’s lack of initiatives in multilateral organizations for the same period, support
this view. India’s pragmatic engagement with the world began 1990s onward, with
its economic liberalization.
Kumar argues, however, that this could be an incorrect reading because India
has behaved as a self-interested and rational actor even during this period, for which
its approach has been called inward looking. This chapter assesses India’s standing
in global governance, with reference to the BRICS, by showing it as an intentional
actor, playing the game to its own interests. This chapter notes the inconsistency
between India’s projected power ambition and its current status in global political
economy, and suggests bridging the gap by augmenting its material capacity through
strategic alignments.
Ka Zeng analyzes the scholarship on the most prominent country in the
BRICS group in “China and Global Economic Governance”. Zeng describes China’s
rapid ascent in the global economy and rising influence in multilateral economic
institutions. These related phenomena have given rise to an increasingly large body
of literature on the country’s role in global economic governance. Zeng’s chapter
engages in an extensive review of this body of literature. In addition to outlining the
major themes and arguments in the debate, it identifies emerging research agendas
and areas for future research. It is argued that earlier analyses of China’s role in global
economic governance tend to focus on the question of whether China is operating
within the parameters of the postwar institutional arrangements or whether it has
sought to challenge the established standards, rules, and norms underlying these
institutions. These studies try to do so by documenting the evolution of the Chinese
approach over time or assessing China’s position vis-à-vis both the existing players
and other emerging powers.
A second strand of literature probes in greater depth the sources of Chinese
behavior to address such questions as domestic influences on China’s role in the global
economy, the degree to which it is being socialized into adopting global norms and
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Introduction xxix
rules, and how key features of the existing regimes in turn affect China’s integration
into the liberal international economic system. There seems to be a broad consensus
that Beijing has not sought nor brought about significant changes to key global norms
and rules in areas such as trade and investment, even though it seems to be increasingly
challenging the status quo in other issues areas such as aid and development financing.
Philip Nel’s chapter, “South Africa, BRICS, and Global Governance: How SA
Tried to Change the World and Succeeded in Changing Itself ” traces the remarkable
shift in South Africa’s ideological profile across its initial post-apartheid years to its
present role as aspiring regional power within the BRICS group of states. From 1994,
the country embraced rule-based multilateralism as the preferred means of growing
out of the confines imposed by apartheid while simultaneously securing its interests in
a rapidly-globalizing liberal economic order. Its ambitious journey of global economic
integration has taken the form of abolishing protectionism, securing IFDIs (inward
foreign direct investments), signing numerous BITs (bilateral investment treaties)
and joining the World Trade Organisation (WTO). This chapter outlines how South
Africa — in promoting a Western liberal approach towards global governance — ini-
tially developed a role for itself as a reform-oriented middle power and bridge-builder
between the established powers of the industrial North and global South.
In 2010, the country was invited to join the BRIC association. As this chapter
details, the country has subsequently re-oriented itself towards a more inward-
looking, “sovereignist” trajectory that prioritizes South African national interests
while challenging the Western approach to economic liberalism, human rights and
governance. This exclusivist pivot has also been perceived as part of a bigger strategy
to secure regional power status through alignment with other BRICS members
against the dominance of a liberal order. Essentially, South Africa — in setting out to
change the world — ended up changing itself when it became an attractive partner
to emerging powers seeking to bring forth a new form of global change.
Regionalism and Foreign Aid
The following sections of this volume examine issue areas of particular importance
and relevance to the BRICS countries in the global economy. These next two chapters
take on the issues of regionalism and foreign aid. They consider the approaches and
roles of the BRICS countries in the pursuit of regional leadership in their neighbor-
hoods as well as in other regions through foreign aid, which often serves as an
important instrument of economic statecraft and development policies.
In “Emerging Economies — But Regional Powers? The BRICS and Regionalism”,
Tanja A. Börzel and Thomas Risse focus on the roles of the BRICS countries as
b3508_V2_FM.indd 29 11-02-2020 13:21:09

xxx Introduction
regional leaders and their influence in the creation and development of regional
institutions. They argue that while Western dominance is eroding, the BRICS coun-
tries, in spite of the increasing economic capabilities, are not stepping up to fill the
void. Rather, they appear to be concentrating their efforts on building up regional
leadership and focusing on regional solutions for managing interdependence, political
stability, and economic growth.
Börzel and Risse provide in-depth examinations of each country’s role in shap-
ing their respective regional organizations. While the BRICS acronym may suggest
a certain solidarity, their analysis indicates more divergences than convergences
in the approaches and forms of BRICS’ pursuit of regional leadership. In terms of
explanation, the authors find that existing theoretical frameworks in international
political economy such as hegemonic stability theory and economic interdependence
provide at best weak insights into the variation of the BRICS’ countries regionalism
approaches. Given that BRICS countries cannot together be taken as a unitary actor,
the authors call for more comparative research to examine the sources of these
divergent regionalisms.
“BRICS and Foreign Aid”, by Gerda Asmus, Andreas Fuchs, and Angelika
Müller, provides an overview of the small but growing literature on the bilateral
foreign aid activities carried out by the five BRICS countries. While these so-called
emerging donors are steadily gaining prominence in international development,
they are certainly not new to the field, with foreign aid programs dating back as far
as the 1950s. The recent increase in both the size and scope of their development
activities around the globe is regarded by some as a threat to the international
aid architecture dominated by the United States and its allies in Western Europe
and Japan. What do we know about the size, scope and institutional design of the
BRICS countries’ aid activities? What can we learn about these donors’ aid motives
by analyzing the pattern of their aid recipients and focal sectors? Does the exist-
ing qualitative and quantitative literature allow us to draw conclusions about the
effects of BRICS aid on economic growth, other development outcomes, govern-
ance and conflict in recipient countries? Moreover, how will BRICS aid affect the
DAC-centered international aid architecture and the way the so-called traditional
donors provide aid?
This chapter examines existing scholarly work to draw some tentative conclu-
sions, and the authors emphasize the considerable variation BRICS donors show
in their aid approaches. The BRICS countries rarely act as a group in international
development cooperation. As in the case of regionalism examined in the previous
chapter, the BRICS, though originating mostly from the developing world, also pursue
divergent policies, approaches, and possibly goals in their foreign aid activities.
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Introduction xxxi
Investment and Finance
The four chapters of this section analyze the behaviors of the BRICS countries
in the areas of investment, monetary policy, credit ratings, and international
economic agreements. The chapters examine, in turn, the role of the BRICS
countries in the global investment regime (Haftel), their exchange rate regimes
and levels of valuation (Li), China’s CRAs as counter-hegemonic institutions on
the rise (Mennillo), and BRICS countries’ behaviors in treaty-shopping across
investment and trade agreements (Gray). The chapters detail commonalities and
differences across the individual countries comprising the BRICS and highlight
their relative importance and weight in participation and determining outcomes
in these governance areas.
In “BRICS and the Global Investment Regime”, Yoram Z. Haftel examines
the role Brazil, Russia, India, China, and South Africa (BRICS) play in the global
investment regime and the policies they espouse. What accounts for the similarities
and differences across these countries with respect to their approach to interna-
tional investment agreements (IIAs) and investment arbitration? What are their
implications for the future of this regime?
Haftel’s study addresses these questions by situating emerging market econo-
mies in the persistent North−South divide that is endemic to the global politics of
foreign direct investment (FDI). Surveying the policies of the five countries since
the 1980s, it shows that all were initially motivated to provide foreign investors with
protection against political risk in order to attract FDI. As their own position in the
global economy has changed and the rules of the regime itself have evolved, the
investment policies of the BRICS countries have transformed, albeit in distinct ways.
China and, to a lesser extent, Russia appear broadly content with the current state of
affairs. Brazil, India, and South Africa, on the other hand, seem to object to current
rules, which they view as overly protective of foreign investors at the expense of host
state regulatory space. Haftel argues and shows that two factors — the amount of
FDI outflows and regime type — usefully account for the observed variation across
BRICS’ international investment policies, but that more research is needed to fully
understand this matter. Regardless of its sources, the diversity between the BRICS
countries suggests that the prospects of them shaping the rules of the global invest-
ment regime, either individually or collectively, are rather bleak.
In “Exchange Rate Policies of the BRICS”, Andrew X. Li reviews the global trends
in exchange rate policies in the post-Bretton Wood era as well as the exchange rate
policies of the five BRICS countries. His overall argument is that the exchange rate
policies of the BRICS countries have converged to greater exchange rate flexibility
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xxxii Introduction
and undervaluation of currencies, which are consistent with the global trend among
developing countries. Li also reviews the existing literature on the causes and
consequences of exchange rate policies and picks out the explanations applicable
to the BRICS countries. Further, the author proposes a few possible directions and
questions for future research in response to the call to develop the “third-generation”
theories of the political economy of monetary institutions. In this connection, Li
suggests research questions specific to the BRICS countries and discusses how the
study of the BRICS may contribute to the “third-generation” agenda.
Giulia Mennillo, in “He Who Pays the Piper Calls the Tune: And the ‘Relocation
of the World’s Credit Rating Center’ Goes To’?” provides a thorough overview of
the politics of credit rating agencies (CRAs). Mennillo’s study does so as follows:
first, an analysis of the current CRA global landscape; then, an in-depth illustration
of promising CRAs by the BRICS, in particular China; and finally, a discussion on
challenges facing new CRAs.
Offering explanations for why one would wish to challenge the hegemon, the
discussion highlights the criticisms and deficiencies observed in the current CRA
landscape. Mennillo also introduces the major players amongst Chinese CRAs.
The chapter provides a comprehensive discussion of the roots of the deficiencies in
the global CRA framework. It analyses the likelihood of the new CRAs’ compliance
with the existing framework vis-à-vis their possible attempts at challenging the
status quo. Mennillo’s analysis concludes by acknowledging that a counter-hegemon
is not the solution to the flaws and challenges facing global rating landscape. The
chapter is especially informative as a starting point for those who wish to deepen
their knowledge and understanding of the politics of CRAs for developing future
research.
In “Treaty Shopping and Unintended Consequences: BRICS in the International
System”, Julia Gray gives an overview of the various roles that different actors — firms
and governments alike — in the BRICS countries have played in the “treaty shop-
ping” landscape. Since the end of the Cold War, many countries such as the BRICS
have turned to signing a wide range of economic agreements as a signal of their
commitment to be part of the international community. The resulting rule overlap
between BITs and PTAs in terms of substantive issue areas (shared investment
chapters, overlapping rules of origin, etc.) as well as the overlapping jurisdictions
created by multiple international tribunals are empirical realities that affect emerging
markets around the world. It has created the ability for firms to treaty shop among
tribunals that may not span their original jurisdictions, incorporating abroad to take
advantage of differing dispute-settlement provisions.
Gray argues that although this does not guarantee an outcome in favor of the
firm, it does create further opportunities for litigation, which can be costly and
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Introduction xxxiii
time-consuming for states. This reality might benefit powerful firms more than less
powerful ones in terms of the overall settlement. Thus, for the BRICS countries,
the theoretical and empirical phenomenon of treaty shopping creates a mixed bag
in terms of outcomes. Assessing whether the BRICS have been helped or hurt by
treaty shopping requires looking both at state and non-state actors. While some
governments and firms have been beneficiaries of treaty shopping, others have faced
losses — at times even within the same country, as the Russia example illustrates.
As the international system of treaties and agreements grows increasingly tangled,
it becomes difficult to offer a clear assessment as to whether countries are better
off integrating fully into it or opting out of part or all of it, as some of the BRICS
have done.
Climate Negotiations and Energy Governance
This section features two chapters on areas of international political economy of

increasing importance in recent years: governance of climate change and the politics
of energy markets. Michaelowa and Michaelowa examine the lack of BRICS coun-
tries’ coordination in climate change negotiations. Fumagalli’s chapter focuses on the
energy policies of individual BRICS countries, leading to similar conclusions that
highlight the large and significant variations in individual preferences that preclude
a coordinated BRICS-level position in energy governance.
In the chapter on “The BRICS in the International Climate Negotiations”, Axel
and Katharina Michaelowa argue that the BRICS countries have never collaborated
in international climate policy as one negotiation group, mainly due to Russia hav-
ing very different interests from the other four countries. Russian greenhouse gas
emissions have declined substantially over the last 30 years together with the Russian
economy while those of the other BRICS have multiplied several times. They have
recently surpassed those of the OECD. In 2009, Brazil, China, India, and South Africa
formed the “BASIC” negotiation group in order to prevent binding emission com-
mitments for emerging economies being defined by the Copenhagen Conference. It
was very successful, sidelining the EU in the final negotiations. However, since then
BASIC has become less powerful. China uses various negotiation groups to further
its interests. India often makes very principled stances regarding interpretation of
“equity”. Brazil and South Africa, which until 2015 were the most progressive of the
BRICS, currently suffer from domestic political and economic crises and thus their
role has declined. Russia has become increasingly irrelevant since taking the Kyoto
Protocol “hostage” between 2001 and 2004. It is thus unlikely that BRICS will speak
with one voice in future global climate negotiations. Subject-specific collaboration
may develop for certain periods, but will be taken up as per each country’s interest.
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xxxiv Introduction
Matteo Fumagalli’s chapter on “The BRICS, Energy Security, and Global Energy
Governance” identifies energy security as one of the key global challenges of the
21st century. The global economy is changing rapidly, with population and economic
growth shifting towards emerging markets, especially — though not exclusively — in
Asia. In turn, such shifts are engendering critical changes in the energy diplomacy
and energy security strategies of new energy players. Nowhere is this more evident
than in the case of the BRICS. Fumagalli’s chapter uses the politics of energy to
reflect on the rise, evolving role and impact of the BRICS on global energy gov-
ernance arrangements and, more generally, dynamics of energy cooperation and
competition. The BRICS’ economic weight has led to demands for greater voice
in the international stage. As it reviews recent shifts in the global energy markets
and the BRICS’ various contributions to global energy and environmental govern-
ance, the chapter advances different propositions.
First, despite progress towards the institutionalization of the group, the BRICS
remain a heterogeneous collection of countries, more the sum of their parts than
a new coherent bloc, despite recent efforts at institutionalizing the group, a greater
scope for energy cooperation and its participation in climate change negotiations.
Second, they are responding to energy transitions and climate change in different
ways, in some cases embracing them, in others shying away in the name of domestic
political considerations. Third, progress towards global energy governance remains
patchy in light of persisting contentious issues among the BRICS themselves, and
between the group and advanced industrialized countries and other countries in
the global South. While the BRICS may be dissatisfied with some aspects of global
governance, especially in terms of the lack of representation and “voice”, thus far they
have not articulated a shared vision of what an alternative may look like. Thus far, the
BRICS have found the current global energy governance arrangements preferable
to revisionist courses of action.
Representation, Fragmentation, and Legitimacy
This volume concludes with two chapters that focus on a central issue for BRICS
countries’ participation and influence in governing the international economy:
representation in major international institutions. Representation, which is
strongly linked to legitimacy of the major international institutions that exercise
economic governance, is problematized in the context of major institutions of
global economic governance. Kaya’s chapter applies a “voice” and “exit” framework
to analyze the BRICS countries’ participation in the IMF and the World Bank, and
Parízek and Stephen look additionally to the WTO and the G7−G20 to draw out
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Introduction xxxv
the consequences of contentious representation in these institutions. Together, they

provide important insights especially into the motivations for forming new and
alternative institutions, such as the Asian Infrastructure Investment Bank (AIIB)
and the New Development Bank (NDB).
“BRICS and the International Financial Institutions: Voice and Exit”, by Ayse
Kaya analyzes the BRICS’ relations with the two international financial institutions
(IFIs) with near-universal membership, the International Monetary Fund (IMF)
and the World Bank. The chapter, following not just the literature on this topic but
also the way actual events unfolded, examines BRICS’ “voice”, i.e., expressions of
discontent with and efforts to reform the IFIs, and creation of pathways to “exit”, i.e.
the beginnings of BRICS-led financial institutions, specifically the AIIB, the NDB,
and the Contingent Reserve Arrangement. The chapter argues that explanations
that draw in a detailed manner from specific institutional features and policies do
a better of job of accounting for both partial successes with voice and what the new
institutions mean for the postwar multilateral order. The chapter also charts pos-
sibilities for refining future research on this topic.
In “The Representation of BRICS in Global Economic Governance: Reform and
Fragmentation of Multilateral Institutions”, Michal Parízek and Matthew D. Stephen
problematize the issue of representation of BRICS in Global Economic Governance
(GEG) and the institutional consequences of their attempts to redress their under-
representation in multilateral institutions. The authors start from the observation,
shared by major International Relations theories, that multilateral institutions need to
adequately represent all the important powers in the international system if they are
to remain stable, effective, and legitimate. Parízek and Stephen discuss representation
conflicts between BRICS and the established powers in four major GEG institutions:
the G7−G20, the WTO, the International Monetary Fund, and the World Bank.
For each case they identify the nature of the representation conflict and discuss the
institutional outcomes of the conflict in terms of: (1) adjusting representation itself,
(2) the impact on policy output, and (3) the emergence (or not) of institutional
fragmentation. While in the G7−G20 case the authors observe a relatively successful
case of increased BRICS representation and of rapid institutional adjustment, in the
WTO case, the increased representation of BRICS is accompanied by policy deadlock
and fragmentation. By contrast, the International Monetary Fund and the World Bank
have responded to representation conflicts mostly cosmetically, leading to institutional
fragmentation trends. The chapter argues that major GEG institutions face a double
challenge in relation to the BRICS: they need both to accord new power through
increased representation and to maintain policy performance. When institutions
fail on either of these conditions, they open the doors to institutional fragmentation.
b3508_V2_FM.indd 35 11-02-2020 13:21:09

xxxvi Introduction
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PART I
Understanding the BRICS
Phenomenon
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CHAPTER 1
Brazil as a BRICS Country
Cristiane Lucena Carneiro
International Relations Institute, University of Sao Paulo, Brazil
Introduction
When the term BRICs was coined, Brazil, Russia, India and China could arguably
qualify as four countries that were on a path toward a critical transition that would
ultimately transform these societies from limited-access orders into open-access
orders.1 Open-access is a ubiquitous feature of what Douglas North and collabora-
tors have coined social development (North et al., 2006). Fifteen years later, scholars
argue that Brazil has embarked on this path toward a critical transition. The analysis
claims that since the year 1994 “Brazil has been on a relatively virtuous path of eco-
nomic and political development” (Alston et al., 2016: 20). Aside from the question
as to how the other three countries evolved during these 15 years, a topic addressed
by chapters in this volume, this chapter suggests that international trade institutions
played a prominent role in the Brazilian case.2 The chapter proceeds to seize this
relationship, with an emphasis on the WTO.
Unlike South African latecomer membership in the BRICS group, Brazil was
an original and important piece of the BRICs’ quadrangle. The sheer size of its
1
The term BRICs refers to the four original members (O’Neill, 2001). South Africa joined
the BRICs in December 2010 although its membership was formally confirmed only at the
third BRICS Summit in April 2011.
2
Another reason for limiting the analysis to Brazil is the fact that Russia and China joined
the GATT/WTO system much later in time, in 2012 and 2001, respectively.
b3508_V2_Ch01.indd 3 11-02-2020 13:10:53

4 C. L. Carneiro
population and economy guaranteed Brazil a place in any “club” organized along
such cleavages as “emerging powers”,3 “rising powers”,4 or “middle powers”.5 Unlike
the other three BRIC’s founding members — Russia, China, and India — Brazil is not
a military power and privileges diplomatic over coercive means to achieve its foreign
policy goals (Dauvergne and Farias, 2012).6 This singular characteristic would place
Brazil in a special position with respect to the international development agenda. To
that effect, Brazilian foreign policy has become increasingly assertive, not least but
in the areas of global health promotion, South−South cooperation, and renewable
energy (Dauvergne and Farias, 2012). Foreign policy scholars suggest that Brazil’s
longstanding tradition of non-intervention and support for the peaceful resolution of
international conflicts is behind Brazil’s successful initiatives vis-à-vis international
development (Sotero, 2010; Cervo, 2010).
Another area of influence that has attracted attention by scholars and policymak-
ers is democracy promotion. Here, Brazil’s unique position stands out again amongst
the other BRICs countries. For one, together with India, Brazil constitutes the
“democratic half ” of the BRICs club. But unlike India, Brazil has embraced a more
assertive role toward the promotion of democracy — most notably in Latin America
(Stuenkel, 2013). The Brazilian role is particularly important nowadays because
traditional actors in the realm of international democracy promotion efforts, such
as the UK and the US, have given signs that they will fold toward a more inward-
looking agenda.7 Moreover, Brazil enjoys a privileged position to engage with other
countries when it comes to promoting democracy. As a middle power, Brazil shares
historical trajectories and contemporary challenges with other developing countries,
which facilitates a constructive dialogue. On the other hand, Brazil has elected
not to attach conditionality to its democracy promotion initiatives — in juxtaposi-
tion to American and European practices. For this reason, Brazilian efforts in this
arena are often perceived as more legitimate and expected to yield better results
3
The terms “emerging powers” is frequently used by Andrew Hurrell, who sees these
countries as essential for a thorough understanding of the global order in the 21st century
(Hurrell, 2000).
4
Stuenkel privileges the term “rising powers” in his analysis of the role of Brazil and India in
the promotion of democracy (Stuenkel, 2013).
5
The term “middle power” has a deep historic aspect, as it was first used in the mid-20th
century (Dauvergne and Farias, 2012).
6
For more on the economic and social characteristics of Brazil and how they compare to the
other BRICs countries see Armijo and Burges (2009).
7
To this effect, the decision of the UK to leave the European Union and the election of
Donald Trump for the US Presidency are seen as evidence of this “pull-back” phenomenon.
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Brazil as a BRICS Country 5
(Stuenkel, 2013). Along the same lines, scholars suggest that “being democratic helps
inspire trust” (Armijo and Burges, 2009).
It is in this capacity — as a democratic, non-interventionist, middle power —
that Brazil engages with the international community. Brazil’s foreign policy agenda
has yielded concrete results in the areas of South−South cooperation, public health,
renewable energy, and democracy promotion. Underlying these efforts is a proactive
international trade agenda. The remaining sections of this chapter will chronicle
the Brazilian trajectory with respect to international trade, with an emphasis on
Brazil and the World Trade Organization (WTO). Section two analyzes the growing
importance of international trade for the Brazilian economy and elaborates on the
role of international trade to boost the standing of Brazilian Presidents domestically.
To that end, the analysis concentrates on the years 1995−2015, capturing the creation
of the WTO and the outcome of 10 years of democracy in Brazil.8
Brazil and the WTO

The Role of International Trade in the Brazilian Path toward a
“Critical Transition” (1995−2015)
International trade grew consistently, as a percentage of GDP, during the years after
the entry into force of the WTO agreements (Figure 1). The growing relevance of
international trade for the Brazilian economy can be explained, in part, by the avail-
ability of strong third-party enforcement through the Dispute Settlement Mechanism
(DSM). The security of contracts rose and the risk of doing business with Brazil
declined, because of the shadow of law associated with the WTO. It is also a fact
that the high price of commodities, together with favorable exchange rate terms,
played a key role in the international trade boom (Campello, 2015); nevertheless,
I argue this effect would have been less expressive in the absence of WTO third party
enforcement. Aside from the sheer economic benefits associated with the rise in
international trade and its consequences for development, third-party enforcement
also provided novel strategic tools for Brazilian trade diplomats. Thus, it comes as
no surprise that Brazil features in the first case brought to the new DSM, a dispute
challenging the legality of US import restrictions on gasoline.9
8
1985 marks the Brazilian transition to democracy, with the first democratic elections for
Congress in 20 years. Subsequently, a new Constitution was enacted in 1988, when free and
fair elections for the President were held.
9
United States — Standards for Reformulated and Conventional Gasoline” (WT/DS2/AB/R).
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6 C. L. Carneiro
Figure 1: International trade as a percentage of GDP (Brazil, 1995−2015).

Source: World Bank (2016).
Brazil would use its expertise in international trade to head litigation efforts in
the WTO with significant consequences for other developing countries. The sugar
and cotton cases illustrate this strategy, once again.10 The sugar case against the
EU and the cotton case against the US, both challenged the government subsidies
offered to domestic cotton producers, in the US, and sugar producers, within former
European colonies. Brazil argued that these subsidies violated GATT’s most favored
nation clause and other WTO agreements, and could not be justified under GATT/
WTO exceptions. A number of other sugar and cotton producing countries had a
direct interest in the outcome of this dispute, mostly developing countries, for whom
these commodities accounted for an important share of international trade. Some
of these countries joined the dispute as “third participants”, a status that — under
the WTO regulations, grants the third participant the prerogative to take part in the
proceedings and to submit its views on the dispute.
The approximation with developing countries and the coordination efforts to
pursue litigation in the WTO has helped to consolidate the Brazilian status as a
tenured member of the BRICS club. Brazilian leadership was much more visible and
prominent than one could make the case with respect to the other BRICS countries.
The belief that Brazil had emerged to become the “southern hegemon” began to take
root within international policy circles, what helped build the path toward a “critical
European Communities-Export Subsidies on Sugar WT/DS266/36, 9 June 2006 and

10
United States-Subsidies on Upland Cotton WT/DS267/46, 2 June 2008.
b3508_V2_Ch01.indd 6 11-02-2020 13:10:53

transition”. In addition, the imagery of Brazil as a “southern hegemon” also hardened

within the Brazilian dominant networks.11
Beliefs held by the Brazilian dominant network had changed in fundamental
ways between 1964 and 2014. The preference for developmentalism that marked
the dictatorship years, evolved toward beliefs in social inclusion. The triggering
mechanism for this first shift in beliefs was the democratization process, starting in
1985. One decade later, in 1994, there was a window of opportunity that led to yet
another shift in beliefs. This time the dominant network’s beliefs centered around
fiscally sustainable social inclusion (Alston et al., 2016).
This chapter argues that beliefs at the international level also shifted. The
Brazilian dominant network called for itself the new role of “southern hegemon”, and
the WTO played a key part in the development of this new set of beliefs. In many
ways, the growing importance of international trade for the Brazilian economy
paved the way for the influential role of the WTO from 1995 onward. The notion
of the WTO as a third party enforcer was key to this development, as argued above,
but the Brazilian presence was in many ways singled out. Two characteristics
distinguish the Brazilian presence in the WTO: (a) the broad spectrum of participa-
tion, going beyond the DSM itself to engage in other forms of participation which
was labeled “assertiveness” elsewhere (Carneiro et al., 2016); and (b) the timid
presence of Brazil with respect to regional trade agreements (RTAs) and preferential
trade agreements (PTAs), henceforth referred to as PTAs. The paper elaborates on
these two characteristics, which consistently marked the relationship between Brazil
and the WTO between 1995 and 2015. I argue they constitute evidence of a new set
of beliefs, within the Brazilian trade diplomacy, that crystallized the importance of
the WTO for the Brazilian path towards a “critical transition”.
Brazilian Assertiveness in the WTO
The paper distinguishes between assertiveness and participation in the multilateral

trade system. There is a large scholarship on participation in the Dispute Settlement
Mechanism, but not much has been written on assertiveness. Our focus on asser-
tiveness accounts for participation by states in the DSM, but it goes beyond that in
order to account for state action that provokes the system but does not amount to
disputatious behavior. One of the reasons for incorporating instances of assertive
11
Beliefs are central to the theoretical framework presented in Alston et al. (2016): “We label
the set of perceived impacts of formal laws (a subset of institutions) on outcomes as core
beliefs. The beliefs about how the world works guide the choices of the dominant network
over which institutions to put in place to most likely get their desired outcomes (2016: 25).”
b3508_V2_Ch01.indd 7 11-02-2020 13:10:53

8 C. L. Carneiro
behavior that are non-disputatious in nature is the fact that the states often face a
trade-off between the costs associated with adjudication in the WTO and the likeli-
hood of securing a favorable outcome. When the costs outweigh the benefits, we may
still observe assertive behavior at the committee level, wherein states become more
vocal within WTO committees (with an emphasis to the Committee on Sanitary
and Phytosanitary Measures, SPS Committee, and to the Committee on Technical
Barriers to Trade, TBT Committee), in spite of the absence of litigation.
There is little to no scholarship on the notion of assertiveness. On the other
hand, the literature on state participation in the WTO is prolific. This literature is
dominated by large-N studies that uncovered challenging paradoxes and recurrent
dynamics. There is a traditional view expressed in the literature that concentrates on
international mechanisms and focuses on explaining state behavior as a consequence
of power and economic dynamics. Early work by Horn et al. (1999) analyzes the
rationale associated with disputatious behavior in the WTO. They observe that states
with a diverse export sector and higher per capita GDP bring more disputes to the
system. Recent work by Davis and Bermeo (2009) addresses a similar question, and
concludes that the WTO remains heavily influenced by power asymmetries. This
article also finds that the lack of legal capacity, as well as past experience with WTO
disputes, constitutes one of the most important impediments for developing country
participation in the DSM. Guzman and Simmons (2005) operationalize a power
hypothesis and a capacity hypothesis, and conclude that low-income states tend
to file against high-income states because there is more at stake in these disputes,
as opposed to disputes between developing countries. Legal capacity is also at the
center of research by Busch, Reinhardt and Shaffer (2009), which makes significant
progress when it comes to measuring legal capacity. The authors present evidence
from surveys, which reveal that developing countries fail to file complaints due
to their lack of legal capacity in 67% of the cases covered by their study. Overall,
developing countries have not secured better concessions under the WTO system,
when compared to the GATT years (Reinhardt and Busch, 2003), and this is no less
true for the case of Brazil.
A subset of the scholarship on participation analyzes the impact that the
institutional changes enacted in 1995, with the creation of the WTO, has had on
participation — especially participation by developing countries. Brazil had an active
voice during the Uruguay Round which culminated with the WTO framework.
This presence sought to advance developing countries’ interests, with an emphasis
on leveling the dispute settlement playing field. But these expectations were not
fulfilled and international economic law scholars seem to agree that the new sys-
tem has not substantively improved the position of developing countries vis-à-vis
the resolution of trade disputes in the WTO. To that effect, work by Reinhardt and
b3508_V2_Ch01.indd 8 11-02-2020 13:10:53

Busch (2003) compare the level of concessions to developing countries under the
WTO, in contrast to those granted under the GATT. They conclude that because the
WTO system is somewhat more averse to settlement during the consultations stage,
and because developing countries are less apt to strike favorable compromises before
a panel is established, these countries fail to secure more concessions in the new
system. Earlier work by the same authors had already analyzed the consequences of
increased legalism for bargaining (Reinhardt and Busch, 2003). This article discounts
the implications of the major institutional reform of 1995 (and before that, the one
of 1989), to report that the record of early settlement and the patterns of compli-
ance did not change during the early WTO years, if compared to GATT’s record.
This is important for developing countries, because of the power disparity and its
consequences during the negotiation of a settlement. The analysis covers the period
1948−1999 and reveals that throughout this time, democracies remained less likely
to comply with an adverse ruling.12 Brazil experienced first-hand these scholarly
predictions. In both the sugar and cotton disputes, the Appellate Body’s decision
acknowledged the majority of the claims advanced by Brazil, as a complainant, but
compliance was delayed.13 On balance, the revised dispute settlement procedures
that entered into force with the WTO have not substantively altered the set of
incentives states confront; as a result, states disputatious behavior remained similar
to the record during the GATT years and Brazil continued to encounter some of the
same hurdles to advance its international trade agenda.
This literature has exhaustively discussed the role of power and the impact of
economic characteristics on states’ propensity to bring disputes to the WTO —
or participation. A segment of this literature has also investigated whether the
institutional context that emerged with the creation of the WTO has had any
noticeable impact on patterns identified during the GATT years. The expectation
that the WTO would have increased participation by developing countries in the
dispute settlement mechanism was not borne by the data; similarly, the hopes
that a legalized DSM would have translated into more favorable concessions to
12
Alter (2003) expresses a critical view of the same institutional reforms, and presents
e vidence of the new system’s inability to resolve disputes with examples of protracted cases,
such as the Beef Hormones and the Bananas disputes.
13
In the cotton subsidies case, against the US, Brazil had to file an Article 21.5 compli-
ance procedure and receive authorization to retaliate, before the parties reached a mutually
agreed solution, which happened only in 2014, 9 years after the final decision was circu-
lated. In the cotton subsidies case, against the EU, Brazil filed an Article 21.3(b) compliance
procedure, because the parties could not agree on the reasonable period of time for imple-
mentation of the Appellate Body ruling by the EU.
b3508_V2_Ch01.indd 9 11-02-2020 13:10:54

10 C. L. Carneiro
developing countries did not materialize. Developing countries’ disappointment

vis-à-vis the new system created a window of opportunity for Brazil’s greater role,
as a “southern hegemon”.
Given Brazil’s non-interventionist tradition and its preference for multilateral
engagement, it was only natural that Brazilian foreign policymakers would seize
the WTO stage to promote a greater role for Brazil, as a developing country.
One observable trend in this respect is the level of Brazilian assertiveness in the
system, as measured by the total number of requests for consultations, quasi-
adjudicatory measures (requests for panels, appeals, compliance procedures),
and specific trade concerns (notifications within the SPS and TBT committees),14
as well as trade defense measures initiated by Brazil between 1995 and 2015.
Assertiveness — in contrast to participation — has a proactive and a defen-
sive aspect. For this reason, this chapter proposes two separate measures of
assertiveness, in order to better sort out offensive vs. defensive measures. Thus,
Assertiveness 1 = total number of requests for consultations, requests for panels,
appeals, compliance procedures, notifications within the SPS and TBT commit-
tees; Assertiveness 2 = total number of anti-dumping, subsidies, safeguards and
countervailing measure notifications.15
Figures 2 and 3 show the trend in assertive behavior for Brazil, India, and
South Africa, the last two being the only other BRICS countries that are original
WTO members. The Brazilian presence in the WTO, as expressed by the dotted
lines for Assertiveness 1 and 2, grows even if unevenly along time. This growing
presence constitutes evidence of the new role embraced by Brazil as a ‘southern
hegemon.
It is noteworthy how Brazilian assertiveness differs from India’s. Brazil is much
more active in the DSM and at the committee level — the so called more offensive
pattern of behavior (Assertiveness 1). India, on the other hand, has focused its
efforts on defensive measures, such as safeguards, countervailing duties, and anti-
dumping (Assertiveness 2). An offensive presence, or what we call Assertiveness 1,
14
Committee on Sanitary and Phytosanitary Measures and Committee on Technical
Barriers to Trade.
15
Data comes from the WTO website and consists of a simple count of instances when a
country presented requests for consultations, requests for panels, appeals, compliance pro-
cedures, and notifications within the SPS and TBT committees. These episodes are weighed
equally and make up the measure of Assertiveness 1. Assertiveness 2 is the total sum of
anti-dumping, subsidies, safeguards and countervailing measures notified to the WTO by
the country who imposed these measures. The database is a panel that gathers country-year
observations for every WTO member for the period 1995−2015.
b3508_V2_Ch01.indd 10 11-02-2020 13:10:54

16
14
12
Assertiveness
10
8
6
4
2
0
1995 2000 2005 2010 2015
Year
Brazil India South Africa
Figure 2: Assertiveness 1, Brazil, India, and South Africa (1995−2015).

Source: Carneiro et al. (2016).
70
60
Assertiveness
50
40
30
20
10
0
1995 2000 2005 2010 2015
Year
Brazil India South Africa
Figure 3: Assertiveness 2, Brazil, India, and South Africa (1995−2015).

Source: Carneiro et al. (2016).
is arguably more costly, both in terms of legal capacity as well as reputation. It is

important to emphasize that Brazil is much more assertive than India when we look
at Assertiveness 1 (Figure 2). This is mostly the result of Brazil’s massive recourse
to the SPS and TBT committees, through the use of notifications. Conversely, with
respect to trade defense measures, the Indian assertiveness is higher. Arguably, activ-
ism via trade defense measures is less confrontational (litigious) than requests for
consultations, quasi-adjudicatory measures, and SPS/TBT committee notifications.
This pattern of behavior by India could suggest a less aggressive engagement at the
WTO, implicating lower reputational costs and fewer demands when it comes to
technical capacity.
b3508_V2_Ch01.indd 11 11-02-2020 13:10:55

12 C. L. Carneiro
Brazil’s Strong Preference for Multilateralism
In order to fully capture the way Brazil has engaged with the WTO during the
period under study, one needs to take note of the fact that Brazil has not fully
embarked on the wave of PTAs that have been negotiated ubiquitously. PTAs
are arguably at odds with the goal of equal treatment and most favored nation
status encapsulated by the GATT/WTO agreements. Scholars have gone as far as
to suggest that the new generation of PTAs that regulate nontariff barriers are in
direct conflict with the GATT/WTO agreements — a view supported by a crea-
tive reading of the Appellate Body jurisprudence (Howse, 2015). Regardless of
the legal standing of this widespread practice, for the purposes of the argument
advanced in this chapter, Brazil has chosen to engage very selectively with the PTA
bandwagon. The small number of PTAs notified to the WTO offers compelling
evidence of this pattern.
As Table 1 demonstrates, since the creation of the WTO in 1995 Brazil has
entered into three PTAs. These were negotiated with trade partners that do not
account for a significant share of Brazilian exports and who are peripheral for
Brazil, as far as its regional influence is considered: Kazakhstan, Russia, and
Turkey. Moreover, these agreements are embedded in a Generalized System of
Preferences model, targeting developing countries; they do not carry enough
specificity to impact terms of trade in any significant way. The picture with respect
to RTAs is not much different. There are only three RTAs negotiated under the
auspices of Mercosur — the RTA that was originally signed by Brazil, Argentina,
Paraguay and Uruguay, in 1991, and later joined by Venezuela. Since its entry into
force, Mercosur has had exclusive competence with respect to the negotiation and
Table 1: PTAs and RTAs to which Brazil is a member.

PTA Provider Entry into Force RTA Provider Trade Partner Entry into Force
Australia 1/1/1974 Argentina – Brazil 1/1/2016
Japan 8/1/1971 Brazil – Uruguay (not in force)
Kazakhstan 1/1/2010 MERCOSUR India 1/6/2009
New Zealand 1/1/1972 MERCOSUR Chile 10/3/2017
Norway 10/1/1971 MERCOSUR Mexico 28/12/2016
Russia 1/1/2010
Switzerland 3/1/1972
Turkey 1/1/2002
United States 1/1/1976
Source: WTO (2017).
b3508_V2_Ch01.indd 12 11-02-2020 13:10:55

signature of RTAs that involve any of its members. Therefore, with the exception
of these three RTAs to which Mercosur is a member, Brazil has entered into only
another two agreements — this time with other Mercosur country members:
Argentina and Uruguay. In the case of the Brazil−Uruguay RTA, the agreement
has not entered into force yet. Overall, Brazilian involvement with PTA/RTAs is
very timid.
This choice has obvious adverse consequences for the Brazilian economy
(Thorstensen and Ferraz, 2014); I argue that there is a rationale for the Brazilian
behavior, and it reflects preferences for a multilateralism that would grant Brazil the
sought-after role of a “southern hegemon”. Aside from this untapped conjecture, the
negotiation of PTAs has been the subject of a prolific scholarship. To fully understand
the rationale and consequences of the Brazilian absenteeism, one needs to grasp
PTAs in a more direct way.
Scholars have seized the problematic relationship between the proliferation of
PTAs and states’ behavior in the WTO head on. An initial effort to map PTAs negoti-
ated by the EU and the US (Horn et al., 2010) was followed by a more direct analysis
of the impact of PTA negotiation by the two major trading partners and the record
of WTO disputes between each and their respective PTA partners (Mavroidis and
Sapir, 2015). The authors conclude that the negotiation of PTAs after the creation of
the WTO in 1995 has markedly reduced the number of disputes amongst countries
that belong to the same trade agreement. The authors foresee several reasons to
account for this phenomenon. Regardless of the rationale for the observed reduction
in disputatious behavior in the aftermath of PTA negotiation, which Mavroidis and
Sapir do not explore in their 2015 article, this empirical finding raises concerns
for the WTO and for weaker parties — both within and outside PTAs (Mavroidis
and Sapir, 2015: 361). Those that are PTA members will not benefit from the level-
playing-field structure that the WTO offers; those outside PTAs are still subject to
the residual litigious initiatives by their trade partners. The PTA phenomenon has
arguably set the stage for a greater role by Brazil, as a “regional hegemon”. The higher
the density of PTAs, the greater the window of opportunity available for Brazil. The
PTA bandwagon, together with the pattern of Brazilian assertiveness in the WTO, are
two observable indicators of a new set of beliefs. These beliefs played an important
role in consolidating the Brazilian path toward a “critical transition”.
Aside from the empirical evidence presented here, which documents Brazilian
assertiveness in the WTO together with the country’s skepticism towards PTAs, there
are other noteworthy phenomena. Brazilian active role in the Doha Round as well as
the increased presence of Brazilian public officials in the WTO cadres are two such
instances. A rigorous investigation of these two phenomena is beyond the scope of
this chapter, but future research could explore the role of Brazilian trade diplomats
b3508_V2_Ch01.indd 13 11-02-2020 13:10:55

14 C. L. Carneiro
and scholars at large in the wheels that helped solidify the new set of beliefs within
the dominant network. Along the same lines, the Brazilian government strategy
and discourse during Doha has been consistent with this new set of beliefs — most
importantly, with the notion of a lasting role for Brazil as a “southern hegemon”.
Concluding Remarks
This chapter chronicles the evolution of Brazil, as a member of the BRICS club,
between the creation of the WTO in 1995 until recently. The Brazilian position as
a “southern hegemon” was consolidated during this time frame, mostly as a direct
result of the country’s engagement with international trade. The chapter analyzes
two aspects of this engagement, which follow from the growing importance of
international trade per se for the Brazilian economy. First, the chapter takes notice
of the strategies that Brazil has mobilized in the WTO, with an emphasis to Brazil’s
presence in the Dispute Settlement System as well as its less studied efforts with
respect to trade defense measures and committee behavior. Second, the chapter
discusses Brazil’s skepticism toward and timid record of membership in PTAs. These
two aspects of Brazilian engagement with the WTO arguably constitute a conscious
effort to promote multilateralism, privileging non-interventionist and unconditional
patterns of engagement — which are hallmarks of Brazilian foreign policy.
The Brazilian pursuit of a greater role amongst countries in the South involved
initiatives at the global level going beyond international trade per se, such as the
ones in the realm of public health, renewable energy, South−South cooperation, and
democracy promotion. This chapter engages with the literature on these initiatives
to establish their importance in enabling Brazilian strategies within the multilateral
trade regime. In the end, these four areas of international politics — coupled with
Brazilian greater presence at the WTO, set the stage for a new relationship between
Brazil and other developing countries. This relationship was key to Brazil coming
full circle onto a path towards social development.
The chapter singles out the Brazilian pattern of engagement with the WTO
in even more assertive ways. The analysis of Brazilian assertiveness in the WTO
includes a quantitative overview of nine indicators; it lends support to the conjecture
of a greater presence. This presence is complemented by the prominence of interna-
tional trade in the Brazilian economy, wherein significant externalities occur that
play an important role in the Brazilian path toward a “critical transition”. Here, the
chapter relies on the contribution of Alston et al. (2016), where the authors argue
and demonstrate that Brazil has embarked on a sustainable path toward a “critical
transition”. The road toward development presupposes substantive changes in beliefs
held by the “dominant network”, or “elites”, to use the terminology in North et al.
b3508_V2_Ch01.indd 14 11-02-2020 13:10:55

(2006). The argument advanced in this chapter suggests that international trade
has played an important role in this process, between 1995 and 2015. In particular,
the Brazilian decision to stay outside of the ubiquitous wave of PTAs reinforced
the country’s preference for multilateralism. Along the same lines, Brazilian leader-
ship during the Doha Round as well as the role of Brazilian public officials in the
WTO, are consistent with the Brazilian pattern of engagement and invite a detailed
analysis. These processes have played an important role in the Brazilian path toward
a “critical transition”.
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b3508_V2_Ch01.indd 16 11-02-2020 13:10:55

CHAPTER 2
Russia in Global Economic Governance
Thilo Bodenstein
School of Public Policy, Central European University, Hungary
Introduction
Russia is a core member of the BRICS. It hosted the founding meeting of the BRICS
on 16 June 2009 in Yekaterinburg and also the Ufa meeting in July 2015 jointly with
the Eurasian Economic Union (EAEU) (Toloraya and Chukov, 2016). The BRICS is
not only a venue for high level meetings, but it also aims to provide an alternative
form of representation in global economic governance (GEG). In terms of substantial
policy initiatives, Russia partakes in the BRICS Development Bank and in the BRICS
Contingent Reserve Arrangement (CRA) — a monetary fund with a pool of US
$100 million. It is also involved in plans for a future BRICS payment system and
the creation of an optical fiber submarine cable system among the BRICS members
(BRICS cable). Russia is thus an active member of the BRICS trying to shape the
rules of the game of the future GEG (Toropchin, 2017).
Despite increasing activities, the BRICS is remarkably heterogeneous in terms of
economic power and integration in the global economy. For all its military capabilities,
Russia is not an economic heavyweight within the BRICS. A few numbers exemplify this.1
1
Data on GDP, growth rate and export volume are retrieved from the World Bank’s World
Development Indicators. http://databank.worldbank.org/data/reports.aspx?source=world-
development-indicators (accessed 11 May 2017). Data on bilateral exports are retrieved
from UNCTAD. http://unctadstat.unctad.org/wds/ReportFolders/reportFolders.aspx?sCS_
ChosenLang=en (accessed 11 May 2017).
17
b3508_V2_Ch02.indd 17 11-02-2020 13:11:17

18 T. Bodenstein
With US $1.37 trillion (in current prices) in 2015, Russia’s GDP is smaller than China’s
GDP (US $11.06 trillion), India’s GDP (US $2.1 trillion) and Brazil’s GDP (US $1.8
trillion). Russia’s yearly growth rate from 2009 to 2015 was on average 0.5%, but
growth slowed down to –2.8% in 2015. By contrast, China’s yearly average growth rate
over the same period was 8.5% and India’s 7.5%. Russia’s total export volume is also
dwarfed by China. Russian exports amounted to US $392 billion (in current prices)
in 2015, while China’s export volume was US $2.43 trillion. Finally, only China is a
major destination for Russia’s exports; it is Russia’s second largest export market after
the Netherlands. Russian exports to China were worth US $28,335 million (current
prices) in 2015. Its exports to Japan — its fifth important export market was still US
$14,426 million. By contrast, Russian exports to India were US $4,549 million, to
Brazil US $1,922 million and to South Africa merely US $274 million reflecting the
limit economic exchange between both countries (see Chapter 5).
Although the BRICS does not play a significant role in Russia’s global economic
engagement, the group may still advance alternative forms of representation in GEG
(see Chapter 15). In order to understand Russia’s engagement in the BRICS it is impor-
tant to trace the country’s complicated history of integration into the global economic
system. Finding a proper role has been a major challenge for Russia’s commercial
diplomacy since its independence in 1991. Russia has followed a two-pronged strategy.
In the early 1990s it decided to join the World Trade Organization (WTO) while at the
same time it followed a strategy of regional economic reintegration in the post-Soviet
region, starting with the creation of the Commonwealth of Independent States (CIS)
to increase its political and economy weight in the global economy (Bratersky, 2016).
Both initiatives turned out to be more complex than expected. The WTO negotiations
went on for 19 years and Russia became a member only in 2012. Three years later the
EAEU2 became effective — one of Russia’s major regional economic initiatives. But as
of now, the EAEU is facing integration obstacles.
The contribution traces Russia’s two main efforts to integrate in GEG through
accession to the WTO and the creation of sustainable regional economic integration.
The negotiation process to the WTO was initially slowed down by economic interest
groups fearing to lose from WTO accession. The stalemate was overcome by an
evolution of the interest group constellation, but accession was then again postponed
by a decreasing engagement of the Russian government in economic reforms. The
creation of the EAEU met few resistances by Russian economic lobby groups, as their
losses through regional economic integration were small. The regional integration
process, however, was mainly advanced by Russia’s geoeconomic interests. The final
part reflects on potential venues for future research on Russia’s role in GEG.
2
The acronym EEC is sometimes also used.
b3508_V2_Ch02.indd 18 11-02-2020 13:11:18

Russia in Global Economic Governance 19
Russia and Global Governance: The WTO

Russia saw several advantages from WTO membership. It is member of the IMF,
the World Bank and the G20. Staying outside of the WTO would have prevented it
from shaping the rules of the global trading system (Åslund, 2007). In more practical
terms, its export industries faced constant protectionist threats. As a WTO member,
it has access to the dispute settlement mechanism which provides for legally binding
decisions and regulates penalties. Secure access to export markets, thus, was a key
motivation. The sectors expecting to gain most from WTO membership were those
which were frequently subject to trade discrimination, such as the steel, chemical and
textile industries and especially agriculture. Studies estimated the potential welfare
gains through WTO membership (Jensen et al., 2004; Rutherford and Tarr, 2006).
The authors concluded that in the medium term Russia would be able to increase its
consumption by an additional 7.2% and its GDP by an additional 3.2%. Long-term
increase of consumption could amount to 24% and of GDP by 11%. The greatest
gains through falling prices would materialize in the service sector where tariff
protection was high. Åslund (2007) cites studies that estimated prices in the finan-
cial service sector to fall by one-third, in the air and maritime transport services
by two-thirds, and in the telecommunications sector still by 20%. These economic
gains would mainly result from increased Foreign Direct Investments (FDI) and
improved resource allocation. Yudayeva et al. (2002) estimated that the increase in
FDI could amount to at least US $4 billion per year. Another important aspect of
WTO membership was its role as an anchor for market reforms, as membership
would lock in undertaken reforms and make them non-reversible (Tarr, 2007).
Conflicting commercial interests hampered the negotiation process. There was
support by Russia’s steel and fertilizer industries, which were able to compete on the
international market. These industries joined the Russian Union of Industrialists and
Entrepreneurs (RSPP). Under the leadership of Aleksey Mordashov, owner of the
steel company Severstal, the RSPP became an important advocacy group in favor of
WTO accession. Hesitant in the beginning, the RSPP changed its strategy during the
negotiations and argued in favor of WTO accession as a means to modernize Russia’s
industry. But more importantly, the automotive sector signaled its qualified support
for WTO membership. Russia’s automotive industry was hardly competitive with
foreign producers and operated behind a wall of high tariffs. The initial resistance by
the automotive industry was muted when Oleg Deripaska, owner of the car producer
Rospromavto, received high import tariffs for the automotive industry, which in the
final WTO agreement were phased out gradually (Åslund, 2007).
The Russian Chamber of Commerce and Industry (RCCI), representing import-
competing industries that were seen as non-competitive on the world market and
b3508_V2_Ch02.indd 19 11-02-2020 13:11:18

20 T. Bodenstein
headed by former Russian Prime Minister Yevgeny Primakov, was outspoken

against WTO accession (O’Neal, 2014). A highly contentious issue was branch
banking by foreign banks in Russia (Tarr, 2007). Being able to run subsidiaries in
a country is important for foreign banks to invest in a country, but this implied
adjustment costs for Russian banks. Russia argued that its central bank might not be
able to adequately supervise foreign bank branches, which would increase risk for
depositors. Telecommunications was another area that met resistance. Russia was
required to end the state monopoly of its Rostelekom and to create an independent
supervisory body of telecommunication instead of the telecommunication ministry
that used to be in charge of supervision of the telecommunication sectors (Tarr,
2007). It also had to open its insurance market for multinational life and non-life
insurances. This met resistance from the insurance industry, as it considered itself
less competitive than foreign insurers. Finally, the country also had to open its
markets for business services, including such professions as accounting, law, health
care, engineering, and advertising, among others. In these areas, foreign companies
can operate as foreign owned entities. They can also engage in wholesale and retail
activities (Tarr, 2007).
Another pole of lobbyism against WTO accession was the agricultural sector,
which feared the end of agricultural subsidies, but more importantly the end of Russian
veterinary regulations, which were also widely used by Rospotrebnadzor — Russia’s
consumer and public health agency — as non-tariff import restrictions (O’Neal,
2014). Some resistance came from the services sector, which was wary of enforce-
ment of intellectual property rights, as electronic piracy was still an issue in Russia
(Åslund, 2007).
Despite resistance, the government under President Vladimir Putin was
adamant to integrate the country into the WTO and acted accordingly. The old
ministry of External Economic Relations was merged with other ministries into
the new Ministry of Economic Development and Trade, headed by the liberal and
reform-minded German Gref. The government’s working group on WTO accession
included pro-WTO minded politicians — Finance Minister Aleksey Kudrin and
Prime Minister Mikhail Kasyanov. Maxim Medvedkov, appointed by German Gref,
became trade negotiator. The Custom Code and the Tax Code were also brought
in line with WTO standards. Åslund (2007) assumes that, under this constellation,
WTO accession could have happened already in 2003.
The accession process, however, slowed down during Vladimir Putin’s second
term as president (2004−2008). Domestically, Russia turned away from its liberal
reform commitments and started to create what some observers called a “limited
access order” (North et al., 2013; see Chapter 5). The trial in 2003 against and expro-
priation of the oligarch Mikhail Khodorkovsky, owner of the oil company Yukos,
b3508_V2_Ch02.indd 20 11-02-2020 13:11:18

marked a turning point. The Duma elections in 2003 brought a loss to the liberal
parties and secured a majority to Putin’s United Russia party (Sakwa, 2008). In 2004,
Prime Minister Kosyanov was replaced by Mikhail Fradkov, who was known for his
resistance to WTO membership.
External circumstance also stood in the way of accession. The US Jackson−Vanik
amendment, which subjected US–Russian trade relations to annual reviews regard-
ing the right of Russian Jews to emigrate, was still in place and was repealed only
in December 2012. Another obstacle was the confrontation between Russia and
Georgia, during which Russia issued import restrictions on a range of Georgian
products in 2006. The issues between both countries were settled only in November
2011 (Connolly and Hanson, 2012). Moreover, the global financial crisis (GFC)
of 2007−2008 led to a fall in oil prices in 2008 from US $120 to US $40 causing
an economic crisis and imposing constraints on the government budget. Russia
reacted by postponing WTO negotiations for a year and by introducing trade
measures — 132 trade measures were introduced between 2008 and December 2009
(Gerasimenko, 2012). Only when the oil prices started to increase to around US
$90 by the end of 2010 did the Russian government relaunch the WTO accession
process (Gerasimenko, 2012).
Russia’s WTO experience since its accession in 2012 reflects those of other
larger members in terms of involvement in dispute settlement. Until now Russia has
been a complainant in five cases — four cases against the EU and one case against
Ukraine. It has been respondent in seven cases — four with the EU, one with Japan
and two with Ukraine as a complainant.3 Hofmann and Kim (2015) test whether
dominant powers are more likely to escalate trade dispute with rising powers such
as the BRICS. They find no empirical evidence for the “power transition theory” in
WTO disputes and Russia’s disputes are no exception to this finding. However, the
more problematic aspects of its membership are related to the war in eastern Ukraine
and the accession of Crimea to the Russian Federation in 2014.
As a consequence of Russia’s role in the Ukrainian crisis, the EU and the US
imposed sanctions on Russia (Neuwirth and Svetlicinii, 2016). The EU issued visa
bans and asset freezes, economic sanctions such as the prohibition of purchases
and sales of bonds and other financial instruments, prohibition of arms sales
covering “dual use goods” and equipment for deep water and shale oil exploitation.
The US imposed similar measures on Russia, including more extensive restrictions
regarding trade and business with Crimea. Russia retaliated by “counter-sanctions”
comprising import bans on a wide range of agricultural products from the EU,
3
Retrieved from WTO. https://www.wto.org/english/tratop_e/dispu_e/dispu_by_country_
e.htm (accessed 14 May 2017).
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22 T. Bodenstein
the US, Canada, Australia, and Norway (Neuwirth and Svetlicinii, 2016). Although
the “counter-sanctions” caused shortages in some markets in Russia and the list
had to be revised, the government lauded them in terms of import substitution
policies that would allow the Russian agricultural industry to develop further.
Notwithstanding, the “counter-sanctions” were also welcomed by business
representatives.
The sanctions and “counter-sanctions”, however, are potentially disruptive to
WTO governance. Article XXI of the GATT mentions national security interests, but
there is no jurisprudence that would allow Russian “counter-sanctions” (Neuwirth
and Svetlicinii, 2016). The WTO has no clear procedures of how to deal with politi-
cally induced trade disputes. Thus, Russia’s WTO membership has, at present, the
potential to become disruptive to the international trade order (O’Neal, 2014). To
enhance Russia’s role in GEG, the WTO is currently at an impasse and may be an
example of power-transition theory in WTO governance.
Russia and Regional Governance: The EAEU

Russia’s accession to WTO was also delayed because, in 2009, it requested joint
accession to the WTO by the Eurasian Customs Union (ECU), which comprised
Belarus, Kazakhstan and Russia (Gerasimenko, 2012; O’Neal, 2014). Collective
accession by a customs union was unprecedented and could not be solved within
existing WTO regulations. But the request shows the importance Russia accords
to the regional dimension of its global market integration strategy, similar to other
BRICS states (see Chapter 6). The regional integration efforts resulted in the EAEU
in 2015. But, as of now, the EAEU has not yet fulfilled the expectations of its largest
member state.
After the collapse of the Soviet Union, the first attempt to maintain economic
and political ties between the newly independent post-Soviet states was the crea-
tion of the CIS in December 1991 (Saivetz, 2012).4 In the wake of the Soviet Union
breakup, CIS’s main purpose was to hold together the economic space, including
infrastructures for electricity, transport and communications that were threatened to
disintegrate. As early as September 1993, the nine member states of the CIS signed
a treaty on the creation of an economic union. This included a plan for progressive
economic integration, starting with a multilateral free trade association, moving to
a customs union, eventually comprising free movement of goods, services, labor
and capital, and even finally leading to a monetary union. A first tangible step of
4
A comprehensive overview over regional integration in Eurasia is provided by Hancock
and Libman (2016).
b3508_V2_Ch02.indd 22 11-02-2020 13:11:18

the intention to form a closer union was an agreement to a free trade zone in April
1994, but it was Russia that failed to ratify it (Kembayev, 2016).
The first steps toward deeper regional integration started in 1995 with a decla-
ration of intent to form a customs union between Belarus, Kazakhstan and Russia
(Kembayev, 2016). It was joined by Kyrgyzstan in 1995 and Tajikistan in 1997, but
the agreement remained ineffective. A second move came in 1996 when Belarus
and Russia formed the Union State of Russia and Belarus with the ambitious aim
of not only economic integration, but the eventual unification of both countries. It
became effective in January 2000, but never reached a stage of deeper integration
(Kembayev, 2016).
A major move toward regional integration happened in October 2000 when
Belarus, Kazakhstan, Kyrgyzstan, Russia, and Tajikistan agreed on the formation
of the Eurasian Economic Community (EurAsEC) (Saivetz, 2012; Tarr, 2016).
This new organization became effective as of May 2001 and was joined by
Moldova and Ukraine a year later and by Armenia in 2003. Between 2006 and
2008, Uzbekistan also participated in EurAsEC. The organization was given
decision-making structures with an Interstate Council, a General Secretariat, an
Inter-Parliamentary Assembly and a Court. EurAsEC had a far-reaching agenda
of coordinating member states’ tax and budget policies, economic management,
agriculture, industry, transport, border control, social issues and migration policy.
Goals included the free movement of capital and the intent to form a common
financial market, cumulating in a common currency.5 EurAsEC was also created
with an eye on the WTO, as it was supposed to coordinate its members’ accession
processes (Kembayev, 2016).
Although little substance has been made in this respect, EurAsEC decisively
contributed to regional integration by the launch of the ECU between Belarus,
Kazakhstan, and Russia in January 2010 (Kembayev, 2016). Armenia and Kyrgyzstan
joined the ECU in 2015. A common Customs Code entered into force in July 2010.
Border controls between Russia and Kazakhstan were removed in July 2011 and
between Russia and Belarus a year later. The second contribution of EurAsEC
was the creation of the Common Economic Space (CES)6 (Kembayev, 2016). The
agreement was signed in September 2003 in Astana by Belarus, Kazakhstan, Russia,
and Ukraine, but Ukraine’s Orange Revolution put an end to the project. The CES
gained new momentum with the action plan adopted by the Interstate Council of
EurAsEC in December 2009. The CES, started in January 2012, aimed to implement
free movement of capital, harmonization of economic policy (including the adoption
of formal criteria for macroeconomic policy) and harmonization of labor, finance,
5
Decision of Interstate Council of EurAsEC, 9 February 2004.
6
Sometimes also referred to as Single Economic Space (SES).
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24 T. Bodenstein
health and safety standards, in order to create a level playing field. In November
2011, the decision was made to transfer the work of the Commission of the Customs
Union to the new Eurasian Economic Commission (EEC) located in Moscow.
The final regional integration move was made with the creation of the EAEU
on 1 January 2015. It is currently comprised of Armenia, Belarus, Kazakhstan,
Kyrgyzstan, and Russia. The agreement to form the EAEU was declared by the
Interstate Council of EurAsEC in November 2011. With the EAEU coming into
effect, both ECU and CES were merged and the EurAsEC formally ceased to exist
having served as a “parent” organization. The highest decision-making body of
the EAEU is the Supreme Eurasian Economic Council (SEEC), which consists of
the presidents of the five member states.7 It meets at least once per year and is in
charge of strategic decisions regarding the development of the EAEU. The Eurasian
Intergovernmental Council (EIC) includes the heads of governments and meets
twice a year. It decides on issues that cannot be resolved by the EEC. The EEC is the
main regulatory body where day-to-day work takes place. It consists of the Board of
the Commission and the Council of the Commission, which was called Collegium
during EurAsEC.
One argument in favor of Eurasian regional integration was the disruption
of economic ties that existed in the Soviet Union. But like the BRICS, the EAEU
countries are dissimilar in terms of economic size and have low levels of trade
interdependence (Borodin and Strokov, 2015). Russia’s GDP (in current prices,
2015) is more than five times bigger than all other countries combined, seven times
bigger than the second largest economy (Kazakhstan) and 190 times bigger than the
smallest economy (Kyrgyzstan). Trade patterns of the EAEU countries do not show
a picture of integration (Myant and Drahokoupil, 2008; Borodin and Strokov, 2015).
Export specialization patterns are partially similar with an emphasis on commodity
exports. Fuel exports account for over 60% of merchandised exports for the two larg-
est economies, Russia and Kazakhstan, while their share of foot export is only around
4 percent showing the structural similarity of their economies. Also, the share of
manufacturing exports is above 40% only in case of Armenia and Kyrgyzstan. In
Russia and Kazakhstan, manufacturing exports are below 20%. At the same time,
high-technology exports remain comparatively small for all EAEU member states.
Finally, Armenia and Kyrgyzstan have high shares of personal remittance due to
labor migrants who mainly work in Russia.
In addition, it is striking how little EAEU member states trade with each other.
The two largest EAEU members Russia and Kazakhstan are not their most important
7
http://www.eurasiancommission.org/en/Documents/broshura26_ENGL_2014.pdf
(accessed 6 February 2017).
b3508_V2_Ch02.indd 24 11-02-2020 13:11:18

trading partners. Russia’s exports to Kazakhstan are only a quarter of its exports to
the Netherlands.8 At the same time, Russia buys only slightly more than a third of
what Italy buys from Kazakhstan. Kazakhstan’s exports to Belarus — its second most
important trading partner within the EAEU — is only a fraction of exports to France.
However, Russia is the most important export market of Belarus and Armenia
with Kazakhstan playing a minor role. Only Kyrgyzstan, the tiniest of the EAEU
economies, seems to be economically more integrated with other EAEU countries.
Thus, the economic case for Eurasian regional integration or even a common market
is puzzling and the general picture is that intraregional trade has significantly fallen
over the past 20 years (Gurova and Efremova, 2010: 110).
Regional economic integration, however, can be driven by concerns other than
trade gains. Börzel and Risse (Chapter 6) observe that Russia is the only BRICS coun-
try that explicitly tries to secure a regional “sphere of influence”. Bratersky (2016)
frames the long-term benefits of the EAEU in geopolitical terms. Sergei Glazyev,
economic advisor to President Putin, stresses in his contribution on the Eurasian
Union Russia’s Eurasian character as a “distinct, ideological, political, historical and
cultural concept” (Glazyev, 2015: 84). He is not alone in this. President Putin also
referred in a seminal newspaper contribution to the Eurasian Union as “a power-
ful supranational association capable of becoming one of the poles of the modern
world…”, rallying the member states of the CIS around the Eurasian integration
project (Glazyev, 2015: 88).
The case for Eurasian integration is often framed in terms of geopolitics and
geoeconomics in the Russian debate (Andronova, 2016; Bratersky, 2016). From a
geoeconomic perspective, state agents control and use economic power to follow
a mercantilist agenda. It is “the use of statecraft for economic ends; a focus on
relative economic gain and power; a concern with gaining control of resources; the
enmeshing of state and business sectors; and the primacy of economic over other
forms of security” (Youngs, 2011, cited in Mattlin and Wigell, 2016: 128). Saivetz
(2012) argues that geopolitical and economic goals cannot be separated in Russia’s
policy toward its neighbors.
From this perspective, the driving force of Eurasian integration has been Russia’s
state officials. The concept of geoeconomics assumes that integration processes
are driven by political elites, not necessarily by societal preferences or organized
interest groups. In the case of Russia, both factors are rarely mentioned and barely
observable. According to Krickovic (2014), public support for Eurasian integration
is low and Russian nationalists even reject it. Tsygankov (2012) argues that Russia
8
Data on bilateral exports are retrieved from UNCTAD. http://unctadstat.unctad.org/wds/
ReportFolders/reportFolders.aspx?sCS_ChosenLang=en (accessed 11 May 2017).
b3508_V2_Ch02.indd 25 11-02-2020 13:11:18

26 T. Bodenstein
seeks to bind its neighbors into Russian dominated institutions to preserve its role
as a “regional great power”. The dominant actors for regional integration are the
political leadership and the elite (Krickovic, 2014). Elites focus on the perception of
Russia’s decreased international influence and the need to restore its role as a “great
power” (Trenin, 2011; Mankoff, 2009). Glazyev (2015: 85), for instance, reflects this
thinking by arguing that Russia has power of attraction in Eurasia because “Russia
is not just a country, but a civilization in its own right. Only China, India and Japan
can claim the same.”
Apart from great power instincts, the changing international environment
affects Russia’s regional options. One concern of Russia’s political elites was EU
expansion into the post-Soviet space via its European neighborhood policy, which
was perceived as creating a “cordon sanitaire” around Russia, further isolating it
(Krickovic, 2014). At the same time, political elites saw the decreasing global and
economic influence of the West as a call to engage more in regional integration, in
order to provide public goods that the West would not be able to provide anymore.
A final motivation was the hope that Eurasian integration would help modernize
Russia’s economy by becoming less dependent on Western markets and raw material
exports (Krickovic and Bratersky, 2016).
In the spirit of securing a sphere of influence, Russia’s negotiation style was
not without coercive elements. Although Glazyev (2015: 94) states that “[u]nlike
the EU or the US empire, which coerce other countries by force of arms and the
power of their reserve currencies, Eurasian integration is a voluntary association
of peoples […]”, Russia actually has frequently used its lever of energy subsidies to
increase support of its neighboring country for regional integration (Krickovic and
Bratersky, 2016). Russia’s use of energy prices and purchase of state assets in Belarus
is a case in point (Korosteleva, 2015). Similar negotiation tactics were employed
vis-à-vis Ukraine. Russia put pressure on Ukraine to merge its gas company Naftohaz
with Gazprom (Saivetz, 2012) and tried to prevent it from signing the Deep and
Comprehensive Free Trade Agreement with the EU.
At the same time, the project of the EAEU cannot be fully separated from
security concerns. The founding members of the EAEU are also members of the
Collective Security Treaty Organization (CSTO). The organization’s main purpose
is to maintain regime security, non-interference and state sovereignty. It has identi-
fied “separatism” as a common threat, as well as “information warfare” and “mass
psychological brainwashing”, under which falls information that is “harmful to the
spiritual, moral and cultural spheres of other states” (Jackson, 2014: 193). Armenia’s
membership in the CSTO was a key motivation for joining the EAEU (Delcour,
2015). In a similar vein, Kyrgyzstan’s final decision to become member of the EAEU
can be traced back to its growing security concerns over its citizens joining the ranks
of Islamist groups (Krickovic and Bratersky, 2016).
b3508_V2_Ch02.indd 26 11-02-2020 13:11:18

A final indicator that the EAEU may go beyond purely economic integration
are statements by Kazakhstan’s president Nursultan Nazarbayev who warned against
political integration of the EAEU as a threat to its country’s independence (Sultanov,
2015). In a similar vein, President Alexander Lukashenko of Belarus is opposed to
creating additional supranational structures that would undermine political inde-
pendence and sovereignty in Belarus (Sultanov, 2015). Geopolitical and economic
consideration are closely intertwined.
Interest group politics played a role in delaying Russia’s WTO accession. In the
case of the EAEU, however, their impact on decision-making was limited. First,
the EAEU founding states are authoritarian “limited access orders” with limited
and selective influence of interest groups on political decision makers (Collins,
2004; Frear, 2013). Also, the preparation phase to the EAEU was short and largely
driven by presidential administrations. The outcome of Russia’s WTO accession is
another reason why Russian interest groups were hardly active regarding the EAEU.
Russia’s external tariff has de facto become the external tariff of the ECU and later
of the EAEU. This also implies that other EAEU members have to raise their tariffs
(Hartwell, 2016). Thus, the EAEU is not a threat to Russia’s import competing
industry. For instance, following the creation of the ECU, Russian car exports to
Belarus and Kazakhstan have strongly increased.
The EAEU is expected — as did its predecessor EurAsEC — to increase trade
and investment among its member states and help modernize their economies.
The organization is still fresh and it is too early to thoroughly assess its effects. Tarr
(2016), however, estimates that the EAEU has trade-diverting rather than trade-
creating effects. For example, although Russia’s WTO membership has phased
in lower bound tariffs, which are also the external tariffs of the EAEU, the other
member states were forced to almost double their external tariffs when entering
the EAEU. Armenia’s unweighted average tariff rate was 3.5%, Kyrgyzstan’s 4.6%
and Kazakhstan’s 6.7%. The common unweighted tariff rate of EAEU is expected
to be 7.9% in 2020 (Tarr, 2016). This leads to a substantial increase of lower-quality
imports from Russia and partially displaces imports from other countries. From
a Russian perspective, this is an opportunity to expand its export markets, but on
the whole, the ECU and EAEU do not seem to be trade-creating (Borodin and
Strokov, 2015).
A more serious problem is existing non-tariff barriers on goods that are
reducing access to the Russian market, which appear as sanitary and phytosanitary
regulations and technical barriers to trade. Russia’s GOST system effectively serves
as the regulatory framework of the EAEU with approximately 20,000 applicable
standards. GOST is the Soviet organization of industrial standards and now operates
for all CIS member states (Tarr, 2016). The system of industrial standards has been
highly centralized and has not only covered product standards, but also production
b3508_V2_Ch02.indd 27 11-02-2020 13:11:18

28 T. Bodenstein
standards. For instance, when producers want to adapt production processes due to
market changes or technical innovation, this has to be negotiated with the regulators.
Mutual recognition of standards does not happen and the EU solution of “negative
regulation” — where a country’s regulations have to be accepted by all other EU
countries — is unlikely to emerge in the EAEU. Trade facilitation, by contrast, has
improved since the inception of the ECU (Tarr, 2016). The days it takes to export
from Armenia has fallen from 20 days in 2009 to 16 days in 2015, from 16 to 15 days
from Belarus, from 84 to 79 days from Kazakhstan and from 24 to 22 days from
Russia. The numbers are similar for time it takes to import.
Finally, commitment problems are still considerable. The members of the EAEU
have been involved in mutual trade conflicts since the creation of the ECU and often
non-tariff barriers were used for this purpose. For example, when the war in Ukraine
escalated, Russia unilaterally imposed “counter-sanctions” on Western products. The
other two members of the ECU, however, did not follow Russia’s “counter-sanctions”,
undermining the sense of a customs union (Knobel, 2015). Russia accused Belarus of
circumventing the “counter-sanctions” by transferring Western goods from Belarus to
Kazakhstan and selling them on the way on the Russian market. As a consequence, it
banned meat and dairy products from Belarus on grounds of health concerns, which
was countered by customs checks on Russian vehicles entering Belarus. The latest row
between the two countries happened in February 2017 when Russia reintroduced
border controls with Belarus following a partial liberalization of Belarus’ visa regime.9
Commitment to EAEU rules is also questionable in the relationship between Russia
and Kazakhstan. In March 2015, Kazakhstan stopped Russian imports of fuel and gas
because of Russian trade surpluses (Tarr, 2016). In addition, Kazakhstan put a ban
on meat products from Russia, arguing Russia violated safety standards. The move
was matched by Russian counter-restrictions. The EAEU, thus, has become effective,
but it is still far away from assuming a role as a regional economic block that can put
its weight in the governance structure of the global economy.
Conclusion
On 14−15 May 2017, China hosted the Belt and Road Forum (BRF) for International
Cooperation in Beijing.10 It was dedicated to China’s Belt and Road initiative that
promotes large infrastructure projects to establish trade routes from Asia to Europe,
9
Financial Times: “Belarus’s Lukashenko slams Russia over border controls.” https://www.
ft.com/content/4eeeb5ca-ea1f-11e6-893c-082c54a7f539 (accessed 22 February 2017).
10
Financial Times: “China seeks to ease Belt and Road strategy concerns.” https://www.
ft.com/content/ff13af84-395f-11e7-821a-6027b8a20f23 (accessed 27 May 2017).
b3508_V2_Ch02.indd 28 11-02-2020 13:11:18

including countries of the EAEU. Among the 29 heads of states that attended was
Russian President Putin. To ease Russia’s concerns about China’s engagement in its
Eurasian turf, both countries agreed to a regional development cooperation invest-
ment fund, as China was initially reluctant to link its initiative more closely with
Russia’s EAEU. The BRF reveals the limited impact of Russia’s regional initiatives on
a broader scale, even in its own “sphere of influence”.
Engagement with the BRICS has become Russia’s main strategy to find an
alternative to the West (Johnson and Kostem, 2016) and to have a say in GEG.
Common political initiatives, joint projects and a shared understanding of the key
principles of GEG are supposed to make the BRICS work as a cohesive group
(Toropchin, 2017). The underlying fundamental problem, however, is deep economic
and political asymmetry among the BRICS states and lack of economic interdepend-
ence. Russia cannot match China’s economic — and increasingly political — weight
(Kaczmarski, 2016).
In order to increase its global economic weight, Russia has embarked on two
major projects — WTO membership and Eurasian economic integration. The acces-
sion to the WTO took two decades. Support of key interest groups was lacking, and
after securing support of economic actors, the Russian government shifted priorities
and lost interest in the WTO. Eventually, Russia became a member of the WTO in
2012, but the crisis in Ukraine triggered economic sanctions against Russia and
“counter-sanctions” by Russia. This reduced the usefulness of the WTO for Russia’s
aim to influence GEG. The second project — regional integration in Eurasia — also
took more than two decades to complete. The EAEU became effective in 2015.
Although it is too early to assess the success of the project, the organization is faced
with ongoing commitment problems by its members.
To better understand the present and future of Russia’s role in the global
economy and GEG, research should focus on various interrelated issues. Russia
is trying to promote the role of the BRICS (Toloraya and Chukov, 2016), but it is
unclear how economic and political heterogeneity has impacted on its cohesiveness.
In the past, voting cohesiveness of the BRICS in the UN General Assembly has not
increased (Hooijmaaijers and Keukeleire, 2016). Has political cohesiveness of the
BRICS improved since then or does economic heterogeneity undermine it? Russia’s
WTO membership is another field of investigation. How are the current economic
sanctions reinvigorating import-competing lobby groups in Russia? How do Russian
“counter-sanctions” affect the country’s role and position within the WTO?
With respect to the EAEU, its future development depends both on its abil-
ity to tie the hands of the member states and on China’s Belt and Road initiative
(Andronova, 2016). The initiative is attractive to the Central Asian states. To the
extent that membership of EAEU may clash with full engagement in the Belt and
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30 T. Bodenstein
Road initiative, the EAEU may become the less attractive option. Trade links within
EAEU are only slowly increasing. The challenge of commitment problems is con-
nected to this. These problems can only be credibly overcome if more supranational
power is granted to the EAEU’s common institutions — a move that has been ruled
out by Kazakhstan and Belarus thus far. It is important to understand how increasing
economic interdependence may foster supranational governance in the EAEU. The
WTO and the EAEU are the two institutional pillars that allow Russia to become
part of GEG. If the BRICS want to influence the future rules of the global economy,
Russia has to consolidate its current role in GEG first.
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CHAPTER 3
India and Global Governance
Rajesh Kumar
Department of Political Science, National University of Singapore, Singapore
Introduction
India’s standing in the global economy presents a paradox. In the 1770s, on the eve of
the Industrial Revolution, India was the second largest economy in the world, with
more than 20% of the world output. In the 1970s, this share fell to 3%. Economic
stagnation of nearly two centuries due to colonial rule, an inward looking economy
after independence in 1947, and an interventionist state are main reasons, according
to a report by Goldman Sachs (Goldman Sachs Report, 2007: 11).1 The combined
effect was decades of low growth, which is captured pejoratively by the phrase
“Hindu rate of growth”. The Indian economy, however, began to catch up since the
1990s, when economic liberalization set up its integration into the world economy.
And, since 2001, it has been one of the fastest growing economies of the world, which
is also the reason it is part of the BRICS group.
My purpose is to assess India’s position in the BRICS and in the global politico-
economic governance. The question is whether India can sustain its growth given
its problems, some of which like poverty, for example, have domestic as well as
international dimensions. On the international stage, India’s behavior has seen a
1
One should note that India’s territorial extent was much larger in 1770s. But even if we
adjust the territorial realignments that took place during the 18th through the 20th centuries,
the paradox remains valid. The point is simply that its share in global economy has shrunk
as compared to the past when it commanded the status of a major contributor.
33
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34 R. Kumar
change — from the policy of “strategic restraint”, which it followed until the 1980s,
to that of a policy of “strategic alignment”, which it has followed since the 1990s.
The policy of “strategic alignment” is more prominent in political affairs than the
economic, whereas India’s rise and its position in the global governance will depend
on how successfully it can maintain balance between the two.
India in the BRICS

BRICS is a coalition of emerging economies. Policy analysts have projected the
coalition as the new “engine of growth” for the world economy, something like the
G7 of the post-World War II global order.2 The significance of rise of the coalition is
two-fold: first, it challenges the Western domination in setting the global governance
agenda, and second, it brings hope for increasing cooperation among the countries
of the South, and consequently for redistribution of power in the existing institu-
tions that direct the global “idea and practice of planning” (Gorman, 2014: 471).3
If the BRICS agenda succeeds, we would witness rebooting of the institutions of
“Washington Consensus”, namely, the United Nations, the International Monetary
Fund (IMF), and the International Bank for Reconstruction and Development
(World Bank). This would invite “a rethinking of power symmetries” with respect to
global governance (Taylor, 2009: 46), and, incentivize establishing new institutions
such as the Asian Infrastructure Investment Bank (AIIB), and the New BRICS Bank,
all reflecting “alliance building” among the countries of the global South. And this
would also mean some of the world’s most populous countries, such as China, India,
and Brazil, would be taking the center stage at the global governance platform.
Encouraging trends have backed these expectations. In 2001, a Goldman Sachs
report projected that these countries would contribute to 10% of world GDP for the
2
A Goldman Sachs paper, “Building Better Global Economic BRICs” (30 November 2001)
articulated the acronym, BRICs in 2001 (O’Neill, 2007: 5). Pele (2007: 4) traces the origin of the
acronym to another 2003 paper by Goldman Sachs. South Africa joined the group in December
2010. Its membership was formally confirmed only at the third BRICS Summit in April 2011.
3
BRICs was promoted as an “investment” guide initially, by the economist Jim O’Neill
of Goldman Sachs. The concept looked attractive because it brought together the largest
emerging markets which showed promise of high growth and relative scale of consumptive
power. These emerging markets were identified by their GDP (at purchasing power parity
(PPP)) and by the productivity of their big populations. These countries began identifying
with the concept politically, and their heads of government met for the first time in 2009, at
Yekaterinburg, Russia. South Africa participated in the 2011 Summit meeting in China. It
has emerged as a political economic grouping now, with the potential to alter the dynamics
of global order and governance (see Beausang, 2012: 2; de Coning et al., 2015: 1).
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India and Global Governance 35
first decade of the 21st century. By 2007, the combined share was already 15% of the
world economy. The coalition had approximately 3.5% share in the global capital
market in 2001−2003; its per capita income ranged from about US $500−4500; and
its annual average GDP growth rate exceeded 6% against a world average of 3.7%.
This trend continued for a decade (Pele, 2007: 4−5; Goldman Sachs Report, 2003).
The BRICS coalition is projected to overtake the combined GDP of the G7 by 2035
(Goldman Sachs Report, 2003; 2007).4
The projection may hold well if the coalition is able to sustain its current
performance. Cary Huang (2015) notes that the BRICS economies drive global
growth today, accounting for over 30% of the total. In 2014, the coalition registered
a combined nominal gross domestic product of US $16 trillion approximately, which
was about 20% of the global output. The corresponding share of the G7 countries
dropped to less than 50% in the same period, from the previous share of 65%. BRICS
countries hold US $4 trillion in foreign reserves, almost half of the global total,
whereas G7 control only 20%, which would fall to just 8% if we exclude Japan’s share.
Making a macro-level analysis, Cary Huang (2015) argues that these developments
could mean “the significant tilting of gravity in the global economy”.
The data from individual members of the coalition, however, may appear to
be disappointing. China is currently growing at its slowest pace in 25 years, and
its push for making BRICS a “free-trade” zone may not find support; the member
countries are burdened by cheap Chinese imports, resulting in big trade deficits with
China. Brazil, Latin America’s largest economy at US $1.35 trillion, had a dismal
growth in 2015, and may contract about 3% in 2016. Russia is hit hard by Western
sanctions and by the slump in oil prices. Its economy remains weak, its GDP shrank
3.7% in 2015. IMF predicts a further contraction of 0.8% in 2016 and a modest
growth in 2017 for Russia. South Africa’s economy is the smallest among the BRICS
coalition and is troubled also by a low credit rating, an unstable currency and steep
unemployment rates (CNBC, 2016).
India’s growth has followed a different trajectory in the last few years. Its US
$2.38 trillion economy is growing at 7.5% annually, fastest of the five-member
countries of the BRICS (CNBC, 2016).5 According to the Global Competitiveness
Index 2016 of the World Economic Forum, India has become the second most
4
Projections of the period before 2010 do not include South Africa. But the average values
for the period will not be significantly altered if we assume South Africa to be part of the
coalition from the beginning. The current projections support this.
5
The Indian Government’s budget document of 2017 shares this view. It notes that the
Indian economy has been robust to mild shocks and that, according to the IMF, it will be
“one of the fastest growing major economies in 2017”. Source: http://indiabudget.nic.in/
ub2017-18/bh/bh1.pdf (accessed 27 December 2017).
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36 R. Kumar
competitive BRICS economy, next to China. India’s competitiveness improved

the fastest in 2015−2016, jumping 16 places to rank 39th among 138 countries on
the index (The Economic Times, 2016). The report notes improvement in public
institutions, in transparency of the financial system, and in goods market efficiency,
business sophistication and innovation. Improved monetary and fiscal policies and
lower oil prices have stabilized the Indian economy which now boasts the highest
growth among G20 countries, and its growth may also help the BRICS story unfold
as per the script.
The Global Competitiveness Index 2016 report is significant for two reasons.
First, the report indicates that the BRICS story may not depend on the growth of
China alone anymore. Although China has remained top among the BRICS coali-
tion at 28 rank, the gap with its peers is closing. India, ranked 39, has improved its
performance, so have Russia and South Africa, moving two places up to 43 and 47,
respectively. Brazil has shown a decline, falling six places to 81. Second, the report
identifies international trade and openness to foreign investors as major factors for
economic growth. This may induce cooperation on infrastructure and finance, as
well as on energy, climate change, and sustainable development. India is quick to
realize the importance of “cooperation”, and pressed for a New Development Bank
(NDB) in 2012 at the New Delhi summit. The NDB and a BRICS Contingency
Reserve Agreement (CRA) were institutionalized at the sixth BRICS Summit in
Fortaleza, Brazil in 2014.
India’s commitment to BRICS looks steady, but its fastest growing economy
is also home to most poor people of the world, with nearly half of its 1.3 billion
population living on less than US $3.10 a day (CNBC, 2016). Corruption, poor
public health, inflation, and inefficient tax regulations could neutralize its economic
gains. According to the Transparency International’s Corruption Index of 2012,
India ranks 94th out of 176 countries. The Human Development Index of the UNDP
places it at 136th out of 186 countries (Wulf and Debiel, 2015: 29). And, although
India appears to be reaping benefits of high growth, which is largely attributed to
its new export-optimism and economic liberalization, the policy itself is connected
to factors that drive its domestic politics. India’s position in the global governance
remains an open question.
India in the Global Governance: An Assessment

India’s economic performance mirrors its political outlook. Two distinctive phases
could be identified for assessing its role in global governance: (a) 1947−1990 (the
Cold War years) and (b) 1991 onwards (post-Cold War years). The first phase, also
a period of low growth for India, was the period when Jawaharlal Nehru’s idealism
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(1947−1964) and Indira Gandhi’s realism (1966−1977 and 1980−1984) determined

India’s political and economic strategy. India followed a policy of non-alignment
politically, guided by the belief that for securing its objectives, it needed to keep away
from the “bloc” politics of the Cold War. The imperatives of a low growth economy
could have also led to this policy. India presented a bleak picture in 1947, at the
time of its independence. It accounted for less than 2% of global wealth, whereas
it had to provide for 345 million people. The British rule had brought a degree of
industrialization, but the levels of poverty also deepened during the same period
(Malone et al., 2015). It is difficult to imagine that India accounted for 24% or 25%
of global production in the 1700s, at the time when the British rule was expanding
in India (Maddison, 2003; Washbrook, 2007). Maddison estimates that the United
Kingdom’s GDP amounted to little more than 11% of India’s in 1700, but by 1947
it exceeded India’s by half. While India’s GDP per capita remained essentially flat
during the 200 years of colonial rule, the United Kingdom’s GDP per capita increased
five-fold (see Malone et al., 2015: 12).
These conditions may not have favored J. L. Nehru, India’s first Prime Minister
and his colleagues to take bold steps. Most studies have pointed out that India was
forced to adopt a defensive stance, with an attitude for “export-pessimism” (Tellis,
2016; Baru, 2015). Yet, being non-aligned could be a choice of “strategic restraint”,
less a defensive stance. The policy of non-alignment paid rich dividends. India
enjoyed autonomy in matters of security and material well-being; it survived the
Cold War without compromising on its territorial integrity; and, it established a good
political standing among the “Third World” countries through the Non-Aligned
Movement (NAM) — a position that largely forms the basis for claiming permanent
membership of the UN Security Council today. On the economic front, India created
impressive industrial and technological capabilities, while remaining by and large
away from the global market (Tellis, 2016).
There is another reason I characterize India’s behavior during the Cold War years
as “strategic restraint”. There is evidence that it secured a latitude of maneuverability
by being “non-aligned”. Michal Kalecki suggests that by the policy, India’s behavior
was that of the “clever calf that sucks two cows” (Kalecki, 1993 (1964): 10; Baru,
2015: 330). India’s share of bilateral and multilateral aid increased during the Cold
War years, but its usage was directed at different sectors. The US aid was focused on
agriculture, while the Soviet aid was directed at creating public sector industry and
defense manufacturing, and the World Bank aid was used for building capacities in
irrigation and power. India’s “strategic restraint” was a self-interested behavior in
response to its political and economic developmental needs.
The decade of 1960s is particularly significant. India faced an acute food shortage
in 1965−1966, when the monsoons failed and a war with Pakistan had depleted its
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38 R. Kumar
foreign exchange reserves. India was dependent on food imports from the US, which
expected India to open up its economy and devalue the Indian currency. At the
same time, the US assisted India’s Green Revolution, with the objective of reducing
India’s dependence on imported food. The 1967 devaluation of Indian rupee strained
India’s relationship with the IMF and the World Bank, as India felt the US had not
been supportive enough. Only a few years later, it entered into formal alliance with
the Soviet Union, reoriented the NAM with the demand for a New International
Economic Order, and began showing more interest in the G77, the largest forum of
developing countries. Its reaction to policy recommendations of the Bretton Woods
institutions, the IMF and the World Bank, which favored the debtors’ countries to
reduce budgetary and fiscal deficits, privatize public-sector enterprises, and liberalize
export−import policy turned hostile.
It is true that India’s growth rate was an abysmal 3.5−4% until the 1980s, and
its share in the world trade for the same period declined from 2% in 1950 to 0.5%.
But there was no certainty that it could have been higher had it opened its economy
with weak economic fundamentals. Politically, it could have gone the way other
postcolonial countries in the subcontinent went, falling to military coups or becom-
ing dependent regimes of the Cold War superpowers.
But the decline of the USSR in 1989 altered the global context for India. India was
induced more than ever toward competitive economic alliances, and this outlook was
reflected in its policy of economic liberalization. The dominant view is that domestic
and international compulsions forced India to open up its economy in 1991. With
the collapse of the Soviet Union, India lost access to Eastern European markets, the
rise in global oil prices inflated its imports bill, and due to Gulf War, over 100,000
Indians had to be repatriated from the Gulf region, disturbing remittance inflow
into the Indian economy (Robinson, 2011: 2). The balance of payments crisis of
1991, which is cited as the main reason for economic liberalization, was “triggered”
in part by shifts in the global balance of power and the refusal of the Organization
for Economic Co-operation and Development (OECD) economies to help India
overcome the crisis until it undertook major structural reforms (Baru, 2015: 332).
India had to change its political and economic outlook. India reached out to the US,
by moderating its views on the Afghanistan situation and the Iraq−Kuwait crisis. It
changed its views on the Association of South−East Asian Nations (ASEAN), which
it used to consider as a pro-US group, and sought to enhance economic cooperation
with the group through what is known as its “Look East” policy. The alignments show
commitment to address vulnerabilities in the unipolar world, and to counteract the
Chinese dominance in South and Southeast Asia (Wulf and Debiel, 2015: 28).
India also extended diplomatic recognition to Israel, which has since become
a significant defense and strategic partner, besides building partnerships with the
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countries of the Middle East. One commentator notes that India’s curious relation-
ship with the Middle East starts with calling it “West Asia”, as though it were trying
to “leapfrog” the stagnant economies of Pakistan and Afghanistan, to connect to the
vibrant Persian Gulf (Joshi, 2015: 322). India has important stakes in the region: the
Persian Gulf alone is its largest trading partner, a source of India’s oil and gas needs,
and home to 7 million Indians whose share of inward remittances constitute almost
50% of the total. Shashank Joshi notes that India’s posture in the Middle East has
remained “broadly unchanged”, whose hallmarks may be understood as “reactive-
ness” and “incrementalism” (Joshi, 2015: 322). This may not be a correct view. In
the 1990s, the Gulf War and the Oslo Peace process on Israel and Palestine, revealed
divisions between the Arab Muslim world. This gave India diplomatic leeway in the
region (Blarel, 2014). India changed its earlier stance of the 1950s and 1960s, when it
regarded Egypt as the legitimate spokesman for Arab interests. The widespread Arab
criticism regarding the Palestinian Liberation Organization’s (PLO) support of Iraq
during the war and a series of Arab–Israeli peace conferences in 1991 mitigated the
negative fallouts of India opening up to Israel. This also helped India move from a
policy of quasi-privileged partnerships with a few local players in the Middle East,
to a policy of multi-engagement with the region as a whole (Blarel, 2014). India has
developed relations with each country bilaterally, showing “restraint” in taking sides
in inter-Arab disputes, at the same time pursuing commercial interests with all actors
in the region, showing commitment to its political and economic interests. Strong
strategic partnerships have come up in the last two decades, with Iran, Saudi Arabia,
the United Arab Emirates (UAE), and the Gulf Cooperation Council (GCC), with
emphasis on cooperation in counter-terrorism and anti-piracy.
While opening up its economy to foreign trade and investment, India reached
out to both developed and developing countries, especially its immediate neigh-
borhood. It adopted a principle of “non-reciprocity” with the SAARC countries,
by which it committed to lower its tariff barriers for goods and services from the
neighboring countries, without insisting for the same privilege in return. India
placed its economic development at the center of the South Asia region by suggesting
that the growth of India would benefit the neighborhood. The seed of this idea could
be seen in the 1990s policies of the Narasimha Rao government which liberalized
the Indian economy, but the idea got a systematic shape through what came to be
known as “Gujral Doctrine” (Baru, 2015: 333). India also changed its views on the
trade negotiations under the General Agreement on Tariffs and Trade (GATT),
from opposing the Uruguay Round of negotiations to becoming one of the founder
members of the World Trade Organization (WTO).
Although India may have been “forced” to liberalize in 1991, it managed its
integration with the world economy rather well. The Indian economy grew at the
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40 R. Kumar
rate of around 5.5% from 1980 to 2000. This acceleration of growth was associated
both with rise in domestic savings and investment rates and with an increase in
the share of trade in India’s national income (Baru, 2015: 335). From 2000 until the
transatlantic crisis of 2008, Indian economy grew at an average of 7.5% per year, with
an all-time high of approximately 9% during 2003−2008. This acceleration of growth
and the rise in India’s share of world trade, to around 1.5% by 2010, prompted it to
conclude a series of Free Trade Agreements (FTAs) and furthering opening up to
Foreign Direct Investments (FDIs).
India’s policy of “strategic restraint” has now given way to what I have called
“strategic alignment”, which may be noticed between the two phases of its political
and economic performance. One can claim in hindsight, that India could have
achieved a high growth rate in the first phase (1947−1980) had it not insulated its
economy from the global market. This view is built upon the spectacular growth
of 7.5–9% of the subsequent phase, which India registered after integrating its
economy with the global economy. This view assumes that it was the balance of
payments crisis that forced India to open up to the global market, and that it turned
out to be a blessing in disguise for it brought high growth rates. This could only be
partially true. Rahul Mukherji’s work shows that opening up in 1991 was as much
a choice for India, as was deciding to remain insulated in 1966, when it faced a
similar balance of payments crisis. Mukherji’s point is that “ideational” change in
the state policy paradigm explains two different responses at different time periods
to a similar situation. When the technocracy was averse to India’s globalization at
the time of the 1966 balance of payments crisis, India refused to follow the dictates
of the World Bank and “resumed the most severe version of autarky and economic
regulation after 1969” (Mukherji, 2014: 461). In 1991, when the idea of liberalization
and deregulation found favor with the policy technocracy, India did not hesitate to
open up its economy.
India in the Regional Political Economy

The regional dynamics of India’s engagements resembles a complex game, in which
every actor seeks to advance its own interests. These dynamics involve India’s
neighborhood, notably countries like Pakistan and China, with which it has fought
wars over territorial demarcations, and the US, which was sympathetic to Pakistan
during the Cold War years, but has been slowly getting closer to India in the last
decade and a half. Kanti Bajpai characterizes the regional dynamics of India as that
of a “protracted conflict”, and locates its cause in the “postcolonial sovereignty”
of the actors (Bajpai, 2015: 21−25). In the case of India and Pakistan, the conflict
originates in the respective “cartographic imaginations” of nationhood, through
b3508_V2_Ch03.indd 40 11-02-2020 13:11:41

which India views Kashmir as a symbol of its secular nationalism, whereas for
Pakistan, it remains a symbol of religious nationalism, as also a way for reaffirm-
ing the “two-nation theory” which formed the basis of its own creation. Kashmir,
according to this theory, substantiates the view that Muslims in the northwestern
part of the Indian subcontinent belong to a Muslim nation, and should be freed from
Hindu domination. Pakistan’s irredentism over Kashmir follows this logic (Ganguly,
1995). Other scholars have viewed India’s claims as part of the problem (Varshney,
1991). Kashmir’s economic and strategic importance may also be debatable, and that
India’s reaction may be exaggerated as well (Bajpai, 2015: 24).
There is a territorial issue between China and India also, over the validity of the
Johnson Line and MacMohan line, and over the status of Tibet, whose accession to
China is questioned in the same way, as is Kashmir’s integration to India (Garver,
2001). India makes no irredentist claim on Tibet, but the Indian sense of responsi-
bility towards Tibetans, especially giving political asylum to the Dalai Lama, raises
concerns for China. China claims some parts of the northeastern Indian territory of
Arunachal Pradesh and in the Aksai Chin region of Ladakh. Its “all weather friend-
ship” with Pakistan raises suspicion in India, over its position on Kashmir, and on
larger geopolitical issues of the region. The US involvement in the region dates to the
Cold War years, when its stance on Kashmir was seen favoring Pakistan’s position.
India viewed the US policies as “constraints” on its own regional maneuverability, as
the threat of the American intervention in regional conflicts was always a possibility.
India, Pakistan, and China are nuclear-enabled, which makes the region a potential
negative sum game, where every actor feels that the other is benefiting at its cost.
The conflicts are likely to remain “protracted”, because the conventional military
weakness of one actor neutralizes the stronger actor’s capacity to make it a zero-sum
by changing the territorial status quo to its advantage. Political solutions are desirable
but look distant, given the domestic public’s emotions attached to the claims.
Between India and its four other neighbors, such as Nepal, Bhutan, Bangladesh,
and Sri Lanka, there exists asymmetry in territorial and population size, levels of
economic growth and military capacities. India’s relation with them, with the excep-
tion of Bhutan, has been characterized by mistrust and suspicion until the 1990s,
with brief periods of convergence of interests (Murthy, 2000: 1412). There was a
fear in Nepal, governed by monarchy, and Bangladesh, under the military rule, that
democratic India could influence similar elements in their societies. Anti-Indianism
fashionably overlapped with their nationalisms. The ruling elite adopted anti-India
policies and developed linkages with external powers to bolster their own position
in the country and in the region. India saw this attitude as insensitivity to its own
interests. India and Sri Lanka shared different perceptions on the Tamil ethnic crisis
in Sri Lanka and over adopting measures for solving the crisis. With Bhutan, India’s
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42 R. Kumar
relation has been relatively steady, with economic grant assistance from India for
its 5-year plans, joint partnerships for hydroelectricity, and mutual appreciation
of each other’s security concerns. Hydropower is seen as main economic activity
in Bhutan that could make it self-sufficient, but growing and unsustainable trade
imbalances, and setbacks in the hydro projects promised by India raises concerns
for Bhutan (Langsam, 2017).
The regional geopolitical dynamics affects economic engagements among the
actors also. After the Indo-China war of 1962, trade between the two officially
resumed in 1978 and the Most Favored Nation Agreement was signed in 1984, as
Alka Acharya points out, but it was merely worth US $339 million in 1992. Once the
two countries decided to enhance economic partnership, without prejudice to each
other’s political positions on territorial boundaries for which special representatives
were appointed, trade levels rose to US $8 billion by 2003. In 2004, India became
China’s 11th largest trade partner, with the volume increasing up to US $13.6 billion.
The trade target of US $20 billion by 2008 was reached 2 years ahead of schedule,
and trade of US $60 billion worth was reported in 2010. The volume was expected to
cross 100 billion in 2015. In 2000−2012, the trade between the two was fastest grow-
ing (Acharya, 2015: 364). The Indian export basket is however limited, comprising
primary products mostly, and trade deficit for India has been rising since 2005−2006.
India has been demanding market access to Indian pharma and IT where it has
advantage over China, but the progress is slow on these accounts, as is the Indian
efforts for improving its infrastructure and manufacturing. The political leadership
of both countries has discussed creation of a China−India common market based
on the model of European Union, which could be the largest economic system in
the world, if realized, with a consumer base of 2.5 billion (Ambrose, 2017).
Trade relations between India and Pakistan has been held hostage to the four
wars (1947, 1965, 1971, and 1999). Both have fought over Kashmir and the libera-
tion of Bangladesh. Localized and low intensity conflicts have been common, and
Pakistan’s policy of cross-border terrorism continues to needle India. The low level
of trade could be the result of Pakistan seeking to “protect” itself by keeping India
at arm’s length (Basrur, 2015: 378). Trade between the two began to increase after
the 2001−2002 crisis, when Pakistan realized that nuclear capability has made
confrontation a negative game. Trade was a mere US $521 million in 2004−2005,
which grew to US $2.35 billion in 2012, although the potential for growth is nearly
ten-fold (Mehdudia, cited in Basrur, 2015).
India−Sri Lanka economic linkages are growing with a big boost after conclu-
sion of the India−Sri Lanka FTA in 2000. Trade has multiplied as much as 8 times,
crossing US $5 billion in 2011−2012 (see Suryanarayan, 2015: 422). India’s economic
engagements with Nepal include hydroelectricity projects, and trade in goods and
b3508_V2_Ch03.indd 42 11-02-2020 13:11:41

services, with the Nepalese goods enjoying free access into Indian markets (Muni,
2015: 403). India accounts for nearly 60−70% of Nepal’s external trade, but Nepal
has trade deficit problem. Indian FDI is reported to be almost 50% of Nepal’s total
in 2013. Trade between India and Bangladesh has risen from US $1 billion in 2001
to $4.5 billion in 2012, of which Bangladesh’s share is US $0.5 billion (Datta and
Srinivasan, 2015: 394). River water-sharing, illegal migrants from Bangladesh remain
contentious and emotive issues, and rise of Islamic fundamentalism in Bangladesh
poses a security challenge to India. India and Bangladesh adopted a land and
boundary agreement in 2015, which could address border issues affecting trade
between the two. The economic relationship of India with its neighbors is captive
of the political climate and domestic public opinions. The lackluster performance of
the South Asian Association for Regional Cooperation (SAARC), the South Asian
Preferential Trading Arrangement, and the South Asian Free Trade Arrangement
failed to break down trade barriers.
The challenge for India, however, comes from the increasing Chinese influence
in the region. China’s growing investment in Pakistan, construction of the Gwadar
port, and supplying of civil nuclear plants in violation of the Nuclear Suppliers
Group (NSG) rules are concerns for India. The Chinese presence and infrastruc-
ture building activities in the territory ceded to China by Pakistan in Pakistan
Occupied Kashmir renews prospects of political conflicts between India and China
(Garver, 2001; Acharya, 2015: 366). China’s investments in Sri Lanka, Bangladesh,
and Nepal have been seen as challenging the traditional Indian influence in the
region. Ashlyn Anderson and Alyssa Ayres note that over the past decade China
has become a significant partner to the South Asian countries, forging ties through
trade, diplomacy, aid, and investment (Anderson and Ayres, 2015). China overtook
India as Bangladesh’s top trading partner in 2005, displacing many Indian goods in
Bangladesh. China’s trade with Nepal and Sri Lanka still lags India’s, but the gap is
not too wide. China’s Silk Road project is likely to enhance its influence in the region,
which puts it in competition with India over “economics of influence” in South Asia.
Christian Wagner argues that India’s position in South Asia, as compared to China’s,
is disadvantageous, and blames the lack of clarity on the part of India to pursue its
regional ambitions seriously (Wagner, 2016).
Recent political skirmishes between India and China over Dokhlam, a Bhutanese
territory which India considers strategically important and vital for geopolitical
interests, may suggest toward the “politics of regional influence” also. China’s road
construction in the region, which it calls its own, was met with resistance by India
and Bhutan. A shrill propaganda by the Chinese state-controlled media followed,
pointing to Indian “intrusion” in its territorial sovereignty, but China did not find
much support from other powers of the world. The Indian and the Chinese troops
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44 R. Kumar
decided to disengage after a standoff that lasted for more than two months. As BRICS
members, however, both resolved at the ninth summit held in September 2017, for
“healthy, stable” ties between China and India.6 The ninth BRICS summit discussed
issues such as terrorism, trade and cooperation in agriculture, energy, environment,
climate change, sports, and culture. Significantly, the Pakistan based terrorist groups
were identified along with other organizations for the first time in the declaration
expressing “concern” on the security situation in the region and violence caused
by these outfits. One would notice that India’s “strategic alignment” policy would
enable it to combine assertiveness of its role along with seeking convergence in
other areas of cooperation, without allowing the political considerations to trump
the economic ones.
Rising Power Ambitions and the Domestic Constraints

India’s impressive economic growth during the last two decades, which continued
above world average even during the slowdown of 2007−2008, has bolstered its
ambition of becoming a “leading player”.7 Its “strategic alignments”, political and
economic, are directed toward this object now. Consider South-East Asia, where
India follows a policy of Act East now, as compared to the Look East policy of 1990s.
In fact, it has proclaimed itself as a “new” player in Southeast Asia by making clear
its intention in preserving freedom of navigation in the South China Sea. At the
same time, it has intensified ties with the ASEAN to neutralize the growing Chinese
assertiveness in the region. In a similar way, it has shown determination to secure its
interests in the Indian Ocean Rim despite a new Chinese presence in these waters.
It is a conscious decision on India’s part to invest in enhancing naval capabilities for
power projection around the Indian peninsula. It is the same understanding which
motivates India to build engagements with Iran and the UAE simultaneously, and
make efforts to win over Saudi Arabia, long considered as Pakistan’s friend.
India recognizes that Pakistan is likely to continue to pose intractable prob-
lems, through proxy means such as cross-border terrorism, or through China’s
influence in global political economy where India is seeking “redistribution” and
“recognition”. China has scuttled India’s membership to the Nuclear Suppliers
6
The Indian Express (5 September 2017) reports the Chinese President, Xi Jinping telling
this to the Indian Prime Minister, Narendra Modi.
7
Although India’s foreign policy has been directed toward this goal for quite some time
now, the Indian Prime Minister articulated India’s role as a “leading player” in his message
to Indian Missions on 7 February 2015. The document can be accessed through this link:
http://pib.nic.in/newsite/PrintRelease.aspx?relid=115241 (accessed 27 December 2017).
b3508_V2_Ch03.indd 44 11-02-2020 13:11:41

Group (NSG) for now, ostensibly for evolving consensus over “fair” and “transpar-
ent” criteria for the non-NPT signatories w illing to join the group. It is believed
however that China acted to promote interests of its “all-weather” friend Pakistan
and to block India’s rising influence. A similar motive guides its “technical hold”
on India’s initiative in the UN Security Council to get Pakistan sponsored terrorists
designated as global terrorists. India has refused to be distracted, rather has gone
ahead in stabilizing the subcontinent with renewed outreach to its immediate
neighbors. If SAARC could have no summit meeting in 2016 because of Pakistan’s
support to cross-border terrorism, the Bay of Bengal Initiative for Multi-Sectoral
Technical and Economic Cooperation (BIMSTEC) advanced the engagement
among the neighboring countries, leaving out Pakistan.
India wants to claim a leading role at the global stage. With this understand-
ing, India reaches out boldly to create an intra-Asian balance against China. It has
forged a new partnership with Japan. It maintains an even relationship with Russia
despite the latter’s growing proximity with China and Pakistan. At the same time,
it does not hesitate to engage China through trade and economic partnerships, and
through a visiting membership to the Shanghai Cooperation Organization (SCO),
considered as the zone of Chinese influence. Other important partners like France,
Germany, the United Kingdom, and Israel get no less attention. The most remark-
able partnership to have evolved in recent times is the one with the USA, which has
put its weight behind India’s ambitions. There is a temptation to support India, a
like-minded democracy as a counter-weight to the authoritarian China. The George
Bush presidency began consciously to assist the growth of Indian power. China’s
military buildup and modernization of its army, and its tactics of intimidating the
smaller states in Southeast Asia on its claims over islands in the South China Sea
has brought India and the US closer. The US has been a key destination for India’s
skilled labor, it has supported India with capital and expertise, and it has declared
its support for India as a permanent member of the UN Security Council. The US
and India are partners for a civil nuclear cooperation arrangement. This agreement
facilitated India’s entry into the Missile Technology Control Regime (MTCR), and
help develop negotiations for India’s entry into the NSG. India has been actively
seeking “democratisation” of the UN Security Council, as part of the G4 which
includes Japan, Germany, and Brazil, because it believes that the Council should
reflect the reality of the 21st century. All permanent members of the UN Security
Council, including China, acknowledge in public that India should be playing a
greater role in international affairs.
One may note that India’s geopolitical strategy has been commendable. Consider
India’s power projection in the Indian Ocean Rim, where China is also expanding its
presence. Indian armed forces are large and perhaps adequate for frontier defense.
b3508_V2_Ch03.indd 45 11-02-2020 13:11:41

46 R. Kumar
Moreover, in view of the assessment that the days of full-scale wars are over, there
is little incentive for India to increase its army’s strength. But if India has to play a
bigger role in the Asia-Pacific, modernizing its armed forces is imperative. The cur-
rent and prospective defense budget constraints imply that India has been unable to
negotiate with its recalcitrant and inefficient bureaucracy. This consequently limits
its capacity to provide the protective reassurance sought by many smaller states in
the Asia-Pacific. To be sure, India spent US $10.5 billion between 2004 and 2007 on
creating the world’s fourth largest military, and it was expected to spend more than
US $45 billion on arms purchases between 2009 and 2013 to modernize its army
(Robinson, 2011: 5). Its advanced missile technology makes it capable for planning
long range ICBMs that could target China and the US But it must “court” the US
for its objectives in the Indian Ocean (Berlin, cited in Robinson, 2011: 5). The US
remains the key external actor in the region, with its military presence stretching
from North and East Africa to the Persian Gulf and Arabian Sea, east to Singapore,
and southwards to Diego Garcia.
Experts noting India’s potential to become a global power do not doubt India’s
growing political weight. The position of India in global governance is that of a
“swing-state”, by which it is meant that India is not strong enough to be an inde-
pendent pole, but its presence in any international grouping would strengthen that
group significantly. The essence of being a “swing” state is merely being a balancing
power. A balancing power does not command the same degree of autonomy as
say, an independent pole like the US commands in the global polity today. As an
independent pole, the US is a “system-maker”, whereas as a “swing” state India is
only a “system-shaper”. As a “system-shaper”, India can influence various issues, but
cannot determine outcomes against the core inclinations of the great powers. Clearly,
it is the preferences and strategic objectives of the US which define the configura-
tion of the global system, and this capability gives to it a preponderant position in
global affairs. There is a clear “inconsistency” in India’s own projected role and its
recognized status in the global affairs.
Concerns are also expressed over its ability to sustain its economic growth. State
power may be understood as a composite of the following: (a) material resources;
(b) the ability of the state to extract these resources from its society and use them
for defined political goals; and (c) influence over outcomes (see Tellis et al., 2001).
The rising powers’ primary influence comes from managing its economic growth,
which may help achieve outcomes sometimes disproportionate to its actual material
power (Hart and Jones, 2010: 65−76). The first two attributes remain important for
any state to maintain a degree of autonomy from domestic or foreign veto-wielders.
But the Indian state is insufficient in both these attributes, even as it transiently
shows promise with respect to the third attribute.
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Virmani (2005: 14) suggests that China and India will remain among the three to
five fastest growing economies in the world during the next 20 years or so. Consistent
with India’s own perception, contemporary projections out to 2050 also suggest that
India will become a true pole by then (Tellis, 2016). China, the United States, the
European Union, and India are projected to be the principal global entities domi-
nating the international system in 2050. But, India’s share will be only 7% of global
product against China’s 20%. The US and the EU are likely to contribute 17% each.
The implication is that even if India becomes a true pole, or a “system-maker”, it will
remain the weakest of the principal global players, and its rising power ambitions
could be in serious jeopardy unless it acts upon expanding its capabilities.
Domestic constraints however pose a challenge for India’s capability augmen-
tation. There is a convergence among the Indian political elite over the security
question. The plan for modernizing its army is likely not to face much resistance.
But the policy of “strategic alignment” in economic affairs suffers because there is
a tendency of resistance against moving away from the Nehruvian model of regu-
lated economy. India’s reliance on its bureaucracy for redistribution of economic
benefits aggravates the problem. Subsidy reduction, labor law reforms, and trade
liberalization policies invite vehement opposition from civil society and from the
vested interests within the state structure. Electoral competition sharpens social
cleavages, and thus it constrains the Indian state for pursuing its rising power goals
autonomously. Indian society must address the demands of social justice, but very
often redistribution takes place keeping electoral prospects in mind rather than in
accordance with sound fiscal policies. Corruption depletes the scarce resources the
state earmarks for redistribution. The state is often curiously present in areas where
it ought not to, for example, in producing private goods, and it is seriously deficient
in areas where it has no substitute, such as administering law and order.
The state capacity for resource extraction is poor and inadequate. India’s tax-to-
GDP ratios are among the lowest of G20 members and of the BRICS countries. India
has low savings rate compared to its investment needs. Its high growth is “driven
more by productivity increases than by factor accumulation”, which may not be
sustainable over a long period (Tellis, 2016). It is necessary therefore that the rising
India adopts structural transformation for the success of its growth story. It cannot
become a “system-maker” or a “leading player” if it continues to follow a policy of
economic isolationism. Foreign trade can create opportunities for its demographic
profile, and address severe infrastructural limitations. Given domestic constraints
however, trade pessimism is not easy to achieve. Gains from multilateral engage-
ments like BRICS will be limited, at least in near future, given these limitations.
India is highly dependent on energy imports; therefore, it cannot remain
isolated from the world market, nor can it ignore securing shipping lanes for the
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48 R. Kumar
transportation of oil, from Iran and Burma to as far as abroad as Sudan and Nigeria.
Nearly half of the global sea-borne trade passes through the Indian Ocean, and
almost 65% of the world’s oil and 35% of its gas reserves are found in the littoral
states of the Ocean (Robinson, 2011: 4). By opening up to a trade-led growth regime,
India cannot only secure its energy needs, but rather also augment its capacity to
protect its interests in the Indian Ocean region. The Indian Ocean region today
witnesses an increased Chinese presence, and frequent disruptions by non-state
actors like organized pirates or terrorists. Besides, there is always a possibility that
its supply chain could be disrupted at “choke points” such as the Strait of Hormuz,
the Gulf of Aden, the Suez Canal, and the Strait of Malacca which may have serious
consequences in case of war (Robinson, 2011: 4). If India sees itself as a potential
global power, its strategic calculations should be completed by reaching out to the
rest of the world. India’s “strategic alignments” are praiseworthy in political matters,
but are found lacking on the economic front. Its ambition of becoming “a leading
player” is limited by its current capacity.
Future Prospects
BRICS presents an opportunity for “coexistence” of rising powers (de Coning et al.,
2015). The coalition could rule the world by providing the engine of global growth,
by influencing political decision-making of other countries according to its own
interests, and by providing global knowledge and ideas. Francesca Beausang points
out that the emerging markets or rising powers, in particular the BRICS group, lack
the ability to innovate which threaten their economic domination also (Beausang,
2012: 10). In terms of organization, the members of the BRICS coalition have overlap-
ping memberships in similar initiatives, in groupings such as, India, Brazil and South
Africa (IBSA) and Russia, India and China (RIC). It will be worthwhile to assess
the impact of multiple membership of the members on the effectiveness of BRICS.
As BRICS has come up as a coalition of countries which are bound together by
a colonial past, with a shared aspiration to challenge the Western domination in
the global affairs, it remains to be seen how each member’s strategic interest does
not overshadow the shared aspiration. The key will be to strike a delicate balance
between what they hope for themselves individually and collectively. What is at
stake here is whether forming issue-based coalitions would translate into a capacity
for shaping global rules, given that their interests do not always align (see Chitalkar
and Malone, 2015: 588). Both India and Brazil aspire for a permanent seat on the
UN Security Council, for example, which does not find favor with both Russia and
China.
b3508_V2_Ch03.indd 48 11-02-2020 13:11:41

Energy is an emerging field where all BRICS members have substantial interest
in competing with each other. Africa’s resources have already invited Chinese and
Indian investments, and the Chinese influence in Africa is already being talked
about as a “neo-colonial” project (see Larmer, 2017). It will be interesting to examine
whether India and China cooperate over this agenda, or project it as part of their
rising power ambitions which could take the form of a zero-sum game. Where will
this leave South Africa, Brazil and Russia?
The BRICS coalition members are not united over WTO negotiations, much less
do their views converge on climate change commitments. Most arbitration complaints
in the WTO are from the member countries against each other. This is not a sign
of “coexistence”. Will the coalition succumb to the varied interests of the members?
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CHAPTER 4
China and Global Economic Governance
Ka Zeng
Department of Political Science, University of Arkansas, USA
Introduction
China’s rapid ascent in the global economy and rising influence in multilateral economic
institutions have given rise to an increasingly large body of literature on the country’s
role in global economic governance. This chapter engages in a preliminary review of
this body of literature. In addition to outlining the major themes and arguments in
the debate, it will identify emerging research agendas and areas for future research.
It will be argued that earlier analyses of China’s role in global economic governance
tend to focus on the question of whether China is operating within the parameters
of the postwar institutional arrangements or whether it has sought to challenge the
established standards, rules, and norms underlying these institutions. These studies
try to do so by documenting the evolution of Chinese approach over time or assessing
China’s position vis-à-vis both the existing players and other emerging powers.
A second strand of literature probes in greater depth into the sources of Chinese
behavior to address such questions as domestic influences on China’s role in the
global economy, the degree to which it is being socialized into global norms and
rules, and how key features of the existing regimes in turn affect China’s integration
into the liberal international economic system. There seems to be broad consensus
that Beijing has not sought nor brought about significant changes to key global
norms and rules in areas such as trade and investment, even though it seems to
be increasingly challenging the status quo in other issues areas such as aid and
55
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56 K. Zeng
development financing. Studies that fall into this line of inquiry cull evidence from
a wide range of global governance institutions, including those in the areas of trade,
finance, aid, intellectual property rights, and climate change. They are also character-
ized by considerable methodological diversity to include not only qualitative studies
based mainly on case studies, but also increasingly quantitative analyses that utilize
a large-N research design to assess the main research questions.
Driven by China’s more recent efforts to create new institutions outside of the
existing institutional infrastructure such as the Asian Infrastructure Investment Bank
(AIIB) and the New Development Bank (NDB), a nascent body of literature extends
the previous analysis to examine the drivers of these moves, the opportunities and
challenges for the successful implementation of these projects, and the extent to
which these efforts to promote alternative multilateral arrangements could seri-
ously undermine the liberal international economic order. The prevailing view that
emerges from these studies seems to be that China is generally operating within the
parameters of the existing system, even though it is at the same time pushing for
modest and incremental reforms in certain issue areas.
The rest of this chapter first outlines three major phases in the evolution of
scholarly discourse on China’s involvement in the global economic system. It will
then address a set of additional questions that are relatively understudied but are
capturing growing scholarly attention. The chapter concludes by reflecting on gaps
in the existing literature and identifying directions for future research.
Earlier Assessment of China’s Behavior in Global

Economic Governance
China’s growing participation in international institutions has captured considerable
scholarly interest starting in the 1990s. Earlier literature on China’s rising influence
in the global economy tends to focus on the conditions that facilitated its global
economic ascendance (Lardy, 2002), the progress and problems of China’s integra-
tion into the international economy (Economy and Oksenberg, 1999), China’s early
experience with multilateral economic institutions such as the World Bank, the
International Monetary Fund (IMF), and the General Agreement on Tariffs and Trade
(GATT) and its successor, the World Trade Organization (WTO) (e.g. Jacobson and
Oksenberg, 1990), or how to manage the integration of China into the established
multilateral economic institutions (Johnston and Ross, 1999; Pearson, 1999).
The growing interest in China has also been a broader trend in the academic
literature that examines the increasingly active multilateral engagements of rising
powers in the global economy. Starting in the early 2000s, a growing number of
books and articles (Hogue, 2004; Friedman, 2005; Prestowitz, 2005) have started
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China and Global Economic Governance 57
to caution about the disruption that the rise of emerging powers posed to the
international economic system and the “global power shift” from the West to the
East. This body of work additionally looks at the distinctive characteristics of this
group of countries and the strategies they have adopted to promote their interests
in international institutions and to push for change in the global economy. For
example, Narlikar (2002, 2010) examines the successful bargaining strategies that
China, along with other emerging powers such as Brazil and India have adopted in
the international economic system. In particular, she emphasizes how developing
countries and rising powers can enhance their bargaining power through the effec-
tive use of strategies. Studies in this tradition focus on developing country bargaining
positions and power, as well as the tactics and strategies they use to promote their
interests. However, the empirical focus of these studies tends to be on developing
countries as a whole rather than on China specifically.
At the same time, the progressive growth in China’s influence has inspired an
increasingly large body of literature on the question of whether China is a coopera-
tive player in the global economy. These studies tend to focus on China’s early experi-
ence in international economic institutions such as the WTO, emphasize Beijing’s
“learning” experience in the organization, or assess China’s participation record
against those of other emerging powers. Pearson (2006), for example, argues that far
from mounting a direct challenge to its key rules and principles, Beijing has been a
cooperative player under the WTO’s institutional rubric. Citing China’s support for
the trade liberalization agenda of the Doha Round multilateral trade negotiations
and China’s broad adherence to the rules of the organization, the study contends
that, with the exception of Chinese behavior on Taiwan, there is little indication
that Beijing is challenging the rules and norms of the WTO. Kennedy (2008: 5−6)
examines China’s participation in the WTO and two standards-setting organizations,
concluding that as a new WTO member with a relatively steep “learning curve”,
China has at best played a modest role in the WTO. He emphasizes that while China
is generally playing by the rules of the regime, its relative inexperience, the weak
capacity of Chinese economic diplomats, and “inadequately institutionalized chan-
nels” of government-business consultation on international economic policy have
prevented Beijing from effectively promoting its interests within the organization.
In a similar vein, Wang and French (2014) examine China’s behavior in global
economic governance, concluding that while the country is generally an active
player, its level of participation is not commensurate with its status as the second
largest economy in the world. The study further attributes such a gap to Beijing’s
pragmatic economic interests. Through an examination of China’s involvement
with the G20, Ren (2015) reaches a similar conclusion that while China has actively
participated in the G20 process and generally accepts prevailing international rules
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58 K. Zeng
of the game, it remains a reform-minded status quo power which at the same time
seeks opportunities to enhance its institutional power and push for constructive
changes within the existing system. Still other works address the question of whether
China is a responsible stakeholder or a system transformer through detailed studies
of China’s performance in such areas as multilateral trade negotiations (Gao, 2012,
2015; Gao and Lewis, 2005), global climate change negotiations (Zhang, 2012),
energy security (Chan et al., 2012; Li, 2012), global health (Chan, 2011), and G20
cooperation (Kirton, 2016).
Overall, a relatively large body of literature addresses the question of whether
China has sought to change the rules of the global order. There also seems to be a
preoccupation with Chinese “learning” over time across different areas of global
governance institutions. The predominant view that emerges from these studies is
that while there are areas where Beijing is not entirely content with the existing rules
and norms such as in the area of financial regulation, it is generally comfortable with
and an advocate of the status quo. Furthermore, even though Beijing has sought
modest, incremental changes in certain areas, these moves cannot be construed as
efforts to rewrite the rules of the global governance system.1 Substantial change in
Chinese behavior in a more active and reformist direction would therefore depend
on major changes in both the Chinese domestic economy and in the relationship
between Beijing and the dominant leaders of the existing international system.
Sources of Chinese Behavior

While the above literature tends to focus on how to “manage” the integration of
China into the global economy or assess the extent to which Chinese behavior
challenges the “rules of the game”, more recent studies place increasing emphasis on
the drivers and sources of Chinese behavior. In addition to characterizing China’s
position vis-à-vis the status quo powers, these studies further investigate the sources
of Chinese behavior, paying particular attention to the constraining influence of
norms, domestic politics, and international institutions.
Socialization and Normative Influences
One strand of the literature has sought to explain China’s behavior in global eco-
nomic governance from the perspective of socialization and normative influences.
This approach suggests that frequent interactions between Chinese actors and their
1
For an example of a study that expresses this view, see, for example, Kennedy and Cheng
(2012).
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foreign counterparts generate a dynamic social learning process, whereby inter-

national norms become increasingly internalized. From this perspective, through
increased interactions, China has gained a better understanding of how the system
works and, as a result, has developed a greater stake in the maintenance of the
status quo. In other words, engagement with multilateral institutions has exerted
a gradual socialization effect, leading to behavioral changes which are generally
system conforming. Kent (2007) provides a detailed treatment of such socialization
processes through an examination of China’s interactions with leading international
organizations such as the IMF and the United Nations Environment Programme.
Harpaz (2010) applies the above insight to explain China’s evolving approach toward
the WTO dispute settlement mechanism (DSM). Specifically, she finds that while
China has been a conciliatory defendant and reluctant complainant in its earlier
engagement with the DSM, its approach has gradually evolved into a more aggres-
sive one that is more amenable to international adjudication. She further attributes
such changes to the socialization effect of the country’s intense participation in the
DSM. Li (2012) reaches similar conclusions, suggesting that normative, rather than
material constraints, are crucial to explaining China’s inactivity in the initial years
of its WTO membership.
Harpaz (2016) further adopts a norms-driven approach to explain China’s
profile in international economic governance, finding that as a result of socialization,
China is becoming more entrenched in the existing system and, as a result, is likely
to continue to uphold the status quo even as it pushes for modest and incremental
reforms in certain areas. In the area of China’s international financial relations,
Ferdinand and Wang (2013) make a similar argument that the history of China’s
engagement with the IMF illustrates how China has been socialized into prevailing
global governance norms, even though continuing concerns about potential over-
dependence on the organization has led it to seek alternative ways of enhancing its
own leverage and influence such as through Asian regional financial cooperation.
Overall, most authors seem to concur that, with some exceptions, frequent interac-
tions with multilateral economic institutions have led China to align its interests with
prevailing international norms and to develop a stronger stake in the perpetuation
of the status quo.
Domestic Sources
In spite of its authoritarian political structure, scholars have increasingly recognized

the growing pluralization of China’s political process and its influence on Chinese
foreign policy. As a result, a growing stream of work increasingly turns to the
domestic drivers of China’s role and behavior in the multilateral economic system,
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60 K. Zeng
emphasizing in particular the constraining effects of leader cost-benefit calculations,

domestic interest groups, and political institutions.
Leadership Preferences
Given China’s highly centralized decision-making structure and its complex and
often opaque decision-making process, some of the studies that approach China’s
role in the global economy from the perspective of domestic politics adopt a
rationalist approach to emphasize the cost-benefit calculations of the top leadership.
Such a rationalist, leader-oriented cost-benefit framework emphasizes both the
tangible and intangible economic and political interests underlying the calculations
of top elites that influence China’s foreign economic policy.2 In analyzing the policy
preferences of domestic actors toward international cooperation, such a framework
stresses how, in spite of the proliferation of societal interests and their growing
ability to influence the decision-making process in an authoritarian regime such
as China, top elites are nevertheless uniquely positioned to defend the country’s
economic interests, including industrial policies (Blanchard and Ripsman, 2008).
As top elites in China seek to enhance the country’s economic and technological
competitiveness, promote further market liberalization, and boost long-term
economic growth potential,3 it is reasonable to expect that they will continue to use
the instruments at their disposal to influence China’s foreign economic relations
in ways that enhance the country’s wealth and power, as well as influence in global
economic governance.
Applying a leader-oriented cost-benefit model to China’s accession negotiations
to the WTO, Blanchard (2013a) argues that such a model best explains the country’s
arduous and prolonged accession processes, its strong push for membership in the
second half of the 1990s, and its willingness to accept stringent accession terms.
Blanchard (2013b) further applies this model to examine the variation in China’s
compliance with its commitments to the Trade-Related Investment Measures
(TRIMs) across different issue areas. Specifically, he argues that Chinese leaders are
more likely to comply with their TRIMS obligations when the benefits, measured
in terms of access to foreign capital, technology, and global markets and job
creation outweigh the costs, measured in terms of potential dependence on foreign
suppliers, foreign pressure, the potential for WTO disputes against China, and an
2
For studies that emphasize the key theoretical propositions of the rationalist approach to
international institutions, see Keohane (1988), Harsanyi (1969), Hasenclever et al. (2000),
Martin and Simmons (1998) and Hudson and Vore (1995).
3
For studies that emphasize such elite motivations, see, for example, Blanchard (2013a) and
Wang (2005).
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unfavorable trade balance, and vice versa. As such, the analysis highlights how
domestic considerations may limit the extent to which the WTO can influence or
transform Chinese behavior. In his study of China’s role and position in the Doha
Round trade negotiations, Tu (2013) attributes Beijing’s inability to adopt more
cooperative stances at the WTO to the lack of strong leadership interests and control
over the negotiation process.
In a similar vein, a recent study by Harpaz (2016) analyzes the variation in
China’s performance across three global governance areas — trade, investment, and
development aid — and yields some support for a rationalist state-centric approach.
In both areas of international trade and investment, the Chinese leadership has not
sought to rewrite the rules as the benefits from preserving the system far outweighs
any potential costs. As integration into the global trading system promises to
promote trade and hence economic growth which is critical to regime survival,
it has adopted an approach that is generally supportive of the maintenance of the
existing system. Furthermore, the fragmented international investment system also
enabled the Chinese leadership to successfully secure access for its outward foreign
direct investment (FDI) and promote inward FDI. This provides a sharp contrast to
China’s approach to the international development aid regime where it has sought
to more aggressively pursue its own development financing model in order to gain
access to the natural resources and markets that are vital to the country’s long-term
economic growth.
A state-centric, leader-oriented cost-benefit framework has also been utilized to
explain China’s approach to international monetary policy. Germain and Schwartz
(2015) examine the limits to RMB internationalization, arguing that Chinese
domestic elites are unlikely to adopt unpopular policy measures to support the RMB
as an international currency, such as increasing imports and moving away from
investment and export production to domestic consumption due to the potentially
negative implications of such measures for political stability and regime survival.
This would in turn dampen the prospect that the RMB could rival the US dollar as
an international reserve currency. He (2015) examines the domestic forces behind
China’s push for the use of the RMB globally, emphasizing in particular how the
desire to promote domestic economic reforms represents an important motivation
behind the People’s Bank of China (PBoC)’s push for the internationalization of the
currency.
Taken together, the above studies emphasize how top leaders in China are often
able to override domestic pressure in order to defend their key foreign policy and
national interests. To the extent that the benefit from international economic integra-
tion outweighs its costs, this approach would predict continued Chinese support for
key regime norms, rules, principles, and decision-making procedures.
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62 K. Zeng
Interest Groups
In addition to emphasizing the strategic role of top elites in defining China’s key
foreign policy interests, scholars have increasingly recognized the growing ability
of domestic interest groups to influence China’s international economic policy.
Underlying such an approach is the recognition that even though leaders in an
authoritarian regime such as China may be less sensitive to domestic audiences
than in a democracy, the deepening of China’s economic reform in the past decades
has substantially opened up the policy space to allow for greater input of domestic
interest groups, bureaucratic institutions, and non-governmental organizations.4
Studies following such a line of inquiry thus increasingly devote attention to
how support or resistance from key domestic interest groups has shaped China’s
approach to global economic governance. For example, it has been argued (Chin
and Stubbs, 2011; Jiang, 2008; Ravenhill and Jiang, 2009) that domestic interest
group opposition plays an important role in explaining the exceptions and carve
outs in China’s free trade agreements (FTAs) such as the China−ASEAN or the
China−Australia FTA. Pressure from domestic industries has also been found
to be an important factor influencing China’s WTO dispute settlement and FTA
strategy (Liang, 2007a).
The role of domestic politics has also been recognized in studies of China’s
global investment, financial, and monetary policy. For example, Shi (2015) adopts
a domestic political economy approach to the study of China’s outward FDI (OFDI)
and develops an argument that emphasizes the interaction between state preferences
and state-owned enterprises (SOEs)’ profit incentives. From this perspective, the
symbolic relationship between Chinese political elites and SOEs enabled the latter
to take advantage of the preferential policies provided by the state to take on exces-
sive risks in their investment decisions. This helps to explain the puzzle as to why
Chinese OFDI is frequently drawn to developing countries with a risky investment
environment.
In the area of international monetary policy, Steinberg and Shih (2012) highlight
how the preferences of domestic interest groups, in particular those of the tradable
industries, visibly influenced China’s exchange rate policy. Steinberg (2015) suggests
that China’s current financial policies emphasize the retention of capital controls
and continued government intervention in the foreign exchange market. As the
political balance generated by such policies is tilted in favor of the winners from
the current policies at the expense of the losers, this should dampen the prospect
for substantial policy change in the absence of political reform. In a similar vein,
4
On this point, see, for example, Lampton (2000); Mertha (2009).
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scholars have emphasized the importance of domestic political divisions for Chinese
foreign exchange reserve accumulation (Steinberg, 2014), China’s engagement with
international macroeconomic policy surveillance (Walter, 2014), Chinese leaders’
preference for monetary bilateralism (Jiang, 2014), the move toward capital account
opening and RMB convertibility (Volz, 2014), and Beijing’s use of economic power
as a tool for realizing the country’s strategic foreign policy interests (Norris, 2016).
An important finding that emerges from these studies is that the political cleavages
in China surrounding foreign exchange and monetary policy are unlike those found
in other countries. Policy outcomes often reflect the Chinese policymakers’ parochial
political interests and competing interests of domestic interest groups. In other
words, one can apply the conventional political economy approach to understand
China’s international monetary policy, even though the specific configuration of
forces underlying China’s international monetary policy may be different from that
in most other states.
Political Institutions
While pressure from domestic interest groups influence the demand for international
economic cooperation, political institutions play an important role in aggregating
these preferences and shaping the policy outcome. Consequently, scholars have
devoted some attention to the influence of domestic institutions on China’s ability
to engage in either regional or multilateral economic cooperation. For example,
Liang (2007b) emphasizes how changes in domestic institutional arrangements
brought about by the government restructuring in the late 1990s altered the prefer-
ences of domestic ministries, thus facilitating the negotiation process leading to
China’s accession to the WTO. Pearson (2010) highlights the domestic institutional
constraints on China’s leadership in East Asian economic cooperation mechanisms,
arguing that a fragmented decision-making structure, a heavy reliance on top level
decision-makers who tend to attach relatively little attention to regional economic
cooperation, and the lack of autonomy of negotiators have impeded Beijing’s ability
to play a greater leadership role in the region.
Going beyond specific institutional configurations, the influence of China’s
distinctive economic structures of state capitalism has also received some schol-
arly attention. For instance, Wang (2014) points to the constraints that salient
institutional features of China’s state capitalism place on Beijing’s ability to address
the country’s large external imbalances. Wu (2016) stresses the challenges that the
so-called “China Inc.” model poses to the WTO legal system, arguing that while
the WTO system has so far been effective in handling a number of China-related
trade issues, it faces continuing challenges in effectively designing a set of predict-
able and fair legal rules in order to address thorny issues arising out of the close
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64 K. Zeng
relationship among the government, the Party, and domestic firms as well as the
country’s non-market economy status.
Overall, studies that approach China’s role in the global economy from the
point of view of domestic politics emphasize that despite continued control by the
central government, the policy making process has gradually become more porous
to allow for a wider range of domestic interests and voices. This contrasts with still
another approach discussed below which puts greater weight on the influences of
the international system.
Influence of International Institutions
While studies mentioned in the above sections primarily locate the sources of
Chinese behavior at the domestic level, still another body of research emphasizes
how the character of the existing international system, with its prevailing norms,
rules and principles, may affect the prospect of China’s smooth integration into the
liberal international order. Starting from the premise of an inevitable power shift
between the US and China, Ikenberry (2008) suggests that as China has benefited
significantly from its increasing engagement with international institutions based
on the principles of non-discrimination and reciprocity, this should reduce the
likelihood of major provocations during a period of great power transition. In
Ikenberry’s words, the existing international order is based on a dense set of rules
and institutions that are “hard to overturn and easy to join” (24). If the Chinese
leadership were to adopt a more confrontational stance that seeks to challenge
the status quo, then it is likely to face the resistance of not only the US, but also a
coalition of countries in the West and this should in turn provide a safeguard to the
interests of established powers.
While Ikenberry emphasizes how the overall characteristics of the postwar
liberal international order affects the integration of China into that order, others
examine how specific features of the post-war international economic institutions
may influence Chinese behavior. For example, based on a case study of China’s
compliance with its WTO obligations in the telecommunications sector, Kobayashi
(2013) suggests that as a result of the ambiguities of the WTO agreements and
commitments themselves, China has been able to engage in “creative compliance”
with its treaty obligations whereby it engages in creative interpretation of the law
without explicitly breaching the “black-letter law”. Harpaz’s analysis of China’s WTO
commitment in the banking sector (2013) similarly points to how the ambiguities
inherent in the General Agreement on Trade in Services (GATS) leave room for
countries to engage in flexible interpretations of their obligations. Harpaz cautions
that this should complicate compliance and lead us to lower our expectations of
b3508_V2_Ch04.indd 64 11-02-2020 13:12:09

what compliance and liberalization are capable of achieving in China. Another

study by Harpaz (2016) explores how the variation across the international trade,
investment, and aid regimes affects China’s policy in each of these areas. Specifically,
she finds that as the WTO’s inclusive, consensus-based decision-making process
provides the Chinese leadership with veto power over rules change, this has enabled
the Chinese leadership to take advantage of the organization’s constraining effect
to achieve its own policy objectives. In the area of investment, the fragmented
nature of the regime with no one dominant power also generally facilitates Chinese
cooperation. However, the above patterns contrast with that in the global aid regime
where the dominance of a small number of countries has increased the difficulties
for the system to accommodate China’s rising aspirations, leading China to promote
its own alternative aid model outside of the existing institutional framework.
In sum, the progressive increase in China’s global influence has led scholars to
go beyond simply documenting and characterizing China’s involvement in the global
governance system to probe the domestic, international, and normative influences
on Chinese behavior. These studies are generally of the view that the above forces
tend to constrain China from using its growing influence to reshape the rules and
institutions of the international system to serve its own interests. As Harpaz (2016)
puts it, “China’s national interests, the constraining effect of the institutions in the
liberal international economic order and China’s ongoing socialization will drive it
towards upholding the status quo albeit with some modest and incremental reform
from within.”
Toward Two-Way Socialization in International

Economic Institutions
If scholarly interest in China’s role in global economic governance in the middle
phase of the development of the literature focuses on the question of whether China
is a rule follower or a rule breaker in the international economic system (e.g. Li, 2011;
Kennedy, 2018), then more recent studies, driven by Beijing’s more active moves
to create alternative institutions outside of the existing institutional framework,
increasingly go beyond this debate to focus on the two-way interactions between
China and multinational organizations. Another related question is whether and
how China is seeking to shape and influence the diffusion of international norms
to become a rule maker in the international system.
Importantly, in view of China’s growing influence in global economic govern-
ance, scholars are increasingly directing attention to the degree to which multilateral
organizations are making institutional adjustments to accommodate the interests
and aspirations of rising states. Chin (2010) and Grabel (2011), for example, suggest
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66 K. Zeng
that partly in response to policy proposals made by rising states, including China,
the IMF has made adjustments to its lending policy to increase the flexibility and
rate of turnover of its lending practices and provide countercyclical financing to
countries confronted with financial difficulties in order to weather the storm of the
Global Financial Crisis (GFC). Other studies (e.g. Woods, 2008; Chin and Heine,
2014; Chin, 2015) examine the extent to which multilateral development institutions
have made policy changes to accommodate China and other rising powers’ growing
role in the provision of development finance. Strand et al. (2016) address a similar
question through an examination of China’s relationship with the World Bank and
Asian Development Bank (ADB). However, the study reaches the less sanguine
conclusion that these existing multilateral organizations have failed to adequately
adjust their internal governance mechanisms to account for rising Chinese influence.
A couple of chapters in this volume further shed light on this question. For
example, Kaya (2018) examines the engagement of large emerging economies
(BRICS), including China, with international financial institutions (IFIs) such as the
IMF and the World Bank. Drawing on the “voice” and “exit” framework developed
by Hirschman (1970), she argues that the BRICS have not only achieved some
success in voicing their preference with regard to both the distribution of voting
power within the institution and certain policies of key concern to them, but have
also been able to credibly threaten to exit from the existing institutions through
the creation of the NDB in 2014 and the AIIB in 2015. She further explores the
variables that influence the BRICS’ successful exercise of these strategies such as
the particular features of institutions, the BRICS’ effective negotiation strategies,
domestic politics, and “counter-hegemonic” desires evinced by countries such as
China. Parízek and Stephen (2018, Chapter 15) highlight growing conflicts over
representation in international economic institutions, showing how institutional
stickiness and the established powers’ reluctance to make concessions may result
in greater institutional fragmentation, which may in turn raise key questions about
the legitimacy and performance of existing institutions.
Underlying the above studies is a growing recognition that the socialization
process for rising powers may be evolving from the “one-way socialization” seen in
the early phase of the rise of a new power, whereby its priority is in seeking integra-
tion with the existing norms to the so-called “two-way socialization” whereby the
emerging power begins to more actively “shape the environment without directly
confronting the hegemon”, promote new solutions to global problems, and take on
the role of a “norm-shaper” instead of a “norm-taker”. Subsequent studies examine
how changes in exogenous conditions induced by hegemonic decline have provided
opportunities for the transition from “one-way” to “two-way” socialization, thus
enhancing rising powers’ ability to shape global norms (Chin, 2012). They also
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consider in detail how such “two-way” socialization is taking place in China’s

relationship with major multilateral organizations such as the World Bank (e.g.
Chin, 2010, 2012)5 or the WTO (e.g. Zeng and Liang, 2013).6 Another way in which
recent studies are breaking with the older debate about whether China is acting
as a stakeholder in global economic governance is in considering the variation in
Chinese behavior across issue areas, rather than relying on assumptions about its
disposition or “type”. For example, Foot and Walter (2010) identify three factors
that shape Chinese behavioral consistency with global norms across issue areas,
namely, the compatibility between global and dominant domestic norms; proce-
dural legitimacy and material distributional fairness; and actor perceptions of the
implications of their own and other actors’ behavior for the global power hierarchy.
According to these authors, the salience of the issue area domestically in turn plays
an important role in determining the relative importance of these variables. On
issues of macroeconomic surveillance and climate change, for instance, China has
demonstrated a lower degree of behavioral consistency with global norms due to
the inconsistencies between domestic and global norms, questionable legitimacy,
and significant consequences for the global power hierarchy.
Harpaz (2016) examines the variation in Beijing’s role and behavior across the
issue areas of trade, finance, and development aid, emphasizing how rationalist
state-centric, domestic politics, and normative approaches complement one another
in explaining such variation. Kastner et al. (2016) question the utility of an approach
that emphasizes the importance of “disposition”, or domestically-rooted values,
ideology, and interests, in explaining China’s approach. Instead, these authors call our
attention to the importance of the strategic context of the issue under consideration
and, specifically, Beijing’s outside options and the degree to which it is viewed by
outside powers as indispensable to effective and sustained cooperation within the
regime to explaining its approach in a given issue area. Thus, in international finan-
cial governance, China has pursued a so-called “hold up” strategy which predicates
Chinese cooperation on other actors’ concessions, both due to its favorable outside
options and general perceptions of the country’s importance to global financial
governance.
5
Chin (2012) presents a case study of the new partnering arrangement between the World
Bank and China Eximbank as evidence of Beijing’s growing ability to shape global develop-
ment financing norms.
6
Zeng and Liang (2013)’s co-edited volume on China’s first decade in the WTO includes
substantial discussion of China’s behavior in the evolving structures of the WTO and gives
implicit recognition of how ongoing institutional changes within the global trade regime
have opened the way for China to assert its influence within the organization.
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68 K. Zeng
Kennedy (2018) further examines the variation in Chinese participation in a

wide range of international regimes, including those governing trade, finance, intel-
lectual property rights, climate change, public health, labor, and technical standards.
The contributors collectively argue that China has made further advancement on
the learning curve and become more skillful in navigating the complex regime
rules and promoting its own interests in those regimes that focus on the needs of
industrial producers, but has not made the same progress in those regimes that
primarily address issues of concern to other actors such as labor or tackle other
problems such as climate change. Webster (2014) articulates a theory of “paper
compliance” to characterize the variation in China’s compliance with international
institutions. The theory suggests that Beijing selectively complies with the norms
and rules promulgated by international institutions depending on the feasibility of
obeying them.
Research Frontiers
The above discussion outlines three major streams of work that have dominated the
discourse on China’s relationship with established powers in the global economy,
namely, studies that provide an empirical assessment of China’s role in global
economic governance; explore the sources of Chinese behavior; or emphasize the
growing “two-way” interaction between China and global economic institutions. It
should be noted that outside of these main research areas, there also exists a growing
body of literature that analyses the power dynamics associated with the country’s
rapid economic ascendance, the relative influence of political and economic forces
in shaping the country’s foreign economic policy, and the political, social, and eco-
nomic implications of China’s growing global influence. These studies complement
the works mentioned above in providing a more comprehensive account of China’s
role in governance regimes.
Power and Economic Statecraft
While less studied, the use of power in China’s foreign economic policy and
Beijing’s economic statecraft has attracted growing scholarly interest. Earlier
studies focus on China’s use of “direct power”, defined as either “the ability of one
state to get another state to do what it would not otherwise do, either by persua-
sion or coercion” or “the ability of one state to avoid direct pressure from another
state to do what the former would not otherwise do” (Chin, 2014: 184−185).
Setser (2008) and Drezner (2009), for example, represent earlier attempts to
examine the question of whether China has been able to convert its large holdings
b3508_V2_Ch04.indd 68 11-02-2020 13:12:09

of US debt into policy influence. Drezner, in particular, is skeptical of China’s

ability to translate its creditor state status into political power, suggesting that
while China’s financial power may increase its ability to resist US demands, it
does little to enhance Beijing’s ability to compel or coerce the US to change its
policies. Cohen (2012) surveys the various strategies China used to promote the
internationalization of the RMB and probes the strategic intentions behind the use
of these policy instruments. Another study by Cohen (2008) emphasizes Beijing’s
passive, instead of active use of monetary power, suggesting that Beijing has been
able to take advantage of its huge foreign exchange reserves to forestall external
pressure for policy adjustments.
Chin goes beyond the emphasis on direct power to examine China’s exercise of
structural power, which includes both its first face, or a state’s “power to shape or
determine the broader context within which other states and market actors have to
operate”, and its second face, or the “capacity to expand the range of choices open
to others” (Chin, 2014: 185). Specifically, he argues that China is increasingly able to
exercise the second face of structural power in the international monetary system by
promoting reserve diversification and thus expanding the range of reserve currency
options available to both governments and market actors. At the same time, to the
extent that such efforts may exert a disciplining effect on US economic policy and
constrain the “exorbitant privilege” of the United States, it also allows Beijing to
exercise the first face of structural power.
Echoing the above studies’ concern with the use of power in China’s interna-
tional economic policy, recent studies have also devoted some attention to China’s
use of economic statecraft. For example, Katada and Sohn (2014) suggest that
moves toward financial regionalism in East Asia in recent years may be viewed in
terms of the governments’ use of financial statecraft as both a shield and a sword.
Specifically, by promoting financial regionalism, major regional governments have
sought to promote a counterweight strategy designed to create supplementary or
alternative regional institutions in order to both shield the domestic economy from
adverse conditions in international financial markets and to enhance their influence
in global financial governance by introducing the option of potential defection from
international financial governance regimes. Overall, however, studies of China’s
financial statecraft (e.g. Armijo and Katada, 2014) find that efforts by China and
other emerging powers to promote South−South cooperation and deepen regional
ties to reduce dependence on the global financial system are far from system-
challenging and have not been particularly effective in enhancing these countries’
leverage vis-à-vis established players.
The relative importance of political considerations vs. economic interests in
shaping China’s international footprint has also received growing scholarly attention.
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70 K. Zeng
For example, Liao and McDowell (2016) conjecture that de facto trade and direct
investment interdependence enhance the ability of the PBoC to negotiate bilateral
currency swap agreements (BSAs) with foreign central banks both by providing
firms with insulation from international liquidity shocks and reducing the transac-
tion costs of cross-border exchanges. De jure economic integration via preferential
trade agreements (PTAs) and bilateral investment treaties (BITs) further reinforce
this dynamic. Another study by the same authors (Liao and McDowell, 2014) in turn
emphasizes the role of political, instead of economic considerations, in influencing
foreign countries’ demand to adopt the RMB as a reserve currency. Specifically, as
a state’s preferences for international order, as measured by voting in the United
Nations General Assembly (UNGA), move away from the US-led status quo and
toward the Chinese alternative, the likelihood that it will add the RMB to its reserve
portfolio also increases.
A more recent study by Dreher et al. (2016) seeks to untangle the relative influ-
ence of foreign policy considerations and economic interests in shaping Chinese aid,
arguing that while the former dominates Chinese Official Development Assistance
(ODA), the latter plays a more important role in the distribution of commercially-
oriented sources of state financing that tend to be less concessionary. In pointing to
the potential similarities in the underlying motives of Chinese and Western official
finance, these and other studies (Dreher and Fuchs, 2015) therefore help to debunk
the myth that foreign aid from China should be considered as “rogue aid” driven
solely by self-interest.
In analyzing China’s approach toward FTAs, Zeng (2016) makes a similar
suggestion that economic interests about enhancing market access abroad or
securing essential supplies of raw materials may have taken a back seat com-
pared to foreign policy interests of enhancing China’s international influence
in shaping China’s FTA diplomacy. Overall, the above studies emphasize the
dynamic interactions between China and the partner country and point to
the importance of shared links, either politically or economically, in shaping
Beijing’s trade, aid, and investment strategies. As such, they should help to
illuminate China’s foreign economic strategy and deepen our understanding of
the potential for cooperation between China and its partner countries in the
international economic system.
The Political, Social, and Economic Implications of China’s Economic Ascent
In addition to examining the drivers of China’s international economic initiatives,

recent studies also increasingly analyze the political, social, and economic implica-
tions of China’s rising influence in the international economic system. Research in
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this stream explores reactions to China’s growing trade and investment activities in
host countries and the effect of China’s commercial diplomacy on its foreign relations
or host country development.
First, China’s evolution from being mainly a capital importer to a capital
exporter has generated growing interests and reactions in developed countries
to Chinese outward foreign direct investment (COFDI). Tingley et al. (2015)
focus on political reactions to the mergers and acquisitions (M&A) activities of
Chinese firms in the United States, finding that although national security concerns
provide an important ground for the erection of legal barriers to foreign M&As,
considerations about economically distressed domestic industry and reciprocity
also play a role in explaining political opposition to Chinese investment in the US.
The study thus helps to shed light on some of the important causes of friction in
the US−China economic relationship. Studies (e.g. Meunier et al., 2014; Meunier,
2014) have also examined the political fears that the substantial increase in COFDI
has g enerated in European countries and its potential economic and political
consequences.
Second, the foreign policy consequences of China’s growing trade and invest-
ment activities represent another promising area of research. Based on an empirical
analysis of China’s trade relations with developing countries in Africa and Latin
America, Flores-Macías and Kreps (2013) find that countries that trade more with
China are also more likely to converge with it on foreign policy issues. This implies
that expanding trade relations may potentially enhance China’s foreign policy
influence vis-à-vis the partner country, which may in turn increase the difficulty for
the United States to attract allies in the international arena. Kastner (2016) yields
slightly different conclusions, finding that increased trade dependence on China may
increase the country’s ability to elicit the partner country’s cooperation on economic,
but not necessarily on political issues.
Kaplan (2016) examines the political consequences of capital flows from China.
Through a comparative analysis of two of China’s largest debtors — Brazil and
Venezuela — in the periods both before and after the introduction of Chinese financ-
ing, the study finds that increases in the share of Chinese state-to-state financing in
total external public financing tend to be associated with larger government budget
deficits in these countries. In doing so, the study sheds light on the conditions under
which growing economic interdependence affects the policy autonomy of govern-
ments in developing countries as well as the conditions under which deviations from
Western governance models are likely to occur.
However, not all scholars are of the view that growing COFDI and other forms
of financial flows are effective in reshaping host country policies. For example, some
recent studies (e.g. Blanchard, 2016) suggest that Chinese foreign direct investment
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72 K. Zeng
and other economic ties with Latin America did relatively little to tilt the host
country’s foreign policy toward Beijing. Conversely, cordial political relations may
not help to boost COFDI.
The political, social, and economic consequences of Chinese foreign aid
represent yet another burgeoning area of research. The Asmus, Fuchs, and Müller
chapter in this volume (see Chapter 7) provides a rather comprehensive review of the
existing literature dealing with this question, suggesting that there is little systematic
evidence that Chinese aid has been effective in promoting economic growth and
other development outcomes in recipient countries, is appreciated by the general
public in recipient countries, is directly linked to recipient country institutions
such as democracy or corruption, or has a direct impact on the recipient’s labor or
environmental standards.
Running through the above studies is a common concern with the potential
for China to export its domestic governance models through its global economic
activities. The degree to which the Chinese leadership can translate its growing
economic clout into political and economic leverage, influence partner country
governance in areas such as labor and the environment, and more generally promote
the country’s global influence will therefore likely remain a major area of scholarly
interest in the future.
China’s Emerging Institutional Statecraft and Its Implications for Global

Economic Governance
While the above analysis suggests that China is generally playing by the rules of
the game and also has interests in seeing the system work, more recent develop-
ments also suggest that subtle changes may be taking place beneath the surface. In
particular, China’s push for regional trade agreements (RTAs) such as the Regional
Comprehensive Economic Partnership (RCEP) in response to the growing trend
toward the so-called mega RTAs such as the US-led Trans-Pacific Partnership (TPP),
along with the development of a set of financial institutions and other arrangements
(such as the AIIB, the NDB, and the “One Belt, One Road” (OBOR) initiative)
designed to enhance a China-centric pattern of trade, investment, and infrastructure
development in the region raise important questions about Chinese preferences and
motivations as well as the potential consequences of these new initiatives.
Do these recent developments represent efforts to weaken or overhaul the exist-
ing system? Or can they be considered as useful supplements to the existing structure
that can help increase the effectiveness and legitimacy of established institutions
and so can be considered as system-preserving? In light of Beijing’s recent activism
in promoting these new policy initiatives that may potentially present a forceful
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challenge to the existing institutional structure, a growing number of studies have

turned attention to the nature and drivers of these more recent developments. For
example, Strand et al. (2016) examine the motivations behind the creation of the
AIIB and the implications of the institution for China’s global leadership. While the
authors consider the creation of the AIIB as being driven by China’s dissatisfaction
with the pace of change in global governance institutions, they do not view the
move as mounting a direct challenge to the system dominated by the United States.
Wang (2017) engages in a similar analysis of the motivations behind the creation
of new multilateral development banks such as the AIIB and the NDB and the
risks and challenges they pose to global governance. According to her, these new
institutions arise out of the desire to stimulate infrastructure investment which is
critical to long-term domestic economic growth; develop an additional channel for
raising capital relatively inexpensively; create impetus for reform of the existing
global financial governance system; and reduce dependence on the US dollar. While
pointing to the benefits of these new financial institutions, the study also points to
their potential risks, including enhanced Chinese influence and the challenge they
pose to traditional models of development financing. The tentative view that emerges
from these studies is that these China-backed arrangements represent part of a recent
trend toward a more activist foreign policy by the Chinese leadership and should
not be construed as a threat to the existing international financial order or a major
departure from China’s existing approach.
A more recent study by Ikenberry and Lim (2017) focus on China’s recent
moves to create new, potential rival institutions. In doing so, the authors emphasize
the importance of not only placing these actions within the wider context of the
country’s engagement with regional and global institutions, but also of realizing
the variation in China’s orientation toward three different aspects of the “existing
international order”, namely American hegemony, liberal internationalism, and
the “deeper systemic foundations of sovereignty and primacy” (Ikenberry and
Lim, 2017: 2). Based on this delineation of the complex interactions between a
rising power such as China and the international order, they identify a spectrum of
strategic choices faced by China that ranges from a “status-quo stakeholder” that
seeks to participate in existing rules and practices on the one hand to “outright
opposition to or non-participation” in existing institutional arrangements on the
other. In between these two extremes are a few other middle options such as being
an “authority-seeking stakeholder” that seeks to enhance its voice and influence in
existing institutions through redistributive decision-making authority; engage in
“institutional obstruction” whereby a rising state operates from within the institution
to play a spoiler role or to alter or impede the application of specific rules, norms,
practices; undertake “external innovation” to create new international institutions
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74 K. Zeng
or regimes; or pursues outright “opposition to or non-participation” within an

existing institutional framework. Focusing on the AIIB as a specific case of “external
innovation”, the study concludes that there is no strong evidence that the AIIB’s
operation embodies a strong counter-hegemonic logic and undermines the exist-
ing order as the institution’s underlying norm of multilateralism and the reliance
on international financial markets to fund multilateral development loans should
constrain the degree to which the institution can be used for political purposes. In
light of the flurry of activities by Beijing to create new institutions, the challenge
remains for the scholarly community to sort out the implications of these moves for
the global governance system.
Conclusion
As the preceding discussion shows, the unprecedented economic rise of China has
brought about a significant shift in scholarly interest from earlier concerns about
how to “manage” China’s rise to efforts to better understand both the domestic and
international factors that shape the country’s international economic policy at a time
when the traditional powers have diminished influence. While the above review of
scholarly literature yields no evidence that Chinese behavior has worked to under-
mine the existing system, recent developments call for more careful analysis of the
complex interplay of domestic and international factors that may influence China’s
orientation in the global economic system in the years to come. In particular, China’s
increasingly active push for the creation of new institutional arrangements at a time
of declining support for multilateralism and international institutions in the US has
accentuated the need for us to develop a better understanding of the motivations and
objectives of Chinese policy, as well as the constraints on Beijing’s ability to exercise a
more proactive role in global economic governance. If, as Ikenberry and Lim (2017)
have pointed out, China’s strategic choice will likely feature a mixture of cooperation
and opposition, then greater attention to the potential constraining influence of
domestic politics, international economic integration, and prevailing international
norms may be necessary in order for us to better make sense of Beijing’s policy choice.
At the same time, in light of the country’s increasingly prominent role in
the global economy, it may also be necessary for us to examine in greater detail
China’s coalition-building strategies in global governance negotiations as well as
the incumbent powers’ counter-strategies. During the past decades, China has
both sought to form coalitions with other large emerging economies to advance
its interests in the global governance structure and actively embrace regional
agreements and institutions in order to expand its leverage at the global level. For
example, China has worked closely with Brazil and India in the deadlocked Doha
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Round trade negotiations in 2008. However, although Beijing tends to portray

itself as a link between developing and developed countries in the negotiations, its
independent national power and diverging trade interests with major developing
world agricultural producers have made it difficult for Beijing to effectively play
such a role. In addition, China has actively promoted a series of regional economic
cooperation initiative such as the ASEAN Plus Three (APT) and the East Asia
Summit. In response, the incumbent powers have pursued their own counter-
strategies, including both cooptation and efforts to weak emerging powers’ move to
create outside options that would enhance their bargaining power (Kahler, 2013).
How these strategies and counter-strategies will play out against the background
of China’s continued embracement of free trade and the US’ declining support
for multilateralism and international institutions may therefore deserve greater
attention in future research.
Lastly, in addition to focusing on China’s potential contribution to new multilat-
eral arrangements, future scholarly work could engage in more detailed examination
of the consequences, both positive and negative, of China’s growing economic
engagements for governance models and developmental coalitions in other devel-
oping countries. Recent research (Adolph et al., 2017), for example, points to the
possibility of a “Shanghai Effect” whereby African countries that primarily export
their products to China are increasingly converging with the lower labor standards
in China. The study has also shown that such an effect is likely to be particularly large
if Chinese exports are displacing exports to high, instead of low standard countries.
Similar questions could be asked about the impact of China’s growing economic
influence on environmental standards, domestic governance, and development
coalitions in other developing countries. In analyzing the above questions, it would
also be helpful if researchers could employ multiple methods, including both qualita-
tive studies that examine a given issue in detail through primary field research or
secondary sources and quantitative analyses utilizing a large-N design in order to
better illuminate Beijing’s motivations and preferences as well as the consequences
and ramifications of the country’s expanding global economic reach.
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CHAPTER 5
South Africa, BRICS, and Global Governance:

How SA Tried to Change the World and
Succeeded in Changing Itself
Philip Nel
Department of Politics, University of Otago, New Zealand
Introduction
South Africa (SA) was invited to join the BRIC group of states on 23 December 2010 by
the Minister of Foreign Affairs of the People’s Republic of China, Yang Jiechi (Besada
et al., 2013). This followed extensive lobbying by South African President Jacob Zuma
during 2009 and 2010 (Stuenkel, 2013) among the other BRICs, Brazil, India, and
Russia. The invitation came just a year into the first term of President Jacob Zuma, who
was elected President by Parliament in 2009, and can be regarded as a major foreign
policy success of the Zuma era. This chapter argues that it was more a mixed blessing
than an unqualified success, though. On the plus side, it allowed South Africa to join
an important agenda-setting and operational club of emerging global and regional
powers, thus providing a new outlet for South Africa’s long-standing ambition to make
a difference to global governance. In the process, two costs were incurred.
The first and most important is that BRICS membership has not, as hoped for
by the Zuma government, contributed to “the radical transformation” of the South
African economy in favor of a more inclusive, state-led development-focused growth
model. In fact, developments since South Africa joined BRICS have deepened the
exclusivist, limited-access nature of the South African economy. A number of struc-
tural weaknesses, some of which are leftovers from the apartheid era, but reinforced
83
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84 P. Nel
by policy choices made since 1994, prevent South Africa from achieving the dream
of a non-racial, inclusive open-access that is promised in the 1996 Constitution. The
net effect of these weaknesses is that a large segment of the South African popula-
tion, about a quarter to a third, find themselves systematically excluded from the
benefits of a modern industrialized economy. To combat this, the Zuma government
embraced the notion of “radical economic transformation”, to be achieved through
a state-led industrial development project that would enhance Black participation
in the economy and would lead to the elimination of poverty by 2030. If anything,
exclusion has worsened since 2010, despite the commercial opportunities that BRICS
membership brought, and South Africa’s increasing commercial presence in Africa.
By perpetuating and deepening South Africa’s dependence on primary commodity
extraction, the close association with China in particular has not brought South
Africa closer to halt the relative decline of its manufacturing sector, and has done
little to reverse the education and employment disparities that are some of the worst
legacies of apartheid. It would be wrong to blame BRICS membership exclusively
for the continuation of the structural and institutional weaknesses of the South
African economy. Most of the blame rests with the way in which President Zuma has
developed a strong neo-patrimonial hold on key levers of the economy, particularly
State Owned Enterprises (SOEs) and the organs of state procurement and fiscal
management. These instruments have been used, often in ways that disregard con-
stitutional rules and constraints, to create and capture rents for him, his closest allies,
and segments of the Black business elite. BRICS membership provided some means
to oil this rent-creation machine, through a range of commercial and infrastructural
deals between South African authorities and BRICS members.
The second cost of BRICS membership has to do with South Africa’s foreign
policy orientation and its current contributions to global governance. Most
significantly, BRICS membership provided legitimacy for, and a means through
which, the Zuma government could make its mark as the leading regional power
in Africa. Despite a range of ambiguities, South Africa’s original post-transition
foreign-policy orientation was predominantly that of an emerging middle-power
and bridge-builder (Schoeman, 2000; Jordaan, 2003). Post-apartheid South Africa
embraced multilateralism as a vehicle to link the legitimate development concerns
of poorer states and the opportunities provided by a globalized liberal economic
order. By 2017, this orientation has not completely disappeared. Gradually, and
significantly so since 2010, a second aspiration, that of being a regional power, has
become prominent (Qobo and Dube, 2015). This orientation represents an alterna-
tive approach to globalization than the middle-power approach, and aims more
explicitly at securing regional hegemony, both for the sake of prioritizing domestic
development, but also as a means to join in the establishment of alternative centers
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South Africa, BRICS, and Global Governance 85
of what Carmody calls “gregional power” in global governance, capable of challeng-

ing “Western” hegemony (Carmody, 2012). South Africa was invited to join BRICS
largely because of its economic preponderance and leadership ambitions in Africa,
and BRICS membership both legitimated and provided additional means for South
Africa to secure its status as a regional hegemon. This reorientation of South Africa’s
external role was accompanied by a much more inward-looking reprioritizing of
“the national interest” (see below), and a more instrumental appreciation of how
the rest of Africa could contribute to South Africa’s well-being. On the global stage,
and, as a corollary to the inward looking regional-power orientation, South Africa
is more willing today than in the early post-apartheid era to support the anti-liberal
“sovereignist” agenda also favored by other BRICS members.
The story of South Africa’s membership of BRICS is thus a tale of how South
Africa, by originally setting out to change the world for the betterment of itself and
of its continent, ended up recalibrating its domestic development and its global
orientation, and not necessarily for the better. In what follows, I relate this story in
three parts. The first shows why South Africa and the then four BRICs states found
each other attractive to start off with, and why the active diplomacy of the Zuma
presidency had a favorable reception. The second episode focuses more directly on
how BRICS membership shaped latent and emerging tendencies in South Africa’s
domestic and foreign policy orientations. A third part looks at how, despite the
expressed desire of President Zuma, BRICS membership has coincided with a
weakening, not an improvement, of the capacity South Africa to become an inclusive
social order. A final section concludes by situating the preceding episodes in the
context of a conceptual typology that notes a fundamental isomorphism shared by
all the BRICS members, South Africa included.
South Africa as “Another BRIC in the Wall” (Carmody, 2012)

Being invited to join BRICs in 2010 was an important event for South Africa. It
did not only reflect successful diplomatic efforts on the part of the Jacob Zuma
administration, but also cemented South Africa’s reputation as an emerging regional
power with global standing. The SA government hoped to exploit the commercial
and diplomatic opportunities that membership offered to support and deepen
the “New Growth Path” (NGP) — announced in 2010, and since then replaced by
the National Development Plan (NDP) as the long-term political plan aimed at
eliminating poverty and halving inequality by 2030 (see Table 1 for a South African
Timeline). In promoting the NGP, and the NDP, the growth trajectories and experi-
ences of Brazil, China, and India were regarded as analogous to that of, and as models
for, South Africa. It was also projected that South Africa, in partnership with the
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86 P. Nel
Table 1: South Africa timeline.

1990 Release of Nelson Mandela and other political prisoners.
1991 Start of multi-party talks.
President De Klerk repeals remaining apartheid laws, international sanctions lifted.
1994 First democratic SA election. Nelson Mandela elected president. International sanctions
lifted. SA takes seat in UN General Assembly.
Launch of the Reconstruction and Development (RDP) economic programme.
1996 Truth and Reconciliation Commission begins hearings on human rights crimes
committed by former government and liberation movements during apartheid era.
Parliament adopts new constitution.
Adoption of Growth, Employment and Redistribution (GEAR) macroeconomic strategy.
1998 SA hosts Non-Aligned Movement (NAM) Summit.
1999 General elections. Thabo Mbeki becomes second President of post-apartheid SA, after
Mandela declined to stand for a second term.
SA joins G20 as a founding member.
SA hosts Commonwealth Heads of Government Meeting.
2000 SA hosts UN AIDS Conference.
2001 SA hosts UN World Conference Against Racism.
New Partnership for Africa’s Development (NEPAD) launched and accepted by the African Union.
2002 SA hosts World Summit on Sustainable Development.
2003 6 June 2003, Yashwant Sinha (External Affairs Minister of India), Celso Amorim (Foreign
Minister of Brazil) and Nkosazana Dlamini-Zuma (Foreign Minister of SA) formalize the
India–Brazil South Africa (IBSA) Dialogue Forum by signing “Brasilia Declaration”.
2004 Ruling ANC wins landslide general election. Thabo Mbeki begins a second term as president.
2005 President Mbeki sacks his deputy, Jacob Zuma, due to charges of corruption. GEAR macro-
economic programme replaced by Accelerated and Shared Growth Initiative for SA
(ASGISA).
2006 Former deputy president Jacob Zuma acquitted of rape charges, reinstated as deputy leader
of ANC.
2007 Zuma elected chairman of the ANC.
SA elected for first of two terms on UN Security Council (2007−2008).
SA hosts the G20 Secretariat.
2008 President Mbeki resigns over allegations that he interfered in Zuma’s corruption case. ANC
deputy leader Kgalema Motlanthe chosen by parliament as president.
2009 Jacob Zuma elected president. Economy goes into recession for first time in 17 years.
2010 SA hosts the World Cup football tournament.
New Growth Path replaces ASGISA as macroeconomic program.
2010 SA invited to join BRICS group of states.
2011 President Zuma attends the third BRICS Summit in Sanya, China.
COP 17 (United Nations Climate Change Conference) held in Durban.
SA elected for second term on UN Security Council (2011–2012).
Fifth IBSA Summit hosted by SA in Durban.
(Continued )
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Table 1: (Continued )
2012 Police open fire on striking workers at platinum mine in Marikana, killing 34, injuring 78,
and arresting 200. President Zuma re-elected as leader of the ANC.
Nkosazana Dlamini-Zuma, ex Health and Foreign Affairs Minister elected as Chairperson
of African Union Commission.
2013 Nelson Mandela passes away.
SA hosts the fifth BRICS Summit in Durban.
Government introduces a new macroeconomic program, the National Development Plan
(NDP)-2030.
2014 SA’s fifth democratic election. President Zuma elected for second term.
2015 Government receives unwelcome international attention over allegations of bribery to
disgraced international footballing body FIFA to secure 2010 World Cup, and allowing
Sudanese President Omar al-Bashir to visit despite International Criminal Court arrest
warrant over genocide and war-crimes charge.
2016 Supreme Court rules President Zuma violated the constitution by not repaying public
money used to improve his private residence.
SA announces intention to withdraw from the International Criminal Court (ICC).
2017 SA revokes decision to withdraw from ICC after court declares it “unconstitutional and
illegal”.
President Zuma dismisses widely-respected Finance Minister Pravin Gordhan, leading to
the country’s credit rating being cut to “junk” status by some CRAs.
BRICs, could contribute to and benefit from the growth potential of Africa. Zuma,
in contrast to Mbeki who was skeptical about China’s goals in Africa, was impressed
by the commercial opportunities that China (and other BRIC members) held, and
saw BRIC countries as crucial partners in cementing South Africa’s place in Africa,
in promoting agendas for global change, and in enhancing Zuma’s own particular
domestic agenda (Zuma, 2013).
By 2010, China was already South Africa’s main trading partner, taking 8.8% of
its merchandise exports, mainly ores, slag and ash, and iron and steel. At that stage,
the USA took 7.6% of SA’s exports, and Japan 6.9%. China accounted for 13.9% of all
merchandise imports into SA, mainly electrical machinery and appliances, footwear
and clothing. India also featured as one of SA’s top 10 export destinations (taking
2% of total merchandise exports), and as one of its five most important suppliers.
In contrast, Brazil and Russia took only 1% and 0.4% of SA’s exports, respectively
(SACU, 2012; Brand South Africa, 2012). Expectations were high that membership of
BRICS would enable South Africa to explore its comparative advantages in increas-
ing exports to all of these markets, specifically in fruit and related products, ores,
and machinery (IDC, 2012). Inward foreign direct investment (IFDI) from China
and India into South Africa grew noticeably since 2003, and India became one of
the top five sources of IFDI to South Africa between January 2003 and July 2015
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88 P. Nel
(Sanchez, 2015). By the end of 2011, South Africa — in terms of stock — had become
the eighth largest recipient of Chinese outward foreign direct investment (OFDI).
In return, by 2011 a fifth of South Africa’s stock of OFDI was in the BRIC countries,
mainly China. This share was slightly more than the total stock of South Africa’s
OFDI to Africa in 2011 (UNCTAD, 2013).
Hence, and obviously, growing commercial relations between South Africa and
some of the BRICs (mainly China and India) did play a role in the invitation that the
BRICs extended to South Africa to join the group. In addition, South Africa’s proven
track record as a supplier of mineral commodities, and its leading role in the develop-
ment and provision of mineral-related services, made it an attractive partner for the
commodity-hungry China and India. The total value of South Africa’s mineral reserves
is estimated at $2.5 trillion. South Africa leads the world in the mining of platinum,
chrome, vanadium, and manganese, is the world’s third-largest producer of gold,
and excels in the provision of mining-related services (BRICS, 2011). This, coupled
with the sophistication of South Africa’s service delivery in the fields of personal and
corporate finance, and in telecommunications, stimulated BRICs interest.
However, it was not only the size of the South African market or the degree of
economic exchange between South Africa and the BRICs that secured SA a place at
the BRICS table in 2010. SA is a midget compared to the other members. In 2016, SA
held only the 30th position in GDP measured in constant 2005 international dollars,
factoring in purchasing power), and at $736 billion (in constant international dollars)
its total output was less than 4% of China’s, about 9% of India’s, 20% of Russia’s, 24%
of Brazil’s, and 0.6% of total world output (IMF, 2016). Also in terms of trade, South
Africa was a small player in 2010, providing only 4% of imports into India, just over
1% into China, 0.4% in the case of Brazil, and 0.2% into Russia (IDC, 2012).
Despite its relative smallness, South Africa was attractive as a future BRICS
member because of a mix of a number of factors, additional to its growing com-
mercial links with some of the existing members. It is difficult to place these in a
strict rank order of importance, but there is good reason to believe that South Africa’s
aspirations to be “the gateway to Africa” played the most significant role. In addi-
tion, South Africa’s credibility among a variety of actors as a global bridge-builder
and reform-minded participant, made it an attractive partner for a group who saw
itself as the core shapers of an alternative global order that would not challenge
liberal globalization tout court, but aimed at making globalization work more to the
benefit of the likes of emerging markets and their partners in the Global South. The
perception of South Africa as the gateway to Africa, and as a credible and respected
reform partner were based on the way in which it reintegrated with the global, and
African, economy after 1994, the moral weight of its own domestic transition, and
its proven role as bridge-builder in global governance in the 1990s and early 2000s.
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On the most basic level of identity conception, the SA leadership embraced

and cultivated the notion that its transition from apartheid to non-racial inclusive
democracy was an exceptional moral achievement. And, indeed, it was. SA was eager,
and was encouraged, to carry its message of peaceful change, rule-bound justice, and
reconciliation onto the world stage, and a distinct idealism centered around these
themes could be observed in its foreign policy right from the start (Becker, 2010).
Over time this was translated into a global reformist élan: the pursuit of a more
equitable distribution of power and privilege on the global stage, and the celebra-
tion of rule-based multilateralism as the preferred means to secure the interests of
developing countries in a globalizing world economy. The notion that South Africa’s
transition from apartheid was exceptional and that it is thus entitled or honor bound
to help to make the world more just and protect the weak, continues as an implicit
identity-driver in its foreign policy up until today. The most recent White Paper on
South Africa’s Foreign Policy (DIRCO, 2011) and the glossy 20 Year Review — South
Africa 1994−2014, published by the SA Presidency (2014), emphasize South Africa’s
“unique approach to global issues” and its commitment to carrying the principle of
“ubuntu” (the virtues of other-directedness, non-confrontation, and compassion)
to the world.
Underlying this idealized self-conception are some material interests, but it
would be wrong to not also appreciate how this self-conception shaped South Africa’s
behavior during a large part of the post-1994 years. As far as the material interests
are concerned, South Africa’s most immediate post-apartheid desire was to fully
integrate with the global political economy as a means to grow out of the confines
that apartheid imposed and invited. This implied an acceptance of the liberal
principles underlying the global economy, an ideological price that was offset by a
commitment to global reform and the promotion of an agenda that would favor the
dispossessed and marginalized globally (Nel et al., 2001; Jordaan, 2012).
In stark contrast to the protectionist/isolated years of 1985−1990, post-apartheid
South Africa embarked on an ambitious program of economic liberalization — a
dramatic “gamble on investment” as one commentator aptly described it (Nattrass,
1996; Nel, 2002). This was a program of rapid liberalization of external economic
relations, coupled from 1996 onwards with a liberal domestic macroeconomic policy
(titled the “Growth, Employment, and Redistribution” — GEAR program) that
combined prudential state budgeting, conservative monetary policy, privatization,
and broadening of the participation black South Africans in private economic owner-
ship and management (so-called Black Economic Empowerment — BEE — changed
to BBBEE — Broad-based Black Economic Empowerment — in 2003). Many, but
not all, of the protectionist mechanisms used by the embattled apartheid state were
abolished, South Africa embraced the results of the Uruguay Round of GATT trade
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90 P. Nel
negotiations, and joined the WTO. South Africa was forced to join the WTO as a
“developed economy” and not as a developing economy. This implied deeper tariff
cuts and fewer developmental concessions. Deeper integration of South African
business into the global economy also implied the relocation of headquarters of
South African multinational firms, ostensibly to exploit the opportunities that
internationalization brought. South African imports and exports, as a percentage
of GDP, increased from a 5-year average of 39 in the period 1990−1994 to 60 in the
period 2005−2009 (World Development Indicators, 2015).
South Africa committed under the GATT Uruguay Round to bind all but 2% of
all its tariff lines and replace non-tariff barriers with transparent tariffs (Edwards,
2015). By 2010, the mean applied weighted tariff rate on all South African products
was a third of what it was in the early 1990s (World Development Indicators, 2015;
Department of Trade and Industry (DTI), 2010). On a regional level, South Africa
joined the Southern African Development Community (SADC), initiating a SADC
free-trade area that came into effect in 2008 (Sandrey, 2013). Not qualifying for
membership of the Lomé Convention and its preferential treatment of African,
Caribbean and Pacific (ACP) states, South Africa (as part of Southern African
Customs Union which also includes Botswana, Lesotho, Namibia, and Swaziland)
negotiated an extra-regional Trade, Development and Cooperation Agreement
(TDCA) with the European Union, signed in 1999 (Krapohl et al., 2014), and also
a FTA with the European Free Trade Association states (Iceland, Liechtenstein,
Norway, and Switzerland) that came into effect in 2008. It also benefitted from the
African Growth and Opportunity Act (AGOA), passed into law in 2000 by the US
Congress. AGOA provides quota- and duty-free entry of some African goods to
the US market, and contains trade preferences that are more favorable for African
states than those contained in the WTO’s Generalized System of Preferences
(Prinsloo, 2016).
Compared to the large divestments from South Africa in the 1980s, the next
two decades was a boom time for IFDI, leading to a tenfold increase in the value
of IFDI stock, reaching an average value of US $111,570 million in the period
2005−2009 (UNCTAD, 2016). This represented an increase from just over 8% of
GDP in the period 1990−1994 to close to 40% in the period 2005−2009. The stock
of OFDI by South African institutions constituted an average of 5% of its GDP in
the period 1990−1994 (Verhoef, 2011). By 2010, it had increased to 25% of GDP
(UNCTAD, 2012).
One of the most important tools through which post-apartheid South Africa
secured IFDI was the signing of a large number of bilateral investment treaties
(BITs) that made extensive provision of third-party arbitration in the case of
investor-state disputes. During the immediate post-apartheid period (1994−1998)
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South Africa entered into 15 BITs, mostly with European countries, and by 2005 had
signed 41 such treaties, some of them also with other developing states (Peterson,
2006). By 2009, 42 BITs were in place. While it was clearly part of an aggressive
strategy to reinternationalize as quickly as possible by providing assurances to
risk-averse investors, there is also evidence that the South African authorities
entered into these without much thought about the range of issues that could lead
to investor-state disputes, and the implications of these agreements for national
policy autonomy (Poulsen, 2014). We will see how South African attitudes towards
this essential liberal instrument of global integration changed dramatically by the
time that South Africa joined BRICS.
Regional integration was a very important component of global economic reinte-
gration, and provided the basis for the notion that South Africa acts as a “gateway” to
Africa. Such status is largely self-assigned, and not necessarily popular in the rest of
Africa (Alden and Schoeman, 2013; Obi, 2015), but it was instrumental in persuading
the original BRICs members to invite South Africa to join. For many observers, eco-
nomic integration with the rest of Africa amounted to malign economic penetration
by South African companies, resulting in deindustrialization in certain industries,
the squeezing out of local retail, the dissemination of liberal economic norms, and
contradictorily, the imposition of non-tariff trade and other barriers on neighboring
states (Daniel and Bengu, 2009; Southall and Comninos, 2009; Carmody, 2012). The
mining, retail, beverages, telecommunication, and banking sectors in South, made
extensive use of the pro-Africa focus of the Mbeki era (see below) to expand their
foreign investment stock across the continent. By 2011, South Africa was the fifth
largest holder of FDI stocks in Africa, and the second largest developing-country
investor in Africa (after Malaysia) (UNCTAD, 2013).
Although driven by different domestic agendas, and following different sequenc-
ing schedules, there was close symmetry between South Africa’s post-1994 drive to
liberalize and the global integration programs of the BRIC members. All five BRICS
members experienced a deepening of integration into the global economy in the
1990s and 2000s, albeit from different baselines. Both India and Brazil instituted
programs of trade and international financial liberalization that coincided South
Africa’s in the early 1990s, albeit from lower levels of existing integration than South
Africa. Noticeably, South Africa was already relatively deeply embedded in the
global economy, compared to the other BRICS, by the time of the first fully inclusive
democratic election in South Africa in 1994. This was due to its role as supplier of
highly-valued mineral commodities, including gold and platinum, and the fact that
its financial institutions had important international linkages.
By the time that it joined BRICS, South Africa had increased its exposure and was
the most economically globalized of all the BRICS. Axel Dreher’s 100-point index of
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92 P. Nel
economic globalization, which incorporates both de facto capital and trade flows, as
well as the depth of existing de iure restrictions on such flows, provides a useful guide
to measure a state’s integration with the global economy (Dreher, 2006). Taking 5-year
averages, the relative scores of the five BRICS in the period 1990−1994 (with the score
for 2010−2014 in brackets) were: Brazil 46 (51), China 40 (50), India 24 (42), Russia
31 (53), and South Africa 51 (65). Global reintegration, and extensive penetration of
the African continent was good for the South African economy, in real terms, South
Africa’s GDP was 77% larger by 2012 compared to 1994. In per capita terms, this
translated into real growth of 31% (World Development Indicators, 2015).
South Africa also had a significant impact as a “mobilizer” (Vom Hau et al.,
2012) of the African region, in particular to get the region to look for ways in which
it could benefit from integration into the liberal world economy. It also persuaded the
rest of Africa to be more forthcoming in accepting standards of good governance as
defined by Western powers and the International Financial Institutions (IFIs), such
as the World Bank and International Monetary Fund. Aligning Africa closer with
global liberal norms, in return for better economic access to Western markets and
deep Official Development Assistance (ODA) pockets, turned out to be the main
legacy of the Mbeki Presidency (1999–2008). Mbeki personally invested in and
provided ideological justification and organizational capacity for the NEPAD (the
New Partnership for Africa’s Development) program, which became the flagship of
Africa’s program of rebirth and accelerated economic and political modernization
(Taylor and Nel, 2002). In 2002 NEPAD became an official African Union project,
with headquarters in Johannesburg, South Africa, and aimed at enhanced economic
cooperation within Africa and between Africa and its international donors and well-
wishers, based on infrastructural modernization, trade and investment facilitation,
and improving corporate and public governance on the continent. Although China
was by 2010 already significantly involved in a large number of African states, Brazil,
India, and Russia were especially encouraged by SA’s proven capacity to influence
Africa’s agenda and its economic successes in Africa to embrace South Africa’s
self-appointed status as “gateway” to a continent whose economic prospects looked
particularly rosy in 2010 (Taylor, 2014).
South Africa’s commitment to a liberal (open) global economic order, and its
willingness to take the lead in persuading the rest of Africa that this order could
also benefit them, was balanced by a desire to assist in enlarging the development
opportunities for poorer states, and to do so in terms that would echo South Africa’s
own domestic commitment to justice and non-discrimination (Jordaan, 2012).
By 2010, post-apartheid South Africa’s contribution to global governance, and in
particular its commitment to represent a “South’ agenda in the existing institutions of
global governance, were well established. Highlights include its membership (as the
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only African member) of the G20 since its founding in 1999, the first of two stints
on the UN Security Council (2007−2008, and again in 2011−2012), and privileged
participation in the so-called Heiligendamm process launched by Germany in 2007
in which the G7 group of industrialized states interacted with China, India, South
Africa, Brazil, and Mexico on a systematic basis, leading to the enhanced global-
economic role of the G20 in 2009 (Vickers, 2008). South Africa’s enhanced status and
global ambitions also contributed to the formation of the India−Brazil−South Africa
Dialogue Forum (IBSA) in 2003 (Nel and Stephen, 2010). This enhanced South
Africa’s role in the arena of South−South cooperation and led to important policy
initiatives, including the BASIC (Brazil, South Africa, India, and China) alliance
that was formed in the lead-up to the 2009 Copenhagen Conference of the Parties
to the United Nations Framework Convention on Climate Change (UNFCCC).
The timeline in Table 1 provides additional evidence of the prominent role that
South Africa played both in institutions of the Global South, and in hosting global
policy conferences in which it could hone its capacity to influence the agendas of
the Global North. The 2000s turned out to be the high-point of this middle-power,
bridge-building role, especially in the context of negotiations in the World Trade
Organization (WTO), and in the G20 processes. As Stephen (2013: 97) notes, South
Africa’s negotiation strategy in the WTO has been less confrontational and more
integrative than either of its close ideological partners in IBSA (Donna Lee, 2006; Nel
and Stephen, 2010). Since the creation of the WTO’s Dispute Resolution Mechanism
in 1995, South Africa has not been a complainant in a single case, although it has
been a respondent in five, and a third party in seven. In contrast, India has been a
complainant in 23 and Brazil in 31 (WTO, 2017).
As a bridge-builder, South Africa was influential in pushing the industrialized
countries to live up to their own liberal principles, in particular as far as liberalization
of agricultural trade is concerned, and to accept a developmental agenda in such
contentious matters as intellectual property rights and in the Doha Round of WTO
negotiations that kicked off in November 2001. In turn, South Africa has used its
influence to keep developing countries engaged in global trade negotiations after
the famous African walk-out at Cancun in 2003 (which South Africa joined), and
to accept (at least some of) the so-called “new” trade issues, such as trade facilita-
tion, trade and investment, and trade facilitation that industrialized states wanted
to impose (Lee, 2006; Jordaan, 2012). Straddling the distributionally polarized
agendas of the South and the industrialized states means that South Africa’s role
was (and remains) often ambiguous, and that it is sometimes perceived as having
moved too closely to a position where it not only provides legitimacy to a global
neoliberal agenda on trade and development, but has been co-opted by the major
powers (Bond, 2004; Jordaan, 2012; Lee, 2006).
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94 P. Nel
South Africa’s middle-power bridge building diplomacy also supported d ifferent

revisionist/reform attempts in other fora of global governance. These included
attempts to balance/block the power of the North in climate-change negotiations,
pursuing institutional reforms such as a revision of voting rights in IFIs and
expanded permanent membership of the UNSC, and influencing the agenda of
the G20 to be (Stephen, 2013; Nel, 2010). South Africa was widely perceived and
valued as an emerging reform-orientated middle power (Schoeman, 2000; Jordaan,
2003), committed to multilateral, rule-based global governance, and well placed to
challenge Western dominance, but also to bridge divides between the established
powers of the industrial North and the global South. This fitted the global reformist
interests of the BRIC nations very well.
South Africa as a BRICS Member: From Bridge-Builder

to Regional Power
BRICS membership coincided with important changes in the foreign and domestic
policies of South Africa. Some of these had a long gestation, dating back to the
middle of the 2000s and cannot be attributed exclusively to the effect of BRICS
membership. However, BRICS gave it a certain momentum, focus, and longevity.
Two important trends stand out. First, and in contrast to the almost helter-skelter
manner in which South Africa embraced global economic integration on liberal
terms between 1994 and 2007, there has been a distinct national-interests-first
reorientation in economic development outlook, and trade and foreign policy in
general. Secondly, South Africa has become more explicit in challenging some of
the universalist and interventionist principles that underlie Western liberalism’s
approach to human rights, good governance, and humanitarian intervention,
prompting some observers to speak of a “sovereignist turn” in South Africa’s orien-
tation. By enumerating these changes in what follows, I do not want to create the
impression that South Africa has turned its back totally on the policies of the 1990s
and 2000s that stood it in reasonably good stead. Middle-power bridge-building
is not dead, and neither is South Africa’s basic commitment to a global economic
order integrated on liberal precepts. However, by the time that Jacob Zuma became
President in 2009, criticism of the failings of these policies had become much more
prominent, and the process of looking for alternatives was well-under way.
Three processes/documents were crucial signposts of the changes that would
come to fruition after Zuma took over the presidency of the ANC in 2007, and
became President of the country in 2009. The one was the work of the National
Planning Commission (NPC) from 2010 to 2013, including a “Diagnostic
Report” — a comprehensive review of strengths, weaknesses, and opportunities
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facing South Africa. The Diagnostic Report formed the basis of the eventual National
Development Plan, and was quite critical of the lack of achievement in a number of
areas, including employment, broad-based quality education, and socio-economic
and spatial inequalities (National Planning Commission, 2013).
To overcome these shortcomings, the NDP proposed that government poli-
cies be geared toward turning the South African state into a capable, strong, and
accountable developmental state, associated with explicit industrial and labor-market
policies that aim at decent job creation and lifting per capita income levels across the
board. Foreign policies and external economic relations should support these goals,
and the range and sequencing of external liberalization and integration with the
global economy must be made dependent on domestic industrial and redistributive
goals. Chapter 7 of the NDP made it clear that foreign relations, including projects
focused on shaping global governance and cementing South Africa’s position in
Africa, in future had to serve one and only one purpose: promoting the national
interests of South Africa, conceived in terms of overcoming the shortcomings cited
above, and identifying the key global partners that could assist in this:
The shift of global power towards developing countries provides South Africa with
an opportunity to maximise its regional and international influence over the next
20 to 30 years. Policy making should be driven by the objectives set out at the
inaugural meeting of the National Planning Commission in May 2011: to grow
the economy, reduce poverty and improve the quality of life of all South Africans.
In other words, government’s global and regional policy-making stance should be
South Africa-centric. Policy-making should improve the country’s functional inte-
gration in the region, on the continent, among developing countries — especially
with key states like Brazil, India, and China — and in the world, with measurable
outcomes.
The 2010 South African Trade Policy and Strategy Framework produced by the
Department of Trade and Industry (DTI, 2010) pointed out that while South Africa
had been quite successful since the early 1990s at liberalizing trade by reducing tariffs
and canceling them altogether on more than 50% of imports, this had not assisted
South Africa to give full effect to its industrial development plans and diversification
of exports. To align trade and industrial development better, it argued, a strategic
developmental approach to tariff policy had to be introduced — analogous to the
managed trade policies followed by “successful developing economies” — meaning
China, in particular.
The third document that clearly heralded the realignment towards a domestic
developmental agenda was the 2011 White Paper on Foreign Policy issued by the
renamed Department of International Relations and Cooperation (DIRCO, 2011).
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96 P. Nel
Titled Building a Better World: The Diplomacy of Ubuntu, the White Paper continued
to frame foreign policy in terms of the unique and exceptional “South African
experience”, normatively couched in the universalist terms of “Ubuntu”. Beyond
this normative veneer, though, the White Paper is quite hardnosed in its explicit
commitment to the promotion of national interests, conceived of in the same
domestically-orientated terms that the NDP uses. While the themes of protecting
multilateralism, and promoting cooperation to secure “a just, humane, and equitable
world order of greater security, peace, dialogue and economic justice” receive fair
hearing, the White Paper repeatedly emphasizes that the goal of South Africa must
be to “build an environment in which it can realize its national socio-economic
agenda as well as its political and security interests” (DIRCO, 2011: 10). As was
the case with the Diagnostic Report mentioned above, and in Chapter 7 of NDP,
the White Paper contained an implicit critique of the universalistic role of bridge-
building middle-power that was associated with South Africa’s foreign policy under
Mandela and Mbeki, now replaced with a solid commitment to pursue a narrow
range of national interests above all else. By the time of the fifth BRICS Summit in
2013, the first held in South Africa, the conception of national interests as defined in
terms of a developmental approach to domestic and internationally-focused policy
making was firmly established as the distinctive trademark of the Zuma era in South
African politics (Zuma, 2013).
This reconceptualization of national interests — manifested in these various
documents and other policy declarations (Qobo and Dube, 2015) — and the policy
and behavioral changes to be reviewed below, can be seen as manifestations of a
distinct “sovereignist” turn on the part of South Africa. “Sovereignist” here refers
to a normative preference for domestic and international arrangements that create
maximum room for national autonomy protection of sovereignty — shared by all
the BRICS, what Miles Kahler calls “maximum policy discretion to deal with the
effects of globalization” (Kahler, 2013). As Laïdi (2012: 614) argues:
The BRICS form a coalition of sovereign state defenders. While they do not seek to
form an anti-Western political coalition based on a counter-proposal or radically
different vision of the world, they are concerned with maintaining their indepen-
dence of judgment and national action in a world that is increasingly economi-
cally and socially interdependent. They consider that state sovereignty trumps all,
including, of course, the political nature of its underpinning regimes.
By the time of the fifth BRICS summit (held in South Africa) in 2013, such a
sovereignist approach became a distinguishing feature of the Zuma era. It is no
coincidence that BRICS’s most important sovereignist initiative to date — the
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NDB, was agreed to at the fifth Summit, followed by the announcement of a

Contingent Reserve Arrangement at the sixth Summit 2014 (in Brazil). More
recently, the idea of a new CRA, aimed against the dominance of the established
“Western” agencies, has also been floated.
Although hardly explored in the literature on a developmental state in South
Africa (see the edited volume Edigheji, 2010), there is a close association between
the notion of the protection of sovereignty/national autonomy and the pursuit of
national development strategies in an era of (and in reaction to) economic globali-
zation (Polidano, 2001). In addition, the aspiration to be recognized as a regional
power, in contrast to the role of middle-power bridge-builder, also presupposes a
change of priorities. Bridge-building uses the strategy of issue entrepreneurship to
carve out the policy space in which the developing world — including Africa — can
benefit from economic globalization. The regional-power approach, in contrast,
relies on organizing and mobilizing the region to guarantee that the regional
power secures its national interests first and foremost (Vom Hau et al., 2012). In
turn, the regional power undertakes to provide regional public goods, such as
the provision of peace-making and peace-keeping resources, protection against
foreign intervention, and representing Africa in global governance fora (Hentz,
2008; Vickers, 2013).
The national-interests-first sovereignist turn in South Africa’s interaction with
the world is reflected in three significant policy innovations during the years of
BRICS membership. Two relate to domestic development priorities, while a third is
reflected in South Africa’s voting behavior at the UN.
Domestically, a distinct counter-movement against perceived restrictions
on national autonomy grew in intensity from 2009 to 2010 onwards. The specific
context was a review of the 42 BITs that South Africa entered into since 1994
(DTI, 2009). As explained above, this formed part of a “gamble on investment”
which characterized the first decade of the post-apartheid era (Peterson, 2006).
BITs have been interpreted as a crucial dimension of the legalization of world
politics. Abbot et al. (2000) describe legalization as a form of institutionalization
that is characterized by heightened obligations, greater precision in rules and,
perhaps most crucially, the delegation of rule interpretation and enforcement
to third parties. It is this later feature of the BITs that South Africa had entered
into that precipitated a rethink on its part, initiated by a case brought by Italian
investors (with a holding company in Luxembourg). The plaintiff claimed that the
stipulations of the Mineral and Resources Development Act of 2002 (MPRDA)
constituted an infringement of their property rights and that it was unlawful as
due process was allegedly not followed. What the plaintiffs found particularly
damaging were the stipulation of the MPRDA that South Africa maintains
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98 P. Nel
national-control of mineral resources, and that all companies had to embark on

programs of Broad-based Black Economic Empowerment (BBBEE) (see Piero
Foresti, Laura de Carli and Others vs. Republic of South Africa, ICSID Case No.
ARB(AF)/07/01). The claim was settled in 2010 (mining rights were exchanged for
a 5% Black empowerment arrangement), but the case triggered a comprehensive
review of the potential implications of BITs for the national policy autonomy of
the South African state. This culminated in the rescinding of a number of BITs
with European states from 2012 onwards (Norton, 2014; Bosman, 2016). By the
end of 2015, a new South African “Protection of Investment Act” came into effect,
offering investors protection in national courts, mediation, recourse to state-
to-state arbitration, but ruling out third-party investor-state arbitration. South
Africa was not alone in questioning the wisdom of bargaining away national
policy autonomy for the sake of IFDI, and the issue of state-investor arbitration
became a major bone of contention in debates about mega-regional trade agree-
ments (RTAs) such as TTIP and the TPP. UNCTAD also devoted considerable
attention to generating new guidelines on sovereign-friendly investment regimes
(UNCTAD, 2016, Chapter 3).
A second manifestation of the inward-looking national-interests-first change
in South African policy comes in the form of increasing policy “warnings” that
South Africa in future will tie its tariff policy much more closely to its develop-
ment needs. In an implicit criticism of the rapid and deep liberalization of South
African trade in the 1990s, the Department of Trade and Industry (DTI) has started
issuing warnings that “South Africa will be resolute in using tariffs to defend
domestic industry and support industrial development” (cited in Creamer, 2017;
see also Dube and Gus, 2012). In his pronouncements on this matter (February
2017) the DTI Minister did add that South Africa cannot afford to become “overly
protectionist”, but pointed out that South Africa will no longer be a push-over when
it comes to trade policies and trade remedies” (cited in Creamer, 2017). Above,
I noted that South Africa has as yet not been a complainant in a single WTO
dispute resolution proceeding. Judging by the Minister’s words, it would seem that
from 2017 onwards, South Africa will be ready to resort to that type of remedy if
it deems its own industrial interests to be at stake. Part of this can be regarded as
South Africa’s response to growing global protectionist trends that came to a head
with the BREXIT vote in the UK and the election of President Trump in the USA.
However, the decision to align tariff policy closer with national industrial policy
dates back to 2012−2013 (DTI, 2013).
The third manifestation of South Africa’s sovereignist turn is a pattern of voting
in the UN that shows an increasing hesitancy to criticize states for behavior that
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could be construed as breaches of human rights and other international liberal

norms. Again, this sovereignist turn did not originate with the Zuma presidency, but
had gradually been gestating in the 2000s in contrast with South Africa’s early com-
mitment to the promotion of human rights, which the Mandela presidency elevated
to a specific aim of the new South Africa’s foreign policy. In 1998, South Africa’s
National Plan of Action for the Promotion and Protection of Human Rights (NAP)
was submitted to the UN’s Office of the High Commissioner for Human Rights and
emphasized that all human rights were “universal, indivisible and interdependent”
(cited in Graham, 2016: 63). Over the next decade, South Africa’s approach to the
matter increasingly became ambiguous (Jordaan, 2014). As Graham (2016) shows,
South Africa’s policy on the international promotion of human rights continues to be
an evolutionary learning process, in which a broader range of interests/forces came
to the fore than in the heady, single-mindedness of the early post-apartheid days of
the 1990s. South Africa continues to be quite consistent in voting for and promot-
ing thematic human rights concerns in various UN bodies, including the right to
development that has become a theme of its membership of the Human Rights
Council (HRC; member since 2014). However, in both its terms as non-permanent
member of the UNSC (2007−2008; 2011−2012), and in its voting behavior in the
UN General Assembly Third Committee and the HRC, South Africa is increasingly
hesitant to support country-specific resolutions that could be construed as interfer-
ence in the domestic affairs of member states, or that manifest a broad interpreta-
tion of the “interventionist” terms of Chapter 7 of the UN Charter. South Africa’s
policy aims at squaring competing values: promotion and protection of human
rights to give effect to the normative exceptionalism that the country continues to
claim, and at the same opposing attempts by Western nations to weaken norms
pertaining to non-interference, territorial integrity and sovereignty. Human rights
remain a bone of contention in the UN system, and while this battle is not of South
Africa’s making, its very legitimacy as a spokesperson for, and its aim of becoming
a permanent UNSC member on behalf of Africa, are dependent on its credentials
as an opponent of liberalism of the interfering kind (Jordaan, 2012). As far as the
latter is concerned, South Africa (for most of the time) consistently found common
ground with the BRICs (Ferdinand, 2014). Its decision in 2016 to withdraw from the
Rome Statute that established the International Criminal Court (ICC), in line with
a general African disquiet about the perceived anti-African bias of the ICC, should
also be interpreted as a manifestation of South Africa’s growing enthusiasm for a
sovereignist approach to global affairs. The decision to leave the ICC was rescinded
in 2017, though, after a South African court found it to be unconstitutional and
illegal (Torchia, 2017).
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100 P. Nel
How Successful Was the BRICS Experiment?

The previous section argued that South Africa’s profile domestically and in terms
of global governance has changed markedly in the last decade, away from that of a
middle-power that embraces liberal economic policies and attempts to build bridges
between established industrialized states and aspiring industrializing states. In its
place has emerged an aspiring regional power, focusing on how its role in Africa and
the world can contribute to the consolidation and deepening of the developmental
state model of national development. BRICS membership was intended to contribute
to securing South Africa’s status as Africa’s regional power, and to assist in the restruc-
turing of the South African economy. Since 2014, the latter goal has increasingly been
couched in terms of a new slogan, namely, “radical economic transformation” (Bhorat
et al., 2017). What this means is as yet not clear, but there is evidence that points to
a coordinated attempt by the Zuma Presidency to secure, both through legal and
dubious means, a form of patron−client control over crucial state-owned enterprises
(in particular the Electricity Commission — ESKOM, and the railways — Transnet),
state procurement channels, and strategic parts of the mining sector. Zuma has also
been staffing the state sector with a number of preferred clients, while getting rid
of opponents, such as the highly-respected Minister of Finance (Pravin Gordhan)
who was unceremoniously sacked in April 2017. Ostensibly, all of the above is done
in order to promote Black ownership of and participation in the national economy,
but for some observers it is clear that it actually is geared towards benefiting a select
group of cronies around Zuma, and a small section of the emerging Black business
class in South Africa. The degree to which BRICS membership plays into this strategy
of “state capture” (Bhorat et al., 2017) is not fully transparent, but it is obvious that
the BRICS connection was instrumental in “securing” a large and lucrative nuclear
energy deal with the Russians. One of the reasons that the President had a falling out
with his previous Minister of Finances was that the latter was strongly opposed to this
type of dubious “deal making”. Although Mr. Gordhan finds himself in the political
wilderness (in May 2017), his opposition to the nuclear deal has been vindicated by
a court ruling that instructed the President to follow transparent tender procedures
and submit the allocation of the right to build new nuclear reactors in South Africa
to Parliament (Cotterill, 2017).
Six years is not a long time in the development trajectory of a country, and it
is too soon to draw any firm conclusions about the longer-term effects of BRICS
membership, and the sovereignist turn described above, on South Africa’s domestic
situation. There are indications, though, that the trends traced above have not
assisted in making South Africa a more inclusive social order, despite all the words
that have been spilled on this elusive goal since the late 2000s. I rely on the notion
b3508_V2_Ch05.indd 100 11-02-2020 13:12:37

of inclusiveness as defined by Ranieri and Ramos (2013). They make a distinction

between inclusiveness of participation and the inclusiveness of sharing in the
benefits of economic growth. The first can be traced by the International Labor
Organization’s indicator of the employment-to-total (available) labor force, expressed
as a percentage. The second can be measured as the head-count poverty rate, that
is, the portion of the population that find themselves in poverty as a percentage of
the total population. In addition, a measure of income inequality can also be used
to trace the second dimension of inclusivity.
By the time that South Africa joined the BRICS, the economy grew at a rate
that kept pace with population growth, and recorded a GDP per capita growth rate
of 1.5% in 2010 (after the slump in 2009 due to the global financial crisis (GFC)),
and 1.7% in 2011. Since 2012, this growth rate has contracted markedly and has
been negative since 2015 (see Table 2 for available summary economic statistics).
As a result, the unemployment rate has crept up to beyond 26% by 2016. Young
South Africans are particularly affected by persistent high levels of unemployment.
According to Moody’s (Laing, 2017), unemployment amongst the 34-year old and
younger amounted to 48.6% in the third quarter of 2016, and 65.5% among those
younger than 24 years (excluding students). Festus et al. (2016) find that the largest
concentration of the unemployed is among young, poorly-educated black residents
of rural Gauteng, which is the mining and industrial heartland of South Africa.
Unemployment also signals that a sizeable portion of the black population remains
excluded from suitable education that would prepare them for formal employment.
However, educational imbalances are not the only determinant of unemployment.
High unemployment in post-apartheid SA is related to: (a) the continual shrinkage
of the non-mineral tradable sector and manufacturing in particular (see Figure 1 and
Table 2, and Rodrik, 2008), and (b) to the rigidities of the labor market. Manufacturing,
as a percentage of GDP, has declined from around 20% in the mid-1990s to about
13% in 2015. This places a structural constraint on the ability of the economy to
absorb newcomers to the labor force. Other labor-market rigidities include the role
of organized labor and of business management. The former is a labor aristocracy,
and one of the alliance partners of the ruling ANC, and keeps upward pressure on
wages, including the (likely) introduction of a minimum wage. Management/business
responds to rising wages by increasing productivity and shedding unskilled labor, thus
exacerbating unemployment (Seekings and Nattrass, 2015: 232).
BRICS membership exacerbated the imbalances captured by Table 2 — primarily
by increasing South Africa’s long-term structural vulnerability and inhibiting job
creation/employment growth in the non-mineral tradable sector. Minerals account
for about a quarter of total South African merchandise exports, up from about 10%
in the mid-1990s. This dependence on mineral exports, and South Africa’s exposure
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b3508_V2_Ch05.indd 102
102 P. Nel

Table 2: South Africa: Selected social economic indicators 2008–2017.
Metals and
b3508_V2 The Political Economy of the BRICS Countries

Current Ores as Unemployment
Real Real GDP Account Inward Gross Contribution of Percent of Contribution Gini of Rate (% of
GDP Per Capita Overall Fiscal Imbalance FDI, % Government Manufacturing Merchandise of Services to Disposable Potential
Year Growth Growth Balance (% of GDP) of GDP Debt to GDP Exports GDP Income Workforce)
2008 3.2 1.8 -7.2 3.44 27.2 15.9 29.1 65.5 22.7
2009 -1.5 -2.9 -4.1 2.58 31.6 15.0 29.3 66.6 63.1 23.7
2010 3.0 1.5 -2.0 0.98 35.3 14.4 28.3 67.2 24.7
2011 3.2 1.7 -2.3 0.99 38.8 13.3 31.0 67.5 69.0 24.7
2012 2.2 0.7 -4.0 -5.0 1.17 41.0 13.1 27.7 67.9 25.0
2013 2.2 0.6 -3.9 -5.7 2.24 44.0 13.2 29.9 67.8 24.6
2014 1.5 -0.1 -3.7 -5.4 1.65 46.9 13.3 25.9 68.0 25.1
2015 1.3 -0.4 -3.9 -4.3 0.48 49.8 13.5 24.0 67.8 25.4
2016 0.1 -1.6 -3.7 -4.1 51.5 13.2 68.7 26.1
2017 1.1 -0.6 -3.6 -4.8 52.6 26.7
Note: Figures for 2017 are projections.

Sources: World Development Indicators (2017); IMF (2016b).
“6.5x9.75”
11-02-2020 13:12:37
Figure 1: The decline of manufacturing and unemployment in South Africa, 1990−2015.
Source: World Development Indicators 2017.
to China, are points of vulnerability, not strength. China takes 10% of South African
exports, and is the country’ largest single export market. Global demand for South
Africa’s commodity exports is also largely determined by China. 60% of all South
Africa’s commodity exports to BRIC countries in 2015 were minerals, and two-thirds
of those went to China alone. It is no surprise, therefore, that shrinking Chinese
demands for commodities reduced imports from South Africa by a quarter from
2014 to 2015, and at US $30 billion was lower in 2015 than it was in 2011, having
grown by a factor of eight between 2006 and 2011 (BRICS, 2016: 193). Exposure to
SSA, the basis of the “gateway to Africa” selling point, adds to this vulnerability. SSA
accounts for 30% of South Africa’s exports, and most of its FDI assets held outside
China. It is an open question whether the BRICS’s NDB and CRA would be able to
compensate for these vulnerabilities.
South Africa’s lack of inclusivity is reflected dramatically in the high, and rising,
income inequality levels (Anand et al., 2016). Consumption (income) inequality has
increased from 57.8 on a 100-point Gini scale in 2000 to 63.1 in 2009. The consump-
tion share of the lowest quintile shrunk from 3% to 2.7%, and the share of the middle
class — the next three quintiles — also shrunk by about 4%. The consumption share
of the top quintile increased from 62% to 68%. The most recent income survey of 2011
records a Gini of 69 for disposable income (DI), and a staggering 77 for market income
inequality (MII = income before tax and transfers). The income share of the lowest
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104 P. Nel
quintile was 1.54% (DI) and 0.30% (MII), and the share of the top quintile 74.5% (DI)
and 81.4% (MII), respectively (income surveys reported in UNU-WIDER (2016); see
also World Bank (2014). It is clear that South Africa is having success in reducing net
(after tax and transfer) inequality, but that the structural factors that determine MII
(before tax and transfer) inequality contribute to keeping South Africa amongst the
group of most unequal states in the world (Woolard et al., 2015; World Bank, 2014).
Thanks to a range of fiscal interventions, in the form of social assistance cash
transfer programs, poverty rates have declined markedly since 1994. Most of these
have their origins after 1996 when the state compensated for its turn to an orthodox
neoliberal macroeconomic strategy (GEAR — see Table 1) by increasing cash
transfers to vulnerable groups, reaching as many as 17 million South Africans in
2017, at a cost of more than ZAR 10 billion per month. Such social assistance is the
main source of income for the majority of poor households in the country. Fiscal
redistribution — stimulated by democratization (Seekings and Nattrass, 2015) has
been a success, and by 2011 (which was when the last census took place) lifted
almost 4 million people out of poverty. Between 2006 and 2011, the percentage of
households whose income fell below the national poverty line decreased from 57%
to 46% (Seekings and Nattrass, 2015) on different poverty measures and findings.
In 2011 alone, fiscal transfers reduced extreme poverty (income below US $1.25 a
day) from 35% (market income) to 17% (disposable, after tax and transfer income)
(World Bank, 2014). Whether such fiscal largesse is sustainable is an open question,
though a long-term study by the South African Treasury warns that a growth rate of
at least 3% is required to continue paying for it (Ferreira, 2015). As Table 2 shows,
South Africa last achieved that rate of growth in 2008. Currently, the state is running
a fiscal deficit, state borrowing is increasing, and there is a long-term current-
account imbalance. This is set to worsen in view of the downgrade of South Africa
sovereign credit rating to junk status by CRAs Fitch and Standard and Poor’s in April
2017, with Moody’s contemplating a similar move. In the absence of sustained and
inclusive economic growth based on renewed industrialization of the South African
economy (Jonas, 2017), more than the current 17 million South Africans (out of
a total of 52 million) will be dependent on cash transfers just to maintain a basic
standard of living, and there is no guarantee that the state will be able to afford it.
Conclusion
Brazil, China, India, Russia, and South Africa form an exclusive club, but not in the
sense that they will never want to spoil a good acronym by allowing other states to
join. Rather, they are exclusivist, in the sense that the overall configuration of their
political, social, and economic institutions systematically excludes or marginalizes
b3508_V2_Ch05.indd 104 11-02-2020 13:12:38

significant segments of their populations, each in their own way (but see Alston
et al., 2016 on Brazil). Using a typology popularized by a recent prominent strand
of neo-institutionalism, they are “mature limited access orders” (North et al., 2013).
Limited access orders are characterized by elite rent-seeking pacts, which serve to
co-opt those with the capacity to violently challenge the status quo. As elite pacts,
they limit the access of non-elites to existing institutions, and new organizations
are allowed only to the extent that they serve to maintain or strengthen the elite
pacts. Politics, and a range of patron−client relations determine access. In mature
limited access orders, the dominance of an elite-based overall political arrangement
coincides with some seemingly inclusive institutions and norms, such as competitive
elections, a market economy, functioning legal systems and relatively free media.
Overall, and due to the specific ways in which some seemingly inclusive institutions
operate, they continue to marginalize sizeable sections of their populations. In South
Africa, despite the exemplary liberal democratic credentials of its 1996 Constitution,
a strong independent media and legal system, and a diversified market economy,
social and labor-market institutions conspire to exclude systematically as many as
a quarter to a third of the population from the material and psychological benefits
enjoyed by the more fortunate.
This chapter argued that the exclusivist credentials of post-apartheid South
Africa have become more evident in recent years, and that this trend has largely
coincided with South Africa’s membership of the BRICS group since 2010. It also
coincides with a “sovereignist” turn in South African foreign political and economic
relations in which important dimensions of the global liberal order are challenged
in favor of an emphasis on national development priorities and resistance to some
liberal cosmopolitan values and practices. I deliberately used the term “coincide”
to link these domestic and foreign policy trends to avoid assuming causality while
the mutual influences of events and trends are diffused, dispersed, and subject to
feedback loops. Nevertheless, there is enough evidence to sustain a coherent tale
about a country that originally set itself the goal of contributing to global change,
and thus becoming an attractive (for various reasons) partner for others who also
have an interest in global change. It then hitched its own fortunes and specifically
the fortunes of a favored elite around the figure of President Zuma, to those other
“emerging powers”, and found itself changed in the process. South Africa gained
considerable respect in the 1990s and early 2000s as a global mediator and champion
of the cause of the developing South, although ambiguity was not absent from that
role (Jordaan, 2012). By 2017, though, this respect is dissipating as it becomes clear
how the aspirations of being a regional power, combined with declining governance
standards domestically, is transforming this BRICS member. Whether this makes
South Africa less attractive as a member to the other BRICs, remains to be seen.
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106 P. Nel
Want to Know More?

Three recent contributions to the literature on South Africa are highly recom-
mended. The first is a report by the “State Capacity Research Group” under the
title “Betrayal of the Promise: How South Africa is Being Stolen” (Bhorat, 2017).
It reveals the murky world of the patron−client network that President Zuma and
his cronies have constructed in an attempt to undermine the Constitutional state
in South Africa and to redirect state capacities for their own sectarian purposes.
Mzukisi Qobo and Prince Mashele’s book The Fall of the ANC: What Next? (Qobo
and Mashele, 2014), analyzes the weaknesses that have beset one of Africa’s oldest
and previously most respected national liberation movements, the African National
Congress. Given the prominence of the ANC in South African politics, where it
has ruled unchallenged since 1994, the fortunes of the country are closely linked
to those of this movement/party. Current signs of a rot, spreading from the top,
bode ill for the future.
Jeremy Seekings and Nicoli Nattrass’ “Policy, Politics and Poverty in South
Africa” (Seekings and Nattrass, 2015) is the best available account of poverty in
South Africa, how policy initiatives have aimed at dealing with it, and how the labor
market, and actors in the labor market, contribute to excluding a large part of the
population from participating fully in a modern diversified economy.
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PART II
Regionalism and Foreign Aid
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CHAPTER 6
Emerging Economies — But Regional Powers?

The BRICS and Regionalism
Tanja A. Börzel and Thomas Risse
Otto Suhr Institute for Political Science, Freie Universität Berlin,

Germany
Introduction
The rise of the BRICS (Brazil, Russia, India, China, and South Africa), has certainly
changed the international political landscape. Yet, we are still a far cry from a multi-
polar world. Multi-polarity is a concept that belongs to the 19th century, because
it fails to capture globalization, i.e. the inter-connectedness and interdependence that
characterizes the 21st century. The Western dominance in global governance is cer-
tainly fading. At the same time, however, the BRICS have not filled the void. Rather
than assuming a leadership role in global governance, they have focused on the
regional level to manage problems of interdependence that threaten their political
stability and economic prosperity. How important is regionalism to the BRICS? Do
they champion different forms of regionalism? How is the BRICS’ engagement in
regionalism going to affect the global economy and the global order more broadly?
This chapter argues that the BRICS may have the economic resources to become
global leaders and to make a difference internationally. Yet, they still lack a vision
for the global order and the political will to use their capabilities to pursue it. So
far, the BRICS’ appetite for global leadership appears to be limited. Rather, they
seek to shape the order of the region in which they are embedded. Since the end of
the Cold War, Brazil, South Africa, and India have increasingly acted as regional
115
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116 T. A. Börzel & T. Risse
powers seeing regionalism as a way to pursue their national interests. They have
engaged in regional institution-building to contain the influence of external actors
or to prevent and manage threats to the regional stability, such as massive human
rights violations, coup d’états, and natural disasters. More recently, China and Russia
have also become more active in seeking the cooperation of their neighbors. Still,
the commonalities of the BRICS in engaging in regionalism are outweighed by the
differences between them. Explaining these differences is a challenge for theories
of comparative regionalism.
This chapter is organized in three parts. The first part compares how the BRICS
have engaged in regionalism. While all five countries play an increasingly active role
in their respective regions, they differ greatly in the approach they take and the impact
they have on regional institution-building. Second, we explore the extent to which
main approaches to regionalism help us explain this variation. The third part concludes
the chapter by putting the regionalism approaches of the BRICS in the broader context
of their (potential) role as leaders in the global economy. We argue that economic
power per se is not sufficient to affect the international order. With the possible excep-
tion of China, the emerging economies have not put forward an alternative vision and
still largely follow the practices of Western democracies. And even China appears
to work mostly within Western-led multilateral institutions attempting to shape its
policies. Finally, we end with some reflections on avenues for future research.
Towards a Regional Leadership?

The IPE literature discusses regionalism as both stepping stones and stumbling
blocks for global (economic) governance (Preusse, 2004; Musila, 2005). Irrespective
of its effect on global trade and investment, regional leadership plays a key role in
the creation and prevalence of regional organizations (Gilpin, 1987; Yarbrough and
Yarbrough, 1992; Lake, 1993; Mattli, 1999b). Emerging economies have sufficient
capabilities to act as regional leaders. Besides realizing economies of scale or avoiding
and managing policy externalities, they could use regional institutions to challenge
or circumvent global governance regimes (Frazier and Stewart-Ingersoll, 2010).
Indeed, students of comparative regionalism have expected emerging economies
and rising powers to engage with their region and take on leadership in creating and
developing regional institutions (Nolte, 2010; Burges, 2008). Others have cautioned
that regional powers may have the capabilities but lack the purpose and practice of
regional leadership (Schirm, 2010; Prys, 2010; Krapohl et al., 2014). Moreover, if
they choose to lead, their leadership is not necessarily benevolent but can take the
form of coercive domination (Destradi, 2010).
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Emerging Economies — But Regional Powers? The BRICS and Regionalism 117
Initially, the BRICS were rather reluctant to engage systematically in regionalism.

Yet, in the past years, they have played an increasingly active role in (re)building
regional governance institutions.
Brazil: Post-Hegemonic Regionalism
Brazil has been ambivalent towards pushing regional institution-building in Latin

America (Spektor, 2010). On the one hand, its neighbors have complained about
Brazil’s lack of commitment and unwillingness to provide regional leadership. On the
other hand, the economic integration between Argentina and Brazil, which started
in 1986, formed the basis for the Southern Cone Common Market (MERCOSUR)
created in 1991 (Krapohl et al., 2014). The establishment of and institutional support
for MERCOSUR marked a reorientation in Brazilian foreign policy towards using
regionalism as a means to consolidate Brazil’s leadership in the region (Lazarou,
2013; Teixeira, 2011). The Treaty of Asunción of 1991 aimed at fostering the interna-
tional competitiveness and national development of Argentina, Brazil, Paraguay, and
Uruguay, through regional trade liberalization. The democracy clause established
with the Ushuaia Protocol in 1998 was to help stabilize democracy in Paraguay
(Ribeiro Hoffmann, 2012).
The establishment of MERCOSUR resulted in a significant increase of intra-
regional trade in the 1990s, particularly between the two major economies. Some
have interpreted MERCOSUR as a bargain between Argentina and Brazil of
“preferential access into the Brazilian market in exchange for Argentinian support
for Brazilian international trade strategies” (Bouzas et al., 2002 quoted in Malamud,
2012: 170). While the Argentinian crisis at the end of the millennium reversed the
trend, Brazil used MERCOSUR as a platform to mobilize opposition against the
US Free Trade Area of the Americas initiative (Lazarou and Luciano, 2015). It also
launched the South American Presidential Summit in 2000 as an alternative venue
to promote trade and security in the region.
The financial crisis of 2008 increased the demand for trade and development
cooperation at the regional level. Economic and political integration had stalled in
MERCOSUR despite the attempts of Brazil and Argentina to relaunch the project
in 2003. The creation of the Permanent Review Court in 2004, the MERCOSUR
Parliament (Parlasur) in 2006, and the Fund for Structural Convergence in 2005,
70% of which Brazil pays for (Lazarou and Luciano, 2015), were to strengthen
the social and citizen dimension of regional integration. Yet, they did not change
MERCOSUR’s intergovernmental or inter-presidential character. The strong role of
the presidency in Latin American politics is mirrored at the regional level where
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member states seek to protect rather than transfer their sovereignty (Malamud,
2003). Regional organizations in Latin America are dominated by state leaders and
involve low degrees of pooling and delegation of authority (Bianculli, 2016).
To provide a continental umbrella for regional cooperation, Brazil spearheaded
the creation of the Union of South American Nations (UNASUR) in 2004 (Burges,
2007).1 UNASUR is the first South American integration scheme bringing together
the Andean Community (CAN) and MERCOSUR as the two major economic
blocs in the region. It compromises the 12 independent South American states
and centers on social policy, infrastructure, energy, and security rather than trade.
Similar to MERCOSUR, UNASUR shall also promote democratic stabilization.
With its focus on development and democratic stabilization, Brazil has promoted
UNASUR as a counterbalance to the US and the Organization of American States
(OAS; Mera, 2005; Tussie, 2009). UNASUR is to tie in Venezuela while keeping
out Mexico and its Pacific Alliance partners (Colombia, Peru, and Chile), which
favor regional trade liberalization over regional development (Burges, 2008; Linke-
Behrens, 2015: 15−16; Lazarou and Luciano, 2015). Finally, UNASUR serves Brazil
as platform to establish interregional relations within the Global South, e.g. the
Africa-South America Summit (ASA) or the Summit of Arab-South American
countries (ASPA).
Brazil also supported the creation of the Community Latin American and
Caribbean States (CELAC) in 2010. CELAC unites the Rio Group of Latin American
states, which had existed since 1986, with the Latin American and Caribbean
Summit (CALC). Similar to UNASUR, Brazil’s engagement has been motivated by
its post-liberal regional agenda and its ambition for the region to develop a com-
mon voice to increase its influence at the global level (Lazarou and Luciano, 2015).
While UNASUR and CELAC are considered the centerpiece of post-hegemonic
regionalism in Latin America (Briceño-Ruiz and Ribeiro Hoffmann, 2015; Riggirozzi
and Tussie, 2012), the two regional organizations reflect the declining relevance of
US-led Pan-Americanism as much as Brazil’s aspirations to promote its post-liberal
agenda at the regional level.
Overall, Brazil has increasingly used its regional power to promote regionalism
in South America and to boost its image as a rising power (Malamud, 2012; Lima,
2008). MERCOSUR and UNASUR have served its interest to offset the influence of
the US and the OAS, which Brazil perceives as dominated by the US. Together with
CELAC, MERCOSUR and UNASUR also help promote Brazil’s global ambitions for
changing international institutions towards giving the Global South a greater voice
The South American Community of Nations (SACN) founded in 2004 was renamed in
1
UNASUR in 2008.
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(Lazarou and Luciano, 2015; Vigevani and Ramanzini Júnior, 2011; Gratius and
Saraiva, 2013; Burges, 2009). At the same time, the effectiveness of regional institu-
tions in Latin America has been weak (Bianculli, 2016) which limits their use as a
“springboard for Brazilian leadership” (Malamud, 2012: 171). Moreover, members
of MERCOSUR, UNASUR and CELAC are reluctant to let Brazil represent them at
the global level (Malamud, 2012). Argentina, for instance, was one of the strongest
opponents of Brazil’s campaign for a permanent seat in the UN Security Council.
Nor was MERCOSUR able to agree on a joint candidate for the post of Director
General of the WTO in 2005 as a result of which Brazil competed with Uruguay
(Malamud, 2012: 171−172). The lack of support and outright rivalry by Venezuela
and Bolivia have made Brazil turn to the other BRICS countries to advance its global
agenda (Malamud, 2012).
Russia: Competitive Regionalism
Russia is the only regional power that developed an explicit strategy of using
regionalism to secure its sphere of influence in its “near abroad” and to control it
neighbors. This strategy predated the Putin era (Tsygankov, 2006; Saivetz, 2012;
Molchanov, 2016; Krickovic, 2014). The Commonwealth of Independent States
(CIS) was designed to “hold together” the former Soviet Republics after the Soviet
Union had collapsed in 1991 (Libman and Vinokurov, 2012). It was supposed to
help Russia regain political control over former Soviet states and stress its claims
to regional hegemony. While the CIS set out to mimic monetary and economic
integration in the European Union, it has largely remained a “paper organization”
(Obydenkova, 2011). Russia therefore initiated a series of other regional institu-
tions, including the Customs Union of 1995 with Belarus, Kazakhstan, the Kyrgyz
Republic, and Tajikistan, which later transformed into the Eurasian Economic
Community (EurAsEC), or the Collective Security Treaty Organization (CSTO), a
common defense alliance created in 2002 (Obydenkova, 2011; Wirminghaus, 2012;
Hancock and Libman, 2016).
The 2008 global financial crisis (GFC) resulted in renewed efforts of Russia at
regional institution-building. The export of natural resources had failed to turn
Russia into an “energy superpower” (Tsygankov, 2016). Rather than bringing all post-
Soviet countries under one common institutional roof, Russia started to diversify its
approach setting up relations with smaller sub-groups (Vinokurov, 2007; Krickovic
and Bratersky, 2016).
The Eurasian Economic Union (EAEU) inaugurated in 2015 is the most
recent of Russia’s ambitions of integrating former Soviet Republics into a regional
organization that is to fend off the EU’s attempts to draw its “Eastern neighbors”
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closer by offering deep and comprehensive association and free trade agreements
(DCFTA; Wirminghaus, 2012; Frazier and Stewart-Ingersoll, 2010: 743; Dragneva
and Wolczuk, 2013; see also Chapter 2). Post-Soviet states have to choose between
joining the EAEU and signing a DCFTA with the EU. Besides making Eurasian
and European economic regionalism mutually exclusive, Russia pursues a form of
“plutocratic regionalism” (Hancock, 2009) in which it provides substantial benefits
to other members (e.g. lower gas prices, market access). In return, smaller states
delegate authority to Russia to make and implement decisions. Russia’s agreement
to “supranationalise” the Eurasian Economic Commission (EEC), the executive
body of EAEU modelled after the European Commission, appears to undermine
claims about Russia using regionalism to control its near abroad. The EEC has the
power to initiate and draft policies, adopt decisions, monitor the implementation
of international treaties, frame strategic plans and may even conclude international
treaties on behalf of the EAEU (Treaty on the EAEU 2014). More importantly, it
takes decisions by qualified majority. However, the highest organ of the EAEU is
the Eurasian Supreme Council, which still decides by consensus. Thus, the EEA
imposes a weak form of “voluntary restrictions of its (Russia’s, TAB/TR) sovereignty”
(Molchanov, 2016: 129). It could as well-increase Russia’s leverage by making it appear
less threatening to its neighbors (Krickovic, 2014) and promote its image as a “benevo-
lent hegemon” rather than a “neighborhood bully” (Krickovic and Bratersky, 2016).
Russia feels increasingly encircled by rival powers. It has used regionalism to
counter external influence and intervention by providing its neighbors with access
to Russian markets, also for labor migrants, to finance and to cheaper energy, as well
as by helping authoritarian regimes deal with internal and external security threats
(Krickovic and Bratersky, 2016). By making states join comprehensive regional
agreements which are competitive rather than complementary to European forms
of economic regionalism, Russia seeks to tie its neighbors into Russia-led regional
institutions asserting what is sees as its traditional sphere of influence (Gast, 2017)
and counter its economic and geopolitical decline as a former super power (Wilson,
2017). Declining oil prices, the plunge of the Russian ruble and Western sanctions
have considerably undermined the economic incentives Russia can offer to make
membership in regional institutions attractive. As a result, Russia increasingly relies
on its role as a provider of security and stability in the region stepping up its troop
deployments and military aid (Krickovic and Bratersky, 2016). Interestingly, this is
done bilaterally rather than using the regional structures of CSTO (Wilson, 2017).
Arguably, Armenia forewent a Deep and Comprehensive Free Trade Agreement
with the EU to join the EAEU, not because of the greater economic benefits but in
return for Russian security guarantees in the conflict with Azerbaijan over Nagorno
Karabakh.
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More recently, Russia started to seek the cooperation of China to promote the
economic development in the post-Soviet area. The EEU signed a memorandum of
understanding with the Chinese Silk Initiative (OBOR, see below) in 2016, which
may indicate a policy reversal in Russia’s approach to regionalism in Central Asia
moving away from containing and countering the growing influence of China
towards a division of labor, in which Russia guarantees security and China promotes
economic development in the region (Krickovic and Bratersky, 2016; Wilson,
2017). For Belarus and Kazakhstan, this division of labor provides an opportunity
to decrease their economic dependence on Russia, which may eventually under-
mine the EAEU and Russia’s role as regional hegemon more broadly. At the same
time, with China using “One Belt, One Road” (OBOR) rather than the Shanghai
Cooperation Organization (SCO) for pursuing economic development projects in
Central Asia (see below), Russia seeks to use SCO for boosting its global role by
expanding its membership (Wilson, 2017: 15). In 2016, SCO approved the accession
of Pakistan and India.
India: Selfish Regionalism
India has increasingly shown aspirations for regional leadership in the South Asian
network of institutions such as the South Asian Preferential Trade Area (SAPTA),
the South Asian Association for Regional Cooperation (SAARC), and the Bay of
Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation. Two
of its main foreign policy doctrines inform India’s approach to regionalism: First,
the “Look-East Policy” involves a stronger focus on East Asia and ASEAN, in
particular. The ASEAN-India Free Trade Area (2010), for instance, serves India to
increase its influence in South-East Asia and position itself as a main competitor
to China (Wang, 2010). Second, India’s relations with SAARC members are guided
by “asymmetrical responsibility”, where it makes concessions, such as preferential
market access, without insisting on reciprocity particularly with regard to the least
developed countries, including Nepal, Bangladesh, and Bhutan (Jain, 2005). SAARC
was established as early as 1985 to support the socio-economic development of
India, Pakistan, Nepal, Bangladesh, and Bhutan through collective self-reliance
(Jain, 2005). Ten years later, the member states decided to develop SAARC into a
Free Trade Area (SAFTA) and create a South Asian Development Fund (SADF) to
finance infrastructure projects.
While India has become more active in region-building, it has refrained so
far from developing a vision for how to create stability in the conflict-ridden
region (Destradi, 2012). Its previous policy of regional interventions was not
intended “to make friends but to establish its hegemony” (Tripathi, 2016: 148).
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Its neighbors regard with suspicion India’s preponderant power and lasting conflict
and competition for leadership with Pakistan. Bangladesh−India−Myanmar−
Sri Lanka−Thailand-Economic Cooperation (BIMST-EC), for instance, has been
designed to exclude Pakistan from free trade agreements (FTAs) of which India is
part (Jain, 2005; Wang, 2010). Despite its commitment to non-reciprocal treatment,
India, which accounts for 80% of the region’s GDP, has benefited most from regional
trade cooperation. While overall regional trade has remained low, India’s exports
in other member states has grown exponentially; its imports, by contrast, have
remained low (Jain, 2005: 70; Juhos, 2015: 472). India continues to rely on an ad hoc
and country-by-country approach towards economic and security cooperation with
neighbors, also in trying to counter the growing influence of China in the region.
China’s trade with and foreign investments in the SAARC members are higher than
India’s (Juhos, 2015: 472−473). Similar to Central Asia, Beijing is using OBOR to
establish bilateral infrastructure and development projects with India’s neighbors.
While India has declined the invitation to participate in the Silk Road Initiative,
China has observer status in SAARC and seeks full membership.
Conflict and rivalry with Pakistan in particular has largely impaired economic
integration and intra-regional trade in South Asia, which are the lowest in Asia
(Dash, 2012). India’s attempt to move beyond its immediate neighborhood by look-
ing East, West, and North (Juhos, 2015: 471) makes countries in the region reluctant
to accept India’s emerging regional leadership (Tripathi, 2016). They perceive India
as a “selfish hegemon” abusing its power to exploit its weaker neighbors and use
regional cooperation as a “launching pad” for its global power ambitions (Juhos,
2015: 470; Behuria et al., 2012: 231). Last not least, India still lacks the diplomatic
capacities to play a major role in regional governance (Behuria et al., 2012).
China: Regionalism with “Chinese Characteristics”
China used to be hostile towards Asian regionalism. It considered ASEAN as a tool

of Asian countries allied with the West to fight communism (Narine, 1998). It had
a clear preference for bilateral relations (Dent, 2008). After the end of the Cold War,
however, China increasingly developed a more positive approach towards regional-
ism to foster trade and security with its neighbors and to support its export-driven
development strategy (Wang, 2011b). On the one hand, China has sought to partici-
pate in and further develop existing institutions. It joined the Asia-Pacific Economic
Cooperation forum (APEC) in 1991 and the Asia-Pacific Trade Agreement (APTA)
in 2001. Beijing also became a formal observer to the SAARC in 2005. On the other
hand, China has launched a number of new initiatives, including the SCO in 2001,
the East Asian Summit in 2005, the China−Japan−Korea FTA negotiations in 2012,
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the Regional Cooperation Economic Partnership (RCEP) agreement in 2011, and

the Asian Infrastructure Investment Bank (AIIB).
These regional engagements notwithstanding, China has focused on its
bilateral relations with ASEAN (ASEAN+3; ASEAN Regional Forum) to develop
its role in the region (Wang, 2011b). In 2002, China and ASEAN started to
negotiate a China-ASEAN FTA (CAFTA), which came into effect on 1 January
2011. CAFTA covers goods, services and investments; it also provides a formal
mechanism to solve disputes on trade and investments. By population, CAFTA
is the largest free trade area in the world and the third largest in terms of value
(Wang, 2011a, 2011b).
The OBOR project launched in 2013 seeks to extend China’s bilateral relations
with Asian countries. It reflects the strategy advanced by China’s leader Xi Jinping
to promote a new type of regionalism that seeks to go beyond trade and expand
geographically beyond East Asia by building a wider Asian community “of common
destiny” based on infrastructure links, essentially projects financed by the AIIB, and
historical and cultural linkages (Zhang and Li, 2016). Interestingly, the Silk Road
Economic Belt Initiative aimed at engaging Central Asia circumvents the SCO
where Russia has sought to limit China’s attempts to use the regional organization
for its economic development projects (Wilson, 2017: 14−15). The 21st Maritime
Silk Road Initiative, by contrast, is complementary to South-East Asian regionalism
since the latter focuses on trade rather than development. So are the China−Pakistan
Economic Corridor and the Bangladesh−China−India−Myanmar Corridor, due to
India’s reluctant engagement in SAARC (see above).
China’s approach to regionalism “with Chinese characteristics” (Zhang and Li,
2016; Beeson and Shaomin, 2016) is open and non-exclusive. It experiments with
diversified forms of regional cooperation characterized by low levels of formality
and obligation, weak centralized institutions, and consensus-based decision-making
(Kahler and MacIntyre, 2013). While being hardly legalized, China’s regionalism
endorses global norms, such as multilateralism and open markets (Kolmas, 2016;
Wang, 2011a). At the same time, China’s approach remains distinctively bilateral.
Unlike Brazil, South Africa or Russia, China does not play a leading role within
regional institutions but seeks to build Asian regionalism through strengthening its
bilateral, predominantly economic ties with them.
Overall, regionalism serves the broader international goal of China’s “peaceful
rise” and the “building of a harmonious world” (Wang, 2011b: 206) establishing
its position as a regional and global power (Wang, 2016). This is also reflected in
China’s engagement with other regions and regional organizations, particularly
in the Global South, including the Forum for East Asia-Latin America Cooperation
(FELAC, 1999), the Forum on China-Africa Cooperation (FOCAC, 2000), the
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China-Community of Latin American and Caribbean Countries Forum (China-

CELAC, 2014; Ribeiro Hoffmann, 2016), as well as regional trade agreements
(RTAs) with the Gulf Cooperation Council and the South African Customs Union
(Wang, 2011a).
South Africa: Self-Interested Regionalism
During the times of colonialism and apartheid, South Africa pursued a similar
approach to regionalism as Russia using the Southern African Customs Union
(SACU) as a means to dominate its neighbors, get access to cheap labor, and cre-
ate a market for its internationally uncompetitive products (Flemes, 2009). The
post-apartheid governments declared their willingness to employ South Africa’s
reboosted economic power to exercise regional leadership (Flemes, 2009). South
Africa was instrumental in creating the New Partnership for Africa’s Development
(NEPAD) and the African Union (AU). It also used its economic leverage to actively
shape SACU (Soko and Balchin, 2016). South Africa’s role within Southern African
Development Community (SADC) has been more ambivalent, though (Amos,
2010; Lorenz-Carl, 2013; Muntschik, 2013). On the one hand, Pretoria successfully
integrated the country into the organization, which its neighbors had created to
counter-balance South Africa during apartheid (Amos, 2010). It pushed through
the creation of a free trade area set up in 2008. On the other hand, the South African
government undermined the conclusion of an Economic Partnership Agreement
between SADC and the EU by going for a strategic bilateral partnership with the
EU (Amos, 2010; Krapohl et al., 2014). South Africa did not play a prominent role
in managing the various crises in the region either. Angola, Rwanda, and Uganda
helped remove Mobutu Sese Seko from his autocratic rule over the Democratic
Republic of Congo in 1997. And it was the former president of Botswana who
negotiated the transition after Laurent Kabila had been ousted from power in 2002
(Clark, 2016). Finally, South Africa did not prevent the dismantling of the SADC
Tribunal instigated by Zimbabwe in 2010 (Hulse and van der Vleuten, 2015).
In recent years, South Africa has lost some of its global standing, which under-
mines its aspirations for regional leadership (Soko and Balchin, 2016). Its economic
and military capabilities have declined (Hulse, 2016). Suspicion and distrust of its
neighbors have further undermined South Africa’s regional power. Rather than
implementing the FTA, for instance, SADC countries have concluded bilateral FTA
with each other in order to prevent what they see as a takeover of their markets by
self-interested South Africa (Lee, 2003; Hulse, 2016). Zimbabwe has championed
the Common Market for Southern and Eastern Africa (COMESA), which competes
with SADC (Hulse, 2016).
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Similar to India, South Africa’s neighbors perceive it as a “self-interested, almost

coercive actor” (Hulse, 2016: 3). They have also criticized South Africa’s Western
orientation and commitment to liberal democracy and economic liberalism (Flemes,
2009). To be fair, South Africa has provided some “co-operative hegemony” (Flemes,
2009), e.g. when it agreed to opening its markets first while giving the economically
weaker members of SADC more time. However, these attempts at “benevolent
leadership” (Krapohl et al., 2014) have been overshadowed by its unilateral extra-
regional trade policies, such as the bilateral Trade, Development and Cooperation
Agreement (TDCA) with the EU, which entered into force in 2000. Beside some
asymmetrical trade liberalization, the TDCA comes with substantial development
aid. Overall, South Africa has been “a reluctant and conflicted regional power”
(Clark, 2016), which has largely failed or at best underperformed as regional leader
promoting and abandoning regionalism depending on what serves its economic
and security interests best.
Same Same But Different: Explaining BRICS’ Role

as Regional Powers
The BRICS have played an increasing role as regional powers, yet in very different
ways. India and South Africa are rather selective in their regional engagement. Brazil
and Russia have consistently engaged in regional institution-building. So has China,
however, less by dominating regional organizations but by strengthening its bilateral
ties with them and other Asian countries. With the exception of Russia, none of the
BRICS appears to have a clear vision of regionalism and their role in it. They differ,
however, in their preferences for institutional design. China and India have resisted
deeper forms of regionalism. Brazil, Russia, and South Africa have been more open
to formalized cooperation but have been equally reluctant to pool and delegate
national sovereignty in practice.
The BRICS also share common features in their approaches to regionalism. First,
to the extent that they foster regional cooperation, they do so in order to maximize
their short-term interests. None of them — with the possible exception of China and
only most recently — pursues a long-term strategy of regional integration. Second,
and related to the first point, most BRICS are very reluctant to support supranational
integration schemes that might constrain their own freedom of action. They mostly
prefer regional intergovernmentalism (except maybe for Russia and the EAEU).
How can we account for the differential approaches the BRICS have taken
towards regionalism? In the following, we discuss power-based approaches (bal-
ancing behavior and regional hegemony), (economic) interdependence (managing
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conflict and negative externalities, promoting value chains), as well as domestic

politics (regime type and locking-in of domestic reforms). We also compare the
BRICS to other regional as well as external powers.
Power-Based Approaches
Power-based approaches such as neorealism assume that in the absence of a central

enforcement power (anarchy), cooperation is risky for states which are concerned
about the equal distribution of power among them (Baldwin, 2013; Grieco, 1988).
To explain regional cooperation, hegemonic stability theory points to powerful
states within the region or outside, which are willing to and capable of acting as
“regional paymaster, easing distributional tensions and thus smoothing the path
of integration” (Mattli, 1999a: 56; Gilpin, 1987: 87−90; Grieco, 1997). For example,
the US played a key role as external hegemon in the creation and prevalence of
the European Community and ASEAN by mitigating the security dilemma in the
region (Gruber, 2000; Acharya, 2014). Germany is often portrayed as regional
paymaster and “reluctant hegemon” in the EU (Bulmer and Paterson, 1996; Bulmer
and Paterson, 2013). Conversely, the ineffectiveness of regionalism in the Middle
East or East Asia is often blamed on the absence of a regional or external hegemon
(Fawcett and Gandois, 2010; Hemmer and Katzenstein, 2002).
Powerful states facilitate the emergence of regionalism for different reasons.
The US, China, Russia, South Africa, or Nigeria supported and engaged in region-
building for geostrategic and economic reasons to strengthen military alliances,
promote stability in neighboring countries, or secure access to new markets, cheap
labor, water and energy resources (Antkiewicz and Whalley, 2005; Gowa, 1995;
Clarkson, 2008; Coleman, 2007: 155−184). Brazil has championed MERCOSUR and
UNASUR to establish itself as a regional power and to counter-balance US influ-
ence in Latin America (Mera, 2005; Tussie, 2009; Teixeira, 2011). Likewise, Russia
has built EEA and CSTO to protect its near abroad against the influence of the EU
and NATO (Obydenkova, 2011; Hancock and Libman, 2016). More generally, the
similarity among the BRICS as short-term utility maximizers in their approaches
to regionalism is largely consistent with power-based approaches in international
relations theories. So is their reluctance to pool or delegate sovereignty.
However, power-based approaches have a hard to time to explain the variation
among the BRICS as well as the variation over time. While hegemonic leadership
may help initiate and promote regionalism, powerful states are not always willing
to act as hegemons (Destradi, 2010). The only regional power, which has played a
hegemonic role as paymaster of its region is Russia, at least to some extent. China
has been rather reluctant to use its regional power to shape regionalism and has
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only started recently assuming a more active role (Zhang and Li, 2016). Moreover,
it has been undecided for quite a while whether to play regional bully or paymaster
(on the distinction between benign and malign hegemony see Gilpin (1981)).
Most recently, the Trump Administration, by giving up TTP, has handed China
a major victory regarding its aspirations to create the Regional Comprehensive
Economic Partnership (RCEP). Brazil has been ambivalent towards pushing regional
institution-building in Latin America (Spektor, 2010). India appears to have aspira-
tions for regional leadership but so far refrained from developing a vision for how to
create stability in the conflict-ridden region (Destradi, 2012). South Africa has used
its economic power to actively shape the Southern African Customs Union (SACU)
but has played a more ambivalent role within Southern African Development
Community (SADC; Lorenz-Carl, 2013; Muntschik, 2013).
A similar and inconsistent picture emerges for regionalism as a way to balance
external powers. Russia’s efforts can be read as an attempt to counter the EU in its
near abroad, while Brazil and China have tried to balance the US in Latin America
and Asia, respectively. Yet, balancing behavior against external powers does not
explain India’s regional policy or that of South Africa. With regard to intra-regional
power rivalries, they have often contributed to preventing efforts at regional
institution-building. Examples include the competition between China and Japan in
East Asia (Beeson, 2006; Dent, 2012; Grimes, 2008), between India and Pakistan in
South Asia (Dash, 2012), between Brazil and Venezuela in South America (Burges,
2007), or between South Africa and Nigeria in Sub-Saharan Africa (Francis, 2006).
(Economic) Interdependence
International Political Economy (IPE) approaches emphasize welfare enhancing

effects of cooperation, which tend to be greater among geographically proximate
states. These include reduced transaction costs, economies of scale, technological
innovation due to greater competition, more foreign direct investments, and greater
economic and political weight in international markets and institutions (Mattli,
1999b: 46−47; Hancock, 2009: 25−29). Accordingly, globalization becomes a major
driver for economic regionalism since global markets entail increased trans-border
mobility and economic linkages, and trade issues are less cumbersome to deal with
at the regional than at the multilateral level (Schirm, 2002). Coping with negative
externalities, such as diversions of trade and investment, provides another rational
to pursue economic regionalism. States may either seek membership in regional
institutions generating the external effects as many European countries have done
in the case of the EU and some of the South American countries do with NAFTA
(Mattli, 1999b: 59−61). Or they create their own regional group. NAFTA can be
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interpreted as the US reaction to the fortification of the Single European Market

and the emerging economic regionalism in Asia (Mattli, 1999b: 183−185). A similar
“domino effect” (Baldwin, 1995) was triggered by the US turn towards regionalism
which has contributed to the proliferation of regional preferential trade agreements
(PTA), since states perceived the US as no longer capable of or willing to ensure the
stability of the global trading system (Mansfield, 1998).
Variation among the BRICS might be explained by the higher degree of
economic interdependence fueling the demand for regional institutions to settle
resulting conflicts (Mansfield, 1998; Mansfield and Milner, 1997; Mattli, 1999b;
Moravcsik, 1998; Stone Sweet and Caporaso, 1998). Economic interdependence
plays a prominent role for Russia’s efforts at regional institution-building in Eurasia
(Hancock and Libman, 2016). At the same time, East Asia is by far the most eco-
nomically integrated region (next to the EU) among those considered here. However,
China has only recently begun to invest in regional institution-building. In this
context, the IPE literature has argued that value chains and economic production
networks are a main driver of regionalization in Asia. They link investment and
intra-firm trade across multiple countries (Wang, 2011b). Intra-regional ties have
grown not only in terms of trade but also advanced infrastructure, communica-
tion, and movement of people have grown rapidly and link to the regional trade
and investment strategies of China (Weidenbaum and Hughes, 1996; Peng, 2002).
Transnational production networks work as functional equivalents to formal
regional institutions (Katzenstein, 2005; Ravenhill, 2009).
With regard to South America, Southern Africa, and South Asia, however,
economic interdependence is comparatively low and, thus, cannot explain the vari-
ation in the regional approaches of Brazil, South Africa, or India. As a result, IPE
approaches focusing on economic interdependence produce mixed results at best
with regard to explaining the behavior of the BRICS toward their respective regions.
Regime Type and Domestic Politics
Geographic proximity and democracy seem to increase the intensity of economic

exchange between countries, and hence foster regional cooperation (Mansfield et al.,
2000). An important body of research on the political economy of PTA formation
and implementation has focused on the compatibility of political institutions in
partner countries. To the extent to which “homophily” prevails among trading
partners with similarities in their political institutions, these countries are also
more likely to form a PTA (Hurrell, 1995: 68−71). This line of research emphasizes
the influence of two institutional features on PTA formation: regime type and veto
players (Mansfield and Milner, 2012; Mansfield et al., 2002, 2007).
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On regime type, the main argument is that democratic leaders have an incentive
to sign PTAs because they provide information about leadership and performance.
The premise is that it is difficult for voters to distinguish between the government’s
poor performance in managing the economy and events that are beyond the govern-
ment’s control. In order to avoid a scenario in which voters may vote a government
out of office for reasons beyond its control, governments have an incentive to sign
PTAs because these agreements offer reliable information to voters about the behav-
ior of the home government and the governments in PTA partner countries. PTAs
thus provide democracies with the institutional mechanism to make information
available to voters. In non-democracies, however, governments have less incentive to
enter into PTAs because electoral imperatives are far less pressing. Democracies are
thus more likely to enter into PTAs than autocracies. Governments of democracies
can increase political support through PTAs, while autocratic governments have
less incentive to do so.
The literature on international democracy promotion established a link
between the democratic quality of states and their membership in regional
organizations (Pevehouse, 2005, 2016). States use regional organizations to “lock
in” democratic developments through deeper forms of regional cooperation and
integration, entailing judicial litigation and sanctioning mechanisms. A prominent
example often referred to in the literature is the post-communist countries of
Central and Eastern Europe that sought membership in the European Union after
their transition.
Locking in domestic reforms may also work for authoritarian governments;
they instrumentalize their membership in regional organizations to boost the sover-
eignty and legitimacy of their regimes (Levitsky and Way, 2010; Söderbaum, 2004).
Institutional lock-in at the regional level is not only about committing successor
governments to domestic reforms, democratic or otherwise. It can also provide a
signaling device by which incumbent regimes seek to publicly commit themselves
to certain institutions that external donors or investors care about. Domestic and
regional stability are important for attracting capital and technology. After all,
autocratic rulers often rely on economic prosperity for their domestic legitimacy
(Solingen, 2008).
How do these arguments score with regard to the BRICS? As to the propensity
of democracies to engage in regional cooperation and integration, three of the
five BRICS are democracies (Brazil, India and South Africa), but their behavior
has varied quite substantially and over time. Moreover, only one region of those
under consideration here is populated by democracies, namely, South America. Yet,
regional integration in MERCOSUR has stagnated for quite some time. Regime type
as such does not seem to explain the behavior of the BRICS.
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What about “lock-in” effects and “regime boosting”, irrespective of regime

type? First, Eurasia as well as the SCO come to mind here as regional institutions
encompassing various autocratic regimes. Russia’s efforts to boost regionalism
in its near abroad, as well as China’s engagement in SCO are roughly consistent
with the regime-boosting argument. Second, Brazil’s initial and strong support for
MERCOSUR as well as post-Apartheid South Africa’s backing of SACU and SADC
are also consistent with the arguments about democratic “lock-in”. The same holds
true for Brazil’s later support for UNASUR as an association of left-wing South
American governments. Third, China’s more recent attempts to foster regionalism
in Asia are at least partially motivated by efforts to back up domestic economic
reforms through the conclusion of multiple FTAs (Jetschke and Katada, 2016).
Last not least, India’s selective regionalism is also consistent with the argument
here, since it has little to gain domestically by boosting regional institutions in
South Asia.
In sum, power-based approaches can explain similarities among the BRICS,
particularly their pursuit of short-term interests with regard to regionalism and their
preferences for intergovernmental institutional designs of regional organizations.
At the same time, hegemonic stability theory which emphasizes the long-term
interests of (regional) hegemons in (regional) cooperation to maintain order and
stability, is largely disconfirmed by the behavior of the BRICS. Moreover, power-
based approaches cannot account for the variation in the BRICS’ approaches to
regionalism. In a similar vein, (economic) interdependence does not seem to provide
much leverage in explaining the variation among the BRICS. In contrast and over
time, domestic lock-in effects and “regime boosting” arguments are at least partly
consistent with the empirical evidence. Yet, regime type is irrelevant as an account
for the variation among the BRICS.
Conclusions: From Regional Powers to Global Leaders?

We have argued in this chapter that, at best, the BRICS pursue regional policies
which are geared toward short-term utility maximization. None of them is prepared
to foster regional integration in a similar way as the US in the post-World War II
period. Nor do they assume roles as regional “benign hegemons” who maintain
regional order and are prepared to pay the costs of regionalism. While all BRICS
are similar in this regard, the differences among them are also remarkable. Russia
has created and dominates a whole new set of regional organizations, while China
largely works through existing institutions. Brazil, Russia, and South Africa have
assumed regional leadership roles, at least to some extent, while India pursues
b3508_V2_Ch06.indd 130 11-02-2020 13:15:28

extremely selective regional policies. Last not least, China exerts leadership not
through regionalism, but through bilateral relations in a “hub and spoke” system.
What does this tell us about the future role of the BRICS as potential global
leaders? Are the BRICS transforming themselves from regional to global powers?
If we take our cues from the regional performance of the BRICS, they have a long
way to go. They certainly command the economic and military capabilities to pursue
both regional and global leadership roles. Their economic performance is indeed
remarkable, the only exception being Russia (Molchanov, 2016), which looks more
like a rent-seeking than an emerging economy. Russia, China, and India rank among
the top military powers of the world — after the US, which is still the lonely number
1. China’s defense budget is not even a quarter of the size of what the US spends on
its military. If it was only about military capabilities, Brazil and South Africa would
have little potential for becoming a global power any time soon. However, how
important is military power for shaping the global order?
Material resources as such, be they military or economic, appear at best a neces-
sary condition. What it takes to influence, not to mention shape the global order
in the 21st century is, first, a vision, and second, the strategic capacity to put “your
money where your mouth is”, i.e. deploy your capabilities to pursue your vision. The
BRICS seem to lack both vision and practice so far. With the possible exception of
Russia, none of them has so far developed a vision of regional order and put it into
place. Moreover, none of the BRICS has so far developed clear ideas on how to revise
the global (economic) system. Russia and China are permanent members of the UN
Security Council, but they have shown little enthusiasm for changing the global
governance structures. Brazil and India, together with South Africa (IBSA), call for
a new economic world order that reflects the interests and needs of the Global South
(Hurrell, 2006; Alden and Vieira, 2005). But they have failed to present their vision
of how such a new order would look like and how existing norms, practices, and
outcomes of global governance would have to be revised (Narlikar, 2013). At best,
the emerging markets seek a redistribution of power. This is justified by the need to
give the Global South a greater voice (Nel, 2010; Kingah and Quiliconi, 2016). The
reform of IMF quotas and the inclusion of China’s renminbi in the basket of SDR
currencies are indicative of changes within existing institutions to accommodate the
global shift in power. As such, they play to the theme of continuity in international
institutions and raise questions concerning the factors affecting institutional change
and development. The BRICS have pushed the formation of alternative institutions
for economic governance: the BRICS Bank and, more recently, the AIIB. These new
institutions essentially replicate the functions of existing institutions but give the
BRICS a greater say.
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International institutions created or dominated by the BRICS certainly have

the potential to drive global economic governance in a more competitive direction,
offering alternative forms of governance from the traditional leading economies.
Yet, similar to their approaches to regionalism, the BRICS neither seem to have a
vision nor do their interests always align.
In conclusion, this chapter on the BRICS role in shaping regionalism has
demonstrated that that they cannot be treated as a unitary actor, as the acronym
implies. While having similar weight in their respective region and equally pursu-
ing self-interested policies, the variation with regard to their practices is probably
greater than the similarities. Major international relations theories have a hard time
accounting for these similarities and the differences. Our survey has also revealed a
lack of comparative research about the BRICS. Single case studies about individual
regional powers and their policies toward their regions abound. Little they tell us,
however, about how unique the BRICS’s engagement in regionalism is, also when
compared to other emerging economies, and how best to explain it.
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CHAPTER 7
BRICS and Foreign Aid
Gerda Asmus*, Andreas Fuchs†, and Angelika Müller*
*Alfred-Weber-Institute for Economics,

Heidelberg University, Germany
†
Faculty of Business and Economics,
University of Goettingen, Germany
Introduction
At their annual summit in the Brazilian city of Fortaleza in July 2014, the five
leaders of the so-called BRICS countries (Brazil, Russia, India, China, and South
Africa) launched the New Development Bank (NDB) to support the funding of
infrastructure projects in developing countries. At the time this chapter is in print,
the bank has been equipped with an initial subscribed capital of US $50 billion, it
has opened its headquarters in Shanghai, and the Indian national K.V. Kamath has
assumed his role as the Bank’s president. Together with the newly established Asian
Infrastructure Investment Bank (AIIB) and the planned Shanghai Cooperation
Organization (SCO) Bank, the NDB is seen as a challenger of the international aid
architecture dominated by the United States and its allies in Western Europe and
Japan. Unsurprisingly, the United States opposes such initiatives that question its
global leadership (Desai and Vreeland, 2015; Stiglitz, 2015), but it is astonishing that
139
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140 G. Asmus, A. Fuchs & A. Müller
30,000
25,000
20,000
15,000
10,000
5,000
Figure 1: Annual gross disbursements of ODA in millions of US dollars (2010−2014

average).
Note: Estimate for Brazil is based on 2010 data due to lack of data for other years.
Source: Own figure based on data from OECD (2017b).
many Western countries have jumped on the China-led bandwagon and become
members of the AIIB.1
These young multilateral initiatives led by BRICS countries add to the long-stand-
ing and impressively growing bilateral aid activities of these five states. Brazil, Russia,
India, China, and South Africa are all not new to the aid business, in spite of which
they often receive the label “new donor” or “non-traditional donor” (Manning, 2006;
Kragelund, 2008). China, for example, started its aid activities in 1950, while Brazil,
the “youngster” among the BRICS, became an aid donor in 1969 (Fuchs and Müller,
2018). Today, the combined aid budget of the five BRICS is still small compared
to the total amount of aid provided by the club of established donors organized in
the Development Assistance Committee (DAC) of the Organization for Economic
Co-operation and Development (OECD). The rapid pace with which the BRICS’
aid activities have grown in size and scope, however, has drawn significant public
attention (e.g. Naím, 2007; Woods, 2008; Walz and Ramachandran, 2011). Figure 1
shows the average annual gross disbursements of Official Development Assistance
(ODA) by all G7 and BRICS countries over the 2010−2014 period in millions of US
1
On the proliferation of development banks, see Pratt (2017). On why many countries
choose to join the AIIB, see Wang (2016).
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BRICS and Foreign Aid 141
dollars.2 The United States is the world’s largest provider of ODA, followed by Japan
and Germany. Following strict OECD definitions, BRICS aid appears to be small
compared to G7 aid but such statistics hide the considerable amounts of official non-
ODA financing that the emerging powers provide to developing countries. India’s aid
commitments, for example, would rise from an annual average of US $588 million
to $1.56 billion if loans by the country’s Export−Import Bank were added to the aid
projects provided by the Ministry of External Affairs (Asmus et al., 2017). Similarly,
less than one quarter of the US $350 billion in official finance commitments from
China to the developing world between 2000 and 2014 is classified as “ODA-like”
according to AidData’s Global Chinese Official Finance Dataset (Dreher et al., 2017).
Despite the BRICS’ long track record as aid donors, until recently scholarship
has devoted almost exclusive attention to foreign aid provided by both the member
countries of the DAC and the big international financial institutions (IFIs), mainly
the International Monetary Fund and the World Bank. Scholars have scrutinized
in depth these donors’ aid allocation (e.g. Alesina and Dollar, 2000; Kuziemko and
Werker, 2006; Hoeffler and Outram, 2011). They also investigated whether and
under which conditions it is effective in promoting economic growth and other
developmental goals (e.g. Burnside and Dollar, 2000; Clemens et al., 2011; Galiani
et al., 2017), and examined the side-effects of these flows (e.g. Kono and Montinola,
2009; Bjørnskov, 2010; Nunn and Qian, 2014). Unsurprisingly, several survey studies
try to help researchers cut a swathe through the thicket of the aid literature (e.g.
Doucouliagos and Paldam, 2008, 2011; Milner and Tingley, 2013; Fuchs et al., 2014).3
On the contrary, academic research on emerging donors outside the DAC is
scarce.4 There are at least two main reasons why foreign aid from BRICS countries
has largely flown under the radar in social sciences research. First, these countries’
bilateral aid flows have not always been sizeable. This is particularly true for
the 1990s, i.e. after the end of the Cold War and the abolishment of the apartheid
regime in South Africa. Second, the aid activities of all BRICS donors are much more
opaque compared to those of the DAC donors and the big international financial
2
According to the OECD, ODA are “those flows to countries and territories on the DAC List
of ODA Recipients and to multilateral institutions which are: (i) provided by official agencies
[…] or by their executive agencies; and (ii) each transaction of which: (a) is administered with
the promotion of the economic development and welfare of developing countries as its main
objective; and (b) is concessional in character and conveys a grant element of at least 25% […].”
3
More recently, a growing number of scholars work with geo-referenced aid data to explore
aid allocation and effectiveness at the subnational level (e.g. Strandow et al., 2011; Öhler
and Nunnenkamp, 2014; Dreher and Lohmann, 2015).
4
See Dreher et al. (2013) for a literature review on non-DAC donors more generally.
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institutions, preventing researchers from conducting thorough empirical analyses.

Tellingly, China, the largest BRICS donor, ranks second to last in the annually
published Aid Transparency Index.5 Recent advances in the availability of unofficial
data on BRICS aid (e.g. Tierney et al., 2011; Asmus et al., 2017; Dreher et al., 2017;
Strange et al., 2017; Brandt, n.d.) have helped to fill this research gap.
A better understanding of BRICS aid is important. Woods (2008: 16) describes
the rise of non-DAC donors as “[a] silent revolution [that] is taking place in the
development assistance regime”. The five BRICS countries are not members of
the OECD, let alone the DAC, and thus do not have to abide by the organization’s
standards. They are thus less constrained in the way they provide aid and may
follow their political and economic self-interests and strategic considerations to
a greater extent than DAC donors (Sato et al., 2011; Fuchs and Klann, 2013). The
BRICS donors have common ground insofar as they seek to challenge the prevailing
international aid architecture through reforms or the establishment of new institu-
tions (Tierney, 2014). Their growing bilateral aid budgets, the joint construction of
new multilateral development organizations, the often-promulgated rejection of
aid conditioned on policies and institutions, and a focus on aid tied to goods and
services from the donor economy are said to undermine the dominance of DAC
donors in the world of international development cooperation.6
This chapter aims to provide a comprehensive overview of the small but growing
literature on the bilateral foreign aid activities carried out by the five BRICS countries
around the globe. It aims to answer the following questions: What do we know about
the size, scope and institutional design of the BRICS countries’ aid activities? What
can we learn about these donors’ aid motives by analyzing the pattern of their aid
recipients and focal sectors? Does the existing qualitative and quantitative literature
allow us to draw conclusions on the effects of BRICS aid on economic growth, other
development outcomes, governance, or conflict in recipient countries? Moreover,
how will BRICS aid affect the DAC-centered international aid architecture and the
way the so-called traditional donors provide aid? While our examination of previ-
ous scholarly work allows us to draw some careful conclusions, it also reveals the
heterogeneity of the five BRICS’ aid activities. Based on our findings, we highlight
major avenues and challenges for future research.
We proceed as follows. The second section provides a brief discussion of
the major differences between the aid policies of BRICS donors and those of the
so-called traditional donors. The following five sections introduce each BRICS donor,
5
Publish What You Fund (2016) evaluates China’s Ministry of Commerce, which is the coun-
try’s leading aid agency. Only Saudi Arabia ranks lower among the 45 rated aid agencies.
6
See Bunte (2013) for arguments why recipient governments may or may not prefer uncon-
ditional over conditional aid.
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summarize the existing research on their aid activities, and sketch avenues for future
research. The final section summarizes the chapter.
What Is Different About BRICS Aid?

There are several theoretical reasons why BRICS aid should differ from DAC aid. First,
BRICS donors are not bound by the regulatory framework of the DAC or similar rules.
Second, the BRICS countries are large in terms of population and the size of their
economy but still clearly below the level of economic development of DAC donors,
which may affect their aid motives. Third, the BRICS differ from (the typically Western)
DAC donors since their aid philosophies — with the exception of Russia — have
been anchored in the Non-Aligned Movement (NAM) and, more specifically, in the
framework of South−South Cooperation, including the principle of non-interference
in domestic affairs. In what follows, we briefly discuss each of these three points and
highlight what sets the BRICS apart from the so-called traditional donors.
First, by operating outside the DAC, BRICS donors have not committed them-
selves to align their aid efforts with the DAC’s principles and regulations. Their
actions do not have to undergo a regular peer review by the DAC (Ben-Artzi, 2017).
The DAC has established a lengthy set of principles, standards, and procedures by
which member donors govern their relations with recipient countries. Most notably,
the 2005 Paris Declaration on Aid Effectiveness lays out principles on how to make
aid more effective.7 Although Russia was negotiating its OECD membership and the
OECD has run “Enhanced Engagement” programs with the other BRICS countries
since 2007, none of the BRICS countries abides by DAC aid principles. It rather
seems that most BRICS nations’ aid modalities resemble the aid practices of the DAC
donors a couple of decades ago (Kragelund, 2010). Sato et al. (2011: 2097) argue that
the absence of “collective institutions for self-restraint” provides non-DAC donors
7
Although the BRICS donors have signed the Paris Declaration, it is commonly under-
stood that they did so as recipients and not as donors of aid (e.g. Chaturvedi, 2008;
Bräutigam, 2009). The declaration includes the following five core principles: “(1) Ownership:
Developing countries set their own strategies for poverty reduction, improve their institu-
tions and tackle corruption. (2) Alignment: Donor countries align behind these objectives
and use local systems. (3) Harmonisation: Donor countries coordinate, simplify procedures
and share information to avoid duplication. (4) Results: Developing countries and donors
shift focus to development results and results get measured. (5) Mutual accountability:
Donors and partners are accountable for development results.” See https://www.oecd.org/
dac/effectiveness/parisdeclarationandaccraagendaforaction.htm (accessed 13 February 2017).
Evidence in Minasyan et al. (2017) suggests that aid effectiveness improved for those donors
that enhanced their quality of aid giving after the Paris Declaration.
b3508_V2_Ch07.indd 143 11-02-2020 13:15:55

with “a certain level of freedom to pursue their own short-term national interests
through their aid activities”. For example, the BRICS donors’ decision to tie their aid
deliveries to goods and services from the donor economy stands in sharp contrast
to DAC principles (Kragelund, 2008). This is of concern both from a development
perspective as tied aid typically reduces its value for the recipient (Knack and Smets,
2012) and from the perspective of businesses in OECD countries as it provides
BRICS donors with commercial advantages vis-à-vis DAC donors. Moreover, the
low share of budget support in the BRICS’ aid portfolios should also be of concern
if one attaches a value to the principle of country ownership.
Second, the BRICS countries’ lower levels of income provide another argument
why BRICS aid should follow self-interests more than that of DAC donors. Fuchs and
Vadlamannati (2013) hypothesize that self-interest is a particularly important driver
of aid from the perspective of poorer donor countries. Given the developmental
challenges that a “needy” donor country faces domestically, its population’s support
for altruistic development aid activities is arguably weaker.8 Altruistic aid can be
understood as a “luxury good” (Dudley, 1979). Governments of poorer countries
are therefore more likely to emphasize the expected benefits that accrue to the donor
country from engaging in foreign aid. To this effect, Naím (2007: 95) holds an extreme
view, arguing that “rogue aid providers [China, Iran, Saudi Arabia and Venezuela]
couldn’t care less about the long-term well-being of the population of the countries
they ‘aid.’” Analyzing the results of the existing aid allocation literature on non-DAC
donors, Dreher et al. (2013: 407) conclude that, “aid allocation by ‘new’ and ‘old’
donors appears to follow similar rules” — in the sense that both donor groups follow
their geopolitical and commercial interests. Nevertheless, DAC donors seem to allocate
aid towards recipient needs to a slightly higher degree than non-DAC donors (Dreher
et al., 2011; Fuchs and Klann, 2013; Fuchs and Vadlamannati, 2013). However, the
observed differences between DAC and non-DAC donors are not as sharp as to “justify
branding non-DAC donors as ‘rogue donors’” (Dreher et al., 2013: 407).
Third, with the exception of Russia, BRICS aid is associated with the principles
of South−South Cooperation.9 Mwase and Yang (2012) list the objective to achieve
mutual benefits (rather than poverty reduction), the lack of policy conditionality, and
the focus on microsustainability of individual projects (contrasting the DAC’s atten-
tion to long-run debt sustainability) as the key differences in the BRICS’ philosophies
compared to the group of DAC donors. These key differences could “be traced
8
In line with this idea, Cheng and Smyth (2016) find that support within China for outgoing
aid is lower in the country’s poor provinces.
9
Russia, a country of the North, closely cooperates with the global South and shares its
views on creating a multipolar world, non-conditionality in development cooperation, and
non-interference into domestic affairs (Larionova et al., 2016).
b3508_V2_Ch07.indd 144 11-02-2020 13:15:55

back to the South−South Cooperation discussions, which emphasize principles of

equality, solidarity, and mutual development and complementarity” (Mwase and
Yang, 2012: 4). Similarly, Mawdsley (2012) identifies four characteristic features of
the “symbolic regime” of Southern donors that sets them apart from “traditional”
aid giving. One, Southern donors call on a “developing country identity” which
they would share with recipient countries. Two, they highlight their expertise in
development appropriate to the context in recipient countries.10 Three, they oppose
hierarchical donor−recipient relations. For example, they avoid the term “aid donors”
and typically label themselves as “partners in South−South Cooperation”. Four, they
emphasize the mutually beneficial relationship between partners. Mutual benefit is
an important leitmotif of their aid giving.
Their public rejection of aid conditioned on policies and institutions is said to
undermine the dominance of DAC donors. While Western donors, at least on paper,
reward countries with good policies and institutions, emerging donors allegedly
“provide aid without any strings attached” (Dreher et al., 2013: 405). Authoritarian
leaders of recipient countries that are hostile towards aid tied to democratic institu-
tions or the respect of human rights may view this as an advantage. Indeed, Bermeo
(2011) provides empirical evidence that supports the claim that the source of aid
matters for its impact on institutions.
The BRICS countries’ principle of non-interference also affects the selection
of projects within countries. In line with the Bandung principles, Southern donors
claim not to interfere in the internal affairs of recipient countries or to exert pressure;
their aid projects are said to solely emerge from the requests of the recipient gov-
ernments. As Bräutigam (2011: 761) points out, “[T]he Chinese emphasis on local
ownership can lead to ‘prestige’ projects that do not appear to be poverty-reducing:
a new government office building, a sports stadium or a conference center.” Dreher
et al. (2019a) identify some adverse effects of this “demand-driven” aid approach. It
appears that significantly more Chinese aid flows into the birth regions of African
leaders, which tend to be richer relative to the country’s average. At the same time,
Dreher et al. (2019a) do not find comparable effects for the World Bank.
In light of these substantial differences vis-à-vis the still dominant DAC donors,
the BRICS’ aid activities are perceived as challenges to the prevailing international aid
architecture. Their initiatives to reform the existing multilateral development organiza-
tions and the setup of new institutions further magnify this perceived threat (Tierney,
10
For example, India’s Ministry of External Affairs claims that it “possess[es] skills of man-
power and technology more appropriate to the geographical and ecological conditions and
the stage of technological development of several developing countries”. As quoted on sev-
eral websites of Indian embassies, e.g., the Indian embassy in Azerbaijan. Available at http://
www.indianembassybaku.in/eoi.php?id=Itec (accessed 12 February 2017).
b3508_V2_Ch07.indd 145 11-02-2020 13:15:56

2014). However, the BRICS have not yet attempted to develop a joint development
strategy (Gu et al., 2016). Moreover, the extent to which BRICS donors work differently
compared to the club of established donors varies among the five countries. Russia,
for example, was not exposed to the South−South Cooperation discourse as it was not
part of the so-called Third World and the related institutions such as the G77. It was
even considered close to the DAC regime until the country’s OECD accession negotia-
tions were put on hold in 2014. While we discussed a couple of common theoretical
expectations on the BRICS countries’ aid activities, the lack of a joint aid framework
makes a separate analysis of the B, R, I, C, and S in foreign aid more appropriate. The
following sections provide an overview of the current state of research on each BRICS
donor and discuss how each of them departs from the established DAC paradigm,
highlighting differences within the group of BRICS donors.
Brazil
Brazil’s development cooperation dates back to the 1960s with the provision of
modest technical cooperation to other developing countries (Inoue and Vaz, 2012;
Muggah and Hamann, 2012).11 From 1978 onwards, following the launch of the
Buenos Aires Plan of Action for Promoting and Implementing Technical Cooperation
among Developing Countries, Brazil’s technical cooperation increased steadily
(Inoue and Aoki, 2007). In 1987, the growing administrative burden gave rise to the
establishment of the Brazilian Cooperation Agency (ABC), which is located within
the Ministry of External Relations (Cabral and Weinstock, 2010). Finally, the inaugu-
ration of President Luis Ignacio Lula da Silva in 2003 marked its recent emergence as
an internationally recognized aid donor: Lula’s administration prioritized social issues
in its foreign relations agenda (Soares De Lima and Hirst, 2006). From this time,
Brazil’s aid activities increased significantly in both size and scope. ABC’s annual
spending increased from US $0.24 million in 2004 to US $21.5 million in 2010 (ABC,
2017). According to OECD estimates, 2010 marked the first year that incoming and
outgoing aid projects were of comparable size (OECD, 2017).
Under Lula’s successor, President Dilma Rousseff, both incoming and outgoing
aid decreased (IPEA, 2016; OECD, 2017). In contrast to Lula, the Rousseff admin-
istration put higher priority on domestic social issues. Between 2010 and 2013, she
reduced Brazil’s aid budget by more than 30% and reoriented Brazil’s international
development policy towards domestic commercial interests (Costa Leite et al., 2014;
11
For a general overview of Brazil’s development cooperation and the debates surrounding
it, consult Vaz and Inoue (2007); Cabral and Weinstock (2010); Inoue and Vaz (2012); and
Costa Leite et al. (2014).
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Younis et al., 2014; IPEA, 2016). Nevertheless, Brazil’s total aid remained well above
pre-Lula-period levels. According to the latest available estimate, Brazil spent around
US $397 million on aid in 2013 (IPEA, 2016).12
Brazil’s institutional framework for development aid is decentralized and suffers
from loose coordination (Vaz and Inoue, 2007; Cabral and Weinstock, 2010). While
the ABC is the main executive body mandated for technical cooperation, several
other governmental institutions provide development cooperation independently
from the ABC. The Ministries of Health, Agriculture, Education, and Science and
Technology are all involved in Brazil’s aid activities without the obligatory involve-
ment of the ABC or the Ministry of External Affairs.
This institutional complexity obscures Brazil’s aid activities and makes them
difficult to assess. The official estimate states that only 7% of Brazil’s aid budget is
spent on bilateral technical assistance, while 58% is channeled through international
organizations (Inoue and Aoki, 2007). Both the Brazilian government and third par-
ties have undertaken first attempts to render the country’s aid activities more trans-
parent. For example, the Institute for Applied Economic Research, a government-run
think tank, has published three reports to quantify Brazil’s development cooperation
(IPEA, 2011, 2014, 2016). These reports are the only official data sources on Brazil’s
total aid flows. They cover the years 2005−2013 and report aggregate numbers by
year and sector. Due to the lack of a central accounting system, the reports rely on
survey data and do not cover all aid institutions and types of financial cooperation
(Costa Leite et al., 2014; Bry, 2017). Brazil’s lack of aid transparency may not only be
due to bureaucratic overload but also a lack of political will. Brazil’s refusal to sign
the 2005 Paris Declaration and the 2008 Accra Agenda for Action in 2008 (Cabral
et al., 2014; Semrau and Thiele, 2017) highlights the country’s unwillingness to
implement standards established by the DAC.
An alternative data source for Brazil’s aid activities is the AidData database,
which tracks individual development finance projects by both OECD and non-
OECD donors (Tierney et al., 2011). The available data cover 1,097 projects between
1998 and 2010, with an average annual commitment amount of US $159,354.
However, those data are limited to the ABC’s aid activities and do not include pro-
jects after 2010, when the ABC stopped providing project-level information (Semrau
and Thiele, 2017). Given the absence of an official aid database, future research could
entail initiatives to construct a comprehensive database from a multitude of official
and unofficial data sources, including media reports.13
12
For a comparison with OECD countries, peacekeeping expenditures must be excluded,
which results in US $386 million.
13
See Strange et al. (2017) for a comparable initiative for Chinese aid.
b3508_V2_Ch07.indd 147 11-02-2020 13:15:56

The AidData database allows analysts to obtain a clearer — albeit incomplete —

picture of Brazil’s aid engagement. The geographic focus of Brazil has historically
been Latin America and the Lusophone countries (Semrau and Thiele, 2017).
Although the number of recipient countries has significantly increased, totaling
159 in 2013 (IPEA, 2016), Latin America and the Lusophone world remain the
priority. This can also be seen from Table 1, where we provide a list of the top
10 recipient countries of aid from Brazil (and the other BRICS donors) over the
2005−2010 period (data from Tierney et al., 2011). In terms of sectors, contrasting
China’s and India’s focus on economic infrastructure, Brazil prioritizes agriculture
and social sectors such as health and education (Younis et al., 2014; Bry, 2017;
Semrau and Thiele, 2017). These priorities align with the country’s domestic social
agenda.
A recent econometric study sheds light on Brazil’s aid motives by analyzing its
aid allocation across countries (Semrau and Thiele, 2017). The study focuses on three
aspects: recipient institutions, recipient need, and Brazil’s own strategic interests.
Starting with the role of recipient institutions, Brazil claims that its aid initiatives
respect the national sovereignty of the recipient countries (De la Fontaine and
Seifert, 2010; John de Sousa, 2010), which should imply that recipients’ institutional
Table 1: List of BRICS donors’ most important recipient countries.

Brazil Russia India China South Africa
2005−2010 2010−2015 2006−2010 2005−2014 2005−2010
1. Mozambique 1. Cuba 1. Bhutan 1. Russia 1. DR Congo
2. Haiti 2. Kyrgyzstan 2. Sri Lanka 2. Pakistan 2. Guinea
3. São Tomé & P. 3. North Korea 3. Afghanistan 3. Angola 3. Zimbabwe
4. Timor-Leste 4. Nicaragua 4. Nigeria 4. Ethiopia 4. Lesotho
5. Guinea-Bissau 5. Serbia 5. Ethiopia 5. Sri Lanka 5. Comoros
6. Cape Verde 6. Tajikistan 6. Nepal 6. Laos 6. Liberia
7. Angola 7. Syria 7. Cote d’Ivoire 7. Venezuela 7. Sudan
8. Paraguay 8. Armenia 8. Mozambique 8. Turkmenistan 8. Uganda
9. Algeria 9. Zambia 9. Sudan 9. Ecuador 9. Burundi
10. Senegal 10. Guinea 10. Syria 10. Brazil 10. Seychelles
Notes: The list of China’s most important recipient countries covers both ODA and OOF projects. The list of India’s
most important recipient countries is based exclusively on flows from the country’s Ministry of Foreign Affairs and
Exim Bank. The list of Brazil’s most important recipient countries is based exclusively on flows from the Brazilian
Cooperation Agency (ABC). The list of South Africa’s most important recipient countries is based exclusively on
flows from the African Renaissance Fund.
Source: AidData’s Global Chinese Official Finance Dataset (Dreher et al., 2017), OECD Dataset: DAC2a (OECD,
2017a), AidData Research Release 3.0 (Tierney et al., 2011).
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characteristics should not affect aid giving. Yet, some scholars argue that, as a
democratic country, Brazil might ultimately favor values similar to those of the
OECD countries (John de Sousa, 2010). In line with the former idea, Semrau and
Thiele (2017) find that neither the recipients’ level of corruption nor their regime
type influence project allocation via the ABC. Semrau and Thiele’s findings are thus
in line with Brazil’s lip service to the principle of non-interference, which is also
dominant in China’s and India’s foreign aid programs.14
Turning to recipient need, there is evidence that Brazil’s aid allocation is needs-
driven. Semrau and Thiele (2017) show that countries with a lower GDP per capita
have a higher probability of receiving Brazilian aid.15 Zondi (2013) sees the needs-
based approach supported by the fact that Brazil wrote off the debt of 12 African
countries to support their endogenous growth.
Finally, potential political and commercial benefits to the Brazilian government
are subject to a wider debate. The focus of Brazilian aid on Latin America and the
Lusophone world seems to support the claim that Brazil is trying to bolster its status
as a regional power and a leader for certain regions of the developing world (Cabral
et al., 2014). A case study by Bry (2017) suggests that Brazil’s emphasis on mutual
benefits and non-conditional aid indeed succeeds in creating a positive image among
recipients. Although Semrau and Thiele (2017) show no quantitative evidence that
Brazil favors its important export markets as recipients, other scholars discuss in
detail how Brazilian aid seeks to promote national firms accessing new markets (e.g.
Magnoni, 2010; Burges, 2014).
Given these inconsistent findings on the drivers of Brazil’s aid allocation pattern,
more research is required — not only on the motives behind Brazil’s aid activities.
If Brazilian aid continues to grow in size and scope, the effects of Brazil’s aid on the
recipient countries deserve closer investigation. This could include evaluations of
single aid projects at the micro level and analyses of the effects on macro-indicators
of economic development such as GDP growth. Future research should also address
the data gaps if official data remains scattered and incomplete.
14
On the contrary, an earlier study by Dreher et al. (2011) finds a statistically significant neg-
ative effect of the control of corruption on the likelihood of receiving aid from Brazil. Both
studies use AidData’s project-level datasets (Tierney et al., 2011), but Semrau and Thiele
use a more recent version. In addition, Dreher et al. (2011) do not control for Lusophone
countries, which could also explain the different results.
15
Again, the earlier study by Dreher et al. (2011) finds different results. In their study, poorer
countries do not receive more ABC aid flows, but the study does not control for Brazil’s bias
towards Latin America and Lusophone countries.
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Russia
Russia, as the legal successor of the Soviet Union, is unique among the BRICS
donors. Strictly speaking, it is neither emerging nor re-emerging but rather it has
been reborn as a player in the global donor community. Beginning with the aid and
trade program in 1953 (Berliner, 1959), Soviet support rapidly reached a peak of
US $1 billion in 1960 — a level comparable to the US’ aid effort in terms of gross
national product at the same time (Goldman, 1965). Soviet aid was mainly allocated
to the Middle East and South Asia. Between 1966 and 1977, for example, the largest
recipients were Afghanistan, Bangladesh, Egypt, Iran, Iraq, Pakistan, Syria, and
Turkey (Rai, 1980). Main areas of support were technical assistance and academic
programs: “by 1978, more than 26,000 [third-world students] were [educated] in the
USSR” (Brun and Hersh, 1990: 148). The construction of the steel plant at Bhilai in
India and a highway program in Afghanistan, both celebrated successes, emphasized
the Soviet determination to be seen as a powerful leader in the field of development
cooperation (Goldman, 1965). Another well-known example is the construction of
the Aswan dam in Egypt, for which the Soviet Union won the competitive bid by
offering larger loans with lower interest rates than the US and the United Kingdom
(Goldman, 1967).
Soviet relationships with developing countries focused on countries that share
their communist ideology. A shared discontent over (Western) colonialism and
the rise of capitalism provided a foundation for development cooperation (Jaster,
1969). In a quantitative analysis of Soviet aid during the Cold War era, Rai (1980)
finds correlations between Soviet aid and UN General Assembly (UNGA) voting
alignment, suggesting that aid was used to reward or punish recipient countries for
their foreign-policy positions. Other early studies find that the Soviet Union achieved
policy concessions through foreign aid.16 In a recent study, Bueno de Mesquita and
Smith (2016) argue that the size of policy concessions received from a recipient in
exchange for aid depends, among others, on the presence of a competing donor
country. For the Cold War era, they find that the US spent much more on aid while
receiving less security concessions once the Soviet Union entered the scene as a
“rival” donor in the mid-1950s.
Russia’s rapid economic decline following the dissolution of the Soviet Union
implied that the country found itself on the other side of development cooperation
16
For example, Roeder (1985) finds that “Soviet aid […] can […] induce compliant behavior
indirectly through the creation of trade dependence” and notes that Soviet aid was mostly
tied to Soviet products. Lundborg (1998) models a gift exchange theory and shows that
more US aid leads to more US support, while such support decreases if Soviet aid increases.
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during the 1990s (Larionova et al., 2016). Only after spending about a decade as
a net recipient, did the country slowly begin to recreate a development program
in the mid-2000s (Gray, 2011). In 2007, Russia, under the presidency of Vladimir
V. Putin, adopted a concept note on development assistance, which builds on the
Millennium Development Goals (MDGs), as well as Russia’s National Foreign Policy
Concept and the National Security Concept (Ministry of Finance, 2007). The official
goals include poverty reduction, disaster relief, and the development of trade and
economic partnerships. Other goals are “to influence global processes with a view
to establishing a stable, fair and democratic world order”, “to create a belt of good
neighborliness along the Russian national borders”, and “to strengthen the credibility
of Russia and promote an unbiased attitude to the Russian Federation” (Ministry of
Finance, 2007: 6). Moreover, the government strived for cooperation with the OECD,
which led to accession negotiations in the same year (OECD, 2007).17
Russia reinforced its intentions to integrate with the OECD aid community
through reporting its ODA statistics from 2011 onwards (Ministry of Finance,
2012).18 However, in the course of increasing tensions over Ukraine, the planned
referendum on Crimea’s secession, and Russia’s critical role in those events, the
OECD member states decided to suspend the accession process in March 2014.19
In April 2014, a successor to the 2007 aid strategy concept was adopted (Ministry
of Finance, 2014; Ministry of Foreign Affairs, 2014). While it clearly builds on
the previous strategy, new emphasis is put on an increase of Russia’s institutional
capacity, a growing bilateral aid budget, and aid transparency.20
Between 2010 and 2015, Russian ODA disbursements have more than tripled
from US $520.9 million to US $1.7 billion. As a point of reference, its contribution
in 2015 amounts to 36% of Italian aid. While the transition economies in Eastern
Europe and Central Asia as well as Latin America have been the focal regions of
Russian aid initially, Africa is gaining in importance. According to latest OECD data,
Russia contributed on average US $44.6 million to Africa annually between 2010
and 2015, which is twice the amount of aid towards Eastern European countries
(US $22.8 million). However, the former is still far from its contributions to Asia,
and Central America, with these receiving US $284.8 million and US $170.8 million,
17
See Davis (2016) on why countries (do not) seek membership in the OECD.
18
Reported numbers begin in 2010.
19
Nonetheless, as of today, Russia still reports aid information to the OECD.
20
In 2014, around 75% of Russian aid is provided bilaterally, while multilateral aid contri-
butions, especially via the World Bank Group, the United Nations and, to a much smaller
extent, regional development banks and other organizations, account for the remaining
25% (Ministry of Finance, 2007; OECD, 2016).
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respectively (see also Table 1). Examples for projects in 2014 include budget s upport
for the Kyrgyz Republic, agricultural machinery supply in Nicaragua, delivery of
Russian trucks for humanitarian operations in Afghan remote areas, assistance
in Guinea to prevent the spread of Ebola, and humanitarian and food aid to Syria
(Ministry of Finance, 2014). The majority of Russian aid projects are in the educa-
tion, health, food security, and public finance sectors. Additionally, debt relief and
debt-for-development swaps are offered (Ministry of Foreign Affairs, 2014; OECD,
2016). The Ministries of Finance and Foreign Affairs are mainly responsible for the
framing of Russian foreign assistance and overseeing its implementations (OECD,
2016). Many more agencies add to the assistance structure, which complicates
coordination (Larionova et al., 2016).
Although Moscow reports aid data to the OECD, project-level information
is not made available and thus one cannot draw a detailed picture of Russia’s
development cooperation. Finding comprehensive and structured information on
Soviet aid is also challenging. A useful data source for Soviet economic aid is the
replication data for Charles Dannehl’s 1995 book, which comprises information
on aid to non-communist developing states for the 1955−1989 period (Dannehl,
1995). Scholars may also resort to reports produced by the United States’ Central
Intelligence Agency, containing information on economic and military aid (e.g. CIA,
1974). However, such sources are not in line with OECD reporting standards, which
complicates comparisons to other aid providers at the time. A complete account on
Soviet and Russian development aid is yet to be produced and will probably only be
possible in the wake of an official release of documents by the Russian government
or an opening of its archives to the public.21
While many studies on Soviet aid have explained Moscow’s motives during that
era, Russia’s aid strategy today is not well understood. In the 2007 concept note,
Russia refers to itself as a superpower with the responsibility to contribute to inter-
national development efforts (Ministry of Finance, 2007). It would be worthwhile
to evaluate whether Russian aid sticks to its official developmental goals or rather
follows the purpose of extending its sphere of influence. Russia further claims that
its development cooperation aims to “foster democratic processes, development of
market-oriented economies, and observance of human rights in recipient countries”
(Ministry of Finance, 2007: 6). Whether Russia indeed follows these goals in its
allocation decisions should be subject to scrutiny. In the spirit of Rai’s (1980) analysis
of the link between Soviet aid and recipients’ UNGA voting behavior, scholars could
analyze the political benefits that accrue to Russia from its foreign aid program.
21
Researchers interested in a thorough analysis of Russia’s aid distribution could also con-
sider AidData’s TUFF methodology (see section on China below).
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India
With more than US $4.5 trillion received between 1960 and 2015, India has been the
world’s largest recipient of foreign aid (OECD, 2017a). At the same time, India has
run its own outward development assistance since the early years of its independ-
ence (Nehru, 1958).22 India’s economy and presence in the international community
have grown significantly over the past two decades and its development cooperation
has evolved in tandem — both in its geographic scope and sectoral coverage. India
started to identify itself as a donor rather than as a recipient in the early 2000s. In
the 2003−2004 budget speech, India’s Minister of Finance announced that India
would only accept untied aid and reject new aid offers from most bilateral partners.
At the same time, India planned to cancel debt for Highly Indebted Poor Countries
(HIPCs) and to expand its grants and project assistance under the so-called India
Development Initiative (Singh, 2003). Some observers find it puzzling that a country
that continues to be comparatively “needy” increasingly provides foreign aid (Fuchs
and Vadlamannati, 2013).23 Others argue that the growing aid budget is simply the
result of an emboldening economy coupled with a long history as a provider of
development assistance (Mukherjee, 2015).
Indian development programs were initially fragmented and decentralized. The
Indian Technical and Economic Cooperation Program (ITEC), created in 1964,
represents India’s first step towards organizing its foreign assistance and remains
the flagship program to date. Together with the Special Commonwealth African
Assistance Program (SCAAP), it reaches 161 countries globally through personnel
training, consultancies, expert exchange, study programs, equipment donations, and
humanitarian aid (Mawdsley, 2010; MEA, 2013). In January 2012, India’s Ministry
of External Affairs (MEA) established the Development Partnership Administration
(DPA) to handle the increasing outflow of aid projects, combat fragmentation, and
further the institutionalization of its aid efforts. Placing the DPA within the MEA
highlights the close ties of India’s development cooperation to its foreign policy.
Today, another increasingly important arm of India’s aid policy is the Department
of Economic Affairs (DEA) within the Ministry of Finance. Among other initiatives,
the DEA provides interest-equalization support to India’s Export−Import (Exim)
22
For an overview of the early history of India’s foreign aid, see Dutt (1980).
23
In the early 2000s, 38.2% of India’s population still lived on less than US $1.90 a day
(World Bank, 2017). Although the most recent data show that the share almost halved until
2011 (21.2%), poverty is still very high compared to Brazil (11%), Russia (0.1%), China
(7.9%), and South Africa (16.6%).
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Bank, which in turn provides concessional loans to developing countries (Arora

and Mullen, 2016).
Approximately 54% of MEA’s 2016−2017 budget was committed to grants, loans,
and training towards foreign governments (US $1.314 billion), accounting for 0.46%
of the government’s total budget. This represents a slight decrease in development
cooperation allocated by the MEA compared to the previous budget year. At the
same time, foreign assistance through the DEA has doubled (Ministry of Finance,
2017). Until 2015, 226 LoCs amounting to US $16.9 billion were allocated to devel-
oping countries, about 50% of which went to African states (MEA, 2015a). Most
of such credits are comprised of a grant element of at least 25% required to qualify
as ODA by OECD standards (Hubbard and Sinha, 2011). Some scholars, however,
question whether these flows would indeed qualify as ODA as they are mainly geared
towards export promotion rather than recipient development (Hubbard and Sinha,
2011). Around 85% of these LoCs are tied to goods and services provided by Indian
firms. They are designed to facilitate Indian firms entering African markets and
mostly involve infrastructure, transportation, IT, energy, and agricultural projects
(Sinha, 2011). Hence, a substantial part of India’s development assistance is intended
to benefit both sides of the transaction.
India prioritizes two geographic regions: South Asia and Africa. The main
recipients in South Asia are Bhutan, Sri Lanka, Afghanistan, Nepal, and Bangladesh
(see Table 1), with a majority of aid allocated towards the sectors Energy Generation
and Supply, Transport and Storage, Industry, as well as Water Supply and Sanitation
(Tierney et al., 2011). Energy and infrastructure related projects in particular enable
India to benefit from its cooperation efforts in the long-term (Agrawal, 2007). Recent
schemes include the Terai Road Project, which links the Terai region in Nepal with
neighboring Indian regions, or the Punatsangchu Hydroelectric Project in Bhutan,
which contributes to energy exports to India (MEA, 2015b). Many aid projects
in Nepal and Bangladesh are also seen as a strategy to counter Chinese influence
(Mullen and Ganguly, 2012). It is worth noting that not all aid provided to its neigh-
bors is perceived positively. For example, despite India’s claim that it follows Nepalese
demands, the Nepalese population views India as strategic, following its own political
agenda, while lacking transparency and accountability (Adhikari, 2014).
Turning to Africa, India enhances its cooperation with all countries on the
continent through the India−Africa Forum Summit (IAFS), a platform for African−
Indian relations held every 3 years.24 Its development projects in Africa mainly focus
on personnel training (civil servants and engineers), loans for Indian equipment and
24
The IAFS resembles China’s Forum on China−Africa Cooperation (FOCAC) in its
institutional design (Taylor, 2012).
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services, as well as education and IT (Mawdsley, 2010). One of the most prominent
projects is the Pan-African E-Network with a budget of US $125 million. This
ambitious endeavor seeks to connect 53 member states of the African Union both
with each other and with India to enable access to tele-education and tele-medicine
(Pan-African e-Network Project, 2011). India’s traditional link to Africa is mainly
on account of its support for the African decolonization process and fight against
apartheid, its active role in the Commonwealth, and its diaspora particularly in
Eastern Africa (Muni, 1991; Adam, 2015). India’s aid activities in Africa appear to
be part of a larger strategy and can be seen as part of a cooperation package. Within
Africa, it has strong trade ties, invests in businesses, and is one of the largest provid-
ers of UN peacekeeping forces (Naidu, 2008). Cheru and Obi (2011) connect India’s
aid activities to resource security and the development of new market opportunities.
This manifests in India’s growing engagement in West Africa since the 2000s, where
it has increased investments in the energy sector of resource-rich countries (Beri,
2008; Mawdsley, 2010).
Officially, Indian aid allocation is demand-driven, unconditional, and, within the
horizontal South−South Cooperation framework, based on the idea of mutual assis-
tance (George and Samuel, 2016). Quantitative results in Fuchs and Vadlamannati
(2013) show that Delhi also follows commercial and political self-interest: recipient
countries that align their votes in the United Nations General Assembly (UNGA)
with the Indian government and those that have strong trade ties with India receive
significantly more aid. Since India is a relatively poor donor country with a long-
standing democratic system, it appears to be easier for the Indian government to
justify its expenditures vis-à-vis its electorate if it is provided in a more self-interested
manner (Fuchs and Vadlamannati, 2013).25
While most emerging donors lack an official aid database, India at least provides
project-level information in the annual reports of the MEA and press releases on
LoCs by the Exim Bank. AidData made this information available in an easily acces-
sible format for the 2006−2010 period (Tierney et al., 2011). Asmus et al. (2017) are
currently extending and geo-referencing the data to allow for geospatial analysis of
Indian aid worldwide for the 2006−2014 period. With the growing availability of
detailed and structured data, researchers can evaluate Indian aid allocation and its
effects on various outcome variables. For example, future research could analyze
whether Indian aid to Africa is indeed a combination of developmental goals and
commercial partnerships, and whether India is competing with China and other
countries in a bigger scramble for the continent (Cheru and Obi, 2011). Likewise,
25
For an interview- and media evaluation-based analysis on the domestic perception of
Indian development cooperation, see Mawdsley (2014).
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the role of the widespread Indian diaspora in its aid allocation decisions is yet to be
explored. Turning to India’s neighborhood, it would be interesting to assess whether
energy projects serve India’s energy supply more than they support the bordering
countries economies. Researchers could also examine whether and to what extent
China’s and India’s involvement in development cooperation in South Asia affects
their respective power statuses.
China
Despite being labeled as a “new donor”, China’s foreign aid program is almost as
old as the People’s Republic itself.26 Egypt was Beijing’s first aid recipient in Africa
in 1956, when it received its first aid tranche worth US $4.7 million (Bartke, 1989).
Using historical aid data, Dreher and Fuchs (2015) analyze the main drivers of
Chinese project allocations during the history of China’s aid program. They find
that political considerations, such as Beijing’s demand for international recognition,
were dominant during the initial phase of China’s aid giving. After 1978, with Deng
Xiaoping’s economic reforms, China opened to the West and economic considera-
tions gained significant weight in China’s aid policy. After the Tiananmen Square
protests in 1989, China actively sought diplomatic support in the developing world,
which once again put political motives at the center of its aid-giving considerations.
Finally, the results in Dreher and Fuchs (2015) show that after the 1995 aid reform,
which introduced market principles into the aid system, China’s aid policy and
practices became increasingly guided by commercial interests.
A complex network of institutions administers China’s aid activities.27 The
Ministry of Commerce (MOFCOM) is the coordinating agency and is directly
responsible for the provision of humanitarian assistance, most grants, and interest-
free loans (e.g. Bräutigam, 2009). The Ministry of Finance leads the budgetary
process, is responsible for China’s contributions to international organizations, and
oversees the Export−Import (Exim) Bank of China, which is the main provider
of concessional loans and export credits. The Ministry of Foreign Affairs ensures
that China’s aid policy is in line with its foreign policy objectives, leads the net-
work of China’s embassies worldwide and organizes the Forum on China−Africa
26
See Davies (2007), Bräutigam (2009), and Kobayashi (2008) for thorough summaries of
the history of China’s foreign aid.
27
Kobayashi (2008), Bräutigam (2009), and Corkin (2011) provide overviews on the institu-
tional setup of China’s aid administration. See Rudyak (2017) for a summary of the recent
debate on institutional reforms.
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Cooperation (FOCAC).28 Other ministries and agencies provide aid in various areas.
For example, China’s Ministry of Health is responsible for parts of China’s medical
aid (Grépin et al., 2014).
China considers its aid “as a sensitive area, a state secret” (Bräutigam, 2009: 2).
This is underscored by the withdrawal of lists containing all completed aid projects
from MOFCOM’s yearbooks in 2006 (Dreher and Fuchs, 2015). An official and
comprehensive aid database is not available. The few remaining official sources of
information on aid projects are scattered. The White Papers on China’s Foreign Aid
(State Council, 2011, 2014) only provide values at a very high level of aggregation. To
obtain a grasp of the universe of Chinese aid, researchers rely on unofficial estimates.
Kitano and Harada (2016) estimate China’s gross foreign aid at US $5.1 billion over
the 2010−2014 period, of which 8% was provided as multilateral aid.29 According to
these statistics, China was the world’s sixth largest donor in 2014. The OECD (2017b)
estimates China’s average annual gross ODA disbursements at US $3.0 billion over
the 2010−2014 period (see again Figure 1). These values are smaller than Kitano
and Harada’s estimates as they do not cover disbursements of concessional loans.
AidData was able to track Chinese aid projects from various official and unofficial
sources and the resulting database suggests that total Chinese official finance com-
mitments to the developing world amounted to an annual average of US $23.6 billion
over the 2000−2014 period (Dreher et al., 2017).30 However, less than a quarter
could be identified as ODA under DAC definitions.31 Overall, estimates of Chinese
aid vary widely and the debate boils down to the question of what should count as
aid (e.g. Lum et al., 2009; Bräutigam, 2011; Wolf et al., 2013; see Strange et al., 2017
for a discussion).
28
The FOCAC meetings are China’s official forum to engage with Africa. The first meeting
took place in Beijing (2000) and was followed by summits in Addis Ababa (Ethiopia, 2003),
Beijing (2006), Sharm el-Sheikh (Egypt, 2009), Beijing (2012), Johannesburg (South Africa,
2015), and Beijing (2018).
29
Note that China counts only the interest-rate subsidy, not the value of the loan. Debt relief
is not included in China’s definition of foreign aid.
30
All values throughout this chapter obtained from the 1.2 Research Release (see http://
aiddata.org/china, accessed 27 November 2017). AidData’s China in Africa dataset uses
the so-called Tracking Underreported Financial Flows (TUFF) methodology. Applying a
“ground-truthing” approach, Muchapondwa et al. (2016) provide support for the reliabil-
ity of the dataset and methodology. See also data-gathering initiatives by Brant (n.d.) for
Chinese aid in the Pacific and by Gallagher and Myers (2016) for Chinese loans to Latin
America.
31
According to ECOSOC (2008), the grant element (assuming a 10% discount rate) varies
between 24.2% for some China Exim Bank loans to 75.1% for Chinese government loans.
b3508_V2_Ch07.indd 157 11-02-2020 13:15:56

China’s aid differs from DAC aid in many respects. First, it is largely tied to
goods and services from China. While aid projects provided through China’s
Ministry of Commerce are principally tied to Chinese companies and products, any
project can be granted an exception to this rule if deemed necessary (Bräutigam,
2009). Regarding the tying status of the Exim Bank loans, its official guidelines
state that at least 50% of all procurement should come from China. Second, China
rarely provides aid in the form of budget support and most bilateral activities
come as project aid. Third, China’s aid is similar to the request-based system in
early Japanese development assistance (Bräutigam, 2009; Kragelund, 2010) and, in
striking contrast to DAC donors, lacked country development strategies until very
recently. According to Bräutigam (2009: 308), China prefers experimentation to
explore what works.
Almost every developing country in the world is a recipient of some form of
Chinese aid. Only countries that maintain diplomatic relations with the government
in Taipei (Taiwan) rather than Beijing are typically excluded.32 Figures published
by the State Council (2014) for 2009 suggest that most Chinese aid goes to Africa
(45.7%), followed by Asia (32.8%), and Latin America (12.7%). On the African
continent, AidData could track the largest amounts of Chinese development finance
in Angola, Ethiopia, and Sudan over the 2000−2014 period (Dreher et al., 2017).
Estimations of the volume of China’s aid allocation across recipient countries suggest
that China’s ODA is mainly driven by Beijing’s foreign-policy interests (Dreher et al.,
2018). It shows no robust link with natural resource endowments (Dreher and Fuchs,
2015). On the contrary, less concessional flows, such as export credits, correlate with
economic variables such as recipients’ debt burden, access to oil, and bilateral trade
volume with China (Dreher et al., 2018).
Not only is China’s geographical reach almost all encompassing, the same holds
true to the sectoral composition of Chinese aid. While public attention focuses
on large infrastructure projects and prestige projects, such as the construction of
stadiums and government buildings, China is active in virtually all sectors. While
social infrastructure projects, such as the provision of hospitals and government
buildings, dominate in terms of project numbers, economic infrastructure pro-
jects, mainly in the areas of transport and energy, are the heavyweights in terms
of financial values (Dreher et al., 2017). Although AidData was not able to track a
single project on environmental protection at the time of their first study in 2013
(Strange et al., 2013), China has recently started activities in this area and began
32
There are few exceptions to this rule such as humanitarian aid after severe catastrophes
(e.g. Tubilewicz, 2012).
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listing “Strengthening Environmental Protection” as one of its goals in a recent

White Paper (State Council, 2014).33
The question as to whether Chinese aid has been effective in promoting eco-
nomic growth and other development outcomes in recipient countries is largely
unexplored. Critics voice doubts that Chinese aid is geared towards economic
development given that China is engaged in so many prestige projects, such as gov-
ernment buildings and stadiums, that are not directly linked to economic growth or
poverty reduction (Lum et al., 2009; Will, 2012). Others praise China for its focus on
infrastructure (Bräutigam, 2009). According to results from panel growth regressions
in Busse et al. (2016) for the 1991−2010 period, Chinese aid and foreign investment
have no robust effect on economic growth in African countries. Using georeferenced
aid data, Dreher et al. (2019b) examine the effects of Chinese development projects
on development at the subnational level. Their results suggest that Chinese aid
is successful in promoting regional development as measured by nighttime light
emissions. At the country level, Dreher et al. (2017) find positive growth effects of
Chinese ODA but not of less concessional and more commercially-oriented types
of official finance. Given the short time in which Chinese aid flows are substantial
and the long time lags that some types of aid require to show effects, this question
should be reinvestigated as more data become available.
In contrast to Western donors and the big IFIs, China does not link its aid
to conditions that relate to recipients’ political systems or their human rights
records. The Chinese government emphasizes that it “never uses foreign aid
as a means to interfere in recipient countries’ internal affairs” (State Council,
2011).34 Bräutigam (2009: 285) notes that “China’s rise has clearly given dictators
additional financing options”, but also points to Western donors’ aid provisions
to authoritarian regimes. Even if China’s aid allocation was not biased towards
autocratic recipient countries, recipient countries might turn to emerging donors
like China to circumvent conditions linked to their institutional setup and human
rights record.
Several papers explore these links between Chinese aid and recipient institu-
tions. A series of papers (Dreher and Fuchs, 2015; Broich, 2017; Dreher et al.,
2018) finds that the cross-country allocation of Chinese ODA does not respond
33
AidData lists seven projects in the environmental sector in Africa over the 2013−2015
period. See http://china.aiddata.org/ (accessed 4 February 2017).
34
This principle of non-interference, also enshrined in Indian aid, dates back at least to
the Final Communiqué of the 1955 Bandung Conference. It became part of the “Eight
Principles of China’s Foreign Aid to Developing Countries” laid out in 1964, and has been
reiterated continuously since then.
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to the quality of institutions in recipient countries, in line with China’s principle of

non-interference with recipients’ internal affairs.35 In a more direct analysis of the
effects of Chinese aid on institutions, previous research provides some support for
the raised concerns. In a quantitative analysis of democracy in developing countries,
Kersting and Kilby (2014) find eligibility for Chinese aid to be negatively linked with
democracy.36 Bader (2015), however, does not find that Chinese aid stabilizes autoc-
racies, but such an effect does follow Chinese trade flows. Concerning corruption, in
her response to the critique that China is favoring countries with corrupt regimes,
Bräutigam (2009) emphasizes that China is very active in Africa’s best-governed
countries such as Botswana, Mauritius, and South Africa. However, first studies show
that Chinese aid worsens corruption within countries. Using Tanzanian survey data,
Kelly et al. (2017) provide evidence suggesting that Chinese aid activities undermine
a corruption-reducing effect of World Bank aid projects. Similarly, Isaksson and
Kotsadamm (2018) find increased levels of corruption around active Chinese project
sites but no such link for World Bank project locations.
The supposedly lax environmental and labor standards of China’s development
finance are subject to criticism (see Bräutigam, 2009 for a discussion). Kurlantzick
(2006: 5), for example, is concerned that “Chinese investment could contribute to
unchecked environmental destruction and poor labor standards, since Chinese
firms have little experience with green policies and unions at home, and some
African nations have powerful union movements”. Strange et al. (2013) list several
instances of crackdowns on Chinese activities out of environmental concerns in
Gabon and Sierra Leone. They also refer to a report by Human Rights Watch (2011)
on labor abuses, including poor health and safety standards in Chinese state-owned
copper mines in Zambia. While to date there is no systematic study on the effects
of China’s aid activities on labor standards, two quantitative studies analyze their
environmental impact. In the first, BenYishay et al. (2016) show that exposure to
Chinese-funded infrastructure projects slows forest loss in Cambodia, but speeds
it up in Tanzania. They conclude that “China’s development activities need not lead
to widespread environmental damage when nearby ecosystems are appropriately
protected, but domestic environmental governance plays a crucial role in shaping
these outcomes” (24). In the second, Hsiang and Sekar (2016) could not link a
sudden increase in the production of illegal ivory through elephant poaching to
35
The picture is different for other official flows, such as commercial loans, which appear to
flow over-proportionally to more corrupt countries (Dreher et al., 2018).
36
This is in line with Bermeo (2011) who shows that recipients of aid from a uthoritarian
sources are less likely to democratize than countries that receive aid from democratic
donors.
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greater Chinese influence through aid. These two papers form an exception and
there remains much room for further research on the environmental consequences
of China’s development activities.
There is little systematic evidence on the extent to which recipient populations
appreciate Chinese aid. Using representative survey data, Eichenauer et al. (2018) find
no evidence that inflows of Chinese aid, trade and investment improve or deteriorate
attitudes towards China among Latin American individuals. Findley et al. (2017) con-
duct a large field experiment in Uganda and find some evidence that citizens prefer
aid from the United States compared to Chinese aid. Chinese aid is often criticized
for the high number of Chinese staff involved in its aid projects (e.g. Alden, 2005).
This is of concern as it may prevent human capital spillovers to the local population.
According to Bräutigam (2009: 154), however, “the idea that the Chinese always bring
over planeloads of their own workers and [do] not employ Africans is wrong.” Her
own non-representative collection of project information suggests that the share of
local workers in Chinese projects ranges between 0 and 96% with a median value of
83% (Bräutigam, 2014). Similarly, Davies (2007) cites the results of a survey by the
British Department for International Development (DFID), according to which the
local labor share in Chinese construction and infrastructure projects in four selected
African countries amounted to 85−95%, comprising mostly, but not exclusively,
low-skilled labor. Nevertheless, more systematic data gathering efforts and analyses
are warranted to shed more light on local human capital spillovers.
Research on China’s gains from its aid program is still scarce. Is China success-
fully buying foreign-policy support in international fora such as the United Nations
Security Council? Do Chinese companies benefit from their government’s aid efforts
and does the aid engagement have distributional consequences within the Chinese
business community? In a similar vein, scholarship should investigate the effects
of China’s aid on the way the established donors provide aid. Results in Granath
(2016) already suggest that, in response to growing Chinese aid activities in recipient
countries, DAC donors increase their own aid. In a pioneering study, Hernandez
(2017) finds that countries with a larger influx of Chinese aid receive less severe
conditions from the World Bank. Further avenues of research could be the effects
of Chinese aid on the sectoral composition and the concessionality of “traditional”
aid. There is also little research on whether Chinese aid harms the effectiveness of
Western aid. An exception is Li (2017). He finds that the democratizing effects of
DAC aid to Sub-Saharan Africa have been reduced with the emergence of Chinese
aid. On the positive side, the results in Strange et al. (2017) suggest that sudden
withdrawals of “traditional” aid are less likely to translate into violent conflict if
recipient countries have access to funding from China. The extent to which Chinese
aid hampers Western aid effectiveness with respect to development outcomes and
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the West’s ability to buy political support from developing countries also deserves
close attention.
South Africa
South Africa is the newest BRICS member, joining the group in December 2010.37
As an aid donor, South Africa is said to have a comparative advantage as a result
of its geographical, cultural and political knowledge of Africa, and its own recent
experience in building a democracy. Its aid contribution is far from reaching the
volumes of the other BRICS countries (see again Figure 1). Thus, it is not surprising
that South Africa’s aid initiative is largely unexplored.
The total volume of South Africa’s development aid is difficult to assess. There is
no central accounting of South Africa’s bilateral aid and hence a lack of reliable data.
According to one source, South Africa’s aid in 2004 amounts to approximately US
$1.6 billion, which would be less than 0.01% of South Africa’s GDP (Alden and le
Pere, 2010: 5). Others cite relatively high numbers of 0.7−1% of the country’s GNI
(around US $6 billion) (Grimm, 2011a; Besharati, 2013a), according to which South
Africa would be one of few countries in the world that achieve the United Nation’s
target for international aid. However, these estimates include peacekeeping activi-
ties and multilateral contributions which are not counted under OECD definitions
(Tjønneland, 2013). In fact, just about 10% of its contribution from 2005−2009 went
to bilateral assistance (Yanacopulos, 2013). For instance, South Africa channels
substantial amounts through organizations such as the South African Customs
Union (SACU), the Southern African Development Community (SADC), and the
African Union (AU). Bilateral flows via the African Renaissance Fund are currently
estimated at US $183 million (Figure 1), which should be a better approximation of
the actual number of all bilateral flows.
The history of South Africa’s development aid reaches back to the apartheid
era. As Braude et al. (2008) point out, assistance to other countries emerged as an
instrument to gain foreign political support. In 1968, the Economic Cooperation
Promotion Loan Fund was installed as a financial instrument for South Africa’s
cooperation (Besharati, 2013a). Until the 1980s, South Africa steadily expanded
its bilateral assistance to more countries but kept its focus on the African conti-
nent (Vickers, 2013).38 In general, foreign policy under the apartheid regime was
37
South Africa’s BRICS membership was formally confirmed only at the third BRICS
Summit in April 2011.
38
As Braude et al. (2008: 5) highlight, financial aid during the apartheid era also went
to the so-called “Homelands” or “Banustans”, which were independent states within the
b3508_V2_Ch07.indd 162 11-02-2020 13:15:57

characterized by isolation. With the end of the apartheid regime, South Africa
opened up and established a multiracial democracy in the 1990s. The presidency of
Thabo Mbeki was marked by the so-called African renaissance — an idea according
to which African countries could achieve cultural, political, and economic renewal
through mutual support and cooperation (Yanacopulos, 2013). This idea was also
manifested in the New Partnership of African Development (NEPAD) in 2001
(Grimm, 2011b). In addition, Mbeki initiated the establishment of the African
Renaissance Fund (ARF) in 2000, as a new institution for South Africa’s develop-
ment cooperation and a replacement of the Economic Cooperation Promotion
Loan Fund. In 2010, the Parliament decided that the fund needed restructuring
due to several administrative failings (Besharati, 2013b). Around the same time
the idea for a central implementing agency that would better coordinate and
streamline South Africa’s aid activities was born (Besharati, 2013a). Since then the
construction of the South Africa Development Partnership Agency (SADPA) has
been ongoing.39
The current institutional setting of South Africa’s development aid is relatively
complex. Based on interview evidence, Braude et al. (2008) estimate that “at least
half of all national government departments are engaged” in development projects.
Today, the ARF is the main implementing agency of South Africa’s aid activities. It
is planned that SADPA will take over this role but the process has been extremely
slow (Lucey, 2015). Besada and Tok (2015) claim that the ARF currently commands
a budget of ZAR 600−800 million (US $70−94 million). This is expected to increase
when SAPDA starts its operations.40
South Africa’s development aid concentrates on Sub-Saharan Africa. This is not
surprising given that South Africa’s take on South−South Cooperation is informed
by “its national interest as being intrinsically linked to Africa’s stability, unity, and
prosperity” (DIRCO, 2011). According to an estimate of Besharati (2013a), more
than 70% of South Africa’s development aid is channeled to member states of the
Southern African Development Community (SADC). Historical exceptions to
the focus on African countries have been places in humanitarian need such as
South African territory designated for the black South African majority. The purpose of
these flows was to strengthen the political regime by creating the image that “black South
Africans had places where they could express themselves politically”. However, the inde-
pendence of the “Banustans” was not recognised outside of South Africa.
39
See the Parliamentary Monitoring Group’s website at https://pmg.org.za/committee-
meeting/22022/ (accessed 14 February 2017).
40
A more conservative estimate by Lucey and O’Riordan (2014) projects the prospective
budget of SADPA at only ZAR 500 million (US $50 million).
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Palestine or Haiti after the 2010 earthquake (Grimm, 2011a; Tjønneland, 2013;
Yanacopulos, 2013).
The backbone of South Africa’s development model consists of institution-
building, peacekeeping, and post-conflict development (Grobbelaar, 2014). Examples
include peacekeeping interventions in Burundi, Lesotho, and most prominently
the Democratic Republic of Congo (Lucey, 2015; Hengari, 2016). Ultimately, South
Africa has a self-interest in keeping the region peaceful and prosperous. South Africa
draws on its own history of internal institution-building for these interventions — a
fact which many scholars see as South Africa’s comparative advantage (Hendricks
and Lucey, 2013; Vickers, 2013; Hengari, 2016). This sectoral focus stands in stark
contrast to South Africa’s lip service to the principle of non-interference. This
contradiction is also evident in aid projects that have been tied to political reforms.
For instance, South Africa replied in 2011 to a request by Swaziland for a bailout
with an aid offer tied to both reforms of the financial system and reforms related to
democratic rights (Besharati, 2013a).
The motives behind the regional and sectoral concentration of South Africa’s
aid has been the subject of some debate. Besharati (2013a) names undesired migrant
streams as one of the motives behind the allocation of funds. Grimm (2011a) further
hypothesizes that some of the funds are meant as compensation for destabilization
politics that South Africa practiced during the apartheid regime. One example is the
case of Mozambique, where South Africa sponsored the militant organization during
the Mozambican civil war. In addition, Yanacopulos (2013) claims that South Africa
is trying to buy votes to enter the United Nations Security Council. Dreher et al.
(2011) show some quantitative evidence of South Africa’s aid allocation pattern. They
find that poorer, more fragile states have a significantly larger probability of receiving
South African aid. They also find that countries that perform worse in controlling
corruption receive more aid from South Africa. These results are generally in line
with the notion that South African aid is directed towards conflict-prone countries
with institutional struggles.
Whether South Africa can indeed capitalize on its regional knowledge and own
development history is still unclear. Evidence is limited to a few case studies on the
effectiveness of South African aid (Hendricks and Lucey, 2013; Hengari, 2016).
South Africa has actively participated in global meetings on aid effectiveness in Paris,
Accra, and Busan (Besharati, 2013a; Grobbelaar, 2014). It also supports regional
initiatives on aid effectiveness such as the African Platform for Aid Effectiveness
of the African Union and the NEPAD. However, South Africa’s own aid activities
do not meet these standards. Transparency and accountability are a continuing
impediment to the analysis of South African aid. Due to the decentralized struc-
ture of its aid activities, comprehensive monitoring is difficult (Besharati, 2013a).
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The major implementing agency, the ARF, currently does not disclose any detailed
spending accounts. Whether the SADPA will be more transparent in the use of its
funds remains to be seen. The only available project-level data on South Africa’s aid
activities can be found in a dataset provided by AidData, which covers projects from
2005−2009 (Tierney et al., 2011). In the NEPAD documents, South Africa recognizes
country ownership as an important pillar of aid effectiveness (Besharati, 2013a).
Although the ARF and SAPDA officially do not provide tied aid, South Africa’s
development aid often comes de facto in a package with South African institutions,
organizations and companies (Besharati, 2013a).
Vickers (2013) claims that South Africa does not fit into the “traditional” aid
donor category, primarily due to its lack of comparable financial resources. Its
strength as an aid donor rather lies in its history of institution-building and knowl-
edge of the cultural, political, and economic context of African countries. Whether
this advantage in fact has a tangible impact still needs to be investigated. Future
research could focus on the effects of South African aid on political stability and on
the economic welfare of the recipients. More and better data is needed to make this
assessment possible. In addition, future research could study the motives behind
South Africa’s aid activities to better understand the underlying political agenda.
Conclusions
The five BRICS countries have a long history in the field of development coopera-
tion. Since the turn of the millennium, their commitments have become sizeable,
and consequently, BRICS aid has moved to the center of the academic debate on
foreign assistance. BRICS aid is generally associated with the principle of non-
interference and an emphasis on mutual benefits. These principles run counter to
the Western donors’ idea of aid untied to goods and services from the donor but tied
to democracy and human rights in recipient countries. This concept questions the
conventional DAC aid architecture, which in turn is often perceived as paternalistic.
At the same time, it is suspected that BRICS aid is more strongly driven by their
donor’s self-interests than aid provided by established donors.
Compared to aid flows from OECD countries, aid from BRICS countries is still
small. It is thus unlikely that it will grow into a standalone alternative to the DAC
system. Still, the aid activities of the BRICS donors — with the exception of South
Africa — have gained global reach. In terms of sectors, there is large variation
between the individual BRICS nations. While China invests heavily in large-scale
economic infrastructure projects and India is well-known for its work in the energy
and IT sectors, Brazil focuses on agriculture, health, and education projects. Russia
is also strongly engaged in education and health projects. Interestingly, South Africa
b3508_V2_Ch07.indd 165 11-02-2020 13:15:57

engages very actively in peacekeeping activities. This focus stands in contrast to

OECD aid, which typically avoids conflict-prone contexts. Overall, BRICS aid seems
to be a complement to rather than a substitute for DAC aid. Ultimately, recipients
should benefit from this growing diversity in international support.
The manner in which the BRICS countries provide aid differs substantially from
the DAC guidelines. The grant share is usually smaller and export support, particu-
larly in the cases of China and India, is substantial. While the BRICS countries are
often associated with the principle of non-interference, the reality of Russian and
South African aid in particular is different. According to official documents, Russia
asks its aid recipients to have national programs in place that tackle domestic poverty
and economic development, and a true interest in developing bilateral relations
with Russia (Ministry of Finance, 2007). South Africa even actively interferes with
the governance of recipient countries, including conflicts and democratic crises.
These interventions stand in stark contrast to its lip service to the non-interference
principle. In general, BRICS donors seem to be motivated by their geopolitical and
commercial self-interests. However, it is important to note that existing quantitative
studies show no robust evidence that they follow self-interests to a larger extent than
DAC donors.
Little is known on the developmental effects of BRICS aid. The literature on this
issue remains largely anecdotal, mainly due to the lack of comprehensive and well-
structured data. In contrast to the DAC donors, no comprehensive official database
exists that tracks BRICS donors’ aid contributions at the project level. However, in
the case of China and India, some research initiatives have been initiated to track
and geo-reference individual aid projects. Making such data compatible with OECD
standards will facilitate comparative studies on the allocation and effects of BRICS
aid as well as on the coordination and competition of the BRICS countries with other
bilateral and multilateral aid activities.
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PART III
Investment and Finance
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CHAPTER 8
BRICS and the Global Investment Regime
Yoram Z. Haftel
Department of International Relations,

The Hebrew University of Jerusalem, Israel
Introduction
The regulation of international investment is currently in flux. Unlike international
trade, a multilateral and centralized institution that regulates foreign direct investment
(FDI) does not exist. Instead, cross-border capital flows are tackled by more than 3,000
international investment agreements (IIAs), many of which are bilateral investment
treaties (BITs) that were signed in the 1990s.1 In addition, and largely based on these
treaties, more than a thousand investment disputes were (or are) adjudicated by inter-
national arbitrators in a decentralized system known as investor-state dispute settlement
(ISDS). Taken together, these two features form the so-called global investment regime.
This regime is best understood in the context of the North−South divide. The
stated objective of investment agreements and arbitration is to provide foreign
investors with protection against political risk in the host countries. Thus, most
treaties include provisions that guarantee standards of treatment (e.g. most favored
nation (MFN), national treatment (NT), and fair and equitable treatment (FET)),2
1
Other IIAs are treaties with investment provisions (TIPs), most commonly free trade
agreements (FTAs) with an investment chapter.
2
MFN and NT are relative standards that provide foreign investors with treatment no less
favorable than investors from third countries and local investors, respectively. FET is an
181
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182 Y. Z. Haftel
protection against and adequate compensation in case of expropriation, the freedom

to transfer capital, and the like. In addition, many of them allow foreign investors to
turn to international arbitration if they believe that the host government has violated
the agreement. Given that much FDI flowed from economically developed countries
(EDC) to developing countries, and given that the latter were associated with height-
ened political risk, developed countries utilized IIAs to shield their investors from
such a risk. It is not surprising, then, that most IIAs are North−South.3
One might wonder why did so many developing countries sign so many IIAs that
supposedly hurt them so quickly all the while they resisted investment protection at
the multilateral level (Guzman, 1998). Allegedly, they did it in order to attract much
needed flows of FDI into their economies and to demonstrate their commitment
to liberal economic policies (Elkins et al., 2006; Haftel, 2010; Jandhyala et al., 2011;
Salacuse and Sullivan, 2005). Many governments, it appears, have exaggerated the
potential benefits and overlooked or minimized the costs associated with these
treaties (Poulsen, 2015).
The global investment regime has garnered only limited interest from relevant
stakeholders and the public at large until the early 2000s. A growing number of ISDS
cases during the first decade of the century, as well as their significant monetary and
political implications, has brought this issue to the attention of policy-makers, experts,
foreign investors, and transnational advocacy networks, who have begun reevaluating
and debating the merits of the existing system. In particular, many critics wondered
whether the alleged relinquishing national sovereignty and delegating power to interna-
tional arbitrators is justified and called for a “rebalancing” of investors’ rights and host
states’ flexibility. Indeed, as multinational corporations (MNCs) have begun to slap host
governments with claims in international forums, some governments have responded
with greater reluctance to sign new or ratify existing BITs (Haftel and Thompson,
2013; Jandhyala et al., 2011; Poulsen and Aisbett, 2013), to renegotiate or denounce
existing treaties (Haftel and Thompson 2018; Thompson et al., forthcoming), or to
seek annulment of costly awards handed down by arbitration panels (Simmons, 2014).
While initial challenges to the regime emerged from the global South, dis-
satisfaction has spread to EDC as well. This trend is reflected, for example, by the
fierce opposition to the investment chapters in the Trans-Pacific Partnership (TPP),
Transatlantic Trade and Investment Partnership (TTIP), and the Canada-EU
absolute standard that protects foreign investors from arbitrary measures and harassment
by the host government (UNCTAD, 2012).
3
Former communist countries are subsumed under the South. There are also numerous
South−South IIAs, but very few North−North IIAs. With respect to the latter, it is com-
monly argued that low political risk and independent court systems obviate the need for
protection through an international agreement.
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BRICS and the Global Investment Regime 183
Comprehensive Economic and Trade Agreement (CETA). In response, countries such

as the United States and Canada have updated their Model BITs and have begun to
sign agreements that provide governments with greater State Regulatory Space (SRS)
and restrict the ability of investors to file claims in international tribunals (Alschner
and Skougarevskiy, 2016; Broude et al., 2017).4 On the whole, it seems that most
governments, in the North as well as the South, remain committed to the general
principle that the protection of foreign investors is required, but strive to strike a better
balance between this objective and the host state regulatory flexibility.
Emerging market economies (EMEs) such as Brazil, Russia, India, China, and
South Africa (henceforth: BRICS), are in a curious position vis-à-vis the global
investment regime. On the one hand, all countries are part of the global South
(with the exception of Russia, perhaps) and are historically recipients of FDI. From
this perspective, one might expect them to oppose international agreements that
impose investor protection at the expense of national sovereignty. Moreover, their
sheer economic size might endow them with the political leverage to shape FDI-
related rules — especially if acting collectively. On the other hand, their depend-
ence on the global economy for growth, as well as the increasing international
exposure of their own MNCs, might motivate them to back the current regime,
at least to an extent.
This chapter takes a closer look at this tension by, first, examining the record
of BRICS countries with respect to IIAs and ISDS. It shows that most of them have
become increasingly skeptical about the benefits of investment agreements, espe-
cially after fighting arbitration claims. China and, to an extent, Russia appear to be
an important exception to this generalization, however. The analysis also indicates
that each country adopted a rather distinct strategy, without much coordination
with other BRICS, thereby offering little prospect for collective action. The third
section offers possible explanations for these divergent approaches, contemplating
in particular the role of regime type and a country’s global economic profile. This
section also charts research frontiers in this context and points to promising avenues
of future research. The final section concludes with implications for the future of the
global investment regime and the role of the BRICS in it.
BRICS and the Global Investment Regime: An Overview

This section surveys BRICS policies and experience with respect to IIAs and BITs.
Table 1 reports basic facts with respect to these two aspects of the regime: it first
4
SRS refers to the extent of the ability of governments to freely legislate and implement
regulations in given public policy domains. For further elaboration, see Broude et al. (2018)
and Thompson et al. (forthcoming).
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184 Y. Z. Haftel
Table 1: Involvement of BRICS in the global investment regime

as of December 2018.
South Africa Brazil Russia India China
IIAs Signed 49 23 81 85 130
IIAs in Force 15 1 64 57 111
IIAs Renegotiated 0 0 4 5 22
IIAs Terminated 10 0 1 60 3
ISDS Respondent 1 0 24 24 3
ISDS Claimant 3 0 22 6 5
reports the number of BITs signed and mutually-ratified for each country as well
as the number of renegotiated treaties (as of the end of 2018). It then reports the
engagement of these countries in ISDS both as a respondent and as a claimant.5 The
remainder of this section takes a closer look at each country, starting with South
Africa, Brazil, and Russia, and then India and China.
South Africa
The case of South Africa is perhaps emblematic of developing countries that initially
embraced the global investment regime and then made a sharp turn to reject it
(Poulsen, 2014, 2015).6 It signed close to 50 BITs, most of them in the second half
of the 1990s. It pursued this policy in the post-Apartheid era in order to improve
the country’s image and attract much needed FDI. Over the 2000s, however, South
Africa had turned from an enthusiastic participant into an outspoken critic of the
regime. The key episode to bring about this shift was a complaint filed by an Italian
investor that challenged affirmative action measures enshrined in the South African
constitution.7 This was followed by a governmental review of South Africa’s BIT
policy that resulted in a report harshly criticizing existing practices and recommend-
ing that the country changes course (DTI, 2009; Poulsen, 2014).
Since 2009, South Africa had virtually stopped signing new BITs and ratifying
BITs not yet in force. Most controversially, it had embarked on a process of unilateral
5
Data on IIAs is based on UNCTAD, http://investmentpolicyhub.unctad.org/IIA, as well
as author’s own calculations. Data on ISDS cases is based on UNCTAD, https://investment
policy.unctad.org/investment-dispute-settlement (accessed 8 December 2017).
6
Other notable cases are Ecuador, Bolivia, and Venezuela.
7
Piero Foresti, Laura De Carli and others vs. Rep. of South Africa (ICSID Case No.
ARB(AF)/07/1).
b3508_V2_Ch08.indd 184 11-02-2020 13:16:28

BIT denunciation with nine important European partners as well as with Argentina.8
South Africa has terminated these BITs despite European pressure to keep them
intact (Poulsen, 2015: 189). Interestingly, though, it did not terminate several other
BITs, most of them with other developing countries (two of which with other BRICS,
namely, China and Russia). This (incomplete) distancing seems to have achieved its
stated goal: South Africa did not face an international investment claim since the
Foresti case. On the other hand, South African investors have turned to ISDS three
times since 2012, one claim two claims against Lesotho and one against Mozambique.9
In sum, South Africa appears to disavow the investment regime as a host
country, but accept it as a home country. This approach does not offer a long-term
solution to the tension between investor protection and national sovereignty, how-
ever. So long as South Africa’s remaining IIAs continue to be in force, it is exposed to
arbitration claims in the future. Notably, most of South Africa’s IIAs were signed in
the 1990s and do not include many of the recent innovations appearing in “modern”
IIAs. It has not taken any proactive steps to renegotiate or update its IIAs and does
not present an alternative governance structure to the current rules and institutions.
Brazil
As Table 1 shows, Brazil is one of few countries, and arguably the most important
one, that remains largely on the sidelines of the global investment regime. Even
though it signed 14 BITs in the 1990s, mostly with European partners, it ratified
none. This failure to ratify seems to have emanated from a cumbersome legislative
process combined with a determined and effective opposition (Lemos and Campello,
2015; Wei, 2012) as well as the belief that Brazil can be attractive enough to FDI even
without BITs (Bento, 2013: 312; Collins, 2013: 38). As a direct consequence, Brazil
was not involved in any ISDS either as a claimant or a defendant.
Like in other emerging markets, however, the growing involvement of Brazilian
MNCs in the global economy during the 2000s have resulted in a mounting pressure
on the government to protect them through investment agreements (Bento, 2013:
275−276). Not least because Brazilian corporations found themselves entangled
in investment disputes with host governments with no recourse to international
arbitration (Bento, 2013: 317−318). Brazilian businesses were especially interested in
agreements with developing countries where they had strong business ties, especially
8
These are Austria, Belgium/Luxemburg, Denmark, France, Germany, the Netherlands,
Spain, Switzerland, and the United Kingdom.
9
The claims against Lesotho is based on the investment protocol of the South African
Development Community (SADC) rather than a BIT.
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186 Y. Z. Haftel
in Sub-Saharan Africa and Latin America (Collins, 2013: 38; Morosini and Badin,
2015). After long deliberations and consultations, in 2013 the government produced
a new template of an investment agreement, labeled Cooperation and Investment
Agreement (CIFA). This template agreement strives to strike a balance between
investment protection and SRS. With respect to standards of protection, for example,
it includes (qualified) MFN and NT but no FET clauses. Most importantly, CIFAs
completely exclude binding ISDS provisions. Instead, they emphasize consultation
and mediation through a Joint Committee and an Ombudsmen (Brauch, 2015;
Morosini and Rotton, 2015).
The first two CIFAs were signed in 2015 with Angola and Mozambique, two for-
mer Portuguese colonies, where Brazilian firms have strong economic interests. Since
then, it signed several additional agreements, all with Latin American or African
partners.10 Only the CIFA with Angola entered into force by the end of 2017, so their
impact remains largely hypothetical. Given that they have no reference to ISDS, it
is safe to assume that Brazil will not take part in the current system of international
arbitration in the foreseeable future. It remains to be seen whether this model will
satisfy Brazilian investors operating abroad and whether other governments will
find it suitable for their needs.
Russia
Russia represents an interesting case of a large EME that has shifting and cross-
cutting interests with respect to foreign investment. As reported in Table 1, Russia
has concluded a large number of BITs in the last 30 years or so, about three-quarters
of them are in force. It was also involved in a large number of investment disputes,
both as a defendant and as a claimant, most of them filed within the last decade or
so. Indeed, Russia was entangled in the largest number of ISDS cases among the
BRICS countries. At first blush, Russian lasting embrace of the global investment
regime, despite the large number of investment arbitration instances, seems to defy
theoretical expectations (Poulsen and Aisbett, 2014; Haftel and Thompson, 2018)
and to diverge from the perspectives of South Africa and Brazil discussed above.
A closer look at the records suggests that the reality is a bit more complex.
Looking, first, at Russia’s BITs, Figure 1 shows the number of BITs signed each
year since 1989 (during which it signed its first BITs, then as the Soviet Union),
The agreement with Peru is part of an FTA. According to the Brazilian Ministry of Foreign
10
Affairs, negotiations are under way with South Africa, Algeria, Morocco, and Tunisia. See
http://www.itamaraty.gov.br/en/press-releases/12538-brazil-mozambique-cooperation-
and-investment-facilitation-agreement-cifa (accessed 10 February 2017).
b3508_V2_Ch08.indd 186 11-02-2020 13:16:28

9
8
7
6
Number of IIAS
5
4 LDC
3 EDC
2
1
0
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
Year
Figure 1: Annual number of Russian IIAs, 1989−2016.

Source: UNCTAD’s International Investment Agreements Navigator. http://investmentpolicyhub.unctad.
org/IIA (accessed 16 February 2017).
divided into two groups of countries: economically developed countries (EDCs)

and less developed countries (LDCs). It is apparent that most of the BITs concluded
right before and after the fall of the Berlin Wall were with developed, mostly Western
European, countries, in an effort to attract FDI into the Russian economy.11 It also
joined the Energy Charter Treaty (ECT), a regional BIT-like agreement in the energy
sector, in 1994 (Rubins and Nazarov, 2008: 103).12 The last investment treaty signed
with a developed country was the 1998 Russia−Japan BIT, however. The pattern
for BITs concluded with developing countries is quite different. Only a handful of
BITs with LDCs were signed in the early 1990s, but since the early 2000s all BITs
are with countries from the global South (including all other BRICS except Brazil).
Since 2005, Russia concluded more than 20 BITs, most recently with Cambodia,
Iran, and Morocco.
The causes for this shift echo the lines of thinking prevailing in other EMEs. The
dissipating interest in BITs with EDCs was driven by a growing concern that they
give foreign investors too much protection at the expense of national sovereignty.
This issue gained salience after Russia faced an investment claim in the late 1990s
11
Russia signed a BIT with the US in 1992, but never ratified it.
12
The ECT involved mostly European countries and entered into force in 1998. Even though
Russia never ratified the agreement, it was argued that it is still obliged by it. This issue
turned out to have significant legal implications in an important arbitration case related to
Yukos Oil (see below).
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188 Y. Z. Haftel
(Collins, 2013: 57). This was coupled with high prices on exporting commodities,
such as oil, which rendered the need for IIAs less pressing (Rubins and Nazarov,
2008: 103). Thus, the Putin government put the signing and ratification of BITs on
hold in the early 2000s. At the same time, a growing global exposure of Russian
MNCs resulted in pressure to protect them in host countries (Collins, 2013: 61).
This might explain Russia’s continued eagerness to conclude treaties with developing
countries.
An examination of Russian BITs’ content is also quite revealing in this respect.13
The BITs signed under the Soviet Union followed a template espoused by communist
governments in the 1980s. These agreements had rather limited investment protec-
tions and access to ISDS, which was available only for disputes over the amount
of compensation in case of expropriation (Ripinsky, 2013: 598). Russia updated
its Model BIT in 1992, adopting an investor-friendly template akin to Western
European ones. Thus, the BITs signed in the 1990s contained standards of treatment,
such as MFN, NT, and FET, as well as easy access to ISDS.
Russia adopted a new model in the early 2000s. While some commentators sug-
gest that this model was more sensitive to considerations of national sovereignty and
flexibility (Rubins and Nazarov, 2008; Collins, 2013), it appears that current BITs do
not significantly diverge from earlier ones. As Ripinsky (2013: 597) argues, “The cur-
rent Model BIT — even though more developed than the first two (1987 and 1992)
models — can still be described as minimalist: it includes only the basic bare-bones
provisions which lack the details and sophistication of other States’ recent BITs.”
Indeed, a glance over the texts of recent BITs, for example the 2010 Russia−Singapore
BIT, suggests that it remains largely favorable to foreign investors.14
In late 2016, Russia adopted a new regulation that provides guidelines with
respect to the content of future IIAs. Among other things, it includes a more
demanding definition of foreign investors, no FET and Full Protection and Security
provisions, and a more limited access to ISDS (Dahlquist, 2016). It remains to be
seen whether these changes will be incorporated into future IIAs. Even if they are,
the more cautious approach they embody remains largely in line with broader global
trends and is much less radical than South Africa’s and Brazil’s.
The Russian experience with ISDS largely dovetails its BIT program. As
already mentioned, Russia faced a large number of claims, most of them rather
recently. Many of these claims were filed by Western European investors. The most
13
For a detailed commentary on Russian Model BITs, see Collins (2013) and Ripinsky
(2013).
14
It contains, for example, FET, NT (albeit with some exceptions), and MFN provisions as
well as unrestricted ISDS rules.
b3508_V2_Ch08.indd 188 11-02-2020 13:16:29

well-known case involves several claims by shareholders of the Russian oil company
Yukos, which was nationalized in the early 2000s. In 2014, the claimants won a
staggeringly high award of US $50 billion in the Permanent Court of Arbitration.
This award was overturned in 2016 and is still litigated at the time of this writing.15
One line of defense pushed by the Russian government was that the claimants were
not foreign investors, but local ones who established shell companies abroad and
are therefore not entitled for protection under the agreement (Collins, 2013: 58).
This is a likely impetus for Russia to define foreign investors as only those who have
“substantial presence” in the home country.
Seven recent claims represent a different dynamic: all were filed in the wake of
the 2014 Russian invasion to and annexation of Crimea and are based on the 1998
Russia−Ukraine BIT. These claims are complicated by geopolitical disputes and raise
difficult and intriguing political legal issues that are beyond the scope of this chapter
(Tzeng, 2016). On the other side of the ledger, as of December 2018 Russian MNCs
filed 22 claims against host governments. All of these claims involve other develop-
ing countries, most of which are in Russia’s “near abroad”. This shows, as argued by
Collins (2013: 60), that “Russian firms are quite willing to pursue dispute settlement
in international fora when it is in their interest”. In this context, it is unsurprising,
perhaps, that an annex to the 2016 regulation states that Russian BITs should “focus
primarily on outgoing investments, i.e. the interests of Russian investors abroad, and
the scope to improve the investment climate faced by Russian investors (and indeed
the possibility to receive incentives or preferential treatment)”.16
In short, Russia’s position has shifted from a largely FDI recipient country in the
early 1990s to one that is both a recipient and a sender of foreign capital and thus
have cross-cutting interests. Like South Africa and India, Russia appears to have
had misgivings about its investment treaties that once faced international invest-
ment claims, which resulted in a more cautious approach to the global investment
regime. Nevertheless, Russia’s response appears muted in a comparative perspective:
it continues to sign and ratify IIAs, it did not denounce any of its existing treaties
(with the exception of the 2009 withdrawal from the ECT) and has revised its
model BIT incrementally and cautiously. While one might argue that signing agree-
ments with countries that are more likely to be destinations to Russian investors
rather than the other way around lessens the risk of exposure to future claims, the
15
“Russia wins legal victory over Yukos damages”, Financial Times, 20 April 2016. https://
www.ft.com/content/2a23a352-06ce-11e6-a70d-4e39ac32c284 (accessed 14 February
2017). The reason for the overturn emanates from the fact that Russia did not ratify the
ECT, on which these claims are based.
16
Cited in Dahlquist (2016: 1).
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190 Y. Z. Haftel
recent claims brought by Ukrainian investors suggest that such logic has its limits.
Moreover, given that Russian BITs continue to include an MFN clause, investors
from developed countries can use their provisions (substantive and procedural) to
sue Russia (Rubins and Nazarov, 2008; Collins, 2013). Only time will tell if Russia
will take a more assertive stance vis-à-vis the regime in light of the recent surge in
ISDS cases it is embroiled in.
India
Much like other developing countries, India joined the BIT “train” in the early
1990s, as part of a broader economic liberalization program. This was a sharp turn
from its previously staunch resistance to international regulation of FDI (Ranjan,
2014). Since its 1994 BIT with the United Kingdom (UK) in 1994, India concluded
more than 80 IIAs, the large majority of which were in force until recently (revisit
Table 1). These treaties brought about a large number of claims against India since
the middle 2000s. In contrast to Russia, the balance is heavily tilted against India
in this respect, with only six ISDS cases in which Indian investors are claimant.
This has led to greater skepticism towards the global investment regime and a more
assertive response.
India’s initial BITs reflect the conventional position of host developing countries.
As Figure 2 shows, many of its early agreements were with Western European coun-
tries with a clear aim to attract foreign investment (Ranjan, 2014).17 India also signed
numerous treaties with other developing countries, but continued to sign IIAs with
developed countries until at least 2011, when it concluded a Free Trade Agreement
(FTA) with an investment chapter with Japan (contrast with Russia). It has stopped
signing and ratifying investment agreements after 2011, which is a clear watershed
in its investment policy (Ranjan, 2014, 2015). Most of the agreements signed by
India are stand-alone BITs, but four are FTAs with an investment chapter: Singapore
(2005), South Korea (2009), Malaysia (2011), and Japan (2011).18
A look at the content of Indian IIAs indicates that they are heavy on investor
protection and light on SRS. Indeed, the template used by India is based on the
UK−India BIT, which in turn is based on the UK Model BIT (Ranjan, 2014: 430).
With few exceptions — that were most likely driven by more balanced templates
17
Ranjan (2014: 430) suggests that government officials were especially concerned about
competition from China.
18
Notably, India also concluded older BITs with Malaysia (1995) and South Korea (1996).
Both these BITs and FTAs appear to be in force. India also signed an FTA with ASEAN in
2014. It is not yet in force.
b3508_V2_Ch08.indd 190 11-02-2020 13:16:29

10
9
8
7
Number of IIAS
6
5
LDC
4
EDC
3
2
1
0
1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
Year
Figure 2: Annual number of India’s IIAs, 1989−2016.

Source: UNCTAD’s International Investment Agreements Navigator. http://investmentpolicyhub.unctad.
org/IIA (accessed 16 February 2017).
of the partner country, such as the 2009 BIT with Colombia — offered foreign
investors broad protections (Collins, 2013). Ranjan (2014) argues that this “rule
taker” approach was driven by India’s wish to attract FDI rather than an effort to
protect India’s investors abroad. A noteworthy exception is the handful of FTAs,
which are much more sensitive to concerns of national sovereignty. For example,
most of these FTAs qualify the FET provision and provide a detailed definition of
indirect expropriation (Ranjan, 2015). The inconsistent approach reflected in the two
types of agreements signed by India during the same time period is quite intriguing.
Ranjan (2015) argues that this is partly due to their varying scope and partly due to
the fact that they were negotiated by different ministries.19
As already mentioned, India stands out among the BRICS in the number of
investment claims filed against it, especially relative to the number of claims filed by
Indian investors. All of these disputes erupted since the middle 2000s and involve
a variety of home countries (mostly Western European countries, but also Russia,
Mauritius, and the United Arab Emirates) and sectors (e.g. telecommunications,
energy, and real estate). In a significant early case, White Industries Australia Ltd.
BITs are within the authority of the Ministry of Finance while FTAs are within the
19
Authority of the Ministry of Commerce. In a recent decision, the authority to negotiate

FTAs was transferred to the Ministry of Finance, such that there is more policy consistency
(Hanessian and Duggal, 2017: 217; Hepburn, 2017).
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192 Y. Z. Haftel
vs. India, an UNCITRAL tribunal ruled in favor of the claimant after the Indian
legal system failed to enforce an earlier award handed down by the International
Chamber of Commerce. Two aspects of this ruling highlighted the potential risks
existing in Indian BITs. First, it showed that the judiciary is part of the government
and subject to the agreement’s rules. Second, the claimant used the MFN clause in
the Australia−India BIT to access a provision contained in a different (India−Kuwait)
BIT, drawing attention to the possibility of treaty shopping (Collins, 2013: 86−87;
Malhotra, 2016; Ranjan, 2014). Subsequent claims, such as those that followed a
controversial decision by the Indian Supreme Court to revoke licenses to several
telecommunication companies, further underscored India’s vulnerability to inter-
national investment arbitration.
Largely as a result of these disputes, which were accompanied by an outcry from
academics, civil society, and legislators, India stopped signing and ratifying BITs
and conducted a comprehensive review of its investment policy (Ranjan, 2014).
Like South Africa, it came to the conclusion that its investment treaties went too
far in protecting foreign investors at the expense of SRS. As stated by the Ministry
of Finance:20
These reciprocal agreements had been negotiated on the basis of the Model Text
adopted in 1993, […] which were susceptible to broad and ambiguous interpreta-
tions by arbitral tribunals regarding provisions of existing Indian BITs that do not
adequately take into account the socio-economic conditions found in India and
the broad objectives of government policy.
The review resulted in an overhaul of India’s investment policy. This is most

clearly evident in the 2015 Model BIT, which tilts the balance back to host state
flexibility. With respect to substantive provisions, it completely excludes MFN
and FET as well as contains a large number of exceptions on investor protection
and permits the government to take a variety of measures to promote social and
economic objectives. Regarding procedural matters, the Model still includes ISDS
but requires partial exhaustion of local remedies first (Hepburn, 2017). It includes
additional hurdles that render the use of ISDS very difficult (Hanessian and Duggal,
2017; Ranjan, 2015, 2017). India has indicated its intention is to renegotiate all
BITs that their initial term has expired according to this new template (Hanessian
Statement of Saurabh Garg, Joint Secretary, Department of Economic Affairs, India’s

20
Ministry of Finance for the 2016 World Investment Forum. http://unctad-worldinvest-

mentforum.org/wp-content/uploads/2016/07/WIF-2016-Statement-India-.pdf (accessed
15 February 2017).
b3508_V2_Ch08.indd 192 11-02-2020 13:16:30

and Duggal, 2017). For more recent treaties, India produced a “Joint Interpretative
Statement”, which it hopes to sign with BIT partners. This statement includes more
limited definitions of investors and investment, a qualification of FET, restrictions
on treaty shopping through MFN, and more (Malhotra, 2016). This two-pronged
approach ought to reclaim India’s regulatory space.
On the face of it, India’s approach seems less radical than South Africa’s and
Brazil’s, but more than Russia’s. While its new Model BIT offers much fewer protec-
tions to foreign investors, it keeps some key substantive provisions (such as NT and
full protection and security) and leaves the door open to international arbitration.
The implications of India’s actions are uncertain, however. So far it has signed
only one agreement based on the 2015 Model. It has indicated, moreover, that it
will terminate its BITs with partners who refuse to renegotiate. Given the lack of
enthusiasm about India’s model elsewhere, this ultimatum has largely materialized.21
This puts India more squarely with the small but growing camp of countries that
reject the current rules of the global investment regime.
Surprisingly, perhaps, India’s changing orientation seems to pay little heed
to its growing role as a sender of FDI. Its position as a home country is evident
in the global profile of several Indian MNCs in the information technology (IT)
and automotive sectors, for example (Collins, 2013: 79−82). It is also apparent
in the handful of ISDS cases in which Indian investors were the claimants, such
as against Poland (2014) and Indonesia (2015). While observers point out that
India ought to take the protection of its own investors abroad into consideration
(Collins, 2013: 100; Ranjan, 2014: 449; Ranjan, 2017), there is not much evidence
that this factor has influenced current debates and policies. For example, India’s
intention is to renegotiate or terminate all of its BITs, many of which are with other
developing countries where India is more likely to be a sender of FDI rather than
a recipient (Ranjan, 2017). From this perspective, it diverges from other BRICS in
an important way.
21
One European Ambassador to India said “[n]ot a single EU member country has any inter-
est whatsoever to negotiate a new BIT with India and there will be numerous conditions
attached to a hypothetical EU-India BIT.” See “India to Trade Partners: Sign New Bilateral
Investment Treaties by 31 March” Live Mint, 11 January 2017. http://www.livemint.com/
Politics/8IRq2uiGhDAxjyiO2lEJ3K/India-asks-trade-partners-to-sign-new-BIT-pact.html
(accessed 16 February 2017). Indeed, India’s agreements with 60 countries have been ter-
minated by the end of 2018. The list of terminated BITs includes important economic part-
ners, such as Germany, Australia, and Russia. The fate of other treaties remains unclear at
the time of this writing (Hepburn, 2017).
b3508_V2_Ch08.indd 193 11-02-2020 13:16:30

194 Y. Z. Haftel
China
China started signing BITs in the 1980s, mostly with developed European countries.
It dramatically expanded its program in the subsequent two decades and has become
a major player in the global investment regime. With more than 130 signed BITs and
FTAs with investment chapters, over 110 of them in force, China ranks first among
developing countries and second (to Germany) worldwide in the number of IIAs.
Unlike other BRICS, China has continued to sign IIAs in recent years, for example
a BIT with Turkey and an FTA with Australia (both in 2015). Moreover, despite the
large number of treaties China concluded over the last three decades, its experience
with ISDS is relatively limited. Various aspects of China’s IIA policy were examined
quite extensively by other scholars (Berger, 2013, 2015; Gallagher and Shan, 2009;
Hadley, 2013; Schill, 2007; Wei, 2012; Zeng and Lu, 2016), and is therefore discussed
here more succinctly.
China was highly suspicious of FDI and strongly resisted the global invest-
ment regime until its opening to the global economy in 1979 (Schill, 2007: 77). It
started signing BITs shortly thereafter, though, with a 1982 agreement with Sweden
(thus earlier than other BRICS). In the rest of the decade, it signed over 20 BITs,
mostly with EDC (but not with the US). China concluded some 70 BITs in the
1990s, mostly with developing countries (because there were not many developed
countries without which it had an agreement left). Beyond signing additional
BITs in 2000s, China started renegotiating its older BITs, updating about 20 of
them, and signed the first FTAs with a comprehensive investment chapter.22 Thus
far, China concluded less than 10 such FTAs, but with important partners, such
as ASEAN, Australia, Japan, New Zealand, and South Korea. It seems, then, that
China continues to expand its IIA network with both developed and developing
countries.23
A closer look at China’s IIAs points to at least two shifts in its approach to the
balance between investor protection and SRS. The first wave of BITs, signed in the
1980s, left the parties with much room to maneuver. Like other communist coun-
tries, China was willing to grant access to ISDS only with respect to the amount of
compensation in case of expropriation. In addition, Chinese BITs did not include a
commitment to national treatment (Berger, 2015; Schill, 2007). China abandoned
22
The first renegotiated agreement is the 2001 Netherlands−China. The first FTA with an
investment chapter was signed with Pakistan in 2006.
23
One notable country missing from this network is the United States, of course. The
two powers have been negotiating a BIT over the last several years, but are yet to have a
mutually-acceptable text. See Congyan (2009).
b3508_V2_Ch08.indd 194 11-02-2020 13:16:30

this model in the late 1990s and started signing treaties that were consistent with
Western European templates, thereby providing foreign investors with stronger
substantive protections and easier access to international investment arbitration.
Many of the renegotiated BITs of the early 2000s reflect this change as well, as they
updated agreements from the 1980s and early 1990s (Berger, 2013; Wei, 2012).
The more recent, “third generation”, of Chinese BITs and FTAs reclaims state
sovereignty through a variety of carve outs, exceptions, and references to the state’s
right to regulate (Berger, 2013, 2015; Collins, 2013; Congyan, 2009).24 For example,
several recent Chinese IIAs define investors in a manner that excludes “letter box”
companies and restrict access to MFN and FET standards. These innovations were
borrowed from templates and treaties advanced by other countries, most notably the
US. This has led observers to label this shift as the Americanization (Congyan, 2009)
or “NAFTA-ization” (Berger, 2015) of Chinese IIAs. As Berger (2015) notes, however,
China’s shifts from one generation to another were far from complete. He shows
that the rules embodied in Chinese agreements vary quite widely across partners,
even in the same time-period. For example, in the decade since 2006 China signed
several traditional BITs that do not take into account recent attempts to provide host
states with greater regulatory space. Berger (2015: 864) maintains that this trend is a
result of a “flexible” Chinese approach, which tends to go along with the template of
the partner country, regardless of economic size, level of development, and the like.
Be that as it may, it appears that China is more comfortable with the principles
and rules of the global investment regime, compared to other BRICS countries. This
reality comports with the fact that over the 2000s China has transformed from a
recipient to an important sender of FDI. In the first half of the 2010s, China (exclud-
ing Hong Kong) was consistently the third largest source of outgoing FDI, after only
the United States and Japan (UNCTAD, 2016).25 Ostensibly, China views BITs not
only as an instrument to attract FDI into its economy, but also a tool to protect its
investors abroad (Berger, 2013; Collins, 2013: 129).
China’s involvement in ISDS appears rather limited, especially considering its
large number of IIAs in force. By the end of 2018, it was a respondent in only three
24
Here, too, several treaties are renegotiations of previous ones. It is interesting, though,
that these newer agreements do not always terminate their older counterparts, which might
result in legal ambiguities. In an extreme example, China currently has three IIAs in force
with South Korea: the 2007 BIT (which replaces a 1992 BIT), the 2012 tripartite FTA with
Japan, and a 2015 bilateral FTA. An examination of this perplexing overlap is beyond the
scope of this chapter.
25
Adding Hong Kong, which is also a top-ten sender of FDI, to China bumps the duo to the
second place.
b3508_V2_Ch08.indd 195 11-02-2020 13:16:30

196 Y. Z. Haftel
known cases, while Chinese investors filed five claims against host governments.26
These disputes had some effect on China’s perspective and policies. Interestingly, an
(unsuccessful) attempt by a Chinese investor to use an MFN clause in the China−
Peru BIT to “import” ISDS provisions from other Peruvian treaties caused concerns
in China and prompted it to insert a provision that excludes ISDS from the MFN
provision in subsequent treaties (Berger, 2015: 862). Nevertheless, this reaction is
much more circumscribed than the ones advanced by South Africa and India, for
example. Whether a larger number of disputes with higher stakes — a trend that
experts expect, but is yet to materialize (Collins, 2013: 129) — will push China closer
to these peers is too early to say.
BRICS and the Global Investment Regime: Convergence,

Divergence and Research Frontiers
The brief overview of BRICS policies in the area of investment treaties and arbitration
allows one to make several broad generalizations regarding similarities among and
differences between these EMEs. Zooming in on the latter, this section provides a
preliminary account that underscores a combination of domestic economic interests
and political institutions. Given the paucity of comparative and systematic research
on EMEs and the global investment regime, this section also points to pressing and
promising avenues for future research.
As described above, all BRICS joined the BIT trend as they have integrated into
the global economy in the 1980s and 1990s in order to attract much needed foreign
capital into their economies. Thus, their programs initially emphasized agreements
with EDC, mostly from Western Europe. Two later developments shaped their
approach to the global investment regime. First, the emerging phenomenon of
investment arbitration caught them by surprise, sowed doubts with respect to the
benefits from the regime, and created a backlash against it. Second, the rapid shift
from a traditional position of a recipient of FDI to a significant source of global
capital compelled these countries to view the regime from a home country perspec-
tive. This transformation and the accompanying cross-cutting interests probably set
emerging markets apart from other developing countries.
These parallels nonetheless, the response of the five countries to the two devel-
opments just mentioned is clearly quite diverse.27 Generally speaking, Brazil, South
26
This count excludes the controversial claim Phillip Morris filed against Australia, which
was based on the Australia−Hong Kong BIT.
27
Also see Alschner and Skougarevskiy (2016: 369−370).
b3508_V2_Ch08.indd 196 11-02-2020 13:16:30

Africa, and India object to the current regime, which they perceive as tilted too
heavily in favor of foreign investors at the expense of host states. China, on the other
hand, appears at ease with the rules reflected in recent so-called “modern” IIAs as
well as ISDS. Russia is somewhere in between these two poles. The remainder of this
section ponders two preliminary explanations to this apparent divergence: (1) the
volume of outwards FDI; and (2) the nature of the political system.
Balancing Interests as FDI Recipients and Senders
Governments of EMEs are possibly seeking to strike a balance between their

interests as host and home economies. It may not be a coincidence that China and
Russia — who appear more comfortable with the regime — are among the 10 largest
senders of FDI worldwide, while the other three countries lag far behind them. As
Figure 3 demonstrates, China’s FDI outflow was under $5 billion per annum until
the early 2000s, but then started climbing briskly. It crossed the $100 billion per
annum in 2013, which put China as the third largest sender of FDI in the world (not
including Hong Kong and Macau). Russia shows a similar pattern: its FDI outflow
have increased from about $3 billion in the early 2000s to more than $60 billion
in 2013 and 2014. This puts Russia in a group of the 10 largest senders of foreign
capital worldwide. The other three countries show a much more moderate growth
of outwards FDI and rarely crack the top 20 senders of FDI in the world.
140,000
120,000
100,000
Millions of US$
80,000
60,000
40,000
20,000
0
–20,000
Year
Brazil China
India Russia
South Africa
Figure 3: FDI outflows of BRICS countries, 1990−2015.

Source: UNCTADSTAT. http://unctadstat.unctad.org/EN/ (accessed 18 February 2017). Data for China
do not include Hong Kong and Macau.
b3508_V2_Ch08.indd 197 11-02-2020 13:16:31

198 Y. Z. Haftel
It seems, then, that the shift from an exclusively host country to a host and home
country was felt more strongly in the former two countries, thereby exerting greater
pressure to protect the assets of their MNCs abroad through IIAs and ISDS. Those
governments that have remained mostly recipients of FDI, on the other hand, are
more likely to use their growing economic clout to conserve or regain their national
sovereignty.
We know little about the process by which economic actors strive to affect their
governments’ approach to the global investment regime and the extent to which
they have an influence on actual policies. These poorly understood dynamics are
ripe for further investigation. One intriguing possibility involves the nature of
the firms investing abroad. In particular, state-owned enterprises (SOEs)28 are
quite dominant in BRICS, compared to EDC. Moreover, available data show that
some BRICS SOEs are active in international markets and are therefore, exposed
to foreign investment risk (Kowalski et al., 2013). From a political perspective,
one might conjecture that given the government’s direct stake in their perfor-
mance, internationally-oriented SOEs are in a good position to obtain investment
protection.
The dominance of SOEs varies across the BRICS, of course. Kowalski et al.
(2013: 22) assess this variation with the Country SOE Share (CSS), which is an
equally weighted average of SOE shares of sales, assets, and market values among a
country’s top ten companies. While all BRICS save South Africa are among the ten
countries with the highest CSS, their individual raking is telling: China ranks first
with a CSS of about 96% (!), Russia ranks third with 81%, India ranks seventh with
59%, and Brazil ranks eighth with 50%.29 These rankings echo the rankings of FDI
outflows in general and appear consistent with the idea that SOEs are responsible, at
least in part, to the greater willingness of China and Russia to stick with the current
rules of the regime. Much more work is needed, however, to fully grasp the role
of SOEs within the global investment regime and their varying impact on BRICS
investment policies.
Another aspect that requires further scrutiny is the economic sectors that
engage in outwards FDI. Insofar as some sectors are more vulnerable to host state
discrimination or unfair treatment and to the extent that the size of these sectors
varies across the BRICS, one should expect divergent dispositions towards the
global investment regime. It is commonly thought that sectors either with high sunk
28
Defined as a majority state-owned enterprise (Kowalski, 2013: 11).
29
The CSS does not distinguish between domestically and internationally-oriented compa-
nies. In addition, the calculations are based on data from 1 year only (2011). One should
therefore treat these data with caution.
b3508_V2_Ch08.indd 198 11-02-2020 13:16:31

costs (such as resource extraction, infrastructure, and utility provision) or that are
politically sensitive (such as extractive industries, utilities, communications, and
national defense) are the most susceptible to expropriation or maltreatment (Colen
et al., 2016; Danzman, 2016). Sectoral FDI data for the BRICS is neither readily avail-
able nor easily comparable, but extant research indicates that Russian, and, to a lesser
extent, Brazilian, outwards FDI concentrates in vulnerable sectors, such as resource
extraction, energy, and infrastructure. India’s outwards FDI, on the other hand, is
dominated by manufacturing and services. Chinese FDI is somewhere in between,
with the lion’s share of outwards FDI in services sectors as well as resource extrac-
tion sectors (Andreff, 2015: 105−107). Interestingly, though, the latter is dominated
by Chinese SOEs (Kowalski et al., 2013: 28). These initial observations hint that a
fine-grained sectoral analysis might yield important insights into EMEs’ policies
vis-à-vis the global investment regime.
Domestic Political Institutions
To the extent that IIAs and international investment arbitration are contested by civil
society groups and viewed negatively by public opinion, their ability to affect policy
could hinge on the nature of domestic political institutions. Specifically, we should
expect that the backlash against the regime, to the extent that there is one, will exert
greater pressure on governments in democratic countries, compared to other regime
types. Indeed, Simmons (2014) shows that since 2008 democratic governments are
more likely to seek annulments of ISDS awards. She argues, plausibly, that such
governments face greater scrutiny and higher expectations of accountability to public
interests. In his turn, Pelc (2017) argues that democracies are more vulnerable to
frivolous investment claims, which strive to produce regulatory “chill” in the host
country. Thus, as skepticism vis-à-vis the regime increases, democracies should be
more assertive in their opposition to it.
The BRICS appear to corroborate this conjecture. It would be uncontroversial
to suggest that Brazil, South Africa, and India are more democratic and have more
veto players compared to China and Russia. According to the Polity database, for
example, the former three are mature democracies at least since 1995 (Marshall
et al., 2016). China is consistently authoritarian, while Russia’s scores indicate that
it is a “competitive authoritarian” country (Levitsky and Way, 2002).30 In line with
the theoretical expectations, the more democratic countries hold a more negative
view of the global investment regime, especially since the late 2000s. This conjecture
According to its Polity score, Russia was more competitive in the first half of the 2000s, but
30
has become more authoritarian since then.
b3508_V2_Ch08.indd 199 11-02-2020 13:16:31

200 Y. Z. Haftel
receives further empirical support from the different cases. We have seen above that
the opposition in the Brazilian Congress was effective in stalling the ratification
of BITs signed by its executive. The pressure by the public and the media to retain
national control over important policy areas was present in South Africa and, even
more so, in India (Ranjan, 2014, 2015). There is no evidence of similar tendencies
in the non-democratic BRICS.
To be sure, the distinction between democracies and non-democracies is rather
simple and somewhat rough. It does not account, for example, for variation within
the three democracies in terms of their specific responses as well as their timing. As
we have seen, Brazil rejected the regime early on, South Africa has changed course
after hit by a single claim, while India faced multiple claims before rethinking its
approach. A closer look at the different political rules that govern policy making,
e.g. the number of veto players, the structure of the electoral system, and the con-
stitution, might provide clues with respect to this question (Lemos and Campello,
2015). Relatedly, one might need to examine the domestic rules that govern foreign
investment (as well as broader public policy, perhaps) and whether they complement,
substitute, or contradict global ones. Taking up these issues is a fruitful avenue for
future research.
Bringing Interests and Institutions Together
Undoubtedly, neither economic interests nor political institutions, in and of them-

selves, provide a complete account of the differences across the BRICS. Combining
these two factors is more likely to offer a satisfactory explanatory framework. Table 2
does just that for the 2010s. As one can see, both the volume of outwards FDI and
the level of democracy account for the variation in the acceptance of the global
investment rules and principles. This result provides preliminary empirical support
for the significance of interests and political institutions and suggests that further
research is warranted.
Table 2: Outwards FDI (OFDI), regime type, and acceptance of

the global investment regime by the BRICS.
Democracy Non-Democracy
Low OFDI Brazil, India, South Africa
(low acceptance)
High OFDI Russia (intermediate
acceptance)
China (high acceptance)
b3508_V2_Ch08.indd 200 11-02-2020 13:16:31

Given that both explanations co-vary perfectly in these cases, however, it is

difficult to assess their relative importance and whether the simultaneous presence
of authoritarianism and high global exposure of local MNCs is required for EMEs
to be comfortable with robust protection of foreign investors. From this perspec-
tive, greater variation on key variables might allow us to see the impact of different
explanatory factors more clearly. One way forward would be to examine the evolu-
tion of BRICS policies over time. Another would be to expand the sample to other
EMEs, such as Mexico, Indonesia, and Turkey. After all, the list of countries included
in the BRICS club is rather arbitrary. The inclusion of cases that fit in the upper right
or lower left cells in Table 2 might shed additional light on the role of interests and
institutions. This is a promising avenue of future research.
Conclusion: Implications for the Future of the Global

Investment Regime
This chapter surveyed BRICS policies with respect to international investment
agreements and disputes. It showed that the perspectives of these EMEs have shifted
over time, reflecting global as well as domestic changes. While these countries share
some similarities, there are notable differences between their approach and policies.
I have suggested that these dissimilarities can be attributed to the degree to which
their own corporations are exposed to investment risk abroad and their regime type.
Given the growing economic and political clout of the BRICS, it may be
reasonable to expect greater influence of these countries on global investment
rules, especially if they can coordinate their policies. For example, Mehta and
Ranjan (2015: 26) argue that the “changing treaty practice [of BRICS] could result
in these countries emerging as rule-makers in investment treaties”. Moreover,
as emerging economies are more likely to adopt a home country perspective,
EDC increasingly view the regime from a host country lens. As these Western
democracies were hit by investment claims, they have become more sensitive
to considerations of regulatory space and sought to rebalance global invest-
ment rules (Broude et al., 2018). Following this logic, one could envision how a
would-be US−China IIA could serve as a template for multilateral investment
rules (Congyan, 2009).
Such optimism about global convergence is likely unwarranted. To begin with,
some of the BRICS policies in this area are internally inconsistent. We have seen, for
example, that South Africa denounced some BITs but kept others intact, that India’s
BITs and FTAs reflect a different set of rules, and that the content of China’s IIAs is
quite diverse. Such incoherence would render it difficult for any given country, even
China, to become a “rule maker” (Berger, 2015: 868). Furthermore, there seems to
b3508_V2_Ch08.indd 201 11-02-2020 13:16:31

202 Y. Z. Haftel
be little coordination between the BRICS on this issue. Ironically, perhaps, as Brazil
started signing a new generation of investment treaties, India gradually terminates
its own IIAs. In addition, this chapter shows that these countries have a very different
approach to key issues, such as the rules governing ISDS. Hence, while the BRICS,
as a group, largely oppose Western-led initiatives such as the TPP, they do not offer
a coherent alternative (Alschner and Skougarevskiy, 2016). From this vantage point,
it appears that EMEs will continue to be rule-takers rather than rule-makers.31
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direct investment flows to China, 1997–2011”, International Interactions, 42(5):
820–848.
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CHAPTER 9
Exchange Rate Policies of the BRICS
Andrew X. Li
Department of International Relations,

Central European University, Hungary and Austria
Introduction
Exchange rate policy has been an important research agenda in the field of interna-
tional political economy (IPE) since 1990s. This surging interest in exchange rate
policy was driven intellectually as much as practically. It is worth mentioning that
the diversification of exchange rate regimes temporally overlapped with the wave
of globalization. The rapid expansion of international trade and global production
networks created a powerful force of integration that brought national economies
under one world economic system. Against this background, the significance of
exchange rate policy cannot be overlooked. As Leblang (1999) points out, in this era
of globalization, exchange rate policy serves as a buffer between international and
domestic markets. Intellectually, it is widely recognized that such policies involve
an inseparable mix of politics and economics (Frieden, 2000).
This chapter has three goals. First, I review the global trends of exchange rate
policies in the post-Bretton Wood era as well as the exchange rate policies of the five
BRICS countries. My overall argument is that the exchange rate policies of the BRICS
countries have converged to greater exchange rate flexibility and undervaluation of
currencies, which are consistent with the global trend among developing countries.
Second, I review the existing literature on the causes and consequences of exchange
rate policies and pick out the explanations applicable to the BRICS countries. Third,
I propose a few possible directions and questions for future research in response
207
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208 A. X. Li
to the call to develop the “third generation” theories of the political economy of
monetary institutions. In this connection, I also suggest research questions specific
to the BRICS countries and discuss how the study of the BRICS may contribute to
the “third-generation” agenda.
Broadly speaking, exchange rate policy has two dimensions, the choice of
exchange rate regime and the level of exchange rate vis-á-vis some equilibrium level.
“Exchange rate regime/system” refers to the rules and policies that govern the appre-
ciation and depreciation of currencies. Under a “fixed exchange rate regime”, govern-
ments establish a fixed price for their domestic currencies in terms of an external
standard (gold, for example) or a foreign currency, whereas under a “flexible/floating
exchange rate regime”, there is no fixed price for domestic currencies. Other exchange
rate regimes lie in between these two ideal types. A “fixed-but-adjustable exchange
rate regime” works like the fixed regime, but governments can adjust the fixed price
at which the domestic currencies are pegged. “Managed float” works like the flex-
ible regime, but exchange rates are allowed to float freely only within a band and
are subject to government intervention if they appreciate or depreciate beyond the
band. The second dimension is commonly known as the degree of overvaluation
or undervaluation. According to Steinberg (2015), based on the purchasing power
parity (PPP) criteria, “overvaluation” occurs when “(domestic) residents can buy
more foreign goods than domestic goods” and a currency is “undervalued” when
“domestic goods are cheaper than foreign goods” (22).
This essay is organized as follows. The following section presents the global
trends and stylized facts of developing countries’ exchange rate policies. Then I turn
to the determinants and consequences of exchange rate regimes and currency valua-
tion. Finally, I elaborate on the possible directions of intellectual advancement under
the “Third-generation” agenda.
Global Trends and Stylized Facts

The closing of the gold window on 15 August 1971 marked the collapse of the
Bretton Woods system, an international financial system principally based on fixed
exchange rates. To borrow the language of Ghosh et al. (2002), the end of the Bretton
Woods also marked the beginning of a “brave new world” whereby countries were
free to choose their exchange rate regimes. Indeed, the post-Bretton Woods period
witnessed diverging paths of exchange rate regimes across the world. Since then,
most developed countries, with the exception of those in Europe, have floated
their currencies either against each other or independently. European countries,
on the other hand, quickly agreed to maintain exchange rate stability through the
coordination of exchange rate policies. This effort led to the creation of the European
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Exchange Rate Policies of the BRICS 209
Monetary System (EMS) in 1979 and eventually the European Monetary Union
(EMU) with a single currency in 2002.
Bernhard et al. (2002) show that while the proportion of developed countries
adopting fixed exchange rate regimes has remained fairly constant over time, an
increasing number of developing countries has switched to flexible regimes. At the
time, immediately after the collapse of Bretton Woods, almost all developing coun-
tries had some sort of fixed exchange rate regime. By the mid-1990s, however, more
than half of the developing countries have floated their currencies. Using the binary
coding of exchange rate regime developed by Shambaugh (2004b), I estimate that
the percentage for developing countries with fixed exchange rates dropped further
to just below 40% by 2000 and stayed around 40% after 2000. Overall, there is a clear
trend toward more flexible exchange rate regimes among developing countries.
A closer examination of the developing world reveals more nuances in exchange
rate regimes beyond a binary classification. At the two ends of the spectrum are
hard currency pegs (including dollarization) and free floating. The two extreme
regimes represent two defensive strategies against speculative attacks. A hard peg
serves as a signal of credible commitment while free floating removes the targets of
such attacks. However, most developing countries have had exchange rate regimes
between the two extremes. For example, Latin American countries such as Mexico,
Chile, Argentina, Brazil, and Peru in general adopted a variant of fixed exchange rate
regime known as the crawling peg, whereby the currencies are allowed to float within
a narrow band. But even within this small sample of countries, Chile had a more
flexible regime than the rest. According to De Gregorio (2001), in the early 1990s,
Chile switched to a “wide band” regime in which the exchange rate is allowed to float
in a wide range. In practice, this is very close to a free-floating exchange rate system.
On the other dimension of exchange rate policy, it turns out that the exchange
rates of most developing countries have been misaligned, meaning that they have
been either overvalued or undervalued. Prior to year 2000, overvaluation was more
common than undervaluation among developing countries. During the 1990s, for
example, the overvalued Argentine Peso made imported luxurious goods very much
affordable to average Argentine consumers. However, it also made the country’s
export prohibitively expensive and harmed its economic growth. Worse still, the
overvalued exchange rate was also partly responsible for a major economic crisis
in Argentina towards the end of the 20th century, which led to a 22% fall in average
incomes from 1998 to 2002 (Steinberg, 2015: 2). At that time, Argentina was joined
by Brazil, Mexico and many countries in Africa, Eastern Europe and the Middle
East in overvaluing their currencies.
More recently, however, the trend has been reversed and undervaluation has
become more popular among developing countries. Levy-Yeyati et al. (2013)
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210 A. X. Li
find that in the 2000s, foreign exchange intervention has mostly been used to
depreciate or limit the appreciation of the local currency. For example, Brazil has
depreciated its currency from 1 Real per USD in 2000 to almost 4 Real per USD
in 2015. China has long been accused of currency manipulation over the past 20
years by undervaluing the Chinese Yuan. Using the data for year 1990, Rogoff
(1996) regresses the real exchange rate on the natural log of GDP per capita and
reports that the Renminbi was undervalued by over 40%. The regression using
2000 data produces an even larger residual term for China, indicating that the
Renminbi was undervalued by an even larger margin in 2000. The Big Mac Index
by The Economist shows that in July 2011, four of the five BRICS countries had
undervalued currencies against the USD. The Brazilian real was the only over
valued currency at that time.
Exchange Rate Policies of the BRICS

This section presents a brief history of the exchange rate policies of each of the BRICS
countries. I place greater emphasis on the transitions of exchange rate regimes and
changes in the currencies’ valuations.
Brazil
Brazil’s exchange rate regime in the last three decades of the 20th century was
a typical crawling peg, or fixed-but-adjustable regime. During this period, the
government frequently adjusted the exchange rate, resulting in alternating periods
of appreciation and depreciation of the real exchange rate (RER) (Bonomo and
Terra, 2001: 120). This adjustment of RER, according to Bonomo and Terra (2001),
reflects the government’s choice between fighting inflation and improving the
balance of payments. For example, in 1983 the Brazilian government announced a
30% maxi-devaluation, followed by continuous mini-devaluations as a response to
the deterioration of balance of payment occurred in the previous year. Later as the
government’s priority shifted from external adjustment to fighting inflation, a long
period of RER appreciation was observed together with a few price stabilization
attempts from 1985 to 1992.
The Brazilian real was introduced in 1994 as a new currency at a one-to-one
parity with the USD. The real was allowed to appreciate as capital flowed in. However,
the appreciation of the real and reduction in tariff barriers promoted Brazilian
import, leading to a growth of current account deficit from 1994 onward. With a
current account deficit, the ability to maintain exchange rate pegs depends on inflow
of foreign capital. Due to the Asian financial crisis in 1997 and the Russian crisis in
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1998, inflow of private foreign capital to Brazil quickly dried up. These conditions
forced the Brazilian government to abandon its currency peg. The real became
floated on 18 January 1999 and has been floating since then.
Based on the 2011 Big Mac Index, Brazil is the only BRICS country with an
overvalued currency. Given the free floating of the real since 1999, the overvaluation is
hardly a policy outcome. In fact, since the floating of the real, Brazil’s central bank has
been targeting inflation rather than the exchange rate (Fraga, 2000). The overvaluation
of the real is possibly due to increased foreign demand for Brazilian assets and prod-
ucts, which bids up the price of the real in the foreign exchange market (Ross, 2016)
(The Brazilian Real: A Case Study (PBR)). Furthermore, although the nominal value of
the real has been falling, the real effective exchange rate (REER) between the Brazilian
real and the USD has not changed much (Canuto, 2016) (Where has all the BRL depre-
ciation gone?). Unlike the nominal exchange rate, REER corrects for domestic price
level. As the Brazilian economy has undergone a structural transformation towards a
service-based economy, the non-tradables and services become more expensive over
time. As a result, the Brazilian real has not depreciated much in real terms. In 2011,
the real was one of the most overvalued currencies in the world. However, according
to the 2016 Big Mac Index, the real was slightly undervalued instead of overvalued.
Russia
The trajectory of Russia’s exchange rate policy is comparable to that of Brazil, but
with one outstanding difference. The transition to a floating exchange rate regime
was more gradual and carried out in phases in the case of Russia. The post-Soviet
period (1992−1998) witnessed the dollarization of the Russian economy as a result
of high inflation and loss of confidence in the domestic currency. During this period,
monetary policy took the form of exchange rate policy as exchange rate was used
as the policy anchor.
As in the case of Brazil, the 1998 Russian crisis rendered currency pegs
unsustainable and marked the beginning of the transition to greater exchange rate
flexibility. After the crisis, the Bank of Russia shifted to a managed float regime. In
the years following the crisis, the exchange rate was still tightly managed until 2005.
In 2005, the Bank of Russia introduced a dual-currency basket system consisting
of USD and Euro in unequal shares. The basket’s value was used to determine the
ruble’s nominal exchange rate. The dual-currency band remained narrow and stable
from 2005 to 2008. The global financial crisis (GFC) in 2009 eroded Russia’s current
account balance and led to rapid capital outflows. The Bank of Russia had to allow
the ruble to depreciate by widening the dual-currency band. It announced a wide
fixed band and also introduced a floating operational band in January 2009. As a
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212 A. X. Li
result, the volume of foreign exchange intervention was significantly less from 2009
onward. In November 2014, Russia switched to a fully floating exchange rate regime.
Since then, the Bank of Russia has abandoned exchange rate based operational indi-
cators and introduced inflation targeting, making price stability the main objective
of the central bank.
Overall, the Russian ruble has depreciated against the USD and other major
currencies over the past two decades, as a consequence of three major deprecia-
tions during financial crises that occurred in 1998, 2008 and 2014 to 2015. As the
economy recovered after the crises, there were periods of mild appreciation of
the ruble, but the exchange rate never got back to the previous level. For example,
although the ruble started to appreciate since the last quarter of 2015 after its col-
lapse in the second half of 2014, the ruble’s value by the second quarter of 2016 was
still more than 50% lower compared with the mid-2014 level. To some extent, the
three financial crises have accelerated Russia’s transition to a flexible exchange rate
regime, as each crisis and depreciation was associated with increased flexibility of
the exchange rate system. Without the crises, Russia’s transition to a fully floating
exchange rate regime and inflation targeting might have been slower and less
decisive.
India
India’s transition to a managed float exchange rate regime in the early 1990s was
driven by similar dynamics as in the case of Russia in 2009. India started with a
par-value system in 1947 whereby the rupee’s value was fixed with gold. For a few
years after the collapse of the Bretton Woods system, the rupee was fixed with pound
sterling until September 1975 when the rupee began to be pegged with a basket of
currencies. The Reserve Bank of India did not disclose the currencies in the basket
and their weights as a measure to prevent currency speculation.
In the late 1980s and early 1990s, with the widening of the current account
deficit, the Indian economy began to face balance of payment difficulties that
necessitated stabilization and structural reform. The most significant part of the
reform with respect to the exchange rate was a two-step downward adjustment of
the exchange rate by 9% and 11% in July 1991. Known as the “double devaluation”,
this exchange rate adjustment also put an end to the pegged exchange rate regime.
Following a short period of dual exchange rate system as a transitional arrangement
between March 1992 and March 1993, a market determined exchange rate regime
was introduced in March 1993. Since then, India’s exchange rate regime has been
a managed float and foreign exchange intervention has been used merely as an
instrument to prevent excessive exchange rate volatility of the rupee.
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Since the transition to a managed float regime in 1993, the rupee has generally
depreciated against the dollar. From 1993 to 2002, the trend of depreciation of the
rupee continued monotonically. Year 2003 witnessed the first reversal of this trend
when the rupee appreciated against the dollar from 2003 to 2005. Another sharp
appreciation occurred in 2007 followed by an even sharper depreciation in 2008
due to the global financial crisis (GFC). By June 2010, the rupee’s exchange rate had
returned to its pre-crisis (2006) level. This trend also implies that India’s exchange
rate regime has shifted from a one-way to a two-way managed float system and the
Reserve Bank is willing to tolerate greater volatility in recent days.
China
China is the only BRICS country that still maintains some sort of fixed exchange
rate regime today, despite greater flexibility in its exchange rate system after 2010.
To some extent, China’s exchange rate regime since the early 1990s is comparable to
that of Brazil in the last three decades of the 20th century, which was characterized
by persistent government intervention in the foreign exchange market and periodic
adjustment of the exchange rate. However, instead of having periodic cycles of
overvaluation and undervaluation as in the Brazilian case, the Chinese yuan has
generally been undervalued since 1993. According to Kaplan (2006), the degree of
undervaluation of the Chinese yuan ranged between 15% and 50% based on the
calculations of different researchers.
Before 2005, the People’s Bank of China (PBoC) maintained a de facto peg
with the USD. A major change came in July 2005 when the PBoC announced
the end of the peg to the USD and the adoption of a managed float system
based on a basket of currencies. The announcement was also accompanied by a
revaluation of the RMB by 2.1%. However, as Steinberg (2015) points out, the
actual degree of flexibility of China’s exchange rate regime hardly changed after
the official announcement. In fact, exchange rate data shows that after an initial
appreciation of the RMB against the dollar, the yuan was again pegged to the
dollar from 2008 to 2010. Moreover, the 2.1% revaluation could by no means
correct the big margin of undervaluation, which is estimated to be more than
40% around that time.
The undervaluation of the RMB is observed only after China started its market
oriented economic reform in 1978. Between 1949 and 1978, the exchange rate
between RMB and the dollar was maintained around 2 yuan per dollar. By 1994, the
RMB had depreciated by more than 80%. From 1994 to 2005, the exchange rate was
kept around 8.3 yuan per dollar. During this period, there was a 15% appreciation
of the RMB between 1996 and 1998 following the devaluation of various Asian
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214 A. X. Li
currencies in 1997. Another appreciation occurred between 2007 and 2013 when
the RMB appreciated against the dollar by 37%. At the end of 2013, the exchange
rate between RMB and the dollar reached 6.04 yuan per dollar. Starting from 2014,
the RMB once again depreciated against the dollar. The average exchange rate for the
past 3 years is about 6.5 yuan per dollar. However, the past few years has witnessed
greater exchange rate flexibility of the Chinese yuan. Since 2014, the exchange rate
is allowed to fluctuate within a 2% band, making the exchange rate regime closer
to managed float.
South Africa
South Africa is the earliest BRICS country to adopt a market-oriented exchange rate
policy. For a brief period following the collapse of the Bretton Wood system, South
Africa adopted a policy of independent managed float from 1974 to 1975. However,
due to speculative attacks on the rand, the South African authority announced in
mid-1975 that the rand would be pegged to the USD, and at the same time intro-
duced very restrictive measures to control foreign exchange.
These restrictive measures soon turned out to be inadequate and produced
suboptimal economic results, as the currency peg did not permit the rand to respond
to domestic economic conditions. As a result, starting from 1980, the South African
government decided to switch to more market-oriented exchange rate policies. The
goal was to have an independent and flexible rand subject to the management of the
Reserve Bank. In 1986, the authority introduced soft and flexible monetary targets,
whereby the Reserve Bank exercised discretionary judgement on the most appropriate
combination of interest rates and exchange rates based on the economic condition.
In the 1990s, the monetary policy framework started to place greater emphasis
on the reduction of inflation. As South Africa normalized its relationship with the
rest of the world, the goal was to bring domestic inflation in line with the country’s
major trading partners. After a decade of informal inflation targeting, South Africa
announced in 2000 that it would formally adopt the inflation targeting framework
with a specified inflation target between 3% and 6%.
Convergence and Divergence in the Exchange Rate Policy

of the BRICS
The BRICS countries’ exchange rate policies are largely consistent with the global
trends and patterns. Over time, their exchange rate regimes have also converged to a
floating regime, with the exception of China. According to DeRosa (2009), in 1991,
only South Africa had a “managed float” exchange rate regime. Brazil and India had
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“crawling peg” regimes while Russia and China maintained conventional currency
pegs. In 2006, South Africa and Brazil were considered full-fledged floaters with
independently floating currencies. India and Russia adopted the “managed float”
system. China was the only country among the BRICS with a pegged currency at that
time. However, things began to change with China’s exchange rate regime from year
2010. Since then, there has been a visibly greater degree of short-term fluctuations
in the value of the Chinese yuan.
In the meantime, the valuation of the currencies of the BRICS countries have also
converged to undervaluation. As mentioned earlier, the 2011 Big Mac Index indicates
that four of the five BRICS countries had undervalued currencies. The 2016 version
of the index shows an even more dramatic situation. Not only that all five countries
are having undervalued currencies, but the Indian rupee and South African rand have
become the most undervalued currencies in the world, more undervalued than the
Chinese yuan. One point of divergence among the BRICS countries’ exchange rate
policies is the adoption of inflation targeting. Three of the five countries — namely,
Brazil, Russia, and South Africa — have adopted inflation targeting while India and
China have not. In the following section, I review the literature on exchange rate
policies and pick out the explanations most applicable to the BRICS.
Explanation
Choice of Exchange Rate Regime
The choice of exchange rate regime has been the subject of a large literature in politi-
cal science and economics. Existing studies on the choice of exchange rate regime is
centered around the famous Impossible Trinity (Mundell, 1961), which states that it
is not possible for a government to have a fixed exchange rate, autonomous monetary
policy and free flow of capital at the same time. A government can at most have two
of the three policy goals at any point in time. In an era of financial openness whereby
capital mobility can be reasonably assumed to be given, governments often have to
choose between a fixed exchange rate and discretion over monetary policy.1
1
In a very recent paper, Rey (2015) challenges the Impossible Trinity by pointing out that
with capital mobility, cross-border flows and leverage of global financial institutions trans-
mit monetary conditions globally, even under floating exchange rate regimes. Thus, we
have a “dilemma” instead of “trilemma” in a sense that independent monetary policies
are possible if and only if the capital account is managed in some way. Nevertheless, the
Impossible Trinity has been the conventional wisdom at the heart of the existing literature
of international finance.
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216 A. X. Li
Conventional wisdom of international finance holds that fixed exchange rates

and central bank independence are alternative mechanisms that solve the time-
inconsistency problem by making a government credibly commit to low inflation.
To summarize, the time-inconsistency problem refers to the fact that politicians have
incentives to announce a policy of low inflation during elections and renege on it
later. Since inflation can stimulate economic growth, politicians may find it politi-
cally beneficial to inflate the economy prior to elections. As politicians hold different
preferences at different points in time, the announcement of low-inflation policy is
incredible. Fixed exchange rates solve the problem by depriving the government of
monetary policy autonomy. By adopting a fixed exchange rate regime, a government
effectively “ties its own hands” from inflationary monetary policy. Alternatively, the
government may grant the central bank independence so that the government has
no say in the making of monetary policy.
In light of this analysis, the question comes down to why a government chooses
a particular commitment mechanism. This question has been tackled from either
the complement or the substitute perspective. Broz (2002) sees the two forms of
monetary commitments as substitutes as they differ in terms of transparency.
According to the author, fixed exchange rate is a more transparent regime com-
pared with central bank independence because the latter is much more difficult
to monitor. When political decision-making is opaque as in countries governed
by authoritarian regimes, a more transparent form of commitment is needed and
authoritarian governments therefore are more likely to choose fixed exchange
rate. In contrast, when the political process is more transparent as in the case of
democracies, central bank independence is more credible and can be monitored
more effectively. Thus, central bank independence is a more credible and effective
mechanism to commit to low inflation in countries with higher levels of political
transparency.
However, the argument that democracies are more likely to commit to a flex-
ible exchange rate regime does not go without challenges. Hall (2008) argues that
we do not have a solid understanding of the causal mechanisms that link political
democracy to exchange rate flexibility. The author points out three flaws in the argu-
ment by Broz (2002). First, it may not be plausible to assume that all governments
seek to reduce inflation over the long run. Second, it is not clear that governments
do treat fixed exchange rates and independent central banks as substitutes for com-
mitting to low inflation. Third, income policy represents an alternative strategy for
fighting inflation in some developing countries. Though Hall (2008) does not offer
additional theoretical explanations to the phenomenon, his evidence shows that the
number of veto players or the regular use of competitive elections may be factors
worth considering.
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The BRICS countries seem to fit well with the argument that political democracy
is associated with exchange rate flexibility. According to the 2014 POLITY Score,
Brazil, India and South Africa are classified as “Democracy”, Russia belongs to the
category of “Open Anocracy” and China falls under “Autocracy”. Except China, all
the other four countries have adopted flexible exchange rate regimes. At the same
time, however, the BRICS countries also pose some challenges to Broz’s argument.
Among the four exchange rate floaters, three have adopted inflation targeting.
While it is true that inflation targeting requires some political transparency, it is
not exactly the same as central bank independence. The case of India is even more
puzzling. According to Dincer and Eichengreen (2014), the Reserve Bank of India
is the least independent among the 89 central banks in their sample. As mentioned
by Hall (2008), it may not be the case that governments treat fixed exchange rates
and independent central banks as substitutes.
Several existing studies are able to address the first and second criticisms of Hall
(2008) as they provide clear causal mechanisms linking democracy to exchange rate
flexibility without the assumption that governments treat fixed exchange rates as a
form of commitment to low inflation. Leblang (1999) argues that economic integra-
tion and the rise of democratic institutions make it difficult for politicians to main-
tain fixed exchange rate as a credible commitment. This is because governments face
“increased pressure for distributive and expansionary policy that occurs when more
diverse groups are included in the policymaking and electoral process” (605). Bearce
and Hallerberg (2011) refer to the Impossible Trinity and argue that the median voter
in a democracy is likely to prefer autonomy in monetary policy. To win the median
voter, politicians have to retain monetary sovereignty and forgo fixed exchange
rates. The idea that the median voter is most likely to prefer autonomous monetary
policy over fixed exchange rates is derived from the sectoral framework developed by
Frieden (1991).2 It is argued that internationally oriented producers such as export
sectors, international traders, and investors prefer exchange rate stability and would
lobby for fixed exchange rates. On the contrary, domestically oriented sectors such
as producers of non-tradable goods and services prefer monetary policy autonomy
as the performance of these sectors depend to a large extent on the strength of the
national economy. Based on this argument and their own calculation, Bearce and
Hallerberg (2011) conclude that “the average national economy in the post-Bretton
Woods era has about 65% of its GDP devoted to domestic production, making it
very likely that the median voter works as a domestically oriented producer and
It should be highlighted that Frieden’s (1991) framework itself is not a median voter model.
2
However, his sectoral analysis has implications on the sector in which the median voter
might be located.
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218 A. X. Li
thus favors exchange rate flexibility to achieve domestic monetary autonomy” (178).
This argument sounds plausible for the BRICS countries as all of them have large
domestic markets. It is therefore highly likely that the median voters in the BRICS
countries are domestically oriented producers.
Some authors have attempted to account for the variation in the choice of
monetary institutions within democratic politics. Bernhard and Leblang (1999)
consider the effect of electoral and legislative institutions and argue that in a system
where the cost of electoral defeat is high and electoral timing is exogenous, such
as in majoritarian systems, the incumbents are eager to retain monetary autonomy
as a policy instrument to win the majority and therefore are more willing to forgo
fixed exchange rates. On the contrary, in less decisive systems such as proportional
representation, politicians are more likely to adopt fixed exchange rate regimes.
Hallerberg (2002) considers the veto power of party players and subnational govern-
ments. In unitary systems where the government is formed by a single party, it is easy
for voters to identify the party player’s policy that benefit them, such governments
therefore prefer autonomous monetary policy and forgo fixed exchange rates. In
unitary systems where the government is formed by multiple parties, such identifica-
tion is difficult and the coalition government finds it more effective to target specific
constituencies using fiscal policy.3 In this situation, the government prefers fixed
exchange rates and independent central banks. In federal systems, the subnational
governments are much stronger. The federal government in this case has less control
over fiscal policies and the subnational governments do not like a dependent central
bank that give more power to the federal government. The result is a combination
of flexible exchange rates and central bank independence.
Bernhard and Leblang’s (1999) argument could explain the cases of India and
Russia, where elections to the House of the People and the State Duma follow the
first-past-post rule. In these two cases, the theory successfully predicts the choice of
flexible exchange rate regimes. However, the theory does not work too well for the
cases of Brazil and South Africa, which have a party-list proportional representation
electoral system but also flexible exchange rate regimes. Hallerberg’s (2002) argument
does a slightly better job in explaining the monetary policies of the BRICS. Three of
the four democratic BRICS countries, namely, Brazil, India, and Russia are federal
systems. In these three cases, the theory successfully predicts exchange rate flexibility.
3
A distinction between monetary and fiscal policy is that the former is a macroeconomic
policy affecting the entire economy. The latter, on the other hand, can be both macro
and micro in nature, which makes it possible to be tailored to target specific groups. Thus,
if the government intends to “sell” a policy only to selected groups, fiscal policy is a more
viable option.
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Also, inflation targeting means that the central bank has partial independence. South
Africa is a unitary state with the African National Congress as the dominant party,
and the theory also achieves predictive accuracy in the South African case. In fact,
an important reason why South Africa introduced a market-oriented exchange rate
system in the 1980s was because a fixed exchange rate prevented interest rates from
responding optimally to the economic conditions.
Just like democracies, countries governed by non-democratic regimes also
demonstrate variations in their choices of monetary regimes. Steinberg and Malhotra
(2014) show that monarchies and military regimes are more likely to maintain fixed
exchange rates than civilian dictatorships because the former regimes have smaller
electorates. In these regimes, the diffuse groups that prefer a flexible exchange
rate regime do not have political influence. The pressure to fix the exchange rate is
especially strong when the small electorate predominantly consists of internationally
oriented businesses. Civilian dictatorships, on the other hand, face large elector-
ates just like democracies, so they have to care about the policy preference of the
“median voter” who is most likely to oppose fixed exchange rates. China is the only
BRICS country governed by a civilian authoritarian regime. Although this theory
fails to explain China’s reluctance to allow the RMB to float before 2010, it is useful
to understand the introduction of greater exchange rate flexibility by the Chinese
authorities after 2010.
Another group of literature focuses on countries’ structural position in the global
economy in explaining the choice of monetary regime. Plümper and Neumayer
(2011) see the structural position of a country in international trade as a determinant
of its choice of monetary institutions. Import-dependent countries are more likely
to peg their currencies for the fear of imported inflation. Moreover, the choice of
anchor currency is determined by the degree of dependence of the pegging country
on imports from the key currency country. Shambaugh (2004a) considers the effect
of reliance on global capital and argues that reliance on different types of foreign
capital generates distinct capital-specific policy preferences. Specifically, countries
whose constituents rely heavily on commercial lending and/or portfolio investment
are more likely to pursue fixed exchange rates because it reduces risks in the rate of
return associated with exchange rate fluctuation. In contrast, foreign direct investors
who usually produce tradables and target export sectors are more likely to lobby for
flexible exchange rate systems in order to take advantage of exchange rate policy.
These arguments shed an important light on the exchange rate regimes of the
BRICS countries. First, this group of countries has big domestic markets and is not
very dependent on imports. Therefore, they are less concerned about imported
inflation and a fixed exchange rate does not look very attractive in this regard.
Second, foreign direct investment has become a driver of economic development in
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220 A. X. Li
the BRICS countries, particularly China and India. This also explains why a flexible
exchange rate regime may be more attractive to this group of countries.
Exchange Rate Valuation
Now I turn to the explanations of the level of exchange rate. It should be emphasized
at the beginning that quantifying currency overvaluation or undervaluation is itself
a difficult task. The benchmark or equilibrium level of exchange rate is often deter-
mined by the Balassa−Samuelson regression. The Balassa−Samuelson effect, which
is also known as the productivity biased PPP (Officer, 1976), has its intellectual
root in two seminal pieces by Balassa (1964) and Samuelson (1964). It is a theoretical
framework to account for the widely-observed phenomenon that consumer prices
in more developed countries are systematically higher than those in less developed
ones. The economic model consists of two goods (a tradable and a non-tradable),
two countries (a rich one and a poor one) and one factor of production (labor). It
is assumed that labor in both sectors of the same country is equally productive and
international trade equalizes the price of the tradable products across the two coun-
tries. Then, if the richer country is more productive for various reasons, it follows
that the price for the non-tradable good needs to be lower in the poor country to
equalize wages across the two sectors. The implication of the analysis is that first, due
to productivity and wage differentials, the Big Mac should not carry the same price in
New York as in Beijing; second, as a country gets richer, there is real appreciation of
its currency due to higher real prices. Thus, a typical Balassa−Samuelson regression
would look something like this:
log(RER) = α + βlog(real GDP per capita) + e,
where RER stands for the real exchange rate.

The Balassa−Samuelson Effect is an important theoretical contribution as it
provides scholars with a foundation to pin down a country’s equilibrium exchange
rate. The empirical testing of the model, however, is more nuanced and more
controversial. This should not be surprising as the real world can seldom work as
elegantly as theoretical models. Égert et al. (2006) in their study of transition econo-
mies find that the trend appreciation is usually affected by factors other than the
Balassa−Samuelson effect. The authors identify three main sources of uncertainty,
namely, differences in the theoretical underpinnings, differences in the estimation
techniques and differences related to the time-series and cross-sectional dimensions
of the data. Using more advanced techniques such as panel cointegration and boot-
strapping, García-Solanes and Torrejón-Flores (2009) study a sample of 16 OECD
countries and 16 Latin American countries and find evidence for not rejecting the
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Balassa−Samuelson hypothesis in the Latin American area. A more recent work by

Frensch and Schmillen (2011) suspects that the empirical discrepancy may stem
from measurement errors leading to downward-biased estimates. The authors adopt
an innovative trade-based variety measure that differentiates between tradable and
non-tradable sector productivities and find stable and robust Balassa−Samuelson
effects across all specifications.
Although all BRICS countries have undervalued currencies according to the
2016 Big Mac Index, all the countries except China have let their currencies float
prior to 2016. Thus, it is a bit of a stretch and misleading to interpret the observed
undervaluation as a policy choice of the floating countries. The rest of the section
focuses on China, the only BRICS country that is still subscribing to some sort of
fixed exchange rate regime, and a country that has long been an interest of scholars
studying exchange rate policies.
Steinberg (2008) argues that overvaluation is usually supported by broad coali-
tions and undervaluation is supported by specific sectors. Therefore, institutions
with multiple veto points tend to produce overvalued exchange rates because such
institutions induce governments to adopt policies that satisfy several industries.
Undervaluation takes place when its advocates are politically influential and the
institution provides few veto points. Steinberg (2015) constructs a “conditional
preference theory” and argues that the preference of the manufacturing sector for
undervalued exchange rates is contingent on whether the state controls labor and
the financial market. Exchange rates are most likely to be undervalued in countries
that combine a large manufacturing sector with a state controlled labor and financial
system. Under such a system, undervalued exchange rates are more profitable to
manufacturing firms as they are less likely to translate into higher borrowing costs
and higher wages. Therefore, the manufacturing sector’s support for currency
undervaluation strengthens with greater state control over labor and the financial
system. Interestingly, according to Steinberg and Shih (2012), interest groups in fact
have greater impacts on exchange rates in non-democracies because autocrats tend
to choose exchange rate policies that serve the interests of the most powerful interest
groups. In non-democracies, these groups often have access to political processes,
which makes leaders sensitive to their preferences.
China satisfies the conditions specified in the above arguments for currency
undervaluation. As a non-democracy, China has fewer veto points in the policy
making process compared with its democratic counterparts and that gives its poli-
cymakers greater autonomy. At the same time, as the world’s factory, China has a
large and economically important export-oriented manufacturing industry. This has
also increased the political influence of the country’s manufacturing sector. Last but
not least, China has a state-controlled labor and financial system. According to the
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222 A. X. Li
conditional preference theory, the manufacturing sector in China would prefer an

undervalued exchange rate. Given the economic importance and political influence
of the manufacturing sector and China’s institutional context, the manufacturing
sector’s interests and preferences can be easily translated into policy outcomes.
Another reason why undervaluation is preferred by the Chinese authority is
that currency undervaluation produces future economic growth. Although under-
valuation is generally unpopular in the short run, economists have found out that
undervalued exchange rates promote economic growth in the long-run and there
are few outliers to that hypothesis. Eichengreen (2007) simply argues that the RER
should be made low in order to boost net export of the economy. Another seminal
piece by Rodrik (2008) explores the relationship between currency undervaluation
and economic growth. It is one of the few works that provide a solid theoretical
explanation of why undervaluation favors growth. The author argues that an
undervalued currency serves as a second-best mechanism that alleviates the adverse
impacts of institutional weakness and market failure. Specifically, tradables are more
susceptible to poor institutions compared with non-tradables. An undervalued
currency boosts the production of tradables by raising their domestic prices relative
to non-tradables. Similarly, tradables are particularly prone to market failure due to
the presence of learning and coordination externalities. In this case, an undervalued
currency again works as a second-best solution in lieu of Pigovian remedies. In other
words, undervaluation is a substitute for industrial policy.
The undervaluation-growth hypothesis put forward by Rodrik receives empirical
support in a large number of studies.4 Some of the authors have attempted to find
the channels through which currency undervaluation translates into growth. Mbaye
(2013) finds that undervaluation promotes growth through its positive impact on
total factor productivity. This is consistent with Rodrik’s argument that undervalu-
ation alleviates the negative effects of poor institutions. Montiel and Servén (2008)
rules out saving as a mechanism through which the RER affects growth. Lartey
et al. (2012) see the exchange rate as an intermediate channel through which rising
levels of remittances lead to the Dutch Disease. This is done through the spending
effect whereby, remittances lead to real exchange appreciation and the resource
movement effect that favors the non-tradable sector at the expense of the tradable
sector. Regardless of the theoretical underpinning, the hypothesis that undervalua-
tion promotes long run growth is one of the most robust relationship found in the
growth literature. Steinberg and Malhotra (2014) note that “the aggregate (welfare)
4
See Cottani et al. (1990); Béreau et al. (2012); Williamson (2009); Mbaye (2013); Gala
(2008), Berg and Miao (2010); Razmi et al. (2009); Vieira and MacDonald (2012); Gluzmann
et al. (2012); and Levy-Yeyati et al. (2013).
b3508_V2_Ch09.indd 222 11-02-2020 13:16:57

effects of over/undervalued exchange rates are often more noticeable than the
distributional effect” (501).
Authors who have challenged Rodrik’s hypothesis include Magud and Sosa
(2010) and Woodford (2009). According to Magud and Sosa (2010), while
overvaluation and high volatility harm growth, the effect of undervaluation is
mixed and inconclusive. Woodford (2009) argues that first, the strong and robust
correlation between currency undervaluation and growth may be exaggerated in
Rodrik’s cross-country evidence and second, such a causal effect is hardly the only
interpretation. In addition to offering several methodological reasons as to why the
coefficient of undervaluation is overestimated in Rodrik’s regression, the author
argues that even if we take the correlation between undervaluation and growth for
granted, such a correlation does not necessarily mean causality. The first possibility
is spuriousness in that policies leading to undervaluation are themselves favorable
to growth. Second, there is also a possibility of reverse causation if the choice of
exchange rate policy is not fully exogenous with respect to the state of the economy
at that time.
Despite the criticisms, it is hard to deny that China experienced the highest
growth rates when its currency was the most undervalued. This also allowed China
to enjoy a huge current account surplus and to build up its foreign reserves. As for
other BRICS countries, given that India and South Africa now have more under-
valued currencies than China, it would be interesting to watch the growth effect of
undervaluation on the two economies in the years ahead.
Moving Forward: Advancing the “Third Generation” Research Agenda
Bernhard et al. (2002) categorize the political economy literature of monetary insti-
tutions into three generations. The “first generation” approach employs the policy
demand−supply framework whereby interest groups, voters and economic sectors
constitute the “policy demanders” and governments, politicians and political parties
constitute the “policy suppliers”. The key contribution of the “second-generation” lit-
erature is the simultaneous consideration of exchange rate regime and central bank
independence in solving the time-inconsistency problem. In this chapter, I have
reviewed the works from the two generations of literature and used the theoretical
arguments to explain the choices of monetary policies of the BRICS countries.
In the concluding article of the 2002 special issue of International Organization,
Freeman (2002) challenges the field of international political economy to develop
“a new generation of theoretical models and empirical tests that encompass work on
the micro-foundations of economic and political equilibria, a broader understand-
ing of the welfare criteria used to evaluate institutional arrangements and a deeper
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224 A. X. Li
analysis of the economic consequences of political information” (Bernhard et al.,

2002: 719−720). This direction is what the authors label as the “third-generation”
agenda.
I conclude this chapter by offering three potential directions to advance the
existing scholarship using the “third generation” approach for the study on exchange
rate policies within and beyond the BRICS. Future research on exchange rate regime
choice may develop an analytical framework that takes into consideration policy
instruments available to the government of an open economy beyond monetary
policy. The incorporation of other policy instruments allows for a richer action
space whereby one understands a government’s rational choice with regard to the
choice of exchange rate regime. For example, Freeman (2002) mentions that the
effects of fiscal policy differ in open and closed economies. Future research may
take that statement one step ahead and show that even among open economies, the
effectiveness of fiscal policy and monetary policy differ depending on the choice
of exchange rate regime. Such an approach offers a more complete picture of the
welfare consequences associated with a particular choice of exchange rate system and
provides scholars with a broader basis to understand how a government negotiates
the monetary trilemma.
This approach has an important implication for the study of the undervaluation-
growth hypothesis mentioned earlier. Overall, the existing literature finds a robust
relationship between currency undervaluation and economic growth, but the causal
mechanism is far from clear. If the choice of exchange rate regime conditions the
effects of monetary, fiscal and even trade policies, then the growth effect of cur-
rency undervaluation may be contingent on the choice of exchange rate regime. In
this connection, an interesting question for the study of the BRICS and developing
countries is that if the other currency undervaluators like India and South Africa
are able to “replicate” China’s growth experience under a different type of exchange
rate regime.
Second, future research on exchange rate valuation may capitalize on the
temporal dimension. Steinberg (2015) notes that undervaluation has many long-
run benefits, such as higher growth rates, lower unemployment, and lower risk
of national financial crises. However, the author also notes that undervaluation is
undesirable for many groups in the short-run. In other words, currency depreciation
involves a trade-off between short-run political costs and long-run economic ben-
efits. Such a trade-off could be central to a government’s decision-making calculus
and can be theoretically explored from a dynamic optimization perspective. This
approach represents a response to Freeman’s call for better interdisciplinary synthesis
by incorporating economic ideas into political decision-making. While this may
not apply to governments that really allow their currencies to float freely, it is an
b3508_V2_Ch09.indd 224 11-02-2020 13:16:57

interesting question for those governments that still exercise some control over the
value of their currencies, such as China.
Finally, future research may aim to better understand the micro-foundations of
the choice of exchange rate policies. A review of the history of the BRICS countries’
exchange rate policies seems to suggest that crises have been the driver behind the
major changes in exchange rate regimes. In other words, the choice of exchange rate
regime may not really be a choice, as some scholars tend to believe. In this connec-
tion, a bigger and certainly more difficult research frontier involves studies on how
structure interacts with agency. For example, immediately after Brazil floated the real
in January 1999, the real depreciated by more than 50%, which triggered panicky
reactions and fueled inflation. The Central Bank of Brazil had to make a decision
whether to go back to a fixed regime. As documented by Fraga (2000), the Central
Bank felt it made sense to let the real continue to float and find a new nominal
anchor. That was why a full-fledged inflation targeting framework was adopted in
the end. The Brazilian experience shows that even under harsh structural constraints,
there is still a room for policy decision that involves a lot of calculation on the part
of the policymakers. It is therefore, interesting and important for scholars to better
understand the micro-foundations behind the decision-making process. This is an
area where qualitative research such as in-depth case studies and interviews can
make an important contribution to the third-generation agenda.
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CHAPTER 10
He Who Pays the Piper Calls the Tune:

And the “Relocation of the World’s Credit
Rating Center” Goes To?
Giulia Mennillo*
Department of Political Science,

National University of Singapore, Singapore
Introduction
At the eighth BRICS Summit 2016 in Goa, India, the BRICS countries agreed
to explore “the possibility of setting up an independent BRICS Rating Agency
based on market-oriented principles” (Goa Declaration, 2016: 9, par. 44). The
initiative which was born during the seventh BRICS Summit 2015 in Ufa, Russia,
is emblematic of the BRICS’s institution-building efforts to transform the “global
governance architecture” and to become a major player in it. Even though no
timetable has been announced for the actual setup of the BRICS rating agency,
the undertaking as a whole reflects the group’s desire to “bridge the gap”, as Indian
Prime Minister Narendra Modi put it, between its economic weight gained over
the last decade and the corresponding lack of authority in financial governance
(The Times of India, 2016).
* Some fragments of this chapter are extracted from the author’s dissertation. The author
thanks Kimberly Tan Hui-An for providing helpful research assistance.
229
b3508_V2_Ch10.indd 229 11-02-2020 13:17:35

230 G. Mennillo
The intention to set up an own credit rating agency (CRA) is the first attempt
of the BRICS countries as a group to rival the Western dominated rating oligopoly.1
Even though in the past individual countries or groups of institutions tried similar
initiatives on their own, these efforts did not succeed in breaking up the dominance
of the American headquartered “Big Three”, namely, Standard & Poor’s Ratings
Services, Moody’s Investors Service, and Fitch Ratings. For example, in 2013, a
consortium of five rating agencies from India, South Africa, Brazil, Malaysia, and
Portugal launched the credit agency “ARC Ratings” which is headquartered in
Lisbon, Portugal, and is recognized by the “European Securities Market Authority”
(ESMA) as a registered CRA to operate in the EU.2 Since the individual agencies
were not able to expand beyond their national markets on their own over the last
decades, they decided to join their forces.3
The exception that proves the rule in terms of the prospects of seriously
challenging the “Big Three” might be China. Major players of its increasingly relevant
rating industry are starting to expand abroad. Against this backdrop, it is remarkable
that China had already expressed concerns about the credibility of the new BRICS
initiative to establish an own CRA (Mutize and Gossel, 2017). Such a stance raises
the question whether China will be a leading, passive, or even paralyzing force in
the BRICS’s institution building efforts. This chapter does not give an answer to this
question, and, at this stage, any answer is probably premature. Instead, familiarizing
the reader with the politics of CRAs, this chapter aims to convey an understanding
why China and the BRICS view the establishment of an “own” CRA as instrumental
in achieving their vision to challenge Western hegemony. Therefore, this chapter will
equip the reader to approach the question raised above from a different and more
informed perspective.
The world’s leading CRAs have been dubbed as “pivotal gatekeepers” (Partnoy,
2006) and “global monitors” (Sinclair, 2003) of global financial markets. Sovereign
1
In order to avoid misunderstandings, in this chapter the acronym “CRA” does not refer to
the BRICS “Contingent Reserve Arrangement” which was established in 2015 as an instru-
ment to provide liquidity in case of short-term balance of payments pressures. For further
details about the BRICS Contingent Reserve Arrangement, see Kaya, Chapter 14.
2
See the list of “registered or certified” CRAs published by the European Securities Market
Authority (ESMA): https://www.esma.europa.eu/supervision/credit-rating-agencies/risk
(accessed 20 July 2017).
3
Participating companies are “Credit Analysis and Research Ltd.” (CARE Ratings) founded
in India 1993, “Global Credit Rating Co. Ltd.” (GCR) established in South Africa in 1996,
“SR Rating, LTDA” founded in Brazil in 1993, the “Malaysian Rating Corporation Berhad”
(MARC) founded in Malaysia in 1995, and the former “Companhia Portuguesa de Rating,
S.A.” established in Portugal in 1988: http://www.arcratings.com/uk/our arc/37 (accessed
18 July 2017).
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He Who Pays the Piper Calls the Tune 231
ratings can have a decisive impact on the fiscal autonomy and economic condition of
a country. They directly affect the interest rates sovereign borrowers have to pay to refi-
nance themselves on international bond markets. They indirectly affect the refinancing
conditions of corporations including financial institutions given that sovereign ratings
are used as “sovereign ceiling” for determining corporate bond ratings. Not for nothing,
K.V. Kamath, current President of the BRICS’s “New Development Bank” (NDB), noted
that “ratings of multilateral banks like the BRICS-promoted NDB were affected by the
parent countries’ ratings, despite having deep capital buffers” (The Hindu, 2016). The
US-headquartered rating agencies would “constrain growth in emerging nations”.
This chapter is structured as follows: To begin with, I provide a snapshot of the
status quo of the global rating market; firstly, how the criticism of the American
rating oligopoly has been driving calls for having “own” CRAs in different parts of
the world and, secondly, why the persistence of the CRA oligopoly is a puzzling issue
until today. Then, I illustrate the case of the Chinese CRA industry giving a short
account of its history and major players. Finally, I discuss whether it is really the
“American-ness” per se or other aspects that constitute the main problem of rating
and, correspondingly, to what extent a Chinese or BRICS rating agency can be a
remedy for these. The chapter ends with concluding remarks.
The Status Quo

Criticism of “Big Three” Driving Calls for “Own” CRA
With the onset of the global financial crisis (GFC) in 2007, CRAs have come under
the public spotlight in the “developed” world in a way never experienced since their
existence. Standard & Poor’s, Moody’s, and Fitch faced harsh criticism because of their
questionable assessments of structured financial products leading up to the crisis. The
subsequent CRAs’ excessive downgrading of European sovereign debt incited calls
for the establishment of a “European” CRA.4 It would be erroneous to assume that the
criticism of CRAs only existed since the GFC. Emerging economies have been feeling
disadvantaged by the Western CRAs already for a long time (Barta, 2012). Frequent
downgrades sparked criticism that the “Big Three” would not treat developing coun-
tries fairly, and primarily “serve Western political interests” (Mutize and Gossel, 2017).
Consequently, calls for having an “own” authoritative CRA grew louder.
An oft-repeated reproach is that CRAs would be overly conservative giving
developing countries worse ratings than economic fundamentals would justify
(Persaud, 2009). CRAs would reproduce a well-known phenomenon of investors’
4
For a concise account of why simultaneous efforts to build a European CRA failed in the
decades preceding the financial crisis, see Engelen (2004: 6).
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232 G. Mennillo
behavior by imposing an insinuated “original sin” on emerging economies which

would “suffer from an inherited burden, almost irrespective of the policies of their
governments” (Nelson, 2016).
In Asia, the politics of sovereign ratings raised scholarly and public attention
already during the East Asian crisis in 1997−1998. Ferri et al. (1999: 394) show that
“rating agencies attached higher weights to their qualitative judgment than they gave
to the economic fundamentals”. At the time, Asian governments complained about
the frequency and timing of CRAs’ sovereign downgrades, which were regarded as
driven by US standards. The American CRAs were criticized for their apparent “lack
of cultural awareness” (Bruner and Abdelal, 2005: 203−204) and inability to “really
‘understand’ Asian business practices” (Sinclair, 2001: 443). Curtailing governments’
room for maneuver in the midst of the crisis, the rating events were interpreted as
an illegitimate foreign intrusion into domestic affairs (Sinclair, 2003: 151−155).
More than 10 years after the East Asian crisis, also the West had to face
the f inancial market’s questioning of the once taken-for-granted sovereign
creditworthiness of many European sovereigns. Also in this case, the CRAs’ role in
setting the terms of orthodox economic and fiscal policy-making has caused contro-
versy (Gärtner et al., 2011; Paudyn, 2013; Gärtner et al., 2013; Hiss and Nagel, 2014;
Fuchs and Gehring, 2015). The excessive and hasty downgrades sparked criticism
of the CRAs’ “procyclical” role in terms of the market’s sovereign risk perception
similarly to the Asian financial crisis. Instead of mitigating the market’s excessiveness
both in terms of risk appetite and aversion, ratings would fuel a certainty bubble in
good times, and favor herd behavior almost “off the cliff edge” in bad times.5
In the course of the European sovereign debt crisis, also the CRAs’ putative US
bias has been a hotly debated issue of controversy. Especially when the CRAs started
downgrading European sovereigns to a massive degree and at a high frequency, the
criticism that CRAs would have a politically biased perception grew even louder.
Reminiscent of the Asian policymakers’ reactions to the sovereign downgrades a
decade earlier, European politicians who problematized the American origin of the
CRAs were also those that called for establishing a European CRA (Die Welt, 2011).6
Rating actions are susceptible to such politicking because of the simple fact that
a rating is not a technical product independent of context, but a judgment and, thus,
5
One explanation for the conservative ratings in the wake of both sovereign debt crises is
that CRAs wanted to compensate for past mistakes. Demonstrating their learning capacity,
CRAs aimed at restoring reputation and credibility — critical assets to survive in the rating
industry (Bruner and Abdelal, 2005; Ferri et al., 1999).
6
For example, in 2011, German politician of the Christian-democratic-liberal governing
coalition Rainer Brüderle criticized sovereign ratings for their political bias (Süddeutsche
Zeitung, 2011).
b3508_V2_Ch10.indd 232 11-02-2020 13:17:35

product of deliberation. By necessity, a judgment cannot be exempt from ideological

predilections and normative considerations. For this reason, the location of the major
CRAs’ headquarters has always been an easy target for criticizing the agencies’ work and
questioning the ratings’ credibility. Nevertheless, the oligopoly of the US headquartered
CRAs has shown to be remarkably resilient despite crisis-induced waves of criticism.
The Persistence of the CRA Oligopoly
Despite the dominance of the US headquartered “Big Three”, the rating market is
becoming more globalized and competitive. The recent rise of CRAs in other parts
of the world such as China suggests that the oligopoly will likely be challenged eco-
nomically and ideationally speaking. If the rating market experiences a geographical
shift in terms of market power and epistemic authority, this will have profound
implications for sovereigns that borrow on international bond markets as these
will have to adapt to different conceptions of sovereign creditworthiness and other
norms of economic and fiscal policy.7 So-called “market orthodoxy” as we know it
today and experienced in the past through the politics of sovereign ratings in the
European sovereign debt crisis and the East Asian financial crisis, will be redefined.
However, the long-standing persistence of the CRA oligopoly and the failure to
break it up, necessitate a closer look at the dynamics which perpetuate the status quo,
otherwise, future attempts to challenge the oligopoly may come to nothing. The US
headquartered CRAs have a world market share of 96% (Gaillard and Harrington,
2016: 39).8 Depending on the counting method, there are between 80 and 150 CRAs
operating on the global rating market. Despite the apparent high number of players,
the credit rating market is still highly concentrated, both overall and at the individual
product category level, i.e. comprising ratings of corporate and sovereign bonds, as
well as structured financial instruments (EC, 2016).9
7
Paudyn (2013: 804) refers to this imperative as the “prescriptive normativity” of ratings. This
dynamic is facilitated by the fact that sovereign ratings are unsolicited, i.e. CRA issue them
without the order of a bond issuer. The conflict of interests associated with the issuer-pays busi-
ness model of rating does not exist in this case; the CRA has no incentive to please the issuer.
8
In the EU, the “Big Three” have a total market share of 92.85%: Standard & Poor’s has 45%,
Moody’s 31.29% and Fitch 16.56% of market shares based on 2015 turnover from credit
rating activities and ancillary services (ESMA, 2016: 6).
9
The authors of EC (2016: 52) note that “[m]easures of market share and HHI [Herfindahl-
Herfindahl Index] based on total revenues (from rating activity and ancillary services) imply
slightly lower levels of concentration compared to measures based on revenue from credit
rating activity alone. However, this is likely to be driven, at least in part, by different defini-
tions and treatment of ‘ancillary services’ across CRAs in their Transparency Reports […]
this could also indicate that smaller CRAs rely less on rating revenues than the larger CRAs.”
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234 G. Mennillo
There seems to be a stable equilibrium between smaller market players and the
“Big Three”. Smaller credit rating agencies operate either on a local−national basis or
are specialized in niche markets and specific sectors. By building strategic alliances
with the market oligopoly, small agencies benefit in terms of reputation, publicity
and credibility, whereas, the “Big Three” can secure their dominant global market
position. This quasi win−win situation tends to underpin the oligopolistic market
structure of the global rating industry.
Even though such an explanation may be an accurate account of the status quo,
it would be naive to assume that no disruptive structural shift will be able to change
the market share distribution of the global rating market in the future. One example
of such a disruptive change may be the extraordinary growth of the Chinese bond
market (which has become as large as the rest of the emerging countries’ bond mar-
kets combined), the concomitant rise of a domestic credit rating industry, and the
incremental opening up of its capital account.10
The Case of the Chinese CRA Industry

Overview: From Ornament to Systemic Relevance?
China’s endeavor to create “a more market-oriented financial system” over the

last 30 years predetermined, at least in the long run, that banks would not play
their traditional role in financial intermediation any more (Kennedy, 2008)11 and
that a financial infrastructure in which CRAs fulfil a key role as informational
intermediators would be needed.
As the Chinese bond market has grown to the third largest in the world after
the US and Japan,12 it was only a matter of time that the divergence between theory
10
The Asian Development Bank’s (ADB) “Asia Bond Monitor” conveys an impression of the
growth dynamic of the Asian bond market: In China, it increased from 13% to 19% in terms
of GDP between 2005 and 2014. In Korea, from 55% to 72%, and in the Philippines from
0.3% to 6.0% (Nakagawa, 2015: 5). Despite these developments, there is a general lack of
scholarly interest in the nexus between bond market development and emerging markets.
This is not to say that bond market development in the BRICS and particularly in China
has not been object of inquiry, for example, see Rethel and Sinclair (2014); Elliott and Yan
(2013); Zhen (2013); Gras (2005); Harwood (2000).
11
This process is referred to as “financial disintermediation” which will be discussed more
in detail below (subsection “Not American-ness but regulatory and institutional reliance
on CRA ratings”).
12
The volume of China’s bond market has reached the volume of Rmb 48 trillion (US
$7.4 trillion) beginning of 2016, the US market is at US $35 trillion and Japan at US $11 trillion
(Financial Times, 2016).
b3508_V2_Ch10.indd 234 11-02-2020 13:17:35

and practice as regards the importance of the Chinese CRA industry decreased
significantly, if not, disappeared completely over the last decade. A closed capital
account with an almost zero share of international investors further facilitated the
rise of a “home-grown” credit rating industry.
In 1987, China made the first step to establish a credit rating industry by intro-
ducing new regulations on corporate bonds (Cousin, 2007: 35). As a consequence,
in the beginning of the 1990s the rating of corporate bonds became the core business
of the rating industry (Gras, 2005: 32). Since the former planning Commission
(NRDC), however, retained the exclusive authority as the market’s gatekeeper,
Chinese CRAs had the symbolic function of a “decorative fig leaf ” and ornament,
apparently only established for creating the impression of a developed capital
market.13 Therefore, the factual influence of CRAs on bond issuers and investors
was characterized as “weak” at the time (Kennedy, 2008).
This tide has been reversed only in the early 2000s, when the industry started
to take shape (Chen and Everling, 2002). In 2002, the China Securities Regulatory
Commission (CSRC) came up with “comprehensive regulations” for the CRA
industry including accreditation requirements (Kennedy, 2008: 75). It was the
same CSRC, preceded by the “People’s Bank of China” (PBoC), which since the
late 1990 was the spiritus rector for creating a fully-fledged and functional credit
rating industry oriented towards the American model. Indeed, China started to
adopt international regulatory practices and standards by introducing rating-based
financial regulation. As in the United States, Chinese CRAs have been granted
“regulatory licenses;” ratings are used as regulatory requirements for bond issuance
and investments (Gras, 2005: 52−53). As Kennedy (2008) puts it, the government
mandate CRAs received by using ratings as tools in financial regulation “may be
the best barometer to measure the Chinese government’s general stance towards
private authority”.
With exception of the Asian financial crisis 1998−99, there is a general neglect
of the constitutive and “catalyst” role of CRAs for bond market development
(Gras, 2005). In the case of China, the effort to build up a fully-fledged credit
rating system, as a function of developing a domestic bond market, has been
widely unnoticed in the literature with a few exceptions (Kennedy, 2008; Gras,
2005; Kennedy, 2003). Quite the contrary the practitioner’s self-perception; the
Chinese CRA, Dagong, publicly propagates its mission to actively participate in
This “re-regulation” of the bond market happened in two steps, 1993 and 1999. For more
13
details, see Gras (2005: 53).
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236 G. Mennillo
the construction of the Asian Bond Market, as “recommended by the Ministry

of Finance”.14
A further indicator that the Chinese rating industry’s irrelevance belongs to
the past is the concern by Chinese authorities that credit risks are, at the time of
writing, underestimated in the market. Also in China, the dominant business model
in the rating industry is “issuer-pays”, meaning that the issuer of a bond or security,
instead of the investor, orders the rating from the CRA.15 Being bond issuer and CRA
customer at the same time creates the infamous conflicts of interest of the rating
industry that are regarded as triggers of the GFC that started in 2007. In order to
maintain old customers and acquire new ones, under the issuer-pays business model,
rating analysts have an incentive to be less severe in their assessments than required,
which goes at the cost of the quality of ratings. Higher competition among CRAs
multiplies this effect as the customers’ bargaining power increases. In the worst case,
this can result in “rating shopping” and seriously inflated ratings.
In the Chinese case, conflicts of interest are even more exacerbated. Since 2009,
local governments were incentivized to issue bonds to stimulate the economy, which
increased the number of small CRAs (Bloomberg News, 2015). The promotion of
small domestic CRAs has led to an intensified competition on the rating market,
while “issuer-pays” has remained the dominant business model. State-owned enter-
prises (SOEs) and private firms with close ties to the government are also customers
of CRAs. All these factors taken together have the potential to seriously harm rating
quality and distort the representation of credit risks.
Consequently, the National Development and Reform Commission (NDRC)
“issued tough guidelines in late December 2012 that barred CRAs from soliciting
customers by promising artificially inflated credit ratings, in a bid to remedy the
negative impacts of the “issuer pays” model in the credit rating business” (China
Daily, 2013). If Chinese authorities succeed in prioritizing the “investor-pays” busi-
ness model over the predominant “issuer-pays” business model in its rating industry
reforms, this would amount to a game-changer in the industry.16 Considering that
authorities neither in the United States nor in Europe were able to change the
industry’s business remuneration models in the post-GFC regulatory reforms,
China would start to mutate into a “maker” of financial governance. It would put
14
Source: http://en.dagongcredit.com/content/details20_8205.html (accessed 30 December
2016).
15
According to Bloomberg (2017a), approximately 41% of China’s domestic corporate bonds
are rated triple “A” by the major domestic CRAs.
16
The alternative business model of “investor-pays” contains other conflicts of interests, for
example, free-rider problems.
b3508_V2_Ch10.indd 236 11-02-2020 13:17:35

an end to being “governance taker”, given that its rating industry adopted many of
the flaws of the Western counterparts not only regarding business models, but also
with respect to rating analytics or the hard-wiring of ratings in financial regulation,
as mentioned above.
Major Players
In 2001, when the “Association of Credit Rating Agencies in Asia” (ACRAA) was
founded by a consortium of Asian credit rating agencies with the assistance of the
Asian Development Bank (ADB), there was yet no Chinese CRA among its mem-
bers.17 More than 15 years later, the major Chinese CRAs are members of ACRAA.18
Nowadays, the Chinese credit rating industry is dominated by five accredited
CRAs; Dagong Global Credit Rating Co., Ltd., Shanghai Far East Credit Rating Co.,
Ltd. (SFECR), China Lianhe Credit Rating Co., Ltd., Shanghai Brilliance Credit
Rating & Investors Service Co., Ltd., and China Chengxin International Credit
Rating Co., Ltd. (CCXI). But these companies are not the only players on the Chinese
rating market. There are also about 68 smaller domestic CRAs that operate in niche
markets, in specific sectors or industries, or only locally. In most cases, local authori-
ties or research institutions are founders of these companies (Cousin, 2007: 35).
Chinese policymakers inverted to their own advantage the logic of the above-
mentioned win-win situation between the global players and emerging CRAs.
Usually, the strategic alliances between domestic CRAs and the “Big Three” have
served to perpetuate the status quo of the global rating market, but restrictive mar-
ket access policies prevented that the typical structure of the global rating market
would be reproduced in China. While the closed capital account kept international
17
ACRAA regards its mission to undertake “activities aimed at promoting the development
of Asia’s bond markets and cross-border investment throughout the region”. Founding
members were 15 Asian CRAs from 10 countries. As of September 2016, ACRAA doubled
its members to 30 CRAs from 14 countries: Bahrain, Bangladesh, India, Indonesia, Japan,
Kazakhstan, Korea, Malaysia, Pakistan, China, Philippines, Taiwan, Thailand, and Turkey.
Source: http://www.acraa.com/final.asp (accessed 30 December 2016).
18
The ACRAA members of the People’s Republic of China are: China Lianhe Credit Rating
Co., Ltd.; Dagong Global Credit Rating Co., Ltd.; Shanghai Brilliance Credit Rating &
Investors Service Co., Ltd., Shanghai Far East Credit Rating Co., Ltd. (SFECR) and Golden
Credit Rating International Co. Ltd. Source: ACRAA website, http://acraa.com/acraamem-
bers.asp, last accessed 12 July 2017. China Chengxin International Credit Rating Co.,
Ltd. (CCXI) does not appear on this list. However, the following link features CCXI as
an ACRAA member and subsidiary of Moody’s: http://acraa.com/china_c.asp (accessed
19 December 2017).
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238 G. Mennillo
investors outside, foreign CRAs were granted access to the Chinese market only by
forming joint ventures with domestic agencies.19 Indeed, CCXI has been in a joint
venture with Moody’s, China Lianhe with Fitch Ratings, and Shanghai Brilliance
has a partnership with S&P. But this did not imply the end of Dagong and Shanghai
Far East, quite the contrary. Turning the equilibrium dynamics upside down, China
created a breeding ground for the emergence of a home-grown rating industry.
“Dagong”, the current market leader, has no contractual relationship with the
American CRAs, neither the pioneer “Shanghai Far East”.
The Pioneer
The “Shanghai Far East Credit Rating Agency Co., Ltd.” (SFECR) is a Chinese
credit rating agency, headquartered in Shanghai. The company was founded in
1988 by the Shanghai Academy of Social Sciences “with the mission to develop
internationally accepted standards of capital market in China” (PR Newswire,
2004). The ownership structure is private, with Xinhua Financial Network, Ltd. as
the largest shareholder.
After recognition by the Shanghai branch of the PBoC, Shanghai Far East had
maintained over 50% market share in the loan certificate-rating sector in Shanghai
from 1999 to 2002 (PR Newswire, 2004). While being operational only domesti-
cally, it was the leading agency at the time. In 2002, SFECR and Hong Kong-based
Xinhua Finance formed a “Strategic Alliance” (PR Newswire, 2002), a joint venture
named “Xinhua Far East China Credit Ratings” providing equity ratings and issues
stock market indices (Kennedy, 2008: 72). Shanghai Far East was the first mainland
Chinese CRA that joined ACRAA in December 2003 (PR Newswire, 2004).
The company has 72 employees, more than half of it are analysts. The Chairman
of the Board of Directors is Xing Jun, its Vice Chairman is Dr. Chung-Hsing Chen.20
Its product portfolio consists of ratings of securities, corporate bonds, bank loan cer-
tificates, financial institutions, structured finance products, and of public finance, i.e.
ratings of domestic institutions that issue public debt, such as local governments.21
Over the last decade, Shanghai’s Far East market share in China decreased to less
than 5% (Zhen, 2013: 71). As of writing, SFECR has not expanded outside Asia.
19
Since July 2017, international rating agencies are allowed to set up wholly owned units in
China (Bloomberg, 2017a).
20
See http://www.bloomberg.com/research/stocks/private/snapshot.asp?privcapId=8032413.
Previously, this Bloomberg note erroneously indicated that Shanghai Far East would be out of
business. Following our inquiry, the information was corrected.
21
For more information, see the website of Shanghai Far East, http://www.sfecr.com/.
b3508_V2_Ch10.indd 238 11-02-2020 13:17:35

The Example of a Joint Venture

CCXI is an example of a Chinese rating company that is in joint venture with one
of the “Big Three”, namely, Moody’s. Next to Dagong, as of writing, CCXI is the
only Chinese CRA that issues sovereign ratings. As a subsidiary of China Chengxin
Credit Rating Group, which was founded in 1992, CCXI was established in 1999.
Before Moody’s stepped in in 2006, CCXI was a joint venture credit rating company
among China Chengxin Securities Rating Co., Ltd., Fitch Ratings and International
Finance Corporation, the private sector arm of the World Bank Group. In 2005,
further reforms of the Chinese capital markets took place that fostered the devel-
opment of the Chinese bond market. In the wake of these changes, in September
2006 Moody’s took over the regulatory cap of 49% share of CCXI. It contributed
managerial expertise and technical know-how to the company including the training
of staff. In March 2017, a share-holding re-organization took place, which reduced
Moody’s share. As a result, Moody’s holds 30% of CCXI, and China Chengxin Credit
Management Co. Ltd. holds 70%.22
CCXI has its headquarter in Beijing and a staff of over 220 professionals. Its
product portfolio covers ratings on “bonds publicly traded in or privately placed
through China’s interbank market” of medium-term notes (MTN), commercial
papers (CP), bank financing bonds, structured finance products, and other fixed
income instruments.23
CCXI has also expanded outside mainland China. It opened its first overseas
subsidiary in Hong Kong in July 2012, named “China Chengxin (Asia Pacific).” In
order to operate there as a CRA, it was granted a “Type 10 license” by the Hong
Kong Securities and Futures Commission (SFC) in June 2012 (China Daily, 2013).
Indirectly, this also supports CCXI’s expansion beyond Asia. Regardless of the fact
that “China Chengxin (Asia Pacific)” is not listed as a certified CRA in Europe unlike
its competitor “Dagong Europe”, the “endorsement regime” under the European
CRA Regulation can benefit companies in the situation of CCXI. Given that ESMA
considers the regulatory frameworks for CRAs of Hong Kong (among others) “to be
in line with European rules” (ESMA, 2012), this means that EU CRAs can “endorse”
credit ratings issued in non-EU countries, under the condition that “the ratings must
be issued by CRAs that are registered or licensed and are subject to supervision
in those countries” (ibid.).24 Simultaneously with its expansion efforts, CCXI also
22
Source: http://www.ccxap.com/About.aspx (accessed 17 July 2017).
23
Source: https://www.moodys.com/Pages/atc002001002.aspx (accessed 4 January 2017).
24
This is facilitated by the fact that the EU CRA Regulation provides two alternatives for
a non-EU CRA that “wants its ratings to be used for regulatory purposes in the EU”;
certification (equivalence) or endorsement. Source: ESMA website on “Non-EU Credit
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240 G. Mennillo
started to issue sovereign credit rating reports, starting with 30 countries in 2012
(China Daily, 2012).
The “Big Fish”

“Dagong Global Credit Rating Co., Ltd.” is a stand-alone Chinese CRA and market
leader in China, at the time of writing. It is the largest domestic credit rating agency
in China with a 30% market share. The company explicitly positions itself as the
counter-hegemonic challenger of the “Big Three”. According to Dagong’s Chairman
and founder Guan Jianzhong, it is the company’s “historic call” to relocate “the
world’s center of credit rating […] from the Occident to the Orient […], to create a
professional, impartial, authoritative and influential CRA, [and] to make long-term
contributions for the continual improvement of the financial market”.25
Dagong was founded in 1994 upon the joint approval of the PBoC and the
former “State Economic and Trade Commission”.26 Its headquarters are in Beijing.
Major shareholders are the private companies Beijing Shi Xing Hong Liang
Investment Management Consultant Co., Ltd. and Beijing Da Gong Xin Yuan Credit
Rating Consultant Co., Ltd. (Cousin, 2007: 36).
Dagong employs approximately 600 analysts and staff, and operates with
34 branches domestically. It has launched two subsidiaries outside mainland China;
in Europe and Hong Kong. This expansion has been interpreted as the “first Asian
credit rating company to challenge US domination in the European credit rating
business” (China Daily, 2013).
But this was not the only attempt by Dagong to expand beyond China. Already
in September 2010, the Securities and Exchange Commission (SEC) in the US
rejected Dagong’s application to be granted the status of “Nationally Recognized
Statistical Rating Organization” (NRSRO), a regulatory requirement for CRAs to
access and operate on the US market (Financial Times, 2010).
The subsidiary “Dagong Europe Credit Rating srl” was established in March
2012 and is headquartered in Milan, Italy. Since July 2016, Dagong has also a
branch office in Frankfurt, Germany. In its beginnings, Dagong Europe was a
joint venture between Dagong Global (60% ownership) and Mandarin Capital
Rating Agencies” (https://www.esma.europa.eu/supervision/non-eu-credit-ratingagencies,

last accessed 20 July 2017). Given the “extensive use of the endorsement regime in practice”
ESMA Chairman Steven Maijoor announced changes to the endorsement guidelines for
third country credit ratings (Reuters, 2017).
25
Source: http://www.dagonghk.com/AboutUs.php?act=list&parent_id=19&menu_id=28
26
Source: Dagong website, http://en.dagongcredit.com/ (accessed 12 July 2017).
b3508_V2_Ch10.indd 240 11-02-2020 13:17:35

Partners, “a Private Equity fund linking Mid-Market European businesses with

Chinese partners” (40% ownership). Since January 2015, Dagong Global Credit
Rating is the sole shareholder of Dagong Europe. Since 13 June 2013, ESMA, the
supervisor of CRAs within the EU, lists “Dagong Europe” as a registered CRA,
which allows the company to pursue its business activities in the EU.27 As of writ-
ing, Dagong Europes is the only Chinese CRAs that holds the status as certified
CRA in Europe.28
In 2013, Dagong Europe was also recognized by the Joint Committee of the three
European Supervisory Authorities (ESAs) as External Credit Assessment Institutions
(ECAI) operating in the European Union.29 According to the 2016 annual market
share calculation undertaken by ESMA, Dagong Europe has a 0.04% market share
based on its revenues from credit ratings and ancillary services reported to ESMA
on the basis of their 2015 accounts (ESMA, 2016).
In September 2014, the subsidiary “Dagong Global Credit Rating (Hong Kong)
Co., Ltd.” was officially launched.30 Two months before, the Securities and Futures
Commission of Hong Kong (SFC) granted a Type 10 License to Dagong HK, which
entitles the company to provide credit rating services in Hong Kong. The establish-
ment of the Hong Kong office is seen as the “spearhead [of] Dagong’s regional and
global expansion, as it becomes a leader in the pan-Asian credit rating space”.31
The product portfolio of Dagong is split between domestic and international
ratings. The former includes ratings of, e.g. short-term financing bonds, medium-
term notes, enterprise bonds, financial bonds, asset-backed securities, convertible
bonds, and corporate bonds. The product segment of international ratings consists
of both enterprise and sovereign ratings.
Sovereign Ratings — Dagong Only Reinventing the Wheel?

Dagong issued its first sovereign credit rating report in July 2010 in the wake of
the GFC. Since then, it has issued sovereign ratings of more than 90 countries and
regions. Dagong describes itself as “a globally-oriented” and “first non-western” CRA
27
Registered status “is guarded diligently” and only granted if applicants “demonstrate
their ability to meet all the regulatory requirements”. Source: https://www.esma.europa.eu/
supervision/credit-rating-agencies/supervision (accessed 27 December 2016).
28
See the list of “registered or certified” CRAs published by ESMA: https://www.esma.
europa.eu/supervision/credit-rating-agencies/risk (accessed 20 July 2017).
29
Source: http://www.dagongeurope.com/about_us.php (accessed 27 December 2016).
30
Source: http://en.dagongcredit.com/content/details20_8156.html (accessed 27 December
2016).
31
Source: http://www.dagonghk.com/AboutUs.php?parent id=19 (accessed 11 July 2017).
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242 G. Mennillo
that “[a]s the founder of sovereign credit rating criteria […] provide[s] the world
with sovereign credit risk information” (Dagong Europe, 2016). There is an emphasis
by Dagong of having developed an own and original rating methodology (Dagong
Hong Kong, 2015). Dagong is trying to distinguish itself from its competitors, and
especially from the “Big Three”. To what extent references to the “Dagong credit
theory” or to “the establishment of the Chinese rating theory” is only rhetoric or
points to a truly “new way” of rating, opens up a wide research agenda.
Indeed, the English version of Dagong’s published sovereign rating methodology
is reminiscent of those published by the American counterparts. For example, what
Dagong refers to as “national management ability” features more or less as “political
score” in S&P’s methodology (S&P’s, 2012). Dagong’s “economic strength” is equiva-
lent to S&P’s “economic score;” “fiscal strength” corresponds to “fiscal score;” and
Dagong’s “foreign exchange strength” corresponds largely to S&P’s “external score”.
“Financial strength” corresponds roughly to S&P’s “monetary score”, even though
Dagong splits up “financial strength” in two categories, namely, “development level
of financial system” and “stability of financial system”. The former category includes
the analysis of monetary policy. The latter category seems to have no equivalent in
S&P’s sovereign rating methodology.
All these similarities among Dagong and the “Big Three” in terms of sovereign
rating methodologies should not be overemphasized. Compared to the English
3-pager of Dagong’s rating methodology, a glance on Dagong’s Mandarin version
with its 52 pages reveals that Dagong uses a different taxonomy. According to this
elaborated document, the sovereign analysis consists of the following four factors;
“debt servicing environment”, “wealth creation ability”, “source(s) of debt service”,
and “solvency analysis”. In part, they overlap with the categories listed in the English
version, but there are aspects which are unique to Dagong’s approach. This shows
that further research is required to systematically compare the rating methodologies
of Dagong and the American oligopoly in order to determine to what extent Dagong
is really adopting a unique method of rating, or whether it is only reinventing the
wheel.
On the occasion of the sovereign debt crisis in Europe, Guan commented on
the supposedly “ideologically driven standards” of the CRAs’ sovereign rating
methodologies (Lietsch, 2011, own translation). It would not be “sensible” to stylize
an ideology as a benchmark for the determination of a sovereign’s creditworthiness.
The American CRAs would equate sovereign creditworthiness with the Western
standards of liberal democracies. Deviation from this ideal type would inform the
ordinal rating scale. For example, central bank independence, currency convert-
ibility, the openness of the economy and of the financial sector, would not be relevant
factors that determine a country’s creditworthiness. The “Big Three” would put too
b3508_V2_Ch10.indd 242 11-02-2020 13:17:36

much emphasis on the willingness of a sovereign to repay its debt (which escapes
from measurement), at the cost of neglecting the sovereign’s actual practical capabil-
ity to repay its debt (which is usually measured by economic fundamentals).
Even though the published “Dagong Sovereign Credit Rating Methodology”
also includes the sovereign’s “willingness” to repay debt in its definition of sovereign
ratings (Dagong Hong Kong, 2015), rhetorically, Dagong distances itself from this
tricky task. The company would mainly focus on a country’s de facto “capability” to
repay debt. Put differently, whatever is conducive to this capability, scores positively
in the rating, for example, the policy effectiveness of the “system” on its economic
management, or, the extent to which the financial sector serves the “needs” of the
real economy (Lietsch, 2011, own translation). However, it is questionable whether
these aspects really correspond to an output-oriented capability approach. They
rather reveal that it is in the eye of the beholder what aspects are deemed conducive
to the practical capability of a sovereign to repay its debt. In short, the idea that rating
can be exempt from ideological and normative considerations and follow a purely
output-oriented approach is illusory.
This point can be well-illustrated with Dagong’s downgrade of the US from
“A” to “A-” with a negative outlook in October 2013 (Langner, 2013). According
to Dagong, the US would be in “a situation that cannot be substantially alleviated
in the foreseeable future”. Debt growth in the US would still outpace fiscal income
and GDP. Despite a “last minute agreement in Congress” the US would be “still
approaching the verge of default crisis”. At the time, the CRAs stuck to a relatively
high US sovereign rating regardless of the turmoil in Congress accompanying the
shutdown and debt ceiling debates.32 Guan Jianzhong seized this opportunity to
blame the CRAs for “having lost their professional ethics” (Süddeutsche Zeitung,
2013, own translation). The CRAs would function as an extended arm of the US
government by indirectly approving the expansive monetary policy of the Federal
Reserve with the favorable ratings. Dagong’s opinion about the Federal Reserve’s
quantitative easing as a monetary policy response to the GFC shows that what con-
stitutes a “good” or a “bad” monetary policy in a specific historical circumstance is
a highly controversial issue. But raters, in the end, have to come up with a judgment
on whether a sovereign government will be able and willing to repay its debt, despite
existing ambiguities. In other words, owing to the contingency of social reality, the
politics of creditworthiness is inescapable.
32
When Dagong downgraded the United States in October 2013, Moody’s rated the US
“Aaa” with a stable outlook, Fitch “AAA” with a negative outlook, and S&P’s “AA-” with
a stable outlook (Lopez, 2013; Böcking, 2013). S&P’s downgrade to “AA-” had occurred
2 years before in the course of the previous debt ceiling debates (Reuters, 2011).
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244 G. Mennillo
As a pragmatic answer to the intricacies of the rating business, Dagong proposes

a “Reform of the International Credit Rating System”. As “a representative of Chinese
CRAs, Dagong pushes forward” this reform (Dagong Europe, 2014) and has mapped
out “guiding principles” (Dagong, n.d.-a). Dagong identifies the current international
credit rating system as “the source of the global credit crisis” (Dagong, n.d.-b: 6).
Therefore, it promotes the establishment of an “international credit rating agency”
that would be able to provide a platform in which the rating agencies of all countries
could work together in order to guarantee the safety of the “global credit systems”
(Lietsch, 2011, own translation). It remains an object of further inquiry whether the
planned BRICS rating agency will function as the mini-pilot project in this respect,
or whether Dagong has something different in mind.
“American-ness” of CRAs Our Problem — Chinese and/or

BRICS Rating Agency the Solution?
The Presumptive US Home Bias of the “Big Three”
To regard a Chinese or BRICS rating agency as the “solution” presupposes to regard

the “American-ness” of the CRAs as “key problematique” of rating (Abdelal and
Blyth, 2015: 58). The following section gives an overview of the debate on the
presumptive US home bias reproach held against the “Big Three”.
The world’s two largest CRAs, S&P’s and Moody’s, are exclusively headquartered
in the United States. The “epistemic predilections” of the US are inferred from this
geographical position and attributed to the CRAs (Sinclair, 1999: 160). From this
perspective, ratings can be characterized as “a US phenomenon” (Sinclair, 2005:
120). By “subjecting all [differently institutionalized forms of capitalism] to the
expectations inherent in the American model”, ratings can have “profound effects
over time” (Sinclair, 1999: 162). Countries deviating from the CRAs’ expectations
ex ante may go through disruptive adjustment processes, which can result in harsh
criticism towards the CRAs.
Not only in terms of sovereign ratings, but also in the case of corporate ratings,
CRAs have been facing a wave of criticism due to their supposedly American world
view. In continental Europe, characteristics of the bank-based financial system
in terms of accounting methods and financial ratios (Bruner and Abdelal, 2005:
204) led to “[b]ad experiences with the Anglo-Saxon–oriented raters” which in
turn “built up resentments among companies and financial institutions” (Engelen,
2004: 69).
Since CRAs are part of the US-centered financial system and its institutional
infrastructure, some argue that the CRAs’ self-preservation instinct makes them
b3508_V2_Ch10.indd 244 11-02-2020 13:17:36

“advocates of American interests” (Hörbst, 2010). The CRAs’ presumptive “clearly

visible political agenda” would consist in maintaining the status quo and preserving
the US dollar’s role as main global reserve currency. CRAs would have an interest
in weakening the relative position of competing currencies for international reserve
currency status, and would downgrade other countries accordingly. In turn, granting
the top rating to their domicile country and preserving its c reditworthiness, regard-
less of its high public indebtedness, is thus conducive to this aim. Such a mercantilist
reading of the CRAs’ role implies that the establishment of an “own” (non-US) CRA
is inevitable for successfully challenging US hegemony.
In the wake of the GFC, a range of empirical studies analyzed whether sovereign
ratings suffered from a so-called “home bias”. For example, Vernazza et al. (2014)
identify the “Eurozone periphery” as the US CRAs’ “biggest casualty”. Measured
against economic fundamentals, affected countries were “on average rated almost
five notches” too strictly between 2009 and 2011.
Further empirical work that gained prominence in the CRA “home bias” dis-
course is Fuchs and Gehring (2015, 2013). Especially in the aftermath of the financial
crisis, the “Big Three” would have given European states excessively severe sovereign
ratings compared to the US sovereign rating (Buhse, 2014). Fuchs and Gehring
(2017, 2015, 2013) find empirical evidence that sovereign ratings are biased “in favor
of the respective home country, culturally more similar countries, and countries in
which home country banks have a larger risk exposure”. Remarkably, these results
do not only apply to the “Big Three”, but also to, for example, the smaller German
agency “Feri EuroRating Services” and “Dagong”.33 For this reason, the authors do
not only recommend a higher degree of competition in the rating industry, but
also a greater variety in the domiciles of CRAs. Different national and regional
backgrounds of the CRAs could balance the home bias, resulting in more “objective”
and high-quality ratings.
In view of the presumed home bias of the CRA oligopoly, practitioners’ and
academics’ calls for a more competitive and heterogeneous rating market are
plausible. Questions of effectiveness and desirability aside, and regardless of the
harsh criticism CRAs faced during the last years, the establishment of a CRA which
is able to effectively challenge the “Big Three” and based outside the US, seems still
mission impossible. However, the rise of a significant Chinese credit rating industry
At the time of writing, Feri is out of business. On 1 August 2016, “Feri EuroRating
33
Services” was acquired by “Scope KGaA”, which is the parent company of “Scope Ratings”.
ESMA withdrew the credit rating registration of Feri on 29 March 2017 (ESMA, 2017).
“Scope Ratings” is a German-based CRA registered under ESMA.
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246 G. Mennillo
including larger players with ambitions of expansion, and the intention to set up a
BRICS rating agency may have already started the ball rolling.
“American-ness” of CRAs Our Problem, Really?
This section gives an overview of the arguments that question the problematization
of the “American-ness” of CRAs. For if the American-ness does not constitute the
“key problematique” of rating but something else, then, ceteris paribus, a counter-
hegemonic BRICS or Chinese rating agency may risk perpetuating the weaknesses
of the current rating system.
Not American-ness, but Outraged Policymakers

With regard to policymakers’ criticism of sovereign ratings, and this applies both to
the East Asian crisis and the sovereign debt crisis in Europe, “a curious dialectic in
rating agency–state relations” manifests itself. Sinclair (1999: 160) notes that “when
states are downgraded by the major global agencies they are often vocal in their
denunciation of the judgments”, and interpret them as an affront. In the extreme
case, policymakers regard CRAs as part of a conspiracy of American imperialism,
which only further aggravates the hostility towards the US-based firms (Hackhausen,
2012, own translation).
In 2011, in the midst of the sovereign debt crisis, former European Internal
Market Commissioner Michel Barnier criticized the CRAs for not taking many EU
governments’ unprecedented reform measures sufficiently into account. He proposed
a temporary ban on sovereign ratings of countries during bailout talks (Norman and
Neumann, 2011). The unwillingness to accept “bad grades” would cause discomfort
and induce policymakers to accuse the CRAs of partiality and complicity.34 Although
the American CRAs are private firms that have no official link to the US government,
such a suspicion is hard to falsify, and therefore persistent.
Policymakers, however, lose credibility if they boast about their top ratings in
good times, and complain about ratings in bad times. When states tacitly enjoy the
benefits of their triple “A” status, they implicitly acknowledge the validity of ratings.
When the tide turns, the entity being judged is not best positioned to question the
validity of the judgment by accusing CRAs of a “home bias”. A sovereign debt crisis is
therefore not the best time for policymakers to problematize the politics of sovereign
34
Brummer and Loko (2014) and Dittmer (2011) argue that since US authorities would not
see CRAs as advocates of foreign interests, policymakers in the EU would have imposed
harsher regulations on CRAs in the aftermath of the GFC.
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ratings. Their accusations of CRAs will likely by dismissed as “policymakers wanting

to take revenge on their judges”.
A counter-hegemonic BRICS or Chinese rating agency will not be able to
alleviate this dynamic of outraged policymakers. When states will experience a
downgrade, they will likely accuse the alternative CRA of partiality and complicity
with the foreign government as well.
Not American-ness, but Unintended Consequences

Another argument that questions the problematization of the CRAs’ “American-
ness” as the main problem of rating is related to the fallacy of over-emphasizing
vested interests. As an unintended consequence of rating actions, sovereign rating
downgrades may weaken other currencies against the USD. This, however, does
neither imply that CRAs change sovereign ratings intentionally nor that the US
government stands behind this.
Once a counter-hegemonic BRICS or Chinese rating agency will have acquired
the market power and epistemic authority as its American counterparts, its sovereign
rating actions may likely trigger similar unintended consequences on exchange rates,
interest rates and other factors that affect the economic situation of a borrowing
nation.
Not American-ness, but Special Role of USD

Some regard S&P’s downgrade of the US on 5 August 2011 as further evidence to
falsify the US home bias reproach (Hackhausen, 2012, citing German politician,
and former ECB board member, Jörg Asmussen).35 The market reactions to the
downgrade were remarkable: Treasury bills (T-Bills) rose in value, and yields went
down (Reuters, 2011; CNN money, 2011). Market reactions to downgrades of
other sovereigns usually move vice versa. The American downgrade suggests the
firmness of the market’s conviction that there is no serious reason to question US
creditworthiness. What observers from outside the US perceive as a home bias in
sovereign ratings, may just be the CRAs’ “reproduction” of this market belief.
There are, indeed, material reasons that cast a different light upon the home bias
reproach. To this day, the USD has a unique status as the dominant global reserve
currency (Norrlof, 2014). If the US enjoys certain privileges due to the special role
of the dollar, this compounds the comparability with other debt-issuing nations.
The weakness of this argument lies in the fact that, at the time, the CRAs had been already
35
criticised for being less strict with the US government. It remains an open question to what
extent the US downgrade can be interpreted as a reaction by S&P’s to weaken the accusation
of home bias.
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248 G. Mennillo
If the “American-ness” per se does not constitute the problem of rating which
is perceived as the home bias, but instead, it is the special role of the dollar as the
leading reserve currency, this means that a counter-hegemonic BRICS or Chinese
rating agency will not be able to alleviate this problem unless there is no leading
reserve currency in the future.
Sovereign ratings are, by definition, relative expressions. From this follows that the
“Big Three” would do themselves a favor in terms of credibility if they withdrew their
US sovereign rating, at least for the present, to silence the home bias reproach. For the
future, this also means that CRAs that are headquartered in the country that issues
the leading reserve currency would do themselves a favor if they do not issue the sover-
eign rating of their respective home country in order to avert the home bias reproach.36
Not American-ness, but Susceptibility of Sovereign Ratings to be Interpreted

as Political Instruments
As mentioned above, US headquartered CRAs are often regarded as a prolonged arm
of US government, and Dagong, although privately owned, faces criticism for not
being independent from its own government.37 The insinuated lack of independence
from the government goes at the cost of rating credibility.
There seems to be a general susceptibility of sovereign ratings to be interpreted
as political instruments, whoever is issuing them. The greater the consequences of
rating actions, the more this susceptibility tends to increase.
On 24 May 2017, Moody’s downgraded China “for the first time since 1989”
(Bloomberg, 2017b). The company justified its decision based on the prospect that
“economy wide-leverage” will outpace economic growth “over the coming years” and
“erode China’s Credit Metrics” (Moody’s, 2017). The Chinese Ministry of Finance
reacted that the rating decision would be “absolutely groundless” arguing that
Moody’s would underestimate “the capability of the government to deepen reform
and boost demand” (Bloomberg, 2017b). Particularly the timing of the downgrade
raised controversies, given that China has recently been on the path of opening up
its bond market to foreign investors, and a lower rating makes it more costly for a
sovereign to issue bonds because of the higher risk premium it has to pay to inves-
tors. At the same time, Dagong assigns China a top rating, whereas, it rates the US
as “A-”, “below Russia and France”.
36
Unless there will be a “multi-polar” reserve currency basket in the future, in practice, it
is highly unlikely that CRAs would stop issuing the rating of the country with the leading
reserve currency given investors’ demand for it.
37
Chairman Guang never tires of repeating that there are no ties between Chinese authorities
and Dagong (Süddeutsche Zeitung, 2013; Grzanna, 2013a,b; Lietsch, 2011).
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As is the case with the American counterparts, only when Dagong will downgrade
its own domestic government, this may be interpreted as the litmus test of its inde-
pendence.38 The same logic will probably apply to a new BRICS rating agency issuing
sovereign ratings. Otherwise, an insinuated lack of independence will likely dampen
its prospects of success given the importance of reputation for the rating business.39
Not American-ness, but Other Biases

In case of the “Big Three”, the specific propensity of sovereign ratings to be subject
to the home bias is commonly referred to as the “American-ness” of the CRAs.
However, if there is a general propensity of sovereign ratings to be subject to other
types of biases altogether, objections can be raised as to whether it is the CRAs’
“American-ness” that constitutes the main problem of rating.
For example, Bartels and Weder di Mauro (2013) show that sovereign ratings of
the small German CRA “Feri” are susceptible to a negative “neighborhood bias” that
even tends to outperform the CRAs’ presumptive home bias. During the sovereign
debt crisis in Europe, “Feri was even more aggressive both in terms of a lower level
and a higher propensity to quickly downgrade Eurozone problem countries than
the Big Three.” Although it may be questionable whether Feri really reflects “an
unbiased European view”, the authors conclude “that European countries would
have received an even tougher treatment from a European rating agency than from
the US-based ones”.
If there is a general propensity of sovereign ratings to be subject to biases other
than home bias, then a counter-hegemonic BRICS or Chinese rating agency will
likewise perpetuate this problem.
Not American-ness, but Transnational Character

Unsurprisingly, CRAs dismiss criticisms of being advocates of partisan interests
as conspiracy theories. Rejecting accusations of partiality, Moritz Krämer, Head of
EMEA Sovereign Ratings at S&P’s asserts: “We do our job” (Hackhausen, 2012, own
translation). In line with the “synchronic-rationalist” mental framework of rating
orthodoxy (Sinclair, 2005: 70), CRAs in their self-understanding adopt a cross-
cultural perspective which — by definition — cannot have a US bias.
According to Sinclair (2005: 120), the global expansion of CRAs with sub-
sidiaries and allies all over the world contributes to an increasingly “transnational”
As seen in the American case, such actions are not able to entirely silence accusations.
38
If the European Union as a public institution were to promote a European CRA, its inde-
39
pendence, especially in terms of sovereign ratings, would likewise be questioned (Bartels

and Weder di Mauro, 2013; Paudyn, 2011).
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250 G. Mennillo
character of rating. Regarding the CRAs’ “transnational view” as an affirmation of

“the agencies’ US origins, norms and practices”, Sinclair infers that “the mental
framework of rating remains largely American”. I argue that such a line of reason-
ing hinges critically on the understanding of “American” and “transnational”. As
sovereigns converge because of financial globalization,40 it will become increasingly
difficult to identify the kind of bias the sovereign rating actually suffers from. If
“transnational” stands per se and does neither mean “American-ness” nor “Chinese-
ness”, then transnational actors such as the rating agencies will be constitutive of
this category.
Abdelal (2007: 3) maintains that there is an “important misconception of the
conventional account” of the role of the United States concerning the origins and
politics of financial globalization. What if the criticism of the CRAs’ US bias is based
on this misconception, and the CRAs should instead be regarded as crucial players
in the general development of global financial capitalism? For example, Ouroussoff
(2010) conceives of the CRAs as a counterpart to the executives in charge of the
world’s largest corporations. The relevant dichotomy would lie between the CRAs as
representatives of a new model of capitalism, “whose task it is to enforce the criteria
on investors’ behalf ” and “the old model of the risk-taking entrepreneur”. On Wall
Street, the “silent war” between these two counteracting forces would shape the
global economy.
It is likely that a BRICS rating agency will continue to reproduce the dichotomy
between investors and entrepreneurs in global capitalism, representing the interests
of the former. Also in the case of Dagong a straightforward investor orientation
seems to confirm Ouroussoff (2010), as literally the company’s slogan “Sincere
service for investors” suggests (Dagong Hong Kong, 2015). However, particularly
as regards the transnational character of the investor orientation, there is a clear-cut
difference between a future BRICS rating agency and Dagong. Dagong perceives
itself as an immediate advocate of “Chinese” investors. As the Chairman’s message
states:
China is both an international creditor and an exporter of capital […] it should be

for the creditor to evaluate the credit risks of the debtor, and we should not rely on
the debtor’s ratings to protect the creditor’s interests.41
40
Indirectly, these dynamics of convergence can also be related to sovereign ratings, which
induce sovereigns to align to common criteria of assessment.
41
Source: http://www.dagonghk.com/AboutUs.php?act=list&parent_id=19&menu_id=28
b3508_V2_Ch10.indd 250 11-02-2020 13:17:36

As being an “international creditor” is equated with being “Chinese”, the

investor orientation of Dagong thus serves as a constitutive element of its identity
as a Chinese CRAs. Constructing the “Western rating agencies” as advocates of debt
issuers — which is a point one can hardly deny, let alone due to the issuer-pays busi-
ness model — Dagong legitimizes its mission to relocate the “world’s credit rating
center” to China, remarkably, out of a seemingly technical necessity derived from the
“creditor−debtor relationship”. From such a perspective, Dagong’s expansion strategy
can be rationalized as a legitimate reaction to the failure of the American agencies to
“provide proper services to investors” during the GFC. Insinuations of hegemonic
aspirations including accusations of a “Chinese home bias” can be silenced straight
away. Protecting the interest of the theoretically transnational investor suffices as
raison d’être for a Chinese CRA.
Not American-ness, but Regulatory and Institutional Reliance on CRA Ratings

When claiming that it is “not the American-ness of the [CRAs] that creates the key
problematique” of rating, Abdelal and Blyth (2015: 58) argue that the challenges are
of “more fundamental” nature and related “to the practices of regulatory delegation
and producing market conventions”. Disintermediated financial markets necessitate
an epistemic authority for passing judgments on creditworthiness, as banks do not
fulfil their traditional role as financial intermediators between lenders and borrowers
any more. This outsourcing of judgment to a third-party for investment decisions
has become such an entrenched practice that even institutional investors and
regulatory authorities cannot escape the temptation to delegate due diligence. The
consequence of the delegation of credit risk assessment to a centralized third-party
is the harmonization of the market’s risk perception that leads to herd behavior and
amplifies systemically destabilizing “cliff effects”.
Practices that accompany structural changes of financial disintermediation and
their consequences do not disappear only because the headquarters of the market
leading CRA will shift to the East or to one of the BRICS countries. Under these cir-
cumstances, the epistemic authority of CRAs will continue to exist, no matter where
the headquarters of the rating agencies are. Institutional and regulatory reliance on
CRA ratings may continue, as well as procyclical market behavior.
Not American-ness, but “Market Forces” vs. “the State”

An alternative problematization of rating that goes beyond its “American-ness”
relates to the aspect of ceding “further sovereign authority to market forces” (Paudyn,
2011: 259). An example which suggests that the “Big Three” are not necessarily
advocates of “American” but “market” interests, is the CRAs’ discursive intrusion
into US domestic policy issues. As the US debates about raising the debt ceiling in
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252 G. Mennillo
2011 and about the government shutdown in 2013 have shown, when the situation
evokes the CRAs’ disapproval, CRAs issue direct warnings with negative rating or
outlook implications (S&P’s, 2013; Puzzanghera, 2013).42
This means that the politics of sovereign ratings manifests itself less in a s truggle
between states, but rather between “market forces” and “the state”. This implies that
the country which hosts a CRA is also subject to the rating judgment. If this is the
case, a counter-hegemonic BRICS or Chinese rating agency will not make a differ-
ence in this respect.
Furthermore, if the investor-pays remuneration model will become the dominant
business model of rating in the future, as the name already suggests, investors’ ideas,
norms and world views are likely to play a more important role than is already the case
for the understandings of creditworthiness underlying the rating process. This has a
straightforward implication for the “prescriptive normativity” (Paudyn, 2013: 804) of
ratings, as rated entities will have to orient themselves towards investors’ understand-
ings of creditworthiness even more in order to preserve their access to credit.
As long as sovereign states refinance themselves on international bond markets,
the normative implications of sovereign ratings with respect to fiscal and economic
policy deserve close scholarly attention, independently where the market and
opinion leading CRA has its headquarter. This opens up a wide spectrum of research
questions that can be addressed by scholarship in the future: How do understandings
of creditworthiness and their inherent world view converge and diverge across the
global rating industry? Which understandings of sovereign creditworthiness may
come to dominate the global financial markets in the future, and shape ideas about
economic and fiscal policy accordingly?
Not American-ness, but Flawed Methodology

Another problem that goes beyond the aspect of the CRAs’ American-ness
concerns the rating methodologies. CRAs have been criticized for their “falla-
cious analytics” (Paudyn, 2011: 259) and for “not understand[ing] or adequately
model[ling] the economic fundamentals” (Bartels and Weder di Mauro, 2013;
Afonso et al., 2012). If, ceteris paribus, the rating methodologies remain the same,
and only the headquarters of the agencies change, then a counter-hegemonic
BRICS or Chinese rating agency will not be able to alleviate the CRA problem of
flawed methodologies.
Pressure can also be exerted implicitly articulating a positive prospect: “In Fitch’s opinion,
42
agreement will ultimately be reached on raising the debt ceiling and the US government will
make full and timely payments on its debt” (Fitch Ratings, 2011).
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Conclusion
When China opened up its interbank bond market to foreign capital beginning of
2016, the Financial Times warned that “[l]ike China itself, its bond market is too big
to ignore”. This chapter suggests that the same logic will apply to the Chinese credit
rating industry as well. With the ongoing opening up of China’s capital account, the
authority Chinese CRAs started accumulating domestically over the last years may
very likely transcend their own boundaries.
The influence of Chinese CRAs over international investors and issuers may
still be regarded as weak and insignificant. However, as China is becoming a global
investor of systemically relevant size, ratings from Chinese CRAs may increasingly
matter for global investment decisions.
Nevertheless, a wide spectrum of challenges of rating will not disappear once
the market and opinion leading CRAs will be headquartered outside the United
States. Whether it is the special role of a leading reserve currency in a global finan-
cial system; the general tendency of sovereign ratings to be interpreted as political
instruments; other biases sovereign ratings can be subject to different from home
bias; the transnational character of rating; the regulatory and institutional reliance
on CRA ratings; the power struggle between “the market” and “the state” in finan-
cial capitalism; or a flawed rating methodology — a counter-hegemonic BRICS or
Chinese rating agency per se are not the solution to these challenges.
Finally, even if we concede that the US home bias of the American CRAs exists,
it is highly unlikely that a BRICS or Chinese CRA will not suffer from a similar
home bias as well. What seems to be more relevant at this point is not whether a
home bias in rating really exists, but that it is perceived to exist by policymakers, as
the promotion of an own CRA by Chinese authorities and the more recent BRICS’s
initiative to establish an own CRA testify.
Independently whether one conceptualizes the “key problematique” of rating
in its American-ness or in something else, these controversies caution us against
treating ratings as unambiguous metrics. That non-Western policy-makers have
gotten a feel for the structural power CRAs wield in global financial markets — and
that they are determined to host firms they can identify themselves with as these
reproduce and shape opinions of creditworthiness according to own ideas, norms,
and world views — reveals the social dimension of rating.
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CHAPTER 11
Treaty Shopping and Unintended

Consequences: BRICS in the
International System
Julia Gray
Political Science Department, University of Pennsylvania, USA
Introduction
Since the end of the Cold War, the BRICS countries, along with emerging markets
across the world, have been quick to sign on to a variety of economic agreements —
including preferential trade agreements (PTAs) and bilateral investment treaties
(BITs) — in the international system. Many of these agreements served to signal
those governments’ friendliness to investors and to the globalized world more
generally (Gray, 2009). But Investor-State Dispute Settlement (ISDS) mechanisms —
which allow private actors to launch litigation against other countries, effectively
giving firms the same rights as countries (Simmons, 2014) — are some of the most
contentious features of the international cooperative landscape. Although these
provisions have existed for some time in some form (Miles, 2013; Hale, 2015), recent
cases have put ISDS provisions under increased scrutiny. Emerging markets such as
Brazil, Indonesia, and India have recently terminated many of their bilateral invest-
ment treaties (BITs) precisely because those provisions leave them open to litigation
(Poulsen, 2014). But in an interesting twist, the complainant may not even be from
the state with whom the agreement is signed.
259
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260 J. Gray
The practice of so-called “treaty shopping”, where actors can avail themselves
of the web of international adjudication to pick the regime that best suits them,
puts into focus the contentious and complicated nature of these dynamics. Treaty
shopping — long present across treaties governing taxation and now spreading to
international arbitration (Streng, 1992; Reinhold, 2000; Barthel et al., 2010) — has
become widespread in recent years.1 The BRICS countries fall along the entire spec-
trum of implications of this phenomenon, including as complainant, r espondent,
and vehicle.
For example, in one famous case, the US-based tobacco firm Philip Morris
brought a lawsuit in 2011 against Australia concerning the regulation of cigarettes
(specifically, the requirement that cigarettes be sold in plain packaging). However, it
used its subsidiary in Hong Kong — Philip Morris Asia — to launch the suit, so that
it could take advantage of a relatively lenient bilateral investment treaty (BIT) signed
between Hong Kong and Australia in 1993. The tribunal ultimately ruled that the
tobacco firm did not have jurisdiction for the suit, but it led Australia to request an
opt-out of the ISDS provisions in the negotiations for the Trans-Pacific Partnership
(although it subsequently softened its position).2
This example demonstrates how the rule overlap in international agreements
can have unintended consequences for BRICS, emerging markets and developed
economies alike. The original goal of the particular bilateral investment treaty that
Philip Morris deployed was to promote investment by limiting the degree to which
the governments of Hong Kong and Australia could discriminate against foreign
direct investment. Even though that treaty had not been much in use between its
original signatories, it created a window for international litigators as well as for a
multinational firm to attempt to use the agreement to their own advantage. This
action created consequence for the countries in question, as well as for subsequent
international agreements. Thus, even when governments have not signed formal
agreements with countries of interest, multinationals whose subsidiaries extend
across multiple jurisdictions can, with the help of international law firms, take
action against states from third jurisdictions (in this case, Hong Kong). The lack of
1
Treaty shopping in arbitration and taxation should not be confused with forum shopping.
In the latter, states pick the international forum of which they are already members that
stands the best chance of giving them a favorable outcome in a given issue area. Treaty shop-
ping means that non-state actors such as firms structure their ownership to take advantage
of other countries’ arrangements.
2
In another case of overlap, Australia’s plain packaging requirement is also currently being
contested at the WTO, with actions brought against Australia by five different countries —
Ukraine, Honduras, the Dominican Republic, Indonesia, and Cuba.
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Treaty Shopping and Unintended Consequences 261
a centralized ISDS system means that firms can use ISDS provisions across a wide
variety of international agreements to attempt to gain leverage over states.3
This can have many potential consequences for emerging markets and for the
BRICS countries, although those states have varied in both their susceptibility
and response to treaty shopping. As the example above shows, convergence and
divergence exists among those countries. At times, the BRICS countries can be
used as vehicles in treaty shopping, as the Hong Kong example above shows; other
times, companies in those countries can be the perpetrators of treaty shopping,
as is frequently the case in Russia. Governments including Brazil and India have
also chosen to withdraw from such treaties altogether. Nonetheless, the web of
international treaties on offer just after the end of the Cold War have entangled
many of these countries in protracted and costly legal battles and lost revenue via
taxation. Many of the BRICS have taken measures to avoid leaving them vulner-
able to treaty shopping for arbitration (South Africa, India, and Brazil) as well as
taxation (China).
Rather than thinking of international agreements as contracts solely among
signatory states, and as the BRICS countries as signing individual treaties to secure
particular outcomes, these agreements are best viewed as part of a complex dynamic
in the international system. This approach makes two important moves. The first
is to view agreements not as bilateral or multilateral, but rather as systemic. The
second is to shift the emphasis from the formation and joining of international
institutions, to an examination of the ways in which institutions evolve over time,
giving power to substate as well as non-state actors. This allows for a more holistic
view of the international system, and of the ways that the system affects different
actors in the BRICS countries. International legal instruments, including treaties
with ISDS provisions, can empower some firms with respect to governments as
well as to other firms, both within and outside the BRICS (Buthe and Milner, 2009).
Viewing the rule overlap in international agreements as opportunity structures,
rather than strictly as the products of bargaining over states for a certain cooperative
outcome, allows for a more nuanced understanding of the reciprocal interactions
among states, markets, non-state actors, and the international system in an era of
globalization. This approach is echoed in the literature concerning regime complexes
3
One legal briefing identifies investor protection in five areas — BITs, PTAs, the Energy
Charter Treaty, ASEAN’s Comprehensive Investment Agreement, and human rights
treaties — and went on to say that “it is increasingly important that international investors
understand these protections, both when structuring their foreign investments and when
they face interference by a host state” (Client Alert Commentary; Latham and Watkins;
International Arbitration Practice Number 1563, 29 July 2013).
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262 J. Gray
(Colgan et al., 2012) and forum shopping (Busch, 2007; Drezner, 2008; Davis, 2009),
integrating with recent work on transnational non-state actors as well as bureaucra-
cies (Johnson, 2013).
This chapter gives an overview of the various roles that different actors — firms
and governments alike — in the BRICS countries have played in the treaty shopping
landscape. Assessing whether the BRICS have been helped or hurt by treaty shop-
ping requires looking both at state and non-state actors. While some governments
and firms have been beneficiaries of treaty shopping, others have faced losses — at
times even within the same country, as the Russia example below will illustrate.
Furthermore, the benefits and costs can vary widely depending on the judgment of
the tribunal. That is to say, as the international system of treaties and agreements
grows increasingly tangled, it becomes difficult to offer a clear assessment as to
whether countries are better off integrating fully into it or opting out of part or all of
it, as some of the BRICS have done. This is a very different policy prescription than
what was on offer in the 1990s, when the BRICS countries first rose to prominence.
The BRICS and Treaty Shopping in an Interdependent World

After the fall of the Berlin Wall, developing countries the world over — including the
BRICS — rushed to sign international agreements of all varieties. These agreements
were meant to signal that the countries belonged in the global regime for coopera-
tion, as well as to attract investment and trade. However, these agreements carried
with them many unintended consequences (Poulsen, 2015), including opening
themselves up to litigation. But the web of treaties also opens up the possibility for
actors to jump jurisdictions. This exposes countries to new layers of international
interactions.
Lawyers have been writing about treaty shopping for decades, particularly as it
emerged in taxation,4 but this phenomenon has only recently attracted the attention
of political scientists (Buthe and Milner, 2009; Gertz, 2015; Tucker, 2015; Arel-
Bundock, 2016). Treaty shopping in the area of international investment arbitration
stems from the ability of private investors to sue states, an important feature of the
postwar regime for international investment (Simmons, 2014). Indeed, the world’s
first investment treaty — drafted in 1959 between Germany and Pakistan — did not
include arbitration provisions in its investment treaties until 1981. These provisions
grew in popularity in the 1980s and are now a standard feature of many international
agreements (Lupu and Poast, 2015).
4
See, for example, Streng (1992), Haug (1996), Reinhold (2000), Rodriguez (2008), Skinner
et al. (2010), and de Swart (2015).
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At first glance, it might seem that these disputes are the purview of developed
countries, leaving the BRICS out of the game. Of those ISDS claims that have been
filed, around 70% are from investors in the US or the EU. And yet, closer examina-
tion reveals that it is not always firms that originate in the country that initiated the
dispute. Companies in the Netherlands are among the most frequent initiators of
disputes, second only to firms in the United States and the United Kingdom. But this
is partially because the Netherlands has an extremely liberal investment regime, with
their boilerplate investment treaty having quite broad and general legal language
that is favorable to investor interpretation of concepts, such as expropriation and
violation of rights (Skinner et al., 2010). The Netherlands in total hosts around
20,000 “shell companies” or “mailbox companies” (1,600 of which are subsidiaries
of US companies) to benefit from investment protection (Van Os and Knottnerus,
2011), as well as from around 95 BITs and ISDS provisions around the world.5 The
Dutch BITs in general contain widely similar provisions, largely due to the fact that,
despite the theoretical predictions of the rational design literature, agreement design
tends not to vary much within a country (Allee and Elsig, 2014). Once a country
has forged its first agreement in a given issue area, subsequent agreements tend to
look quite similar to the initial one (Poulsen, 2014). This means that the many BITs
and ISDS provisions held by the Netherlands tend to offer domestically registered
firms very similar types of protection, regardless of the part of the world or the
host country. This helps account for the high number of ISDS cases initiating from
firms ostensibly based in the Netherlands. In terms of treaty shopping, developing
countries have been respondents in 53 out of 66 cases, which accounts for 80.3% of
the potential treaty shopping cases.
In certain treaties, MNCs wishing to launch dispute procedures against a given
country can do so through setting up or utilizing an existing office in a third country
with whom the primary country does have an agreement. This practice of “treaty
shopping” circumvents the channel of direct interstate bargaining over invest-
ment agreements and leaves governments potentially vulnerable to litigation from
unexpected sources (Harten, 2005; Kirtley, 2009; Skinner et al., 2010).
5
According to Van Os and Knottnerus (2011), Dutch cases “account for a full 10% of the
roughly 400 known investment cases world-wide. The majority (29) of the investors that
have sought arbitration under a Dutch investment treaty are foreign (i.e. the ultimate or
controlling parent is not based in the Netherlands), while 25 of these claimants are indeed
shell companies that appear to have set up shop in the jurisdiction of the Netherlands with
the sole objective of availing themselves of the generous Dutch tax breaks and investment
protections.”
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264 J. Gray
In treaty shopping for investment litigation, the presence of multiple dispute

settlement mechanisms at the international level can allow firms and states to select
the forum that is most likely to give them a favorable outcome (Romano, 1998; Stahl,
2005). Firms can choose to adhere to the investment provisions in a BIT or a PTA,
thereby obviating the other agreements that a country may have signed (Baccini
and Dur, 2015). But the globalized structure of production as well as of jurisdiction
mean that the state and territory are not always equivalent (Agnew, 1994). The web of
overlapping treaties mean that legal jurisdiction can transcend particular territories.
This holds true as well for treaty shopping regarding taxation, where firms can set up
shell companies to take advantage of bilateral tax treaties that offer more favorable
terms than those between their home and host countries.
Just as globalization creates an overlapping tangle of transnational adjudica-
tion (through BITs as well as through the investment portion of PTAs,6 as well as
other international agreements that contain ISDS provisions) — it also gives rise
to opportunities for firms to decouple themselves from national commitments
(through FDI, production networks, affiliates abroad). This gives firms an oppor-
tunity to use the international legal commitments made by their host state to gain
advantage over third states. This creates a complex politics in which firms can use
these features of globalization strategically to both equalize their position with
respect to other firms and to the state. However, these strategies may not prove
successful in arbitration.
As St John (2016) describes, when the World Bank initially promoted ISDS
provisions to countries’ agreements, they were intended to solve the political prob-
lem of nationalizations of investment in a peaceful manner. Indeed, Poulsen (2015)
provides compelling evidence that most developing countries that signed on to BITs
in the 1990s did so without conducting any kind of systematic cost-benefit analysis,
and many representatives did not even realize that the ISDS provisions would be
legally binding. Thus, at best, states (both individually and collectively) were unable
to anticipate the way in which these multiple treaties could be deployed by law
firms and MNCs with multiple jurisdictions. At worst, ISDS emerged as a standard
provision in many agreements as a result of World Bank bureaucrats’ influence,7 and
many countries did not even know what they were signing.
6
It should be noted that the ISDS provisions in PTAs only apply to the investment portions
of those agreements, not to all products covered.
7
This is consistent with the dynamics described by Johnson (2013), in which IO bureaucrats
can play an influential role in treaty design.
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The result is that the BRICS, as well as many emerging markets have signed onto
a set of institutions that are not under their direct control. At present, states, IOs, or
other actors that are beholden to states do not govern the international regime of
investment arbitration. Rather, the system is both delegated to private arbitration
within the very general framework to which states have agreed, and is also open
to other private actors, MNCs and other firms and the lawyers working for them.8
Thus, in the period where states signed onto international agreements that
included ISDS provisions, they unwittingly built in opportunity structures that firms
and lawyers could attempt to exploit. Although many states are currently endeavor-
ing either to limit their involvement or exit altogether from treaties containing these
provisions, opportunities for arbitrage on the part of non-state actors still exist.
This is a consequence of the rule overlap that exists in the international system, as
well as non-state actors’ ability to construe jurisdiction in creative and unexpected
ways. Among the BRICS countries, an assessment of the benefits and losses very
much depend on the level of analysis. Individual firms within those countries can
benefit from treaty shopping, but states themselves can bear costs if they end up in
arbitration proceedings.
Even domestic firms can reincorporate abroad to gain leverage on their home
governments. In a similar example to the Yukos case in Russia, described below, an
Argentine firm that claimed mistreatment at the hands of the Kirchner regime set
up a shell company in the Netherlands to sue the Argentine government for breach
under international, not domestic, rules (Wellhausen, 2014), in the case of TSA
Spectrum de Argentina SA v. Argentina, 2005. The case was ultimately dismissed
due to suspicions of treaty shopping.9 Further, one of the first acknowledged cases
of treaty-shopping occurred when a Lithuanian company, Tokios Tokeles, brought
a case via a Ukraine−Lithuania BIT against the Ukrainian government in 2004 for
unfair investor treatment. But jurisdictional questions arose once it was discovered
that 99% of Tokyo’s capital and around two-thirds of its management originated from
8
For a journalistic account of how this system emerged, see Haley Sweetland Edwards’s
“Shadow Courts: The Tribunals That Rule Global Trade”, Columbia Global Reports,
September 2016.
9
The tribunal ruled that “the ultimate owner of TSA on and around the date of consent was
the Argentinian citizen Mr. Jorge Justo Neuss. It therefore follows that, whatever interpre-
tation is given to the BIT between Argentina and the Netherlands, including the Protocol
to the BIT, TSA cannot be treated, for the purposes of Article 25(2) (b) of the ICSID
Convention, as a national of the Netherlands because of absence of ‘foreign control’ and
that the Arbitral Tribunal therefore lacks jurisdiction to examine TSA’s claims.”
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266 J. Gray
Ukraine itself (Skinner et al., 2010).10 This has repercussions for BRICS including
China and Russia, where investors may suspect unfair treatment at the hands of
domestic courts and establish shell companies abroad to gain preferential treatment.
The Role of Firms: MNCs and Law Firms
Some BITs contain denial-of-benefits clauses that include specific definitions of

what constitutes as an investor. These are meant explicitly to discourage firms from
establishing ownership structures solely to obtain treaty benefits. These also can be
found in taxation treaties; for example, US income tax treaties have a “limitation
on benefits” that serves the same purpose as restricting the definition of investors
(Fleming, 2012; Buthe and Milner, 2009).11 For this reason, back-end treaty shop-
ping is considered to be a relatively riskier prospect for firms, because tribunals
may decide that the firm is not a legitimate party to the ISDS provision in the new
country (Skinner et al., 2010).
The fact that firms can incorporate post-hoc — often under different names than
the parent company — makes the phenomenon of treaty shopping very difficult to
quantify. Treaty shopping can manifest at many points along an investor’s decision-
making timeline, making it difficult to say the precise moment and motivation for
offshore structuring. Furthermore, firms are not transparent about when and why
they choose to incorporate abroad, making the systematic study of their intentions
challenging.12 ISDS cases also tend to be confidential, meaning that tribunals do
10
Cases addressing arguments that the claimant did not in fact have the nationality of
the other Contracting Party include Aguas del Tunari vs. Bolivia, ICSID, Decision on
Jurisdiction (2005); ADC vs. Hungary, ICSID, Final award (2006); Saluka B.V. vs. Czech
Republic, UNCITRAL, Partial award (2006). See also Antoine Martin, International
Investment Disputes, Nationality and Corporate Veil: Some Insights from Tokios Tokeles
and TSA Spectrum de Argentina, Transnational Dispute Management, Volume 8, Issue 1
(February 2011).
11
In most German treaties, for example, a firm must have a seat in Germany in order to be
treated as an investor in these treaties.
12
Constructing a large-N empirical test of these propositions is challenging, for several rea-
sons. First, the disputes themselves can be difficult to identify. Because of the thousands of
possible venues for litigation, there is as of yet no off-the-shelf measure of disputes across
all possible tribunals. Second, the data on shell companies are even more difficult to track
down. Often these companies have different names than their original owners, so i dentifying
a shell company that formed to take advantage of a given ISDS provision involves back-
tracking from the dispute itself. Furthermore, globalized MNCs often use intermediaries to
transfer the assets, which makes identifying the legal owners almost impossible.
b3508_V2_Ch11.indd 266 11-02-2020 13:18:33

not publish systematic accounts of their proceedings. Nonetheless, non-systematic

evidence suggests that treaty shopping abounds.13
The critical role of law firms — many of which operate in the BRICS — in this
process is also difficult to measure directly. Many firms actively advertise their
services, offering expertise in treaty shopping both in international taxation as
well as, increasingly, investment arbitration (Poulsen, 2015; St John, 2016). Indeed,
some argue that it is primarily law firms — who stand to gain from the legal fees —
that are driving the agenda of treaty shopping.14 But their influence is difficult to
observe directly and systematically. Many of these proceedings are secret; many are
conducted in hotel rooms and not in formal courts; and although the number of
international arbitrators has been growing in the past 5 years, it is challenging to
obtain formal figures of their presence.15
If even domestic firms are able to use these treaties against their own govern-
ments, this clearly prompts a rethinking of the conventional rendering of dynamics
between domestic governments and foreign companies. Thus, many of the tradi-
tional arguments about information asymmetries and obsolescing bargains may
be called into question. Domestic firms that can use international arbitration tools
would not be subject to these types of dynamics, and further investigation would
13
Wellhausen (2014) has collected data on 586 investor-state disputes. In her data, 11
isputes — around 2% — involve three or more “home” countries, and an additional 59 —
d
10% — involve two home countries. Some of these cases are almost certainly instances of
shell companies.
14
“Legal vultures: Law firms driving demand for investment arbitration”, Corporate Europe
Observatory, 27 November 2012. https://corporateeurope.org/trade/2012/11/chapter-3-
legal-vultures-law-firms-driving-demand-investment-arbitration. Accessed 26 December
2017
15
As one arbitrator noted, “There has come into existence an elite group of international
arbitration practitioners … If you ask an international arbitration practitioner where they
are based, they will answer Geneva, London, New York, Paris; increasingly also Dubai,
Hong Kong or Singapore. If you ask them who their clients are, they will tell you sovereign
states, energy companies, telecoms companies and so forth. But if you ask them where their
clients are from, you may well find that you have to reach for your Smartphones to locate
the answer. Where exactly are Luanda, Bishkek, Bamako, Riga? No territory is too remote.
The arbitration practitioner cuts a bold and fearless figure, travelling across the world to
anywhere an arbitration agreement may exist, armed only with an iPhone with access to
Google Translate. It is no wonder that many young lawyers want to join this elite corps
of practitioners.” Ndanga Kamau, arbitrator with King and Spalding in Houston, at the
International Council for Commercial Arbitration 50th Anniversary Speech, 19 May 2011.
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268 J. Gray
be needed to theorize about the balance of power between such firms and their own
governments and legal systems.
Nonetheless, treaty shopping demonstrates the many layers of political and
economic interaction among states, firms, territories, and international legal com-
mitments. The following section describes some of the practical and normative
consequences of this type of politics for emerging markets and BRICS.
Convergence and Divergence among EMEs and BRICS

Responses to treaty shopping have varied among the BRICS. India, Brazil, and to
some extent South Africa have sought to insulate themselves from treaty shopping by
withdrawing from many of their treaty obligations. By contrast, Russia has emerged
as both the target of and the vehicle for treaty shopping, often as nationals seek
to find recourse from expropriation outside of the country’s own courts. Chinese
companies via Hong Kong have themselves participated in acting as vehicles for
treaty shopping, and China as an outward investor has both the need for such trea-
ties to protect its companies. This section gives an overview of the BRICS and their
response to treaty shopping.
Russia
Russia is a good example of the complexities of the international treaty system for
the BRICS. It is a country where even Russian nationals face potentially unfair treat-
ment from the government and have then resorted to incorporation abroad and the
use of international treaties as a means of gaining compensation from government
expropriation.
For example, consider the case involving Yukos Oil Company shareholders, in
which Russia specifically invoked the transnational nature of firms as a defense against
charges of expropriations. In three linked arbitrations — involving two firms in Cyprus
and one in Isle of Man, which combined held 70.5% of shares of Yukos — shareholders
sued Russia for compensation for the indirect expropriation of Yukos. They argued
that the launching of tax evasion proceedings against Yukos in 2004 — which ended
up bankrupting the company — were not done in good faith.
Russia’s defense was two-fold. First, Russia argued that the claimants could not
be judged to be foreign investors, since the firms were shell companies that were
operated by Russian nationals. To that end, the state has the right to deny investor
protections to an entity that does not do business where it is organized. Russia argued
that its 1994 agreement on partnership and cooperation with the European Union
laid out conditions through which companies may only be considered as such if
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they operate substantial and continuous links with Russia’s economy. Thus, Russian
nationals used foreign shell companies to attempt to sue their own government —
but that same government used a third-party international agreement in its defense.
The case — which involved five separate jurisdictional issues — has had a
mixed history. In 2014, an UNCITRAL arbitral tribunal found that Russia had not
exercised the right of denial because the Energy Charter Treaty (ECT) Article 17(1),
which reserves this right, was not referred to in the 1994 agreement. The tribunal
ordered the payment of over $50 billion in compensation to the firms — at the time
the biggest damages award in investment treaty arbitration. However, in 2016 the
district court of The Hague overturned the award, on the grounds that Russia had
never ratified the ECT, despite signing it.
This demonstrates the complicated nature of the international landscape
for firms, agreements, and legal systems. In the Yukos case, private actors set up
shell companies in other territories in order to sidestep their own domestic legal
system. This means that for the government, the international treaty system proved
subversive, but for the investor it proved advantageous. Similarly, in the extensive
cases of Sedelmeyer v. Russian Federation (brought through 80 distinct legal pro-
ceedings around the world), Franz Sedelmeyer, a German national who had set up
companies in the then-USSR starting in 1989, sought compensation for expropriated
assets through using the USSR−Germany BIT. Russia attempted to use the same
defense — disqualifying Sedelmeyer as an investor — without success.16
China: Treaty Shopping in Arbitration and Taxation
Similarly, as in Russia, many Chinese firms have taken advantage of the web of inter-
national treaties just as the Chinese government has sought to insulate itself from
their ramifications. For China, firms tend to engage in treaty shopping with respect
to taxation rather than arbitration (Arel-Bundock, 2016). It is common practice
for multinational companies based outside of China to investing in that country
through a shell or holding company based in a country with a more favorable tax
arrangement, such as Barbados or Singapore — or even Hong Kong, which has
special status within China.
The Chinese government has pushed back on these arrangements, with a
series of decisions and policies. For example, in 2008, the State Administration of
Taxation in China pushed back on a claim of exemption from capital-gains tax from
a company in Barbados. The company — established by US citizens — purchased
“Major Pitfalls for Foreign Investors in Russia: What Are Russian BITs Worth?” Kluwer
16
Arbitration Blog, Elvira R. Gadelshina (Khrenov & Partners), 1 December 2011.
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270 J. Gray
a third of the equity of a Chinese company in 2006, selling it back to the original
shareholder at a profit of nearly $12 million the following year. A China−Barbados
tax treaty should have meant that the firm did not need to pay capital gains tax in
China, but the Chinese authorities questioned the provenance and legitimacy of
the Barbados-based company and ultimately determined that the company did not
qualify as a tax resident of Barbados, making them liable to capital gains tax.
Starting in 2008, China has made a number of efforts to clarify in legal terms
its definition of investors, specifically to prevent treaty shopping. For example, in
2009 the country issued a circular specifically aimed at defining a beneficial owner,
in an attempt to prevent foreign companies from treaty shopping regarding taxation
through intermediary holding enterprises. In recent years, it has signed treaties that
pay particular attention to these definitions, such as with the Netherlands, which as
mentioned is a locus of treaty shopping.17 To that end it converges somewhat with
the other BRICS, which have endeavored to insulate themselves from the possibil-
ity of treaty shopping. Yet, China’s role as a significant outside investor — as well
as the special status of Hong Kong, which leaves it open to participating in treaty
shopping as described in the Australia case — make its relationship to these treaties
somewhat tenuous.
India: Limiting Taxation “Round Tripping”
Like China, India has been subject to treaty shopping regarding both investment
arbitration as well as taxation. On the former, it has played several roles. India has
been defined as acting as the host country for eight cases of treaty shopping in
arbitration (the second-most frequent host after Venezuela). In terms of taxation,
India only recently took direct steps to curb treaty shopping (known as well in that
country as “round tripping”), after having been long subject to lost tax revenue.
Cyprus, Mauritius, and Singapore are candidates for tax treaty shopping,
wherein Indian nationals as well as investors from other countries would set up shell
companies in those jurisdictions, with which India had signed bilateral tax avoidance
treaties. Those companies could then invest back into India while avoiding taxation.
As a result, Mauritius became the largest source of FDI for India, with 34% of total
FDI revenues between 2000 and 2015.18
17
“New Tax Treaty signed between The Netherlands and Mainland China”, DLA Piper,
18 June 2013.
18
“India, Mauritius to amend tax treaty: All you need to know”, Hindustan Times, 11 May
2016.
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Treaty shopping with respect to taxation was viewed as enough of a problem that
the government took measures to curb it. The Indian government in 2013 labeled
Cyprus as a “noncooperating jurisdiction”, hoping to send a signal to investors and
making them liable for a 30% withholding tax on investments in India. The measure
proved inadequate, and a more drastic step was required. In 2016, India announced
changes to its tax treaty with Mauritius as well as Cyprus, ending the exemptions
after a 2-year grace period.19 Indeed, India has concurrently become something of
a leader in terms of combating tax evasion, working in the context of the G20 to
establish common reporting standards for taxation.
Some have raised normative questions about the utility of treaty-shopping
possibilities as a way of attracting investment. It is possible that the overall eco-
nomic benefits of a particular investment could outweigh the losses, particularly
if it increases overall economic activity. Indeed, in one domestic legal case (Union
of India v. Azadi Bachao Andolan) the Indian Supreme Court’s judgment stressed
that treaty shopping for taxation could help attract capital and technology to
India. “Developing countries need foreign investments, and the treaty shopping
opportunities can be an additional factor to attract them. […] The developing
countries allow treaty shopping to encourage capital and technology inflows, which
developed countries are keen to provide to them. The loss of tax revenues could be
insignificant compared to the other non-tax benefits to their economy” the court
opined (Avi-Yonah and Panayi, 2010).
Pushback from the BRICS and Around the World: India, South Africa,
and Brazil
Given such concerns, one might think that the states would be able to insulate
themselves to opt out of potential investor litigation by simply refusing to sign such
treaties, or exiting them. Several countries have, in fact, done so: in recent years
Argentina, Bolivia, Brazil, Ecuador, Indonesia, South Africa, and Venezuela have
all pulled out of agreements that contain ISDS provisions.20 Other countries that
fear that governments are disadvantaged in these disputes have moved to set up an
alternate arbitration regime that would be less friendly to investors.21
As the chapter in this volume on investment notes (see Chapter 8), treaty shop-
ping has also prompted states to revoke or refuse to sign agreements with ISDS
19
“Tax pacts and India: Bye bye, treaty shopping,” Financial Express, 22 November 2016.
20
“The arbitration game,” The Economist, 11 October 2014.
21
“ALBA Members Take the Lead in Crafting Alternatives in Arbitrating Investor-State
Disputes,” CEPR, 13 May 2013.
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272 J. Gray
provisions, as a means of protecting themselves from treaty shopping (Peinhardt

and Wellhausen, 2015; Poulsen, 2014; Poulsen and Aisbett, 2013). In emerging
markets, the general concerns about developing countries being beholden to power-
ful MNCs — and that ISDS provisions tend to be biased in favor of investors — have
led to rhetoric about the need to establish alternate forms of international dispute
settlement (Fiezzoni, 2011).
Brazil and South Africa have sought to pull back from treaties that open them
up to international arbitration. India has also given notice that it will terminate the
nearly 60 investment treaties that it has already signed.22
The cries have been taken up by developed and developing countries alike;
Australia, as mentioned, has expressed caution about entering agreements with ISDS
provisions following its litigation via Hong Kong, and France and Germany have
made similar protests concerning ISDS procedures in a proposed EU-Canada trade
agreement.23 These concerns have filtered up to the level of the EU commission as
well.24 Recently the French trade minister, spoke against investor-state settlement
provisions, saying “[w]e must preserve states’ rights” to “set and apply their own
standards”, he told the French Senate.25
In terms of developing countries more generally, in early 2017 Romania and
Poland took initial steps to terminate their BITs with countries already in the EU,
reducing some of the overlap.26 Similarly, after a series of cases, the Venezuelan
government terminated BIT with the Netherlands in 2008 as well as from the
World Bank’s ISDS.27 Indonesia has done the same, revoking nearly all its BITs, and
Bolivia also has withdrawn from the ICSID.28 Similarly, Brazil signed 14 BITs in
the 1990s, but none was ever ratified in domestic legislature.29 The absence of these
agreements, however, does not mean that deals are not struck — indeed, Campello
and Lemos (2015) argues that Brazil, which remains a record attractor of FDI,
22
“India’s bilateral investment treaties: Once BITten, 57 times more shy,” Hindustani Times,
25 November 2016.
23
“Paris and Berlin want changes to EU-Canada trade deal,” EurActiv, 27 January 2015.
24
“Commission floats ISDS reform ahead of EU ministerial trade talks,” Euractiv, 6 May
2015.
25
“When Corporations Sue Governments,” New York Times, 3 December 2014.
26
“Green Light for Romania to Terminate its Intra-EU Bilateral Investment Treaties,” Kluwer
arbitration blog, 14 March 2017.
27
“Venezuela’s Withdrawal From ICSID: What it Does and Does Not Achieve,” Investment
Treaty News, IISD, 13 April 2012.
28
“Indonesia to terminate more than 60 bilateral investment treaties,” Financial Times,
24 March 2014.
29
“The arbitration game,” The Economist, 11 October 2014.
b3508_V2_Ch11.indd 272 11-02-2020 13:18:33

simply addressed most of the demands placed on it by investor through alternative

channels that were less transparent and more tightly controlled by the executive. The
Bolivarian Alternative for the Americas (ALBA), founded by Venezuela’s Chavez
to counter market-based international economic organizations, has discussed
creating an alternate center for dispute settlement provisions that would allegedly
not be biased in favor of investors’ interests. The agreement includes Ecuador,
Bolivia, Cuba, Nicaragua, Dominican Republic, St Vincent, and the Grenadines, as
well as Venezuela. At the discussions to form the tribunal, Argentina, Guatemala,
El Salvador, Honduras and Mexico were also present.30 This is perhaps not surprising,
since Argentina, Ecuador, Venezuela, and Mexico each had around disputes lodged
against them in recent decades.
More to the point, however, the exit from ISDS provisions mean that less
transparent deals between states and investors might be struck. The irony of the
treaty-shopping that has emerged as a result of rule overlap is that it takes place in
the absence of a truly comprehensive multilateral investment regime. The OECD’s
attempts to forge a multilateral Investment Agreement ran aground in 1995; the
Uruguay Round attempts to forge cooperation on investment were controversial. By
withdrawing from ISDS provisions, states are not eschewing foreign investment; such
investment will still likely not be deterred, but the transactions between governments
and firms will be obfuscated, and citizens and non-governmental organizations
will not have a chance to participate in the discussions. However, these calls have
intensified; one legal expert was recently quoted as saying, “[w]hat I would say to
Australians is that while the system is in the state it’s in right now, signing any new
treaty is a very serious mistake. You have to weigh the benefits against the burdens.
Somebody at some point might be able to explain to me where all the benefits are,
but I certainly haven’t seen any.” 31
Examples from Other Emerging Markets
The impact of treaty shopping can be either positive or negative, or both simultane-
ously. For example, the Nomura case in the Czech Republic had profound conse-
quences, both materially and legally. The country faced a number of suits with total
claims of over $1 billion. The IPB incident also sparked a change in Czech banking
laws; one such law now prohibits banks from owning non-financial companies.
30
“ALBA Members Take the Lead in Crafting Alternatives in Arbitrating Investor-State
Disputes,” CEPR report, 3 May 2013.
31
“TPP’s clauses that let Australia be sued are weapons of legal destruction, says lawyer” Jess
Hill, The Guardian, 9 November 2015.
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274 J. Gray
Another requires investors to take a minimum 51% stake in a bank. Although the
losses through the legal fees made the case the most expensive in Czech history, some
argue that the cases did improve the regulatory environment surrounding banks.32
That said, of its ISDS cases — which have in total sought around $3.5 billion in
damages from the country — the Czech government has lost three, paying around
$500 million in those settlements.
Similarly, contradictory outcomes emerged in the Rompetrol case, which turned
out to be one of the most protracted ones in Romanian legal history, and with dif-
ferent outcomes on the domestic and international levels. On the domestic front, in
2012, the Romanian court acquitted Patriciu of the charges of money laundering, but
not before the defendants a number of times attempted to have the case thrown out
of court, alleging that it was unconstitutional and that the charges were politically
motivated.33 However, in 201434 many of the other managers — including a senator
and a former minister — received jail sentences for stock-market manipulation with
respect to Rompetrol shares.
On the international front, however, the outcome was different. In 2009, the
tribunal for the Netherlands−Romania BIT did find that the fair and equal treat-
ment principle was violated. However, it refused to award any monetary amount
to Rompetrol, which had claimed that it had incurred moral damages as well as
economic losses. Treaty-shopping was an explicit part of the respondents’ defense,
arguing that “the dispute amounts in its essence to a complaint by a Romanian
national against Romanian authorities and in relation to activities in Romania”
(Kirtley, 2009). But the tribunal affirmed that the jurisdiction was relevant both
under Chapter 2 of the ICSID convention as well as Article 8 of the Netherlands−
Romania BIT.
The international ruling in favor of Rompetrol but without any damages
awarded ultimately, was a short-term victory for the firm and seemed to have no
impact on the lawsuits within Romania itself. After the domestic cases dragged on,
Rompetrol filed for bankruptcy in Romania in 2015, with a debt of $58.5 million
32
“Pád IPB zlepšil český bankovn systm, řika analytik,” Cesky rozhlas, 16 July 2010.
33
“Romanian court acquits prominent businessman accused of money laundering,” BBC
Worldwide Monitoring, 29 August 2012.
34
Patriciu also died in that same year, but not before (in a further layer of international adju-
dication) filing a complaint with the European Court of Human Rights about inhumane
treatment during his detention. In 2012, the tribunal rejected the claim as inadmissible.
Domestically, in 2007 Patriciu sued the Romanian Intelligence Service for illegally tapping
his phone; domestic courts awarded him around $13,000 in compensation.
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along with three times that amount as legal interest to the country.35 Therefore, at
the end of the day it is unclear that the international ISDS case had a lasting impact
on the Romanian government’s path to resolve the dispute, apart from occupying its
resources as it responded to international adjudication. Of course, deep investigation
would be necessary in order to make evaluations of each case and the real impact it
had on both the firms and the states in question. But this is a fruitful area of research
for future study that looks at the outcomes and impacts of investment arbitration,
particularly when treaty shopping is involved.
Thus, the complexity of the international system of arbitration can lead to
differing and contradictory outcomes for emerging markets. The consequences
of arbitration on state sovereignty are even more problematic in a world of rule
overlap and opportunity structures, as states may find their resistance strategies to
be limited in the face of treaty shopping. At the same time, many have expressed
concern about the ad hoc nature in which these legal decisions have been made. In
Argentina, several companies brought ICSID cases against the government over its
decision in 2002 to abandon its currency board, which pegged the peso to the USD.
The Argentine government claimed that doing so was a matter of national security
and therefore trumped its treaty obligations. This led to a flurry of cases from several
different jurisdictions, which have all been arbitrated with different rulings and
procedures. One legal scholar described the phenomenon as “extremely poor legal
analysis with substantive outcomes that do not reflect either the text of Argentina’s
BITs nor the intent of the state parties to those BITs” (Burke-White, 2008).
Tribunals are increasingly alert to the issue of shell companies using jurisdic-
tional overlap to their advantage. For example, when a Czech citizen named Vladimir
Beno, who owned multiple Czech companies, was brought to prosecution for evading
taxes and customs duties, in 2004 he sold two of his metal companies — Benet Praha
and Benet Group — to an Israel-based company called Phoenix Action, which was
run by his own family members. That company quickly brought a case against the
Czech Republic under the jurisdiction of a Czech−Israel BIT, saying that the cases
involving Benet Praha and Benet Group effectively appropriated Phoenix’s assets,
therefore violating the Full Protection and Security provisions in the BIT. However,
the tribunal called out the treaty shopping provisions, saying that Phoenix itself was
“nothing more than an ex post facto creation of a sham Israeli entity created by a
Czech fugitive from justice, Vladimir Beno, to create diversity of nationality”. The
tribunal further found that the company had not been undertaking any significant
investment in the Czech Republic, but simply acted as “a rearrangement of assets
35
“A tangled business: Romanian oil company Rompetrol SA files for insolvency,” Romania
Insider, 5 June 2015.
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276 J. Gray
within a family, to gain access to ICSID jurisdiction to which the initial investor
was not entitled”.36
The ruling involving a recent Venezuela gas dispute was similarly ambiguous
on the effects of treaty shopping and its broader consequences for international
law. When Venezuelan President Hugo Chavez nationalized oil and gas projects in
the country, Exxon Mobil gas — which is headquartered in Irving, Texas — had no
immediate legal resource because of the lack of any kind of investment agreement
between the US and Venezuela. However, Mobil was able to restructure its investment
to a Dutch subsidiary of Mobil Gas that centered on the nationalization of oil and gas
projects by Venezuela. The tribunal noted that Mobil restructured its investments
through the Netherlands with the sole purpose of gaining access to ICSID arbitration
to contest Venezuela’s new energy policy through the Netherlands−Venezuela BIT.
The tribunal concluded that this was “a perfectly legitimate goal as far as it concerned
future disputes”. However, the tribunal took exception to this approach with regard
to pre-existing disputes, stating that “to restructure investments only in order to
gain jurisdiction under a BIT for such disputes would constitute […] an abusive
manipulation of the system of international investment protection under the ICSID
Convention and the BITs”.37 That judgement, however, did not prevent Exxon Mobil
from being found in favor and awarded $1.6 billion — although that amount was
a tenth of their claimed damages.38 Both Rompetrol and Nomura relied on back-
end incorporation to treaty shop, incorporating in the Netherlands subsequent to
a dispute. In both cases the tribunal acknowledged the claim but took no issue of
the validity of the identity of the claimant.39 But those other cases have been mixed.
36
Quoted in Skinner, Miles and Luttrell (2010). That being said, future tribunals have not
been constrained by that precedent. One ISDS tribunals — in the case of Metal-Tech v.
Uzbekistan — disagreed with the Phoenix case’s definition in terms of what counted as an
investment. By contrast, in the case of Tidewater v. Venezuela, the tribunal invoked the
Phoenix case as an example of a firm abusing the international system through restructur-
ing its investment to gain access to different international treaties. “Recent Developments
in Investor-State Dispute Settlement,” UNCTAD Report, April 2014.
37
Quoted in Van Os and Knottnerus (2011).
38
“Exxon Mobil awarded $1.6 billion for assets seized by Venezuela,” Los Angeles Times,
4 October 2014.
39
Interestingly, this differs from the case lodged against the Czech Republic through Phoenix
Action, where the attempt to sue the country through the Israeli BIT was thrown out on
precisely those grounds. That may have been a function of weaker language in the Israeli-
Czech BIT, since that case was not launched appreciably later than the other ones (it was
initiated in 2004).
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The presence of rule overlap means that as states integrate with the international
system, it is more likely that one set of agreements will contradict another automati-
cally. For example, Eastern European countries have also been particularly subject
to treaty shopping. They tended to be caught among several cross-cutting pressures,
including the enthusiasm for signing many different types of international agree-
ments in order to convince investors of their creditworthiness after the fall of the
Berlin Wall (Gray, 2009); the adoption of relatively lax standards to attract investors
and increase competitiveness; and the subsequent attempts to harmonize their
own policies with EU standards in the run-up to EU accession. The subsequent
cracking down of regulatory standards combined with the earlier ISDS provisions
left those countries exposed to litigation. Some 65% of all disputes against Central
and Eastern Europe stem from other EU countries that had previously signed BITs
prior to accession.
One case — again featuring the Netherlands — involved the Dutch investor
Eastern Sugar claiming that the Czech Republic had violated its BIT principles of
fair and equitable treatment through imposing regulations on sugar imports. The
Czech Republic countered that the Netherlands BIT should have been obviated by
the country’s 2004 accession to the EU — of which both countries were members.
Indeed, the Czech Republic further argued that they had enacted the disputed
regulations in order to comply with the EU’s acquis communautaire requirements
for EU membership. The tribunal, however, found in favor of the Netherlands
and seemed to favor the BIT law over EU law, writing that “an international
arbitral tribunal, independent from the host state is the best guarantee” of investor
protection.40
All these examples illustrate the tension between domestic law and international
law, as well as with the overlapping jurisdictions when countries are accountable to
multiple legal frames, is problematic for transparency but also for the legitimacy of
the domestic legal structure.41
40
“A test for European solidarity: The case of intra-EU Bilateral Investment Treaties,”
Transnational Institute report, January 2013.
41
Cases addressing arguments that the claimant did not in fact have the nationality of
the other Contracting Party include Aguas del Tunari vs. Bolivia, ICSID, Decision on
Jurisdiction (2005); ADC vs. Hungary, ICSID, Final award (2006); Saluka B. V. vs. Czech
Republic, UNCITRAL, Partial award (2006). See also Antoine Martin, International
Investment Disputes, Nationality and Corporate Veil: Some Insights from Tokios Tokeles
and TSA Spectrum de Argentina, Transnational Dispute Management, Volume 8, Issue 1
(February 2011).
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278 J. Gray
Research Frontiers
For the BRICS countries, this points to a more thorough understanding of the
political salience of arbitration. States increasingly encounter unanticipated and
complex relationships that emerge as a result of globalization. Although legaliza-
tion was initially meant to be an impartial solution to the problem of ensuring
international cooperation (Goldstein et al., 2003), the system of international arbi-
tration is politically charged. Scholars have noted that power matters in legaliza-
tion, observing asymmetries among states in the use of WTO dispute mechanisms
(Kim, 2011) as well as in other types of litigation (Yackee, 2014). Acknowledging
that politics and power matter even in the allegedly neutral system of arbitration is
an important first step in exploring, then, the outcomes that legalization produces
for states.
After the fall of the Berlin Wall, states formed, signed, and joined interna-
tional agreements at an unprecedented rate. These efforts included the signing
of economic agreements — including BITs and PTAs — many of which included
dispute settlement mechanisms. Developing countries in particular tended to
sign these agreements because they viewed it as a necessary part of joining the
global order, not because their governments had done any type of economic
analysis of the costs and benefits of those agreements (Poulsen, 2014). At the
same time, most of those countries did not anticipate that the dispute-settlement
provisions that the agreements contained would be legally binding. Thus, the
investor disputes came as an unwelcome surprise to many (Poulsen and Aisbett,
2013).
The contradictions and complications of the international network of treaties,
agreements, and legal frameworks hold many consequences for emerging markets
in general and the BRICS countries in particular. In previous understandings of the
international system, power was the ultimate driver of influence and reward in this
system. This put developing countries as well as the BRICS at a potential disadvan-
tage. Long perceived as the weaker players, many of these emerging markets had to
navigate the international system on the back foot, relying on institutional rules to
ensure fair treatment.
In today’s interconnected world, however, countries and firms of all v arieties —
not just powerful ones — can attempt to benefit from the legal tangle of international
regimes. Firms can not only take advantage of the ambiguity created by rule overlap
and attempt to use it to their own ends. They can also use their own abilities to incor-
porate abroad to take advantage of jurisdictions where their original governments
might not have agreements, through so-called treaty shopping. In fact, some law
firms explicitly advise clients to consider structuring their investments so that they
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can take advantage of treaty shopping.42 However, states still have recourse against
firms, and the litigation does not always go the firms’ way; treaty shopping does not
guarantee a favorable outcome for the investor.
Although the legal implications of treaty shopping are not uniform, and
although many cases have specifically focused on the identity of the investor in
their consideration of the legal merit of the case, it cannot be denied that treaty
shopping — or the fear of it — has structured not only international agreements
but also state behavior with regard to membership and ratification of international
treaties. Russia’s failure to ratify the ECT has temporarily saved it from a massive
payout regarding unfair treatment of Yukos, and Brazil’s and India’s reluctance to
sign onto these treaties aims to limit vulnerability to litigation in the international
system. Future research could explore the dynamics created by these types of
interactions among the state, firm, and non-state actor as they are shaped by the
international system.
Furthermore, the relationship between the BRICS and the international system
of agreements is somewhat called into question by these developments. Less power-
ful, non-Western countries previously relied on the international system as a means
of reining in more powerful states and providing fair treatment and access to less
powerful ones. These treaties also sent signals to markets and other actors about
the credibility of developing countries, demonstrating that they were interested in
signing on to a rules-based system (Simmons, 2000). However, now that signing on
to these treaties is making countries vulnerable to litigation, the BRICS countries’
relationship to the international system may have shifted. Larger countries such as
China are themselves outward investors, meaning that they might themselves be
subject to unfair treatment in other countries and might be interested in using the
international regime of arbitration to their advantage. At the same time, firms in
parts of China may be used as vehicles for this arbitration, as the Philip Morris-Hong
Kong case illustrates.
We can thus imagine contradictory pressures within the BRICS countries in
terms of their government’s level of engagement with the international system of
treaties. On the one hand, governments might want to insulate themselves from
global litigation and might be tempted to withdraw from or refuse to ratify these
treaties. On the other hand, firms in those countries that are engaged in outward
investment might push their home governments to sign up to those treaties to afford
them protection outside of their home territories.
42
N. Blackaby and S. Noury, International Arbitration in Latin America, Latin Lawyer
Review (2006) (section on “Structuring the investment to attract the protection of
i nvestment treaties”).
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280 J. Gray
Future research could also explore the various ways in which private actors in the
BRICS countries — including firms, individual investors, and NGOs — contribute
to and utilize regime complexes across a variety of issue areas. For example, similar
layers of international rules and regimes exist in the environment, in energy,43 and
in human rights. Those areas as well, are populated by firms and non-governmental
organizations along with governments. Similar patterns of overlap most likely occur
in these substantive areas, and closer examination could reveal the ways in which
those various actors interact in those situations. Much of the popular commentary
on ISDS provisions frame them as opportunities for powerful firms to litigate
unsuspecting — and implicitly less powerful — countries, and this would be an
area of investigation.44
Treaty shopping is an example of the transnationalization of the authority of
private actors. The rule overlap in the international system means that firms can
leverage institutional transitivity to obtain their objective. However, the issue for the
BRICS countries has to do with the degree to which their firms are powerful and
have influence with their own country. Relative access to institutions — domestic or
international — compared to other sub-state or market actors is potentially a source
of asymmetric power with regard to agenda setting. These opportunity structures
are not equally distributed among actors. In principle, many kinds of firms — both
small and large — can take advantage of treaty shopping. Indeed, many less power-
ful firms are able to establish shell companies — which in many countries can be
43
In fact, the majority of ISDS cases filed against the Czech Republic and Spain — the EU’s
most frequently sued countries — involve government measures concerning renewable
energy.
44
Several factors complicate the analysis of this claim. First, the economic logic of FDI
s uggests that firms in more capital-intensive countries would tend to invest in labor-
intensive countries. Thus, there is already something of a power asymmetry inherent in the
theoretical structure of FDI (that said, the empirical pattern shows that most FDI actually
occurs between developed countries, with the US and the EU accounting for the bulk of FDI
inflows). Second, in the instances when expropriations or violations of investment do occur,
they tend to happen in less democratic countries (Jensen, 2008; Wellhausen, 2014), which
also tend to be poorer countries; the US and Western Europe have seen relatively fewer
cases. So although it is the case that less developed countries tend to be the targets of litiga-
tion from firms based in richer countries, we would need to analyze this claim given the
likelihood of both the initial FDI investment, as well as the likelihood of an alleged violation
of investor rights. Even then, the secrecy of many ISDS claims would make this difficult
to analyze; one might expect that particularly the more powerful firms would be better
able to obfuscate their suits, meaning that the data may be censored to disproportionately
represent legal action from smaller firms.
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done quickly and inexpensively — making treaty shopping accessible to a wide

range of actors in principle. However, it tends to be the case that more powerful
multinational companies are better positioned to treaty-shop for their own benefits,
as they have both the resources and the information to use these treaties to their
advantage. Furthermore, more powerful multinationals are more likely to have
already structured their ownership to take advantage of favorable taxation, after
which “back end” ISDS treaty shopping becomes easier. They can also better afford
the often protracted legal costs of an international dispute.
Conclusion
Most international relations theory takes the emergence of international agreements
as a product of bargaining among states (Koremenos et al., 2001). In the formulation
of the rational design of institutions, firms that had concerns about expropriation
could lobby their governments to strike an agreement with the state in question.
Firms would lobby for provisions, but voters and non-governmental organizations
would have the chance to weigh in on those provisions. Treaty-shopping makes the
international treaty bargaining process — long held by many as the primary form
of interstate efforts toward cooperation — somewhat obviated. If firms are able to
bypass the process through which states agree to reciprocal treatment of investment,
this lessens the value of international bargaining and leaves states vulnerable.
Dispute-settlement provisions are usually intended to be leveling features of the
international system, giving all parties in the international system equal voice in
the arbitration process. Prior to the introduction of ISDS provisions, it was only the
powerful states who could protect their firms’ investments abroad, by intervening
either at the diplomatic level, or even militarily. In the absence of a unified regime
on investment protection, the uncertainty created by jurisdictional overlap leave
the system open to abuse by firms from powerful countries. This is an example of
the asymmetric power relations that the new interdependence theory would predict.
This chapter has drawn from two phenomena that effect emerging markets
around the world. The first is the rule overlap between BITs and PTAs in terms of
substantive issue areas (shared investment chapters, overlapping rules of origin, etc.).
The second is overlapping jurisdictions created by multiple international tribu-
nals, including those found in BITs and PTAs, as well as regional agreements and
international tribunals. These empirical realities have created the ability for firms
to treaty shop among tribunals that may not span their original jurisdictions,
incorporating abroad to take advantage of differing dispute-settlement provisions.
Although this does not guarantee an outcome in favor of the firm, it does create
further opportunities for litigation, which can be costly and time-consuming for
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282 J. Gray
states. This reality might benefit powerful firms more than less powerful ones in
terms of the overall settlement.
Thus, for the BRICS countries, the theoretical and empirical phenomenon of
treaty shopping creates a mixed bag in terms of outcomes. These countries have been
on both the receiving end and the “shopping” end of treaty shopping. In terms of
legal consequences, tribunals seem appreciative of the phenomenon of incorporating
abroad, although wide variation persists in terms of whether they use the incorpora-
tion of a firm as grounds for dismissing a case. In terms of state power, countries
also retain the option to exit or to renegotiate treaties that contain ISDS provisions,
and many — such as Brazil and India — are choosing to do so.
This ability of firms — both within and outside the BRICS countries — to jump
jurisdictions as a way of taking advantage of international tribunals has implications
both for IR theory and for public policy. On the theoretical front, this phenomenon
cuts against the prominent theories of international integration, which put the state
as primary in international cooperation and conflict. Under this view, MNCs are
limited to lobbying their home country for treaty provisions that are favorable to
them. However, the globalized nature of productions allows firms to sidestep the
bargaining process in their country of origin. Thus, it is not only large and powerful
firms that can take advantage of treaty shopping, as theories of power politics might
predict. Rather, a firm needs only to have access to the global economy to avail
themselves of treaty shopping. This can potentially put developing countries as well
as the BRICS in a position of power in the global treaty network.
On the policy front, the ability of non-state actors to supersede the interstate
negotiation process might raise concerns about the consequences of globalization.
If firms have the ability to act through jurisdictions to which they are not primarily
accountable, this undercuts the role of the state — and the channels through which
voters have to express their preferences on matters that concern them. As many
debate ISDS provisions in current international economic agreements, and as gov-
ernments such as Brazil and India threaten to pull out of agreements that contain
such provisions, the fact that firms can dodge the interstate negotiating process
might be cause for concern among those who raise questions about the democratic
accountability of such agreements.
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PART IV
Climate Negotiations and Energy
Governance
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CHAPTER 12
BRICS in the International

Climate Negotiations
Axel Michaelowa and Katharina Michaelowa
Department of Political Science, University of Zurich,

Switzerland
Introduction
This chapter examines the role that the BRICS, i.e. Brazil, Russia, India, China, and
South Africa, have played in the international climate negotiations. These negotia-
tions have been undertaken continuously since the late 1980s, with the following
key milestones: The United Nations Framework Convention on Climate Change
(UNFCCC) being agreed in 1992, the Kyoto Protocol to the UNFCCC negotiated
in 1997, which covered the period 2008−2012, and finally, the Paris Agreement
for the period after 2020, agreed in 2015. Due to a traumatic negotiation failure in
Copenhagen 2009, the regime has shifted from a “top-down” structure with cen-
tralized rules and mitigation commitments exemplified by the Kyoto Protocol to a
“bottom-up” approach embodied in the Paris Agreement. Here, all countries define
their mitigation “contribution” and report about their implementation progress
according to rules defined on the international level.
In international climate negotiations, countries have traditionally formed groups
who try to push joint negotiation positions. Initially, there was just one major divide,
namely, between countries listed in Annex I of the UNFCCC (“industrialized
countries” or “Annex I countries”) and those not listed (“developing countries” or
Non-Annex I countries’). Over time, more specific negotiation groups have been
289
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290 A. Michaelowa & K. Michaelowa
Late 1990s
(a)
Mid-2010s
(b)
Figure 1: Negotiation groups in the early and the current phase of international climate
negotiations.
Note: Groups are overlapping due to multiple membership.
formed, the landscape has become more fragmented, and groups on specific issues,
such as forest protection, have emerged (see Figure 1). These negotiation groups are
not linked to the emissions growth of countries — there is no group of countries
with high emissions growth, nor one of those with low emissions growth.
All five BRICS countries are often thought of as emerging powers, i.e. countries
that have become powerful, individually or as a group, and thereby challenge the
established power structure within international regimes or regime complexes.
Statements of BRICS foreign ministers regularly mention the need to address
the c limate change problem (Brütsch and Papa, 2013: 322; Ruppel and Ruppel-
Schlichting, 2013: 562−563), but BRICS countries do not negotiate jointly within
the UNFCCC (Gladun and Ahsan, 2016: 40; Davenport, 2012: 38). Even at the most
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BRICS in the International Climate Negotiations 291
basic level of differentiation, Russia is part of Annex I while the other BRICS are
not. Given this situation, how relevant are the BRICS, individually and as a group, in
the context of the international climate negotiations, over time and especially in the
most recent period after the Paris Agreement in 2015? Does it make sense to look at
them as a group at all? Can these countries all be considered as emerging powers in
this context, and if so, in which way do they challenge any established international
players? At the same time, how stable has their own position become by now, and
what are the main challenges they face themselves? In the following, these questions
will be discussed with a specific focus on relevant dynamics over time.
Emerging Powers within the UNFCCC: BRICS,

BASIC or just China?
When comparing different fields of international policy making and/or different
regime complexes, it becomes obvious that the BRICS do not always assume
relevance in the same way. In some areas, e.g. development aid, the truly emerging
donor at any relevant scale, effectively challenging the established donor community,
is China (see Chapter 7). In other fields, such as energy security, and security policy
more broadly, Russia seems to play a predominant role (see Chapters 2 and 13).
Within BRICS, Brazil and South Africa seem to have been chosen as representatives
of the Latin American and African continent, while not necessarily playing in the
same economic and political league as China, India, and Russia (see Ruppel and
Ruppel-Schlichting, 2013: 558−559 for a discussion on why South Africa was invited
into the BRICS). With regard to our field of interest, Davenport (2012: 38) clearly
states that they have never formed a homogeneous group:
The BRICs have certainly never acted as a concerted force in international climate
change negotiations; instead, their behaviour reveals marked and intriguing dif-
ferences between four countries [sic] with a broadly similar status in the global
economy.1
This view is echoed by Brütsch and Papa (2013: 319) and Leal and Nabuco
(2016: 6). In yet other areas such as science (Finardi and Buratti, 2016), all five coun-
tries collaborate, which gave rise to the joint group term “BRICS” in the first place.
In the climate negotiations, the term “BRICS” has never been used.
1
Note that Davenport counts only four countries because South Africa was included only
in 2011 into the BRICS. Even though it joined the group in December 2010, South Africa’s
BRICS membership was formally confirmed only at the third BRICS Summit in April 2011.
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The Emergence of BASIC
In 2009, just before the major Conference of the Parties (COP) 15 in Copenhagen,
the four countries Brazil, China, India, and South Africa formed a negotiation group
known as “BASIC”. The initial push came from China and India in October 2009,
with the alliance formally unveiled in November 2009, one week before the start of
the Copenhagen negotiations (Qi, 2011: 307).2 This group dominated the negotia-
tions and the “Copenhagen Accord” was the result of a deal between the US and
BASIC, while the previously leading EU was sidelined. Since then BASIC countries
have met at a ministerial level every quarter, and also engaged domestic researchers
in joint analyses of key problems of international climate policy (see e.g. BASIC
experts, 2011).
This provides us with a first idea about who the emerging powers may be in
the context of this policy field, and that Russia may have a somewhat less relevant
position here.
Russia: The Outlier Within BRICS
Russia was always member of a different negotiation group than the BASIC countries,
and had markedly different interests, especially in the context of the Copenhagen
conference (see Brütsch and Papa, 2013: 321, Leal and Nabuco, 2016: 7). Here, Russia
promulgated a “Climate Doctrine” that stressed the benefits of climate change for the
country (Gladun and Ahsan, 2016: 28). Russia essentially wants to avoid any nega-
tive effects of international climate policy on its fossil fuel export revenues, and has
always resisted ambitious emission targets. Ever since the Kyoto Protocol it has tried
to generate revenues from sale of surplus emission allowances, the so-called “hot
air”. At the Durban conference of 2011 Russia teamed up with Canada and Japan in
order to block the extension of the Kyoto Protocol beyond 2012 unless other major
economies, i.e. BASIC countries, accepted binding emission commitments (Brütsch
and Papa, 2013: 323). In Doha 2012, Russia almost scuppered the final plenary due to
its anger about the elimination of “hot air” from the second commitment period of
the Kyoto Protocol. Gladun and Ahsan (2016: 9) see Russia’s “distancing itself from
its partners” in the context of global climate change as a deficiency that weakens the
2
Qi (2011: 301−302) stresses the role of an EU funded project which brought together
researchers and stakeholders from the later BASIC members between 2005 and 2007, and
which did actually create the acronym “BASIC”. This project led to a “Sao Paulo Proposal”
that contained many elements of the 2015 Paris Agreement, notably voluntary contribu-
tions of developing countries and the 2°C target. However, it was still anchored in the Kyoto
Protocol architecture.
b3508_V2_Ch12.indd 292 11-02-2020 13:18:55

role of BRICS in global governance overall. It should also be stressed that Russia has
been seen as highly unpredictable player in the climate negotiations.
Assessing the Strength of BRICS Member Countries in the

UNFCCC Negotiations
We will examine the role of the different BRICS countries more systematically in
the following using two specific indicators of power within the UNFCCC. The first
relates to the countries’ contribution to global greenhouse gas emissions and their
development over time. In the specific context of the international climate negotia-
tions, this indicator is highly relevant for a country’s role in the negotiations because
any agreement that does not include a substantial share of world emissions will not
yield any substantial benefits in the future. As a consequence, the entry into force of all
major agreements in the context of the UNFCCC required a minimum share of world
emissions to be covered by member countries. For instance, the entry into force of the
Kyoto Protocol in 2005 depended on 55% of Annex I emissions (i.e. of all emissions
from countries that would have binding commitments under the Kyoto Protocol) to
be covered. Similarly, the entry into force of the Paris Agreement in 2016 required a
minimum of 55 countries jointly covering at least 55% of world emissions to ratify.
14000
12000
10000
8000
6000
4000
2000
0
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
Russia Brazil South Africa India China
Figure 2: Cumulative CO 2 emissions from fossil fuel use of BRICS countries 1971−2014
(million t).
Note: The share of Russia in total emissions of the Soviet Union in 1990 has been applied to the Soviet Union
emissions from 1971−1989 to extend the Russian data series.
Source: IEA (2016).
b3508_V2_Ch12.indd 293 11-02-2020 13:18:55

70
60
50
40
30
20
10
0
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
BASIC share BRICS share OECD share
Figure 3: The share of BASIC, BRICS and the OECD in global CO2 emissions (%).
In terms of overall emissions, China clearly stands out, with India becoming
relevant since the 2000s. Brazilian and South African emissions are dwarfed by those
of the other BRICS (see Figure 2). However, it should be noted that Brazilian emissions
from deforestation, which are not covered in the Figure,3 oscillated between 500 and
1500 million t CO2 annually, making the country a relevant emitter on the global scale.
Note that Russia significantly lost importance in relative terms: The country had
a much higher share in world emissions when the Kyoto Protocol was negotiated in
1997 than when the Paris Agreement was concluded in 2016. This is due to both the
rapidly increasing emissions of the other BRICS, notably of China, and the decline
of the Russian economy.
Figure 3 shows how the share of BASIC countries in global emissions has
more than quadrupled since 1970, while the share of the BRICs only doubled. This
discrepancy is again explained by the initially high, but subsequently declining
Russian emissions. By 2013, BASIC had overtaken the OECD in terms of overall
emissions.
The second indicator for relevance within the UNFCCC directly reflects the role
of the respective country or country group in the negotiations. These negotiations
take up at least four weeks every year, with two weeks used for the formal decision-
making by the Conference of the Parties (COP) and two weeks for the meeting of
the subsidiary bodies to the UNFCCC. Formal decision-making requires consensus.
Consensus however, has been interpreted differently over time. Opposition of one
3
Reliable long-term statistics on CO2 emissions from deforestation are unfortunately not
available.
b3508_V2_Ch12.indd 294 11-02-2020 13:18:56

or two smaller countries has repeatedly been overridden by the COP president, but
even Russia’s opposition in 2012 was not seen as lack of consensus by the Qatari COP
president. We use an indicator based on a count of statements commenting upon
the statements of other parties at these negotiation sessions, i.e. whether countries
support, agree with, oppose, or criticize other countries’ statements or positions. On
the one hand, this indicator shows the active participation of any given country, and
on the other hand, it shows how often the country’s interventions have been used as
a reference for others. This dataset is based on Castro’s (2017) hand-coding of sum-
maries of the international climate negotiations published in the Earth Negotiation
Bulletins (ENBs) between February 1995 (11th Session of the INC in New York)
and December 2013 (COP19 in Warsaw).4 The ENBs have been chosen as the data
source since they are seen as a detailed and objective source of information by many
negotiators and observers in the climate talks, and because there are no publicly
available official transcripts of the negotiations. Figure 4 uses these data to show
how often statements by individual BRICS countries as well as by BASIC as a whole
have been used as a reference by other parties in the negotiations, which we use as
a proxy for their relevance in the negotiations.
The graph shows that China has consistently been the BRICS country most
frequently referred to by other countries, followed by India. Brazil was seen as
important at some COPs, for example in the context of the “Brazilian Proposal”
400
Number of comments received by
350
Brazil
300
China
other parties
250
India
200 South Africa
150 BASIC
100 Russia
50
0
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
13
19
19
19
19
19
20
20
20
20
20
20
20
20
20
20
20
20
20
20
Figure 4: Comments received by other parties at UNFCCC COPs.

Note: The peaks in 1995, 2000, 2009 and 2012 are due to the increased significance of the COPs in these years and
the broad range of topics covered there.
Source: Castro (2017).
4
The original ENBs can be downloaded from http://www.iisd.ca/vol12/. For a detailed
description of the new dataset by Castro (2017), see Bagchi et al. (2017, Annex 1).
b3508_V2_Ch12.indd 295 11-02-2020 13:18:57

uring the late 1990s but not at others. Russia was seen as important in the beginning
d
of the period, but not at its end.
Castro’s (2017) data also allow us to classify the BRICS within all other p arties
and negotiation groups based on the above indicator. The resulting ranking shows
that in 2013, the last year of the coding period, China was the country most
frequently referred to among all parties (ahead of the EU), and both India and
Brazil also ranked among the top 10 countries, on ranks four and ten respectively.
In contrast, Russia and South Africa only reached ranks 28 and 39.
India: Principled Approach to UNFCCC Negotiations
In terms of active participation in the negotiations, India stands out. It has been
renowned for a highly principled stance on the principle of equity, and on the inter-
pretation of “common but differentiated responsibilities”, but at times, it has also been
successful in brokering consensus. Already in Berlin 1995, India built a key bridge
between industrialized and developing countries through formation of a “Green
Group” within the G77 (Happaerts, 2015: 249). In Kyoto 1997, it opposed emissions
trading unless initial allocation of emissions budgets was done equitably (Davenport,
2012: 43). India was crucial in brokering agreement on “Nationally Appropriate
Mitigation Actions” at the Bali conference in 2007 (Qi, 2011: 303). India played a
key role in the endgame in Copenhagen as well as in Cancun 2010, especially due
to its environment minister Jairam Ramesh taking relatively progressive positions
with regard to mitigation commitments that were subsequently criticized at home
(Michaelowa and Michaelowa, 2012: 578−579). While the Indian position hardened
again after Ramesh took over a different ministry within the Indian government,
India played a crucial role in the final plenaries between Durban 2011 and Warsaw
2013, where it was a relevant participant of “huddles” to resolve remaining conflicts.
In Cancún, India’s intervention allowed to overcome the stalemate between industri-
alized and developing countries with regard to external monitoring of mitigation in
the latter (Qi, 2011: 312−313). As compared to other BRICS except for South Africa,
India has the advantage of a well-trained elite fluent in English, which represents a
major advantage within the negotiations (Michaelowa and Michaelowa, 2012: 586).
China — Rising Negotiation Star
China engaged strongly in the UNFCCC negotiations in the latter half of the 2000s,
sending huge delegations, and since Copenhagen the country has always played a
critical role in the final outcome of the COPs. While pushing strongly for energy
efficiency policies on the domestic level for many years (see e.g. Leal-Arcas, 2013:
b3508_V2_Ch12.indd 296 11-02-2020 13:18:57

25), until 2014, China unambiguously argued against any kind of obligations at the
international level, which was a crucial determinant of the “bottom up” nature of
the Copenhagen Accord (Michaelowa and Michaelowa, 2015: 509). The standoff
between Annex I countries and China at the Copenhagen conference in 2009 on
this issue became legendary. Representatives of the former had proposed a global
emission reduction target of 50% between 1990 and 2050 in order to reach the 2°C
target, while industrialized countries would reduce their emissions by 80% during
that period. China opposed this proposal which led to the exasperation of German
Chancellor Merkel who asked “why are we not allowed to set targets for ourselves?”
However, as the Chinese correctly recognized, the joint definition of the overall
target and the part taken over by commitment of Annex I countries would have
led to implicit emission reduction requirements for Non-Annex I countries that
would have been even more stringent than those for Annex I countries. This is due
to the fact that if one sets a global emissions target and a target for industrialized
countries, this automatically defines an emission target for developing countries.
Figure 5 shows how the target for developing countries would have looked like. It
depicts business as usual emissions growth for Annex I and Non-Annex I countries
until 2020, and the necessary emission reductions from 2020 onwards to reach the
2050 target.
The Chinese role after Copenhagen was further strengthened by the intense
diplomatic outreach of the Obama Administration to the Chinese government,
which led to a “tandem” role of these two countries both in the run-up to the Paris
COP and its aftermath. A special US−China deal in November 2014 on long term
Figure 5: Emissions development for Annex I and Non-Annex I countries under business-as-
usual, and the proposed Copenhagen global emission target for the year 2050.
Data Sources: Global level and industrialized countries 2020: UNEP (2012, Appendix 1: 7), Industrialized
countries (Annex I) 1990 and 2010: UNFCCC inventories, Developing countries (Non-Annex I):
calculatory difference.
b3508_V2_Ch12.indd 297 11-02-2020 13:18:58

mitigation by both countries indicated China’s readiness to take up an international

commitment, and paved the way for the Paris Agreement.
Brazil and South Africa — Playing Bridging Roles
Brazil and South Africa were less visible than India and China, but in contrast
to the latter, both countries have indicated an openness to take up mitigation
commitments since the late 2000s. Happaerts (2015: 248) stresses that Brazil had “the
most a mbitious climate policies, arguably even among all non-Annex I c ountries”
and thus found itself at odds with China’s and India’s positions. Since 2007, South
Africa developed detailed scenarios for long-term mitigation, determined in
terms of absolute emissions and including the idea of a peak year (Michaelowa
and Michaelowa, 2015: 507). Qi (2011: 309) underlines that South Africa faced
criticism by other African countries about its alignment with China and India at
the Copenhagen conference. In Durban 2011, South Africa pushed for emissions
mitigation by developing countries.
Russia was a key player at the Kyoto conference in 1997, refusing to take
up an emission reduction target, and called the “greatest winner” by Davenport
(2012: 42). In contrast, Gladun and Ahsan (2016: 21) state that Russia “remained
largely irrelevant in international negotiations on climate change”. This shift from
key player to outsider can be linked to the changed political context due to different
US Administrations. When it became clear in 2000 that the United States would not
ratify the Kyoto Protocol, Russia’s ratification became crucial for the Protocol’s entry
into force. This allowed the country to play an important role for a while and to push
through a number of special clauses to its own advantage, notably the possibility
to receive credits for carbon sequestration of forests which would happen anyway
(Davenport, 2012: 45). Only when the EU stated clearly that it would block Russia’s
accession to the WTO if Russia did not ratify the Protocol, the Russian government
did so in 2004 (Makarov, 2016).
In contrast to the situation under the Kyoto Protocol, the Obama Administration
ratified the Paris Agreement without delay, and once the world’s two largest emitters
China and the United States had ratified in September 2016, there was no more risk
that the emissions threshold for the entry into force of the agreement might not
be met. As a consequence, Russia did not have special bargaining power anymore.
Overall, clearly the relevant emerging powers in the international climate
negotiations are China with its now extremely high share of world emissions, but
also India, Brazil, and South Africa due to their strong emissions growth. This is
also evidenced by the countries’ active role in the negotiations, especially by India,
but also by BASIC as a group. BASIC took up the position that industrialized
b3508_V2_Ch12.indd 298 11-02-2020 13:18:58

countries should continue to carry the main burden of climate change mitigation
as long as per capita emissions of emerging economies remained significantly
below those of industrialized countries. Over the years and following the initial
surprise regarding BASIC’s negotiation power at Copenhagen, other parties
started developing expectations for BASIC and its individual members to actually
take over leadership roles for the whole UNFCCC process. At the Paris confer-
ence, BASIC countries worked carefully towards an agreement, bolstered by the
strong diplomatic interaction between the US and the BASIC countries prior to
the conference. At the start of the Trump Administration, which renounced any
leadership from the side of the United States on climate change, Chinese Prime
Minister Xi Jinping expressed willingness to take over a leadership role (World
Economic Forum, 2017).
In contrast, Russia cannot be counted into the group of emerging powers here.
Rather than as “emerging”, it appears to be a declining power (see also Hou, 2014:
27): While being part of Annex I, i.e. a country that should have committed to
active emission reduction policies, such policies were never actually introduced in
the country, given the continued replacement of outdated socialist heavy industry
technology by more modern equipment, which led to co-benefits in terms of a
lower emissions intensity. Given the country’s long-term blocking attitude as well
as unpredictability (Andonova and Alexieva, 2012: 614), it is not confronted with
any international expectations. While Russia was important for the ratification of
the Kyoto Protocol due to its high share of world emissions, it has become a more
or less irrelevant player now, whose only interest is widely perceived as protecting
its economic growth and selling “hot air”.
Where BASIC Is Challenging the Established Players

As described above, especially during the Copenhagen negotiations, BASIC managed
to reach a key position within the negotiations. The countries’ strategy was successful,
not only with respect to international recognition as major players (both for BASIC
as a whole, and individually for China and India), but also with respect to the solu-
tion adopted in the Paris Agreement, namely, with no top-down obligations, but a
pure bottom-up system. In addition, following the Chinese criticism at Copenhagen,
the Paris Agreement does not link the individual countries’ “nationally determined
contributions” to the overall goal to avoid global warming beyond 1.5−2°C. This
yields a large emissions gap between the global target and national pledges — a
problem that was discarded in Paris in the hopes to achieve a strong ratcheting-up
process. In contrast, the EU did not find sufficient support for its positions, and
generally seems to be losing more and more of its leadership role.
b3508_V2_Ch12.indd 299 11-02-2020 13:18:58

As opposed to other areas, where the large emerging economies have tried to
challenge industrialized countries outside established fora, notably by building
new and competing institutions, BASIC has always referred to the UNFCCC as the
key ground for climate change negotiations. Arguably, this is due to the consensus
principle — even in its somewhat hollowed-out form that has developed in the
UNFCCC context — and the absence of weighted voting rights in contrast to the
decision-making rules in other international organizations, such as the World Bank
and the IMF.
It is not yet clear to what extent the greater power of BASIC members, notably of
China and India, will be a challenge or rather an advantage for the future dynamics of
the climate negotiations. With increasing power, they appear to also (slowly) adjust
their positions to take up greater responsibilities. Given their growing importance
they also face increasing demands to contribute to the solution of the problem of
global warming. BASIC members “have been pushed by mounting international
pressure to play a greater role in international affairs in line with their growing
global impacts” (Hallding et al., 2013: 620). This pressure increasingly came from
developing countries, too (e.g. Michaelowa and Michaelowa, 2012: 578).
Initially, BASIC countries insisted that their status as developing countries meant
that they were not obligated to take up emissions reductions commitments. When
pressured to do so in Copenhagen, they simply referred to the principle of “common,
but differentiated responsibilities” and did not accept any differentiation within the
group of developing countries for that purpose. Accordingly, Tabau and Lemoine
(2012: 197) see BASIC countries as wanting more power but fearing responsibilities.
2 years later Hochstetler and Milkoreit (2014: 224) stressed that BASIC is destabiliz-
ing the climate negotiations by introducing a third category beyond Annex I and
Non-Annex I. Finally, del Pilar Bueno and Pascual (2016: 127) see BASIC as a key
reason for the success of the Paris conference. They argue that Paris negotiations
were based on an agreement between the US, BASIC and the EU. This increasing
willingness to take up responsibility was already predicted by Michaelowa and
Michaelowa (2015).
Own Challenges and Inconsistencies Within the

BASIC Group
Some of the changes within BASIC may be related to challenges that have emerged
within the BASIC group soon after its creation. In particular, there has been a
somewhat contradictory self-representation strategy of BASIC and its individual
members: On the one hand, they state that they are poor developing countries that
b3508_V2_Ch12.indd 300 11-02-2020 13:18:58

cannot be burdened with significant mitigation contributions. On the other hand,

they argue that they are strong economic and political powers able to play a key
role in defining the climate policy architecture of the future. This is particularly
visible in the case of India. At the UNFCCC COPs in 2015 to 2017, India presented
itself as a high-tech nation with a flashy pavilion that would have raised attention at
a World Exposition. At the same time, it was arguing for “climate justice” (implying
that one should not point at poor countries like India to engage in potentially
growth-impeding climate change mitigation solutions) and stated how age-old
traditions contribute to low-emission lifestyles. For BASIC as a whole, the same
dilemma was obvious: On the one hand, its main objective initially was to clarify
that its members firmly belonged to non-Annex I (and should thus remain without
any binding commitments). On the other hand, as rightly stated by Hochstetler and
Milkoreit (2014: 224) the creation of BASIC itself signaled the existence of a new
set of emerging powers, and hence a third category of countries between Annex I
and Non-Annex I.
An additional challenge is that BASIC members are less homogeneous as it
may appear at first glance. As shown in Table 1, they strongly differ with respect to
their income status, with India having a GNI per capita of less than half of any of
the other BASIC countries and emissions that are much smaller than those of the
Table 1: Key characteristics of BASIC member states.

GNI pc 2015 t CO2 Economy and Climate
Country USD (PPP) pc 2014 Change Climate Policy Preferences
Brazil 15,020 2.3 Deforestation based. Large Pro REDD+ and CDM
biofuel production sector.
China 14,160 6.6 Large coal producer, but Energy efficiency (gave up
strongly upcoming on on CDM)
renewables, huge energy
needs.
India 6,020 1.5 High vulnerability to climate Moral claims, pro CDM and
change, rural energy climate finance (≠ aid)
poverty (traditional
biomass).
South Africa 12,830 7.9 Large coal producer, mining. Most accommodating —
accepted absolute targets,
COP17 in Durban 2011
Notes: Per capita emissions refer to fossil fuel combustion (IEA, 2016). GNI per capita in many Eastern European
countries is comparable to BASIC members, e.g. $16,000 in Bulgaria and $7,800 in Ukraine.
b3508_V2_Ch12.indd 301 11-02-2020 13:18:58

other countries in per capita terms. Despite its recent growth spur, it hence largely
remains a developing country for the moment.
The relevant economic sectors and hence both vulnerability to climate change
and the cost or benefits arising from mitigation policies also differ significantly
across the four countries. This in turn generates different priorities in the context of
international climate policy. Brazil, for instance, has a strong interest in obtaining
finance for the protection of its remaining rainforest, i.e. policies negotiated under
the label REDD+ (Reducing emissions from deforestation and forest degradation),
and funding for emission reductions in the framework of market mechanisms such
as the Clean Development Mechanism (CDM) introduced in the framework of
the Kyoto Protocol. China and India have also greatly benefitted from the CDM
in the past, developing thousands of projects and receiving billions in revenues
of sales of emissions credits to industrialized countries. Given its own financial
capabilities, China seems to have given up the hope that other countries would
thereby fund its mitigation projects in the future. In contrast, India still expects
external funding — not just through the CDM, but also through other support
for its mitigation activities (climate finance) — but tries to ensure that this fund-
ing should be distinct from development aid in order to obtain full freedom over
the use of funds and — presumably — to avoid the stigma of an aid recipient that
does not fit well with the economically and politically powerful image the country
otherwise wishes to project. South Africa, finally, takes up a rather open and more
accommodating position in the negotiations, which is quite surprising given that
its economy is widely based on coal and mining with less opportunities to explore
in the renewables sector than in the other BASIC countries.
Hence within BASIC, preferences and policy priorities are clearly diverging. Ever
since the success in Copenhagen, it has become difficult to keep the unity among
BASIC members given these significant differences. South Africa for instance, chose
the role of a “bridge builder” between North and South when it hosted the Durban
Conference in 2011. In this context, it published a national emissions limitation
strategy at a time when the other BASIC members were adamantly refusing defining
national emission commitments (Michaelowa and Michaelowa, 2015). Hochstetler
and Milkoreit (2014: 230) stress that BASIC was in disarray during the Durban
conference, even denying that it was a real negotiation group. South Africa as host
country pressed for concessions of Non-Annex I to Annex I countries. Similarly,
Brazil was relatively open to national mitigation action as its deforestation emissions
were coming down steeply in the late 2000s (Hochstetler, 2012). China tried to keep
the original Copenhagen position and — finding BASIC too soft — was instrumental
in the creation of a new negotiation group. This “Like-minded developing country
group” (LMDC) set up in 2012 became the hardline voice of those countries that
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did not want to engage in any significant mitigation, unless receiving substantial
financial and technical assistance (Blaxekjaer and Nielsen, 2015: 759). China so
could use either BASIC or the LMDC to spread different messages depending on its
negotiation strategy. India has followed China in this use of two negotiation groups
depending on the degree of stringency of its position.
Whither BRICS in the International Climate Negotiations?

Convergence, Divergence, and Research Frontiers
Can BRICS countries play a positive role in international climate policy by brokering
“upward compromises” (Davenport, 2012: 52) or do they lead to further fragmen-
tation of the international climate policy regime? Will they be able to go beyond
“taking up actions only in areas in which their economic trajectories would not
be hampered” (Leal and Nabuco, 2016: 7)? Prior to the Paris Agreement, BRICS
could not act as one group in the UN due to the Annex I-Non-Annex I divide
that separated Russia from the rest of the group. After the Paris Agreement, which
formally did away with the divide, BRICS countries theoretically would have
the chance to form a strong negotiation bloc. The BRICS environment ministers
established a working group on the environment in 2015 which could, in principle,
fulfil a coordination role for climate negotiation positions (Gladun and Ahsan,
2016: 40−41). Principally, BRICS could become a powerful negotiation group. But
this has never happened. Instead, parts of BRICS with converging interests were
able to form a negotiation group, BASIC, which played a critical role in redefining
the international climate policy regime between the Copenhagen Conference and
the Paris Agreement. But once its aim of preventing legally binding commitments
for emerging economies was reached, BASIC lost relevance in the negotiations, as
differences in interest became visible.
The substantial divergence of interests among BRICS members due to different
economic structures, levels of income and emissions intensities has led to different
positions in the UNFCCC negotiations, especially in the last years. These significant
differences in interest make it very unlikely that BRICS will speak with one voice,
unless the countries converge with respect to their economic performance and emis-
sions intensity. Russia does not make any efforts to wean itself off fossil fuel export
revenues, and thus will not support any significant mitigation targets. China is now
increasingly seeing itself as world leader in climate policy, especially after the US
can no longer fulfil this role under President Trump. In this role, it does not want
to be bound by specific negotiation group interests, but remain flexible as shown by
its use of various negotiation groups in the past. India with its still low, but rapidly
b3508_V2_Ch12.indd 303 11-02-2020 13:18:58

rising per capita emissions and high poverty-related challenges will continue to
argue for significant headroom to grow its emissions, and equity-based approaches
to mitigation. Brazil’s domestic political and economic woes will relegate climate
policy issues to lower political relevance than in the past decade. The same is likely
in South Africa, which, in 2017, again deferred the introduction of a carbon tax.
Future research may try to assess what conditions could lead to a closer collaboration
of BRICS, and what conditions would further a continued increase of divergence.
In hindsight, the huge success of BASIC in Copenhagen (see the detailed
description of BASIC’s activities there by Nhamo (2010: 365−366)) may be seen as
a historical “lucky punch” instead of the start of a negotiation alliance successful in
the long run. Therefore, climate leadership is unlikely to emanate from the BASIC
or BRICS as a group.
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responsibilities for climate change mitigation?”, Climatic Change, 133(3): 499–510.
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climate negotiations”, Climate Policy, 12(5): 575–590.
Nhamo, G. (2010). “Dawn of a new climate order: Analysis of USA + BASIC collaborative
frameworks”, Politikon, 37: 353–376.
Del Pilar Bueno, M. and G. Pascual (2016). “International climate framework in the making:
The role of the BASIC countries in the negotiations towards the Paris Agreement”,
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Qi, X. (2011). “The rise of BASIC in UN climate change negotiations”, South African Journal
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climate change policy from an African Perspective”, in O. Ruppel, C. Roschmann and
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CHAPTER 13
The BRICS, Energy Security, and Global

Energy Governance
Matteo Fumagalli
School of International Relations, University of St Andrews, UK
Introduction
On 1 June 2017, US President Donald J. Trump announced that the United States
would withdraw from the Paris Agreement on Climate Change (hereafter, PACC),
which the United States had previously signed in April 2016 (Rucker and Johnson,
2017). Although the earliest this can formally happen is 2020, the announcement
nonetheless deals a significant blow to global energy governance due to the defection
of one of the world’s largest emitters of greenhouse gases. With even Syria signing
the PACC in November 2017, that left the US as the only country that will not be
part of the agreement. Whether this will in the end be tantamount to a “gift” to
China’s president in the form of an opportunity for global leadership, as the New
York Times wrote at the time (Sanger and Perlez, 2017; Urpelainen, 2017), remains to
be seen. Regardless of that, the US’s withdrawal raises questions about the future of
the Western-led international order and global governance arrangements (Bomberg,
2017).
Recent developments and shifts in global energy markets have brought adjust-
ments to how consuming countries pursue energy security, here understood in
terms of the accessibility, affordability, efficiency, and environmental sustainability
of energy (Sovacool, 2010a). Changes to domestic energy strategies and international
energy diplomacy are having implications for global energy governance (here
307
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308 M. Fumagalli
defined as “international collaborative efforts undertaken to manage and distribute

energy resources and provide energy services”) (Florini and Sovacool, 2009: 5239).
Thus, developments in the field of energy offer a useful vantage point to reflect
on developments in global governance arrangements and the emergence of a new
post-Western architecture, and the role of rising powers in bringing that into reality.
Energy security is one of the greatest challenges of the 21st century (Dannreuther,
2017; Goldthau and Sitter, 2015). The global economy is changing rapidly, with
population and economic growth shifting towards emerging markets. Nowhere
is this more evident than in the case of the BRICS countries (Brazil, Russia, India,
China, and South Africa). Virtually all the growth in world energy demand comes
from these fast-growing emerging economies, especially China and India. These
five countries alone will make up over 50% in world energy demand by 2035 (BP,
2017a). China is expected to be the largest growth market for energy for most of the
next two decades, but it is expected to be overtaken by India by 2035 (BP, 2017a). By
contrast, energy demands among OECD economies is forecast to barely increase.
This chapter focuses on how the BRICS are responding to the intertwined politics
of energy and climate change, domestically and internationally. The origins of the
BRICS acronym date back to 2001, when “Jim O’Neill, then head of global economic
research at Goldman Sachs, predicted the rise in economic power of Brazil, Russia,
India, and China (then only BRIC, as South Africa joined in December 2010) in the
following decade” (D’Ambrogio, 2014: 1).1 The five countries surely can be regarded
as “heavyweights” in terms of size, demography and economy (D’Ambrogio, 2014:
1). “Taken together they encompass 26% of the world’s land and 42% of the world’s
population” (D’Ambrogio 2014: 1). In 2015 their GDP reached $33.1 trillion, and their
per capita GDP was $10,709 (BRICS Energy Indicators, 2015: 1). In the energy sector,
the BRICS accounted for 37% of the world’s energy demand (up from 30% in 2008)
and for 41.4% of CO2 emissions due to energy usage (up from 33% in 2008), in large
part owing to the significant presence of coal in their energy mix (MME, 2015: 1;
MME, 2008: 1). They represent 20% of world trade. These are impressive figures.
Yet, “the BRICS remain a heterogeneous group of countries. They do not share
a geographical context, they are not a trading bloc, nor are they united by cultural
affinities or historical ties” (D’Ambrogio, 2014: 1−2). In fact, they do not have many
ties apart from the fact that they are rising economic powers, or that they are perceived
to be.2 The asymmetry between the various BRICS countries is also evident: China’s
economy is larger than those of the other four combined. Beijing’s GDP represents
1
South Africa’s BRICS membership was formally confirmed only at the third BRICS Summit
in April 2011.
2
Russia went through severe economic slumps first during the 2008−2009 global finan-
cial crisis (GFC) and later as a result of the Western sanctions imposed after Moscow’s
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The BRICS, Energy Security, and Global Energy Governance 309
58% of the group’s GDP. “Two thirds of BRICS’ trade is generated by China, placing
it in a dominant position” (D’Ambrogio, 2014: 1). China ranks among the top three
destinations for the exports of the other members of the BRICS group; furthermore,
85% of intra-BRICS trade involves China (D’Ambrogio, 2014: 1). The two countries’
economies differ starkly from one another: China and India are pursuing industrial
development. Brazil and Russia tend to rely more extensively on the gains of com-
modities exports (D’Ambrogio, 2014: 2). The group includes “three multi-ethnic and
multi-cultural democracies (Brazil, India, and South Africa) and two authoritarian
states (Russia and China)” (D’Ambrogio, 2014: 2). All this taken together raises
considerable questions about the cohesiveness and coherence of the group. At the
same time, the group has gone a long way in institutionalizing; regular summits,
an expanding agenda, a BRICS bank. While the role of BRICS in global economic
governance has been subject to some degree of scrutiny (Hopewell, 2017 on trade;
Huotari and Hanemann, 2014, Slaughter, 2017, Cooper, 2017 and Schollman, 2014
on finance; Nicolas, 2016 on economic governance), less has been said about their
role in energy and environmental governance. When it has, this has typically come
in the form of country case studies3, with few limited BRICS-wide exceptions4. The
subject has also been neglected in earlier reviews of the field such as the Routledge
Handbook of Energy Security (Sovacool, 2010b), the Routledge Handbook of Global
Environmental Politics (Harris, 2016), and the relevant entries of International Studies
Association (ISA)’s Compendium (Ozdamar, 2017; Duffield, 2010), Global Energy
(Ekins et al., 2015), the Handbook of Global Environmental Politics (Dauvergne,
2012), or Bernauer (2013) and Hughes and Lipscy (2013)’s reviews of the field.
The 2012 study by the Norwegian Institute of International Affairs (NUPI) (Eriksen
et al., 2012) and Anceschi and Symons (2012) are rare exceptions, but are in need of
updating.
Thus, this chapter contributes to the field by taking stock of recent trends in the
form of shifts in the energy markets and the way they have affected and in turn been
reshaped by the BRICS and also, theoretically, by reviewing the terms of the scholarly
debate and conversations on the relationship between the BRICS and energy security.
Scholarship on energy and energy governance has grown tremendously in recent
annexation of Crimea in 2014. South Africa and Brazil experienced recessions in recent
years, too, and China went through a slowdown in 2014−2015.
3
On Russia see Shadrina and Bradshaw (2013), Henderson and Mitrova (2015), Heinrich
(2003); on China (Kong, 2011; Christoffersen, 2016; Wu and Nakano, 2016; Wang, 2014),
on India see Bisht (2012), and Bajpai et al. (2015), and on Brazil see Setzer (2014).
4
Eriksen et al. (2012), Dubash and Florini (2011), Downie (2015), Van de Graaf and Colgan
(2016), Camilleri (2012), Sun (2014), Van de Graaf and Westphal (2011), Van De Graaf and
Colgan (2016), Underal (2017), Martin-Moreno (2014), Symons (2012), and Falkner (2014).
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310 M. Fumagalli
years and has produced valuable insights on issues of definitions and measurement
(Sovacool, 2010a; Cherp et al., 2011; Cherp and Jewell, 2014; Spreng, 2014; Stirling,
2013; Falkner, 2014), as well as discussion of the promise and limits of emerging
governance arrangements (Bernauer, 2013; Florini, 2011; Escribano, 2015; Dubash
and Florini, 2011; Florini, 2012; Florini and Dubash, 2011; Harris, 2010; Ladislaw,
2011; Krickvic, 2015; Downie, 2015; Hochstetler and Milkoreit, 2015).
By so doing, the chapter seeks to engage the following questions: how do
changes in the global economy and energy markets affect the BRICS and how are
they responding to them? What role do they play in global energy governance
arrangements? Are the BRICS revisionist or supporters of the institutional status
quo? When and why does competition prevail over cooperation, and competition
with whom, exactly? How do the BRICS relate to advanced industrialized countries
and countries in the Global South, or with each other, for that matter?
The main story this contribution tells is that of a rather heterogeneous group
which struggles to position itself as a coherent entity, as far as energy security and
governance are concerned. This is not to say that no progress has been made (the
2016 New Delhi Summit forcefully added energy as a new area in which coopera-
tion should be pursued by the members of the group, a point later restated in the
2017 Xiamen summit5), but the diversity in economic structures and resource
endowments of the BRICS leads to them pursuing different agendas and priorities.
The BRICS are responding differently to the challenge of climate change and are
responding differently and unevenly to energy transitions, although here the outlier
is clearly Russia, whereas the other four seem to be eager to play an active role in
nascent global energy governance arrangements. Overall, although the BRICS seek
greater representation and voice in the current institutions, they do not share a vision
of what a new post-Western order will look like.
The chapter is structured as follows. The second section provides a short over-
view of the key shifts in the global energy markets, paying attention to changes in the
patterns of both supply and demand. Third section discusses the BRICS’ contribution
to global governance by reviewing areas of agreement and contention among the five
countries and vis-à-vis countries in the global South and advanced industrialized
countries. And the fourth section turns to the international political economy of
energy and identifies key debates in this exciting and expanding inter-disciplinary
scholarly field. It highlights the main research frontiers and also identifies some of
the most promising questions raised by recent developments, before concluding.
5
Ministry of External Affairs. Government of India (2016), Ministry of Foreign Affairs of
the People’s Republic of China (2017).
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Trends and Shifts in Energy Markets: Supply, Demand

and Energy Transitions
The center of gravity of the global economy has shifted towards non-OECD markets
and players. The world economy is expected to double over the next 20 years (BP
2017a), with growth averaging 3−4% per year (BP, 2017a). China and India will
account for half of the increase in the growth of the global economy. The BRICS
“club” includes energy importing (China, India, South Africa) as well as energy
producing (Russia, Brazil) countries.
With the world’s eighth largest oil reserves and the largest natural gas reserves
(17% and 26% respectively (Henderson and Mitrova, 2015; Russell, 2015)) Russia is a
producer of global importance, though much of its oil goes to domestic needs, unlike
Brazil, which produces mostly for export. Brazil’s off-shore discoveries have made
the country a relevant producer of hydrocarbons over the past decade, which it sells
primarily to China. The situation in India, China, and South Africa is remarkably
different. There economic development takes priority, and these countries are net
importers. China’s continued rise depends on continued reliable access to natural
resources. India and South Africa suffer from domestic constraints, poverty and insuf-
ficient economic development (Rich and Wilson Rowe, 2012: 6−8). In the pages below,
I examine each country in turn, paying attention both to the current situation in terms
of reserves, production and consumption, and trends over the 2006−2016 period.
While production of oil in Russia has increased tremendously over the past 10
years, production of natural gas has remained stagnant, primarily as a result of the lack
of investment and discoveries (Table 1). Consumption of coal has increased. As Russell
notes, “Russia’s energy mix is essentially made up of fossils fuels (90%) with some
nuclear power and, in light of the country’s energy strategies, this situation is unlikely
to change in the near future” (Russell, 2016: 1). Natural gas covers about 90% of Russia’s
domestic energy needs and the largest domestic source of energy (54% of consump-
tion), followed by oil (22%) and coal (12%) (Russell, 2016). Nuclear constitutes the larg-
est non-fossil source of energy and the country is largely self-sufficient in that regard,
as it is home to the world’s third largest uranium deposits and has highly developed
technology (Russell, 2016: 2). The hydro-electric sector is in dire need of investment;
Russia uses a mere 20% of hydroelectricity potential, and thus there is an enormous
scope for expansion. As for renewables Russia boasts massive potential which, however,
appears likely to remain untapped due to domestic political considerations. Renewables
account for a small share of the energy mix, less than 1% (Russell, 2016: 2).
After averaging 9.8% per year between 1978−2013, China’s real GDP growth
has slowed since 2014, with a target now set at 6.5% for 2016−2020 under the
g overnment’s 13th 5-year program. The Chinese economy has entered an era of low
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312 M. Fumagalli
Table 1: Energy reserves, production, and consumption in Russia

(1996−2016).
Share
1996 2006 2016 (2016, %)
Oil Reserves 113.6 104 109.5 26.6
Production 98.19 11,227 12.2
Consumption 2,762 3,203 3.3
Natural gas Reserves 30.9 31.2 32.3 17.3
Production 595.2 579.4 16.3
Consumption 415 390.9 11
Coal Consumption 141 192.8 5.3
Nuclear Consumption 97 97.3 2.3
Hydro-electric Consumption 39.6 42.2 4.6
Renewables Consumption 0.1 0.2 —
Electricity Consumption 992.1 1,087.1 4.4
Source: BP Statistical Review of World Energy (2017b). Oil is measured in million
tonnes, and all other sources of energy in MTE (million tonnes equivalent).
growth (since 2014). The structure of the Chinese economy is changing and energy
demand growth is likely to slow down as well. As China’s economy goes through
significant changes, so do its patterns of energy production and consumption.
Table 2 shows, reserves and production of oil and gas have increased in the
period between 1996 and 2016, although they have not been able to keep up with
the country’s demand for energy. Oil consumption has nearly doubled from 2006
(increasing to 12.8% in 2016), with natural gas consumption going through a
stunning four-fold increase over the same period, although in terms of its share of
global gas consumption it remains below 6%. Coal consumption remains at very
high levels (at over 21% of the world’s coal consumption), which inevitably has led
to high levels of global greenhouse gas emissions. The rise in China’s GHG emis-
sions in 2016 has pushed up global CO2 emissions after a 3-year lull. Consumption
of nuclear, hydro-electric, and electric energy has also grown tremendously over
the past decade, and so has renewable energy, particularly in the form of solar
and wind.
India’s economy has grown considerably in recent decades, although at a slower
pace than China’s. Its energy reserves are negligible and so is production, especially
insofar as hydrocarbons are concerned. India is, however, a key consumer of coal
(8.3% of global coal consumption), oil (4.6%) and electricity (5.6%) (Table 3).
Renewable energy is, at current levels, also negligible.
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Table 2: Energy reserves, production, and consumption in China

(1996−2016).
Share
1996 2006 2016 (2016, %)
Oil Reserves 16.4 20.2 25.7 1.5
Production 3,711 3,999 4.3
Consumption 7,432 12,381 12.8
Production 60.6 138.4 3.9
Consumption 59.3 210.3 5.9
Coal Consumption 23,004 244,010 21.4
Nuclear Consumption 12.4 48.2 8.1
Renewables Consumption 2.5 86.1 20.5
Electricity Consumption 2,865.7 6,142.5 24.8
Source: BP Statistical Review of World Energy (2017b).
Table 3: Energy reserves, production and consumption in India

(1996−2016).
Share
1996 2006 2016 (2016, %)
Oil Reserves 5.5 5.7 4.7 0.3
Production 760 856 4.3
Consumption 2,737 4,489 4.6
Coal Consumption 897,782 8.3
Electricity Consumption 744.1 1,400.8 5.6
Although its overall reserves of hydrocarbons are small by world standards

(Table 4), Brazil has emerged as an important producer and exporter of oil due to
recent discoveries (Lazarou, 2015). After a period of sustained growth in the late
2000s, Brazil’s economy slowed down in the early 2010s, before entering recession
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314 M. Fumagalli
Table 4: Energy reserves, production and consumption in Brazil

(1996−2016).
Share
1996 2006 2016 (2016, %)
Oil Reserves 6.7 12.2 12.6 0.7
Production 1,806 2,605 2.8
Consumption 100 138.8 3.1
Consumption 20.6 36.6 1
Coal Reserves 6,596 0.2
Electricity Consumption 419.4 581.7 2.3
in 2015 (Lazarou 2015: 1). Brazil is an emerging economic power in crisis. Brazil’s
growth in the 2000s was essentially the result of two factors: macroeconomic reforms
and fiscal adjustment begun in the 1990s, and the demand for Brazilian exports of
primary products from international markets, especially from China. The global
economic turndown, however, reached Brazil too, with stagnation in 2011−2014
and finally a recession in 2015.
South Africa is home to the African continent’s most developed economy and,
until it was overtaken by Nigeria in 2014, the largest economy (Latek, 2015: 1). It is
Africa’s only member of the G20 and has been a member of the BRICS since 2010.
However, despite some important growth in the 2000s, South Africa resembles an
“economic powerhouse in decline” (Latek, 2015: 1).
The South African economy has been crippled by the 2009 crisis, has only
made a very slow recovery since then, and has been further slowed by the 2015
turbulence on the global commodity markets (Latek, 2015: 1). South Africa’s high
reliance on exports of natural resources makes the country sensitive to external
shocks. Furthermore, there are evident internal constraints, such as frequent elec-
tricity outages and years of under-investment in power generation and distribution
(Latek, 2015: 1). Oil and gas reserves, and production are negligible in South Africa.
Renewable energy also remains an untapped potential, and coal consumption
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remains comparatively high (Table 5). Mining of natural resources remains a pillar
of South Africa’s economy (2).
Energy Transitions Among the BRICS
The BRICS are serious CO2 emitters (BP, 2017b). As Figure 1 indicates, greenhouse
gas emissions have increased considerably over the space of 10 years. At present,
China and the United States remain the world’s leading emitters, with India and
Russia catching up. Brazil and South Africa have also increased their CO 2 emis-
sions between 2006 and 2016. They do respond to the challenge of climate change
remarkably differently. At one extreme of this ideal spectrum lies Russia. Due to
Table 5: Energy resources, production and consumption in South

Africa (1996−2016).
Share
1996 2006 2016 (2016, %)
Coal Consumption 9,893 0.9
Electricity Consumption 253.8 251.9 1.0
3500
3000
2500
2000
1500
1000
500
0
Russia China South Africa Brazil India
Oil Gas Coal
Nuclear Hydro Renewables
Figure 1: BRICS CO2 emissions (2006−2016).

Source: BP (2017b).
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316 M. Fumagalli
abundance of cheap fossil fuels, widespread climate change skepticism, and lack of
international pressure, Russia’s leadership has not felt compelled to make anything
other than a loose commitment to curbing CO2 emissions. This, in fact, means it
can increase emissions by 50% while still meeting its target (Russell, 2015: 2). What
has aided Russia in the past is that due to the protracted economic decline of the
1990s — which led to the closure of some of the worst polluters — Russia’s emissions
have remained relatively low, only 5% of global GHG emissions are Russia’s (China
22%, US 12%, EU 9%, India 6% and Brazil 4%). Domestic policy inaction has gone
hand in hand with a lack of enthusiasm for climate commitments (Russell, 2015:
2). Being a large producer and consumer of fossil fuels explain this. Russia did not
ratify the Kyoto Protocol until 2004, 7 years after its adoption, despite the fact that
due to the reasons outlined above Russia was never in danger of missing the target
(Russell, 2015). Moscow declared that it would not accept any binding reduction for
the post-2012 period. Russia has barely participated in the pre-Paris climate confer-
ence negotiations and “boasts” a fairly un- ambitious submission (Russell, 2016).
At the opposite end, both in terms of a remarkable improvement in its data and
its disposition towards climate change negotiations and the moves needed to curb
emissions, is Brazil. Not long ago a serious CO2 emitter, Brazil has made considerable
progress on the renewables and the hydro-electricity front. Brazil plays an active role
in international climate change negotiations. Its success record on reducing defor-
estation has made it a leader in the reduction of carbon emissions. Between 2005
and 2012 it reduced its CO2 emissions by over 40% through a focus on deforestation
(illegal deforestation was reduced by 78%) and boosting the share of renewables in its
energy mix. Brazil nonetheless remains the world’s seventh biggest emitter of GHG,
responsible for 1.45% of global emissions. It is party to UNFCCC and to the Kyoto
protocol, but it does not have a compulsory goal for carbon emissions reduction
stemming from the Kyoto Protocol, as it is not classified as a developed country.
Data in Table 6 and Figure 2 highlight the fuel mix of the economies of the
BRICS as of 2016. Oil remains the most important type of fuel for all BRICS except
for Russia, for whom the main source of domestic energy is natural gas. Coal is
hugely important for China and India, although its share in the fuel mix is expected
to decrease in the coming decades (BP, 2017b). Although the share of renewables
in China, Brazil and India’s energy mix is increasing, fossil fuels continue to make
up the lion’s share of it in all five countries, ranging from 63% in Brazil to 86% in
China, 87% in Russia, 92% in India and 95% in South Africa.
In sum, this section has shown that the BRICS are a heterogeneous group, made
of producers and consumers of energy, of countries that have embraced energy
transitions and where renewables are steadily growing as part of their energy mix,
with others resisting such trends. The data above illustrate the intertwined nature of
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Table 6: Energy mix and the BRICS.

Russia China South Africa Brazil India
Oil 148 578.7 26.9 138.8 212.7
Gas 351.8 189.3 4.6 32.9 45.1
Coal 87.3 1,887.6 85 16.5 411.9
Nuclear 44.5 48.2 3.6 3.6 8.6
Hydro 42.2 263.1 0.2 86.9 29.1
Renewables 0.2 86.1 1.8 19 16.5
TOTAL 674 3,053 122.1 297.7 723.9
Source: BP (2017).
3500
3000
2500
2000
1500
1000
500
0
Russia China South Afirca Brazil India
Oil Gas Coal

Nuclear Hydro Renewables
Figure 2: Primary energy and the BRICS: Consumption by fuel (2016).
Source: BP (2017).
the politics of energy and climate (Rich and Wilson Rowe, 2012: 6). The economic
rise of the BRICS is closely tied to the global politics of energy and their consump-
tion of global energy/and climate change. Each member of the BRICS “club” faces
multifaceted domestic energy issues and politics that shape its energy strategy and,
consequently, its participation (or lack thereof) in climate change negotiations. To
what extent does this internal diversity of the BRICS group affect its behavior and
stance on the international stage? This is what the following section examines.
The BRICS and Energy Governance

This section reviews both key developments and progress in terms of the BRICS’s
role in global energy governance and some of the major contentious issues, amongst
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318 M. Fumagalli
them and between them and countries of the global South, as well as advanced
industrialized countries. The most visible progress of the BRICS as a group has been
its relatively rapid process of institutionalization, from a mere acronym in 2001
(BRIC, then BRICS from 2010 when South Africa joined) to a more institutionalized
organization. The group has held annual meetings since the one in New York at the
side of the UN General Assembly meeting in 2006, followed by regular summits in
Ekaterinburg (Russia) in 2009 and then hosted in each country on a rotating basis.
At the 2013 summit in Durban (South Africa), the members established a BRICS
Think Tank Council and the BRICS Business Council. Gradually, BRICS cooperation
has extended to financial governance, with the establishment of the BRICS bank and
a reserve arrangement (D’Ambrogio, 2014). At the sixth summit held in Fortaleza
(Brazil) in July 2014 the BRICS decided to create the New Development Bank
(NDB), with the purpose of mobilizing resources for infrastructure and sustainable
development projects in BRICS and other emerging and developing economies.
At the seventh BRICS summit in Delhi (India) in 2016, the BRICS explicitly referred
to energy as an area in which cooperation among the members should expand and
deepen, a point later stated in the 2017 Xiamen (China) summit. This is not to say that
there are no differences among the member countries or contentious issues. Although
the BRICS’ rise has been peaceful, this has not been free of contention. Some of
these issues pertain to them only (such as the China−India geopolitical rivalry),
whereas others blur the lines between the BRICS, advanced industrialized countries
and countries in the Global South, such as the difficulty of setting up inclusive and
sustainable global governance arrangements and the risk of creating a new oligarchy,
a “concert” of a select group of powers, with the exclusion of the majority.
Contentious Issues Among the BRICS
Two main fissure lines exist within the BRICS. The first concerns bilateral issues,
of which the rivalry between China and India, the two largest and most populous
countries, is the most vivid example of how competition, rather than cooperation,
has come to define energy security in Asia (Jain, 2014). The China−India relationship
is plagued with several unresolved issues, from territorial disputes (Tibet), Beijing’s
relationship with Pakistan and, not least, competitive energy relations. Energy is
reshaping the international relations of Asia, where it is a subject of geostrategic
contest rather than cooperation and interdependence. A site of production, as much
as of huge consumption of energy, primarily fossil fuels. As Jain notes “Asia is now
the center stage of the world’s energy concerns” (Jain, 2014: 547).
This is not to say that energy cooperation between New Delhi and Beijing
is impossible, as joint activities in Sudan and Syria have shown (Reischer, 2012;
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Bajpai et al., 2015), but these are marginal issues, and thus energy cooperation
remains the exception rather than the rule. Despite all the rhetoric of a strategic
partnership, Russia−China relations are not less fraught with challenges. Although
Russia has seemingly acquiesced to the shift in power to China which saw it becom-
ing the junior partner in the relationship (Kaczmarski, 2015), some of the irritants
remain and have deeper historical roots, such as Moscow’s fear about an encroaching
Chinese presence — through migration — in the sparsely inhabited regions in the
Russian Far East, where six million Russian citizens face over 100 million Chinese
on the other side of the border. Other irritants are of a more recent nature, such as
Moscow’s occasional departure from its advocated principle of non-interference in
the domestic affairs of another country and the staunch defense of sovereignty. Its
recognition of Abkhazia and south Ossetia in 2008 and its more recent annexation of
Crimea in 2014 were not well-received in Beijing. Apart from immediately bilateral
issues, Russia and China also share a neighborhood: Central Asia. Although both
powers have peacefully co-existed so far (Cooley, 2012), in practice Central Asia is
where competition already takes place between the region’s main security provider
(Russia) and the main commercial partner and investor (China). Bilateral issues
aside, the BRICS also differ in terms of their stance on climate change and ways to
tackle it. They may well-agree about their dissatisfaction with a global institutional
order they did not create and whose rules they did not write, but they agree on
little else in terms of what an alternative should look like, something which hasn’t
changed since the NUPI study in 2012 (Eriksen et al., 2012). Russia is very much
the spoiler in the group. Russia remains an important international player, more
relevant in some regions (the post-Soviet neighborhood and Syria, among others)
than in others. Moscow is playing a decreasing role in G8, G20, and OECD, which
turned their back on Russia post-sanctions and Crimea. Moscow remains a member
of the G20 not least due to the support of fellow BRICS. Accession to OECD was
suspended. In short, Russia’s prestige has taken a hit, although the negative impact
on the relationship with its fellow BRICS has been negligible. Moscow tends to
favor working within the framework of the United Nations, which, the Russian
government emphasizes, remains “at the center for regulation of international rela-
tions and coordination in world politics” (Russell, 2015: 1). Domestically, Brazil has
developed a National Plan on Climate Change set out in 2007−2008, consisting of a
comprehensive framework to combat climate change which proposes a set of mitiga-
tion actions. The plan focuses on deforestation and increasing energy efficiency and
renewable energy. Beyond its borders, having hosted the 1992 Earth Summit and
the 2012 Rio+20 UN Conference on Sustainable Development, Brazil has positioned
itself as a significant actor in the international climate arena (Lazarou, 2015: 2). The
EU and Brazil have been the two first actors to adopt the UNFCCC and the Kyoto
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320 M. Fumagalli
Protocol, in a move that signaled the importance of cooperation on environmental

issues. On the whole, although some writers have perhaps too alarmistically pointed
to coming resource wars in Asia (Chellaney, 2013a, 2013b) or the coming of an
“energy great game” (Jain, 2014), it is a fair point to note that China as the leading
Asian consumer sees little point in cooperating (Jain, 2014: 547), and that more
generally completion prevails over cooperation. This is not because there is anything
intrinsic to natural resources that makes rivalry or even conflict inevitable, but rather
because of an institutional void.
The BRICS and Advanced Industrial Countries
Energy governance is an area in which progress has been slow and, again, uneven.
There are, of course, several reasons for this. One is a lack of institutional architecture
(Downie, 2015): At present there is a plethora of multilateral organizations for deal-
ing with energy in which emerging markets are unevenly involved, such as the G20,
IEA, International Energy Forum (IEF), OPEC, International Renewable Energy
Agency (IRENA), and IAEA. Acronyms aside, what is evident is that membership
in the relevant clubs (sellers and buyers) does not accurately reflect the contribution
to the global economy any longer. Among the sellers, some emerging economies
are members of OPEC (Qatar), and most of the members are from the Middle East,
with no Central Asian state (or Russia, for that matter) being a member. Neither
of the BRICS is part of OPEC. As to the buyers, the IEA included Japan and Korea
only recently and is de facto a club for OECD economies. Again, the organiza-
tion does not include a single BRICS country. In this regard, therefore, the Paris
Agreement represents a small but important step towards building an institutional
architecture. The most significant development because of its relevance to global
energy governance is the 2016 Paris Agreement on Climate Change (PACC) (IEA,
2016). Reflecting a long and arduous path of negotiations, failures and agreements
from Durban to Kyoto to Brisbane, PACC, which entered into force in November
2016, it is “fundamentally, at its heart, about energy” (IEA, 2016). Covering over
190 countries, with China, India and Brazil as parties to the agreement (not Russia,
which was a signatory), the agreement focuses on emissions reductions in the
power sector (electricity), seeking to tackle global warming through a reduction
in GHG emissions. This brings about transformative change in the energy sector.
Changes are in fact already under way, as countries are on target to achieve, even
exceed, the targets, sufficient to slow the projected rise in CO2 emissions but not
enough to limit warming to less than 2°C. Growth in energy-related CO2 emis-
sions stalled in 2015, as a result of a 1.8% improvement in the energy intensity of
the global economy, a trend bolstered by gains in energy efficiency and the use of
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cleaner energy sources worldwide (mostly renewables), before increasing again in

2017 (Hausfather, 2017).
The group has not threatened the current multilateral and financial international
structure. It has called for reforms and for them to acquire decision-making power
consistent with their economic weight. Politically, in this newly emerging world
order they are also challenging the old powers in the field of security. However,
there has been no open contestation of the current order and, if anything, the
Paris agreement constitutes a way in which AICs and BRICS can work together.
The importance of reducing the carbon intensity of their economies is evident to
all BRICS. China leads the way. Russia is recalcitrant. At the same time, it should
be clear that the pursuit of energy efficiency and diversification among emerging
economies, and the big ones among the BRICS such as China and India, is driven
less by concerns about climate and more by concerns about energy security. This,
however, is not tantamount to an alternative to the status quo; at the moment there
is no shared vision among the BRICS as to what a post-Western global (energy)
governance arrangement may or should look like. Despite the rise of new players
and the emergence of new voices (and new interests and agendas), membership to
both clubs (IEA and OPEC) remains restricted, despite the “association dialogues”
of the IEA with key non-members. It goes without saying that without membership
the emergence of new players and voices goes unrepresented.
Relations Between the BRICS and Other Developing Countries
In climate change negotiations, the BRICS have been quite content with being
“bundled” with other developing countries, a position which indicates how the
BRICS still perceive themselves (as being outside “the establishment” and the defend-
ers of the status quo). Ties between individual BRICS and the Global South have
received some attention, typically in the form of China’s energy diplomacy in Africa
(Taylor, 2009), Central Asia (Cooley, 2012), or in South-East Asia (Hong, 2015).
Interest in China’s $1 trillion flagship One Belt, One Road (OBOR) initiative is also
growing, although so far it is more the drivers of Beijing’s initiative have been subject
to scrutiny and less has been said about the countries, economies and societies on
the receiving end of the OBOR. As economic growth, and consequently demand for
energy, is shifting eastwards, it is not surprising that attention has especially focused
on developments in Asia. In this respect, energy dynamics in Asia well-illustrate
the challenges of institutionalized energy cooperation between the BRICS and
developing countries in specific regions of the world. Neither ASEAN (Association
of Southeast Asian Nations) nor the Shanghai Cooperation Organization (SCO)
deals with energy explicitly, let alone effectively. In Southeast Asia, international
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322 M. Fumagalli
cooperation is driven primarily through ASEAN-centered institutions and yet,

energy is not seen as an issue warranting its own separate organization in the region.
ASEAN+3 deals with economic matters, but not energy specifically, and ARF (the
ASEAN Regional Forum) focuses primarily on security. The 2007 Cebu Declaration
has seemingly remained a “toothless arrangement” (Jain, 2014). Similarly, attempts
to move beyond a focus on security within the framework of the SCO has not
yielded any tangible result. While ASEAN’s consensus based modus operandi seems
to prevent a focus on an admittedly fractious issue such as energy security and
cooperation, in the case of SCO it seems that the organization’s main added value
lies in its being a forum that allows Central Asia’s smaller players to simultaneously
manage relations with two great powers such as China and Russia, and for the two to
manage ties with each other. On a separate issue, the different structural economic
conditions and economic capacity of some of the poorer less developed countries
(LDCs), such as Myanmar, Laos, or Cambodia, places them in a radically different
situation when it comes to considering embracing energy transitions and radically
altering their fuel mix in favor of renewables. While these are choices that countries
like Brazil and China have been able to “afford” to make, coal remains a cheaper
and thus more realistic option for many poorer economies. In sum, as Jain puts it,
“to speak of Asia as top player is not to suggest that it is a cluster of actors or act as
one in its quest for energy” (Jain, 2014: 549). Energy competition, interwoven with
matters of geopolitical rivalry, status, prestige and history, is the compelling story of
Asian politics and security in this early part of the 21st century. If, as Jain claims, “the
nature of energy fuel as an essential commodity traded in a highly competitive world
market makes energy security a competitive strategic pursuit for Asian states” (Jain,
2014: 554), it is also fair to note that an institutional void has not helped with moving
away from the current zero-sum game that prevails in Asia’s energy markets. The big
risk here is that the eagerness of the BRICS to get recognition and a “seat at the table”
is that new divides will emerge and that a “new oligarchy” will emerge (Melchior,
2012: 3). To summarize, two issues stand out in relation to the relationship between
the BRICS and the current global governance arrangements. First is the emerging
economies’ — and the BRICs most notably among them — dissatisfaction with the
current architecture of the global economy (Downie, 2015). Second is the lack of an
alternative vision by the very same actors. This is clearly the result of their different
priorities and interests, which hinder their operation as a coherent coalition of
international actors (Downie, 2015). The BRICS are important and mighty but their
interests are sometimes diverging, and their international role is still in the making
(Melchior, 2012: 4). Despite the evident progress in institutionalizing the BRICS as
an organization, is this a group of like-minded countries or a heterogeneous bundle
of states, some of which are rising powers (China), some “declining-rising” powers
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(Russia), and the rest a mixture? Will they act together or individually? What does
China want to make out of the BRICS and how does this relate to Beijing’s OBOR
initiative?
The BRICS and the International Political Economy of

Energy: Convergence, Divergence, and Research Frontiers
The study of energy has long suffered from under-theorization, with policy-oriented
research receiving the bulk of attention. There are signs that this might be chang-
ing, driven by theoretically-innovative contributions in international relations
(Dannreuther, 2017), public policy (Florini, 2011; Florini and Dubash, 2011;
Dubash and Florini, 2011) and international political economy (Goldthau and Sitter,
2015). As the single greatest area of convergence among the BRICS — and among
scholars researching global governance and the BRICS — is the demand for greater
representation and voice in international institutions, it is not surprising that a key
debate has revolved around questions of change versus continuity in the interna-
tional system and, by extension, about the durability of current Western-designed
and -led governance arrangements. The extent of the individual BRICS’ — and
especially China’s6 — dissatisfaction with the status quo in the form of a Western-
made and Western-led international order is debated (Breslin, 2013; Hochstetler
and Milkoreit, 2015; Cunliffe and Kenkel, 2016), with some scholars emphasizing
the status quo orientation of the BRICS (Downie, 2015), or at least some of them,
and others highlighting some (potentially) revisionist initiatives. While there may
be a desire for a new global order, at present there has been no detectable move
towards revisionism or a direct challenge to the existing arrangements, as intra-
BRICS energy cooperation efforts are still in their infancy. This has to do with the
fact that the BRICS do not see “eye to eye” as to what the new order may look like.
There is, in other words, no unified vision of an alternative order (Downie, 2015). In
practice, this leaves the BRICS as norm-takers, rather than norm-makers (Dubash,
2011; Downie, 2015), although the Paris Agreement on Climate Change has the
potential to transform global energy governance. The lack of BRICS institutional
space is clearly visible in energy-related organizations. A second “big debate” in the
study of the BRICS is between those that emphasize the competitive nature of energy
and those instead who privilege cooperative relations. This, by and large, depends
on the analytical tools used to make sense of such phenomena. On a larger level
6
On China-specific debates, also beyond the confines of energy, see Allison (2017), French
(2017), Lim (2015), and Beeson (2009).
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324 M. Fumagalli
there appears to be a divide between those that see relations as more competitive or
cooperative. At the risk of some simplification, such a divide can be captured by the
conversation between those that focus more on the geopolitics of energy (Jain, 2014;
Pascual, 2015; Hashim, 2010; Heinrich, 2003; Henderson and Mitrova, 2015) and
those, informed by public policy and IPE perspectives and tools, that have a greater
interest in governance, with recent innovative endeavors to bridge the two (Goldthau
and Sitter, 2015). Cooperative dynamics stand out clearly in publications on Brazil
and South Africa. Literature on Russia, by contrast, has concentrated on Moscow’s
use of energy as a foreign policy tool, particularly in its immediate neighborhood
(Hashim, 2010; Heinrich, 2003). An approach focused on Russia’s “weaponization
of energy” has not been free of critique, and Orttung and Overland had subjected
the claim to close empirical scrutiny (Orttung and Overland, 2015). Empirically,
the literature has paid greater attention to Russia’s European neighborhood and the
implications for EU-Russia relations, with far less being written about Russia’s Asian
relations. As noted elsewhere in this chapter, competition prevails over cooperation
when it comes to energy security in Asia (Jain, 2014; Chellaney, 2013a, 2013b),
although that is compounded by other pre-existing issues (historical legacies and
geopolitical rivalries), raising questions as to whether competition needs to be the
“default” condition when it comes to Asia’s energy relations.
Beyond this, energy offers a new and refreshing starting point for reflecting on
the transformation of the BRICS and more generally or rising powers beyond the
BRICS. Drawing on neo-Gramscian sensibilities in international relations, Hameiri
and Jones have challenged one of the key assumptions of international relations —
the state as a unitary actor — and have examined how processes of de-centralization,
fragmentation and internationalization are taking place in countries often associated
with the image of Westphalian statehood (China and Russia being among them) and
how such domestic processes are having external implications, often diverging from
that country’s foreign policy (Hameiri and Jones, 2016). In practice, one dimension
that is especially relevant to the BRICS is the internationalization of sub-national
actors and the emergence of the “energy giants”, the state-owned enterprises (SOEs).
The emergence of the SOEs is clearly visible in the renationalization of energy giants
like Yukos in Russia in 2004 and, most notably the rise of state-owned enterprises in
China (Andrews-Speed and Shi, 2016) and Russia (Hashim, 2010; Henderson and
Mitrova, 2015; Heinrich, 2003). More than the domestic role of these state-owned
enterprises, what has attracted interest is their assertive role abroad as part of their
respective countries’ energy diplomacy (on China: Cutler, 2014; Hubbard and
Williams, 2014; Wang, 2017; Dannreuther, 2011; on Russia: Poussenkova, 2010).
Sub-national actors are playing a growing role in international affairs by carrying
out initiatives which are at times aligned with and at times diverging from the
b3508_V2_Ch13.indd 324 11-02-2020 13:19:23

foreign policy of their respective countries. The para-diplomacy of sub-national

actors has been subject to investigation in India (Plageman and Destradi, 2015;
Dossani and Vijaykumar, 2006; Jenkins, 2003a, 2003b; Sridharan, 2003), South
Africa (Cornelissen, 2006; Geldenhuys, 1998; Nganje, 2014a, 2014b) and Russia
(Sharafutdinova, 2003; Joenniemi and Sergunin, 2014). This is starting to be visible
in the areas of energy and environmental governance, as evidenced by Setzer’s work
on Sao Paulo in Brazil in environmental governance (Setzer, 2014) and Fraundorfer’s
research on China’s cities and climate governance (Fraundorfer, 2017). Hameiri and
Jones (2016) and Tubilewicz (2017) have also shed light on the internationalization
of China’s provinces. Yunnan Province and the Greater Mekong Sub-Region. An
important insight that is relevant to debates on energy and energy governance is
that domestic processes of decentralization and fragmentation have both domestic
and international ramifications, in the form of the rise of multiple and competing
centers of power and the challenges this poses to coherent policy-making, especially
in under-institutionalized countries (on India: Dubash, 2011; on China: Cabestan,
2017; Freizer, 2010).
Last, but not least, are efforts to bring insights from more critical strands of
international relations into the study of energy. In a recent important study of energy
security, Dannreuther, in particular, argues that energy security should be under-
stood as a value in competition, even conflict, with other values such as economic
prosperity and environmental sustainability (Dannreuther, 2017). Dannreuther’s
dual focus on power and justice is also highly innovative as, typically, energy has
been framed in the language of the form, but not the latter (Dannreuther, 2017).
What is especially interesting about China, but similar points can be made about
Brazil and India, is the attempt to frame the country’s attempts to tackle climate
change and thus steer the energy transitions processes in the language of a “green
growth” or “transition to a green economy”, thereby combining the emphasis on
sustained economic growth — oftentimes the pillar of performance legitimacy —
with exploring new opportunities by reducing fossils in the fuel mix in favor of
renewable energy. So far, however, with the exception of Hameiri and Jones (2016)
and Dannreuther (2017), critical approaches to international relations have struggled
to make inroads in energy debates. Following from this, questions arise about the
impact of energy transitions, especially in terms of the impact that energy transitions
might have on domestic power configurations, especially of the more authoritarian
members of the BRICS.
While much scholarly attention has focused on the policies and strategies of
the BRICS themselves, remarkably little has been said about how countries on the
receiving end of the BRICS’ attention are responding to it. How are local states,
economies and societies being reshaped by the actions of China and its state-owned
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326 M. Fumagalli
enterprises? What are the negative externalities of natural resource diplomacy?

Although something has been written about the effects of China’s Africa diplo-
macy, more should be done about the periodic rise in resource nationalism,
understood as a state’s effort at restoring ownership over key strategic assets in
the natural resource sector, a phenomenon of growing salience in countries on
China’s doorstep such as Myanmar, Mongolia, and Kyrgyzstan (Fumagalli, 2015).
Attention to this issue has been limited and sporadic, with oil receiving the bulk
of attention (for an exception on South Africa’s mining sector see Andreasson
(2015). The case of the OBOR initiative is also relevant here; at least in terms of
the initiative’s official objectives and how it is framed publicly, energy cooperation
is ascribed great importance, and energy, infrastructure and logistics linkages are
expected to create goodwill for enhanced political partnerships between China
and the partner countries.
Conclusion
Are the BRICS a new player in their own right, or an assemblage of different actors
each with its own specificities and divergent interests? They are certainly a hetero-
geneous collection of actors rising in their own different ways, asking for greater
voice on the international stage in light of their economic weight. Yet, this combined
growth has thus far not translated into a coherent voice, let alone a shared vision for
what a post-Western international order might look like. At the same time, there are
visible signs of institutionalization of the bloc.
The chapter has advanced the following propositions. First, it has shown that
the label BRICS conceals as much as it reveals when it comes to either identifying
shifting patterns of demand and consumption or gauging, whether the BRICS
countries behave as one coherent group. In all this, the BRICS have become not
only an important part of the story, but central players. At the same time, they have
not yet articulated a shared vision, let alone one which may be an alternative to the
current Western-designed and Western-led institutional architecture. The BRICS
relate differently, unevenly, to one of the biggest challenges of the early part of the
21st century: climate change and energy transitions.
The chapter has highlighted that how the individual BRICS countries respond
to energy transitions is a result of both domestic issues (such as the fragmentation
of energy governance and the low level of institutionalization more generally) and
global processes, and the interaction of the two. Furthermore, while many among
the BRICS eagerly present themselves as models of Westphalian states, jealous of
their own sovereignty and resistant to foreign interference, in practice state trans-
formation has already affected them deeply in recent decades. This has led to the
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rise of new important international actors even in the energy sector, such as state-
owned enterprises (Gazprom, Sinopec, PetroChina, PetroBras) and sub-national
actors, such as cities (Sao Paulo) or provinces and regions (India’s states or China’s
provinces such as the Yunnan). Inevitably, several questions remain, the answers
to which will only become apparent in the coming years. How will China’s flagship
initiative, the OBOR, impact on the countries and economies on the receiving end
of China’s attention? How will further advances in technological innovation affect
the BRICS’ energy security strategies? Lastly, how far will the populist Zeitgeist push
the backlash against globalization and what impact is this going to have on global
governance, its fragile architecture and the role of the BRICS? Developments in the
late 2010s serve as stark reminders that global governance is still a work in progress
even in the field of energy, the role of the BRICS is still in flux and, thus, significant
challenges to redefining a new world order lie ahead.
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PART V
Representation, Fragmentation,
and Legitimacy
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CHAPTER 14
BRICS and the International Financial

Institutions: Voice and Exit
Ayse Kaya
Department of Political Science, Swarthmore College, USA
Introduction
This chapter analyzes the BRICS’ relations with the two international financial
institutions (IFIs) with near-universal membership, the International Monetary
Fund (IMF) and the World Bank. The chapter, following not just the literature on
this topic but also the way actual events unfolded, examines BRICS’ “voice”, i.e.
expressions of discontent with and efforts to reform the IFIs, and the creation of
pathways to “exit”, i.e. the beginnings of BRICS-led financial institutions, specifically
the Asian Infrastructure Investment Bank (AIIB), the New Development Bank
(NDB), and the Contingent Reserve Arrangement. It argues that explanations
drawing in a detailed manner from specific institutional features and policies do a
better job of accounting for partial successes with voice. It also charts possibilities
for refining future research on this topic.
BRICS and the IFIs: Voice and Exit

The relative economic rise of large emerging economies (BRICS) in the last several
decades has been one of the most monumental changes in the global economic
337
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338 A. Kaya
landscape. For instance, in 1997, the year of the Asian Financial Crisis, the G20
emerging economies’ share of world economic output was about 27%; whereas, the
same number for the G20 advanced economies was approximately 45%. By 2015,
however, these emerging economies had increased their share of world GDP to
40%, as the G20 advanced economies’ share declined to about a third. In other
words, the importance of the two groups of countries for the world economy had
almost reversed in 1997−2015.1 China, in particular, has seen unprecedented growth
levels, making its individual share of world GDP in 2015 over 17%. Meanwhile, in
1997−2015, the USA’s share of world GDP declined by 5 percentage points, making
the 2015 US GDP slightly smaller than China’s. And, once the second largest world
economy, Japan’s GDP in 2015 was only about 4.5% of the world’s total economic
output.2 The 2008 financial crisis, which threw the USA into the Great Recession and
continues to affect parts of Europe in the form of a debt crisis, has further solidified
this seemingly tectonic shift. The shift has also raised numerous questions regarding
the governance of the global economy, particularly as it pertains to its key IFIs with
universal membership, the International Monetary Fund (IMF) and the World Bank
(WB). Not only have these institutions come to be seen as representing the economic
asymmetries of decades gone by, but the BRICS’ enhanced capacity to contribute to
the institutions has rendered them more important for institutional functions, such
as lending, and thus for governance (Kaya, 2015).
This paper assesses the rise of BRICS in the context of IFIs. The recent
story of BRICS in the IMF and the World Bank has been one of both “voice”—
articulations of dissatisfaction with the IFIs’ existing structures and pressing
1
There are valid disagreements regarding the coherence of BRICS as a category (see Kirton
(2015) for a review of different perspectives). Nonetheless, BRICS’ activities within and
related to the IFIs show a relatively high degree of cohesion (e.g. Cooper and Farooq,
2013). Exploring the origins of this cohesion constitutes a different analysis altogether, but
it plausibly emerged as a byproduct of institutional factors in addition to BRICS’ coordi-
nation. In the IFIs, discussions on formal representation (voting rights and seats on the
Executive Board) center around country classifications, pitting institutionally dominant
advanced economies against emerging and developing economies. Hence BRICS face a
strong incentive to coalesce around as unified of a position as possible (surely, this does
not mean their preferences are perfectly aligned). As discussed here, BRICS have endorsed
clear goals: reducing the dominance of advanced economies in a way that carves out more
autonomy for their policies and representation (Kaya, 2015).
2
These numbers were calculated based on GDP, PPP (constant 2011 international USD)
from the World Development Indicators. For a skeptical perspective on the rise of BRICS,
see Sharma (2012).
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BRICS and the International Financial Institutions: Voice and Exit 339
for reform — and creating potential pathways of “exit” from the institutions
(Hirschman, 1970).3 While notions of voice and exit mesh with actual events as
well as the way in which observers have studied those events, it is important to
note at the onset that at this point exit neither means abandonment of existing
institutions, nor creating true substitutes for them. Rather, questions about exit
center around institutional arrangements led by BRICS, which boost the cred-
ibility of the threat of exit and could plausibly constitute pathways to exit at a
future point.
BRICS have exercised their voice, namely, discontent, with two related but
distinct aspects of these institutions: (1) the distribution of voting power, thus formal
power, within the institutions; (2) policies of key concern to them — specifically
controls on the capital account and the expansion of the basket of currencies that
make up the Special Drawing Right (SDR), which is a reserve asset and the IMF’s
unit of account. In both these realms, the BRICS’ attempts to alter the institutions
more in line with their own preferences has met with some success. At the same
time, the credibility of the BRICS’ so-called exit from the two IFIs has particularly
been enhanced since the creation of the New Development Bank (NDB) and the
Contingent Reserve Arrangements (CRA) in 2014 and the launch of the AIIB in
2015.
The relevant literature, in turn, has advanced a number of variables in explain-
ing the BRICS’ success with voice, including: the pressures created on the IFIs
by the BRICS’ credible threat of exit; the BRICS’ effective negotiation strategies,
and the particular features of institutions, such as the nature of their funding.
Explanations for BRICS’ enhancing of “exit” options seem similarly varied: each of
the BRICS have domestic rationale for pursuing the NDB and the AIIB; the BRICS,
particularly China, could have “counter-hegemonic” desires; and only partial success
with voice in exiting institutions propels exit from those very institutions. There,
thus, seems to be a complex dynamic between “voice” and “exit”. Some see inad-
equate progress with voice compelling exit from the IMF/WB, while others identify
3
In Hirschman’s (1970) original conceptualization of “exit” and “voice”, customers’ aban-
donment of the firm’s products denotes the exit option, whereas in using their voice, the
customers appeal to the firm’s management to fix their discontent related to the deteriora-
tion of the product. Not only did Hirschman explore his framework in the context of orga-
nizations and politics, his set-up has been influential within political science (e.g. Drezner,
2007). As will be shown, it is particularly suited to understanding the theory and empirics
of BRICS and the IFIs. Differently from exiting the products of a firm, however, exit from
a multilateral institution more likely involves a state’s disengagement from the institution,
and only rarely formally abandoning membership in the institution.
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340 A. Kaya
exit as enhancing influence within the institutions. For example, the presence of the
AIIB is interpreted as due to the dissatisfaction of the BRICS with the IFIs, as well
as a reason for BRICS’ success with reforms in the IFIs.
Although the literature has adequately spelt out “voice” and “exit” rationales,
there is room for teasing out the dynamics between these two. Particularly, even
though the threat of exit did not seem more severe in the case of the IMF, the BRICS
have nonetheless received more concessions in that institution relative to the World
Bank in 2008−2010 (Kaya, 2015). In other words, the threat of exit does not seem
to adequately explain the degree of success through voice. Rather, it seems to be the
case that a degree of exit — in this case the creation of the AIIB and the NDB with
functions similar to those of the World Bank’s — follows lack of adequate success
with voice. Further, to more fully explain how BRICS have exercised voice success-
fully, consulting the IFIs’ particular institutional characteristics (such as, existing
rules or autonomy of the staff) as well as the preferences of the dominant powers
seems crucial (ibid.; Gallagher, 2014).
The presence of voice and the credible threat of exit also raise questions about the
durability of the post-war order led by the USA and its allies, including the European
Union and Japan. Obviously, since existing institutions reflect the preferences of their
creators disproportionately (Ikenberry, 2000), any success BRICS have with reform
is, by definition, going to change the institutions away from the dominant states
(regardless of whether the dominant powers approved of such change). But, such
change could ultimately boost the legitimacy of these institutions, thereby prolong-
ing the post-war order. Indeed, voice aims to reduce the prevalent discontent with
the institution, and it is a sign of “loyalty”, that is the participant’s continued interest
in the institution (Hirschman, 1970). At the same time, some of the successes that
BRICS appear to have scored simultaneously bind them to the existing institutions.
For instance, the Chinese currency (renminbi)’s inclusion in the IMF’s SDR basket is
a source of prestige for China, but it was contingent upon China promising further
capital account liberalization in accordance with IMF norms. Yet, if exit begins to
dominate voice, then the post-war order, which has already weakened due to factors
not related to the BRICS’ rise, could further disintegrate. The verdict, however, is
out on whether the creation of new institutions truly means exit from existing ones
(doubtful) and whether exit will dominate voice (also doubtful).
The rest of this chapter, first, discusses BRICS’ partial success with voice, i.e. their
efforts to alter existing institutional rules and norms and the extent to which these
efforts came to fruition. It then discusses the BRICS’ threat of exit with an emphasis
on the AIIB, the NDB and the CRA. Each of these sections contains a critical and
synthetic assessment of existing explanations. The final section turns to the question
of the impact of these developments on the US-led post-war order.
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Voice
The proceeding discussions examines the BRICS’ calls for reform (i.e. expressions of
discontent) within the IMF and the World Bank along two dimensions: (1) changes
to (formal) governance rules and procedures, and (2) policy changes. Surely, govern-
ance and policy changes are inextricably related — the former likely spurs the latter,
but these categorical distinctions serve analytical clarity, and they also follow the
way actual negotiations took place.
Discontent with Governance Structures
In 2008−2010, member states in both the World Bank and the IMF reformed the
distribution of voting power (across the membership), the method of calculating
each state’s voting power, and the structure of the Executive Board (Kaya, 2015,
Chapters 5 and 6).4 Importantly, as a result of these reforms, the rate of change in
the G20 emerging economies’ total voting power within the IMF and the World
Bank were 27.74% and 18.62%, respectively (ibid.: 173, Table 6.4). Such a change
has meant that the G20 emerging economies as a group ended up with more voting
power than G20 European economies (ibid.). Within the IMF, China increased its
voting power from under 3% to over 6%, making it the third largest shareholder.
India, Russia, and Brazil also got promoted to being among the top 10 shareholders
in the IMF. Further, the IMF moved to an all-elected Board, removing the privilege
of some states to appoint their Directors. While the effects of this reform are yet
unclear, it was a move toward flattening institutional hierarchies.
Not just the significance of these reforms, but also the length of time it took US
Congress to ratify them — Congress passed the bill endorsing the change, which
naturally required an increase in American financial contributions (known as the
quota) to the IMF, at the end of 2015 — attracted a great deal of attention. The US
Congress’ recalcitrance was seen as giving impetus to the formation of alternative
institutions, particularly the AIIB.
Against this backdrop, the rest of this sub-section focuses on BRICS’ efforts
to alter the way in which the IMF calculates members’ voting power (based on
quotas). It also contrasts this success with BRICS’ less successful efforts at the WB.
This selected focus illuminates the key factors at work and the main issues of debate.
Importantly, the benchmark against which to judge BRICS’ efforts here are not
subjective assessments of how much the BRICS’ power should have been boosted,
but what the BRICS’ pre-reform demands were. In this way, instead of a subjective
4
Other works that discuss select dimensions of these reforms are: Woods (2010), Wade
(2011), and Lesage et al. (2013).
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342 A. Kaya
yardstick that shifts across actors and authors, the analysis can focus on a benchmark
that is relatively more objective and consonant with institutional debates.
Reforming the Quota Formula in 2008
Quotas in the IMF serve critical functions, as they determine the member states’
financial contributions to the institution, thereby their relative voting power.
A member’s quota can also affect the size of the loans the member receives from the
institution. Even though the ultimate distribution of the quotas does not depend
solely on quota formulae, by virtue of forming the technical reference point for the
quota distribution, quota formulae carry great importance. In 2008, the IMF moved
from an opaque system of multiple quota formulae to a single one with some vari-
ables of preference to the rising states, though the new quota formula did not reflect
all of the rising states’ demands.5
The BRICS began pushing for a reform of the quota formulae soon after the
1997 Asian Financial Crisis, during which the IMF conditionality imposed on
borrowing members, particularly Thailand, S. Korea, and Indonesia, was seen as
too austere (e.g. Stiglitz, 2002). In turn, the IMF’s seemingly unfair treatment was
seen as intrinsically related to the Western powers’ disproportionate influence over
the institution (e.g. Birdsall, 2006). In a 1997 Executive Board meeting, the Chinese
Executive Director emphasized that “in order to solve the protracted anomalies in
quota calculations and distributions, I would like to stress my support for a Board
discussion on quota formulas to take place …” (IMF, 1997: 13). Several years later,
the Brazilian Director again expressed a sentiment shared among the large emerging
economies (IMF, 2001: 6):
Preserving the legitimacy of the [IMF] depends on the ability to adapt the quota
structure to reflect changes in the world economy… consensus on a new quota
formula that can better support these objectives is an essential aspect of the new
architecture of the international monetary system, and should be treated by the
Board with the corresponding importance and priority.
A putative turning point came with the 2006 “Singapore Resolution”, which
committed the IMF to boosting the voting power of countries that had experienced
sustained levels of high economic growth and to focus on the voice of low-income
countries. Taking an ad hoc step toward this end, in 2006, China, Mexico, South
Korea and Turkey got quota, thus voting power, boosts.
5
For a history of quotas and the various formulae used until 2015, see Kaya (2015, Chapter 3).
For most of the institution’s history five formulae and two datasets were used.
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The structural change, however, came 2 years later with the introduction of the
2008 quota formula, which Table 1 summarizes. Along the BRICS’ preferences, the
weight of the GDP in this new formula was significantly larger than in p revious
formulae, permitting the fastly growing economies to translate some of that
economic capacity to representation within the IMF. The inclusion of GDP calculated
at purchasing power parity (PPP) exchange rates, further boosted the large emerging
economies’ economic size and therefore relative voting power. This shift was a first
for the institution, since up to that point, only GDP calculated at market exchange
rates had been a part of the formula. And, it met BRICS’ long-standing demands.
For instance, in the 2002 discussions on the issue, the Indian representative put it
unequivocally: “Quotas and hence contribution to Fund resources should be on the
GNP/GDP computed on a PPP basis” because, as opposed to GDP converted at mar-
ket exchange rates, GDP PPP “better reflect the real value of total output produced
by a country” (IMF, 2002, 3, 6). In the discussions leading up to the formula, the
Chinese central bank’s Deputy Governor echoed these views, “we believe a quota
formula including PPP GDP, which is simpler and more transparent, is the most
effective way to raise the overall share of developing members” (Xiaoling, 2007).
Further, given the build-up of their reserves, the retention of reserves in the 2008
formula revision was a boon to boosting the BRICS’ quota and thus, relative voting
power. Reserves had all along been a factor in the IMF’s quota calculations, but its
retention in the formula was nonetheless subjected to intensive debate pre-reform.
If quotas are seen as a benchmark for accessing loans from the IMF, then the higher
reserves of a country, the lower its need for such funds. A number of advanced
economies initially took this view, but the final outcome was in accordance with
BRICS’ desire to retain reserves.
Table 1: IMF’s quota formula.
CQS = (0.5Y + 0.3O + 0.15V + 0.05R)k.

CQS = calculated quota share.
Y = a blend of GDP converted at market rates (60%) and PPP exchange rates (40%) averaged over a
3-year period.
O = the annual average of the sum of current payments and current receipts (goods, services,
income, and transfers) for a 5-year period.
V = variability of current receipts and net capital flows (measured as a standard deviation from the
centred 3-year trend over a 3-year period).
R = 12-month average over a year of official reserves (foreign exchange, SDR holdings, reserve
position in the Fund, and monetary gold).
k = a compression factor of 0.95. The compression factor is applied to the uncompressed calculated
quota shares, which are then rescaled to sum to 100.
Source: IMF documents.
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344 A. Kaya
However, the inclusion of the “openness” variable (O in Table 1) and the small
weight given to reserves were against BRICS’ preferences. BRICS were particularly
concerned about the impact of openness because it primarily benefitted the
Europeans, given intra-EU trade is counted as inter-country trade. Within-
currency union trade, BRICS’ Directors emphasized, was less likely to cause the
kind of balance of payments crises facing countries trading outside of their own
currency. For example, the Russian Director noted that, like their Indian counter-
part, they could live with the openness variable only if “all intra-union trade was
excluded during quota calculations” (IMF, 2002: 41). This wish, however, was not
met. Further, the BRICS’ Directors would have preferred the weight on reserves
as well as GDP PPP to be higher (e.g. IMF, 2007). Despite these unfulfilled prefer-
ences, the 2008−2010 reforms nonetheless boosted the BRICS’ voting power in
unprecedented ways.
The same cannot be said of the 2008−2010 reforms at the World Bank. For
example, as a consequence of these reforms, the rate of change in G20 emerging
economies’ voting power was 19% in the Bank, compared to 28% in the IMF
(Kaya, 2015: 172−173). China’s gains were twice as large in the IMF compared to the
World Bank’s International Bank for Reconstruction and Development (IBRD). The
2010 change to World Bank’s shareholding formula, which officially de-linked World
Bank shareholding calculations from the IMF’s quota calculations for the first time,
also fell short of BRICS’ expectations. This formula consisted of three components:
economic size, following the IMF blend of GDP (75%), “development contributions”
(5%), and cumulative contributions to the International Development Association
(IDA) (20%). Both the low weight of development contributions — a catch-all phrase
of countries’ input to the Bank’s mission of economic development — and the high
weight of the IDA contributions ran counter to the BRICS’ interests. Not only have
BRICS been relatively significant borrowers from the IBRD (as a proportion of
the IBRD’s total lending), they also contribute miniscule amounts to the IDA, whose
primary donors remain the G7 countries (see Kaya, Chapter 6 for more detail). Nor
did the BRICS end up seeing the reform they wished to see in IDA’s donor-controlled
governance. Another issue is the Bank is controlled relatively more from the top by
a President, who has always been an American. In contrast, more of the IMF’s senior
management is now from BRICS, including a Deputy Director from China.
Voicing Discontent with Key Policies
The picture has been similarly one of partial success when it comes to policy
changes. Given space constraints, the pursuant discussions on this topic focus on
the two issues most critical to the BRICS’ preferences and the governance of the
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global economy: (a) BRICS’, particularly China’s, calls for change to the basket of
currencies that make up the IMF’s Special Drawing Right (SDR), and (b) BRICS’
calls for leniency on the use of capital controls within the IMF.
Case of the Special Drawing Right (SDR)

In November 2015, the IMF welcomed the Chinese renminbi to the basket of
currencies that constitute the SDR, the IMF’s reserve asset, with this decision to
be implemented in October 2016. The SDR’s original purpose was to provide relief
from dollar-dependence in the Bretton Woods era of fixed exchange rates, when in
the 1960s the supply of dollars (USD), which was tied to gold, was becoming tighter
in the face of growing demand (e.g. Clark and Polak, 2002). A basket of currencies
(until October 2016 — the USD, the euro, the Japanese yen, and the pound sterling)
determine the value of the SDR.6
Two main criteria have governed the inclusion of a currency in the SDR basket.
First, countries/regions whose currencies qualify for the basket hold the highest
ranks in terms of the value of their exports of goods and services. A 2000 decision
limits the exports criterion to the currencies of the top four exporters (IMF, 2010a).
Second, in 2000, with encouragement from the staff, the IMF Executive Board
decided to introduce a second requirement for qualification to the SDR basket —
that a currency be “freely usable” (FRU).7 Until the November decision, the latter
of these criteria was seen as the impediment for the Chinese currency to enter the
SDR basket.
BRICS, over the years, have requested re-evaluation of the SDR basket, with the
eventual goal of revamping SDR’s role in the international monetary system (IMS).
Famously, in 2009 the Governor of the Bank of China, Zhou Xiaochuan, called for
the creation of a “super sovereign” reserve asset to reduce IMS’ reliance on the USD
as the primary reserve currency, specifically pointing to the SDR to fulfil this key yet,
unclaimed role (Xiaochuan, 2009). In 2011, at various platforms, the G20 emerg-
ing economies called for the IMF to reform the SDR to enhance its importance.
They also argued that the inclusion of an emerging economy currency in the SDR
basket could increase the attractiveness of the asset (IMFC, 2011; IMF, 2011a). In
a representative statement, the Brazilian Finance Minister emphasized, “[t]he SDR
could play a larger role in the international monetary system, especially if its basket
is enlarged with the inclusion of emerging market currencies” (Mantega, 2011).
6
The rationale of a basket methodology, which commenced in 1974, is to reduce volatility
in the value of the SDR (Polak, 1979).
7
Freely usable means the currency is widely traded and used in international transactions.
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346 A. Kaya
At the same time, BRICS’ summits have also emphasized the role of the SDR and
its valuation.8
Initially, however, these calls were met with resistance from the dominant share-
holders of the institution. For example, the 2010 IMF evaluation of the SDR basket
commended China’s efforts to liberalize the international usage of the RMB, but found
the currency to fall significantly behind the currencies in the SDR basket in terms
of international financial transactions. In other words, the Chinese currency did not
meet the FRU criterion, though by 2010 China had become the third largest exporter
(IMF, 2010b). Further, in 2011, Timothy Geithner, the US Secretary of the Treasury,
downplayed the importance of the SDR: “[It] can’t provide the role that many people
would aspire to it, and there is no risk of ” it replacing the USD (Geithner quoted
in Somerville and Wroughton 2011). The European representatives were, similarly,
resistant to change with an emphasis on the FRU criterion (e.g. Rostowski, 2011).
Eventually, however, BRICS’ “voice” on the issue compelled several in-depth staff
reports (e.g. IMF, 2011a, 2011b). The last one of these reports (IMF, 2015) reversed
course on earlier ones, noting that the renminbi’s (RMB) international usage, in trade
and trading, had increased significantly, and the Chinese authorities were willing to
improve impediments, such as access to financial markets on mainland China. The
report essentially justified the extension of the SDR basket to the RMB, while at the
same time committing China to further capital account liberalization.
Changing Views on Capital Controls

Until after the 2008 crisis, the IMF’s general policy toward controls on inflows of
capital was one of “stigmatization”, seeing them as “harmful for economic per-
formance, generating severe distortions, delaying policy adjustment and sending
negative signals to market actors” (Chwieroth 2015: 52). Indeed, in 1995 the IMF’s
Executive Board debated at length a staff proposal to endorse capital account
convertibility as one of the IMF’s mandates.9 While different works disagree on
the sources of this emphasis on capital account liberalization (e.g. Abdelal, 2007;
Chwieroth, 2010; Stiglitz, 2002), they converge on identifying it as a key area of the
IMF’s advocacy of liberalization.
Yet, after 2010, the IMF’s position on capital controls seems to have evolved
(Gallagher, 2014). For example, in a key 2011 policy paper, the IMF staff noted that
“Emerging markets…are experiencing a surge in capital inflows…While inflows are
typically beneficial for receiving countries, inflow surges can carry macroeconomic
8
See, for instance, Third and Fifth BRICS Summit Declarations (http://www.brics5.co.za).
9
These discussions died out, as there was inadequate shareholder support to extend the
IMF’s jurisdiction, especially after the Asian crisis.
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and financial stability risks” (IMF, 2011b: 3, emphasis added). This shifting position
culminated from a series of articles by IMF economists questioning the previously-
held conventional wisdom in addition to years of pressure by emerging economies,
particularly Brazil, but also China and India. In fact, BRICS pressed on this matter
not just within the IMF, but also through other platforms. Importantly, in 2011 the
G20 released “Coherent Conclusions” on capital account management, supporting
the right to control inflows (ibid.: 11).
Although this shift in institutional stance was significant, it nonetheless did
not go as far as completely meeting BRICS’ preferences. For one, although BRICS
preferred to not bring the management of capital flows under IMF surveillance,
a 2012 shift within the IMF endowed the institution with powers to undertake
surveillance on capital account movements (Gallagher, 2014, Chapter 6). In other
words, national autonomy was restricted in favor of multilateral guidance. At the
same time, the Brazilian view of mutual-adjustment, where both capital sending
and receiving countries had to take measures to decelerate the flow of cross-border
capital, was overlooked (ibid.).
Explanations
What explains these (partial) successes BRICS have had?
Credible Threat of Exit
One plausible answer appears to be their credible threat of exit. Randall Stone
(2011), for instance, argues that the options a state has outside of the institution
increases with greater economic power. And the more options a state has outside of
the institution, the greater the willingness of the other members of the institution to
allow the state to have exceptional sway over the institution. From this perspective,
as the BRICS’ economic importance has increased, so have their exit options. This
point holds true even in the absence of the creation of new institutions. For instance,
increasing economic fortunes have allowed BRICS to build up foreign exchange
reserves, which in turn provide these states with self-reliance mechanisms during
crises. In the presence of the increasing credibility of the threat of exit, if the current
institutions are to retain their participation, then they need to heed BRICS’ expres-
sions of discontent. In Stone’s words, the membership needs to “restore incentives”
for the exiting state to “invest [back] in the institution” (40).
Kastner et al. (2016: 171) also emphasize the importance of exit options: “China’s
favorable outside options, combined with perceptions of its indispensability on issues
of global financial governance, provided China with the wherewithal to pursue a
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348 A. Kaya
hold up strategy — a strategy by which China could make its cooperation conditional
on concessions from other actors.” Here, the aforementioned reforms are seen as
the conditional “concessions”. While the authors’ exit argument is compelling and
“hold up” is a pithy concept, it is debatable whether there was actual hold-up. Long
before Congress had ratified the IMF reforms, China, and the other BRICS, had
already provided credit lines to the IMF (Kaya, 2012), had consistently participated
in reform discussions, and had conceded to reforms that did not meet their full
demands. China had even agreed to voting increases below what the calculations had
shown. Even more, whether the reforms were concessions per se remains debatable.
The upshot is that from one perspective, the threat of exit compels increases to the
BRICS’ ability to rectify their discontent with the institutions. And, the institution’s
(partial) meeting of these demands, in turn, incentivizes them to cooperate in the
institution.
Institutional Factors
Analyzing different issue areas, other authors have pointed to the importance of
various institutional factors, as well as the role of advanced economies, which act
as institutional gatekeepers (e.g. Gallagher, 2014; Kaya, 2015). For instance, the
way in which the IMF is funded, with quotas and lending lines, demands more
upfront contributions from shareholders than the way in which the World Bank is
funded, since the IBRD can raise its own funds and the bulk of its capital is callable
(drawn only when needed), which has never happened. Even more, since the IDA
is donor-dependent with the advanced economies as its major donors and because
these states are loath to forgo influence over it, there was little impact the threat of
exit could make (Kaya, 2015). In another example, the staff ’s changing views on
capital controls, backed by new economic theories and research, has made them
more amenable to the emerging economies’ views on capital controls (Gallagher,
2014). From this perspective, the institutional effects of underlying economic power
will be contingent upon particular institutional characteristics (Kaya, 2015).
Negotiation Strategies
Another set of factors that could be considered is strategies for change (e.g. Kahler,
2013; Gallagher, 2014; Chwieroth, 2015). Gallagher, for instance, notes that on the
issue of capital controls, BRICS skillfully connected their demands for change in IMF
policy to the academic shifts underway in the institution. And, the relatively uni-
fied voice of BRICS on critical financial governance issues eased their success with
reforms. There are, however, remaining questions here. For instance, would even the
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best of strategies work in the absence of other factors, such as lack of willingness for
change on the part of dominant states? Plausibly, lack of intra-group cohesion, poor
timing, or institutionally irrelevant framings of voice can act as stumbling blocks
even when the pathway to reform is relatively clear.
2008 Financial Crisis
One final factor is the 2008 global financial crisis (GFC), which has stressed
advanced economies, thereby reminding the world of underlying shifts in economic
power, and increased the demand for borrowing from the IMF and the World Bank.
Rather than a cause for the particular changes, however, the 2008 crisis seems to,
at best, explain their timing. Specifically, 2008 reforms at the IMF were foreseen in
2006, and the 2010 reforms were foreseen in 2008, but perhaps they could not be
delayed beyond 2010 because of the IMF’s need to replenish its coffers during the
global crisis. A similar argument could be made in the case of the Bank.
In sum, the threat of exit needs to be coupled with institutional explanations in
order for it to better explain success with voice.
Pathways to Exit?
Since the credibility of exit increases with alternative institutional options and
because the extent to which these institutions are truly alternatives could signal
pathways to exit (if not partial exit), it is important to analyze the institutions created
by BRICS. This section’s discussions on the AIIB, the NDB, and the CRA suggest
that while these institutions are not truly substitutes of existing institutions, which
would strongly point to exit (Hirschman, 1970), they nonetheless should be taken
seriously as future pathways to exit, if BRICS’ “voice” in current IFIs is stymied.
Asian Infrastructure Investment Bank (AIIB)
The BRICS’ most significant institutional achievement stands as the AIIB, which in
early 2017 had 57 members, 37 of which were from Asia. A widely-noted fact about
the institution has been that a number of key American allies — including the UK,
Germany, Australia, and South Korea — joined despite US officials’ discouragement
(Perlez, 2015).10 The AIIB’s main mission is to “promote investment” for “develop-
ment of infrastructure”, and it currently holds a capital stock of $100 billion (Articles
10
G20 is not included as a BRICS accomplishment, since the transition from G7 to G20 was
led by advanced economies.
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350 A. Kaya
2 and 4 of the AIIB’s Articles of Agreement (AA)). “Sustainable development” is

the other primary goal of the institution. The institution is endowed with functions
that are similar to the WB Group: it can directly loan or co-finance, make equity
investments in an institution, guarantee loans, and provide technical assistance.
Like the IBRD, it can buy and sell securities to raise funds (Chapter IV of the AA).
The institution’s structure also bears significant similarity to existing IFIs, with
a Board of Governors composed of all members and a smaller Board of Directors
(12 members, with nine from regional members) as well as a professional staff. As
in the IMF and the WB, as the numbers would suggest, while some members have
their own Directors, other members share a Director under a constituency system.
Also, as in the IFIs, voting power is weighted based on the member’s capital sub-
scriptions. China is the highest contributor (about 33% of the total capital) with the
greatest formal voice (about 28% of the voting power).11 Paralleling the IFIs, there
are also “basic votes”, which are distributed to members equally. Currently, the basic
votes constitute 12% of the member’s total voting power. Interestingly, this number
is about the original share of basic votes in the World Bank (11%), and was the
number aimed by a range of developing countries in the 2010 reforms (Kaya, 2015,
Chapter 5). In a further similarity with the WB, the AIIB has both paid-in capital
(20% of the total capital) and callable capital (80% of the total capital, to be called
upon in time of need) (Chapter II of the AA).
Another important similarity with the IMF/WB lies in the way in which the dom-
inant member of the institution — in this case, China as opposed to the USA — exer-
cises institutional power. As the institution’s main architect, on decisions that require
a “Super Majority” (two-thirds of the vote representing at least three-fourths of the
total voting power), China so far has de facto veto power. Recent statements by the
AIIB President, Jin Liqun, however, have emphasized that China does not intend to
use its veto and expects to lose it, as new members join the institution (Kynge and
Pilling, 2017). Given that US veto power in the WB (as well as the IMF) was retained
throughout, this would be a novel development at the intersection of power and
institutions. Further, the AIIB is headquartered in Beijing — the placement of the
IMF/WB in DC has long been seen not just as a symbol of American dominance in
the institutions, but also as a conduit for American informal influence over them.
The AIIB, however, also has some unique features. Noted as an “innovation” by
some scholars (e.g. Chin, 2016), the organization does not have a resident Board
of Directors. The reasoning for this institutional feature was to speed up lending,
in direct criticism of the cumbersome procedures of accessing the IMF and the
WB. Existing research (Stone, 2011) shows that when there are greater levels of
11
As of September 22, 2016, as reported by the institution.
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delegation (from the Directors to the management/staff), this actually provides

more opportunities for the dominant shareholders of the institution to influence key
policy outcomes, such as lending. Higher levels of delegation permit obfuscation of
discussions pertaining to policy, providing an opportunity for the major shareholders
to insert their (likely disagreeable) preferences without the prying eyes of the rest of the
membership. Hence, existing research would suggest that the lack of a resident Board,
all else equal, should make it easier for China to pursue its policy preferences relatively
more effectively. Without adequate data on lending, however, this point remains theo-
retical, especially because principal (shareholder)-agent (staff) problems that plague
other international institutions will also be relevant here (e.g. Hawkins et al., 2006).
Indeed, more certainly, the lack of a non-resident Board suggests the staff ’s influ-
ence over the policy decisions. This is compounded by the fact the AIIB President,
like his/her counter-part at the World Bank, holds a significant deal of sway over
the institution. For now, the AIIB seems committed to hiring based on professional
criteria — “an open, transparent, merit-based process”, which means the training of
the staff and the tendencies they bring with that training will be crucial variables to
study in the coming years (AIIB AA, Article 30). It also appears that the selection
of the President will be more open than the process at the World Bank. Until the
election of Jim Yong Kim in 2012, the WB’s process did not include transparent
interviews; whereas, the AIIB’s Articles of Agreement foresees voting by the Board
of Governors, though with a special majority (ibid., Article 29).
The New Development Bank (NDB)
While the AIIB stands as the BRICS’ most impressive institutional achievement, the
NBD, which was India-initiated, shortly preceded it, having been launched at the
2014 Fortaleza Summit of the BRICS (Cooper and Farooq, 2015). The NBD endorses
the same mission as the AIIB: investment in infrastructure and sustainable develop-
ment. Yet, its membership is restricted to the BRICS. While originally China pushed
for unequal contributions to the NDB, based on capacity to contribute, the other
countries rejected this design with the fear that it would give China too dominant
of a role (Kirton, 2015). A compromise on China’s part led to the institution being
founded with $20 billion paid-in capital shared equally among its five members
(ADB, 2014). Like, the AIIB, NDB can provide financing in local currencies.
Contingent Reserve Arrangement (CRA)
During the Fortaleza summit, the BRICS also agreed on a currency swap arrange-
ment worth $100 billion to be activated in case of balance payments crises, which
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352 A. Kaya
could take the form of either a precautionary credit line or an actual provision of
liquidity. Brazil, Russia, and India pledged equal amounts of $18 billion toward this
arrangement, whereas China and South Africa promised, respectively, $41 billion
and $5 billion. With its focus on crises and currency swaps, some could question
whether this arrangement could replace the IMF.
Key institutional features of the agreement suggest that rivaling the IMF is likely
not the CRA’s purpose, nor is it in its capacity. First, the arrangement promises
credit lines (see Article 1b of the CRA). Since states do not have to make assessed,
mandatory contributions as in the case of the IFIs, their commitments are relatively
lower. Second, only the BRICS are eligible to access these credit lines, which means
that the institution will not be as multilateral as the universal IMF. Hence its capacity
to provide financial stability as a global public good is restricted. Third, the IMF’s
technical capacity as well as its ability to dole out loans with conditionality remain
attractive to countries, as the case of Germany’s insistence on IMF’s recent (2010,
2012) involvement with Greece shows. Fourth, CRA actually foresees IMF involve-
ment. If countries want to access more than 30% of their maximum allowance from
the reserve arrangement (which is a country-specific multiplier of each country’s
contribution), then they need to have an ongoing borrowing arrangement with the
IMF (Article 5 of the CRA). Put differently, 70% of a country’s access to the CRA is
contingent upon an IMF arrangement, with which the country should be in com-
pliance. In this respect, while the CRA may further reduce the already diminished
chances of the BRICS’ reliance on the IMF, it cannot be assessed as a truly alternative
institution at this stage. Similarly, bilateral and regional currency swap agreements,
such as Chiang Mai, are ruled out as alternatives to the IMF, even if their role in
buttressing balance of payments crises for a short period is acknowledged (Kawai,
2015; Li, 2015).
Explanations
What explains the BRICS’ moves to create these new institutions, which can be seen
as creating pathways for partial exit or as boosting the credibility of exit?
Institutional Gap
One explanation is the need to focus on infrastructure investment, which is

inadequately met through current development institutions. Here, a number
of BRICS, prominently China and India, have voiced the gap in infrastructure
financing with particular references to the $8 trillion gap claimed in an ADB study
(Wan, 2016: 48; see also Chin, 2014). From this perspective, then, inadequate
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provision of a quasi-public good has compelled a new leadership to emerge in

the global scene. While such arguments about an “institutional vacuum” are
important to recognize, BRICs’ leading of the creation of new institutions cannot
be explained by mere reference to it, since an explanation for why the vacuum
was filled is pertinent.
Slow Reform at the IMF/WB
Perhaps the most widespread explanation for the BRICS’ creation of new institutions
has been the slow nature of progress on reform at the WB/IMF. Particularly, the
significant lag between when the 2010 reforms were approved within the IMF and
when they were ratified by the US Congress met with widespread public criticism
(see above). Ben Bernanke, the former Chairman of the US Federal Reserve, for
instance, remarked that “The US Congress is largely at fault for all that’s happening
[i.e. ‘exit’]”, “The US Congress has not approved it. They should, they haven’t…So
I understand why other countries say, ‘well let’s take our marbles and go home’”
(Bernanke quoted in Pilling and Noble 2015). David Dollar, a well-known expert on
China and former World Bank official as well as an advisor to the AIIB, expressed
similar sentiments, pointing to the inefficiencies in the Board-led loan diffusion by
the WB as well as unfulfilled demands by BRICS for more infrastructure lending by
the Bank (Dollar, 2015). While the World Bank’s cumbersome lending procedures
could reasonably explain the emergence of the AIIB and its dedication to faster
loans, the connection between the IMF and the AIIB seems a bit looser — a point
which is further discussed below. Generally, however, failed reform lowers the
cost of exit, since there is less to lose in (wholly or partially) abandoning existing
institutional frameworks (Reisen, 2015).
Chinese Ambitions
China’s recently more assertive attitude could explain the creation of the AIIB and
the NDB (Wan, 2016). As Wan (ibid.: 44) notes, it is important to see these institu-
tions as belonging to a “series of major policy initiatives adopted by the Chinese
government to expand its influence overseas, including a ‘Silk Road economic belt’
and a ‘21st century maritime Silk Road’”. Eswar Prasad of the Brookings Institution
echoes this view, calling the AIIB “an instrument for China to lend legitimacy to
its international forays and to extend its sphere of economic and political influence
even while changing the rules of the game” (Quoted in Perlez, 2015). It has long been
noted that there is also prestige in pursuing a leading position in the international
order (e.g. Gilpin, 1981).
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354 A. Kaya
Since state-specific goals (such as needing to attract infrastructure investment

or the need to invest foreign exchange reserves) could be pursued bilaterally or in an
ad hoc multilateral manner, China’s efforts toward multilateral institution-building
raises questions about the extent to which these institutions are challenging the
existing, US-led multilateral order.
Challenges to the US-Led Order

To the extent that BRICS have success with their voice in the existing institutions,
they inevitably alter it away from the dominant members’ preferences. This occurs by
definition, since the existing institutions reflect the preferences of their creators rela-
tively more.12 For instance, while the AIIB promises to uphold labor, environmental,
and anti-corruption standards, the traditional donors are reportedly concerned
about these standards being eroded (Perlez, 2015). The bigger issue, however, seems
to be the one Gilpin (1981) raised decades ago: as new states gain economic power
and as their capacity and ambition to alter the existing institutional equilibrium
increases, a period of disequilibrium arises, followed by a new equilibrium under the
newly dominant (i.e. formerly rising) states. The first part of Gilpin’s theory seems
to be materializing — the increasing economic prowess of BRICS is translating into
bolder policy positions. But, disequilibrium is in the eye of the beholder. From the
perspective of US officials and those wanting to see a continuation of US global
institutional hegemony, it may seem like a disequilibrium, while it might be a much
welcome and long-awaited shift in institutional rules and norms from the perspective
of others that have lamented a US-dominated order.
Likely, the more immediate disequilibrium will be felt in Asia, particularly by
Japan. Research has shown the negative effects of China’s rise on Japanese influence
at the Asian Development Bank (ADB) (Lim and Vreeland, 2013). And, the AIIB’s
emphasis on regional cooperation and focus on infrastructure is more likely to
immediately affect the ADB’s actions and policies. Perhaps the Memorandum of
Understanding signed between the institutions in May 2016, could be taken as a
recognition of this potentially uneasy co-existence.13 Along these lines, some authors
have argued that the creation of the AIIB indicates clearly that “China wants to
assume regional leadership” (Hamanaka, 2016: 5).
12
Notably, a diverse set of approaches in international relations — realism, liberal institu-
tionalism, historical institutionalism — support this point.
13
ADB, AIIB Sign MOU to Strengthen Cooperation for Sustainable Growth,” May 2, 2016,
www.adb.org.
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Regardless, the success of BRICS-led institutions is yet unknown. In both the

AIIB and the NDB, an important factor to watch is the institutions’ borrowing
and therefore lending costs, as BRICS face less developed financial markets, not
fully convertible currencies with relatively shallow trading markets, and domestic
institutional weaknesses (Reisen, 2015: 8). Additionally, even though IFI reform
and the global development/financial landscapes have been areas where BRICS
have shown relatively high levels of coherence, there exist many plausible sources
of potential conflicts between these countries, including: intra-group competition,
China’s perceived dominance of institutions and conflicting interests given the large
economic disparities within the group. Further, the trade-off between looking inward
to development needs and outward to international influence could intensify during
economic downturns for BRICS.
Crucially, the IMF and the World Bank are still standing, and indeed the recent
changes that BRICS sought and gained within them likely prolong their survival.
Hirschman’s original treatise on voice and exit emphasizes this point: consumers
who exercise voice are those that have decided — for now — to stick with the
product. As Hirschman notes (1970: 83), the “threat of exit will typically be made
by the loyalist — that is, by the member who cares — who leaves no stone unturned
before he resigns himself to the painful decision to withdraw or switch”. By the same
token, however, to the extent that repeated efforts with voice go unsatisfied, not just
pathways to exit, but actual exit can begin to emerge.
In any case, at the time of writing, arguably the largest challenge to the US-led
post-war order seems to come from within the USA itself. A domestic backlash
against globalization has been building for years, including Congressional intransi-
gence and more recently with the new Trump administration’s nationalist economic
policies. While such a state of affairs might be transitional, the long-term effects of it
may not be. For instance, on January 24, 2017, reports of 25 new countries, including
Canada, Ireland, and a couple of African countries, joining the AIIB surfaced (Kynge
and Pilling, 2017). If US abandons the leadership of existing institutions, where it
is formally and informally the dominant member, or if calls for reforms fall on deaf
US ears, then pathways for exit will strengthen and truly alternative institutions may
emerge. The AIIB is providing a glimpse into that possible future.
New Research Frontiers on BRICS and IFIs

How can future academic studies expand upon existing analyses? One, it seems that
the frontiers of research on BRICS and IFIs focuses on specific features of institutions
and how BRICS’ efforts for reform fare across different issue areas. For instance,
research clearly identifies the issue of capital account liberalization as an area where
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356 A. Kaya
BRICS have had some success in achieving their goals for more autonomy on capital
controls. It seems important to probe what made this area particularly suitable
for success. As noted previously, existing studies provide a number of compelling
explanatory factors, ranging from the shift in academic research within the IMF, to
the smart negotiating strategies of BRICS, but more room remains for systematically
exploring the interaction of these different factors. And, studies should analyze why
and how BRICS failed to achieve similar levels of success in other issue areas.14
Second, and continuing with the theme of variation across institutional settings,
it would be helpful to differentiate across the World Bank and the IMF more, instead
of bundling them together. As noted here, BRICS have achieved more of their goals
for reform in the case of the 2008−2010 reforms to the IMF than to the World Bank.
While some studies (Kaya, 2015) argue this had to do with the constellation of a
couple of key factors — the particular funding structure of the IMF being more
state-dependent compared to the World Bank and the institutionally dominant
states’ greater interest in BRICS’ involvement in the IMF — there is room for more
differentiation across the IMF and the World Bank. In particular, the World Bank
faces an increasingly populated arena of development banks, with the recent addi-
tion of the AIIB and the NDB to a relatively long list of regional multilateral banks.
It would be good to probe whether “regime shifting” is a greater possibility for the
Word Bank than the IMF. Similarly, when discussing the effects of the rise of BRICS
on the US-led order, it would be more fruitful to discuss uneven effects across differ-
ent institutions within the order; rather than a single, uniform impact on the system.
Third, while “voice” and “exit” provide a compelling framework that mirrors
actual developments pertaining to IFIs and BRICS (that is, the dominant story has
been BRICS seeking reforms to ameliorate their discontent with institutions, as
well as bolstering their credibility of exit through new institutions), the interaction
between these two phenomena needs fine tuning in the literature. For instance, exist-
ing arguments that explain the formation of the AIIB and the NDB with reference to
slow reform at the IMF are confusing institutional platforms, since AIIB and NDB
have functions similar to those of the World Bank, not the IMF. More likely, the
lack of adequate progress with “voice” during the 2008−2010 reforms at the Bank,
in addition to grievances with Bank’s lending procedures, spurred the creation of
the AIIB and the NDB. Furthermore, even if the IMF could be taken to respond to
any sort of exit (disengagement from the institution), it was not responding to the
creation of the relatively small CRA, which came a few years after IMF reforms were
undertaken. Exit and voice are likely to co-exist and the translation of voice into
For the sake of disclosure, the author of this piece is currently working on such a book
14
project.
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desired outcomes is a lengthy process in multilateral institutions. Therefore, instead

of trying to link the fulfilment of BRICS’ demands for change to clear instances of
(threat of) exit, it is more fruitful to raise questions about when voice, hence loyalty
to the institution, will be abandoned. Finally, “exit for whom?” is a critical question
that needs to be answered. There is a distinction between exit for one’s self and exit
for others. The only new institution studied here that may eventually offer an exit,
an alternative, for others is the AIIB, given it is the only one with membership that
extends beyond BRICS. In this respect, just as it is too late to declare the US-led-
order-as-we-know-it is still intact, it is too premature to announce the dawn of a
completely alternative multilateral order.
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CHAPTER 15
The Representation of BRICS in Global

Economic Governance: Reform and
Fragmentation of Multilateral Institutions
Michal Parízek* and Matthew D. Stephen†
*Institute of Political Studies, Charles University, Czech Republic

†
Faculty of Economics and Social Sciences, Helmut-Schmidt-University
Hamburg, Germany; GIGA Institute of Asian Studies, Germany
Introduction
Already in 2001, when Jim O’Neill wrote his famous Goldman Sachs paper “Building
Better Global Economic BRICs” (O’Neill, 2001), he proposed quite directly that the
growth rates of these continent-sized economies raised questions about representa-
tion in global economic governance (GEG). Specifically, the banker concluded that
the rise of the BRICs would require a new G7 in which major emerging economies
would also be represented (2001: 11). Arguably, O’Neill would get his wish in 2008,
when a financial panic and the threat of economic crisis prompted the George W.
Bush administration to “upgrade” the G20 Finance Ministers’ forum to include a
Heads of Government summit.
The rise and fall of the great powers in history has always generated tensions over
international hierarchies, whether it be in terms of the distribution of territory, status,
or the ability to write the rules of world affairs (Kennedy, 1988; Cox, 1983; Schweller,
1999; Clark, 2011; Bukovansky et al., 2012; Larson et al., 2014). But compared to
historical power shifts, today, the BRICS have emerged in a heavily institutionalized
361
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362 M. Parízek & M. D. Stephen
international system (Zürn and Stephen, 2010; Ikenberry, 2011; Stephen, 2012; Gray
and Murphy, 2013; Kahler, 2013; Lesage and Graaf, 2015). Examples of international
institutions in GEG include the World Trade Organization (WTO), the International
Monetary Fund (IMF) and the World Bank. At the same time, these institutions
embody representational inequalities (Zürn, 2007; Parízek, 2017), meaning that they
allocate the ability to participate in the policy making process unequally. Examples
include the informal hierarchies of participation that characterize trade negotiations
at the WTO, the selective membership of elite forums like the G7 and G20, and the
weighted voting procedures at the IMF and World Bank. In each of these cases, great
economic powers receive more representation than other states.
Almost all of the existing institutions of GEG were created at a time when
the world economy was dominated by advanced, Western, developed economies.
As such, they often embody procedures and practices that favor the established
powers. Today, by contrast, the global economy is experiencing a transformation as
the global economy rebalances, with the BRICS countries, and China and India in
particular, ascending to the position of principal economic powers. Consequently,
representation conflicts have emerged whereby the BRICS have demanded increased
influence over the procedures and practices of international institutions. While the
BRICS want a say in international economic institutions commensurate with their
new status, international institutions are sticky, and established powers are reluctant
to let go of their privileges. As such, conflicts emerge over representation within
GEG, and institutions adapt only imperfectly (Zangl et al., 2016).
In this contribution, we examine how these conflicts over representation have
played out in several institutions of GEG. The rise of the BRICS has led to a general
contest over representational inequality in international institutions. However, these
inequalities vary considerably across institutions, depending on the institutions’
specific features. Consequently, there is significant variation in the content and
outcomes of representation conflicts in different institutions. We therefore examine
the nature of representation conflicts as they differ across institutions. In a second
step, we examine the institutional outcomes of representation conflicts. First, to
what extent have institutions responded to the rise of the BRICS, by allocating
them increased representation? Have the prior institutional inequalities persisted,
or have they been reduced? Second, how did the representation conflict affect the
institutions’ policy output? Third, was the representation conflict resolved through
reform, or did it cause countries to explore outside options such as transferring
policy functions to an alternative existing institution (regime shifting) or creating
a new institution (institutional creation) (Helfer, 2004; Morse and Keohane, 2014;
Urpelainen and Van de Graaf, 2014), thus fragmenting the regime (Zürn and Faude,
2013; Acharya, 2016)?
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The Representation of BRICS in Global Economic Governance 363
The contribution is structured as follows. First, we survey existing theoretical

approaches to understanding the link between the rise of new powers and represen-
tation conflicts in GEG. Following this, we examine the conflicts over representation
that have emerged as a result of the rise of the BRICS in several economic fields,
such as informal economic policy coordination (the G7/G20), trade (the WTO),
crisis lending and surveillance (the IMF), and development finance (the World
Bank). In the conclusion, we summarize our findings and offer some inductively-
derived observations about the factors that lead representation conflicts to generate
different outcomes across different institutions. We find that fragmentation is a
common outcome of insufficient institutional reform. In the context of an external
power shift, institutions appear to need to pass a double test to avoid fragmentation:
they need both to accord new powers increased representation, and maintain their
policy-making capacity. We close with suggestions for future research.
Representation Conflicts in Global Economic Governance

International power shifts have historically led to conflicts over representation in
global governance. After the Napoleonic wars, the Congress System introduced a
hierarchical system in which a club of mutually recognized “great powers” ordered
international affairs among themselves (Simpson, 2004: 91−131; Clark, 2011: 73−97).
Representation was largely limited to the members of this self-appointed club. After
the First World War, the League of Nations took a step towards formalizing this
inequality in a League Council in which four members were represented perma-
nently (Henig, 2010). Similarly, as the Second World War drew to a close, “sovereign
inequalities” (Donnelly, 2006) were once again enshrined, even more explicitly, in the
UN Security Council (Hurd, 2007). At each step, status-based political inequalities
were renegotiated according to evolving criteria that determined which powers
received special representation in the high organs of global governance.
For realists, international institutions need to privilege powerful states if they
are to remain stable. Indeed, because powerful states create and control international
institutions to further their interests, this is their main purpose (Krasner, 1985;
Mearsheimer, 1994). International institutions need to represent powerful states
because without them the institutions will become irrelevant. Constructivists and
sociological institutionalists, by contrast, emphasize the need for institutions to
maintain legitimacy (Meyer and Rowan, 1991; Hurd, 2008; Zaum, 2013). Especially
since the Second World War, the norm (if not the practice) of sovereign equality
has become increasingly significant. In the same way that democracy became a
way to realize the political equality of individuals through equal representation, the
sovereignty of states came to be associated more strongly with equal representation
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in international institutions (Meyer et al., 1997; Donnelly, 2013). The prominence of

“democratic” criteria for legitimacy of international institutions is also said to have
grown (Grigorescu, 2015). The extent to which international economic institutions
can claim to be representative has therefore become, in a sociological sense, a critical
resource of their own legitimation (Meyer and Rowan, 1991; Rapkin et al., 2016).
Finally, rational institutionalists have traditionally emphasized the functional gains
from cooperating through formal international organizations (IOs), in which case
both power and legitimacy play only a subordinate role (Keohane, 1984; Martin,
1992; Abbott and Snidal, 1998). The path is then open to considering representation
as a dimension of purely “rational” design (Koremenos et al., 2001). This is indeed
what Jim O’Neill had in mind when he argued that the rise of the BRIC economies
required creating a new G7 that would be more effective as a forum for macro-
economic policy coordination (2001: 11). There are, then, power-based, cultural,
and rationalist reasons to suppose that international power shifts, embodied in the
rise of the BRICS, will prompt calls for changes in representation within institutions
of GEG.
The demand that GEG be “representative” in some sense therefore finds
practically universal acceptance. But what does representation mean in the context
of contemporary GEG? For Rapkin, Strand and Trevathan, representation is relevant
to IOs in two ways (2016: 78−80). The first pertains to situations where authority
is delegated to some agent on behalf of a group of principals, and refers to mak-
ing sure such an agent “represents” the preferences of those they represent. This
principal-agent (P-A) type of representation is particularly relevant where IOs have
apex bodies, such as Boards of Directors. The second meaning of representation is
“descriptive representation” (or mirror representation), which refers to the extent
to which a legislative body reflects certain relevant characteristics of its political
constituency. Examples of such criteria from contemporary international organiza-
tions include regional representation, share of quota held, or capacity to contribute
to international peace and security (Rapkin et al., 2016: 81). These notions of
representation underpin, inter alia, the kinds of voting procedures that IOs adopt,
such as consensus or majority voting (Blake and Payton, 2015).
In this contribution, we define representation in international institutions
broadly as the ability to participate in the policy making process. It refers to the
capacity to make oneself heard and have influence over the input side of an institu-
tion’s activities. This definition includes representation in apex bodies (P-A repre-
sentation) and descriptive representation (such as voting rules), but also includes
membership in exclusive clubs or the capacity to participate in decision-making
practices. Representation in this sense can be allocated equally between states,
reflecting sovereign equality, but can also be allocated unequally through measures,
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such as weighted voting or exclusive membership. Representation conflicts refer

to political disputes over how to distribute representation within an institution.
Ultimately, how institutions accord representation to various groups is a matter
of political bargaining. Where institutions are unable to adequately accord repre-
sentation to the newly powerful BRICS states, dissatisfied states may turn to extra-
institutional strategies such as regime shifting or institutional creation (Pratt, 2017).
In the cases that follow, we apply the concept of representation to specific institutions
of GEG, and reveal in which of them representation is allocated unequally and, if
so, to what extent it favors the established powers over BRICS. Our focus is mainly
on state representation in IOs, as this is still by far the most dominant mode of
representation in IOs (Zürn and Walter-Drop, 2011), and the major focus of the
BRICS governments. In a second step, we examine the institutional consequences of
these representation conflicts. We discuss whether and how representation has been
adjusted, the impact on the institutions’ policy output, and whether institutional
fragmentation emerged.
Informal Economic Policy Coordination: The G7/G20

In 1975, as an economic crisis loomed and the old policy tools no longer appeared
to work, the first “international economic summit” of what would emerge as the G7
group of major industrialized countries was convened (Hajnal, 2016). Between 1976,
when the addition of Canada completed the G7, until 2008, the G7 would remain the
major great power summit for economic matters at the head of government level. The
G7 can be considered either an “informal” intergovernmental organization (Vabulas
and Snidal, 2013) or a rather formal “club” (Payne, 2008) of major economic powers.
While originating as a forum for discussion and coordination in matters of economic
policy, the agenda of the G7 expanded over time to include adjacent issues such as
aid, climate change and terrorism. Outcomes are typically non-binding, often vague
summit declarations. Its value is seen to lie in its flexibility and the speed with which
it can react to events (Vabulas and Snidal, 2013: 194). Nonetheless, the role of the
G7 in acting as an agenda setter for other institutions of global governance, and
the exclusiveness of the countries represented there, quickly made it a contentious
institution with contested legitimacy.
While the G7 always espoused “shared beliefs and shared responsibilities”
rooted in liberal democracy and the market economy (Group of Seven, 1975), there
have never been formal criteria for membership. Rather, the core G7 members
have increasingly entertained a series of sporadically invited guests (Kirton, 2015:
119−124). Like great power clubs before it, this tended to reproduce a hierarchical
structure of representation in which some states are in, some states are out, and
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other states may do with sporadic invitations to attend. As a purely informal

forum, representational inequality at the G7 has taken the form of the exclusivity
of membership.
Representation Conflict
The process by which the BRICS achieved representation at the high table of GEG
was initiated by the G7 themselves. Beginning in 2007, the then-G8 began formally
to court five major emerging economies as the “Outreach 5” (the “BICSAM”
countries — BRICS minus Russia, but including Mexico) (Cooper and Antkiewicz,
2008). This had been foreshadowed already in 2005 when the BICSAM countries
were invited by the United Kingdom to attend the G8 summit in Gleneagles, as
it became increasingly evident that economic issues — such as negotiations in
trade and climate change — could not be adequately addressed without emerging
economies’ participation (Cooper, 2008; Kirton, 2015). Initially launched for
a period of 2 years, the process was extended into a so-called “Heiligendamm
Process” in 2009, referring to the institutionalization of dialogue between the G8
and the Outreach 5.
The achievement of greater representation for the BRICS in relation to the G7
has two peculiarities. First, Russia had already been courted as a core dialogue
partner in the early 1990s, and had become a member of the expanded G8 in 1997
(Panova, 2008). This put it in a fundamentally different relation to the institution
compared to other BRICS countries. Second, while critical of the G8’s selectivity
and its self-arrogated political role, the BICS states (excluding Russia) were hardly
desperate to join as new members of the pre-existing club. Rather, the BICS were
critics of its exclusivity while calling for alternative platforms of coordination of
economic policy. According to Gregory Chin, China approached the G7 cautiously
because it perceived it as a club for rich countries. Closer association could have
challenged its credentials as a member of the developing world (Chin, 2008: 20).
China was first invited to attend the G7/8 in 1999 and again in 2000, but rebuffed
both invitations (Chin, 2008: 85). Rather than seek formal representation in the G7,
as Jim O’Neill had envisioned, China emphasized the role of the United Nations and
preferred to relocate the economic policy functions of the G7 to the more inclusive
G20, initiated at the Finance Ministers’ level in 1999. India’s identification as a
longstanding pillar of the global South also affected its approach to the G7, with
Abdul Nafey describing it as one of “studied indifference” (Nafey, 2008: 123). The
“Outreach Five” format of inviting the BICS and Mexico as guests was perceived as
incommensurate with India’s rightful status (Nafey, 2008: 126−127). Brazil under
the Lula administration was similarly concerned to build up alternative avenues
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for international cooperation, such as the IBSA Dialogue Forum involving India
and South Africa, rather than reinforcing established Western institutions such as
the G8 (Gregory and Almeida, 2008: 152). South Africa was similarly critical of
the exclusionary character of the G7, but was “among the keener participants”
of the Outreach Five, according to Brendan Vickers (Vickers, 2008: 181). But the
Heiligendamm Process would peter out, especially after the initiation of regular
BRICS collaboration from 2006 (at Foreign Ministers’ level). The approach of the G7
countries — to integrate the BICS as second-class “invitees” or “guests”— was
therefore insufficient to resolve the disagreement over representation in the major
global forum for informal economic policy coordination.
Institutional Outcomes
Ultimately, representation conflicts between established powers and the BRICS

would be resolved not by the expansion of the G7, but by the addition of a G20 Heads
of State and Government forum. This effectively relocated the economic policy func-
tions of the G7 to the G20. This was also a matter of necessity rather than choice. If
the rise of China and the other major emerging economies had increasingly called
into question the legitimacy and effectiveness of the Western-centric G7/8 format,
the global financial crisis (GFC) undermined them completely. As Vestergaard and
Wade put it, continuing to meet as the G7 without consulting with major developing
countries would have been “like the captain of a ship who stands at the wheel turn-
ing it this way and that — knowing that the wheel is not connected to the rudder”
(2012: 258). In other words, there was a strong functional logic in according new
powers representation at the economic high table.
The major and proximate cause, however, was the emergence of new economic
shocks that precipitated the upgrading of the G20. The G20, much like the G7 before
it, was initially convened at the level of finance ministers and central bankers. It was
convened formally for the first time in Berlin in 1999 in the aftermath of the Asian
financial crisis, in recognition of the need to involve newly “systemically significant”
economies in a flexible and timely forum (Alexandroff and Kirton, 2010; Cooper,
2015; Kirton, 2015). At the same time, its membership was determined at least partly
by political considerations (Payne, 2008; Vestergaard and Wade, 2012). While the
G7 has been retained as an informal forum for like-minded states, the emergence
of another major economic crisis in 2007−2008 prompted a shift to the G20 at
the Washington Summit in November 2008 (Alexandroff and Kirton, 2010). The
G7 continues to meet, but the shift in the major apex body of informal economic
governance was made official after the G20 summit in Pittsburgh in 2009, when it
was designated the “premier forum” for international economic cooperation (G20,
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2009: 19). Today, the G20 plays a similar role to that of the previous G7: providing
an informal and flexible forum for powerful countries to seek agreements, which
can then be presented as a fait accompli to outsiders without their participation.
Decisions taken at the G20 can then be externalized to formal IOs such as the IMF
(Vabulas and Snidal, 2013: 194).
The BRICS states have received the G20 format far more positively than the
attempts at incorporation by the G7. The risk of being incorporated as junior part-
ners into a pre-existing G7 club seems to have underpinned the reluctance of BRICS
leaders to endorse the outreach process, who called instead for formal changes to
institutions such as the IMF and World Bank, and expressed a preference for the
format of the G20 (Baker and Donadio, 2009). Additionally, the policy performance
of the G20 as an informal crisis committee for inter-country macroeconomic
policy during the GFC of 2007−2008 has widely been seen as successful, at least
by comparison to the international response to the stock market crash of 1929.
This centrally involved coordinating economic stimulus programs and providing
mutual reassurances to avoid the competitive erection of trade barriers or cur-
rency devaluations (Cooper, 2010; Woods, 2010; Drezner, 2014: 24−56).1 Later, in
November 2010 in Seoul, all the G20 governments endorsed the Third Basel Accord
on banking regulation. The increased representation of the BRICS in the inner circle
does not appear to have decreased its policy output capacity (although see Chodor,
2017). Through the relocation of policy functions from the G7 to the G20 summits,
the BRICS won representation in the focal institution of GEG. Moreover, in the
context of global economic crisis, the G20 largely delivered on its policy functions.
This largely successful case of reform by increasing BRICS’ representation marks a
contrast to other cases, however.
International Trade: The WTO

All of the BRICS, and most notably China, have rapidly expanded their trade
relations and become global trading nations. Indeed, China, with its more than
$2 trillion worth of exports every year, sometimes referred to as the workshop of the
world, is the second largest world exporter after the European Union. International
trade represents one of the cornerstones of the BRICS’ economic growth. In line
with that, since 2012 (when Russia joined), all of the BRICS have been members of
1
There is the objection that the G20 countries would have pursued these policies anyway.
Yet, the G20 is not designed to enforce binding decisions, so it arguably was successful on
its own terms.
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the central GEG institution tasked with the maintenance and further liberalization
of world trade, the WTO.
In the global trade regime, by comparison to other cases discussed further in the
text, the position and representation of the rising powers may seem at first relatively
equitable. The WTO, as the cornerstone of the regime, applies predominantly the
sovereignty-protecting consensus principle as its decision-making rule (Haftel and
Thompson, 2006). Combined with the one-country/one-vote rule, this procedure is
supposed to ensure that dissenting voices are heard and that no-one can be outvoted
when important decisions are made. Jackson (2001) even includes this notion as
the first of the seven “Mantras” of the WTO. Furthermore, the WTO does not have
a powerful secretariat or apex body to which substantial competences could be
delegated, and which could operate in a biased fashion, for example by favoring
the established over the rising powers or over the weaker members (Elsig, 2010). In
other major GEG bodies, formal or informal, this is not necessarily the case (Woods
and Narlikar, 2001). Finally, India, Brazil, and South Africa have all been among the
founding members of both GATT and the WTO, suggesting that they had some say
in the design of the body’s structure and purpose. All these factors point to a possibly
very limited role for representation conflict within the WTO.
Nevertheless, the reality of the BRICS’ positions in the global trade regime is
historically more problematic. First, two of them, China and Russia, only acceded
to the WTO relatively recently, China in 2001 and Russia as late as 2012. While
in the case of Russia, the slow progress may have been at least partly explained by
the wavering interest of Russia itself in WTO membership (Zimmermann, 2007),
in the case of China, its belated accession is primarily attributable to a remarkably
tough accession bargaining process, whereby China has been forced to offer major
concessions to the WTO membership (Kim, 2010; Pelc, 2011; Adhikari and Yang,
2002). This is perhaps most symbolically epitomized by the postponement of the
market economy status for China for 15 years after the accession, until late 2016.
Second, with regard to the representation of BRICS within WTO decision-
making procedures, the notion of consensus decision-making can function in a
variety of ways, from a deeply deliberative process of reaching a common position
(Consultative Board of the WTO, 2004), to an almost rule-free power game, where
the opacity of the procedures enables power bargaining to flourish. In the WTO,
the latter seems to have been notoriously much closer to the reality (Steinberg,
2002). Thus, the capacity for states to exercise their rights to representation within
the WTO has been circumscribed by inegalitarian practices within the institution.
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A number of works discusses at length the concrete mechanisms through which such
a rule-free game may play out in the WTO context (Jawara and Kwa, 2004; Wallach
and Woodall, 2004). One key mechanism has been the selectivity of participation
in inner circles of multilateral trade negotiations, which have effectively operated
as informal apex bodies (Kapoor, 2004) — in other words, unequal representation.
Additionally, the age and path dependence of WTO rules also plays a role.
These mostly date back to the Uruguay Round negotiations, which were still largely
dominated by the established power “Quad” countries (United States, European
Communities, Japan, and Canada). These were able to impose much of their
preferences on others in the final stages of the Uruguay Round, as the rest of the
membership, including the today’s rising powers, faced a serious threat of being
excluded from the newly created WTO (Finger and Nogués, 2002). So the BRICS’
historical lack of representation continues to shape their levels of satisfaction with
the institutional status quo.
In sum, while the consensus and one-country, one-vote principle of decision-
making in the WTO imply a relatively open space for the representation of the
BRICS in the global trade regime, most BRICS members perceive a palpable bias in
the substantive content of the existing rules in favor of the established powers as a
result of their historical lack of representation. As a result, the turn of the millennium
witnessed an increased demand by BRICS states for a real say in the formulation of
the rules and policies governing global trade, and an increase in their readiness to
engage in a direct representation conflict with the established powers. This took the
form primarily of seeking better representation within the informally constituted
“inner circles” of multilateral trade negotiations (Efstathopoulos, 2012; Stephen,
2012: 299−303; Hopewell, 2017). This new assertiveness became most visible at
the notorious Ministerial Conference in Seattle in 1999, but continued through
to the walk-out of the Cancún ministerial in 2003 (Blackhurst, 2001; Narlikar and
Wilkinson, 2004), and beyond (Hopewell, 2017).
Institutional Outcomes
In response to these pressures, the WTO has been relatively successful in i ncreasing
the representation of the major emerging economies, with the participation of
countries like India, Brazil and China in the inner negotiating circles of the Doha
negotiations (Narlikar, 2010) and their increased use of the dispute settlement
mechanism (see Chapter 1; Davis and Bermeo, 2009). There is little question today
that these countries are seen as critical actors in the WTO.
But, while increased representation of BRICS countries may have improved
the WTO’s perceived legitimacy, it has come at a cost in terms of its policy output,
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at least in the eyes of members seeking greater multilateral trade liberalization.

A key consequence has been the effective blockage of the WTO’s rule-making pillar
(Stephen and Parízek, 2019). When the current Doha Round of negotiations was
launched in 2001, it was envisioned to last 4 years, with a mid-term review in 2003
at the Cancún Ministerial Conference. Yet, the Cancún Ministerial turned out to be
the place where the developing world and the rising powers proved able to effectively
oppose the proposals tabled by the established powers (and the Trade Negotiations
Committee chair) and block further negotiations progress along the lines set up by
them (Narlikar and Tussie, 2004; Narlikar and Wilkinson, 2004; Vickers, 2012). In
spite of some further efforts, notably in 2007, further collapse occurred in 2008 and
the negotiations have never fully recovered from this shock.
The first substantive results of the Doha Round came only in 2013 at the Bali
Ministerial Conference, where a Bali “mini-package” was approved (Wilkinson
et al., 2014). In late 2015 a further “Nairobi” package was approved, again cover-
ing a relatively small portion of the original Doha agenda (European Centre for
International Political Economy, 2015). After that, for the first time, some of
the WTO member states, notably the United States, refused to join a common
declaration reaffirming the states’ commitment to the Doha Round, suggesting
that in their eyes, the round is “dead”, something they have effectively argued for
a number of years anyway (Schwab, 2011; WTO, 2015). Although this has so far
not transformed into an official outcome, if it ever will, this may effectively mean a
fairly ignoble end to the first and so far only multilateral negotiation round under
the auspices of the WTO. The possible consequence, in terms of the internal WTO
negotiation principles, is a move away from the “single undertaking” scheme to
the proliferation of various plurilateral agreements in which members may sign
up individually. In sum, the stronger representation of BRICS, and their effective
ability to block proposals by the United States and the EU, has established a new
status quo in the trade regime. This frustrated established powers, which are now
unable to effectively project their interests into new regulation. In consequence, the
rule-making has for a number of years systematically failed to deliver new policy
output (Stephen and Parízek, 2019).
In the other pillars of the WTO, the Dispute Settlement Mechanism (DSM) and
the Trade Policy Review Mechanism, the representation conflict is less notable. With
regard to the DSM, China has consistently been among the most frequently targeted
countries (with the exception of the EU and USA), but it has also itself developed
into one of the most frequent litigators (WTO, 2017). Besides its obvious economic
relevance for a number of actors, Chinese non-market economy status, held until
2016, has prompted a number of cases, especially challenging China’s opponents’
anti-dumping measures (Manjiao, 2012). The other BRICS seem to have acquired
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the capacity to fully participate in the DSM as well, distinguishing them clearly from
many other developing countries and especially LDCs (Busch, 2007; Vickers, 2012).
In the Trade Policy Review Mechanism, the position of China, India, and Brazil,
has been also found to be close to equal to that of the traditional powers in recent
years (Karlas and Parízek, 2019, appendix), as compared to the first decade of the
WTO (Ghosh, 2010). This suggests that in the everyday business of the organization
BRICS are today effectively (close to) equally represented as the established powers.
Symbolically, this may be represented by the current Director General, Brazilian
diplomat Roberto Azevêdo.
Nonetheless, one side effect of greater BRICS representation has been that the
rule-making pillar of the WTO essentially fails to perform. This is clearly a state
which is helping to drive the very prominent trend of regionalism and the focus
of a number of states on the creation of preferential trade agreements (PTAs). This
trend of the fragmentation of the global trade order has been clearly driven by the
established powers’ dissatisfaction with the “new” status quo in the WTO, whereby
they are unable to effectively project their interests into new regulation. However,
BRICS have not been completely left behind in this process either, and especially
China is developing a network of PTAs, such as with Australia, Chile, Peru, or
notably ASEAN. Similarly, India has several new PTAs with e.g. Japan, Korea and
with ASEAN as well as Mercosur. Brazil enjoys the preferential relations negotiated
by Mercosur. South Africa and Russia then mostly develop preferential relations with
their close neighbors, without a clear global reach. Greater BRICS representation in
the WTO can be associated with greater input legitimacy but has come at the cost
of policy output, at least in one of its core functions. This has fueled a trend towards
fragmentation in the trade regime.
International Financial Stability: The IMF

The WTO demonstrated flexibility in adapting to the rise of the BRICS. The situation
is radically different in the case of the IMF, the primary multilateral institution for
the international monetary and financial system. With its weighted voting system
and the effective veto power of the United States and European Union, the IMF has
been widely criticized for failing to represent BRICS appropriately.
The BRICS countries have made their dissatisfaction with their representation
in the IMF well-known, and have made reform of the IMF one of their major
priorities, calling for “reviewing the IMF role and mandate so as to adapt it to a
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new global monetary and financial architecture” (BRIC Finance Ministers, 2009: 9).
They have pushed for significant changes in the distribution of voting quota,
a redistribution of representation on the Executive Board, and the selection of the
IMF Director based on an “open merit-based processes, irrespective of nationality
or regional considerations” (BRIC Finance Ministers, 2009: 9). As a shareholding
institution, the IMF’s system of weighted voting means that any increase in repre-
sentation for emerging economies must be redistributed from other IMF members.
Representation in the IMF is a zero-sum game.
Votes at the IMF are directly determined by the special drawing right quota
allocation, which is in turn given by a formula including several economic i ndicators.
The current quota formula of the IMF is a mixture of GDP (50%), economic
openness (30%), variability (15%), and financial reserves (5%), with GDP blended
60% in market and 40% in purchasing power terms. The very composition of the
formula, however, is far from economically obvious, and already in the 1940s its
construction was guided primarily by political considerations (Woods, 2006). While
the current formula includes, for example, the variable of economic openness and
variability (favoring small open economies), the BRICS have argued that such vari-
ables as “contribution to global growth” should be included instead (Vestergaard
and Wade, 2015). Thus at the IMF, not only the distribution of representation is
contested, but the criteria for allocating representation are contested too.
The current allocation gives the United States 16.5%, followed by Japan and
China with around 6% each. Because many important decisions (such as voting
quota reallocation) require an 85% supermajority, this accords the United States dis-
proportionate representation. At the same time, the voting total of EU members, even
excluding Britain, exceeds the 15% threshold as well (International Monetary Fund,
2017). This gives the United States but also the EU de facto veto power. Furthermore,
while the formula is supposed to undergo a periodic review, its results do not get
implemented automatically, but instead need to be ratified by the IMF membership.
The last 2008−2010 14th General Review of Quotas took until December 2015 to be
ratified by the United States, postponing the reform implementation by a staggering
5 years (International Monetary Fund, 2015). Moreover, despite the appointment of a
Chinese deputy managing director in 2011, the BRICS have not been very successful
in gaining positions amongst IMF staff (Ferdinand and Wang, 2013). Representation
conflicts in the IMF case have been both protracted and contentious.
Institutional Outcome
What institutional outcomes have followed from this severe representation conflict?
Rather remarkably in the light of bombastic rhetoric connected with the quota
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allocation reform mentioned previously, the actual redistribution of voting power

in response to the BRICS’ demands has been low (Vestergaard and Wade, 2015).
Moreover, it has already been surpassed by new economic realities. Overall,
according to the IMF’s own simulations, if the quota were applied using contempo-
rary economic data (2014), the quota share for “emerging markets and developing
countries” would increase by 13 percentage points to 49.3%. China alone would
gain 5.6 percentage points, India 1.0, Russia 0.7, and Brazil 0.6 percentage points
(International Monetary Fund, 2016: 6). The standard line in IMF publications
goes (rather euphemistically) that “[t]he quota formula is typically used to inform
discussions on the allocation of quota increases, but other considerations are also
taken into account” (International Monetary Fund, 2016). Due to rapid growth and
increased openness in major emerging economies, the extent of “out of lineness”
currently resembles that prevailing before the previous quota reforms, agreed in 2008
(ibid., 17). Even by the established criteria for quota allocation, generally considered
to favor small open economies, the BRICS (excluding South Africa) are greatly
under-represented, and China is woefully underrepresented. This “descriptive”
representativeness of the IMF is deeply unbalanced.
Second, the prominent position of the established powers is also visible in the
composition of the IMF Executive Board. Among the 24 directors on the Board, only
eight are held by an individual country, the remaining 16 by often very heterogene-
ous country groups. The individual directorships are held by the United States, Japan,
Germany, France, and United Kingdom on the one hand, but only by China and
Russia on the side of the BRICS. Both India and Brazil are dominant members in
their respective constituencies, while two other seats are occupied by constituencies
of smaller European members, meaning that the EU/European Economic Area states
completely control five directors (Woods and Lombardi, 2006). This erodes the “PA”
representativeness of the IMF’s apex body further.
Quota and decision-making power have not been the only concerns with the
IMF raised by the BRICS. The policy output has been consistently under criticism as
well. None of the BRICS has been in urgent need of an IMF loan itself for more than
15 years. The fallout from the Asian financial crisis of 1997, and the United States’
(ab)use of its influence in shaping the IMF’s response, still carries a sizeable deterrent
effect for the rising powers, with regard to the economic as well as political costs
of the loans’ conditionality (Henning, 2017). The BRICS are concerned that their
under-representation may lead IMF policy output to favor the established powers
and their allies (Qobo and Soko, 2015: 281). In other words, the BRICS fear that the
IMF is a jointly funded tool under a direct control of and promoting the interests
of the United States and the key European members (Momani, 2004; Copelovitch,
2010). More broadly, the IMF is seen as espousing a policy perspective that strongly
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corresponds to the domestic institutions and ideological predispositions common

especially in the United States, and to a lesser extent in Europe and other OECD
countries (Mukherji, 2014; Baker, 2010). This position, favoring a relatively small
role of the state and “hands off ” forms of economic regulation, stands in opposition
to the often strong involvement of central and local government authorities
in the economies of many of the BRICS (Stephen, 2014; Nölke et al., 2015;
Kurlantzick, 2016).
The chronic institutional and ideological under-representation of the BRICS
(except South Africa) in the IMF has translated, over time, into new initiatives of
institutional innovation. Most notably, persistent dissatisfaction with the role of
established powers in the IMF has led in July 2014 to the signing of the Treaty for
the Establishment of a BRICS Contingent Reserve Arrangement, and in 2015 to the
beginning of its operations (Ministry of External Relations of Brazil, 2014b). While
allegedly not meant as a direct competitor to the IMF in the area of short balance
of payments adjustment lending, the BRICS Contingent Reserve Arrangement
was explicitly motivated by the lack of reform of the IMF governance (Ministry of
External Relations of Brazil, 2014a). This represents a clear case of parallel regime
creation, triggered by the unfavorable treatment of the BRICS within the Bretton
Woods institutions (Eichengreen, 2014; Qobo and Soko, 2015; Morse and Keohane,
2014). More directly, frustration with the lack of reform of the IMF appears to be
a contributing factor to the pursuit of the ASEAN+3 Macroeconomic Research
Office (AMRO), which in conjunction with the multilateralization of the Chiang
Mai Initiative, reproduces the IMF’s two core policy functions of multilateral
economic surveillance and crisis lending (Sussangkarn, 2011; Rana et al., 2012).
For these reasons, the AMRO is sometimes perceived as an Asian Monetary Fund
(The Japan Times, 2016). All of this further contributes to the development of sup-
plementary “regional financial arrangements” that diversify and potentially fragment
the institutional landscape (Henning, 2017).
Development Finance: The World Bank

Another area of GEG in which the BRICS have become critically important is
development finance. Key institutions in this field of GEG are multilateral develop-
ment banks: “institutions that provide financial support and professional advice for
economic and social development activities in developing countries” (World Bank
Group, 2013). The International Bank for Reconstruction and Development (IBRD)
and its associated agencies (together known as the World Bank Group, or simply
World Bank) in particular has played the major role in development finance since
the Bretton Woods conference of 1944.
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Much of what has been said specifically about the IMF applies also to the World
Bank. The Bank operates on a comparable decision-making system: a Board of
Governors, an elected Board of Directors with 25 seats, both adopting decisions by
weighted voting, and a President. Like the IMF, established powers are typically priv-
ileged relative to the BRICS in terms of voting rights, seats on the Board of Directors,
and in appointing senior staff members. While basing its voting share allocation
on a modified version of that adopted by the IMF, in reality, there are systematic
departures from the principle that voting power should reflect in large measure the
relative importance of member countries in the global economy (Vestergaard and
Wade, 2015: 7). Moreover, voting quota reform requires a supermajority of 85%,
which creates a large reform threshold that includes a de facto veto for the United
States as well as the EU. As established powers have obvious interests in preserving
their privileges, the World Bank has largely failed to avoid criticism for failing to
adequately represent the BRICS and other emerging and developing countries.
The BRICS have been consistently dissatisfied with their representation at the
World Bank. At one of their earliest meetings, the BRICS called for a “speeding
up” of voice and representation reform at the World Bank, to ensure that it “fully
reflect[s] changes in the world economy” (BRIC Finance Ministers, 2009: 10). They
also called for equal representation between emerging/developing and advanced
economies, without any losses to individual developing countries, and an end to
the collusion between the United States and its allies to always favor the American
nominee for World Bank President (BRIC Finance Ministers, 2009: 10). In terms
of the capacity and funding decisions of the Bank, the BRICs also called for it to
perform a counter-cyclical role to compensate for private investor jitters, including
raising new resources on global capital markets, relax the single borrower limit, and
invest more in infrastructure projects in low and middle-income countries (BRIC
Finance Ministers, 2009: 10).
As at the WTO, the historical lack of BRICS representation has led to the Bank
being guided by a set of principles advocated by the established powers and often
regarded as inappropriate and unacceptably intrusive by the developing world and
the BRICS. India and China, along with other developing countries, also expressed
opposition to perceived liberal biases in the World Bank’s annual Doing Business
Report, introduced in 2004 (Bretton Woods Project, 2013). Having noted that, the
Bank has undergone a more profound reform than the Fund, being the faster of the
two organizations to downplay the Washington consensus rhetoric of the 1990s
in favor of a more open development paradigm (Barnett and Finnemore, 2004;
Rodrik, 2006).
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The principle disagreement of the BRICS with the established powers’ insistence
on conditionality is perhaps most directly prominent in their refusal to adopt
the ‘Western’ standards in their own donor practice. In other words, as the BRICS
have acquired the capacities to become themselves donors of development assistance,
they challenge the existing rules and standards as so far defined and upheld espe-
cially through the policies of the Development Assistance Committee of the OECD
(OECD/DAC). While over the decades the developed countries have adopted a set
of best practices supposed to improve the effectiveness of development assistance,
with a focus on its long-term effects, the BRICS explicitly challenge these standards
(Tierney, 2014). This holds not only for the OECD/DAC rules, but also for not strictly
inter-governmental arrangements, such as the International Aid Transparency
Initiative where none of the BRICS participates (see Chapter 7; Tierney, 2014;
International Aid Transparency Initiative, 2017).
Institutional Outcome
Reforms at the World Bank may be classified as marginally more significant than
at the IMF (Lipscy, 2015), yet ultimately, they share a similar profile by failing to
incorporate the BRICS in positions commensurate with their capabilities or aspira-
tions (Vestergaard and Wade, 2013; Reisen, 2015). In response to the growth of
emerging economies including the BRICS, established powers conceded a reform
process at the World Bank known as Voice Reform, which was approved at the World
Bank’s Board of Governors in March 2010 (World Bank Development Committee,
2010). This centrally involved the addition of an extra seat to the Executive Board
of Directors for Sub-Saharan African countries, taking the total from 24 to 25, and a
reallocation of voting quota that improved the positions of emerging and developing
countries. Yet, as Vestergaard and Wade show in detail (Vestergaard and Wade, 2013;
2015; Wade, 2013), these changes were more cosmetic than surgical. They conclude
that while the IBRD’s official guiding principle is that voting power “should reflect
members’ weight in the world economy” (World Bank Development Committee
2010: 3), this is more rhetoric than reality. As Reisen summarizes, “the BRICS were
right to conclude that developed countries have no intention of losing voice and
voting power in the established multilateral institutions” (Reisen, 2015: 300).
In response to inadequacies of World Bank reform, the most direct institutional
outcome of the BRICS’ effort to make their views represented in development
finance has been the establishment of two new multilateral development banks,
first the “BRICS” New Development Bank (NDB) in 2014 and then, in 2015, the
Asian Infrastructure Investment Bank (AIIB) (Biswas, 2015). Especially the latter
has attracted widespread attention, as the AIIB quickly attracted as new members
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a number of traditional donor countries, including the United Kingdom and all other
European major donors (Peng and Tok, 2016). The lack of adequate representation
of BRICS in the World Bank is widely seen as a core reason — alongside a desire
for more infrastructure investment, the accumulation of large financial reserves,
and a desire to pursue national interests — for them to establish these institutional
alternatives (see Chapter 14; Chin, 2016; Faude and Stephen 2016; Larionova and
Shelepov, 2016; Pratt, 2017).
The increased number of development assistance arrangements may mean more
plurality in aid, not necessarily more fragmentation (Han and Koenig-Archibugi,
2015). At the same time, to the extent to which there exists a development assistance
regime, it is hard to see it as not being challenged by the establishment of new
bodies which may or may not refuse the rules the regime has applied (or purported
to apply) so far. At a minimum, the creation of new multilateral development
banks by the BRICS creates room for institutional choice and increases the bar-
gaining leverage of borrowing countries. This further fragments the institutional
landscape.
Conclusion and Future Research

This survey of BRICS representation in GEG is far from comprehensive, and many
other institutions could have been included. Nonetheless, our focus on the major
economic multilaterals suggests that dissatisfaction with their representation in exist-
ing institutions is a major hallmark of the rise of the BRICS, although the specific
nature of the representation conflicts that ensue is heavily mediated by features
specific to individual institutions. The “need” to make GEG more representative
in response to the rise of the BRICS appears driven partly by power considerations
(the need to co-opt new powers who could challenge the status quo), partly by
performance concerns (the need to ensure systemically significant countries have
a say), and partly by normative questions of legitimacy (the perception that major
developing countries and new world powers ought to have a commensurate role in
international institutions). One avenue for future research could be to formulate
and assess more specific claims about which of these factors is most important in
explaining institutional adaptation to new demands for representation. We speculate
that in light of the historically protracted legitimacy deficits of existing institutions,
the roles of power and (especially) functional performance appear primary in driving
institutional responses to emerging powers.
Another observation flowing from this survey is inter-institutional variation.
Some institutions such as the G20 and the WTO have reformed and accorded the
BRICS greater representation fairly rapidly, while others, such as the IMF and World
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Bank, have done so only slowly and reluctantly. Given the more informal nature
of the representation hierarchies in the cases of the G20 and WTO, this suggests
that more formal institutions with lower veto thresholds will have a harder time at
adjusting to international power shifts.
Lack of representation of the BRICS in GEG more broadly has the potential
to undermine both the performance and legitimacy of existing institutions. In the
longer term, this tendency is likely to lead to greater institutional fragmentation, as
dissatisfied powers — either rising or established — seek alternatives to multilateral
institutions (Acharya, 2016; Stephen, 2017). This raises concerns regarding inter-
institutional coordination (Kahler, 2016). An overview of representation conflicts
and subsequent institutional outcomes in GEG is provided in the Table 1 below.
By way of suggesting further avenues for future research, we highlight several
inductive observations that would benefit from more rigorous investigation.
First, under what conditions do international institutions respond to the rise of
new powers by according them increased representation? Based on the four cases
Table 1: Representation conflicts and institutional outcomes in global economic

governance.
Representation Institutional Outcome

Conflict Representation Policy Output Fragmentation
G7 Membership in the Major policy functions Successfully None: policy tasks
focal institution shifted from the G7 coordinated migrated from G7
for informal GEG to the newly created response to to G20
G20 GFC
WTO Membership in Shift from the old Increased tendency Yes: shift towards
the inner circle ‘Quad’ to new towards Preferential and
of multilateral negotiation circles negotiation Regional Trade
negotiations involving Brazil, deadlock Agreements
India, and China (RTAs)
IMF Voting quota, seats Minor redistribution Minor adjustments Yes: BRICS’ CRA,
on the Executive of voting quota, to policy output ASEAN+3 AMRO
Board, selection move to all-elected
of Managing Executive Board,
Director Managing Director
still European
World Voting quota, seats Minor redistribution Minor adjustments Yes: BRICS’ NDB,
Bank on the Board of voting quota, to policy output China’s AIIB
of Directors, addition of new
selection of seat to the Board of
President Directors, President
still American
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examined in this chapter, it would appear that informal institutions which embody
membership-based representational inequalities are more responsive than formal
institutions with zero-sum representational inequalities. The integration of India and
Brazil into the inner negotiation circles of the WTO membership during the Doha
Round required only an adaptation of pre-existing negotiation practices, rather than
any formal procedural amendments. The shift to the G20 as the focal institution of
GEG also required no formal changes to existing institutions. At the same time, each
of these adaptations entailed an expansion of membership rather than any redistribu-
tion of power among members. As such, both the formality of existing institutions
and the nature of representational inequalities (club-based vs. zero-sum) appear to
affect institutional responsiveness. Informal, club-based institutions appear most
adaptable to international power shifts, while formal institutions with hierarchical
voting rules appear least adaptable.
Second, how does the promotion of rising powers within existing institutions
affect policy outcomes? In the case of the WTO, adaptation to rising powers
appears to have exacerbated negotiation deadlock, while in the G20 and the
other institutions, this was not the case. This may be a result of the WTO’s special
institutional structure, which combines a requirement for consensus with bind-
ing and legally enforceable policy commitments and a strong dispute settlement
mechanism. Both the need for consensus, and the need to find agreement on highly
legalized forms of policy output, may negatively affect institutional adaptation
to new representation demands. This combination of institutional features only
appears in the WTO case.
Third, under what conditions has the rise of the BRICS contributed to institu-
tional fragmentation via the creation of new institutions? Of our cases, it is only
the G7 that largely avoided fragmentation (by shifting to the G20). The G20 is
also the only institution to have successfully increased the BRICS’ representation
and continued to deliver on its (loose) policy mandate. While the WTO success-
fully accorded rising powers increased representation, its trade liberalization
mandate was paralyzed in the process, increasing the incentive for dissatisfied
countries to pursue outside options. The IMF and World Bank, by contrast, have
largely failed to increase representation for the BRICS, which in turn has given
rise to BRICS’ own pursuit of outside options through institutional creation. From
these observations, it would appear that institutions need to pass a double test to
avoid fragmentation under conditions of external power shifts. They need both to
accord new powers increased representation, and maintain their policy effective-
ness. While these speculations need to be further explored (Pratt, 2017; Faude
and Stephen, 2016), this would appear to be a tough hurdle for global economic
governance to meet.
b3508_V2_Ch15.indd 380 11-02-2020 13:20:41

Acknowledgements
Michal Parízek acknowledges funding by Peace Research Center Prague, the Charles
University Research Centre programme UNCE/HUM/028.
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Index
A B
advanced economies, 343 balance of payment, 210, 212
aid, 55–56, 65, 72 Balassa−Samuelson effect, 220
aid, conditional, 142, 144–145 Bandung principles, 145
aid effectiveness, 143, 159, 161, 164–165 BASIC, 291–292, 294–295, 298–304
aid motives, 142–143, 148, 152, 156, Bay of Bengal Initiative for Multi-Sectoral
164–165 Technical and Economic Cooperation
aid, non-conditional, 149, 155, 159 (BIMSTEC), 45
aid, project tied, 144, 154 Big Mac Index, 215
aid transparency, 142, 147, 151, 154, 164 Big Three, 230–231, 233–234, 237,
approaches to regionalism, 116, 125–126, 239–240, 242, 244–245, 248–249, 251
130, 132 bilateral currency swap agreements, 70
arbitration, 260–265, 267, 275 bilateral investment treaties (BITs), 70,
Argentina, 265–266, 271, 273, 275, 277 91, 97–98, 181, 184–188, 190, 193–196,
ASEAN Plus Three (APT), 75 200, 259–261, 263–264, 266, 269, 272,
Asian Development Bank (ADB), 66, 274–278, 281
354 bilateral relations, 122–124, 131
Asian financial crisis, 210, 232–233, 235 BIT denunciation, 185
Asian Infrastructure Investment Bank Blanchard, Jean-Marc, 60
(AIIB), 34, 56, 66, 72–74, 339, 349–351 Brazil, 3, 85, 87, 185–186, 196, 198–201,
Asian regionalism, 122–123 259, 261, 268, 271–272, 279, 282, 314
Association of Credit Rating Agencies Brazilian aid, 146
in Asia (ACRAA), 237–238 Brazilian aid allocation, 148
Association of South−East Asian Nations Brazilian aid data, 147–148
(ASEAN), 38, 44 Brazilian aid history, 146
asymmetrical responsibility, 121 Brazilian aid institutions, 147
authority, 229, 233, 235, 247, 251, 253 Brazilian aid projects, 147
automotive industry, 19 Bretton Wood, 207, 214, 345
award, 266, 269, 277 Bretton Woods institutions, 38
391
b3508_V2_Index.indd 391 11-02-2020 13:21:51

392 Index
BRF, 28 coexistence, 48
BRICS, 3, 47, 66, 83–85, 96, 183–185, 337, Cold War, 41, 150
361–369 Collective Security Treaty Organization,
BRICS aid, 139–144, 165–166 26
BRICS Business Council, 318 Common Economic Space, 23
BRICS cable, 17 common market, 42
BRICS Contingency Reserve Agreement Commonwealth of Independent States, 18
(CRA), 17, 36, 351 companies (see also firms), 261, 263,
BRICS Development Bank, 17, 318 266–270, 273, 275
BRICS donors, 144 Competitive Regionalism, 119
BRICS payment system, 17 comprehensive regional agreements, 120
BRICS summit, 318 conditional preference theory, 221
BRICS Think Tank Council, 318 conflicts of interest, 236
Bridge-Builder, 88, 94 convertibility, 63
Broad-Based Black Economic Copenhagen Accord, 297
Empowerment (BBBEE), 98 corporate bond, 231, 233, 235–236, 238, 241
cost-benefit calculations, 60
C countercyclical financing, 66
capital account, 347 counter-sanctions, 21, 28
capital account opening, 63 crawling peg, 209–210
capital controls, 346 creative compliance, 64
central bank independence, 216, 218 credible commitment, 217
China, 84–85, 87, 194–198, 201, 261, 266, credit lines to the IMF, 348
268–270, 279, 311, 346, 350 credit risks, 236, 242, 250–251
China−ASEAN, 62 creditworthiness, 232–233, 242–243, 245,
China−Australia FTA, 62 247, 251–253
China Inc. model, 63 critical transition, 13
Chinese aid, 156 cross-border terrorism, 44
Chinese aid allocation, 158 currency peg, 209, 211
Chinese aid data, 157 currency swaps, 352
Chinese aid history, 156 current account balance, 211
Chinese aid institutions, 156 current account deficit, 212
Chinese aid projects, 158 current account surplus, 223
Chinese demands for commodities, 103
Chinese outward foreign direct investment D
(COFDI), 71–72 DAC aid principles, 143–144, 147, 157, 166
Chin, Gregory, 65, 69 DAC donors, 141–145, 158, 161, 166
CIS, 22 DAC OECD aid, 140
Clean Development Mechanism (CDM), democracies, 4, 199–200
302 democratization, 104
climate change, 56, 58, 67–68 Department of International Relations
coalition-building, 74 and Cooperation (DIRCO), 95
b3508_V2_Index.indd 392 11-02-2020 13:21:51

Index 393
Deripaska, Oleg, 19 Eurasian Economic Community, 23

developing countries, 6, 209 Eurasian Intergovernmental Council,
development aid, 61, 67 24
developmental state, 97 European Monetary System, 209
development financing, 56, 61 European Monetary Union, 209
direct power, 68–69 European Securities Market Authority
dispute settlement mechanism (DSM), 59, (ESMA), 230, 239, 241, 245
259, 264, 278 European Union, 42
Doha Round, 57, 61, 74 exchange rate regime, 208, 215
dollarization, 211 exchange rate policy, 207
domestic politics, 58, 62, 64, 67, 126, 128 Executive Board, 341
dominant network, 14 exit, 339–340, 347
donor, non-traditional, 141–146, 148, exorbitant privilege, 69
165–166 expropriation (see also nationalization),
double devaluation, 212 263, 268, 280–281
downgrade, 231–232, 243, 245–249 external innovation, 73–74
Dreher, Axel, 70 externalities, 222
Drezner, Daniel, 68–69 external tariffs, 27
dual-currency basket, 211 Exxon, 276
Dutch Disease, 222
F
E fair and equitable treatment (FET), 181,
EAEU, 18, 22 186, 188, 191–193, 195
East Asia Summit, 75 FDI stocks, 91
economic growth, 222 federal systems, 218
economic interdependence, 125, 127–128, Ferdinand, Peter, 59
130 finance, 56, 67–68
economic liberalization, 33, 38 financial crisis, 338, 349
economic regionalism, 120, 127–128 financial disintermediation, 251
economic statecraft, 68–69 financial globalization, 250
Emerging market economies (EMEs), 34, financial intermediation, 234
183, 186–187, 196–197, 199, 201 financial markets, 230, 232, 240, 252–253
Energy Charter Treaty (ECT), 187, financial stability, 352
189 financial statecraft, 69
Energy Governance, 317 firms, 259–269, 273, 275, 278–282
Energy Markets, 311 first face, 69
Energy security, 307–308 fiscal interventions, 104
energy transitions, 315, 326 fiscal policy, 224
environmental standards, 72, 75 fiscal transfers, 104
Eurasian Customs Union, 22–23 fixed-but-adjustable exchange rate, 208
Eurasian Economic Commission (see also fixed-but-adjustable regime, 210
EEC), 24 fixed exchange rate, 208–209, 213, 219
b3508_V2_Index.indd 393 11-02-2020 13:21:51

394 Index
flexible regimes, 209 gold window, 208

floating exchange rate, 208, 212 governance, 229, 236–237
Flores-Macías, Gustavo, A., 71 governance models, 71–72, 75
Foot, Rosemary, 67 Grabel, Ilene, 65
foreign aid, 72 great power, 361, 363, 365
Foreign Direct Investments (FDIs), 40, 61, Green Revolution, 38
71, 181–183, 187, 189–191, 193–195, Gref, German, 20
197–200 Growth, Employment, and
foreign exchange reserves, 347 Redistribution — GEAR program, 89
foreign policy, 4 Gujral Doctrine, 39
Fradkov, Mikhail, 21 Gulf Cooperation Council (GCC), 39
fragmentation, 363, 365, 372, 378–380
free trade agreements (FTAs), 40, 62, 70, H
190–191, 194–195, 201 Harpaz, Marcia, 59, 61, 64–65, 67
French, Erik, 57 He, Alex, 61
hegemonic stability theory, 126
G Hindu rate of growth, 33
G4, 45 Hirschman, Albert, 66
G7, 361–368, 379–380 home bias, 244–249, 251, 253
G8, 366–367
G20, 47, 57–58, 338, 361–363, 365–368, I
378–380 identity conception, 89
GATT Uruguay Round, 90 Ikenberry, John, 64, 73–74
Geithner, Timothy, 346 imported inflation, 219
General Agreement on Tariffs and Trade Impossible Trinity, 215, 217
(GATT), 9, 39, 56 inclusiveness, 101
General Agreement on Trade in Services income inequality, 103
(GATS), 64 India, 85, 190–193, 197–201, 259, 261,
geoeconomics, 25 268, 270–272, 279, 282, 312
geopolitical, 43 India−Brazil−South Africa Dialogue
Germain, Randall, 61 Forum (IBSA), 93, 367
global economic governance, 65, 67–68, Indian aid, 153
72, 74, 309 Indian aid allocation, 154–155
global energy governance, 307, 310, 323 Indian aid data, 155
global energy markets, 307 Indian aid history, 153
global financial crisis (see also GFC), 66, Indian aid institutions, 153
231, 236, 241, 243, 245–246, 251 Indian aid projects, 154–155
global governance, 92 Indian Ocean Rim, 44
global investment regime, 181–186, 189, inequalities, 362–363, 366, 380
193–196, 198–199 inflation targeting, 212, 214–215, 217
globalization, 84, 96, 261, 264, 278, 282 integration, 282
global liberal order, 105 intellectual property rights, 56, 68
global order, 115, 131 interest group politics, 27
b3508_V2_Index.indd 394 11-02-2020 13:21:51

Index 395
interest groups, 60, 62–63 Kent, Ann, 59

international macroeconomic policy Khodorkovsky, Mikhail, 20
s urveillance, 63 Kobayashi, Yuka, 64
international agreements, 260–262, Kosyanov, Mikhail, 21
264–265, 277–279, 281 Kreps, Sarah, 71
International Bank for Reconstruction Kudrin, Aleksey, 20
and Development (IBRD), 34, 344 Kyoto Protocol, 289, 292–294, 298–299
International Criminal Court (ICC), 99
International Development Association L
(IDA), 344 labor standards, 75
international financial governance, 67, 69 large-N research design, 56, 75
international investment agreements lawsuit, 260, 274
(IIAs), 181–183, 185, 188, 190, 194–195, leader-oriented cost-benefit framework,
197–199 60–61
internationalization of the RMB, 69 leadership, 355
International Labor Organization, 101 leading player, 44, 47–48
international law, 276, 277 learning curve, 57–59
international law firms, 260 legalization, 278
International Monetary Fund (IMF), 34, lending, 353
38, 56, 59, 66, 337, 356, 362–363, 368, level of exchange rate, 208
372–380 Liang, Wei, 63
international order, 307, 326 Liao, Steven, 70
international reserve currency, 61 liberal economic order, 84
international trade, 5 liberal international economic order, 56,
international tribunals, 281–282 65
intra-regional trade, 117, 122 liberal international order, 64
investment, 55, 61–62, 65, 260–267, liberalization, 89, 93
269–273, 275–281 liberalizing trade, 95
investor-state dispute settlement (ISDS), like-minded developing country group
181–186, 188, 190, 192–198 (LMDC), 302–303
Inward Foreign Direct Investment, 90 Lim, Darren, 73–74
Israel, 275–276 Li, Xiaojun, 59
issuer-pays, 233, 236, 251 Lomé Convention, 90
Look East policy, 38, 44, 121
J Lukashenko, Alexander, 27
Japan, 354
Johnson Line, 41 M
MacMohan line, 41
K macroeconomic surveillance, 67
Kaplan, Stephen B., 71 majoritarian systems, 218
Kastner, Scott, 67, 71 managed float, 208, 212–213
Kasyanov, Mikhail, 20 Mandela, Nelson, 99
Katada, Saori, 69 manufacturing, 101
b3508_V2_Index.indd 395 11-02-2020 13:21:52

396 Index
Mbeki, Thabo, 87 New Development Bank (NDB), 36, 56,

McDowell, Daniel, 70 66, 72–73, 139, 318, 339, 351
median voter, 217 New International Economic Order, 38
Medvedkov, Maxim, 20 non-alignment, 37
mergers and acquisitions (M&A), 71 Non-Annex I, 289, 297–298, 300, 302–303
micro-foundations, 225 non-discrimination, 64
middle-power, 84, 94 nongovernmental organizations, 280
military regimes, 219 non-interference, 99
mineral commodities, 88 non-tariff barriers, 27
mineral reserves, 88 non-tradables, 222
Missile Technology Control Regime non-traditional donor, 140
(MTCR), 45 normative approaches, 67
Model BIT, 183, 188–190, 192–193 normative influences, 58, 65
monarchies, 219 norms, 55, 57–59, 61, 64
monetary bilateralism, 63 norms-driven approach, 59
Mordashov, Aleksey, 19 norm-shaper, 66
most-favored nation (MFN), 42, 181, 186, norm-taker, 66
188, 190, 192–193, 195–196 NSG, 44
multilateral order, 357 nuclear capability, 42
multinational corporations (MNCs), 182,
185, 188–189, 193, 198, 201, 260, 269, O
281 OECD aid, 151, 166
multi-polarity, 115 Official Development Assistance (ODA),
mutual benefits, 144–145, 149, 165 70
oligopoly, 230–231, 233–234, 242
N “One Belt, One Road” (OBOR) initiative,
Narlikar, Amrita, 57 29, 72, 321, 327
nationalizations (see also expropriation), O’Neill, Jim, 361, 364, 366
264, 276 one-way socialization, 66
Nationally Recognized Statistical Rating “one-way” to “two-way” socialization, 66
Organization (NRSRO), 240 openness variable, 344
Nazarbayev, Nursultan, 27 Organisation for Economic Co-operation
negative game, 42 and Development (OECD), 38
negative sum game, 41 outward foreign direct investment (OFDI),
negotiation strategies, 348 62, 88
neo-colonial, 49 overlapping treaties, 264
neo-institutionalism, 105 overvaluation, 209, 220
NEPAD (the New Partnership for Africa’s
Development) program, 92 P
Netherlands, 263, 265, 270, 272, 274, paper compliance, 68
276–277 Paris Agreement on Climate Change, 289,
New BRICS Bank, 34 291–294, 298–299, 303, 307, 320, 323
b3508_V2_Index.indd 396 11-02-2020 13:21:52

Index 397
Paris Declaration, 143 Regional Comprehensive Economic

par-value system, 212 Partnership (RCEP), 72
Pearson, Margaret, 63 regional cooperation, 118, 122–123,
People’s Bank of China (PBoC), 61, 70 125–126, 128–130
Pigovian remedies, 222 regional hegemony, 119, 125
plutocratic regionalism, 120 regional institution-building, 116–117,
post-colonial sovereignty, 40 119, 125, 127–128
post-hegemonic regionalism, 117–118 regional integration, 117, 125, 129–130
post-war order, 340 regional leadership, 116–117, 121–122,
power-based approaches, 125–126, 130 124, 127, 130–131
power transition theory, 21 regional power, 94, 100, 105
preferential trade agreements (PTAs), 12, 70 regional trade cooperation, 122
Primakov, Yevgeny, 20 regulation, 235, 237, 239, 246
principal-agent, 351 Ren, Xiao, 57
principle of non-interference, 145, 149, representation, 362–376, 378–380
160, 164, 166 reserve asset, 345
principle of non-reciprocity, 39 reserves, 343
promote regionalism, 118, 126 responsible stakeholder, 58
proportional representation, 218 reverse causation, 223
protracted conflict, 40 rising powers, 46
public health, 68 rival, 352
purchasing power parity (PPP), 208, 343 RMB, 61, 63, 70
Putin, Vladimir, 20, 25 RMB internationalization, 61
rule breaker, 65
Q rule follower, 65
quota formulae, 342 rule maker, 65
quotas, 342 Russia, 87, 186–189, 197–199, 261–262,
265–266, 268–269, 279, 311
R Russia−China relations, 319
ratification, 279 Russian aid, 150
rating shopping, 236 Russian aid allocation, 151
rationalist approach, 60, 67 Russian aid data, 152
rationalist state-centric approach, 61 Russian aid history, 151
real effective exchange rate, 211 Russian aid projects, 152
real exchange rate (RER), 210, 222 Russian Chamber of Commerce and
reciprocity, 64, 71 Industry, 19
REDD+ (Reducing emissions from Russian Union of Industrialists and
deforestation and forest degradation), Entrepreneurs, 19
302
redistribution, 44 S
reform, 340, 349, 356 sanctions, 21
regime type, 126, 128–130 Schwartz, Herman, 61
b3508_V2_Index.indd 397 11-02-2020 13:21:52

398 Index
SDR basket, 345 sovereignty, 275

second face, 69 Soviet aid, 150
secular nationalism, 41 Soviet aid allocation, 150
self-interested regionalism, 121, 124 Soviet aid projects, 150
Setser, Brad, 68 Special Drawing Right (SDR), 345
Shanghai Effect, 75 speculative attacks, 214
shell companies, 263–264, 266–270, 275, SPS and TBT committees, 11
280 spuriousness, 223
Shih, Victor, 62 standards, environmental, 160
Shi, Weiyi, 62 standards, labor, 160
Silk Road, 43, 353 state capitalism, 63
Singapore Resolution, 342 state capture, 100
social assistance cash transfer programs, state-owned enterprises (SOEs), 62,
104 198–199
Sohn, Injoo, 69 State Regulatory Space (SRS), 183, 186,
South Africa, 83–85, 184–186, 196, 190, 192
199–201, 261, 268, 271–272, 314 status quo, 55, 58–59, 64–65, 70
South African aid, 162 status quo power, 58
South African aid allocation, 163 status quo stakeholder, 73
South African aid data, 162 Steinberg, David, 62
South African aid history, 162 Strand, Jonathan R., 73
South African aid institutions, 163 strategic alignment, 34, 40, 44, 47–48
South African aid projects, 164 strategic restraint, 34, 37, 40
South African Treasury, 104 structural power, 69
South Asian Association for Regional structural reform, 212
Cooperation (SAARC), 43 Supreme Eurasian Economic Council, 24
South Asian Free Trade Arrangement, 43 swing-state, 46
South Asian Preferential Trading system-maker, 46–47
Arrangement, 43 system-shaper, 46
South-East Asia, 44 system transformer, 58
southern hegemon, 10
South−South cooperation, 69, 143–145, T
155, 163 taxation, 260–262, 264, 266–267, 269–271,
sovereign bonds, 233 281
sovereign debt crisis, 231–233, 242, 246, technical standards, 68
249 telecommunications, 64
sovereignist agenda, 85 “third generation” theories, 208
sovereignist turn, 97–98 time-inconsistency problem, 216, 223
sovereign rating methodology, 242 Tingley, Dustin, 71
sovereign ratings, 231–233, 239, 241, Tokios Tokeles, 265–266, 277
243–250, 252–253 tradables, 222
b3508_V2_Index.indd 398 11-02-2020 13:21:52

Index 399
trade, 55–56, 61, 65, 67–68 US Congress, 353

trade facilitation, 28 US-led order, 354, 356
trade-related investment measures
(TRIMs), 60 V
Trans-Pacific Partnership (TPP), 72, 182, Venezuela, 270–273, 276
202 veto players, 216
treaty shopping, 192–193, 260–282 veto points, 221
Trump, Donald, 355 voice, 339
two-nations theory, 41 “voice” and “exit” framework, 66
“two-way” socialization, 65–67 voting power, 341
U W
undervaluation, 207, 209, 215, 220, 222 Washington Consensus, 34
unintended consequences, 260, 262 World Bank, 38, 56, 66–67, 337, 368,
unitary systems, 218 375–377, 380
United Nations, 34 World Trade Organization (WTO), 8,
United Nations Environment Programme, 18, 39, 56–57, 59–61, 63–65, 67, 90,
59 362–363, 368–372, 376, 378–380
United Nations Framework Convention WTO disputes, 60
on Climate Change (UNFCCC), 93, WTO dispute settlement, 62
289–290, 293–294, 296, 299–301, 303 WTO membership, 19
United Nations General Assembly
(UNGA), 70 Y
United States aid, 141 Yukos, 265, 268–269, 279
UN Security Council, 45
UN’s Office of the High Commissioner Z
for Human Rights, 99 zero-sum game, 49
USA, 87 Zuma, Jacob, 83–84, 87, 94, 96
b3508_V2_Index.indd 399 11-02-2020 13:21:52

 Political Economy of Informality
in BRIC Countries
11330_9789811202209_TP.indd 5 3/2/20 10:13 AM

Editors-in-Chief
Edward D. Mansfield
Nita Rudra
 Political Economy of Informality

in BRIC Countries
Editor
Santiago López-Cariboni
Universidad Católica del Uruguay, Uruguay
World Scientific
11330_9789811202209_TP.indd 6 3/2/20 10:13 AM

Published by



the publisher.


“6.5x9.75” b3508_V3 Political Economy of Informality in BRIC Countries
Editor’s Note and Acknowledgments
Research on the politics of informality has been traditionally rare in political science.
Despite attracting increasing attention, the topic is still today about many questions
and few answers. Looking at the political economy problems of informality in BRICs
(Brazil, Russia, India, and China) adds the additional challenge of dealing with tre-
mendously diverse and complex nations. In this respect, a single volume can hardly
cover all the relevant topics, approaches, and singularities of these cases. The aim
of this book is to disseminate an organized description of theoretical and empirical
puzzles around different political economy problems that are potentially relevant
for anyone interested in informality in the developing countries. To that end, the
volume follows different strategies. One strategy is departing from research based
on BRIC specific cases to illuminate broad issues and global problems of informal-
ity in the developing world. A second strategy is considering political causes and
consequences of informality in non-BRIC nations as informative to understanding
the BRICs themselves. As a consequence, the volume treats the BRIC countries not
in isolation but embedded in a more general context. Expectedly, this approach helps
to reach a broader audience of students, academics, journalists, policymakers and
activists interested in the topic.
This volume largely owes to the Editors-in-Chief of the book series in which
this book is included. I want to specially thank Edward Mansfield and Nita Rudra
for their generous offer and the unique opportunity to participate in this important
project. They have provided invaluable guidance, advice, patience, and support
during the process, for which I am highly indebted.
This book has been also possible thanks to the excellent work of outstanding
scholars authoring the different chapters. I feel honored for having shared this effort
with each one of them. They have made insightful contributions and showed remark-
able commitment to the project. Thanks to their efforts, old and new debates around
the political economy of informality will reach a broader international audience,
b3508_V3_FM.indd 5 11-02-2020 13:49:51

b3508_V3 Political Economy of Informality in BRIC Countries “6.5x9.75”
vi Editor’s Note and Acknowledgments
hopefully promoting more discussion, academic research, and attracting increased

attention to these issues in policymaking.
The volume has also benefited from the important efforts by Sarah Berens and
Irene Menéndez, who three years ago embraced the idea of promoting academic
exchange between researches interested in political economy and informality in
developing countries. Some examples of that effort were the organization of the panel
“Insider–Outsider Politics in Developing Countries” at the 2016 Annual Meeting
of the Midwest Political Science Association in Chicago, United States, and the
workshop “New Approaches to the Political Economy of Social Policy” that took
place on May 23rd–24th, 2016, at the Robert Ellscheid Saal of the Fritz-Thyssen
Foundation in Cologne, Germany. These were insightful events that certainly helped
to increase academic ties between scholars motivated by similar substantive ques-
tions and research interests. In this respect, this volume also owes a lot to Sarah and
Irene, whom I deeply thank.
Many others have also indirectly contributed with advice, ideas, and comments
at different stages of the project. For these, I would like to thank Melina Altamirano,
Xun Cao, German Feierherd, Alisha Holland, Achim Kemmerling, Fabiana
Machado, Lucas Ronconi, Peter Starke, and Rachel Wellhausenand.
Montevideo, Uruguay
b3508_V3_FM.indd 6 11-02-2020 13:49:51


vii
b3508_V3_FM.indd 7 11-02-2020 13:49:51


b3508_V3_FM.indd 8 11-02-2020 13:49:51

About the Editor
Santiago López-Cariboni is an Assistant Professor at the

Universidad Católica del Uruguay. He writes on both com-
parative and international political economy. He received a
Ph.D. in political science from the University of Essex in 2014.
His primary research interests are in international
and comparative political economy. His work focuses on
the analysis of international trade and domestic policy in
developing countries, labor informality and social policy,
and informal access to basic services. His recent publications
have appeared in the Review of International Organizations, Politics & Society, and
Journal of Comparative Policy Analysis.
ix
b3508_V3_FM.indd 9 11-02-2020 13:49:52

María Constanza Ayala is a Ph.D. candidate in Sociology at Pontificia Universidad

Católica de Chile. She holds a Master of Science in Statistics from KU Leuven. Her
research focuses mainly on educational outcomes, gender and racial discrimination,
and quantitative methodology in the social sciences.
Ida Bastiaens is an Associate Professor of Political Science at Fordham University.

She received her B.A. from Davidson College and her Ph.D. from the University
of Pittsburgh. She specializes in international political economy and international
development. Her research analyzes questions on the political determinants of
integration in the global economy, the impact of international integration on fiscal
and social welfare in developing countries, and citizen preferences for global capital
flows. She recently published a co-authored book with Cambridge University Press
and journal articles in International Interactions, Journal of European Public Policy,
and Review of International Political Economy.
Sarah Berens is a postdoctoral research fellow at the Cologne Center for

Comparative Politics at University of Cologne. She received her Ph.D. from the
joint graduate program of the Max Planck Institute for the Study of Societies and
University of Cologne. During her Ph.D., she spent a year at Columbia University.
In her research, she focuses on the micro-foundation of labor informality, social
policy, taxation, and the behavioral impacts of crime experience in low- and
middle-income countries. Her work has been published in Socio-Economic Review,
Political Behavior, Political Studies, the Journal of Politics in Latin America, and
Social Policy & Administration.
xi
b3508_V3_FM.indd 11 11-02-2020 13:49:52

Luis Maldonado is an Assistant Professor in the Department of Sociology at the

Pontificia Universidad Católica of Chile, with affiliation to The Research Center for
Integrated Risk Management (CIGIDEN), Chile. His research focuses on economic
inequality, disasters, and quantitative methods. His recent studies have been pub-
lished in Public Health, the International Journal of Educational Development, Journal
of Politics in Latin America, and Computers in Human Behavior.
Irene Menéndez is an Assistant Professor of International Political Economy at

the IE School of Global and Public Affairs She obtained a Ph.D. at the University
of Oxford (Nuffield College) in 2015. Her research interests include international
and comparative political economy, the political consequences of globalization, the
political economy of labor markets, and redistribution and the effects of electoral
institutions on political representation. Her work appears in various journals such
as the American Political Science Review, International Studies Quarterly, and the
Socio-Economic Review.
Jonathan Phillips is an Assistant Professor in the Department of Political Science at

the University of São Paulo, specializing in comparative politics and the political econ-
omy of development. He received his Ph.D. in Government from Harvard University
in 2017, an M.Sc. in Development Economics from the School of Oriental and African
Studies, University of London, in 2008, and a B.A. in Politics and Economics from
Oxford University in 2005. His research seeks to explain the political roots of effective
governance, clarifying the incentives that lead some politicians to focus on enforcing
clear programmatic rules while others condition access to public resources on political
support. Through subnational comparisons across primary fieldwork sites in Brazil,
Nigeria, and India, he is developing new datasets, tools, and theories to explain the
wide variation in the quality and form of public service delivery.
Soledad Artiz Prillaman is an Assistant Professor of Political Science at Stanford

University. She received a Ph.D. in Government at Harvard University in 2017 and
a B.A. in Political Science and Economics from Texas A&M University in 2011. Her
research interests lie at the intersections of comparative political economy, develop-
ment, gender, and the politics of the welfare state, with a focus in South Asia and
Latin America. She is motivated by questions such as the following: What are the
political consequences of development and development policies? How are minorities
democratically represented and where do inequalities in political engagement persist?
How are voter demands, particularly of underrepresented populations, translated into
policy and governance? In answering these questions, she utilizes mixed methods,
including field experiments, primary surveys, and in-depth qualitative fieldwork, to
identify empirical relationships as well as the underlying causal mechanisms.
b3508_V3_FM.indd 12 11-02-2020 13:49:52

Guadalupe Rojo is an invited Professor at the Universidad Torcuato Di Tella. She

holds a Ph.D. in Political Science (Duke University 2017), an M.A. in Economics
(Duke University 2014), and an M.A. in Latin American studies (Stanford University
2010). Guadalupe has conducted research on the effect of social capital on public
services and the electoral return on government investments in infrastructure in
shantytowns, both in Argentina and India. She currently works in the housing and
urban development division at the IADB, with a focus on impact evaluations for
slum upgrading programs.
Armin von Schiller is a research fellow at the German Development Institute/

Deutsches Institut für Entwicklungspolitik (DIE). His research is focused on taxa-
tion, tax morale, and fiscal decentralization in developing countries with a special
emphasis on how political factors shape the use of different tax instruments and the
willingness of citizens to pay taxes. Before joining DIE, he worked at the German
Institute for Human Rights and the GIZ (Deutsche Gesellschaft für Internationale
Zusammenarbeit) in Colombia. He has done consulting work for GIZ, the European
Commission, and UNU-WIDER among other organizations. Armin holds a Ph.D.
from the Hertie School of Governance in Berlin.
Laura Seelkopf is an Assistant Professor of Political Science (W1) at the Geschwister

Scholl Institute, Ludwig Maximilians University Munich, Germany. Her substan-
tive research focus is on the political economy of taxation (tax competition, tax
evasion, and the transformation of tax states around the world) and comparative
social policy (inside and outside developed economies, by non-state actors, and via
non-traditional policies).
Yujeong Yang is an Assistant Professor in the Political Science Department at the

State University of New York, Cortland. She received her Ph.D. in Political Science
from the University of Michigan. Her research focuses on comparative political
economy, welfare policies, and labor politics, with a regional expertise in China.
Wei-Ting Yen is an Assistant Professor at Franklin and Marshall College with a

concurrent appointment as a Mellon High Impact Emerging Scholar. She studies
political economy issues and social policy development in the developing world.
Her main research is to understand the demand side politics of social protection
in young democracies, where a majority of citizens have job insecurity and income
instability. She earned her Ph.D. in Political Science from the Ohio State University.
b3508_V3_FM.indd 13 11-02-2020 13:49:52

Contents
Editor’s Note and Acknowledgments v

About the Editors-in-Chiefvii
About the Editor ix
About the Contributors xi
Chapter 1 I ntroduction: Political Economy Approaches to Informality

and Recent Trends in BRIC Countries 1
PART I Tax Revenue, Globalization, and Informality

in BRIC Countries 29
Chapter 2 Comparative Analysis of Tax System in the BRICs and the
A
Challenges Ahead: Informality and the Fiscal Contract 31
Laura Seelkopf and Armin von Schiller
Chapter 3 Is Informal Work Eroding Compliance? 53

Sarah Berens and Irene Menéndez
Chapter 4 an Tax Aid Broaden the Base? International Assistance,

C
Taxation, and the Informal Sector in the BRICs 81
Ida Bastiaens and Laura Seelkopf
PART II Informal Settlements and Basic Service Provision 101

Chapter 5 S ocial Capital, Leadership Accountability,
and Public Services in the Slums of India 103
Guadalupe Rojo
xv
b3508_V3_FM.indd 15 11-02-2020 13:49:52

xvi Contents
Chapter 6 I nformal Electricity Consumption and Political Regimes:

Implications for Political Change in BRIC Countries 139
PART III Labor Market Informality, Mobilization, and Preferences 155

Chapter 7 ow the Labor Force is Mobilized: Patterns in Informality,
H
Political Networks, and Political Linkages in Brazil 157
Soledad Artiz Prillaman and Jonathan Phillips
Chapter 8 Redistributive Preferences in Contemporary Brazil 193

Luis Maldonado and María Constanza Ayala
Chapter 9 nderstanding Informality in China: Institutional Causes

U
and Subsequent Measurement Issues 219
Yujeong Yang and Wei-Ting Yen
Chapter 10 I nsiders, Outsiders, and the Politics of Employment

Protection: Insights from the Brazilian Case 243
Chapter 11 Conclusions 277

Index281
b3508_V3_FM.indd 16 11-02-2020 13:49:52

CHAPTER 1
Introduction: Political Economy

Approaches to Informality and Recent
Trends in BRIC Countries
Department of Social and Political Science,

For a long time, the view that informality, broadly defined,1 is only a consequence
of economic development dominated the positions of academic experts, national
governments, and international organizations. However, about 30% of the gross
domestic product (GDP) generated in the developing world, and 70% of workers
belong to the official economy (Palmade and Anayiotos, 2005). With the recent
trends of income growth in developing countries, the integration of world markets at
a global scale, and the diffusion of democracy, the persistence of the informal sector
in developing nations posited important theoretical puzzles and a difficult political
challenge: it was necessary to find new explanations of informality that could guide
effective policymaking.
Social scientists challenged the dominant account and started to think about
informal economic activity as a phenomenon that may also be the product of social
structures, institutions, and more recently, political behavior. Initial accounts, while
potentially accurate, became insufficient for those motivated by the goal of improving
1
Later, I discuss different aspects of informality and operational definitions in the section
“Social and Economic Realizations of Informality”.
b3508_V3_Ch01.indd 1 11-02-2020 13:32:05

2 S. López-Cariboni
the living conditions of large swaths of population excluded into the informal s ector.
For example, some of these explanations pointed out the consequences of legal
origins and institutions inherited from colonizer countries (Botero et al., 2004). The
limit of such answers is that they often emphasize variables that cannot be directly
affected by current political actors. However, they offered two important lessons.
First, they provide guidance of the contexts in which informality is more persistent.
Second, and more crucially, the logic by which the size of the informal sector cor-
relates with particular institutions tell us that, above all, informality is political.
Subsequent research in the area emphasized several consequences of informality.
Much of this work analyzes its effects on economic growth. However, there is also
increasing evidence of the political consequences of informality. Important debates
exist around labor informality and political mobilization (Baker and Velasco-
Guachalla, 2018; Hummel, 2017; Rudra, 2002). Also, in electoral democracies,
the size of the informal sector may provide grounds for the expansion of political
clientelism undermining the expansion of programmatic politics, while at the same
time, programmatic policies may stop clientelistic behavior (Altamirano, 2016;
Stokes, 2005; Swamy, 2016; Weitz-Shapiro, 2012; Wibbels, 2017). Another impor-
tant consequence is the formation of political coalitions that shape protection for
outsiders, i.e. non-contributory programs that provide insurance to those holing an
informal job (Carnes and Mares, 2014, 2015; Holland and Schneider, 2017).
Finally, many argue that informality itself, or the enforcement level, is a policy
that depends on government choices (rather than state capacity alone). This assertion
has been increasingly analyzed in the context of globalization (Dix-carneiro et al.,
2018; Milner and Rudra, 2017), labor market regulations (Almeida and Carneiro,
2005; Kanbur and Ronconi, 2018), street vending and squatting (Álvarez-Rivadulla,
2017; Holland, 2016, 2017), and basic services (López-Cariboni, 2018; Min and
Golden, 2014).
This volume brings these and other debates about informality to the context of
BRIC countries (Brazil, Russia, India, and China). Moreover, BRIC nations are also
special cases in the developing world, which helps to illuminate the current questions
and existing controversies around the political causes and consequences of informality.
Why (The Politically Economy of) Informality in BRIC Matters

The focus on BRIC countries in this volume does not follow from a design-based
strategy of case selection for making causal inferences based on a comparative
analysis. Instead, this volume has the aim of describing and disseminating a number
of theoretical and empirical puzzles around the politics of informality, which are
potentially relevant for any developing country in the world. Brazil, Russia, India,
and China are exceptionally important and heterogeneous economies, which provide
b3508_V3_Ch01.indd 2 11-02-2020 13:32:05

Introduction 3
very interesting variation to illustrate the different topics covered in the volume.
Similarly, this volume brings attention toward broad debates and research on politics
and informality, which are not always BRIC-specific but certainly relevant for anyone
interested in the BRIC countries. Hence, this volume can be either read from a BRIC
perspective or as a collection of political economy topics of politics and informality
in developing countries.
The growing economic and political power of Brazil, Russia, India and China
has attracted important attention among scholars and policymakers. There is an
increasing amount of research dedicated to understanding the reasons behind the
economic growth of those countries as well as the political implications of these ris-
ing powers for fundamental issues such as global governance, democratization, trade
policy and social provision (Friedberg, 2005; MacFarlane, 2006; Segal, 1999; Soares
De Lima and Hirst, 2006). As noted by Vom Hau et al. (2012), it was hard to think
30 years ago that Brazil would become the main regional leader in Latin America,
India was going to be a major player in the World Trade Organization (WTO),
and that China would be the second largest economy in the world since 2010. The
historically unprecedented economic growth of poor countries such as India and
China (see Figure 1) has been largely responsible for slowing down and ultimately
reversing a long-lasting problematic increasing world income inequality between
nations (Korzeniewicz, 2012; Milanovic, 2010). Yet, the persistence of large shares
of unofficial economic activity and vulnerable population in developing countries
challenges simplistic views that only demand economic growth and democratic
political institutions to ensure social wellbeing. As shown in Figure 1, high scores on
the Polity II variable indicate more democratic regimes in India and Brazil, followed
by Russia (arguably not democratic), while China remains being an authoritarian
country. Important research finds that democracy does not always benefits the poor
and those in the informal sector as expected (Ross, 2006). Many observers also think
that this is indeed the case for large swaths of citizens in countries such as India
and Brazil despite successful economic performance and conditions open political
competition. Even so, income growth and democracy are still strong forces behind
the reduction of extreme poverty and therefore should not be neglected.
Another feature of BRIC that makes them both interesting and important is that
they are major players in the international trade network as well as in other forms
of economic globalization such as foreign direct investment (FDI). This is relevant
because foreign trade has been found to be a major channel policy diffusion (Cao
and Prakash, 2010; Elkins et al., 2006; Elkins and Simmons, 2005; Mosley and Uno,
2007; Simmons and Elkins, 2004). Given that these four countries are responsible for
a large share of international commerce and globally contribute to the international
interdependence, politics and policies in BRIC affecting domestic informality may
have substantial consequences for informality in the rest of the world. As Figure 2
b3508_V3_Ch01.indd 3 11-02-2020 13:32:05

b3508_V3_Ch01.indd 4

10
India
Brazil
b3508_V3 Political Economy of Informality in BRIC Countries

30000
GDP per capita (PPP, constant USD 2011)
Russia 5
Russia
Polity Score
20000
0
Brazil
China
10000
–5
India China
0 –10
1990 1995 2000 2005 2010 2015 1990 1995 2000 2005 2010 2015
Year Year
Figure 1: GDP per capita and democracy in BRICs.

Note: The dark-grey solid line and shaded area represent the mean trend in developing countries with a 95% confidence interval.
Source: World Development Indicators (The World Bank) and Polity IV dataset from Marshall and Jaggers (2010).
“6.5x9.75”
11-02-2020 13:32:07
Introduction 5
shows, while BRICs may seem comparatively closed economies mainly due to the
size of their markets (Figure 2(a) measures import plus exports as a percentage of
GDP), the total income traded by these nations is well above the amount of traded
goods and services by any other developing country alone. This is illustrated in
Figure 2(b), which displays the log of total GDP traded since 1990 until 2015 by
country. For instance, important research shows that Chinese import competition on
the US causes higher unemployment, lowers labor force participation, and reduces
wages in local labor markets that house import-competing manufacturing industries
(Autor et al., 2013, 2016). Also, policies that are thought of directly affecting informal
labor, such as labor standards, regulations, and social insurance policy, have been
found to travel across international borders due to trade interdependence (Adolph
et al., 2017; Greenhill et al., 2009; López-Cariboni et al., 2015; Mosley and Uno,
2007).
Finally, all BRIC nations have considerably large informal sectors, and as a
result, a large share of world’s informality is within the boundaries of these nations.
However, they vary tremendously in terms of the nature and composition of
informality. As the next section illustrates, the shadow economy, tax compliance,
labor informality, informal settlements, and irregular access to basic services are
some of the different although related manifestations of a broader phenomenon of
informal economic activity.2 An important aim of this volume is to provide a variety
of approaches that, taken together, emphasize the role of politics and institutions as
both causes and consequences of informality.
Social and Economic Realizations of Informality

There are different views and conceptualizations of the informal economy, which also
refer to quite different economic and social realizations (Maloney, 2004; Schneider
and Enste, 2000). Since the introduction of the concept in the 1970s, opinions
diverge with respect to both the causes and the nature of the informal sector, as
well as its links to the formal sector. These views may be categorized into three
groups (La Porta and Shleifer, 2009, 2014). The first one is the dualistic approach
(Harris and Todaro, 1970). In this view, the informal sector is an inferior segment
of a dual labor market segregated from the formal economy. This residual sector
arises because the formal economy is unable to offer employment opportunities to
a portion of the labor force. This type of informality refers to informal firms that are
too unproductive to ever become formal, even if entry costs (i.e. costly regulations
Other aspects of informality such as illegal activities and corruption are also relevant and
2
may contribute to mentioned dimensions of informality.
b3508_V3_Ch01.indd 5 11-02-2020 13:32:07


150 35
China
India
Russia
Log of GDP traded in international markets

Brazil
Trade openness as % of GDP
100 30
China
Russia
50 India 25
Brazil
0 20
1990 1995 2000 2005 2010 2015 1990 1995 2000 2005 2010 2015
Year Year
(a) (b)
Figure 2: Openness and total GDP traded by BRICs.

Source: World Development Indicators (The World Bank).
“6.5x9.75”
11-02-2020 13:32:08
Introduction 7
and taxes) were removed. Here, the informal sector follows a survival strategy and
is expected to disappear, being ultimately absorbed by the formal economy, once
superior stages of economic development are reached.
A second view is the structuralist approach, which emphasizes the informal
sector as a result of a process of productive decentralization. It has been also called
the parasite view, insofar as firms are productive enough to survive in the formal
sector, but they remain informal because is more profitable. Here, the two sectors
are in interdependence to increase overall competitiveness of the economy (Moser,
1978; Portes et al., 1989). This account sees the informal sector as comprised of small
firms and unregistered workers as suppliers of cheap labor and inputs to the formal
sector and hence increasing the economic efficiency and competitiveness of the later.
This view does not predict that informality will shrink with growth. To the contrary,
modern firms react to globalization by introducing more flexible productive systems
and by outsourcing to the informal sector to cut down production costs.
A third view is the legalist account. Inspired in the work by de Soto (1989), this
approach conceptualizes the informal sector as a group of self-employed workers and
micro-entrepreneurs that prefer and choose to operate underground as a means of
avoiding the costs of costly registration. In this account, firms would formalize their
businesses if entry costs were eliminated, so they would be no longer constrained
by the limitations of operating informally. The implication is that fexiblization of
regulatory frameworks and reductions in the tax burden would reduce the size of
the informal sector and contribute to income growth and living standards. The key
theoretical introduction of this view is that informality is voluntary instead of a
process of exclusion, such as in the other two previous accounts (Fiess et al., 2010;
Maloney, 1999; Packard, 2007).
However, recent research shows that even though these views are seen as
competing frameworks, in fact they are not. In an analysis of Brazil, Ulyssea (2018)
demonstrates that these three different views do in fact coexist in a single economy.
The empirical evidence indicates that only a minority of 9.3% of all informal firms
corresponds to potentially productive informal firms that are kept out of formal-
ity by high entry costs (legalistic or De Soto’s view). The structuralist, or parasite
view, corresponding to those that could survive as formal firms once entry costs
are removed but choose to remain informal to enjoy the cost advantages of non-
compliance represent the 41.9% of all informal firms. The remaining, this is the
48.8% of informal firms, correspond to the dualistic or survival view, in which firms
are too unproductive to become formal regardless of entry costs and regulation.
Most notably, this is among the first work tackling the difference between firm
informality and labor informality. An important policy implication of the evidence
is that reducing formal sector entry costs for firms would have only a limited impact
b3508_V3_Ch01.indd 7 11-02-2020 13:32:09

on labor informality because low-productivity firms that choose to formalize would

hire a large share of informal workers to compensate their efforts of formalization
(Ulyssea, 2018).
Work that focuses on labor informality alone provides important stylized facts.
First, there exists an important wage-gap between formal and informal workers
(Gasparini and Tornarolli, 2006). This gap is mainly explained by the differences in
the productivity (i.e. skills) between the two types of labor force. In general, poor
informal workers are highly constrained in their capacity to make long- and medium-
term investments, and are therefore unable to make social security contributions. As
a result, labor informality represents an important problem for the development of
welfare states in many developing countries. Social security benefits are often inef-
fective to protect those in the informal sector because they have been traditionally
targeted to a relatively narrow, urban, political clientele of workers in the formal
sector (Huber et al., 2006; McGuire, 1999; Wibbels and Ahlquist, 2011). When
welfare spending depends on benefits that are based on contributory systems, such
as social security and pensions in most developing countries, this type of spending
has regressive economic effects insofar as the eligibility for social protection is tied
to formal employment (De Ferranti et al., 2004; Goñi et al., 2011; Huber et al., 2006).
Despite BRIC having made some important advances toward the universalization of
social protection, for example, through the introduction of non-contributory social
policies (Liu and Sun, 2016), major challenges remain, such as protecting non-wage
self-employed workers and tackling increasing inequalities due to informal within-
country migrant workers, among other important aspects.
It is probably safe to say that extreme poverty is a sufficient condition for falling
into the informal sector of the economy either because of holding an informal job
or living in precarious houses embedded in irregular settlements. The poor, who
are excluded and likely to correspond to the dualistic view of informality, crucially
depend on income growth and non-contributory forms of social protection to
achieve minimum living standards. There is important evidence showing that
development and income growth do matter for reducing extreme poverty and the
size of the population living in slums (Un-Habitat, 2003). A lesson from the BRIC
experience, specially Brazil, India, and China, is that sustained growth has helped
these countries to reduce the share of urban population living in slums, reaching
levels of below the 30% since the 2000s (see Figure 3). As also shown in Figure 3,
extreme poverty has been declining since the 1990s. In this regard, China has been
exceptionally successful in comparison with the mean global trend. In 1981, extreme
poverty in China (population living with less than 2 dollars a day) was over the 80%
of the population. This rate decreased to a 67% in 1990 and it was lower than 2% in
2013. India and Brazil have also steadily reduced their poverty rate over the period,
b3508_V3_Ch01.indd 8 11-02-2020 13:32:09

“6.5x9.75”
(a) (b)
Figure 3: Poverty headcount ratio and population living in slums in BRICs.
Introduction 9
Source: World Development Indicators (The World Bank).
11-02-2020 13:32:10
which is consistent with the income growth trends observed in Figure 1. However, as
also shown in Figure 3, the share of population living with less than 2 dollars a day
in India was still above 20% after 2010, and the population living in slums in Brazil,
India, and China is today about one-fifth of the total.3 This evidence suggests that
a great deal of informality due to exclusion mechanism remains in BRIC countries.
Other manifestations of informality are the so-called “shadow” economy
and the informal self-employment. The shadow economy is usually defined as all
the legal economic activities that contribute to the GDP, but escape detection in
official GDP estimates4 (Schneider and Enste, 2000). In developing countries, small
enterprises — like bars, restaurants, or haircutters — make up the vast majority of
the total number of enterprises and they usually engage in underground activity
(Gerxhani, 2003; Johnson et al., 1997; Schneider, 2005). The shadow economy does
not take into account the number of informally employed self-employed workers, but
instead considers the economic value that is produced underground. The size of the
shadow economy has important consequences for development (Elbahnasawy et al.,
2016) and tax revenues to the state, which results in decreased funding for social
welfare policies, and other important national priorities (Loayza, 1996). Figure 3
shows the size of shadow economy, measured as a percentage of a country’s GDP, is
slowly decreasing over time in developing countries. Brazil and Russia, the BRICs
with larger shadow economies, remain significantly above the mean of developing
countries since 1990. China, on the other hand, has the smallest shadow economy
relative to other BRIC nations and is at the bottom of the distribution over the
analyzed period.
The picture of the size of unofficial economy, however, contrasts with labor
market data on informality. Measuring labor informality is relatively difficult. Yet,
there exist different proxies for the size of the informal labor and are widely used in
the development economics literature (Botero et al., 2004; Eilat and Zinnes, 2002).
One proxy is the self-employed workers as a percentage of total employment. These
non-salaried workers are essentially the own-account workers, which often operate
informally. This proxy is imperfect although commonly used in the scholarship on
labor informality (Fiess et al., 2010; Loayza and Rigolini, 2011; Maloney, 2004). At
the aggregate level, the correlation coefficient between self-employment and the
3
For partisan explanation of slum growth in Brazil, see Alves (2018).
4
The unofficial economic activity is the production and sale of goods and services that
evade official registration and taxation. Such activity is undertaken by firms that are
not registered or by firms that are registered officially but produce part of their output
unofficially. Schneider and Enste (2002) provide detailed discussion of various definitions
of the concept and estimates of aggregate national magnitudes.
b3508_V3_Ch01.indd 10 11-02-2020 13:32:10

Introduction 11
size of the unofficial GDP from Schneider’s 2010 estimates is 0.78. Admittedly, the
proxy is incomplete because it excludes informal salaried workers. However, this
variable proves to be well behaved against direct measures of labor informality
taken from household survey data. In most developing countries, there is a strong
association between own-account work, self-employment, and informal activity,
as most of these non-salaried workers tend to be in low-skill, unregistered jobs
(Loayza and Rigolini, 2011). Figure 2(b) shows that India has a pervasive level of
self-employment with tremendous persistence. A more precise estimate of labor
informality in India suggests that more 90% of workers were informal in 1999–2000
(Bairagya, 2012). China has experienced a secular downwards trend in self-
employment, partially explained by reduction of the agricultural sector. This picture,
however, masks the recent rise of urban informality in that country (Wang et al.,
2016). Brazil, in turn, has reduced labor informality and self-employment during
the 2000s, but it is growing again since 2010. Lastly, Russia is the country with the
smallest share of self-employed workers and informal labor over the period. In fact,
most of the informal employment in Russia is informal salaried work (Gimpelson
and Kapeliushnikov, 2014). These precisions make clear the importance of accurate
conceptualization and measurement of informality. Nevertheless, as it can be noted
from Figure 4, the size of the unofficial economy and labor informality need not
move in the same direction. Hence, theoretical and empirical approaches explain-
ing causes and consequences of informality also need to consider the different
dimensions of the problem.
Political Economy Approaches to Informality

A traditional view is that informality depends on development. Many authors find
that informal employment is associated with lower GDP per capita. Loayza and
Rigolini show that 80% of the variation in informal employment can be explained
by the variation in GDP per capita in a sample of 42 countries. The same connec-
tion between self-employment and GDP per capita has also been documented by
Blau (1987), among others. Others have used Schneider’s measures of informal
production. For instance, Loayza et al. (2005) also find a strong relationship
between informality and national income. The relationship between growth and
formalization is consistent with the dual view of informality. Those who follow
the development tradition of Lewis (1954) and Harris and Todaro (1970), see
informality as a byproduct of poverty: economic growth comes from the formal
sector firms (run by educated entrepreneurs and exhibiting much higher levels of
productivity) and therefore the expansion of the formal sector leads to the decline of
the informal s ector. The macro-correlates support the idea that informality shrinks
b3508_V3_Ch01.indd 11 11-02-2020 13:32:10

b3508_V3_Ch01.indd 12

Figure 4: Shadow economy and self-employment in BRICs.
Source: Medina and Schneider (2018), and World Development Indicators (The World Bank).
“6.5x9.75”
11-02-2020 13:32:12
Introduction 13
with development (La Porta and Shleifer, 2014). In Figure 5, I show that this also the
case for the BRIC economies when within-country variation is considered. Both self-
employment and the shadow economy decrease as income per capita increases. This
evidence, although descriptive and lacking of an identification strategy, challenges
the view that informality promotes development or increases the competitiveness
of an economy.
Political economy approaches incorporated the effects of institutions to the
understanding of the size of the informal sector. The institutional quality may affect
different outcomes such as corruption and informality (Dreher et al., 2009). One
argument is that enterprises in the formal sector receive a higher payoff in terms
of public services for complying with the regulations and taxation. For example,
increases in institutional quality generate lower firm-specific thresholds of tax tolera-
tion (Hibbs and Piculescu, 2010). Similarly, scholars have systematically found that
the “regulation of entry” to the formal economy, i.e. how costly it is to register a firm,
is a strong predictor of the size of the shadow economy (Djankov et al., 2002). At the
micro level, Auriol and Warlters argue that the key determinant of micro-enterprises
to engage in informality in developing countries is the presence of high fixed costs
involved in becoming formal (Auriol and Warlters, 2005). Excessive bureaucracy,
greater corruption, and a weaker legal environment are all factors associated with
a larger unofficial economy (Friedman et al., 2000). Importantly, this literature also
emphasizes that employment protection legislation (EPL), sometimes controversially
called as “rigid” labor market regulations that limit the employer’s ability of hire and
fire, has been found to increase the size of the unofficial economy (Botero et al.,
2004; Ulyssea, 2010).
Some of these assertions have been corroborated in countries such as India. For
instance, Indian states with higher corruption are associated with higher levels of
employment in the informal sector (Dutta et al., 2013). It remains unclear, however,
that other regulations such as employment protection legislation are really an
obstacle for reducing informality and promoting development in India (Betcherman,
2015). In the case of China, it is also quite doubtful that EPL harms labor by exclud-
ing workers in the informal sector. The old system of household registration (hukou),
designed to ensure enough agricultural labor to produce for the urban industrial
sector, has certainly segmented the Chinese labor market between rural and urban
workers. After the flexibilization of labor mobility in the 1970s, rural–urban migra-
tion increased. Yet, low- and middle-class migrants without urban hukou status
do not have access to social welfare programs such as social insurance, schooling
and subsidized housing. Together with the major economic reforms since 1997, in
which state-owned enterprises (SOE) would no longer ensure formal employment
for all urban labor, increasing migration without jobs contributed to an important
b3508_V3_Ch01.indd 13 11-02-2020 13:32:12

b3508_V3_Ch01.indd 14

Figure 5: GDP per capita, shadow economy and self-employment in BRICs.
Note: The dark-grey solid line and shaded area represent the smooth fit with a corresponding 95% confidence interval.
Source: Medina and Schneider (2018), and World Development Indicators (The World Bank).
“6.5x9.75”
11-02-2020 13:32:22
Introduction 15
rise of informal work in urban China.5 Interestingly, all this new informal labor
rise occurred in the absence of EPL. Only in recent years, the Chinese government
has instituted a series of labor legislations and also encouraged collective bargain-
ing and workers’ unionization through the All-China Federation of Trade Unions
(ACFTU). Labor market dualization, the difference of job protection between formal
and informal workers, may be increasing in urban China. In comparing China with
Brazil, Chapter 10 discusses how different paths of development produce different
types of informality and measurement challenges.
An important debate in political economy literature is whether institutions
such as EPL contribute to exclusion in the labor market, and as a consequence,
divide political preferences between insiders and outsiders. Moreover, outsiders
should support policies that either protect them against employment vulnerability
or help them to become insiders (Rueda, 2005, 2006). In close relation with the
insider–outsider theory of the labor market, an important emerging literature in
political science analyzes whether labor informality in developing countries has
political consequences in terms of formal–informal differences in political behavior
and policy preferences (Baker and Velasco-Guachalla, 2018; Berens, 2015a, 2015b;
Berens and Kemmerling, 2016; Carnes and Mares, 2014, 2015, 2016; Singer, 2016).
One relevant question is whether informal workers effectively support governments
that provide social protection for outsiders, such as non-contributory programs
of conditional cash-transfers (Baker and Velasco-Guachalla, 2018; De La O, 2013;
Zucco, 2013; Zucco and Power, 2013). For many, those in the informal sector are
unable to overcome collective action problems and elevate political demands (King
and Rueda, 2008; Kurtz, 2004; Naylor, 2004; Perry et al., 2007; Rudra, 2002). Yet,
there is no clear-cut evidence that informal workers are politically different than
their formal counterparts (Baker and Velasco-Guachalla, 2018). Moreover, recent
research suggests that when the state is proactive, informal workers can organize
and mobilize as much as formal workers do (Hummel, 2017). In sum, analyses
about the consequences of institutions and informality on workers’ preferences are
flourishing in developing countries, but have not yet reached unambiguous conclu-
sions regarding the political consequences of labor market divisions.
Another novel political economy approach builds on the idea that informality
is the product of strategic considerations of politicians that provide deliberate
non-enforcement of the law. Against the view that considers development and state
5
Athukorala and Wei (2018) document that the number of workers employed by Chinese
SOEs dropped from 113 million workers, 20% of the country’s total labor force in 1995, to
65 million workers in 2005.
b3508_V3_Ch01.indd 15 11-02-2020 13:32:22

capacity as the main explanation of informal economic activity,6 politicians may

avoid enforcement of regulations when they possess the capacity to do so (Almeida
and Ronconi, 2016; Holland, 2015, 2016). Recent research suggests that poor
individuals have a coherent material interest in “forbearance”, or deliberate non-
enforcement toward property laws they tend to violate. Because informal welfare
benefits are provided through state inaction, politicians can send more credible
electoral cues of their affinity with poor and dislocated voters through forbearance
than through traditional social policy promises (Holland, 2015). Experimental
survey evidence shows that even larger segments of society (i.e. not only the poor)
support politicians signaling non-enforcement as insurance against income volatil-
ity (López-Cariboni, 2017). In the area of basic service provision, existing research
provides support for the claim that electricity service can be politically manipulated
(Min, 2015; Min and Golden, 2014; Nagavarapu and Sekhri, 2014), especially when
there is limited capacity to affect fiscal and monetary policy (López-Cariboni, 2018;
Min and Golden, 2014). Min and Golden (2014) find electoral cycles in the incidence
of electricity theft and line losses in the state of Uttar Pradesh in northern India.
Specifically, the discrepancy between power supplied and billed increases in periods
immediately prior to general elections.
Recent work also emphasizes the existence of deliberate non-enforcement of
employment protection legislation and consequential persistence of labor informality.7
Some argue that governments that promote globalization benefit from the political
support of informal workers and therefore have no incentive to enforce employment
legislation (Milner and Rudra, 2017). Similarly, trade openness has been found to
reduce government’s labor enforcement effort in Latin America (Ronconi, 2012).
These findings suggest that non-enforcement of labor regulations may be a policy
tool to cushion trade losers against increased international trade competition. For
example, had enforcement of EPL been stricter in Brazil after the trade liberalization
reforms in the 1990s, the effect of import competition on trade-displaced workers”
6
Consistent with the development story, many political economists noted the distance
between the norm and reality in developing countries (Levitsky and Helmke, 2006;
O’Donnell, 1993). Weak enforcement may be a result of extractive and rent seeking behav-
ior by state officials who lack institutional constraints (Robinson and Acemoglu, 2012).
7
The larger literature on informality and globalization relates international trade with labor
informality through market-based mechanisms (Arias et al., 2018; Bacchetta et al., 2009;
Coletto, 2010; Goldberg and Pavcnik, 2003, 2007; Pham, 2017). See also, Blanton et al.
(2018) for an argument regarding the effect of trade (incentives for upgrading and firm
formalization) and IMF contracts (reduction of state capacity) on the size of the shadow
economy.
b3508_V3_Ch01.indd 16 11-02-2020 13:32:22

Introduction 17
employment outcomes could have been much more adverse than it actually was
(Dix-Carneiro and Kovak, 2017; Ponczek and Ulyssea, 2017).
The crux of the problem of enforcement of labor market rules is what Boeri
and Garibaldi (2005) have explained as the “shadow-puzzle”, which implies that
informality is tolerated because it helps to reduce unemployment and its undesirable
political consequences. These authors find a strong positive correlation between
shadow employment and unemployment using Brazilian data. Ulyssea (2010) further
expands this view and shows that enforcement alone would increase unemployment
in a model calibrated for the Brazilian labor market during the 1990s and early 2000s.
There is an important line of work analyzing the political economy of enforcement
of labor laws and its social and economic outcomes (Almeida and Carneiro, 2009,
2012; Almeida and Ronconi, 2016; Amengual, 2014; Antunes and Cavalcanti, 2007;
Boadway and Sato, 2009; Gimpelson et al., 2010; Ronconi, 2010, 2015). One micro-
logic of this has to do with the implementation of labor inspections. Labor inspectors
in Brazil (as well as in the Dominican Republic) tend to have discretion that they use
it to balance society’s demand for protection with the economy’s need for efficiency
(Pires, 2011). An alternative account is that inspectors are not independent but
controlled by the executive power and therefore politicized (Holland, 2015; Ronconi,
2012), or mobilized around pro-enforcement coalitions (Amengual, 2014).
The previous discussion revises only some of the most prominent debates
regarding the politics of informality. Different chapters in this volume are directly
linked to these literatures while others are more inclined to open entirely new ques-
tions and research agendas.
Overview of the Volume

Part I of the volume is dedicated to tax revenue, globalization, and informality in
BRIC countries. Chapter 2, by Laura Seelkopf and Armin von Schiller, analyzes
domestic tax collection in BRICs. From a growth perspective, the experience of the
BRICs can be considered a success story, but it is unclear whether the BRICs use this
expanded revenue potential. The authors ask several questions regarding alternative
tax instrument and their consequences and future challenges. In the context of
high informality, the authors discuss how to deal with tax revenue from a broader
sociopolitical perspective: there are major challenges in developing and strength-
ening the fiscal contract in these countries. Chapter 3, by Sarah Berens and Irene
Menéndez, asks how labor informality affects compliance with the law, understood
as the adherence to tax regulations (as well as civic responsibilities). When informal
labor involves work without the payment of income taxation or social security
contributions, it cannot automatically be equated with general non-compliance with
b3508_V3_Ch01.indd 17 11-02-2020 13:32:22

the fiscal contract. Because informal hiring is frequently decided at the employer
side, individuals who find themselves involuntarily in informal employment may
not behave in ways that characterize deliberate tax evaders. Building on research on
tax compliance and labor market dualization, the authors theoretically explore the
channels through which lack of compliance in labor regulations may affect broader
patterns of non-compliance. They pay particular attention to implications for BRIC
countries, and discuss the ways in which voluntary versus involuntary informal
workers may differ in patterns of compliance with tax regulation and other types
of collective action. Chapter 4, by Ida Bastiaens and Laura Seelkopf, analyzes the
consequences of international tax aid on domestic recipient countries’ tax revenue
and informality. The expectation of international aid is that additional revenue would
be spent on pro-poor policies and used to extend formal labor market rights and
protection to the wider population. However, while international technical assistance
may maximize domestic tax revenue, there is no guarantee for this trickle-down
effect to happen. The authors analyze international assistance programs for tax
reform in the BRICs and illustrate the international approach to support the increase
of domestic revenue. They also test the direct effect of tax aid on tax revenue and
its indirect effect on the shadow economy. The finding that tax aid is effective in
generating revenue, but it does nothing to reduce the size of the informal economy
in BRICs, raises important trade-offs regarding the design and balance between
different types of aid for developing countries.
Part II of the volume is dedicated to the problem of informal settlements,
public goods, and basic service provision. Chapter 5, by Guadalupe Rojo, presents
a theory of slum-level social organization and its implications for electoral behavior
and access to and the quality of public services. Rojo argues that the ability of slum
dwellers to effectively demand local public goods is contingent on the level of their
social capital. Her work illustrates how communities that are empowered with social
capital are able to successfully raise demands to politicians through bloc-voting.
As a consequence, slum dwellers with strong social networks gain access to better
neighborhood infrastructure and higher-quality public services. The author presents
evidence from a unique household survey in 30 slums in the Indian city of Udaipur,
which allows her assess the ways in which communities organize themselves to fulfill
their needs. Chapter 6, by Santiago López-Cariboni, discusses how democratization
may increase the informal provision of insurance for the lower class. The chapter
builds on recent research showing deliberate non-enforcement of the law may be a
cost-efficient and politically viable strategy to increase levels of decommodification
of dislocated and poor voters during negative income shocks. In particular, the
chapter analyzes the extent to which irregular access to electricity service is counter-
cyclical under different political regimes. The chapter shows that in democratic
b3508_V3_Ch01.indd 18 11-02-2020 13:32:22

Introduction 19
cases, such as Brazil and India, electricity losses are more counter-cyclical than in
non-democracies such as Russia and China.
Part III of the volume analyzes different aspects of labor informality, political
mobilization, and preferences. Chapter 7, by Soledad Artiz Prillaman and Jonathan
Phillips, looks at informal workers’ political networks. The authors argue informal and
formal workers have different political networks. They show that informal workers
have fewer political ties in the workplace given the fragmented and insecure nature
of their jobs. Because they are relatively harder to identify, coordinate, and monitor,
informal workers will have less access to clientelistic offers by politicians. Interestingly,
the argumentation and data analysis of a panel of Brazilian municipalities show that
contextual informality (local share of informal labor) changes the ways politicians
seek to mobilize different types of workers (i.e. formal and informal). Informal work-
ers are individually less likely to be exposed to clientelistic offers than their formal
counterparts, and the aggregate local level of informality further increases clientelism
targeted to formal workers. The chapter makes an important contribution in describ-
ing entirely different political experiences of labor market participants depending
on the labor market status and contextual labor market conditions. Chapter 8, by
Luis Maldonado and María Constanza Ayala, evaluates, redistributive preferences
in contemporary Brazil. The authors analyze redistributive preferences focusing on
the heterogeneity of attitudes between formal and informal workers. They argue that
informal and formal sector workers have similar redistributive preferences. Their
challenge to the formal–informal division in redistributive preferences comes accom-
panied by an alternative account suggesting that new cleavages, such as age and ethnic
boundaries, have emerged. The study combines a qualitative analysis of the Brazilian
institutional context with an original analysis of survey data from the Latin American
Public Opinion Project (LAPOP) for the period 2008–2017. The authors conclude
that Brazil is a least-likely case in which traditional cleavages, such as formal–informal
sector divide, are expected to shape redistributive preferences in the society. Chapter
9, by Yujeong Yang and Wei-Ting Yen, analyzes the transformation of the Chinese
labor market documenting the rise of labor informality. The chapter is dedicated to
the debate of measuring informality in China and its implications. A main important
lesson is that the proxies used in Latin America might not be useful in Asia because
labor informality is defined differently. Interestingly, the conceptualization of labor
informality has its political root in China and, hence, leads to distinctive measurement
challenges. The chapter develops a thorough analysis of the institutional origin of
labor informality in China and compares it with other parts of the world. The authors
argue that, compared to countries such as Brazil, China’s labor informality is the
result of (1) the emphasis on labor contracts under its socialist doctrine, and (2) the
trajectory of the welfare state development. The first factor may hide a subgroup of
b3508_V3_Ch01.indd 19 11-02-2020 13:32:22

informal sector workers who hold labor contracts but still suffer from employment
insecurity. The second factor leads to the suggestion that the “social insurance access”
is not a suitable criterion to measure the size of labor informality in China. In contrast,
the authors argue that the possession of labor contract and participation in social
insurance programs are important aspects of formal employment in Brazil, identify-
ing informal employment using the same criteria may yield inaccurate estimates of
informal employment in China. Chapter 10, by Santiago López-Cariboni, analyzes
workers’ preferences for EPL in Brazil. The insider–outsider theory makes a clean and
strong political prediction: labor market outsiders tend to have more preferences for
deregulation and active labor market policies that enables them becoming insiders.
However, there is little systematic analysis of this prediction in developing countries,
not to mention the BRIC cases. The evidence on differences between formal and
informal Brazilian workers with respect to their policy and political preferences pro-
vides only marginal support to the insider–outsider model. This is puzzling given that
Brazil has strict labor regulations, though imperfectly enforced, and a large informal
sector. A potential implication is that some theoretical and empirical challenges to
the insider–outsider model are underlying the small political differences between
formal and informal workers.
The volume concludes in Chapter 11 with a summary of the findings and policy
implications for the BRIC, and developing countries in general, that arise from the
various chapters in this book.
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PART I
Tax Revenue, Globalization, and
Informality in BRIC Countries
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CHAPTER 2
A Comparative Analysis of Tax System

in the BRICs and the Challenges Ahead:
Informality and the Fiscal Contract
Laura Seelkopf * and Armin von Schiller†
*
Geschwister-Scholl-Institute of Political Science, Ludwig-Maximilians-
University (LMU) Munich, 80539 München, Germany
†
Hertie School of Governance, 10117 Berlin, Germany
Introduction
As far as the modern state is a “tax state” (Schumpeter, 1917), modern societies are
tax societies (Martin et al., 2009). What policies governments can implement and
how effectively they can do so depends on the level and structure of tax revenue.
This in turn shapes the societies governments govern. It determines who has to
pay for the state and who does not, who gains and who loses, who is empowered
and who is disempowered. To the extent that states are tax states, informality is tax
evasion. Working, consuming and saving outside the formal sector without paying
taxes — either deliberately or out of necessity — illustrates the weakness or unwill-
ingness of the state to include its people and firms into the formal sector. Hence,
tax evasion constitutes a large part of informality and is often used to define and
measure it (Schneider, 2005; De Paula and Scheinkman, 2011). So, if informality is
largely taxation, how does informality in taxation look like both theoretically and
empirically in the BRICs?
31
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32 L. Seelkopf & A. von Schiller
In this chapter, we first discuss the different challenges international and com-
parative political economy, development economics, and fiscal sociology have identi-
fied for the tax state and how this relates to informality. We then locate the BRIC’s
tax states comparatively, illustrate their development and structure and discuss the
impact of informality on important goals of the tax state, such as revenue genera-
tion, steering of the economy, and redistribution. Brazil, China, India, and Russia
are crucial cases in the study of informality and taxation. Following the United
Nations (2017), they are not only home to more than 40% of the world population,
but are also key countries for the international system. Especially since the 1990s,
they have been main drivers behind the changing equilibrium of the international
system. For instance, as members of key international bodies such as the G20, they
already shape international policy processes and continue to demand more power
in influencing also the international dialogue on tax issues and informality. At the
same time, their national politics impact other countries. High-income economies,
but also increasing economies of low-income developing countries, are dependent
on and also vulnerable to the economic and political development in the BRIC (IMF,
2011a). Hence, an analysis of taxation and informality in Brazil, China, India and
Russia sheds light on important developments not only for the population living in
these countries but also for the rest of the world.
With this development in mind, we analyse the historical evolution of tax s ystems
in the BRIC as well as their characteristics today. We place a strong emphasis on how
they have dealt with challenges since the 1990s and the challenges they are facing
today. Among these, we stress the element of informality and the lack of proper fiscal
contracts. It is important to highlight that although we deal with the BRIC as a group
to identify joint challenges, we also aim to illustrate the differences among them.
National and International Hindrances to

Taxation and Informality
How are taxation and informality related? For many economists, not paying taxes
is informality, either by definition or measurement. The shadow economy consists
of “all economic activities that would generally be taxable were they reported to
the tax authorities” (Schneider, 2005: 600). Yet, the reasons why people and firms
do not — or are not asked to — pay taxes are manifold. Hence, to understand how
taxation and informality are connected, we first need to understand the goals of
taxation and what domestic and international challenges modern tax states face.
In the literature, the goals of the tax state are typically threefold (see, e.g.
Musgrave, 1959). States use taxes to steer the economy, e.g. to discourage or
encourage certain activities, to generate enough revenue for their policies and use
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A Comparative Analysis of Tax System in the BRICs and the Challenges Ahead 33
the revenue to redistribute income. While many political scientists focus on condi-
tions under which governments want to redistribute (e.g. Boix, 1998; Scheve and
Stasavage, 2016), economists argue about the correct size of the state (e.g. Oates,
1985) and what tools to best use for taxation (see, e.g. Steinmo, 2003). Given that
much of the discussion is based on OECD countries after the Second World War, the
capability of the government is always assumed. Hence, even informality becomes
almost a choice of the government rather than a problem of its ability to include
everyone in the tax net. In this scenario, if governments do not crack down on tax
evasion, it is because they do not want to for ideological reasons, think it is too
expensive to crack down on a mostly relatively small number of evaders, or even
deliberately allow informality to help the economy in a recession.
This is different for developing and emerging economies, where the ability to
tax is much lower.
In fact, for many scholars, the share of (direct) tax revenue is actually the best
measure of state capacity (e.g. Tilly, 1975; Levi, 1989; Besley and Persson, 2009;
Dincecco and Katz, 2014). Mostly based on the development of the (tax) state in
Europe, authors argue that states could raise their revenues because they managed to
implement broad taxes, which allowed them to effectively tax all their citizens and firms
across regions, sectors, and income groups. In less developed countries, where both
administrators as well as citizens are less able to extract or pay taxes, the size and struc-
ture of the tax state are much less a conscious decision of the government, but more
an outcome of its lower ability to tax. Hence, governments rely on easy tax handles
(Aizenmann and Jinjarak, 2009) to generate revenue in a world with low administrative
capacity. These are usually trade and corporate taxes. The government only needs to
monitor a few ports, roads and airports or the major companies in a country rather
than a myriad of citizens and small shops as would be necessary for general taxes on
consumption (GST or VAT) or income (PIT). While most countries in the world have
also introduced these more modern taxes (Seelkopf et al., 2019; Genschel and Seelkopf,
2019), less developed economies still rely heavily on trade and corporate income taxes
(Genschel and Seelkopf, 2016b) due to their low ability to tax the rest. This of course
implies huge informality on all other tax bases, namely, on the income of individual
citizens and their consumption. Whether this informality is illegal (people do not pay
the tax they should and administrators cannot coerce them) or legal (the government
has set the thresholds so high that the majority of poor income earners and small shops
fall below it) is somewhat arbitrary. It does however — and this is where developing
and emerging economies are different to their rich counterparts — indicate the same
problem: low government capability to control and convince their tax base.
While international organizations assist countries to overcome these issues
(see, e.g. Chapter 4), globalization in general has made the problem worse. This is
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mainly due to the fact that globalization almost by definition hits those two taxes
the hardest, on which lower income countries mainly rely: trade and corporate taxes
(Keen and Mansour, 2010a, 2010b). An increase in trade liberalization implies a
lowering of barriers to trade and for many developing countries, this implied mainly
a bolishing tariffs. While this potentially increases the overall welfare, it undermines
tax revenues at least in the short to medium run. The IMF has advised the intro-
duction of value-added taxes to offset the revenue loss from liberalization and this
has at least partially worked (Baunsgaard and Keen, 2010). The VAT is also seen as
the solution to the downfall of the other important revenue source: the corporate
tax. With increased globalization, multinational corporations can choose where to
invest (or at least where to park their profits). This induces competition for foreign
investment between countries via lower corporate tax rates. While most countries
worldwide engage in it, this is particularly harmful for developing countries as a
much larger share of their tax revenues stems from corporate taxation and as such
sacrificed on the altar of corporate tax competition. Given that the BRIC are large
countries, they are the potential losers of tax competition (Genschel and Seelkopf,
2016a). The size of their economies is good because foreign firms will keep investing
into the BRIC despite potentially higher tax rates. But it is also bad because they will
not be able to undercut smaller tax havens in their surroundings and hence cannot
turn lower corporate taxes into a viable business model. Hence, they need to go for
an alternative revenue source.
Replacing both trade and corporate taxes with the VAT potentially decreases
the redistributive capacity of the tax state as consumption taxes are generally seen
as regressive. While this might be different in instances of high informality, where
only the rich consume in the formal economy, the VAT is still more regressive than
corporate or personal income taxes. Also, a strong reliance on consumption taxes
logs in a tax system that becomes ever more regressive, the more the informal tax
base is included in the tax net. Hence, an efficient VAT, which broadens its base to
the (former) informal economy, provides more revenue, but increases inequality,
especially if the spending side is not very redistributive.
In sum, informality can stem from deliberate as well as unintended choices on
the side of both lawmakers and people. Tax evasion is a form of unintended infor-
mality on the side of policymakers, but a deliberate step on the side of taxpayers.
People that hide their income or assets in secrecy jurisdictions or consumers and
firms that do not report their taxable activity are evading taxes. This tax evasion is
often used as a measure of informality itself. Yet, informality can also be a deliber-
ate consequence of policy choices, whereby governments exclude large parts of the
population from paying taxes because they are aware of their own low capacity to
tax and hence rather rely on easy-to-tax revenue sources such as trade or corporate
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income. Globalization has made this strategy harder and hence governments try to
rely more on internal taxes, mostly on consumption, but formally also on income.1
Taxation and Informality in the BRIC

To understand the extent of informality in the tax system, it is important to
understand how much tax a state can raise in terms of revenue and where this
revenue stems from (tax mix). Hence, this section will discuss the development and
current state of the tax systems in the BRIC and place them in the wider context.
We will start with the general revenue capacity of the BRIC before we place the tax
systems in their historical context and then delve deeper into the tax mix.
Tax Revenue and Economic Development: Placing the BRIC in Their

Geographical and Historical Contexts
While developed economies differ quite substantially in the amount of taxes evaded,
they all manage to collect substantive revenues. Even Italy, which has a VAT gap
of almost 30% (CASE, 2016: 19), raises more than 40% of GDP in taxes (OECD,
2017). Advanced economies that collect significantly less such as the United States
or Switzerland do this as a deliberate policy choice favouring a smaller state. Yet,
they all easily raise more than the 20% of GDP in taxes deemed necessary to provide
basic public goods (OECD, 2013). This is different for developing and transition
economies such as the BRIC. Here, the revenue-to-GDP-ratio already indicates
the capacity of the state to collect taxes (and hence fight informality and its negative
consequences on society). As Figure 1 illustrates, the level of development and the
size of the tax state are closely connected. Richer countries have the larger tax states.
This is in line with the finding that informality is lowest in advanced economies and
much higher in transition and developing countries; whereas the size of the shadow
economy in OECD countries is estimated around 10% of GDP, it accounts for more
than 50% in some transition and developing countries on average (Palamade and
Anayiotos, 2005).
Based on recent data, it is safe to say that compared to countries at a similar
level of economic development, the tax performance of the BRIC does not appear
to be particularly bad. The BRIC are good tax performers compared to countries
1
A third type of tax base is assets. We do not discuss them explicitly, as they do not amount
to much revenue, require usually high administrative capacity and are — with the potential
exception of property taxes — declining worldwide (see, e.g. Seelkopf et al., 2019).
b3508_V3_Ch02.indd 35 11-02-2020 13:32:55

60
50
Total Revenue
40
Russia
Brazil
30
20
India
China
10
4 6 8 10 12
GDP p.c.
95% CI Fitted values

rev_average rev_average
Figure 1: Economic development and the tax state.

Note: Indicators represented averages over the period 1990–2010.
Source: IMF (2016).
Table 1: Tax revenue in 2014 and introduction year of major taxes.
Total Revenue Tax Revenue Year of First Permanent Introduction

as a % of GDP as a % of
Country (2014) GDP (2014) INH PIT CIT SSC GST VAT
Brazil 34 31 1809 *
1922 1926 1923 1923 1967
China 29 19 1939 1936 1950 1951 1931 1994
India 20 17 1953 1886*
1940 *
1952 Never 2017
Russia 37 28 1882 1916 1885 1912 Never 1992
Note: *Introduced under Colonial Rule.

Sources: IMF (2016), Seelkopf et al. (2019), and Genschel and Seelkopf (2019).
in their geographical area (see also Ivanyna and Haldenwang, 2012). While India
and China seem to be doing slightly less well than Brazil and Russia in terms of
revenue for their level of economic development, the sole focus on tax revenue
is somewhat misleading, at least in the case of China. As the first two columns
in Table 1 show non-tax revenue is very relevant in Russia and China while less
crucial in the case of India and Brazil (as it is in most countries around the globe).
In particular, Russia earns a lot of revenues from its natural resources and China’s
budget is increased by the profits of its state-run enterprises.
b3508_V3_Ch02.indd 36 11-02-2020 13:32:56

Yet, the capacity of a tax system is not only gleaned by comparing it with other
countries in the world. We also need to understand where the BRIC came from to
see their contemporary tax systems in their historical context. In general, the BRIC
developed their first modern taxes relatively early. All four countries introduced at
least one out of six modern taxes before the Second World War (see last six columns
in Table 1). With the exception of China, the development of the modern tax state
already started in the 19th century. In India and Brazil, some taxes even have colonial
roots and remained in place after independence till date (Genschel and Seelkopf,
2019). The tax policies in China and Russia are different. They introduced all their
taxes as sovereign states, yet their pre-Cold War tax states were interrupted by com-
munism. While taxes were still formally in place, the meaning changed significantly
and became more of an accounting exercise rather than a tax as we understand it.
With the return to a capitalist economy in the 1990s, China and Russia reintroduced
modern taxes. Especially at the beginning, this was very challenging as administra-
tors were few and untrained, citizens were not used to paying taxes, and the economy
was not monetized (Appel, 2011). Yet, currently all BRIC countries, including both
Russia and China, hit the UN target of 20% — albeit India only just so. Comparison
of the data in Table 1 to the clearly lower revenues at the beginning of the 1990s in
Figure 2 points to some remarkable developments in terms of revenue collection
over the last decades.
Figure 2: The development of the tax state in the BRIC.

Source: IMF (2016).
b3508_V3_Ch02.indd 37 11-02-2020 13:32:57

In all of the BRIC, the collection trends have been positive. With the exception
of Brazil, which is well known historically to be a relatively high performer in tax
collection (Ivanyna and Haldenwang, 2012; Le et al., 2012), all the other countries
started at low levels. In the case of China, the tax revenue collected was even well
below 10% of GDP in the early 1990s.2 The most positive trends are in the two
post-communist countries, Russia and China, hinting at the strong ability of the
communist states to transform their economies to capitalism and then also tax them.
Unsurprisingly, Brazil has not increased its intake as much, given that it already was
at a relatively high level in 1990. It is, however, steadily increasing its tax revenue.
India instead is mostly stagnant and is struggling hugely to increase its tax intake.
In general, it can be said that the tax state had quite strong roots in the BRIC
and that the administrative setup was already in place for some decades. Following
communism and also changes in the international economy, the BRIC have also
introduced more modern tax instruments recently. In this respect, India represents
a latecomer, at least when it comes to consumption tax reform.3 In the next part, we
will take a closer look at the tax mix in the BRIC.
The Tax Structure in the BRIC
Since the 1990s, the process of globalization accelerated and deepened. From a
revenue perspective, globalization creates a number of challenges for developing
countries. Keen and Mansour (2010a, 2010b) emphasize two most prominent chal-
lenges: the reduction in trade tax revenues and the potential erosion of corporate
tax revenues by international tax competition. It is relevant to highlight that these
challenges took place in a context where the spending needs were high, whereas
the levels of domestic resource mobilization, as discussed above, were relatively low.
Adding to this complexity, if we also look at the challenges from within, it is safe to
say that at the beginning of the 1990s, the state capacity in most of these countries
was low. And so was the size of the tax net and the number of individuals and firms
which have been contributing regularly to the tax revenue. Overall, as in many
developing and emerging economies, the BRICs have been relying on tax instru-
ments that were under pressure and needed little administrative capacity. Hence,
the ability to enforce new taxes on a population, with which revenue bargaining
had been very limited so far, was low. The options for the countries were mainly
three: not complying to the international pressures and trying to keep the system as
2
This was presumably similar for Russia, for which we unfortunately only have data from
the mid-1990s onwards.
3
See https://www.foreignaffairs.com/articles/india/2017-08-17/indias-tax-reform.
b3508_V3_Ch02.indd 38 11-02-2020 13:32:57

it was; losing some revenue without trying to compensate; or losing some revenue
and actively trying to activate new tax bases.
Given the pressure, and also the potential gains from liberalizing, the option
to try to stick to the old system was hardly reasonable. Only in Russia, partly
explained by its peculiarity as exporter of natural resources, were trade taxes an
option. And given the revenue needs of the population — often even increased due
to globalization — simply forgoing the revenue was also not possible. Hence, all
BRIC — similar to most countries worldwide — tried to reform their tax systems
to access their national tax bases. Here, the problem of informality becomes crucial.
Informality — working and consuming outside the formal economy — makes it
much more difficult for states to substitute lost revenue via other tax instruments,
such as sales or income taxes. Moreover, informality can not only be seen as a
problem of low administrative capacity but also as a systematic lack of tax morale.
High levels of informality could be interpreted in this sense, as the final prove that
citizens and enterprises only contribute via taxes if forced. In this sense, new sources
of revenue would demand either investment in higher extractive capacities to force
tax payments or investments in quasi-voluntary compliance to lower resistance to
taxation. How did the BRIC fare in switching from trade and corporate taxes to
consumption and personal income taxes?
As illustrated above international organizations such as the IMF recommended
compensating lost trade revenues through a stronger use of indirect taxation on
goods and services. Indirect taxation, especially VAT, was praised internationally as
the best way forward. It is argued to be a less distortive tax and, if not designed in a
complex way, be characterized by relatively low administrative and compliance costs.
We hence first take a closer look at the ratio of revenue collected through indirect
taxes on goods and services and the revenue from trade taxes (Figure 3). Were the
BRIC able to switch from easy to tax trade to harder to tax consumption?
Especially in China and Brazil, the trend is very positive. In the case of Brazil,
the development is very strong. For every dollar of tax collected through trade taxes,
Brazil was getting approximately 7 dollars through taxing goods and services in 1990.
That number gradually jumped up to above 38 in the mid-2000s. It indicates the
end of a process that was already well under way in the 1990s, namely, the complete
move away from tariffs as revenue source. Different from Brazil, China started
the 1990s with a ratio below 1, indicating that China was collecting more revenue
trough trade taxes than through domestic taxes on goods and services. This is not
surprising considering the recent change to a capitalist economy. What is remarkable
is the speedy increase of the ratio, which seems to now be stabilizing at high 20s. In
the case of India and Russia, the evolution is far less strong. In the mid-1990s, both
countries had a ratio of around 3, which in the case of India has slightly increased to
around 5. Compared to China and Brazil, this appears rather small, nevertheless, it
b3508_V3_Ch02.indd 39 11-02-2020 13:32:57

40
Ratio of indirect taxes to trade taxes
30
20
10
0
1990 2000 2010 2020

Year
Brazil India
China Russia
Figure 3: Ratio of taxes collected through indirect taxes to taxes collect through trade taxes.
Source: IMF (2016).
represents a remarkable increase for a country so plagued by low capacity and high
regional diversities. In the case of Russia, the number has even decreased since the
2000s and at the end of the 2000s, Russia was collecting only slightly more through
indirect taxes than through trade taxes. This is not due to a decline in consumption
taxation as Figure 4 illustrates, but due to an increase of trade tax revenues because
of the resource boom in this period.
As our analysis of the ratio between trade and general consumption taxes show,
we see not only a trend towards the latter but also remarkable differences between
the BRIC. We now turn to Figure 4, which further illustrates these divergences
and trends in term of tax composition by showing the revenue collection of taxes
on goods and services, trade taxes, individual taxes and corporate taxes in every
individual BRIC. A common denominator is that taxes on goods and services, under
which the VAT is subsumed, are crucial for all the countries and, except for India,
clearly increasing in performance. We also see modest yet significant increases in
collection from individual taxes and corporate taxes.4 As mentioned above, with the
expectation of Russia, the collection of trade taxes is decreasing or stagnant.
4
Of course, the average over decades partly cover development that happen later in a period.
For instance, it seems evident that the China has increased recently collection from personal
income tax in a far more effective way than, for instance, India (Piketty and Qian, 2009).
b3508_V3_Ch02.indd 40 11-02-2020 13:32:57

20
15
10
5
0
90s 00s 90s 00s 90s 00s 90s 00s

Brazil China India Russia
Taxes on goods & services Trade taxes
Personal income taxes Corporate income taxes
Figure 4: Tax collection as percentage of GDP in the BRIC by different tax instruments in the
1990s and 2000s.
The challenge of potential pressure on corporate income taxation appears to not

have materialized strongly in BRIC. As Figure 4 shows, income from those taxes has
increased. It is however relevant to highlight that the vast level of economic growth
in these countries might have compensated for the pressures from tax competition.
It is certainly right to say that compared to other countries, taxes on corporations
in BRICS are not particularly high.
Beyond the overall trends, the analysis of the tax composition enriches the
picture of the reality of taxation in the BRIC. In India, the country with the longest
time series, there appear not to be any major shifts in the tax composition. Collection
through indirect taxation has remained stable over the last three decades at around
12% and direct taxation increased at the end of the 2000 to over 5%, albeit mostly via
corporate rather than individual income taxation. Overall, the tax collection remains
rather low and reflects the low capacity of the Indian state(s) to tax its citizens. In
Brazil, although direct taxation has also experienced a modest upward trend, the
step that brought tax collection well above 30% of GDP was indirect taxation. In
China, the collection of the different taxes has run in parallel. Indirect taxation is
dominant, but direct taxation has also increased remarkably (IMF, 2016). The jump
in tax collection we see in Figure 3 seems to indicate that the VAT introduction in
1994 was immediately successful (see Table 1). This is a strong indication of the high
capacity of the Chinese state to collect taxes (and of firms and citizens to pay them).
b3508_V3_Ch02.indd 41 11-02-2020 13:32:58

In the case of Russia, in stark contrast to the other BRIC countries, trade taxes and
revenue from natural resources continues to be a significant contributor to revenue
generation. Yet, Russia has also managed to more than double its tax intake from
corporate taxes and turn individual income taxes into a real revenue source.
In sum, all BRIC have increased their tax intake, although with high degrees
of variation. Indirect taxation continues to be the biggest revenue source, although
we see a shift from trade to consumption taxation. While income taxes are also
increasing, they are only a small share of the overall tax mix. These findings indicate
that the BRIC were somewhat successful in increasing the size of their tax states.
Yet, despite the varied positive trend, the tax intake is still relatively low compared
to developed economies and informality still poses a huge problem. To triangulate
and understand taxation and informality in the BRIC better, we now turn to survey
data to shed light on the taxpayer side.
Challenges in the BRIC: Informality, Capacity,

and the Social Contract
Understanding the development and the current state of the tax system in the BRIC
is an important step in understanding informality in taxation, especially given
that there hardly exist any comparative estimates on actual tax gaps in advanced
economies, let alone developing and transition economies such as the BRIC. But
the challenges faced by the BRIC are not only technical. Another important feature
is whether citizens are willing to enter into quasi-voluntary compliance (Levi,
1989) and pay the taxes the government asks of them. This is why it is so relevant
to complement the information on revenues with survey data on taxpayers and
administrations. We first illustrate how firms judge the BRIC’s tax systems and then
discuss how citizens fare inside and outside the tax system.
Beyond the policy element, a crucial dimension of tax policy and tax perfor-
mance in developing countries is tax administration and its enforcement capacities.
The level of interdependence between tax policy and tax administration, especially
in the context of developing countries, which tend to be characterized by weak state
capacity, has been summarized by Casanegra de Jantscher when she claimed that “tax
administration is tax policy” (1990: 179). It is undeniable that in many developing
and transition economies, the major challenge towards more tax revenue is the
administration (see, e.g. Chapter 4).
Over the last years, we have seen the limitations that tax administration in the
most developed countries face, when it comes to tracking and enforcing legislation.
Not surprisingly, these limitations are even more profound in the BRICs. Here, the
b3508_V3_Ch02.indd 42 11-02-2020 13:32:58

difference between what would be technically optimal or politically desired and what
is reasonable and feasible is even bigger. This has a dimension of efficiency given
that certain taxes are administratively more demanding, or that certain legislation
might be to cumbersome to implement and track. It is in this setting that govern-
ments themselves have a difficult balance to achieve between what is expected of
them, what tax theory says is reasonable, what goals they want to achieve and what
reforms are enforceable.
Administrative capacity and the problem of informality are closely related,
especially when it comes to exploiting more tax sources such as corporate and per-
sonal income taxes as well as the VAT. The governments have not hired enough tax
administrators and those officials are often badly trained and do not have the neces-
sary equipment, such as computers and modern accounting software. In addition,
people and firms alike are not used to being taxpayers. Overall, there is a need to
bring more citizens as well as medium- and small-sized enterprises into the tax net.
Firms
Given the importance of firms for tax collection (IMF, 2011b), we first focus on
the opinion of firms on what constitutes major constraints for them. We use two
different questions as measures for tax administrations, namely, the percentage of
firms which directly state that tax administrations are a major constraint and then
the percentage that report a visit by tax officials. We use another question on tax
rates to compare these two measures of perceived and actual administrative activities
(World Bank, 2018).
Figure 5(a) shows the percentage of firms worldwide that see tax rates (on the
y-axis) and tax administrations (x-axis) as major constraints for their ability to do
business. Interestingly, both are highly correlated. To dislike tax rates is to dislike tax
administrations. The BRIC differ widely, but with the exception of Russia, all fall on
the regression line. Russia is an outlier, where much more firms perceive rates to be
a constraint rather than the administration. This is especially interesting given that
Russia has the lowest rates of all the BRIC. The actual tax rates (see Table A.1) and
the actual perception about them as major constraints differ widely. High (or low)
tax rates alone do not seem to be a good indicator as to why taxpayers choose
informality over taxation.
This also becomes clear when we compare the two graphs. Whereas the percent-
age of firms that sees tax administrations as problematic is highly correlated with the
percentage of those that see tax rates as a major constraint, the actual activity of tax
administrations, namely, paying the taxpayers a visit, seems almost not correlated at
all. This seems to indicate that a firm’s perception might not be such a good measure
b3508_V3_Ch02.indd 43 11-02-2020 13:32:58

Figure 5: A business view on the tax state.
to qualify the efficiency of tax administrations. The actual work of tax controllers is
not seen as an obstacle. China, the country which is to be seen by firms as a prodigy
in tax terms, is the BRIC which has the largest percentage of firms that were visited
by tax officials. Hence, a country with medium tax rates, a rising tax intake and an
effective administration is actually perceived as the one with the fewest constraints
in tax terms by firms. A country such as Brazil, which relies much less on income
taxation as revenue source and sends fewer administrators to check firms, is seen as
much more problematic. This might of course stem from the fact that business men
and women expect more of the democratic Brazilian government than of autocratic
China or are disappointed by the performance on the spending side. To delve deeper
into this question, we now turn to citizens and their perceptions.
Citizens
The increased economic development in the BRIC has not only increased the tax
base but also changed who is taxable. Thanks to the high number of people who
no longer live in (absolute) poverty in many developing and emerging economies,
the number of people that are in a position to make a contribution to the society in
the form of (direct) taxes has increased. This creates the challenge for BRIC as well
as other emerging economies to move from a tax system relying on few taxpayers,
which pay the vast share of the revenue, to a system based on a broader tax base, with
more but also smaller individual contributions. This has economic but also political
b3508_V3_Ch02.indd 44 11-02-2020 13:32:59

implications. First, the government has to convince or force many more people to
pay. Second, the government has to anticipate that turning citizens into taxpayers
will make them demanding a say in what is done with their money (Moore, 2004;
Brautigam et al., 2008). Overall, we know that the nature of government financing
affects the relationship between governments and citizens, and that enhancing
revenue mobilisation might drive politicians’ responsiveness to citizens, citizens’
engagement in public affairs and, ultimately, more accountable and inclusive govern-
ment institutions (e.g. Paler, 2013).
Taxing individuals might therefore not be the best strategy for governments,
although the idea of governments as pure revenue maximizers continues to be
strongly present in many discussions (see, e.g. Piracha and Moore, 2016). The
political cost of taxation can be high and even more importantly, given capacity
constraints, the success of any policies aiming at sustainably increasing and main-
taining tax collection at higher levels will demand some degree of quasi-voluntary
compliance (Levi, 1989). This means that in order to tax more and establish modern
effective and efficient tax systems, BRIC are faced with the challenge to transform
not only their tax policies and the way they handle them, but more profoundly the
revenue bargaining, on which the public finance system is based and legitimatized.
With higher levels of economic development, the scope to tax more broadly and
different economic actors increase (Ravaillon, 2009). While in poorer countries, the
decision to rely solely on a much reduced number of taxpayers can be sensible given
the small tax base and the reduced number of persons with capacity to contribute,
this natural constraint loosens with economic growth. This opens the possibility
to engage in revenue bargaining with the broader tax base and consolidate a more
inclusive fiscal contract. Survey data show that BRIC are far from consolidating
a fiscal contract involving citizens through quasi-voluntary compliance. Table 2
highlights the percentage of the population over time, who consider that cheating
on taxes is never justifiable.
Table 2: Percentage of population supporting that cheating taxes is never justifiable.
1989–1993 1994–1998 1999–2004 2005–2009 2010–2014
Brazil 60% — — 39% 65%
China 81% 78% 76% 58% 43%
India 80% 74% 76% 53% 77%
Russia 48% 43% 43% 46% 41%
Note: Percentage of respondents who consider that cheating on taxes is never justifiable.
Source: World Values Survey, various waves. Inglehart et al. (2014).
b3508_V3_Ch02.indd 45 11-02-2020 13:32:59

The numbers vary strongly among the BRIC. India systematically shows pretty
high numbers, while Russia seems to have the smallest amount of people consider-
ing cheating unacceptable under any circumstances. Beyond differences between
countries, the trends within countries are intriguing. In China, the numbers are
decreasing rapidly. China represents an extreme case, but in general, it is safe to say
that there is no upward trend in any of the countries. Consolidation or decrease in
the number of people that see taxation as just is far more common. This might be
taken as a major sign of eroding (rather than forming) fiscal contracts. The BRIC
have apparently not been able or willing to convince taxpayers that their contribution
is meaningful and relevant. Rather, it appears that in taxing, the BRIC have used the
stick rather more than the carrot. In this line, the numbers point at a non-technical
but highly crucial dimension for developing countries, which are trying to tax more
and better. A modern, effective and efficient tax system will not function against
the will of the taxpayers. Even if technical and administrative solutions are found
to extract more resources, these efforts will not be sustainable.
Economic development changes the options for states to finance themselves. This
refers to the tax potential in absolute terms as well as the amount of actors with the
economic capacity to contribute. Most often, the perspective of the state is taken and
scholars, advisers and policymakers discuss what the state needs to tax more effective
and efficiently. Yet, a real transformation can only happen, when the discussion is
complemented by looking into what taxpayers want. Only by creating quasi-voluntary
compliance will administratively constrained countries, such as the BRIC be able to
extend their tax base and transform the way they tax (see, e.g. Berens and von Schiller,
2017). This is a more socio-political than a purely economic process and it appears to
have been neglected or at best been only very moderately successful in the BRIC. Cases
of clientelism and corruption with increased public budgets have certainly not helped
in this regard and give a good excuse for taxpayers to distrust government officials.
It is also in this context, where the level of informality should not be seen only as a
technical and administrative challenge, but also as a sign of weak tax morale and lack
of a fiscal contract. At least some part of informality can be expected to be motivated
by the perceptions of many economic actors that the exchange of revenue for services
received from the state is not attractive for them (see, e.g. von Schiller, 2018).
Conclusion: The Challenge of BRIC and Understanding

the Informality on Taxation
BRIC are now key actors in the international economic and political system. From a
historical perspective, the BRICs were in very different positions at the beginning of
the 1990s. They however faced a similar set of challenges. Globalization put pressure
b3508_V3_Ch02.indd 46 11-02-2020 13:32:59

on certain revenue sources such as trade taxes that had played a major role in the
tax collection. BRIC were under a lot of pressure to reform the way they tax and in
order to substitute lost revenue, they were forced to use tax instruments that they
had neglected so far. At the same time, their rapid economic growth enabled them to
employ tax strategies which before that had been economically inviable. As taxation
is at the core of the state, the challenge to transform the way that the BRIC taxed
was far from only a technical one. The transformation affected and is still affecting
administrative, political, and social dimensions.
The reforms can be tracked in the data. In this chapter, we have described
the trends in revenue collection and revenue composition. Generally speaking,
the changes go in the expected direction, but the reforms have been more
modest than many could have anticipated and the level of heterogeneity between
the BRIC countries is huge. As economic growth was high, revenue was easier
to collect and the pressure to engage in the reforms that were demanded was
lower. The BRIC do have average collection for their respective level of economic
development. BRIC countries could to a certain degree change little to fulfil the
expectations. Administrative capacity seems to have increased, but the develop-
ment of a broad-based fiscal contract seems far from having become a reality.
Lower level of poverty increases a tax potential that many of these countries are
apparently neglecting. Also, the existence of individuals with higher incomes to
be taxed is not being sufficiently exploited.5
A key battleground in this endeavour to higher revenue based on strong fiscal
contract is informality. Informality, as this chapter has highlighted, should be at the
core of the reform agenda. It is a challenge for higher revenue, but also a symptom
of a poor fiscal contract. As the OECD highlights:
“Persistent and high levels of informality reduce tax revenues and the ability to
develop contribution-based social security systems. Furthermore, those workers
who are rationed out or excluded from formal jobs and who depend on informal
employment, either as micro-entrepreneurs or informal wage workers, for income
generation represent a huge challenge for public expenditure (OECD, 2004).
Ultimately, the prevalence of informal employment is not only a fiscal issue: it can
be interpreted as a sign of a dysfunctional social contract between the state and
its citizens. The state is not delivering the public goods in the quantity and quality
5
As Ravallion (2009) calculates, there is some scope to fight poverty redistributing to the
poor revenue generated by increasing tax pressure on higher incomes. He analyses specifi-
cally the cases of three of the BRIC (Brazil, India, and China) and shows how the scope is
very big in Brazil, remarkable in China and very limited in India.
b3508_V3_Ch02.indd 47 11-02-2020 13:32:59

desired by its citizens, while in parallel citizens are evading taxes, social security
contributions and the like in actions which undermine the capacity of the state to
deliver those goods” (Jütting and de Laiglesia, 2009: 19).
The previous analysis suggests that the BRIC are increasing their tax revenue —
China is certainly the country with the quickest growth, whereas India is lagging
behind. On the technical side, efficiency of administration and increasing the tax
net appear most relevant. Yet, a more balanced tax composition would be politi-
cally and economically desirable and possible. Most importantly, politically there
is a lack of fiscal contract and little indications of developments to consolidate it.
Overall, tax reforms in BRIC have taken place over the last two decades, but the
effects have been far less impressive than could be expected. Most reforms have
focused on a technical and administrative dimension and neglected the socio-
political dimension of public finance. The new economic strength in these countries
creates potentials that are not being exploited. This leaves the BRIC as well as the
international community ample scope to engage in this area in order to materialize
the fiscal and governance dividends that more ambitious reform might generate.
Appendix
Table A.1: Tax rates 2016.
CIT PIT VAT INH
Brazil 34 27.5 19 8
Russian Federation 20 13 0
India 34.6 35.5 14.5 0
China 25 45 17 0
Source: Limberg (2018) (PIT, VAT, INH); KPMG (2018) (CIT).
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CHAPTER 3
Is Informal Work Eroding Compliance?
Sarah Berens* and Irene Menéndez†
*
Cologne Center for Comparative Politics,
University of Cologne, Germany
†
IE School of Global and Public Affairs, Madrid, Spain
Introduction
Tax revenue is vital for the state to work and to fulfill its legitimizing function.
Taxation ushered in democratic representation and paved the way for prosperous
and fully-fledged democracies (North and Weingast, 1989; Queralt and Mares,
2015). This dynamic, however, is mostly a narrative of western democracies. Many
developing countries struggle with both a sound fiscal footing and democratic
quality. Compliance (and lack thereof) lies at the very heart of this trajectory.
Compliance refers to cooperative behavior among citizens and the state and the
willingness to fulfill a direct or indirect agreement. This means that citizens pay
taxes as politically agreed upon, go to the ballot on election day to fulfill the most
vital task of democracy and generally abide by the rule of law. But low turnout rates
and unequal representation, chronically underfinanced public authorities, booming
informal labor markets and high rates of criminal violence often make fulfilling this
task difficult for many citizens in the developing world. In this chapter, we empha-
size that understanding the nature of compliance is vital to understand and find
solutions for these challenges. We zoom in on two central problems of compliance,
compliance with labor market regulations (or the lack of it, which essentially refers
to informality) and compliance with civic responsibilities, understood as compliance
53
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54 S. Berens and I. Menéndez
with the fiscal contract (or the lack of it, which refers to tax evasion). Because the
decision to comply is not always at the discretion of the individual, especially in the
realm of labor markets (e.g. informality), different types of motivations may be at
play. We discuss these and other mechanisms driving compliance across both areas,
and make the general argument that forced non-compliance in one realm can erode
compliance in other relationships.
Standard arguments in economics typically view compliance as payment of tax
duties and largely subsume labor informality as part of the concept. The academic
discourse on tax compliance is vast and can be mainly categorized along two branches:
the enforcement literature and the fiscal contract perspective. Early explanations for
compliance emphasized deterrence and fear of punishment, modeling compliance
as a clean cost–benefit calculation (Becker, 1968; Allingham and Sandmo, 1972).
Subsequent empirical research revealed that fear of punishment cannot fully explain
the high levels of compliance that go much beyond the predictions of returns to
taxes in rational choice models (Alm et al., 1992) even though current studies still
attribute a substantial share of compliance to risk perception (see, e.g. Dwenger et al.,
2016). The second strand of research theorizes tax compliance as rooted in the fiscal
contract between taxpayers and the state (Levi, 1989). In exchange for the taxpayer’s
contributions, the state provides public goods, such as infrastructure, public safety, and
the welfare system. In addition to the vertical fiscal relationship, horizontal reliability
is equally important. Social norms that limit free-riding behavior are considered
as vital for tax compliance. Tax compliance is also positively related to tax morale
(defined below) that deems evasion an unjustifiable behavior and thus overcomes the
collective-action problem of free-riding (Torgler, 2005; Torgler and Schneider, 2009).
Similarly, the concept of informality has been defined along a number of
dimensions. The International Labor Organization (ILO) defines workers as infor-
mal “if their employment relationship is not subject to standard labor legislation,
taxation, social protection, or entitlement to certain employment benefits” (ILO,
2002: 126). Research relates the phenomenon of informality to regulatory barriers
to the formal labor market (De Soto, 1989; Loayza, 1996; Johnson et al., 1998), low
institutional quality (Saavedra and Tommasi, 2007), the quality of the legal system
and existing loopholes (Dabla-Norris et al., 2008; Carnes, 2014), and low social trust
(D’Hernoncourt and Méon, 2011).
Yet while tax evasion and informality share some characteristics, they are analyti-
cally distinct phenomena. Indeed, what sounds as a tautology at first sight is a much
more complex set of notions. One reason for this is that the scholarly debate has
tended to overlook the heterogeneity within the group of informal workers. When
informal labor is understood as work without the payment of income taxation or
social security contributions, it cannot automatically be equated with general non-
compliance with the fiscal contract. For instance, a worker who is not paying income
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Is Informal Work Eroding Compliance? 55
tax and social security contributions due to informal employment may at the same
time accurately pay consumption or property taxes. Moreover, because informal
hiring is frequently decided by employers, the link between (and evaluation of) the
fiscal contract and compliance may break down. In a recent contribution, Ronconi
and Zarazaga (2015: 453) find first evidence for the deteriorating effect of withheld
benefits and labor rights for informal workers’ civic engagement in Argentina,
concluding that “employer non-compliance with labor regulation erodes workers’
citizenship responsibilities”. Echoing O’Donnell (1993), this suggests that lack of
legal protection can compromise the pursuit of further interactions with the state.
We pursue this effort further and theoretically unpack the causal links between
informality and compliance to illustrate the complexity of behavioral consequences
linked to labor market exclusion. We highlight the importance of heterogeneity
among informal workers. In particular, we emphasize the importance of voluntary
and involuntary informality, and argue that this has implications for compliance deci-
sions. Ultimately, we aim to provide a theoretical overview of the conditions under
which labor market participants may be more or less likely to comply with various
aspects of the social and fiscal contract. We point out some empirical implications
about the likelihood of compliance in different state-society relationships and possible
causal links between them.
We proceed as follows. We start with a discussion of the concept of informality,
review the literature on the informal sector and discuss issues and challenges of
measurement. We then discuss the compliance literature on taxation and distinguish
different mechanisms of compliance. Next, we provide some theoretical considera-
tions on the links between informality and compliance, bringing together insights
from the compliance and informality literatures and laying out our core argument.
We conclude by spelling out some broader implications and discussing a number
of themes in need of further research.
Informality: Concept Clarification and Measurement Issues

The informal sector consists of a very heterogeneous set of individuals (Portes and
Hoffman, 2003; Perry et al., 2007). The ILO defines workers as informal “if their
employment relationship is not subject to standard labor legislation, taxation, social
protection, or entitlement to certain employment benefits” (ILO, 2002: 126). A large
share of informal sector workers are self-employed or own-account workers, which
usually refers to forms of occupations such as street vendors or owners of a microbusi-
ness. In Latin America, this type of informality accounts for approximately 24% of
urban workers within this sector, while between 30% and 50% of informal workers are
in an employment relationship, e.g. in occupations such as domestic work, small firms
in the agricultural sector, production or the construction industry (Perry et al., 2007: 4).
b3508_V3_Ch03.indd 55 11-02-2020 13:33:37

Empirically assessing the effect of informal labor on individual compliance

attitudes and behavior is problematic, largely due to the very limited data availability
on such sensitive issues. In this chapter, we mainly focus on analyzing how informal
employment relates to the payment of taxes and the sustainment of the fiscal con-
tract from a theoretical and conceptual perspective. However, to motivate some of
the theoretical considerations offered below, we provide some descriptive insights
using aggregate national statistics on the percentage of informal sector workers
(from the International Labor Organization, ILO) and tax revenue as share of GDP
for different types of taxes (OECD, 2018), for a cross-section of Latin American
countries. We calculate averages from the period 2006–2012 since the ILO data on
the size of the informal sector is only available for a handful of years. Because data
on tax revenue are rather limited for developing countries, we start by focusing
on this regional context with a particular emphasis on Brazil. Figure 1 illustrates
the macro-level relationship between the size of the informal sector (in % of the
working population) and income tax revenue (Figure 1(a)) and consumption taxes
(Figure 1(b)) in Latin America. We use a fractional polynomial to avoid imposing
a linear relationship on the two variables. Compared to most other countries in the
15
15
Brazil
Bolivia
Taxes Revenue on Goods and Services (% of GDP)
Uruguay
Income Tax Revenue (% of GDP)
Ecuador
10
10
Paraguay
Honduras
Costa Rica
El Salvador
Brazil Peru
Dominican
Republic Colombia
Peru
Guatemala
Colombia
Uruguay El Salvador
Honduras
5
Bolivia
Costa Rica Ecuador
Dominican Guatemala
Republic
Paraguay
0
20 40 60 80 100 20 40 60 80 100
Share of informal workers (%) Share of informal workers (%)
(a) (b)
Figure 1: The share of informal workers and different types of tax revenue statistics.
Sources: OECD (2018).
b3508_V3_Ch03.indd 56 11-02-2020 13:33:38

sample, Brazil is located at the lower bound regarding the size of the informal sector;
only Uruguay and Costa Rica exhibit lower shares according to the ILO statistic. At
the same time, Brazilian tax revenue levels on both consumption tax and income
tax are the highest in the region. Low rates of informality seem to correspond with
a simultaneously high level of tax returns. But referring to an informal sector of
above 40% of the workforce as low does not seem to be a proper description. Overall,
neither income tax revenue nor tax revenue of goods and services is perfectly
negatively correlated with the size of the informal sector. Also, while the level of
consumption tax revenue is naturally higher compared to income tax revenue, we
see that the pattern of the correlations is different. Of course, these correlations are
only bivariate and could be biased by the omission of key covariates such as the
actual tax rates. But given severe data constraints (data on tax gaps are not available),
we use these descriptive statistics carefully to nourish the notion that compliance
and informality are distinct phenomena.
Next, we explore data at the individual level. The World Values Survey makes
it possible to illustrate the relationship between informality and the individual’s tax
morale (arguably a much closer approximation of the concepts discussed in this
chapter) for a large set of developing countries. As we are particularly interested in
the location of Brazil, Russia, China, and India, we mark these countries in dark
circle in Figure 2. Again, a number of caveats apply. While the survey data provide
a frequently used item to measure tax morale (how justifiable is cheating on taxes
on a scale of 1 — not justifiable to, 10 — very justifiable) we can only approximate
informality with the rather crude category of “self-employed” as an answer to the
question on employment status (V229). Of course, we cannot rule out that some
respondents who chose this category are simply self-employed professionals such as
journalists or entrepreneurs. For the developing country context, self-employment
correlates highly with informality, but this limitation needs to be kept in mind when
interpreting the data. Figure 2 illustrates the share of respondents who report being
self-employed relative to the working population on the x-axis and the percentage
of respondents with low tax morale on the y-axis. As the answer to the tax morale
item is naturally highly skewed to the bottom due, among others, to social desir-
ability bias, we consider respondents who chose a category above 3 as indicating
lower levels of tax morale (1—3 coded as 0 or high tax morale; 4—10 coded as 1, or
low tax morale). We aggregate the information to the country level. Higher values
indicate lower tax morale in the population.
Russia reveals the lowest level of tax morale in BRIC countries with a share of
around 35%. In contrast, Brazil scores around 23%, India at 21% and China reveals
the lowest level with 18%. However, cultural differences and other important
covariates of tax morale might account for these differences. Notably, the correla-
tion between self-employment and low tax morale is far from being positive, which
b3508_V3_Ch03.indd 57 11-02-2020 13:33:38

0.5 South Africa
Algeria Philippines
0.4
Lebanon
Russia
Palestine
Iraq
0.3 Belarus
Kuwait
Ukraine Malaysia
Kazakhstan
Singapore Kyrgyzstan
BrazilZimbabwe
Poland Tunisia
0.2 India
EstoniaUzbekistan Yemen
Mexico Nigeria
Hong Kong
China
Sweden Armenia
Romania
Taiwan
Netherlands
United States Pakistan Peru
Ecuador
New Zealand
Spain
Chile Australia
0.1 Slovenia Libya Egypt
Cyprus Jordan South Korea
Colombia
Uruguay
Azerbaijan Morocco Thailand
Ghana
Trinidad and Tobago
Georgia
Japan Turkey Rwanda
0
0 0.1 0.2 0.3 0.4 0.5 0.6 0.7
Self-Employed as Share of Working Pop. (Mean Value in %)
Figure 2: The percentage of self-employed workers relative to the working population and the
share of respondents with lower tax morale (WVS wave 6, 2010–2014).
would be expected if informality and tax evasion were to be one and the same. The
relationship is even slightly negative, suggesting that countries with a larger informal
sector exhibit at the same time a sound tax morale. But again, the negative relation-
ship might be driven by the crudeness of the measure of informality.
To get at a more precise measure of informality, Figure 3 focuses on a smaller set
of countries in the WVS where a better identification of informal workers is possible.
The survey item on the employment sector (V230) contains a specific category for
informal/autonomous workers next to the category of self-employment, but the
item has only been surveyed in a very small set of countries. We use this category to
calculate the share of informal workers in the working population and correlate the
values with information on tax morale. Now, the pattern is slightly positive though
with very large confidence intervals. But again, this exercise reveals that the cor-
relation between informality and a tax compliant attitude is far from being perfect,
consistent with our claim that both phenomena are distinct. With this measurement
of informal workers, China exhibits a much higher informal sector, above 25%,
compared to the previous measure displayed in Figure 2. These differences further
emphasize the challenges of measurement.
b3508_V3_Ch03.indd 58 11-02-2020 13:33:39

0.5 South Africa
0.4
Palestine
Iraq
0.3
0.2
Yemen
China Mexico
Peru Ecuador
0.1 Egypt
0
0.25 0.35 0.45 0.55 0.65
Informal/Autonomous Workers as Share of Working Pop. (Mean Value in %)
Figure 3: The percentage of informal/autonomous workers relative to the working population
and the share of respondents with lower tax morale (WVS wave 6, 2010–2014).
Working in the informal sector is intertwined with the notion of non-compliance.

But in contrast to tax evasion, which is a deliberate deed to achieve a distinct goal
such as maximizing income or benefits, informal labor is more complex in nature.
As discussed earlier, informal labor is defined by the lack of payroll tax payment,
contributions to social security schemes and the generally higher degree of vulner-
ability due to the lack of any kind of working contract or legally binding agreement
that allows the enforcement of labor regulations, such as not working more than the
legally defined hours, security at the worksite, having leisure time on legal holidays
or even regular payments.
Well-known arguments in the literature on informality argue that regulatory
costs — high registration costs, the regulatory burden to becoming formal or the on-
going costs of a formal relationship — dissuade firms from entering the formal sector
(De Soto, 1989; Djankov et al., 2002; Loayza et al., 2005). Looking at the impact of
labor market institutions (e.g. minimum wages), tax rates and monitoring costs on
the size of the informal sector from an efficiency perspective, research in economics
reveals chain effects to be at work. Informality in one area can drive informality in
others. De Paula and Scheinkman (2010) provide evidence of such chain effects
regarding informality and the payment of VAT among firms in Brazil. Studying
b3508_V3_Ch03.indd 59 11-02-2020 13:33:39

the impact of a new credit scheme for VAT collection in the production process,
they show that how VAT is collected changes the costs of capital and production
and consequently the likelihood of formality/informality among clients and sup-
pliers. The general logic of chain effects can be extended to individuals deciding to
comply with the state. Regulations may involve complex administrative procedures
associated with compliance, increased costs of complying with government-imposed
standards for particular services and the “red tape” associated with having to obtain
government licenses.
Moreover, compliance is in many cases not a matter of choice for the individual
worker. For those individuals in an employment relationship, it is typically the
employer who decides to pay payroll taxes for the employee and to make social secu-
rity contributions. Similarly, street vendors who presumably decide by themselves
not to register their business and to insure in a public pension scheme are in many
cases “forced” by their personal economic constraints to withhold such payments.
Perry et al. (2007: 2) poignantly state: “A microentrepreneur concluding, through a
cost–benefit analysis, that formality is not worth the high registration costs may be
explicitly excluded or self-excluded — either way, the effect is much the same.” In
contrast, Maloney (1999, 2004: 1159) argues that informality can be understood as
an “analogue of the voluntary entrepreneurial small firm sector found in advanced
countries, rather than a residual comprised of disadvantaged, workers rationed out
of good jobs”. He promotes the idea that much of informal employment is voluntary
in nature, as workers see a benefit in the status of self-employment. It grants more
flexibility and power to decide about one’s own effort. Moreover, when social policy
programs are designed in a way, so that, e.g. the spouse of a formal worker is auto-
matically covered, this generates incentives to seek work in the informal sector and,
thus, to avoid “unnecessary” additional costs of social security contributions (see
Levy, 2010). Loayza and Rigolini (2011) illustrate that informality also acts in many
cases as a buffer zone in times of economic recession. The informal sector increases
counter-cyclically to economic ups and downs and can therefore become for some
workers a desirable option relative to unemployment. However, even though
Maloney (1999, 2004) dismisses the dualization hypothesis, he also emphasizes the
heterogeneity of this labor market segment.
Focusing on Côte d’Ivoire, Günther and Launov (2012) provide one of the first
theoretical and empirical investigations on voluntary versus involuntary informal
labor. Applying a cost–benefit framework, the authors show that the actual share of
workers employed in the informal sector is higher than rational decision-making
would predict. Taking into account a set of important covariates, they conclude that
the difference between the optimal size of the informal sector and the actual size of the
informal points to the existence of “entry barriers” (Günther and Launov 2012: 94).
b3508_V3_Ch03.indd 60 11-02-2020 13:33:39

While research on the determinants of informality is still in a nascent phase,

partially due to the difficulties of identifying informal employment, studies on labor
market dualization reveal that formal and informal sector workers are much less
distinguishable in their preferences and behavior than the segmentation hypothesis
would predict. Altamirano (2015), Berens (2015b) and Baker and Velasco-Guachalla
(2018) do not detect any marked differences in preferences for redistribution or
voting behavior for the Latin American context. This might be either due to formal
and informal sector workers simply preferring similar levels of social protection —
both face greater economic vulnerability in a globalized world — or measurement
problems, with neither group correctly identified. We argue here that differences in
the ways in which individuals enter the informal labor market need to be taken into
account. Differences in the deliberateness of entry may influence future compliance
as well as compliance in other collective activities, and this is where differences in
preferences and behavior might obtain.
One important limitation of existing research revolves around the difficulty of
conceptualizing the phenomenon and its clandestine nature. A number of defini-
tions have been advanced when thinking about informality. The ILO, for example,
relies both on a legalistic definition of informality, which focuses on compliance
with labor law (for example, the existence of a written contract among workers or
the registration of firms with the relevant tax authorities), and a benefits definition,
which focuses on the extent of social security coverage. In turn, the productive view
defines workers as informal if they work in a micro-firm. This has made the task
of empirically identifying informal work a challenging one, and suggests that more
than one instrument is required to empirically identify informal work.
The ILO makes use of countries’ regular household or labor force surveys to
estimate the share of informal labor of the working population (e.g. the India Human
Development Survey or the Employment and Unemployment Survey in India or
the Russia Longitudinal Monitoring Survey of HSE used in the Russian Federation).
Since 2015, reducing informality is one of the United Nation’s Sustainable
Development Goals (ILO, 2018). Increasing international awareness of the problem
of informal labor has led to the improvement of the specification of household and
labor force surveys in the last decade as well as to better data on national employ-
ment statistics (ILO, 2018). While national statistics on informal labor are an
important source to study informality, they lack information on individual attitudes
and preferences, which are important variables to provide microfoundations on
which macro-level models of informal work are built. Standardized public opinion
surveys such as the Americas Barometer (Latin American Public Opinion Project,
LAPOP) Latin America and the Caribbean, the Afrobarometer or the World Values
Survey (WVS) are, therefore, crucial additional data sources and an alternative
b3508_V3_Ch03.indd 61 11-02-2020 13:33:39

to household surveys. But they have been either inconsistent in including survey
instruments for identifying informal labor or completely neglected to incorporate
such instruments at all. For instance, in 2006, LAPOP included a question about
social security (seguro social) through the employer, in order to identify informal
workers under the benefits definition. Yet in 2008 this question changed to health
insurance (referring to seguro de salud/seguro social) and varied by country (Baker
and Velasco-Guachalla, 2018). Questions like these were discontinued thereafter,
undermining identification of informal labor based on the benefits definition. The
WVS improved the questionnaire of the latest available wave 6 (2010–2014) in
this regard with an item asking whether individuals were registered through their
employer with the national social security agency of their country. However, the
question was only asked in a handful of Middle Eastern and North African countries.
In addition to items on the coverage through social security, public opinion
surveys usually contain an item that enquires about the respondent’s labor market
status. The main item measuring labor market status used since 2006 in the LAPOP
(similarly in the WVS item V229, or Q96A in the Afrobarometer) asks about
respondent occupation, with response items including self-employed and unpaid
worker. In combination with the aforementioned items about social security or
health insurance status, these categories are currently used to identify informal work-
ers in the Latin American and Caribbean context (Baker and Velasco-Guachalla,
2018; Altamirano, 2015; Berens, 2015b). But given the heterogeneity within the
informal sector, these categories do not capture the entire set of informal work.
Although used extensively to proxy for informality, measures of self-employment
do not capture large numbers of informal salaried workers, and overlook the fact
that some self-employed individuals make social security contributions.
Some country surveys in Latin America such as the Argentine Panel Election
Study (APES) or the Brazilian Electoral Panel Study (BEPS) provide more elaborate
survey instruments to study informality. However, they are currently bound to the
respective country context. In Brazil, determining whether individuals possess
a signed booklet (carteira assinada) makes it possible to determine whether an
employment relationship is subject to standard labor legislation. Although this
provides a solid basis for operationalizing informality, the use of different definitions
of informality (a legalistic definition for the BEPS and a benefits one underpinning
the APES) make comparisons difficult. The APES, in turn, asks respondents who
declare to be self-employed or own a business whether they have registered with
the relevant tax authorities. However, this (legalistic) definition does not capture
contributions made by entrepreneurs, who may resort to private insurance.
Given the complex nature of the phenomenon, the formality–informality divide
may be thought of as a continuum rather than a binary state (ILO, 2013). In this
b3508_V3_Ch03.indd 62 11-02-2020 13:33:39

sense, identifying household effects — whether individuals share a household with a

formal or informal worker — would provide crucial information on the breadth and
depth of the phenomenon. Understanding the extent to which an informal worker
shares a household with a formal worker and is thus insured through a (formal)
family member is key to understanding the links between labor market status and
access to social benefits. Many individuals choose informality because they can get
health coverage through their spouse (Galiani and Weinschelbaum, 2012; Levy,
2008). Indeed, omitting this information is likely to lead to biased estimates of the
effect of informality.
Equally important, available evidence suggests that individuals transit from
formal to informal and back relatively frequently (Maloney, 1999, 2004). Research
on labor market churning between informality and formality remains limited, given
the obstacles to identifying informal workers (Maloney, 1999; Perry et al., 2007). The
next step in this field of research would be to explore how “new” informal or formal
workers differ from “experienced” formal and informal ones. Obtaining information
on an individual’s employment history would thus be crucial to better understand the
different dimensions of informality and its potentially diverse political and economic
implications. Panel data over several years seems to be the gold standard to reach
these goals, but while such data is already extremely costly for one country, it is a
very high bar to reach for a cross-section of countries.
Tax Compliance: The Classical “Umbrella” for Informality

Tax compliance can be approached from a set of different perspectives. Evasion has
been portrayed as “a problem of public finance, law enforcement, organizational
design, labor supply, or ethics, or a combination of all of these” (Andreoni et al.,
1998: 818). Disentangling these different perspectives, and cautioning researchers
against the risks of concept stretching, is one of the tasks that we pursue in this
chapter. The scholarly discourse on tax compliance is vast. One of the main contribu-
tions from the public finance perspective is the influential argument on deterrence
regarding criminal activity from Becker (1968) and Allingham and Sandmo (1972),
who theorize tax payers as utility-maximizers that comply when the benefits of
doing so are greater than the costs, which are based on the risk of being caught and
the respective punishment. The deterrence model predicts that fear of punishment
induces compliance, so that citizens are incentivized to abide by the law. Applied
to tax behavior, taxpayers are predicted to pay their tax duties truthfully as long as
the punishment is sufficiently costly (and the likelihood of penalties to be enforced
sufficiently real, even though this is taken as given in the Allingham and Sandmo
model) and the probability of being caught sufficiently high. However, early studies
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revealed that individuals tend to comply with taxation even in contexts of very
low penalties and a negligible likelihood of audit (Alm et al., 1992). Alm et al.
(1992) show in a laboratory experiment that individuals comply more than what
a cost–benefit calculation, which factors in the correct risk of audit and cost of the
fine, would predict. Some of the over-compliance can be explained by differences in
cognitive responses such as individuals’ tendency to over-predict the risk of audit
(see Casey and Scholz, 1991). But a large share of the variation in compliance can be
explained by the receipt of a return in the form of a public good, the size of which
is determined by compliance of all group members. The seminal work of Alm et al.
(1992), thus, inspired a second prominent argument that expanded the deterrence
model and theorized the productive role of rewards for tax compliance. Despite
this broadening of the analytical lens toward a more encompassing theory of tax
compliance, recent field experiments show that deterrence remains an important
mechanism to stimulate payment of taxes (see Dwenger et al., 2016; Ortega and
Scartascini, 2015).
Taxpayers are more willing to pay their legally defined duties when they receive
a return for their paid contributions. What is also known as fiscal contract literature
nurtured the thought that threat is not a sufficient means to induce compliance, par-
ticularly in a context where institutional weaknesses make upholding the credibility
of threat difficult, such as in the developing world. Margaret Levi (1989) introduces
the seminal concept of “quasi-voluntary compliance”. Citizens are more willing to
pay when they perceive the state as a reliable player who makes meaningful use of
their tax contributions (Levi, 1989; Levi et al., 2009). Payment of taxes is thus a game
of credible commitments (Timmons, 2010). Coercing individuals into compliance
is simply too costly, as the costs of monitoring each and everyone’s tax behavior
exceeds the benefits of taxes. This suggests that compliance is at least partly volun-
tary in nature, and depends on the type and quality of returns the state can offer.
Although more prone to evade, the rich are also the key contributors in the already
narrow tax bases in many developing countries. Berens and Gelepithis (2018) show
for advanced-industrial democracies that support for progressive taxation is much
higher among middle- and high-income earners when social policies redistribute
back to those who are paying the larger share and for the Latin American context,
the rich are much less antagonistic toward taxation when trust in public institutions
is high (Berens and von Schiller, 2017). In turn, fraudulent governmental behavior
such as observable corruption can destroy the fiscal contract and lead to severe
reduction in compliance (Timmons and Garfias, 2015). The institutional context
is therefore particularly important in low state-capacity contexts. When taxpayers
doubt that state institutions are sufficiently equipped to redistribute wealth and to
provide public goods such as schools, infrastructure or a functioning health care
b3508_V3_Ch03.indd 64 11-02-2020 13:33:39

system, tax evasion becomes much more likely (Feld and Frey, 2007; Frey and
Torgler, 2007).
Finally, a well-established literature in behavioral economics also emphasizes
the role of factors usually labeled social norms in fostering compliance. The concept
of tax morale falls into this category. The attitude that Torgler (2007: 136) vaguely
describes as “instrinsic motivation to pay taxes” is positively correlated with the
actual payment of taxes (see also Torgler and Schneider, 2009). In a field experiment
in the UK, Hallsworth et al. (2017) find support for the role of norms (knowledge
of other taxpayers’ behavior) on tax compliance but the evidence in the literature
is mixed. Blumenthal et al. (2001) do not find support for a treatment effect of
normative appeals on American taxpayers’ behavior. Dwenger et al. (2016) show
in a natural field experiment on church taxes in Germany that moral suasion and
nudging has only limited impact or can even backfire and lead to a reduction in
compliance (see also Ariel (2012) on a similar effect at the firm level). Further factors
include, but are not restricted to, notions of fairness or reciprocity, whether towards
the state or towards fellow citizens. In this view, individuals take into account per-
ceptions of fairness and government competence in the provision of (or willingness
to provide) services when choosing to comply with regulations (see also Gintis et
al., 2005). For instance, holding the view that the tax structure is unfair by placing
too high a burden on one group while another group pays much less can crowd out
the willingness to pay (see Roberts and Hite, 1994; Wenzel, 2002). The same holds
for information on how tax money is subsequently spent on public goods. If the
redistributive scheme is considered unfair, support for taxation declines (Stanley
and Hartman, 2017).
Levi’s (1989) concept of “quasi-voluntary compliance” not only factors in
vertical relationships between taxpayer and state but is also based on horizontal
relationships among taxpayers. Akin to a collective action problem in large groups
and high-benefit low-risk environments, taxation induces the desire to benefit from
public goods without contributing to pay for them and, thus, to free-ride on other
taxpayers’ compliance. Trust in other people’s compliance is therefore a key element
for contribution of tax payments (see Scholz and Lubell, 1998). Prosocial behavior
is marked by the human trait to take other people’s behavior into account, i.e. to
be other-regarding. Inequity aversion, shown to be a frequent driver of equal splits
in dictator games in the laboratory, can increase the willingness to comply with
tax regulation (Gintis et al., 2005). Furthermore, Frey and Torgler (2007) argue
that compliance is based on conditional cooperation. The underlying mechanism
essentially describes reciprocity at the vertical level. According to Fehr and Falk
(2002: 690) reciprocity “induces agents to cooperate voluntarily with the principal
if the principal treats them kindly”. The response is not based on the expectation
b3508_V3_Ch03.indd 65 11-02-2020 13:33:39

to receive a return for one’s own contribution or act, or the expectation of future
returns. It is not linked to a tangible reward, but to kindness in a more general sense.
Using survey data for a set of high-income economies, Frey and Torgler observe
that the willingness to pay taxes is conditional on the perception of other people’s
tax compliance. Believing that others pay their duties as well markedly increases
the willingness to comply. Further support for conditional cooperation is offered
by Traxler (2010) and Traxler and Winter (2012). The latter illustrate with survey
data for the case of Austria that social norms can induce compliance depending on
how widespread the norms to comply are. If the individual believes that a majority
believes tax duties must be paid, punishment and social sanctions of tax evasion will
be high. If, however, the share of evaders is high, defection seems much less costly.
But findings from the economics literature also reveal that prosocial behavior can
be crowded out (Bénabou and Tirole, 2006). Individuals who are predisposed to
comply might respond with a reduction in compliance when treated with extrinsic
motivations, such as threat of punishment or reward.
To summarize, the literature on tax compliance finds support for the deterrence
mechanism which attributes payment of taxes to individual cost–benefit calculations
of the risk of being caught, the cost of punishment and the type of reward received.
However, there is still sufficient variation in compliance which cannot be explained
by the deterrence rationale. Social norms such as civic duty, fairness and reciprocity
operating both horizontally and vertically are key drivers that encourage payment
of taxes.
Theoretical Considerations
The above review of the tax compliance literature allows us to identify where tax
compliance and informality overlap and where these two notions differ. We believe
that existing literature has paid insufficient attention to the complex phenomena of
compliance and informality within and across countries. We focus on two relevant
dimensions of compliance across developing countries: compliance with labor mar-
ket regulations and compliance with civic responsibilities, understood as compliance
with the fiscal contract (or a willingness to contribute to public goods). These two
dimensions are related, but theoretically distinct. Next, we theoretically examine the
channels through which lack of compliance in labor regulations may affect broader
patterns of non-compliance and possibly entail “chain reactions”. We draw on the
insights from the literature on compliance and informality discussed above to spell
out how different motivations may play out among workers and thereby illustrate
that noncompliance in one area does not mean noncompliance across the board. In
b3508_V3_Ch03.indd 66 11-02-2020 13:33:40

doing so, we emphasize the importance of heterogeneity among informal workers

(voluntary and involuntary informality) and argue that this has implications for
compliance decisions.
Arguments in the literature on tax compliance suggest that lack of legal recogni-
tion and protection might trigger further non-compliance. Different mechanisms
seem possible, the most prominent one being the mechanism of reciprocity. In an
important study of the trickle down effects of informality, Ronconi and Zarazaga
(2015) provide evidence consistent with the reciprocity mechanism in the
developing-country context. The authors argue that involuntary informal workers
reciprocate by withholding consumption taxes and by refusing to participate in the
collective action of voting. The state defects by not enforcing labor law, allowing the
employer to withhold payment of social security contributions for the employee
and thus forcing the worker to be informal. Involuntary informal workers play
tit-for-tat and defect by reducing tax compliance and civic duties such as voting.
Ronconi and Zarazaga (2015) use household survey data from CAF for nine Latin
American countries in 2011 and operationalize citizenship responsibilities with a set
of variables thought to cover the main “tasks” of individuals in modern states. These
are tax compliance (evasion of VAT) and voting in previous elections (in addition,
knowledge about candidates and their campaigns). Finally, they create an overall
measure of “citizenship” based on information on the respondent’s tax and voting
behavior and corroborate their findings with a list experiment survey conducted in
Argentina in 2014.
One of the strengths of Ronconi and Zarazaga’s contribution is rooted in the
measurement of informal sector workers. The CAF data make it possible to identify
workers who are informal due to their employer’s decision (workers are coded as
informal “if they report that the employer is not making legally mandated contribu-
tions to the social security system” (455). The authors find that informality and thus,
lack of enforcement capacity of the state, reduces tax compliance and the likelihood
of complying with civic responsibilities such as voting. This finding is consistent
with research showing that involuntary informality is particularly salient among
informal salaried workers, who appear to be excluded from more desirable jobs (Perry
et al., 2007: 5). For many of these workers, informality is driven by their employer’s
decision — typically microfirms working informally — not to comply with social
security regulations, and evidence shows that such workers express a stronger
preference for an equivalent job in the formal sector (Arias and Lucchetti, 2007).
Incorporating labor market informality — and the role of exclusion — in
explanations about compliance leads to crisp predictions about when individuals
may be expected to comply and why. However, it overlooks the fact that informality
b3508_V3_Ch03.indd 67 11-02-2020 13:33:40

is heterogeneous, and workers have different motivations to enter the informal labor
market. We build on the aforementioned literature and focus our discussion on two
sources of variation driving more or less compliant behavior. We first emphasize that
different motivations (voluntary or involuntary) may shape entry into informality,
with different consequences for overall patterns of compliance. A worker who is not
paying social security contributions may at the same time pay consumption taxes or
engage in civic activities. We then focus on involuntary informal workers and explore
the role of different mechanisms driving compliance, paying particular attention to
attribution of responsibility in contexts where governments cannot enforce employer
compliance, as well as a number of psychological mechanisms.
Voluntary and Involuntary Entry into the Informal Labor Market
A longstanding view in the literature on labor markets argues that markets are
segmented by wage setting in the formal sector, excluding more traditional sectors
from jobs with state-mandated benefits. As a result, informal workers are (self)
employed in marginal economic activities or employed in small firms with low
productivity levels (Hart, 1973; Sethuraman, 1976; Tokman, 1978).1 Consistent with
the “exclusion” view of labor market segmentation, Ronconi and Zarazaga (2015)
argue that individuals who do not receive legally mandated benefits due to employer
non-compliance blame the state for non-enforcement of social security regulations
and choose not to comply with their duties as citizens.
One implicit assumption in arguments that causally link informality and compli-
ance is that workers are effectively excluded from formal jobs — thus involuntarily
employed in the informal sector. As discussed above, however, recent research in
development economics argues that much of the entry into informal employment is
based on implicit cost–benefit calculations on whether to become formal or informal
(Levy, 2010; Maloney, 1999; Maloney, 2004; Perry et al., 2007). In the “exit” view,
workers choose their preferred level of engagement with the state, depending on
their assessment of the net benefits associated with formality and the state’s capacity
to enforce. This resonates with arguments about the importance of non-pecuniary
considerations reviewed above, and suggests that workers that voluntarily opt out
of formal employment may be driven by a different set of motivations. Moreover,
evidence shows that workers switch from informal to formal and back over the
course of their working lives (Maloney, 1999). Thus, the relative importance of
1
As discussed above, another view argues that costly entry regulations prevent small firms
from becoming formal (De Soto, 1989).
b3508_V3_Ch03.indd 68 11-02-2020 13:33:40

different motivations on compliance may plausibly vary depending on the type of

employment that workers have.2
The exit view of informality emphasizes that workers may opt out of formal
employment for a number of reasons, amongst which are high employment contri-
butions relative to the expected benefits and quality of services, excessive bundling of
benefit packages or high opportunity costs, particularly if medical or other insurance
is available through a family member who is formally employed (Maloney, 2004).
Workers may find that the expected benefit from a formal job (for which they are
typically not qualified) does not outweigh foregone current consumption (in the
form of lower wages linked to a formal job) or the flexibility of an informal job.
Recent evidence from Latin America shows that some workers are more likely to
enter self-employment than others. For instance, Perry et al. (2007: 63–65) show
that a majority of independent (self-employed informal) workers value the benefits
of autonomous work considerably and voluntarily exit formal employment. To the
extent that the locus of responsibility for labor market status is shifted from the
state or employer to the individual, self-employed workers (voluntary informal
workers) may be intrinsically motivated to comply out of a willingness to fulfil civic
duties associated with voting or tax compliance. We may thus expect voluntarily
self-employed workers may be less likely to engage in tax evasion and more likely to
vote relative to informal salaried workers. Or, to put it differently, voluntary informal
workers might apply the same judgment that motivated the choice of informality to
other compliance issues and behave accordingly. If the motive is mainly pecuniary,
then avoidance of costs, such as VAT or property taxes, is the logical consequence.
If individuals value greater flexibility in informality, we have no reason to assume
that the individual is a non-complier in other areas.
Although insightful, extant views of informality also tend to assume a static
view of informality and thus tend to overlook important aspects of the dynamics
of worker mobility across sectors. Frequent switches between formal and informal
sectors should have important consequences for compliance in other areas. A grow-
ing body of research documents a high level of mobility from informal to formal sec-
tors and vice versa in Latin American countries (Maloney, 1999). Informal salaried
workers, for example, do not remain so for long periods of time, usually transiting
to formal sector jobs or self-employment, and back to informal salaried work. One
can imagine individuals as maximizing utility over the course of their working life
(which may include being employed as an informal salaried worker, self-employed
or in the formal sector). Anticipating that they will move to formal employment in
Countries may also differ in terms of history, institutions and legal frameworks, so that tax
2
morale patterns may be more dominant in some contexts than others.
b3508_V3_Ch03.indd 69 11-02-2020 13:33:40

the near future, informal salaried workers may be less prone to evade taxes out of a
concern that such behavior may have adverse consequences for their labor market
trajectory in the future. Future employers may be reluctant to employ individuals
who engage in dishonest behavior.
Individuals might also factor in future benefits associated with formal employ-
ment. Assuming that individuals understand the benefits of compliance in other
areas of taxation (paying VAT or property tax duties and thereby contributing to
the provision of public goods) or civic duties (such as voting and thereby being
represented in politics), short periods of informal labor might be discounted as
brief high-cost periods where non-compliance across the board does not outweigh
the overall benefit in the long run. Indeed, research suggests that informal salaried
work is a point of entry to the labor market for many young workers (Perry et al.,
2007). In the absence of human capital, accumulating experience in the informal
sector often enables workers to get a formal job later (Maloney, 2004). We may thus
expect informal salaried workers to contribute to public goods through taxes (in the
form of indirect taxes) or civic engagement because they hope to be able to benefit
from the benefits of formal employment (in the form of public schools or health).
More broadly, whether driven by fairness or self-interest, or whether they
are voluntarily or involuntarily informal, workers may have reasons to engage in
activities — such as voting — that improve their economic prospects in the pre-
sent or future period. As emphasized by Maloney (2004: 1160), being voluntarily
informal simply means that, given preferences and constraints in terms of human
capital, entry into informal employment is often the optimal decision. It does not
imply that workers are not living in poverty or that they would not benefit from
policies that redistribute income in their favor. Similarly, an involuntarily informal
(informal salaried) worker may be induced to vote against the current government
in order to change the status quo. Singer (2016), for example, finds evidence that
informal workers in Argentina hold their government to account for economic
performance. One may thus plausibly expect (in)voluntarily informal workers to
engage in forms of compliance — such as political or civic participation to change
the status quo — that may directly affect their labor market and economic outcomes
in the mid-term. In a similar vein, when considering the reciprocity mechanism,
playing tit-for-tat is costly in the long run and not fully rational if we assume that
individuals are not purely myopic. Not voting for a political party that could change
the system just because of the desire to punish the state for not living up to its duty
of enforcing labor market regulation would seem to be an irrational strategy for
both voluntary and involuntary informal workers. Although abstention is indeed a
form of protest, such forms of protest behavior may be more effective in advanced
industrial democracies than in weak state capacity contexts.
b3508_V3_Ch03.indd 70 11-02-2020 13:33:40

Involuntary Informality, Responsibility Attribution and Disenchantment
We next focus on the links between involuntary informal employment and

compliance. As discussed above, a growing body of literature emphasizes the role
of reciprocity behind compliant behavior. Yet, given the importance of assigning
responsibility inherent in this mechanism, we believe that a better understanding of
how, precisely, workers that involuntarily enter the informal labor market attribute
responsibility to the state is an important task. A large literature on economic voting
argues that the extent to which individuals attribute responsibility to the state for
economic performance is shaped by a number of characteristics related to political
or institutional context (Powell and Whitten, 1993; Duch and Stevenson, 2000).
However, less is known about how differences in the degree to which states can
legally enforce compliance affects the extent to which individuals hold the state to
account. While most governments enjoy authority to enforce labor regulations, differ-
ences exist in the extent to which they can enforce other types of regulations — such
as social security regulations — that drive employer non-compliance. For example,
in Argentina, enforcement agencies can punish employers who do not comply with
labor regulations (such as vacation time or annual extra wage) and do not register
employees in the social security system, but cannot fine employers who do not
make social security contributions (and thus evade payroll tax) (Ronconi, 2010).3 In
contrast, politicians can also purposefully neglect enforcement of labor standards to
increase electoral gains, as the work of Holland (2017) and Feierherd (2017) reveals
for the Latin American context, making the issue of responsibility attribution a
highly complex one. Given that attribution of responsibility is premised on prior
capacity to act, we may expect informal workers to be less likely to reciprocate in
contexts where the state cannot legally punish employers for violation of social
security regulations. In such contexts, the assumption that individuals might hold
the government to account for labor market outcomes for which they are (not)
responsible is less likely to hold, paving the way for other mechanisms based on
information imperfections. They may, for instance, lack information on the benefits
and functioning of social protection systems (Perry et al., 2007).
Alternatively, as research on unemployment perception emphasizes, individuals
may attribute responsibility for their own economic fate less to the state or the
employer, and more to themselves. Sharone (2013) illustrates that unemployed
workers in the United States blame themselves for losing a job while Israelis blame
the state and explains the divergence with different institutionally driven job search
3
In this case, enforcement agencies can notify the national government and recommend
that employers comply (Ronconi, 2010).
b3508_V3_Ch03.indd 71 11-02-2020 13:33:40

structures. Therefore, depending on the type of labor market institutions, the

visibility of employer discretion and the recognizability of enforcement failure by
state authorities, variation in responsibility attribution among employer, state and
oneself might be observable and, hence, lead to different responses of compliance. If
involuntary informal workers blame themselves for their labor market status, there
is no reason to assume that they will generally be low compliers.
In a slightly different vein, research in social psychology finds that adverse life
experiences such as unemployment, negative shocks to health, or crime experi-
ence can lead to withdrawal and apathy (see Janoff-Bulman and Frieze (1983) on
the psychological responses to violence experience; McKee-Ryan, et al. (2005) on
unemployment). Individuals who experience such negative events are more likely to
have difficulties in family relationships, experience a loss of self-esteem and personal
efficacy and, through this mechanism, are less likely to be politically active and
engaged. Available evidence shows that experiencing unemployment can reduce the
likelihood of voting (see Rosenstone, 1982; Carreras and Castañeda, 2016). Because
informality translates into increased economic vulnerability, involuntary informality
might be viewed as such an adverse life experience. We do not wish to fully review
this strand of literature here, but it is worthwhile to take into account possible
cognitive effects of involuntary informality for behavioral responses in other areas
of compliance. When the experience of involuntary informality gives rise to disen-
chantment, frustration, loss of hope, or the feeling of exclusion, non-compliance
in other areas of taxation or in civic duties might result. While the outcome is the
same as for the reciprocity mechanism, the nature of the mechanism differs. Being
forced into informality despite one’s efforts and wishes can be perceived as a negative
event in the form of “down grading”, reducing the individual’s general motivation
to be engaged and shattering feelings of self-efficacy. Believing that one does not
have control over one’s fate, or more broadly, feeling helpless or disenchanted (see
Peterson and Seligman (1983) on the consequences of crime), is likely to reduce
the motivation to engage in other civic duties which are based on the premise that
action is perceived as meaningful and effective.
Moreover, being excluded from employment-related benefits and having no
recourse to labor law protection (e.g. having no legal backing to demand payment
of minimum wage, to have free time on holidays or to receive an overtime premium)
can also induce the feeling of outsiderness and social exclusion (for a discussion,
see Berens and Kemmerling, 2019). Perceiving oneself as an out-group member of
society should reduce the motivation to engage in collective actions such as voting
or payment of other types of taxes that also benefit insiders or in-group members
(see Luttmer (2001) on the case of ethnicity and redistributive preferences). The
b3508_V3_Ch03.indd 72 11-02-2020 13:33:40

feeling of exclusion can thus influence horizontal bonds (individual-society) as well

as vertical ones (individual-state).
Discussion and Conclusions

In this chapter, we have provided a theoretically driven discussion that seeks to dis-
entangle the links between informal employment and compliance. We have posited
that informality and compliance are related, but theoretically distinct phenomena
which deserve to be examined separately. Building on a nascent body of work that
looks at the implications of labor market insecurity on broader aspects of the social
contract, we have theoretically examined the extent to which lack of compliance in
labor regulations may affect broader patterns of non-compliance. The above discus-
sion illustrates that non-compliance in one area does not mean non-compliance
across the board. We have emphasized the importance of heterogeneity among
informal workers and argue that this has implications for compliance decisions. We
have focused on two aspects of compliance, but there may be more that we do not
discuss here. We see this as a very first attempt in a broader agenda of elucidating
the links between informality and compliance.
The above discussion suggests a number of fruitful avenues for future research.
Clearly, there are good reasons to expect individuals to respond to life-changing
circumstances (such as informality) in different ways. Available evidence suggests
that individual responses are likely to be affected by both context (for example, levels
of enforcement, or whether governments have authority to punish non-compliers)
and individual characteristics (are individuals motivated intrinsically or extrinsi-
cally?). This is consistent with recent research. For example, Dwenger et al. (2016)
report variations in responses depending on differences in “complier type”. Similarly,
Brockman et al. (2016) find evidence in the lab that men and women respond dif-
ferently to deterrence and reward treatments. In turn, Castro and Scartascini (2015)
observe a robust effect of deterrence on payment of property taxes in a field experi-
ment in Argentina, but report heterogeneous treatment effects of reciprocity and
peer-group treatments. Future research should focus on exploring heterogeneous
treatment effects that shed light on different patterns of compliance across different
groups.
In addition, the above discussion highlights the potential for dynamic effects.
While relatively few studies provide evidence of such effects, observing dynamic
effects could help to identify some of the channels through which informality might
affect compliance. A number of countries in Latin America, such as Brazil, have
experienced improvements in formalization in the wake of the commodity boom.
b3508_V3_Ch03.indd 73 11-02-2020 13:33:40

Such positive shocks to reciprocity might trigger a spiral of compliance. Similarly,

negative shocks to tax morale more broadly in the aftermath of the commodity boom
may lead to downward spirals in compliance.
We conclude by spelling out some broader implications that derive from the
above insights. A growing body of literature suggests that governments can poten-
tially shape patterns of compliance through a number of instruments that go beyond
detection probabilities and sanctions. This research has made great progress in
understanding the conditions under which individuals are more likely to obey state
regulations. We emphasize that a more complete understanding of the links between
informality and compliance requires taking into account the types of informality
and the motivations that drive workers to enter into or opt out of informal employ-
ment. Our focus on the links between labor market informality and compliance
with the law also echoes a nascent literature examining the political consequences of
non-compliance with labor market regulations. This literature emphasizes that non-
enforcement of labor regulations is politically motivated (Feierherd, 2017; Holland,
2017). The above discussion highlights that the salience of the electoral gains from
non-enforcement may depend on the motivations driving workers into informality.
When workers are involuntarily informal, the electoral gains of non-enforcement
may be limited.
Lastly, a better understanding of the links between informality and compliance
also has implications for policy. While lack of enforcement has substantial social
costs (Ronconi and Zarazaga, 2015), our discussion implies that this is likely to
vary among labor market groups. Although heterogeneous treatment effects may
make policy more difficult to design, they make effective design of policy all the
more important. Perhaps even more importantly, and in line with extant research,
our discussion suggests that a set of various strategies may be needed to increase
tax compliance. Of course, this is not to say that external incentives, in the form of
enforcement, do not matter. Rather, we concur with Luttmer and Singhal (2014: 155)
in emphasizing that “what matters for policy is not so much what role tax morale
plays in current compliance, but whether it is feasible to improve tax moral on the
margin and whether a given increase in compliance can be achieved at a lower cost by
improving tax morale than by increasing enforcement.” For this task, understanding
the mechanisms through which informality affects compliance is key.
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CHAPTER 4
Can Tax Aid Broaden the Base?

International Assistance, Taxation, and the
Informal Sector in the BRICs
Ida Bastiaens* and Laura Seelkopf †
Department of Political Science, Fordham University,

*
NY 10458, USA
†
Geschwister-Scholl-Institute of Political Science, Ludwig-Maximilians-
University (LMU) Munich, Bavaria, Germany
Introduction
As signatures of the International Covenant on Economic, Social and Cultural
Rights, all four BRICs guarantee their citizens safe and healthy working conditions
and access to social security (United Nations, 1966). Yet, as Table 1 shows, they lack
the financial means to fight inequality and poverty.1 BRICs and other low-income
countries collect between 10% and 20% of GDP in taxes in comparison to 40%
for high-income countries (see Besley and Persson, 2014; OECD, 2017, Table 1).
Correspondingly, absolute poverty, the percentage of the population living with less
than $3.10 a day, is still rife (see Table 1). In India, for example, the poor constitute
over half of the population. The informal economy is also pervasive: in Brazil and
Russia, it is close to 40% of GDP, while it is between 10% and 25% in China and
1
The UN estimates that developing countries need to raise at least 20% of GDP as revenue to
cut poverty in half and improve the living situation of their citizens (OECD, 2013).
81
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b3508_V3_Ch04.indd 82
82 I. Bastiaens and L. Seelkopf

Table 1: Income, informality, and taxation in the BRICs.
Brazil China India Russia
1990 2012 1990 2012 1990 2012 2000 2012

Informal economy (% GDP) 40.8 (1999) 36.6 (2007) 13.2 (1999) 11.9 (2007) 23.2 (1999) 20.7 (2007) 47 (1999) 40.6 (2007)
Gini (various measuresa) 60.6b 56c 34.6b 47.4c 29.7d 35.9d 25.1b 41.6d
Income share top 20% 64.61 57.18 — 47.9 — 44 (2010/11) — 48.3
Poverty (% under $3.10 a day) 35.8 9.3 89.2 22.2 — 57 (2010/11) — 0.5
Total tax revenue % GDP 27.1 33.2 16.2 20.1 15 15.7 (2010/11) 37 35.3
(including SSCs)
Tax revenue (% GDP) 12.0 13.9 8.6 (2005) 9.9 (2013) 9.8 10.8 11.2 (1999) 14.0
(excluding SSCs)
Income tax revenue (% GDP) 4.7 6.1 2.4 (2005) 3.1 (2013) 1.8 5.7 1.4 (1998) 0.5
Goods and service tax revenue 5.5 6.7 7.8 6.3 (2013) 4.4 3.3 7.2 (1999) 5.9
(% GDP)
Aid (excluding tax aid) % GDP 0.37 0.31 0.76 0.10 1.6 0.74 0.5 0.02
(5 year average)
Tax aid % GDP (5 year average) 0 0.01 0.002 0.0002 0.0003 0.004 0.0002 0
Tax aid per capita (5 year 0 1.19 0.01 0.01 0.001 0.07 0.01 0
average)
Notes: aData on the same gini measures for all four countries is not available, bgross income gini, cdisposable income gini, dconsumption gini.
Source: UNU-WIDER (2017), World Bank (2017), Prichard et al. (2017), Schneider et al. (2010), Tierney et al. (2011).
“6.5x9.75”
11-02-2020 13:35:53
Can Tax Aid Broaden the Base? 83
India. A large share of the population thus is free of (direct) taxation,2 but at the
same time has no rights to social security benefits or even basic working regulations.
The taxation–representation nexus does not exist for a large number of citizens in
developing and transition economies such as the BRICs.
This is, of course, not a new development. In historic terms, states, where all
citizens pay taxes on their economic activities and receive rights and benefits in
turn, are an exceptional development. In the 19th century, Western European
countries had lower tax revenues than the BRICs today (Seebohm, 1983). And,
similar to less developed economies today, taxing trade played an important role
for government revenues and was only slowly replaced by income taxes (Seelkopf
et al., 2016). Again, the majority of the population was excluded from paying these
taxes. Income taxes were introduced by elites to secure their political power and
to keep newly emerging elites as well as the poor majority of citizens out (Ansell
and Samuels, 2014; Mares and Queralt, 2015); for example, the Prussian three-class
franchise system, which gave more votes — and hence more control over govern-
ment spending — to richer citizens, gained legitimacy by their higher tax payments.
While such an institutionalized exclusion is no longer viable, informality works de
facto very similarly. Working and consuming outside the formal economy leads
to no tax payments,3 which, in return, reduces the incentive and capacity of the
government to extend formal protection to these informal workers. Thus, in the
BRICs, a vicious cycle of no taxation and no rights and benefits among the poorer
part of society is manifested.
It is not only the stated intention of the BRIC governments to provide basic
public goods for their citizens, but also the goal of the international donor com-
munity to help them raise enough tax revenue to achieve this. Yet interestingly,
overcoming the large-scale informality is not what tax experts are most worried
about. They see an extension of tax payments to the middle and lower classes either
as not very effective (IMF, 2011) or even outright harmful (Schneider, 2005) for tax
collection and economic development. Furthermore, governments face a dilemma
on enforcing tax collection. Tax enforcement, while revenue-generating, can bring
political costs: higher unemployment and potentially lower growth often occur in
economies that rely on micro-firms (Joshi et al., 2014). Enforcement can reduce
2
The majority of poorer people in the BRICs do not have to pay any income tax. While more
have to pay consumption taxes when purchasing products, the poor often also do not pay
these as they live in a barter economy, evade the tax outright or buy from small firms that
are below the VAT thresholds.
3
In India, for example, it is estimated that only 1% of individuals paid income taxes in 2013
(Srivastava, 2016).
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the size of the informal sector, but at the expense of increased unemployment and
welfare losses. Boeri et al. (2005) “shadow-puzzle” in Brazil, for example, explains that
informality is tolerated because it reduces unemployment and undesirable political
consequences (see also Ulyssea, 2010). Standard taxation principles thus dictate that it
should be those that can pay — not the poor subsiding in the informal sector — that
should be targeted for paying taxes. In fact, across most countries, individuals and
firms are often not required to pay taxes below certain direct and indirect tax thresh-
olds. Hence, most foreign assistance to increase tax collection is not geared towards the
majority of the population living outside the formal economy. Experts focus on a small
number of wealthy individuals and — more importantly large firms — to maximize
revenue.4 In turn, international aid earmarked for assistance in tax revenue generation
focuses on combating tax evasion (i.e. informality) by the rich rather than the poor.
Ideally, the additional revenue gained via the monetary and technical assistance
of international donors would be spent on pro-poor policies and used to extend
formal labor market rights and protection to the wider population. Yet, a potential
problem with this technical assistance approach geared towards the maximization of
domestic tax revenue is that there is no guarantee for this trickle-down effect to hap-
pen. Precisely because formalization gives taxpayers access to productivity-enhancing
goods and services (Straub, 2005), richer individuals and firms have an incentive to
keep others out of the formal taxation–representation nexus just like a century ago
in Prussia. Hence, international tax assistance might as well achieve increased fiscal
capacity and raised revenues, but still keep the poorer part of the population locked
in the informal economy — not paying taxes, but also not receiving benefits.
This chapter discusses current debates on informality, government r egulations,
and tax revenue. We first discuss the varied components of informality and taxation.
Then, we dive deeply into international assistance programs for tax reform in the
BRICs and illustrate the international approach to support the increase of domestic
revenue. Ultimately, we test the direct effect of tax aid on tax revenue and its indirect
effect on the shadow economy. Much of the debate centers on the entry costs of
firms to the formal economy. Djankov et al. (2002), for example, show that firms
face significant “entry costs,” such as registration and license fees, to operating in the
formal economy. Strict entry regulation is therefore associated with a larger informal
4
Inequality concerns have very recently added a second argument in favor of targeting the
wealthiest taxpayers. The IMF, for example, advocates the need to “raise more revenue from
the top of the income distribution” because of the “steep cuts” in top tax rates since the
1980s (Tax the Rich? IMF Sparks a Mini Revolution, 2013). Yet, this remains a secondary
concern in less developed countries, where revenue generation remains too low for even
public good production, not even mentioning redistributive spending.
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economy; lowering entry costs should decrease informality and expand the tax base
(Ulyssea, 2010; Djankov et al., 2002). We find, however, that tax aid raises revenue
without reducing the size of the informal economy. We show a trade-off in interna-
tional assistance: while tax aid is effective in generating revenue, it does nothing to
reduce the size of the informal economy. Other forms of aid do help people out of
the informal sector, but that assistance does not increase the BRICs’ domestic tax
revenue generation capabilities. Hence, a careful balancing of aid projects is needed
for sustainable development out of informality.
Taxation and Informality in the BRICs

In developed economies, raising taxes usually involves increasing value added tax
(VAT) rates or broadening the corporate and personal income tax base (i.e. reducing
deductions and exemptions). Bringing informal activity into the tax net is not the
priority because it is quite costly and the size of the informal sector is relatively small
in advanced industrialized nations.5 Typically, those who work in the informal sector
do so willingly to evade taxation or other government regulations.
In contrast, in developing and emerging economies, informality is a much larger
and more endemic problem (Schneider, 2005) with severe negative consequence for
economic growth and productivity. As this book highlights, when analyzing infor-
mality in developing countries, scholars usually focus on the vast number of relatively
poor people forced to — rather than deliberately choosing to — work in the shadow
economy without the regulation and social protection of jobs in the formal economy.
Typical policy recommendations to overcome informality often include expensive
government programs, which inevitably require greater mobilization of tax revenue.
National governments and international donors should thus be very concerned with
integrating more people in the formal economy. Given that tax evasion is a corner-
stone characteristic of the informal economy, it seems straightforward to assume
that tax experts would advocate to include as many people as possible in the tax
system. Yet, this is far from the advice we see. The focus of international tax experts
is advocating for a reduction in tax evasion at the top of the income distribution. To
understand why, we need to take a closer look at the underlying characteristics of
the tax base and tax administration in developing and emerging economies.
Strategies to increase tax revenue in less developed economies such as the BRICs
differ from advanced economies for two reasons. First, the income distribution
5
In economic recessions, however, the calculus changes because the informal economy can
act as a countercyclical balancing force, stimulating the formal economy. This mechanism
does not hold for developing economies (Gërxhani, 2004: 277).
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is more unequal in the South than in the North. While it has been rising in both
country groups, the increase in inequality the BRICs has been dramatic; inequality
after taxes and transfers (as measured by the disposable or consumption gini in
Table 1) is as high as the average inequality in the OECD before taxes and transfers
(gross gini in Table 1).6 This makes the situation in the BRICs comparable to that of
Western European countries at the end of the 19th century, where the only taxpay-
ers were the wealthy (Kemmerling, 2014: 153). Because income is very unequally
distributed in the BRICs, taxing the rich is the easiest, most cost-effective way to
increase revenue (see Table 1). Even in Russia, where absolute poverty is basically
eradicated, the top 20% of the population earn almost half of the income (in Brazil,
it reaches 57%). Hence, the type of tax evasion or avoidance is of great importance
in discussions on revenue generation. Rather than bringing the poor into the official
tax net (Wallace and Latcheva’s (2006) “household economy”), tax officials and
policymakers go where the money is and hence target tax evasion at the top of the
income distribution.
Engaging in such tactics is of particular importance in developing countries
because of their weak tax administration and bureaucratic capacities (the second
difference between North and South tax collections systems). The informal sector is
incredibly difficult to tax because of the plethora of small firms, shops, and vendors
and absence of formal records (Besley and Persson, 2014). Tax administrations in
developing countries have limited resources, including less technological support
(e.g. computers and software). The personnel in these tax bureaucracies are also
less educated and fewer in number. De Jantscher goes even so far as to say, “in
developing countries, tax administration is tax policy” (Casanegra de Jantscher,
1990 cited in IMF, 2011: 19). While such deficiencies are less severe for the BRICs,
their tax administrations still face serious hurdles. China and Russia, in particular,
relative to their income levels, face severe bureaucratic inefficiencies because of their
communist legacy. As Appel (2011) explains, under communism, the Russian tax
administration only managed a few state-owned firms. Then, after liberalization,
the same understaffed tax authorities suddenly needed to deal with a complex set
of newly privatized firms and individuals in a not even fully monetized economy.
How can a government tax a company that pays its employees in vodka or toilet
paper (Appel, 2011: 28–35)?
6
Please note that in 2010 the average gross gini in the OECD was approximately 47 and it
reduces to 30 after accounting for taxes and transfers (OECD, 2016). Unfortunately, we do
not have equally good data for the BRICs and hence rely on different measures of (gross and
net) inequality in Table 1.
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International Tax Aid in the BRICs

Of course, Russia’s tax administration did not have to face these challenges alone.
International organizations such as the IMF, World Bank, and OECD offered their
assistance. They sent experts, computer equipment, and organized training courses
for old and new bureaucrats (Appel, 2011: 34; World Bank, 1995). As the other BRICs
transitioned to an open, market economy, they also received tax aid from the inter-
national donor community (World Bank, 1995b). Table 1 documents the average tax
assistance to the BRICs between 1990 and 2012. We measure tax aid as aid with the
“tax assessment procedures” activity code (under “public sector financial manage-
ment”) in Tierney et al. (2011). This indicates foreign assistance clearly marked to
enhance the domestic tax revenue raising capacity of the recipient country.
In general, the disbursement of tax aid has increased over the last three
decades. In light of continuously low aid commitments by developed countries
and a new focus on sustainable development, international development agencies
increasingly support tax reforms to enhance domestic revenue generation, for
example, goal 17.1 of the Sustainable Development Goals (United Nations, 2015).
While firmly below 1% of total development assistance in the 1980s, tax aid in
developing countries has increased to over 3% of total development assistance
in the 2010s (see Figure 1). The BRICs have also seen an increase in tax aid over
time, although much of the assistance did occur in the late 1990s and early 2000s.
Figure 1: Tax aid (% total aid) to developing countries and BRICs.
b3508_V3_Ch04.indd 87 11-02-2020 13:35:54

Interestingly, while China and Russia received the most tax aid in the 1990s — with
China receiving some assistance in the 1980s — tax assistance to India and Brazil
follows the general developing country trend of more disbursements since the late
1990s. This timeline fits the previous discussion on China and Russia’s challenges
in the late 1980s and early 1990s in transitioning from a communist economy to
market-based economy. Brazil and India, most likely, needed assistance later in the
1990s as the competitive pressures from globalization and inability to tax trade rav-
aged their revenue generation capabilities (see Bastiaens and Rudra, 2018; Bastiaens
and Rudra, 2016; World Bank, 2003). Comparing the levels of tax aid across the
BRICs, Table 1 indicates that India and Brazil receive the most tax assistance, while
Russia receives the least.
Who are the donors assisting developing countries in raising domestic tax
revenue? Despite calls for the harmonization and multi-lateralization of aid alloca-
tion, two-third of overall official development assistance is still given bilaterally
(Seelkopf, 2012: 64). However, this picture changes once we examine tax aid. The
primary donors of tax assistance are multi-lateral development institutions such as
the World Bank and IMF. Less than 15% of tax aid is given bilaterally to the BRICs,
compared to close to 30% for general aid. As Figure 2 highlights, the World Bank
as well as regional development banks are the most important tax aid donors to the
BRICs. Helping developing countries tap into their domestic revenue sources is
seen as a technical matter (Di John, 2006: 1), best solved by international experts.
Figure 2: Tax aid to developing countries and BRICs by various donors.
b3508_V3_Ch04.indd 88 11-02-2020 13:35:54

What do the tax experts advise? Following critiques of the Washington

Consensus (Di John, 2006), the IMF and World Bank are no longer just efficiency-
oriented; they now also acknowledge the importance of equity and redistributive
taxation in their technical policy advice (IMF, 2014: 36–43). Yet, the focus does
remain squarely on maximizing tax revenue. Other development issues, such as
fighting poverty or reducing informality, are seen as problems for the spending side
of the welfare state — often via non-contributory social assistance programs financed
by tax collections (IMF, 2014: 22). For example, the twin goals of strengthening tax
administration and providing public goods for the poor are cornerstones of assistance
from the World Bank to Brazil in 2003 (World Bank, 2003). Yet, importantly, this pro-
ject does not directly tie tax reform to poverty reduction. Instead, the o bjective of tax
reform is reducing fiscal strains and providing a favorable environment for growth,
poverty reduction is then a product of this growth and efficient social spending.
Virtually, all tax aid projects include training measures for the (weak) tax admin-
istrations in developing and emerging countries. For example, in India, the World
Bank has argued, “Tax administration reforms are perhaps more important than tax
reforms” itself (World Bank, 2004: 1). The issue becomes even more pressing in the
BRICs due to their large size and corresponding need to collect taxes throughout the
territory with multiple tax administrators. Even in authoritarian China, for example,
the World Bank has financed projects focusing on standardizing tax procedures
across the provinces via staff training and unified software (World Bank, 1995b). Given
the unequal income distribution and the low administrative capacity in developing
countries, the IMF strongly advises focusing on taxing upper-income individuals
to maximize revenue: “controlling the largest enterprises (usually a few hundred or
thousand), can secure 60–80% of domestic taxes” (IMF, 2011: 20). These firms pay
not only corporate taxes on their profits, but they are also the main source for personal
income taxes and consumption taxes as they withhold these taxes on behalf of their
(formal sector and relatively rich) employees and customers. In line with this focus on
rich taxpayers, international experts regularly advise countries to simplify their tax codes
and introduce high payment thresholds. For instance, in their mission to support China’s
big tax reform in the 1990s, the World Bank strongly criticized the myriad tax rates and
exemptions (World Bank, 1995b). Simplifying the tax code reduces the burdens on a
country’s tax administration and makes tax evasion more difficult for taxpayers.
The introduction of high tax thresholds as a common feature to keep tax
systems simple is also a tactic to maximize revenue in a cost-effective manner. This
approach concentrates on tax reform and compliance from a few rich taxpayers
rather than the majority of poor people and small firms in the informal economy.
Authorities focus on evasion at the top end of the income distribution. Informality
in the middle and lower end of the spectrum is not addressed by international tax
b3508_V3_Ch04.indd 89 11-02-2020 13:35:54

experts to save resources and prevent disruptions to the broader economy. The
logic is that incorporating the informal economy into the formal tax system would
be quite costly and time-consuming because of the administrative and operational
difficulties (Keen, 2012; see also Joshi et al., 2013).7 It is expensive to ensure both
effective tax collections and taxpayer compliance when taxing the informal economy
(Loeprick, 2009). This is not to say that lower thresholds could not lead to increased
revenue collection. In India, for example, the tax revenue foregone because of high
income tax thresholds is estimated to be 1.3% of GDP (IMF, 2006). Yet, focusing on
the potential top taxpayers is first priority. This is in line with the policy choices of
recipient governments themselves. Auriol and Warlters (2005) argue that govern-
ments choose high entry costs to the formal economy (e.g. level of the registration
fees, the complexity and the length of the procedure) as a deliberate policy for
raising tax revenue. Many micro-enterprises stay informal in developing countries
because becoming formal involves large fixed (and/or sunk) costs. Official registra-
tion is simply beyond the reach of these poor entrepreneurs. Such barriers to entry
to the formal sector generate market power for formal firms. Market power rents
can then be confiscated by the government through entry fees and taxes. These
tax instruments have relatively low administrative cost. Yet, while the fixed cost of
market entry increases the tax revenue for the government, it increases rather than
decreases the size of shadow economy at the same time (Auriol and Warlters, 2005).
International tax aid potentially strengthens this policy.
In sum, the expected effects of international tax aid on the informal economy are
not clear. While tax evasion is a core characteristic of the informal sector, tackling
this widespread evasion is not a major goal of tax assistance programs. Instead,
international agencies such as the World Bank or the IMF advise and support poli-
cies that maximize revenue from the small number of taxpayers at the top of the
income distribution. What is the impact of tax aid on tax revenue and informality
in the BRICs?
The Impact of Tax Aid on Revenue and

Informality in the BRICs
We test the effect of tax aid on government revenue generation and the size of the
informal sector in the BRICs. Our dependent variables on tax revenue are total tax
7
La Porta and Shleifer (2014) discuss the problems associated with taxing the informal
sector — informal firms often cannot compete in the formal economy and so greater formal-
ity leads to poverty and job loss. In contrast, others point to how taxing the informal sector
is critical to broader tax morale and compliance or economic growth (see Joshi et al., 2013).
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revenue (excluding compulsory transfers such as fines, penalties, and social secu-
rity contributions) as a percent of GDP, taxes on income, profits and capital gains
(i.e. income tax revenue) as a percent of GDP, and taxes on goods and services (i.e.
goods tax revenue) as a percent of GDP (World Bank, 2017).8 The informal economy
is measured as the size of the shadow economy as a percent of GDP (Schneider et al.,
2010) and labor force participation rate (World Bank, 2017). We operationalize our
independent variable using Tierney et al. (2011) dataset: tax aid as a percent of GDP.
Some examples of tax aid projects in this dataset include the National Program
for Fiscal Administration in Brazil from the Inter-American Development Bank in
1996, Russian–Swedish Co-operation Programme for Financial Reforms in 2003,
Tax Training Programme to China from the United Kingdom in 1998, and World
Bank Technical Assistance for Economic Reform to India in 2000.
We employ an ordinary least squares panel regression with robust standard
errors clustered by country. The sample is the BRIC countries: Brazil, China,
India, and Russia. The years represented in the shadow economy regressions are
2000–2007. The tax revenue models have data between 1975 and 2013. More specifi-
cally, our model specification lags the independent variables by 2 years, as we do not
expect a simultaneous relationship between aid and revenue or informality. Tax aid
assistance programs typically last between 2 and 4 years (Michielse and Thuronyi,
2010). We operationalize our dependent variables as an annual change. We are thus
assessing the lagged impact of tax aid on the changes in tax revenue and shadow
economy.9 Our basic model is
∆Y = Bo + B1*Xt-2 + e.
In addition to tax aid, we also include general aid (i.e. all aid minus tax aid) as
a percent of GDP. While parts of foreign aid are allocated to further the donors’
interests (see, e.g. Alesina and Dollar, 2000), much of it is geared towards economic
development of the recipient countries. It is spent on pro-poor projects and towards
improvement of the general public infrastructure. Hence, we would expect a positive
effect on both the revenue generation via general capacity enhancement and also on
the shadow economy via pro-poor policies.
Following Genschel and Seelkopf (2016), we control for economic, demographic,
and political factors in our estimations. To account for the internal growth and
development conditions as well as integration in the global economy, we include
GDP per capita (logged), GDP growth, and trade (percent of GDP) (World Bank,
2017). Population (logged) controls for the size of the country and the associated
8
Tax aid is not statistically significant in predicting social security contributions.
9
See Allan et al. (2004) for a similar model specification.
b3508_V3_Ch04.indd 91 11-02-2020 13:35:54

challenges (or opportunities) in collecting tax revenue and managing the informal
economy (World Bank, 2017). Finally, we include democracy, measured by Marshall
and Gurr’s polity index (Marshall et al., 2017) to account for the differing revenue
raising capacities across regimes.
Table 2 presents our estimation results. Our findings provide evidence that tax
aid is effective. A one-unit increase of tax aid (as a percent of GDP) is associated with
a statistically significant 5.3 unit change in tax revenue (as a percent of GDP) two
years later. Yet, 2 years after its disbursement, tax aid has no statistically significant
impact on the size of the shadow economy or labor force participation rate. The
opposite applies to general development assistance. A negative, yet statistically insig-
nificant coefficient indicates that general foreign aid does not help tax collection. It
does, however, reduce informality. Given that foreign aid is targeted at those in need
(although a substantial part is also given to further donors’ interest, for example, see
Alesina and Dollar (2000)), this is not surprising.
We further distinguish between income and consumption taxes to understand
the underlying mechanisms at work when it comes to foreign aid, tax revenue,
and informality. Similarly, we see very different effects for tax aid and general aid.
While tax aid is statistically significant in increasing income tax revenue, its effect
on consumption taxation is not statistically significant (although the coefficient is
positive). General aid, on the other hand, plays a much different role. It is statistically
significant in increasing revenue from consumption taxes, but statistically significant
in decreasing revenue from income taxation. These results indicate a general aid curse
(Djankov et al., 2008), where donor funds are consumed and not invested, and where
the indirect tax gains from the additional funds take the pressure off the government
to tax domestic resources. On the other hand, international assistance to increase tax
payments by wealthy firms and individuals seems to be effective. Efforts to train and
equip the tax administration to battle tax evasion at the top (and middle) seem to
have paid off. If progressive income taxation is the gold standard of a capable tax state
(Besley and Persson, 2009), tax aid has helped the BRICs get closer to achieving it.
Our control variables provide some insight on additional factors impacting tax
revenues and shadow economies in the BRICs. Democracy and trade are associated
with declines in the size of the shadow economy, while GDP growth is positively
associated with changes in the informal economy. GDP per capita and population
(while having an expected negative sign) are statistically insignificant in predicting
the size of the shadow economy.
In predicting tax revenue, trade has a statistically significant positive impact, cor-
roborating standard international economic theory on the revenue generating impacts
of trade. GDP growth, on the other hand, is negatively associated with changes in tax
(and income and goods tax) revenue. Population is often statistically insignificant
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Table 2: OLS regressions of tax and general aid on tax revenue and the shadow economy in the
BRICs.
∆Shadow ∆Labor Force ∆Income ∆Goods
∆Tax Rev. Economy Participation Tax Rev. Tax Rev.
Tax aid (% GDP)t–2 5.283** 5.234 8.467 4.692* 4.463
(2.348) (4.793) (7.907) (2.403) (3.500)
Aid (excl. tax aid) (% GDP)t-2 -0.0169 -0.116*** 0.0855 -0.0646*** 0.0737**
(0.0372) (0.0213) (0.0813) (0.0172) (0.0360)
Population (logged)t-2 0.132 -0.145 -0.436** 0.148*** 0.0174
(0.153) (0.220) (0.178) (0.0175) (0.0538)
GDP per capita (logged)t-2 -0.0793 -0.218 -0.00459 -0.0131 0.0308
(0.159) (0.170) (0.156) (0.0180) (0.0642)
GDP growtht-2 -0.105*** 0.0227* 0.0424 -0.0402*** -0.0316**
(0.0400) (0.0126) (0.0281) (0.0154) (0.0152)
Democracyt-2 -0.00255 -0.0337** -0.0134** -0.00367 -0.0115
(0.0313) (0.0164) (0.00675) (0.00630) (0.0217)
Trade (% GDP)t-2 0.0144*** -0.0143** -0.0132*** 2.35e-05 -0.000329
(0.00439) (0.00594) (0.00136) (0.000676) (0.00218)
Constant -1.830 4.644 8.877** -2.502*** -0.433
(3.915) (5.824) (4.404) (0.323) (1.660)
Observations 84 32 87 78 77
Number of countries 4 4 4 4 4
Notes: Robust standard errors in parentheses. *** p < 0.01, ** p < 0.05, * p < 0.1.
in our models (in accordance with structural theories of taxation, see Genschel and
Seelkopf (2016)), although we do see support for countries with larger populations
have larger increases in income tax revenue. Similar to Genschel and Seelkopf (2016),
regime type is statistically insignificant in predicting tax revenues.10
As an alternative measure, we employ the cumulative sum of tax (and non-tax)
assistance to the BRICs over a 5-year period.11 Tax aid is intended to enhance state
capacity and reform tax administrations and, so, once in effect, the impact could
10
Bastiaens and Rudra (2018) find a conditional relationship of democracy and trade tax
revenue on tax revenue in developing countries. Given our very small country sample, the
insignificance of the slowly changing independent variables is not surprising and should be
taken with caution.
11
Alternative measurements, such as the sum of aid over 2 years, are also robust.
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Table 3: OLS regressions of 5-year sum of tax and general aid on tax revenue and the shadow
economy in the BRICs.
∆Shadow ∆Labor Force ∆Income ∆Goods
∆Tax Rev. Economy Participation Tax Rev. Tax Rev.
5-yr sum of tax aid (% GDP)t–2 6.683*** 1.370 0.385 5.693*** 1.790
(2.092) (2.522) (2.060) (2.137) (2.319)
5-yr sum of aid (excl. tax aid) 0.00915 -0.0754*** 0.0441 0.000825 -0.0108
(% GDP)t-2 (0.00636) (0.0243) (0.0524) (0.0138) (0.0179)
Population (logged)t-2 0.0472 -0.360 -0.353*** 0.0898*** -0.0568
(0.136) (0.351) (0.130) (0.0180) (0.107)
GDP per capita (logged)t-2 -0.135 -0.436 0.0727 -0.0488** -0.0789
(0.141) (0.266) (0.192) (0.0212) (0.116)
GDP growtht-2 -0.104*** 0.0167 0.0318 -0.0412*** -0.0314**
(0.0379) (0.0149) (0.0348) (0.0160) (0.0144)
Democracyt-2 -0.0219 -0.0421 -0.0120** -0.0212* -0.0192
(0.0351) (0.0271) (0.00582) (0.0116) (0.0288)
Trade (% GDP)t-2 0.0156*** -0.0155** -0.0118*** 0.00149 -0.00216
(0.00441) (0.00730) (0.00164) (0.00150) (0.00294)
Constant 0.130 10.87 6.554* -1.223** 2.066
(3.374) (9.230) (3.670) (0.543) (3.298)
Observations 84 32 85 78 77
Number of countries 4 4 4 4 4
Notes: Robust standard errors in parentheses. *** p < 0.01, ** p < 0.05, * p < 0.1.
be long-term. In Table 3, we estimate the impact of the cumulative sum of tax and
non-tax aid on tax revenue and the shadow economy. The results are robust and
mirror the findings in Table 2.
An extension of these models to a sample of all developing countries presents
an interesting comparison (see Seelkopf and Bastiaens, 2019). Just as above, we find
that tax aid is effective in raising total tax revenue across all developing countries.
However, in contrast with the BRIC results, tax aid is effective in raising goods and
service tax revenue, but not income taxation in developing countries more broadly.
For example, a one standard deviation increase in tax aid — an amount received, for
example, by Mozambique in 2002 or Niger in 1998 — is associated with a decrease in
income tax revenue by 0.02 units, but an increase in goods and service tax revenue
by 0.16 units the following year. These changes in revenue are similar to the average
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annual change of income tax revenue and double the average annual change of goods
and service tax revenue in developing countries. On the relationship between tax
aid and informality across all developing countries, we find that tax aid has a posi-
tive and statistically significant impact on the size of informal employment and is
statistically insignificant in increasing labor force participation. Therefore, in contrast
to the BRIC findings, the situation appears more challenging and dire in the wider
sample of developing countries: tax aid does not broaden the number of taxpayers
and, in fact, encourages individuals into the informal economy.
Conclusion
Looking at the effect of international tax aid on tax revenues in the BRICs from 1975
to 2013, we find that tax aid increases the overall tax revenue, especially via direct
taxation. Given that direct taxes are seen as a good indicator of fiscal — if not general
government — capacity (Besley and Persson, 2009), this is good news. Also, regarding
equity concerns, international aid directed towards increasing direct taxation is sorely
needed as less redistributive consumption taxes are the biggest revenue source for all
BRICs today (see Table 1). Although the VAT is potentially progressive (IMF, 2011)
due to the large informal economy in the BRICs, it is much less redistributive than
direct taxes. The VAT’s potential progressive effect relies on the fact that the poorer
part of the population does not consume within the formal economy and the govern-
ment is therefore directly taxing higher income earners more. Furthermore, relying on
consumption taxation could make the tax system much more regressive in the future
if more people become part of the formal economy. So far, only China seems to have
turned the personal income tax into a general tax (at least for the middle classes) (Piketty
and Qian, 2009). India and Russia still rely to a relatively large extent on easy-to-collect
taxes, such as trade and corporate taxes (see also Besley and Persson, 2014).
In sum, tax aid includes rich individuals and firms in the tax net and increases
tax revenue generation. Also, tax aid seems to be counterbalancing the aid curse:
while general aid decreases income tax revenue and increases consumption tax
revenue, tax aid helps to increase income tax revenue, which is mostly paid by
the rich. Yet, there is no trickle-down effect of tax aid on the shadow economy.
Tax aid increases revenue by taxing already formalized taxpayers more, not by
bringing in new taxpayers (see also Auriol and Warlters, 2005). Following the
taxation–representation link, the government is much more inclined to spend the
additional funds on the formal economy rather than on non-contributing citizens.
This mechanism explains also, why we do not find an indirect effect of increased
government spending on the size of the informal economy. If at all, tax aid increases
the number of people in the shadow economy rather than decrease it.
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Future research should look to examining further mechanisms linking tax aid
to the informal economy and revenue generation. For example, do domestic politics
mediate the efficiency of tax assistance in developing countries? What other variables
help explain the variation in the success of tax assistance across developing and
emerging market economies? Bastiaens and Rudra (2016) provide one such answer:
tax assistance is more effective in generating domestic tax revenue in liberalized
non-democracies. They argue and find evidence that democratic politicians are more
susceptible to constituent demands for lower taxes in a competitive global economy.
Additional research could explore the role of state capacity, partisanship, and/or
economic structure and diversification on the effectiveness of tax aid.
Scholars should also further assess the economic, social, and political implica-
tions of tax aid. For instance, has tax aid affected the cost of entry for firms in
recipient countries? Other questions could assess the impact of tax aid’s effective
revenue generation on broader societal welfare and public good provision. After all,
this is the manifested aim of international donors. The decision to enter the formal
economy not only depends on the costs (enforcement and barriers of entry), but also
on the benefits of formalization, which is access to public goods. Formality grants
firms and individuals access to productivity-enhancing goods and services (Straub,
2005; Loayza, 1996; Friedman et al., 2000; Johnson et al., 1997). Our findings point
to the observation that governments are not using the gains in extractive capacity to
incentivize firms into the formal sector with productive goods and services. Treating
tax aid as a technical matter and ignoring the wider political economy of taxation
and informality overestimates the positive impact of increased revenue from rich
taxpayers and underestimates the non-revenue related impact of widening the
taxpayer base.
What are additional broader implications of the failure of tax assistance to
reduce the size of the informal economy? As a large percentage of the population
remains in the informal sector — not paying taxes — the democratic accountability
and representation of these citizens could be harmed. Evidence indicates that tax-
ing the informal economy is critical to good governance because the state is more
responsive to taxpayers, citizens are likewise more likely to demand accountability
from the state, and collective action for more effective bargaining may be spurred
(see Joshi et al., 2013; Joshi and Ayee, 2008; Prichard, 2009). Prichard (2009: 36)
aptly explains, “Raising tax revenue has forced processes of implicit and explicit
bargaining between state and society, and has been an important factor in caus-
ing political change.” Helping the BRICs target their wealthy domestic taxpayers
provides revenue needed for (potentially) pro-poor spending policies, yet helping
them include the less well-off informal workers into the tax net can help lift the
voices of the poor.
b3508_V3_Ch04.indd 96 11-02-2020 13:35:55

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PART II
Informal Settlements
and Basic Service Provision
b3508_V3_Ch05.indd 101 11-02-2020 13:42:49

CHAPTER 5
Social Capital, Leadership Accountability,

and Public Services in the Slums of India
Guadalupe Rojo
Duke University, and Universidad Torcuato Di Tella (UTDT),

Belgrano, Argentina
Introduction
Two random slum dwellers in the Indian city of Udaipur (Rajasthan) share most
of their concerns. One lives in Shivaji Nagar Kachchi Basti and the other one in
Sukhadiya Nagar Kachchi Basti. Ethnographic and socioeconomic conditions
are quite similar in these communities, but one enjoys access to water, electricity
and better roads, whereas the other one does not. What makes these homologous
cases so different when it comes to services provided by the government? Why are
some slums successful at demanding local public goods while others just receive
inexpensive handouts the day before an election? How does social capital improve
the quality of infrastructure and public services for the urban poor?
The answer resides in the intersection of social capital, electoral coordination,
leadership responsiveness and the nature of non-excludable Local Public Goods
(LPG).1 Along these pages, I examine the effects of the neighborhood’s social
structure on the capacity of the urban poor to gain access to higher-quality public
1
Throughout this work, examples of Local Public Goods include, but are not limited water
sanitation, waste disposal or sewage system, local health services, road pavement, electric-
ity, public bathrooms and legal recognition of the entire slum territory.
103
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104 G. Rojo
services. More explicitly, my theory suggests that, due to their political organiza-
tion, communities with more social capital successfully articulate their demands to
the government. Network connectedness empowers residents in slums. More and
stronger ties represent higher likelihood for electoral coordination, hence allowing
them to hold slum leaders2 accountable. I argue that denser networks — rather
than sparse ones — are able to improve their living conditions by channeling their
demands through responsive leadership. Drawing on unique households survey
in 30 slums in the Indian city of Udaipur,3 I assess the ways in which communities
organize themselves to fulfill their needs.
Urbanization has been growing rapidly in India, and rural migration has
particularly affected the development of children (Henderson, 2002). Chandra and
Potter (2016) noted that “the absolute increase in persons living in urban areas in
the 2001–2011 decade was greater than the absolute increase in persons living in
rural areas for the first time since independence (Census of India, 2011a)”. Most low-
income households in urban India live in environments characterized by housing
shortage, lack of hygiene, overcrowding facilities and the presence of preventable
diseases due to poor sanitation and lack of garbage disposal.
According to the World Bank, Indian poverty rates4 are decreasing steadily.
Nonetheless, living conditions remain broadly unsafe in most urban slums. More
than 33,000 slums exist in urban India, where 8.8 million households share most of
their concerns in terms of infrastructure and sanitation. For instance, in the State of
Rajasthan, about half of the slums have no toilets and about one-third no electric-
ity connections. At the national level, this later figure drops to 7% (Times of India,
December 23, 2014). As reported by the “Rapid Baseline Assessment for Udaipur
City” in October 2013, none of Udaipur slums had access to drainage or sewerage,
and about 18% of those resorted to open defecation.
This scenario is shared by millions of slum dwellers across the globe. More
precisely, about 1 billion people live under inadequate conditions, either experiencing
overcrowding, or drinking unsafe water, poor sanitation and construction materials
2
I use the words broker, leader, community leader and slum leader interchangeably. They
to refer to a politically influential person residing in the neighborhood, who behaves as an
intermediary between residents and politicians.
3
A two-wave survey was conducted in Udaipur during 2013, as part of a joint project with
Prof. Wibbels. We thank Anirudh Krishna, Janat Shah, Mahesh Kapila, Seema Mishra,
KP Singh and all of the supervisors and survey enumerators at Chitra Management for
invaluable help on this project. We also recognize the financial support of the Duke-IIMU
Research Collaborative.
4
Please see data.worldbank.org for measures of poverty headcount ratio (as a percentage of
population).
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Social Capital, Leadership Accountability, and Public Services in the Slums of India 105
(UN-Habitat Slum Almanac, 2015–2016). Although governments, non-profit and

multi-lateral organizations, all channeled their efforts to stop slum growth, absolute
numbers continue to rise and the slum challenge is still relevant. For example, in
developing regions, the urban slum population (in thousands) was 689,044 in 1990
and 881,080 in 2014, according to the UN-Habitat (2015). During the same period,
the number of urban slum dwellers (in thousands) increased from 93,203 to 200,677 in
Sub-Saharan Africa; from 204,539 to 251,593 in eastern Asia; from 180,960 to 190,876
in southern Asia; and from 69,567 to 83,528 in southeastern Asia. Perhaps, the only
region with no clear pattern is Latin American and the Caribbean, where the urban
slum population has shown an erratic behavior from the early 1990s to date. Starting
in 1990, the number in thousands was 106,054, increasing steadily and peaking in 2000
(116,941), then remaining about 112,500 to increase later again in 2012 (116,227). Now,
the last available figure is 104,847 for 2014; all according to the UN-Habitat (2015).
Take Brazil for example. In spite of the fact that poverty rates have been
decreasing steadily,5 this Latin American country has experienced an expansion
in the informal settlements — so-called favelas — due in part to growth in urban
population. As people move to cities searching for higher wages, the total number of
urban working households without basic water and sanitation grew from 5.3 million
in 1991 to 5.7 million in 2010 (Alves, 2016).
Although the main focus in this study are slum dwellers in the Indian city of
Udaipur, across the globe, we find one-eighth of the population living in similar
conditions. Hence, the relevance of this chapter exceeds any geographical bound-
ary. I argue that the world’s urban poor share most of their concerns, regarding
drinking unsafe water, or dealing with preventable diseases, due to poor sanitation.
How do we empower slum dwellers so that they can improve their quality of life?
Under what conditions urban poor communities are better equipped to effectively
demand from public officials? These are relevant questions not only in India, but
also in many developing regions, where about one-third of the urban population
live under unsafe conditions.
This chapter’s primary goal is to present a theory of slum-level social organi
zation and its implications for (1) electoral behavior and (2) access to and the
quality of public services. My argument departs from traditional theories, which
only consider citizens’ individual behavior. Put succinctly, I argue that the ability of
slum dwellers to effectively demand LPG is contingent on the level of their social
capital. Social trust and connectedness at the slum level enables community-led
enterprises, such as electoral coordination, which translates into what I define as the
good-type partisan homogeneity. When slum dwellers are able to cooperate with
5
According to the World Bank, the poverty headcount ratio at $3.20 a day (2011 PPP), in
percentage of the population, fell from 36.4% in 1993 to 23.5% in 2001 to 8% in 2015.
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106 G. Rojo
their neighbors and agree upon a common political behavior, they increase the odds
that they will be rewarded with public investment.
Alternatively, when social capital is low and slum dwellers are isolated, they
only receive private goods in exchange of their political support — no significant
public investment in their territory. I refer to this scenario as the bad-type partisan
homogeneity; unresponsive candidates win in the districts by large margins. Partisan
homogeneity might appear to imply that slum residents are coordinating their votes,
but in fact in these cases there is no collective initiative present. Typically, these
situations are dominated by the distribution of inexpensive private goods during
electoral periods. Bad-type partisan homogeneity is a consequence of the lack of
social tools to demand that public officials provide improvements in their living
conditions. In this type of community, electoral homogeneity does not provide with
means to negotiate, but it even hurts the urban poor. As politicians do not feel an
electoral threat, just distributing handouts is enough.
Living conditions for the urban poor are often characterized by overcrowding,
high exposure to crime and violence and many other social problems. Yet, this
chapter focuses on deficient infrastructure and social services within the slum
perimeter. Likewise, the urban poor are the principal target of clientelistic practices
to the detriment of the provision of Local Public Goods (Brusco et al., 2004; Calvo
and Murillo, 2004; Remmer, 2007; Keefer, 2007). Due to the diminishing returns
of consumption, low-income constituencies derive higher marginal utility from
handouts than do middle-income voters.6 Given that these groups are electorally
more responsive to direct transfers, we should expect that the provision of public
goods will be lower in poor communities. Yet, variations in levels of public invest-
ment do exist across similarly impoverished populations and the current literature
has failed to explain these divergences.
The trade-off between clientelistic practices and the allocation of resources
to services and infrastructure is undeniably relevant (Remmer, 2007). While one
may argue that receiving rice and beans is a priority for populations suffering from
hunger, it is also necessary to consider the crucial importance of LPG in raising
slum dwellers’ living standards. Having access to drinking water or a proper closed
sewage system may draw the line between life and death in some metropolises.
6
Although clientelistic practices are not only limited to the distribution of private goods,
when I refer to clientelism throughout this chapter, I do not consider allocation of anything
else but goods for immediate consumption (short-lived goods). The point of doing so is to
clearly differentiate between the apportionment of significant government funds towards
Local Public Goods vis-à-vis the minor allocation of resources towards consumable goods.
b3508_V3_Ch05.indd 106 11-02-2020 13:42:49

1200
1000
800
600
400
200
0
Community Gis Peers Country Party Leader Tradion Ideas
Figure 1: Reasons for which slum dwellers vote in Udaipur, India.
According to the Abdul Latif Jameel Poverty Action Lab (J-PAL), 21% of infant
mortality in developing countries is caused by diarrhea, a disease that could be
prevented through access to better sanitation. Across the globe, 2.5 million children
die each year because of exposure to pathogens due to poor treatment of solid
wastes (J-PAL, 2012). Although less dramatic, deficient public services oftentimes
translate into a higher economic burden. As shown in Rojo and Wibbels (n.d.),
the urban poor often place higher value on LPG (e.g. waste disposal system) than
is often assumed. Figure 1 shows that when slum dwellers in Udaipur were asked
in surveys to prioritize their reasons for how they voted, the option “the services
that my community is receiving” (community) ranks higher than “private benefits
that my family is receiving” (gifts).7
The existing literature on slum politics has mostly studied the distribution of
private goods (food, medicine, personal favors, jobs, etc.) in the context of a political
bargain (Auyero, 1999; Calvo and Murillo, 2004; Remmer, 2007; Kitschelt and
Wilkinson, 2007; Stokes et al., 2013, among many other authors). However, scholars
so far have failed to address the ongoing variation in terms of the provision of LPG.
Current research has underestimated the importance of identifying the factors that
7
Figure 1 reports raw number of respondents that mentioned each issue (either as their first
or second priority) for reasons on how to vote.
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108 G. Rojo
may contribute into the improvement of slum infrastructure and services. In poor
informal settlements, access to a sanitation system or clean drinking water is often
mediated by local politicians. Still, the traditional literature on public goods (e.g.
Olson, 1965; Hardin, 1982) has weak explanatory power, particularly in regard to
shantytowns, where patronage prevails.
The urban poor tend to be clustered in informal settlements, and an entire
settlement — not an individual — is the recipient of water, electricity, or natural
gas. This feature of LPG has implications for the study of “collective clientelism”
(Kitschelt and Wilkinson, 2007), which is embedded in a neighborhood context,
and thus should be studied at the slum level using group-based models rather
than solely considering individual-level exchanges. By shifting the paradigm from
the individual to the neighborhood level, my goal is to bring attention to the local
decision-making process. This chapter takes community as the main unit of analysis.
The scope is not the individual voter but a group of voters residing in the same poor
locality. The chief contribution is to shed light on the dynamics of local organizations
(e.g. neighborhood associations) as the key factors that empower the urban poor.
This work illustrates how communities that are empowered with social capital raise
demands to politicians by calling their attention through bloc-voting. Ultimately,
well-connected slum dwellers gain access to better neighborhood infrastructure and
higher-quality public services.
More recently, we have witnessed a new trend in development studies that
focuses on participatory practices within local decision-making process (e.g. Olken,
2010), such as the delegation of budget suggestions to local assemblies: the Gram
Panchayat in India or the Conselho do Orcamento Participativo in Brazil. Still, in the
case of slum dwellers, the scope of these participatory alternatives is often limited,
as they reside within informality — particularly when they dwell on land for which
their possession is illegal. Theorizing along these lines, I propose to redirect the
attention to other forms of political participation that could empower these com-
munities through the acquisition of more and better government services. Namely,
I study the interaction between social capital and electoral coordination, and the
impact of this relation on the provision of LPG.
There are three features of Local Public Goods that make them particularly inter-
esting, they are: (i) non-contingent on individual vote choice; (ii) non-excludable
from any resident of the community; and (iii) non-rival among neighbors. Namely,
LPG are similar to club goods, where residency functions as the membership to
the club. This portrayal assumes non-excludability as a necessary condition for the
theoretical framework. However, I do recognize that there is a growing concern
for the diffuse distinction between public and private goods. In other words, local
politicians could limit access to services arbitrarily, transforming (in theory) local
b3508_V3_Ch05.indd 108 11-02-2020 13:42:49

public goods into (de facto) private goods. Along these lines, Min (2015) argues that
political schemes often interfere with the delivery as well as the implementation of
public programs. Thus, by no means I am stating that pork-barrel politics are absent
in the allocation of LPG. In fact, this work seeks to explain how these political
schemes play within social and political organizations of the slums. In most of the
cases analyzed here, services and infrastructure are indeed non-excludable within
the locality. For instance, when a government decides to allocate funds to build a
sewage system, the most significant part of the investment goes to the central branch,
and each individual household can easily enjoy the benefit subsequently. It is not
impossible, but quite difficult for the government to prevent a family to access the
newly-built sewage.
Then, it is precisely the non-excludability feature of LPG — “impossibility of
exclusion” (Hardin, 1982) — that introduces the need to examine coordination prob-
lems and that also makes bloc-voting relevant. Recent evidence supports the theory
that resource-constrained politicians target communities that demonstrate collective
action skills (Rueda, 2016; Gottlieb and Marx, 2016; Pierskalla, 2016; Gottlieb and
Larreguy, 2016; Grossman et al., 2017). These theories build upon the assumption
that electoral strategies are chosen in cost–benefit terms and that politicians require
a group of voters who can credibly commit to reward public investment. Because
the provision of local public goods is relatively expensive, parties will only provide
them when they can be sure of consistently attaining a large share of support from
any given slum over a period of years. Serving as a large vote bank for a single party
implies a coordination problem for citizens who live in slums. If the community can
solve this collective action problem, its ability to attract local public goods increases.
Along these pages, I provide a slightly simplified version of local political
dynamics, in which I emphasize on the importance of bottom-up demands.
Although I argue that social and political organizations at the slum level are the key
elements here, by no means I propose that outside-slum politics are irrelevant. In
fact, I recognize a good portion of negotiations between community leaders and
politicians does not take place inside the locality, but probably in some external
political office (e.g. Udaipur Municipal Government). However, this chapter pro-
poses to zoom in at the origins of the slum’s political representation, which is — as
my argument goes — social capital formation and community internal organization.
Further research within this project should aim to address the interactions between
slum leaders, political brokers and outside politicians, and how leverage oscillates
among these actors depending on both internal dynamics (e.g. slum dwellers
electoral coordination) and also on external economics and political circumstances.
How do neighborhood associations and internal organizations contribute to
improving the quality of infrastructure and public services for the urban poor?
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110 G. Rojo
Does partisan homogeneity increase the likelihood that a slum will receive LPG?
Or is it always the case that political competition enhances responsiveness? The
short answer: it depends on the level of social capital. The long answer is that
community-led electoral coordination — enabled by social capital — translates into
what I define as the good-type partisan homogeneity. When slum dwellers are able
to cooperate with their neighbors and agree upon a common political behavior, they
increase the odds that they will be rewarded with public investment. Alternatively,
when social capital is absent within the community, partisan homogeneity hinders
electoral accountability.
The chapter is organized as follows. First, I present a review of the state-of-the-
art on the related literature. Second, I describe the core of the chapter’s argument.
This includes a discussion on the justification of why voting behavior is more of a
collective than an individual experience and social capital’s central role in com-
munity empowerment. Third, in order to address the empirical analysis, I describe
the dataset. Fourth, I present the statistical models results — divided into two
subsections — providing empirical support for the “good type partisan homogene-
ity”. Fifth, I conclude with a discussion on the contributions, policy implications
and future steps.
Theoretical Framework
India has long-lasting roots of clientelistic politics (e.g. Chandra, 2004; Wilkinson,
2006). Yet scholarship has mostly underestimated the social influence embedded
in the process. Political brokers not only distribute private goods. In poor informal
settlements, access to sanitation system or clean water is often mediated by local
politicians. Considering the extant interaction of patronage dynamics with the
provision of LPG, we need a comprehensive understanding of what Kitschelt and
Wilkinson (2007) named “collective clientelism”. From a different perspective, the
traditional scholarship on public goods has weak explanatory power in the particular
case of shantytowns, where patronage prevails. Classical explanations from the field
of economics depict public goods as the summation of individual contributions. Yet,
access to LPG for the urban poor, is mainly determined by political dynamics and
non-contingent on taxation. Nonetheless, traditional literature on public goods does
not address any slum politics or patronage logics.
This study comes to address the existing gap in the literature in terms of provid-
ing an all-embracing analysis of social capital and public goods provision under a
context of political clientelism. By shifting the paradigm from the individual to the
neighborhood level, my goal is to bring attention to the local decision-making pro-
cess, and its repercussions on the quality of LPG. This chapter intends to contribute
b3508_V3_Ch05.indd 110 11-02-2020 13:42:49

to a better understanding of the mechanism linking social capital and leadership

accountability. In other words, how social capital induces slum leaders to behave
more responsively when it comes to acquiring investment from higher-ranked
politicians.
The literature on clientelism is quite extensive, in particular regarding the
description of the direct exchange of material benefits for political support between
voters and politicians (Calvo and Murillo, 2004; Chandra, 2004; Kitschelt, 2000;
Kitschelt and Wilkinson, 2007; Levitsky, 2003; Nichter, 2008; Remmer, 2007;
Robinson and Verdier, 2013; Stokes, 2005, among many other authors). Originally,
scholars considered the exploitative aspect of the asymmetric relationship between
voters and politicians (e.g. Brusco et al., 2004). Whereas, from a quite different
approach, some works focused on the mutually beneficial side of the association (e.g.
Auyero, 1999). Recently, scholars redirected the attention towards the micro-level,
scrutinizing the relationship between voters and brokers (e.g. Stokes et al., 2013).
Building upon this framework, clientelism is conceptualized as a repeated game, in
which, on the one hand, voters provide political support; and on the other hand,
brokers deliver goods such as handouts, food, cash, access to subsidies, welfare
programs, health assistant, clothes, construction materials and among others, jobs
in the government, etc. These linkages are part of a problem-solving network where
favors are exchanged bi-directionally. Quite different from an anonymous machine
only present during elections, relational clientelism portrays the voter–broker
relationship as an on-going and durable one (Nichter, 2010). Yet, studies so far have
not considered the allocation of LPG as part of these continuous exchanges between
neighbors and their slum leaders.
The basic argument in this chapter is that the provision of LPG within the urban
poor cannot be studied independently from clientelistic dynamics. Building upon
Dixit and Londregan (1996), scholars have emphasized the relevance of the machine
in order to minimize the dead-weight losses in the distribution of private goods.
In general, machine voters are defined as those loyal to the broker, from whom she
is able to gather accurate information, and thus target resources more effectively.
In this sense, uncertainty is significantly lowered if brokers are well informed about
the handout-recipients. However, existing studies have mostly examined the broker’s
network of loyal voters in terms of the distribution of private goods. This chapter
departs from traditional literature in clientelism by redirecting the attention to the
role of the brokers as a go-between within the nodes of her own network. The impor-
tance of her connections not only relates to her one-to-one exchange job, but also
is linked to the social organization of the community as a whole. By understanding
the leader’s role as a coordinator, the machine is no longer portrayed as an asym-
metrical and vertical structure. Social networks — my argument goes — influence
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112 G. Rojo
more than just informational flows, but constantly shape voters’ political choices.
In consequence, by coordinating their electoral preferences, communities are
empowered to demand LPG more effectively.
In the context of poor informal settlements, I emphasize three features of
LPG: first, that they are non-contingent on individual vote choice, departing from
the natural dynamics of vote buying or electoral clientelism; second, that they are
non-rival among the neighbors,8 as it is assumed in this work that once the core
of the sewage system is built for the entire slum territory, there cannot be over-
consumption on this good; And last, that LPG are non-excludable from any resident
in the community. The “impossibility of exclusion” in Hardin’s words, introduces
the need to examine collective action and coordination problems. Once public
investment is allocated to a specific locality, everyone in it enjoys free access to it.
Hence, a comprehensive study of this phenomenon needs to evaluate the interaction
between clientelistic linkages, coordination efforts and bloc-voting.
The traditional literature on collective action and public goods (e.g. Olson, 1965;
Hardin, 1982) fails to explain cases where clientelism regulates resource allocation.
Indeed, the mainstream understanding is that any agent will contribute to a public
good as long as the marginal benefit for this contribution compensates its marginal
cost. This framework applies to those LPG that result from adding up everybody’s
contribution (for a complete review on this perspective see Andreoni and McGuire,
1993). However, in most poor informal settlements, residents’ access to LPG is
entirely independent from individuals’ costly participation or income contribu-
tions. All in all, there is a void in the current scholarship as rarely do studies try to
understand clientelistic dynamics and public goods provision jointly.
In general, scholars have paid more attention to materialistic incentives than
to those related to community solidarity with the notable exception of Ostrom
(2000). Nevertheless, to address LPG at the slum level, social trust and neighbors’
cooperation are essential components. Existing research on clientelism analyzes
dyadic (broker–voter) relationships, paying little attention to the group dimen-
sion, and even less to the collective decision-making process at the neighborhood
level — Calvo and Murillo (2013) is an exception worth mentioning. Models for
clientelism usually portray agent actions as individual-level choices. Yet, behavioral
scholars have shown that the act of voting is, to some extent, a collective activity
(Baker et al., 2006; Gerber et al., 2008; Nickerson, 2008; Remmer, 2010; Abrams
et al., 2010; Fowler, 2006).
8
I do not consider “crowding effects” in the consumption of local public goods at the
slum level.
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Normally, local politicians retain degrees of freedom to decide where exactly

(in which locality), they will allocate public investment, making this strategic deci-
sion quite relevant for the human well-being of poor constituencies. Hence, the
distribution of LPG across similarly impoverished settlements cannot be studied
independently from clientelistic dynamics. The typical exchange of political support
for favors — generally ruling redistributive politics in the developing world — does
not just entitle private goods. More often than not, local politicians reward localities
with more than just handouts, making necessary for scholars to understand the
provision of LPG embedded in a context of political clientelism. Along this line,
Auerbach (2013) argues that squatter settlements in India aligning with multiple
political parties have lower levels of local public goods because rival parties undercut
each others’ projects and avoid infrastructure investments in neighborhoods with
ambiguous loyalties.
Last, but not least, there is a solid consensus in current development scholarship
that social capital fosters improvements in living conditions. Some examples include
Narayan and Pritchett (1999), who study village-level social capital’s positive effect
on household income in Tanzania. Isham and Kähkönen (1999) argue an increase
in efficiency in water services is due to social capital in Indonesian villages. Reid
and Salmen (2002) propose that in Mali community cohesion enhances the effect
of agricultural extension services. As shown in Mitra (2009), social capital makes
the difference within the urban poor, particularly by providing job market informa-
tion. However, Mitra finds no evidence that stronger social networks imply higher
earning and consequently, upward mobility. Finally, Krishna and Uphoff (1999)
show how social capital promotes community-led water projects in Rajasthan, India.
Notwithstanding the extensive literature, most of the studies involve rural villages.
With this chapter, not only I bring attention to the urban poor, but I also disentangle
the underlying mechanism that explains such positive effects of social capital, in a
context of political clientelism.
Fundamental Rationale: Social Capital and Agency
During electoral campaigns, urban poor localities experience a bargaining process

between politicians and beneficiaries. This negotiation is mediated entirely by the
figure of the broker. Since political actors are resource constrained, they build a
portfolio diversification strategy and decide how much to invest in each electoral
district. In order to maximize their vote share, they allocate public and private goods
accordingly. For this study, I assume politicians are free to decide where to build a
clinic or a sewage system according to their electoral strategies in spite of any legal
or institutional arrangement that may limit the allocation. Because the provision of
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114 G. Rojo
local public goods is relatively expensive, parties will only provide them when they
can be sure of gathering a large share of support from any given slum consistently
over a period of years.
The mediator is a key actor in this argument. On the one hand, brokers negotiate
with politicians for resources to distribute among slums’ residents with high discre-
tion on how to allot particularistic benefits or handouts across households. On the
other hand, these intermediaries are the recipients of claims from residents in terms
of lacking basic services. Therefore, brokers have to balance their jobs to deliver
votes for specific political parties, rewarding voters with private goods, and to help
the community as a whole to attract public investment for LPG.
Typically, poor voters live side by side with their local leaders or brokers. From
an economic approach, voters maximize their well-being by evaluating the marginal
utility of receiving private goods, and weighing the probability and the significance
of LPG for their neighborhood. Traditional democratic channels are often insuf-
ficient for low-income voters, who rely heavily on direct transfers to get access to
public goods.9 Precisely, to evaluate the chances of receiving public investment in a
particular electoral cycle, residents estimate how many others will vote for their same
candidate. Serving as a large vote bank for a single party represents a coordination
problem for citizens who live in slums.
In collective action problems when there are multiple equilibria, some kind of
mechanism is often necessary for the interested parties to coordinate. Social conven-
tions and shared expectations aid coordination towards higher social utility scenarios
(Schelling, 1960; Young, 1996; Shepsle, 2006). In this case, the coordination problem
resides in getting the majority of the slum behind the same candidate. Community
leaders oversee aggregating individual preferences with respect to LPG (turning
their suggestions into a focal point). On the one hand, voters take leaders’ actions
as key information and cues. On the other hand, politicians realize these leaders are
considered focal points and thus represent a central informational diffusion element
across network’s agents.
In sum, the core argument in this chapter is that both community and leadership
characteristics determine the likelihood of success in demanding local public goods
9
In the words of Krishna (2011): “Some analysts expect political parties to perform the task
of mediating between citizens and the state (e.g. Huntington, 1968; Kohli, 1987). In many
new democracies, such as India, however, political parties are quite weakly organized, do
not penetrate effectively to lower levels, have little or no presence at the grassroots, and may
not provide much support for the tasks of interest articulation, demand representation, and
political communication (Kohli, 1990; Krishna, 2002). Mediated transactions characterize
an important part of citizen–state relations.”
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from the government. In order words, a positive involvement from the leader’s side,
jointly with a highly connected community balance the bargaining process between
voters, brokers and politicians, in favor of the community’s best interests. It is a
double-folded argument. Firstly, leaders’ attitudes and network’s density shape the
prospect of electoral coordination. Secondly, electorally homogenous localities are
entitled with more — or higher-quality — public services. Is this always the case?
Or are there exceptions for the association between electoral coordination and
better LPG? This chapter’s argument is that the good-type partisan homogeneity
yields positive results in terms of public investment if and only if it is rooted in
community-led electoral coordination (enabled by social capital) and not deter-
mined by political clientelism.
Voting as a Social Experience
Particularly in small communities, citizens do not perceive turnout as an individual

experience, for example, sometimes t-shirts with different colors are used to identify
supporters which brings a sense of belonging (Remmer, 2010). Recent evidence
shows that citizens are often persuaded by their immediate social contexts, when
taking political decisions (Baker et al., 2006; Gerber et al., 2008; Nickerson, 2008;
Abrams et al., 2010; Fowler, 2006). The neighborhood is the main environment
where political communication thrives, either by word of mouth, yard signs or
painted walls (Huckfeldt and Sprague, 1995). This territory is the sphere “in which
individuals think collectively” (Sinclair, 2012). It is the interdependence among
individuals what makes residents of the same locality permeable to other people’s
political choices (Marwell and Oliver, 1993; Sinclair, 2012).
The social network in a specific locality is conformed by those neighbors who
are socially linked to each other and discuss every-day personal problems, as well
as community issues and politics in general. The electoral process is conceptualized
as a group activity. Voters’ political behavior is conditioned by the information at
the very local level (Huckfeldt and Sprague, 1995). For instance, an individual has
a presumption about a certain issue, then encounters a neighbor and talk about it,
and they both form a new opinion. Citizens are interconnected and they maximize
utility by reducing informational costs (Downs, 1957), and in this case, by matching
their neighbors’ political preferences.
As well, individuals derive utility by conforming to social norms (Festinger
et al., 1954) and try to avoid disagreement within their main social environment
(Sinclair, 2012). The underlying instrument is the need to seek for social approval
(Lindenberg, 1991). Ergo, social influence at the neighborhood level drives incentives
to coordinate electorally. The intrinsic belief is that public scorn may result from
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116 G. Rojo
violating or avoiding them. In order to anticipate that peers will praise those who
uphold to informal norms, the perception has to be that these political choices are
public (Lerner and Tetlock, 1999; Cialdini and Goldstein, 2004). In other words,
voters evaluate their political preferences individually, but look for consensus
collectively; they do not enjoy expressing a vote choice different from the one the
majority in the community is pursuing. Consequently, given that agents sanction
or reward their neighbors for their political actions or opinions — filtered by their
own points of view — behavioral contagion is understood as a learning process with
social influence (McPhee, 1963; Huckfeldt and Sprague, 1995).
Social capital intensifies informational flow on political behavior, aiding coor-
dination. Although not in relation to clientelistic dynamics, social capital has been
thoroughly studied (e.g. Coleman, 1988; Lin, 1982; Flap and Graf, 1986; Burt, 2000).
As in Putnam (2000), social capital represents “the connections among individuals’
social networks and the norms of reciprocity and trustworthiness that arise from
them”. To Cohen and Prusak (2001), it represents ties binding neighbors and enabling
cooperation. More ties between neighbors increase the speed of social reward/
sanction, reinforcing the mechanism for peer pressure. By emphasizing the inter-
dependence between nodes in a social network (Marwell and Oliver, 1993), we can
clearly challenge the common assumption that under clientelism actors are isolated.
Along these lines, a highly-connected social network simplifies the broker’s
task of signaling and monitoring political behavior across the community.
Politicians know that the electorate is interdependent, and to optimally diffuse
information they will seek to influence the most central node in the network — the
broker. More explicitly, the social network impacts the informational flow, the
monitoring structure (inherent to clientelistic linkages) and, consequently,
the leadership’s role as a focal point in coordination problems. In sum, a dense
social network provides information on political behavior, promotes checking
and supervising and facilitates a social-sanction system between agents. Scholars
(e.g. Täube, 2004) have argued that weak ties often imply private goods, whereas
collective goods, like trust itself, tend to derive from strong ties.10 Furthermore,
the dichotomy between strong and weak ties often translates into the distinction
between symmetric and asymmetric relations, respectively.
10
Homans (1974: 104) puts it this way: “If multiple individual exchanges among the mem-
bers of a group are rewarding enough, that fact may increase the similarity among members
in the sense that more of them conform to a group norm than we should have expected if
the direct reward of conforming, that is, the attainment of a collective good, were the only
one at work.” See also Flache (1996) for a discussion on the provision of collective goods
within dense groups.
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Slum Leaders and Brokerage Roles
Along these lines, the positive effect of social capital is enhanced by leaders’ efforts
to function as a focal point in collective action problems. Leaders may engage due
to their own incentives, but their efforts yield an electorally-homogenous locality.
Through leaders’ engagement — my argument goes — communities are able to take
advantage of their connectivity in a more effective manner. By coordinating their
political behavior — by virtue of social capital — the urban poor are better posi-
tioned to effectively demand public investment from politicians. It is a double-folded
process: connected neighbors prompt accountable leaders, who simultaneously are
able to extract more resources from higher-ranked politicians by offering a strong-
hold or “vote bank”. In the long run, local politicians reward electorally-homogenous
localities with government investment.
According to Baldwin (2013) and Rueda (2016), successful community endeav-
ors require the existence of leadership within a community. There is a wide-ranging
literature focusing on the importance of actors who occupy central positions in
social networks — brokers — and their role in diffusion processes (e.g. Burt, 2000;
Marsden, 1982; Granovetter, 1973; Homans, 1974). In the words of Taube “brokers
are actors that allow or enhance resource flows between otherwise unconnected or
only weakly connected actors; as a result they able to gain advantage due to their
strategies position in social networks.” (Täube, 2004: 30). In general terms, brokers
or central nodes are decisive characters to boost connectedness and enable social
capital throughout the network.
Merton (1968) classifies brokers (or “influentials” in his terminology) into two
categories: Local and Cosmopolitan. Cosmopolitan brokers are distinguished for their
capacity of connecting across communities or clusters (in my theory, political actors
who connect across slums). Local brokers, then, are specialized in the transmission
of leveraging social capital within the community but are not considered brokers
between different cliques. In relevance to this chapter, the main distinction for leader-
ship typology is the following. On the one hand, Liaison is defined as a rent-seeking
broker, in a context of fragile networks, and provided she is not part of the community.
On the other hand, this chapter emphasizes the role of an accountable leader, some-
body fairly close — and probably also a resident — to the locality neighbors, quite
responsive to the residents’ demands. Gould and Fernandez (1990) classify this type
of leader as a Coordinator, which — for this chapter — is associated with coordinating
vote choice (focal point) in order to effectively achieve higher provision of LPG.11
Other types of leaders in the literature are Gatekeeper and Itinerant. See Gould and
11
Fernandez (1990) and Taube (2004) for a complete overview.
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118 G. Rojo
Responsiveness or accountability in leadership is closely related to the citizens’

power to force politicians to comply with their promises, as the following quote
illustrates:
“Accountability refers to the ability to ensure that public officials are answerable
for their behavior, in the sense of being forced to justify and report their decisions,
and of being eventually sanctioned for those decisions. […] The concept of politi-
cal accountability refers instead to the responsiveness of governmental policies to
the preferences of the electorate. Political accountability is intimately intertwined
with the concept of democratic representation. […] A government is politically
accountable if citizens have the means for punishing unresponsive or irresponsible
administrations. It is usually assumed that elections are the central institution for
this type of control (Przeworski, Stokes and Manin 1999). They provide a regular
mechanism for citizens to hold governments responsible for their actions, forcing
out of office those incumbents who did not act in the best interest of voters, or
reelecting those who did.” (Peruzzotti and Smulovitz, 2002: 210–211)
In brief, slum dwellers employ societal mechanisms to hold leaders account-

able by activating horizontal channels to threaten elected representatives to stop
political support or even unelected ones with reputation costs (Peruzzotti and
Smulovitz, 2002). For this chapter, for accountable leaders, I understand those
who are forced to deliver their neighbors with more than just private goods. When
deprived communities address their leaders with complaints on the lack of basic
public services, this type of leader will have to respond to them with some type
of solution. Otherwise, their continuity as leaders will be at risk. Moreover, when
these leaders reside in the same neighborhoods (as they often do), not only politi-
cal costs are at stake. Krishna (2011) finds empirical evidence in Indian villages
that it is quite difficult for a leader (in his study: a panchayat) to cheat villagers
because if the community is united, they can exert social sanctions (e.g. ostracism)
to unresponsive leaders.
Particularly in the Indian case, we can differentiate two types of local leaders:
traditional bosses and young men (Naya Netas). The latter are characterized by
their skills and education and are often specialized in terms of their abilities to deal
with different governmental agencies. Hence, when in need of assistance with a
particular issue, citizens recognize this differentiation system and approach Naya
Netas according to their expertise. Most importantly, unmediated transactions
are very rare; people generally rely on Naya Netas or other type of intermediaries
(Krishna, 2011). In this work, I do not distinguish particular types or local leaders,
and survey respondents in Udaipur identify both slum leaders and ward leaders as
the central ones.
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Hypotheses
H1: Well-connected communities — empowered with social capital — are more

prone to voting together (electoral coordination).
The rationalization for this argument is simple: more connectivity among slum
dwellers allows them to coordinate their political strategy at the neighborhood
level. This translates into a better negotiation with politicians, while an intermedi-
ary or broker is obliged to represent their interests to remain in that leadership
position. The mechanism that enables political organization at the slum level is the
informational flow resulting from the density of the social network. In other words,
the dissemination of information is aided by the shared values and mutual trust in
communities with high social capital.
Interestingly, the positive effect that social capital exerts on electoral coordina-
tion is bolstered by the presence of an intermediary agent who effectively reaches out
and gets resources for her community. Moreover, by signaling the suggested path,
the mediator simplifies the task of aggregating neighbors’ preferences in terms of
electoral choices. In Krishna’s words:
“Social capital represents a potential — a propensity for mutually beneficial col-

lective action. But potential needs to be activated and agency is important for this
purpose. […] when intermediate links are weak, as they are when agency is not
capable, social capital does not translate readily into good performance.” (Krishna,
2001: 934)
H2a: Communities voting together are more satisfied with their LPG, only under
the presence of social capital (good-type homogeneity).
H2b: In the absence of social capital, communities that vote together have lower
levels of satisfaction regarding LPG (bad-type homogeneity).
The second set of hypotheses refer to the interaction effect of electoral coordination
and social capital. My argument states that the effect of electoral coordination —
over LPG — is distinct conditional on the level of social capital. More explicitly, I
hypothesize that when slum voters coordinate their vote choice — when the major-
ity of the slum chooses the same political candidate — they raise the likelihood
of enjoying better-quality LPG if and only if the community benefits from social
capital. Alternatively, slums showing electoral homogeneity under the absence of
social capital, tend to receive more private goods than LPG — within clientelistic
practices. In the negative case (bad-type partisan homogeneity), communities appear
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120 G. Rojo
to be coordinating at the ballot box, but not for the good reasons. Precisely because
of the absence of social capital, slum dwellers are locked-in voters who tend to vote
for the same political party as they are being persuaded with inexpensive handouts.
It is worth mentioning that this argument differentiates between electoral coordina-
tion and partisan homogeneity. The former requires bottom-up community-driven
political organization and agreement. Instead, homogeneity may appear as electoral
coordination but could in fact represent the byproduct of very effective clientelism.
Every case of electoral coordination results in partisan homogeneity (good-type),
but not every case of partisan homogeneity implies electoral coordination.
The connecting link between LPG improvements and the good-type partisan
homogeneity is leadership responsiveness. Frequent interactions and strong ties
between slum dwellers improve leadership accountability. Well-connected commu-
nities yield empowered citizens — instead of locked-in voters — who, if necessary,
can pose a credible threat to disappointing leaders and politicians. Simultaneously,
once a broker is able to demonstrate that she is capable of delivering “vote banks”, she
increases her chances of demanding more investment from higher-ranking politi-
cians. Not only is the community empowered through social capital, but through
this process, leaders’ maneuvering skills are bolstered too.
When posing demands to their local leader, the level of social connectedness
in the residents’ social network impacts positively the power residing in these
voters. That is, higher connectedness favors the likelihood of the group to organize
themselves politically, coordinate electoral choices and hence, extract more resources
during electoral campaigns. Along these lines, when a local leader or broker is not
being responsive to the community, it is feasible for them to communicate — without
the need for a leader — and to try to replace him.12 Networks with high degree of
connectedness embody the most effective and successful undertakings in demanding
for benefits bottom-up.
Empirical Analysis
The data in this section come from original household surveys in 30 slums in the
Indian city of Udaipur, located in the northern state of Rajasthan. Like all Indian
cities, Udaipur’s main local government is a Municipal Corporation, formed by
55 wards leaders. As stated in the 2011 Indian Census, population in Udaipur is
451,100 (233,959 males and 217,141 females), and 100% urban. In 2009, the Udaipur
12
Presumably, there is some level of stickiness in leadership, and it might take several elec-
toral periods, for a majority in the neighborhood to shift to a more dedicated leader. This is
similar to what Magaloni (2006) recognized for the case of the Mexican electorate.
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Municipal Corporation (UMC) conducted a survey finding that 14% of slum popula-
tion in Udaipur falls under the category of Below Poverty Line (BPL) population, in
an upward trend since 1998. Furthermore, the UMC survey in 2009 reported that
47,636 people (9,529 households) lived in slums, which represented about 11% of
the City’s total population at the time (Interim City Development Plan, 2014).
During 2013, we interviewed over 1200 slum dwellers in Udaipur through
two different waves of surveys. The first one — during June and July — covered all
households13 in four slums (N = 750).14 Existing preliminary data on slum popula-
tion in Udaipur, as well as previous qualitative fieldwork (March 2013), informed
the selection of neighborhoods, assuring diversity across key variables. The selected
slums provide the necessary variance in terms of population size, demographics,
socioeconomic characteristics, and differences on the existence of clientelistic
practices and the provision of local public goods.15
For the second wave — during November state elections — the strategy was
modified, to represent the population in more than those four slums, covering
501 households. By a traditional stratified sampling,16 the survey covered a total of
30 slums across the city.17 This time, the key questions asked about names of most
important leaders, as well as typical exchanges (of private and collective benefits)
occurring during electoral campaigns.
In both rounds, we asked about political and electoral monitoring (by the broker
and among peers), vote coordination and the traditional components of social
13
The strategy required covering all residents of the neighborhoods because the goal was to
estimate network analysis measures (connectedness and centrality). Thus, to avoid any pos-
sible bias in the present of sampling (Kossinets, 2006), interviewing all households in the
four slums was the mandatory research design.
14
The four slums in the first wave are Bedwas Kachchi Basti, Bheelu Rana, Shivaji Nagar
Kachchi Basti Sukhadia Nagar.
15
See the Interim City Development Plan (June 2014) for details on population size and
ward distribution of Udaipur slums.
16
Samples sizes at slum level were proportional to their share of the overall slum population
of the city.
17
In the second wave, the slums surveyed are: Amba Mata (Ambavgarh), Avri Mata,
Banjara Basti, Bedwas Kachchi Basti, Bhagri Basti, Bheelu Rana, Bhopa Magri, Gandhi
Nagar Harijan Basti, Gowardhanvilas Indira Colony, Hanuman (C) Roop Sagar, Indira
Nagar Beeda, Kaumi Ekta Nagar, Kishanpol (N), Kishanpol (S), Lohiya Nagar Harijan
Basti, Machhla Magra, Manoharpura, Math Madri, Neemach Khera, Neemach Mata, Od
Basti, Parerion Ki Madri (Kc), Ram Singh Ji Ki Badi, Ratakhet, Sajjan Nagar Harijan Basti,
Shaheed Bhagat Singh, Shanti Nagar, Shivaji Nagar Kachchi Basti, Sukhadia Nagar, and
Vijay Singh Pathik Nagar.
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122 G. Rojo
capital (trust within the community, solidarity between neighbors, etc.). As well, the
survey includes assessment of satisfaction with public services quality in order to
measure improvements in LPG. Since not all questions were asked in both rounds,
the number of observations oscillates across models. As in any voting model and
studies on clientelism, the unit of analysis is the individual. However, the incorpora-
tion of collective considerations shifts the lens to the slum level. This change is not
in itself problematic, but aggregation can be detrimental of the statistical power by
dropping the number of cases significantly.
In order to increase statistical power, the analysis is conducted in a pooled
cross-sectional dataset. For these cases, running a multi-level model is the most
efficient technique to assess both within and across neighborhood variance. The
advantage of this model over traditional ones is that it allows me to account for
clusters in the data without loosing efficiency. According to Gelman and Hill
(2007), multi-level works better with five or more groups. However, even in cases
with less than five, these authors believe that multi-level models can be better
than a simple regression because it is no longer necessary to arbitrarily decide
a base group. Moreover, in terms of the sample size per group, Gelman and Hill
(2007) do not establish a necessary minimum N. While recognizing there might
be challenges to estimate a precise variance within group, the authors believe there
might still be interesting information available by running multi-level models for
these cases.
Description of Relevant Variables from Survey Questions
•• Electoral coordination: Do most members of your neighborhood vote for the

same party?
•• Leader’s engagement as an electoral coordinator: Has your neighborhood
leader suggested that you vote for a specific candidate in the coming elections?
•• Social Capital Index: Factor analysis18 with two variables:
Community trust: Now, speaking of the people from around here, would
1.
you say that people in this community are very trustworthy, somewhat
trustworthy, not very trustworthy or untrustworthy…?
Solidarity within neighbors: How often do people in your neighborhood help
2.
each other with problems (e.g. taking care of a sick family member, finding a
job, lending money, and assistance in general)? Never, Rarely, Sometimes or
Regularly?
18
For diagnostics on factor analysis, please see Tables A.1 and A.2.
b3508_V3_Ch05.indd 122 11-02-2020 13:42:50

•• Ask help neighbor: Suppose, you have an emergency. Beyond your family, who
would you go to for help. This variable was created as a dummy for respondents
who answered “neighbor” among other fixed choices.
•• Frequency in discussing politics with main acquaintance: From time to time,
most people discuss important matters with other people. Looking back over
the last 6 months, about how often do you talk to [NAME19] about politics or
public services: almost daily, at least weekly, at least monthly, at least yearly, less
than yearly, or never?
•• Satisfaction with public services: How satisfied are you with the quality of the
following services: Primary Education, Secondary Education, Health Services,
Roads, Access to Water, Waste disposal (or sewage), Electricity and Public
Bathroom.
•• First, I created a variable that averaged the satisfaction for all these services
(Average Satisfaction). Here, the scale is 1–4, where the highest value represents
the greatest satisfaction. The mean for this variable is 2.3 and the standard devia-
tion is 0.7. Second, I created a variable adding up levels of satisfaction for the three
most important public services: roads, access to water and waste disposal (sew-
age). The reason I chose these services is because when respondents in the survey
were asked about priorities over government services, these were remarkably most
important than any other.20 In this case, this variable (Key Services Satisfaction)
ranges from 1 to 10, with a mean of 3.7 and a standard deviation of 2.3.
•• Partisan homogeneity at the slum level: This refers to the share of the respond-
ents in the same slum who mentioned affinity with the same political party as the
majority of the slum residents. The question used here is: Which political party
do you consider is doing good?
Results
Leadership suggestions or subtle direction are one of the most powerful tools
towards to coordinate political behavior (Rojo and Wibbels, n.d.). All models
19
In the first wave of the survey, we were able to ask each respondent the names of five
acquaintances. Then for the question about frequency in discussing politics with main
acquaintances, we mention the first and last names in their list of friends.
20
Respondents were asked to rank the three most important services. By adding up all first
and second priorities, we get a total of 2,490 mentions. From those, 617 correspond to Water
Sanitation, 603 to Sewage and 407 to Roads. The rest of the priorities were Health with
344 mentions; Public Bathroom with 251; Primary Education 122; Secondary Education
115 and Electricity with only 31 mentions.
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124 G. Rojo
in Table A.3 provide evidence that there are two main forces working towards
electoral coordination: (i) social capital; (ii) leader’s efforts as a coordinator.21 Now,
Figures 2 and 3 present evidence on how social conditions within the community
aid electoral coordination. In this case, the models include two variables that were
part of the first round of survey (but not in the second one). Because there are only
four slums in that dataset, the model includes fixed effects for the neighborhoods.
Effects of leaders’ engagement and Social Capital are statistically significant and
positive over the dependent variable (electoral coordination). The two new vari-
ables of interest in these models are “Help from Neighbor” and “Rarely/Frequently
discuss politics with acquaintances”. The latter describes how often respondents
discuss politics with someone beyond family members (dummy version) and the
former indicates whether neighbors are the first ones to be contacted in case of
an emergency. Although theoretically related, there is no statistical association
between the Social Capital Index and these two variables (Pearson’s correlation is
less than 0.05).
Figure 2: Margins for electoral coordination by social capital and by help from a neighbor.
In the fixed effect models, Sukhadia shows lower probability than Shivaji. In fact, these
21
two basti originally presented as opposed are consistent examples of how electoral coordi-
nation is one path towards the improvement in living conditions.
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Figure 3: Margins for electoral coordination by social capital and by frequency in discussing
politics with acquaintances.
The aforementioned figures show the predicted probabilities of voting together

by the Social Capital Index, but split into different groups. For instance, Figure 2
shows that the predicted probability of electoral coordination is about 0.2 for a
person with the minimum level of social capital and who did not ask help from a
neighbor. Whereas a person with the maximum score of social capital and who did
ask for help from a neighbor has a 0.65 predicted probability of answering that the
neighborhood votes together. Likewise, the most frequently respondents discuss
political issues or public services with their neighbors, the higher the likelihood of
coordinating their votes throughout the community. Namely, the predicted prob-
ability of electoral coordination is about 0.2 for a person with the minimum level
of social capital and who rarely discusses politics with acquaintances. In contrast,
someone with the maximum score of social capital and who frequently discusses
political matters beyond family members has a 0.75 predicted probability of answer-
ing that the neighborhood votes together. All in all, as the hypotheses estimate, the
three independent variables suggesting a tighter community — jointly with leader-
ship engagement — have a positive and statistically significant effect on Electoral
Coordination.
The last part of the empirical analysis shows the interaction effect of social capital
and electoral coordination on services satisfaction. Table A.4 presents the results of
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126 G. Rojo
Figure 4: Margins for key services satisfaction.
Multilevel Models for two different dependent variables: satisfaction with key ser-
vices (roads, water and sewage) and average satisfaction with all services. The main
findings are robust throughout the different model specifications, as Figures 4 and
5 illustrate. First, Partisan Homogeneity has a distinct effect on services, dependent
on social capital. For those neighborhoods with low social capital levels, partisan
homogeneity impacts negatively on services satisfaction. However, for those with
high social capital, partisan homogeneity has a positive effect on services satisfac-
tion. When social capital is low, what appears to be electoral coordination is actually
an scenario of locked-in voters who receive private — instead of public — goods
(bad-type partisan homogeneity).
Alternatively, in the presence of social capital, partisan homogeneity is showing
a successful case of electoral coordination, where neighbors are able to achieve bet-
ter public services by voting together and being rewarded by politicians. In other
words, in the absence of social capital, partisan competition is more rewarding
than homogeneity for poor informal settlements. Also as expected, both leadership
accountability and socioeconomic status have a positive statistically significant effect
on satisfaction over public services. In previous work (Rojo and Wibbels, n.d.), we
have provided empirical evidence that those communities coordinating their votes
are statistically associated with leadership accountability and responsiveness.
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Figure 5: Margins for average services satisfaction.
Concluding Remarks
This chapter addresses the provision of local public goods for the urban poor by
focusing on the decision-making process at the neighborhood level. The argument
describes the need to shift the clientelistic paradigm from the individual to the
community level, as well as turning the attention to the dichotomy between private
transfers and the provision of local public goods. With empirical evidence from 30
slums in the Indian city of Udaipur, I explore how community organization raises the
likelihood of electoral coordination, and consequently, their efficacy in demanding
investment from the government.
While political scientists have thoroughly studied clientelism, they have
mainly overlooked group effects. From an economic perspective, slum politics are
mostly absent in the study of LPG. Finally, albeit extensive, the literature on social
capital and network analysis remains dissociated from the political clientelism
phenomenon. Shortcomings in the existing research on slum politics and electoral
accountability motivate me to assess voting patterns in a collective form. This
chapter’s contribution is to integrate different approaches into a single theory by
exploring the positive impact of social capital on the capacity of the urban poor to
improve their access to better infrastructure and public services.
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128 G. Rojo
In sum, the level of connectedness in the neighborhood’s social network impacts

positively on the power residing in these voters when posing demands to their
local politician. Social capital — this chapter argues — enhances the most effective
undertakings in demanding local public goods (bottom-up). A dense network
poses a credible threat to a negligent broker, as it is feasible for a well-connected
community to communicate and coordinate to replace her. Alternatively, the
community may attract public investment if they manage to coordinate their vote
choice and support the same candidate. On the one hand, local politicians reward
electorally-homogenous localities, increasing the power of negotiation that the slum
leader has in the political bargaining process. On the other hand, by coordinating
their efforts, neighborhood residents are able to hold their leaders accountable. Both
sides of the argument translate into better infrastructure and services provided by
the government due to social capital.
Social capital represents ties binding neighbors and enabling cooperation
(Cohen and Prusak, 2001). Interconnections in the social fabric influence more than
just informational flows, but constantly shape political choices. The analysis of slum
dwellers voting behavior as a collective unit is particularly relevant because the urban
poor tend to be clustered together in neighborhoods and to them, non-excludable
goods (i.e. LPG) are central for the quality of life. When communities are socially
organized, their recurrent interactions increase the likelihood that they will vote for
the same political candidate. Ultimately, social capital brings the necessary tools for
the urban poor to demand for better living conditions.
Having argued elsewhere (Rojo, 2017), that politicians’ good behavior is induced
by the potential risk of bloc-voting, this chapter describes under which conditions —
i.e. social capital — communities are sufficiently empowered, so that they can punish
(reward) governments’ poor (superior) performance. Again, the other side of the story
here is clientelism. Those slums with stronger links among community members are
able to escape the vicious cycle by effectively demanding LPG to local politicians. One of
the forms they can induce responsiveness is through electoral sanctioning. Alternatively,
in the absence of social capital, slum dwellers show lower levels of satisfaction with
public services, even if their electoral choices appear to be coordinated. This scenario of
poor accountability is typically associated to political clientelism (distribution of private
goods). Despite seeing decay in their quality of lives, on election day, locked-in voters
reward incumbents in response to the distribution of private goods. Communities that
are socially organized, on the other hand, have the means to coordinate their votes
regarding LPG. This has implications for the study of party switching.22
As empirically shown here, electoral accountability is a real alternative for the
urban poor. Oftentimes, governments overlook certain neighborhoods’ basic needs,
22
On this regard, please see Rojo (2017) for the empirical evidence on Argentinean slums.
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and their residents fail to effectively call the attention from politicians, not even
during political campaigns. Trapped under the logic of clientelism, slum dwellers
are often locked-in voters. Now, the successful cases — those empowered with
social capital — are actually able to sanction public officials’ performance. These
communities enjoy the advantage of making their needs visible. There, the lack
of public investment is duly noted. Even in a context of absolute informality, land
irregularities and complete deprivation of basic necessities, governments can be
forced to deliver more than private goods. Politicians will know then that if they do
not show any effort to improve slum dwellers’ quality of life, they will lose elections.
Yes, not every poor informal settlement is able to punish unresponsive governments,
but some are. Patronage or other forms of clientelism tend to obstruct accountability.
However, the good news is that, with the existence of social capital, we can expect
governments to know their performance will be evaluated, and electoral sanctioning
is not just a threat.
Policy Implications
The foremost contribution in this chapter is the importance of building strong

communities, especially for low-income individuals. As recognized by existing
research (e.g. Krishna, 2001), social capital is a fundamental tool to improve poor
populations’ living standards. Now, the findings in this chapter contribute to expand
the expertise in the topic. We learn that politicians should, in fact, fear social capital
if they are planning to ignore slum dwellers’ demands. Interestingly, if consolidating
community ties implies a good strategy for voters, it does not necessarily mean the
best path for public officials.
As recognized by the Principal–Agent theory, voters are principals without full
information on policy implementation. Particularly for the case of the urban poor,
informational asymmetries are broadened. This situation highlights the need of
poor voters to do everything in their power to provide their agents with a package of
incentives, so that they will increase responsiveness. As the majority of the electorate,
urban and low-income voters have to hold representatives accountable based on
actions and plans that they cannot themselves observe. Yet this is not always true,
especially, for the case of LPG (highly observable in comparison to abstract poli-
cies). Moreover, for communities empowered with social capital, Principal–Agent
problems can be battled. This is how social capital represents the partial resolution
to Principal–Agent issues. According to my theory and findings, poor voters should
forget about changing politicians’ incentives, and just concentrate their efforts in
building social capital. As a byproduct of their internal organization, trustworthiness
and solidarity, slum dwellers will provide the right incentives to public officials: the
fear of electoral sanction through bloc-voting.
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130 G. Rojo
Ironically, governments might not have any incentive to foster community-led

initiatives. If they are reading between lines correctly, the statistical models in this
chapter indicate that by promoting social capital within the urban poor, their elec-
toral strategies will become costlier. This paradox represents an obstacle to account-
ability considering that many forms of communities’ social organizations originate
from government-funded programs. However, there is always the power of civil
society and non-profit institutions to promote community-driven endeavors, such
as cooperatives. Above all, the power to modify their circumstances resides precisely
in their own hands. During fieldwork, I repeatedly witness social organizations in
the form of neighborhood association meetings or religious encounters, either in the
streets or inside the house of some community member. Being a common feature
within the slum’s landscape, these particular institutions — born within the com-
munity — have an immense power of strengthening the social fabric.
That being the case then, can social capital only emerge by inspiration and
dedication of the community itself ? This chapter proposes that other non-
governmental actors such as NGO or Development Agencies should take these
findings as initial grounds to increase grassroots activities. Considering that
International Organizations, such as the World Bank, often provide funding to slum-
upgrading programs, one may suggest that they pose conditions to their government
counterparts. For example, development initiatives may require that one-third of
the financial resources should be allotted to activities aiming to build stronger com-
munity ties. This way, they are not only helping governments build infrastructure in
poor informal settlements, but they are also forcing them to build the fundamental
bricks for accountability. Third-party entities fostering social capital is a simple
form of compelling agents to empower principals precisely so that the former will
ultimately have to respond to the latter’s demands.
Future Research
Subsequent studies should address the following points. First, as a robustness

check, precinct-level electoral results should complement the existing dataset.
Reported levels of satisfaction with LPG, as well as individual preferences on politi-
cal parties, are fairly precise in the exercise to measure electoral accountability.
However, it could be useful to corroborate these results with a different dataset.
Geographically mapping electoral results at the slum level will be the starting point,
supplementing then political behavior patterns with observational data on quality
of services and infrastructure across slums. In this case, the unit of analysis would
not be individual anymore, thus the importance of increasing the sample size to
more than 30 slums.
b3508_V3_Ch05.indd 130 11-02-2020 13:42:52

Second, there is an implicit assumption in this work that clientelism is the

counterpart of LPG provision. Specifically, under the absence of social capital, the
bad-type partisan homogeneity is linked to the distribution of private goods in detri-
ment to improvements in LPG. Future work should test this assumption directly by
incorporating clientelism variables in the models. Alternatively, public records on
the distribution of government jobs could be accurate patronage indicators.
Third, the scope of this study could be broadened significantly by extending
its reach in time and geography. So far, this project considers 30 slums in Udaipur,
only for the year 2013. By including, for example, a follow-up of the survey, findings
would become more robust, as we would be exploring improvements/setbacks across
a significant time lapse. In the same line, by expanding the jurisdictions to other
cities in Rajasthan, such as Jaipur, I could claim to offer a more generalizable theory.
Fourth, in this chapter, social capital mostly describes characteristics of con-
nectivity and trustworthiness within the social network’s nodes. Therefore, incorpo-
rating new data to conduct network analysis would represent a clear improvement
in the research design. Considering the complexity of collecting network data on
slums, this project could not address this issue in the short term. But while hoping to
include it in the long term, network analysis will allow me to consider more precise
measures of social capital such as network’s density or level of connectedness.
Fifth and last, Putnam (2000) describes different types of social capital, and
these probably entitle dissimilar effects on slum-upgrading programs. I anticipate
that both types of social capital — bonding and bridging — are relevant for this
research agenda. For high-homogeneity neighborhoods (e.g. in terms of ethnic or
religious cleavages), bonding ties should be sufficient to foster electoral coordination.
However, when communities are characterized by different minorities (e.g. Muslim
clusters), bridging social capital becomes necessary to enable cooperation across
separate communities within the same neighborhood.
Appendix
Factor Analysis for Social Capital Index
Table A.1: Diagnostics.
Factor Eigenvalue Difference Proportion

Factor 1 1.659 1.318 0.829
Factor 2 0.340 0.171
Note: LR test: Independent vs. saturated: χ2 (1) = 708.76, Prob > χ2 = 0.0000.
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132 G. Rojo
Following the Kaiser criterion that suggests retaining those factors with eigenvalue equal
or higher than one, I use Solidarity and Community Trust as loading in a single factor.
Table A.2: Correlation matrix.
Social Capital Index Community Trust Solidarity

Social Capital Index 1.0000
Community trust 0.9108 1.0000
Solidarity 0.9108 0.6591 1.0000
Table A.3: Fixed effect models.
Electoral Coordination
(1) (2)
Leader Suggests 0.696* 0.603*
(4.13) (2.87)
Social Capital Index 0.286* 0.377*
(3.21) (3.31)
BJP supporter 0.299** 0.0838
(1.71) (0.40)
Gender -0.0623 -0.120
(-0.36) (-0.57)
Muslim -0.753* -0.812**
(-1.98) (-1.70)
Socioeconomic Index 0.0841 -0.0204
(0.74) (-0.15)
Age 0.00237 0.00511
(0.36) (0.62)
Education 0.0130 0.0254
(0.63) (1.01)
Ask Help Neighbor 0.720* —
(3.92) —
Frequency discuss politics with acquaintance — 0.907*
(dummy) — (4.50)
Bedwas Kachchi Basti (omitted) — —
Bheelu Rana -0.157 -0.253
(-0.60) (-0.78)
Shivaji Nagar Kachchi Basti 0.545* 0.586**
(2.00) (1.70)
Sukhadia Nagar -0.832* -0.687**
(-2.53) (-1.72)
Constant -2.617* -2.772*
(-4.13) (-3.58)
Observations 695 487
Note: t statistics in parentheses. **p < 0.10, *p < 0.05.
b3508_V3_Ch05.indd 132 11-02-2020 13:42:52

Table A.4: Multilevel models.
(1) (2)
Key Services Satisfaction Average Satisfaction

Partisan -0.118* -0.0500*
homogeneity (SLUM) (-3.62) (-4.17)
Social capital = 1 -6.208* -2.258*
(slum dummy) (-3.24) (-3.33)
Social capital (slum dummy) × 0.134* 0.0538*
partisan homogeneity (SLUM) (4.07) (4.50)
Leadership 0.275* 0.187*
accountability (3.16) (4.81)
BJP supporter 0.0136 0.103
(0.06) (1.40)
Gender -0.156 0.0215
(-0.95) (0.51)
Muslim 0.346 -0.0118
(0.82) (-0.16)
Socioeconomic Index 0.447* 0.0677*
(3.94) (2.28)
Age 0.00186 0.000573
(0.27) (0.30)
Education 0.00771 0.00218
(0.36) (0.36)
Constant 7.433* 3.539*
(3.55) (4.89)
Observations 1064 1010
Note: t-statistics in parentheses. + p < 0.10, *p < 0.05.
Random-effect parameters.
Group-level 0.772 0.032
Variance (0.245) (0.019)
Individual-level 3.309 0.213
Variance (0.266) (0.014)
Note: Std. Err. in parentheses
b3508_V3_Ch05.indd 133 11-02-2020 13:42:52

134 G. Rojo
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CHAPTER 6
Informal Electricity Consumption and

Political Regimes: Implications for Political
Change in BRIC Countries*

Introduction
A large body of research demonstrates that democracy increases the provision of
public goods and services (Ansell, 2008; Brown and Hunter, 1999; Segura-Ubiergo
and Kaufman, 2001; Avelino et al., 2005; Stasavage, 2005; Rudra and Haggard, 2005;
Huber et al., 2008). Democracy is also thought to improve outcomes of human
development such as health, education, labor wages, and economic growth (Lake
and Baum, 2001; Przeworski et al., 2000; Olson, 1993; Rodrik, 1999). The logic is
that democracy has distributional effects because politicians who face electoral
competition need to build larger coalitions of political support (Bueno De Mesquita
et al., 2005; Lake and Baum, 2001; Przeworski et al., 2000). Democratic leaders
also have more incentives to generate macroeconomic stability (Doucouliagos and
Ulubasoglu, 2008) and provide insurance in volatile economies from the develop-
ing world. However, they often remain unable to protect the lower class against
*This chapter extends the arguments presented by López-Cariboni (2018a) to the BRIC
countries.
139
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negative income shocks. Policy tools to stimulate the demand side of the economy
during the downside of the business cycle are non-existent (Lustig, 2000; Talvi and
Vegh, 2005; Alesina et al., 2008), while governments have only scarce access to
international credit markets to face income volatility (Wibbels, 2006). Given the
absence of “decommodification” (Esping-Andersen, 1990; Huber and Stephens,
2001), automatic stabilizers, and counter-cyclical social spending (Darby and Melitz,
2008), governments cannot provide consumption-smoothing mechanisms for
lower income groups even when politicians have incentives to do so.
One possibility is to expect that democratic governments abandon the poor
during economic crises (Segura-Ubiergo and Kaufman, 2001; Rudra, 2002; Wibbels,
2006). This is supported by evidence suggesting that democracies often neglect the
economic interests of the poor and those in the informal sector (Ross, 2006). This
fact, however, introduces the important puzzle of how democratic leaders build
electoral support during bad economic times to secure political survival.
Leaders who depend on electoral competition to win office must be sensible
to the support or the acquiescence of the groups negatively affected by economic
crises. I argue here that electoral politics increase the informal provision of
insurance for the lower class. I build on recent research showing deliberate
non-enforcement of the law, in the face of irregular access to basic services, may
be a cost-efficient and politically viable strategy to increase levels of decom-
modification of dislocated and poor voters during negative income shocks
(López-Cariboni, 2018b). While there is empirical evidence of the existence of
“forbearance” — government’s deliberate n on-enforcement of law — in policy
areas such as squatting and street vending (Holland, 2016, 2015), less is known
about its dynamics as a policy of social insurance. In this respect, the analysis
of electricity theft has remained largely overlooked. This is surprising given that
irregular electricity access is likely to be the largest program of informal social
transfers around the world.
The BRICs are at the heart of such assertion. It is estimated that emerging
markets lose $58.7 billion per year and the rest of the markets, including the
largest economies, lose $30.6 billion per year because of electricity theft. The total
cost of electricity theft for the top three countries is about $31.8 billion per year:
$16.2 billion in India, $10.5 billion in Brazil and $5.1 billion in Russia, respectively
(Northeast Group, 2015). This ranking among the BRICs has remained unchanged
since 1990, at least. Figure 1 shows transmission and distribution losses (TDL) of
electricity as a percentage of total domestic electricity consumption, comparing
the evolution of the BRIC countries with the rest of the developing world. The data
confirm that India, Brazil, and Russia lose an important amount of resources in
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Informal Electricity Consumption and Political Regimes 141
Figure 1. Electricity losses in BRIC countries.

Note: The dark-grey solid line and shaded area represent the mean trend in developing countries with
a 95% confidence interval.
Source: World Development Indicators (the World Bank).
TDL. The data not only include stolen energy but also technical, unavoidable losses
due to the energy transmission and the infrastructure quality of the electricity grid.
While technical losses are a stable or a rarely changing component of total electricity
losses, non-technical losses are more variable over time and largely depend on the
amount of electricity theft. As shown in Figure 1, in Brazil and Russia, the problem
has remained almost unchanged during the period, if not worsening. In India, the
amount of TDL increased dramatically until early 2000s and started to decrease since
then but has been never lower than 18%. China, in turn, has a relatively low level of
losses, most of them are technical, and they have been steadily decreasing over time.
Electricity theft, and therefore the variable component of the description shown in
Figure 1, is not only a matter of state capacity but also a political decision of low
enforcement of the property laws. I dedicate this chapter to analyze how electoral
politics affect the evolution of electricity losses.
As argued elsewhere (López-Cariboni, 2018b), forbearance is likely to be a cycli-
cal phenomenon. State flexibility enables governments in dire financial conditions
to target a large amount of benefits to the poor when they most need it. While the
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demand for irregular access to basic services is counter-cyclical, the supply side of
politics can expand the amount of informal transfers to provide insurance (López-
Cariboni, 2017). This political non-enforcement may be higher in d emocracies than
in autocracies, which is consistent with theories linking political regimes and social
protection.
While theories of public goods provision predict differences across political
regimes, there is little knowledge on how exactly electoral competition affects the
provision of insurance in conditions under which fiscal policy is not an option.1
More specific research on the supply of basic services shows that in poor countries,
democratization shifts the provision of electricity from the industry to households
(Brown and Mobarak, 2009), and others document partisan and electoral-cycle effects
on provision and electricity losses (Baskaran et al., 2015; Min and Golden, 2014). I
add here that democracy increases the amount of counter-cyclical irregular electricity
consumption as an insurance mechanism. The chapter also contributes to existing
studies on electricity losses (Smith, 2004; Dal Bó and Rossi, 2007; Wren-Lewis, 2015),
and provides a new political argument to the current understanding of the problem.
Finally, the argument is more closely related to the view of Forteza and Noboa (2016),
and linked to the idea that political non-enforcement results from insurance motiva-
tions rather than only a logic of income redistribution as in Holland (2015).
Economic Cycles and the Demand for Irregular

Electricity Access
In developing countries, social security benefits are often ineffective to protect
those in the informal sector. Social insurance has been traditionally targeted to a
relatively narrow, urban, political clientele in the formal sector instead of a wider
coalition of workers (McGuire, 1999; Huber et al., 2006; Wibbels and Ahlquist,
2011). Consequently, welfare spending often has regressive effects (De Ferranti et al.,
2004; Huber et al., 2006; Goñi et al., 2011), and its fiscal cost is partially socialized
through general consumption taxes. In addition, progressive social spending, such
as education, is the most pro-cyclical component of social policies (Wibbels, 2006).
When welfare protection is pro-cyclical, informal transfers emerge as a policy tool
to provide consumption-smoothing mechanisms (López-Cariboni, 2018b).
Electricity theft is an important factor driving inefficient energy consumption
in the developing world. This phenomenon may manifest by fraud, stealing power
from the grid, billing irregularities, and unpaid bills (Smith, 2004; Depuru et al.,
2011; Winther, 2012). Smith (2004) documents that for a large sample of developing
1
See, however, Brooks (2007) on the privatization of social security regimes.
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countries, non-technical losses (NTL) vary between 10% and 40% of the total
generation capacity. Electricity theft also creates several inefficiencies in energy
distribution and consumption (Jamil, 2013). Households that have informal access to
the grid, or that only pay for a fraction of their actual consumption, tend to consume
much more energy than regularized clients. Moreover, theft is costly and contributes
to power disruptions, which in turn aggregates into costs for the overall economy
and its various sectors (Lewis, 2015). Utility companies and regulation agencies
often choose to increase electricity tariff rates in order to secure the sustainability of
the supplying power, ending in higher electricity prices for legal customers (Jamil,
2013; Winther, 2012).
The most important reason for irregular access to basic services is a ffordability.
Those who cannot bear the cost of electricity are likely to secure their access through
irregular ways, namely, illegal consumption or theft (Depuru et al., 2011; Smith, 2004;
Winkler et al., 2011). Other factors such as house ownership status and precarious
house constructions also play an important role in the propensity toward electricity
theft (Mimmi, 2014). Despite the general agreement on the necessity of enforcement,
inspections and sanctions alone are not entirely effective to reduce losses. Moreover,
enforcement itself is a very politically contentious issue (Golden and Min, 2012;
Holland, 2015, 2016), since irregular electricity consumption is a manifestation of
a complex phenomenon of social exclusion. Importantly, electricity represents a
considerable share of household income for members of the lower class.
Given the risks of irregular electricity consumption, illegal behavior becomes
increasingly more attractive as household income is lower. Yet, electricity theft is not
just a social exclusion problem. Non-poor households can also consider irregular
access as an available insurance mechanism in the face of an adverse economic
shock. Moreover, an important share of electricity theft is present in urban areas
where households have sufficient purchasing power (López-Cariboni, 2018b). Hence,
political permissiveness of irregular access to energy can be an insurance policy
targeted to a large segment of the population.
Since household incomes in developing countries depend on profound busi-
ness cycles and social policies cannot smooth consumption (Lustig, 2000; Talvi
and Vegh, 2005; Alesina et al., 2008), incentives for electricity theft are likely to be
counter-cyclical. Propensity to consume free but irregular energy increases with
negative income shocks. On aggregate, the amount of electricity losses is expected
to increase during economic downturns and decrease during periods of recovery.
To illustrate the relationship between energy losses and economic cycles, I build
on the logic proposed by Holland (2015) and López-Cariboni (2018b). In the
absence of any political decision about enforcement, electricity losses are expected
to be moderately counter-cyclical. This can be seen from changes in the demand
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Figure 2: Effects of negative income shock and political enforcement on electricity theft.
Source: Taken from López-Cariboni (2018b).
for free energy (theft) under a given institutional enforcement policy. As shown in
Figure 2, the compliance curve has a negative slope as long as violations (quantity)
decrease with the number of sanctions (price). The supply curve of institutional
enforcement has the standard positive slope: the state increases the number of sanc-
tions as the number of violations also rises. The first and immediate consequence of
economic fluctuations is shifting the demand for illegal energy. This demand-side
effect generates counter-cyclical movements of electricity theft as defined by changes
shock
in the level of violations between Ei.e and Ei.e Hence, the empirical implication
is that macroeconomic fluctuations should be correlated with at least some change
in the amount electricity theft, even when the government makes no change in the
enforcement policy. In the next section, I look at the implications of political change,
i.e. democratization, for this simple model of enforcement.
Political Regimes and Informal Insurance

During bad economic times, democratic incumbents may implement a lower
enforcement level than under authoritarian rule. Hence, a regime change from
autocracy to democracy should be correlated with a reduction in the slope of the
enforcement curve leading to larger counter-cyclical informal transfers. Such a
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political enforcement in developing country democracies meets known voters’

demand for state flexibility (Holland, 2016; López-Cariboni, 2017).
Recent research in democratic contexts suggests that poor individuals have
interest in “forbearance” toward property laws they are more likely to violate.
Politicians, in turn, can transfer informal welfare benefits through state inaction,
which can be an effecting form of sending credible electoral cues of their affinity
with poor voters. Thus, politicians may strategically avoid enforcement of regula-
tions when they possess the capacity to do so (Holland, 2016). Moreover, citizens
also reward politicians who signal more state flexibility in the face of increased
electricity theft during bad economic times (López-Cariboni, 2017). This is further
supported by research showing that electricity service is politically manipulated
due to democratic political competition (Brian Min, 2015), especially when there is
limited capacity to affect fiscal and monetary policy (Min and Golden, 2014).
Given politicians’ awareness of counter-cyclical consumers demand for irregular
access to electricity, they can expand the insurance mechanism by affecting the level
of enforcement in the negative side of the business cycle. This is likely to be the case
when politicians have incentives to build political support among unprivileged
groups in society. Therefore, I expect that a political regime change from autocracy to
democracy should be correlated with more counter-cyclical fluctuations in electric-
ity losses. This is again represented in Figure 2. An autocratic government always
implements a given institutional enforcement with an associated level of cyclical
shock
fluctuations in electricity losses (from Ei.e to Ei.e ). In democracies, however, elec-
toral competition creates pressures for shifting toward a political enforcement effort
during bad economic times. This change in enforcement allows for the provision
of counter-cyclical informal transfers. Because economic crises have the effect of
increasing the number of individuals willing to bear the costs of informal access to
electricity (demand-side effect of the business cycles), deliberate non-enforcement
is a tool for allocating even more resources when these are most needed. This is
illustrated with the supply curve of political enforcement that has a smaller slope.
The resulting cyclical variation in electricity theft due to a negative income shock
shock
is represented by the change from Ei.e and Ei.e . Therefore, as democracies are
expected to respond to a larger selectorate (Bueno De Mesquita et al., 2005), informal
transfers can be used as insurance policy.
Descriptive Evidence from Developing Countries

and the BRICs
Existing econometric analyses of the data show losses are counter-cyclical in
the developing world (López-Cariboni, 2017; Balza et al., 2013). Here, I look at
the cyclicality of transmission and distribution losses in different political regimes.
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Electricity losses are measured as the power lost over the total power output.
Macroeconomic cycles are best described by the output-gap, which is the difference
between real GDP per capita and the underlying growth trend measured as a per-
centage of that trend. A Hodrick–Prescott (HP) filter is used to estimate the growth
trend. The HP filter implements long-run moving average to detrend the output
series. Electricity losses and economic growth data come from the World Bank,
World Development Indicators. Non-democracies are political regimes with “polity”
scores lower or equal to six. This is a standard cutoff point used in the literature (see,
for instance, Rudra and Haggard, 2005; Morrison, 2009; Kadera et al., 2003; Reiter,
2001; Rousseau et al., 1996). The data are from Marshall et al. (2010). The sample
results from making use of all the available data on electricity losses, democracy, and
real GDP per capita for developing countries between 1970 and 2015.2
In Figure 3, I show the correlation between business cycles and electricity
losses. The shaded areas are 95% confidence intervals of a linear regression line
2
Developing countries are Afghanistan, Angola, Albania, Andorra, United Arab Emirates,
Argentina, Armenia, Antigua and Barbuda, Azerbaijan, Burundi, Benin, Burkina Faso,
Bangladesh, Bulgaria, Bahrain, Bahamas, Bosnia and Herzegovina, Belarus, Belize, Bolivia,
Brazil, Barbados, Brunei Darussalam, Bhutan, Botswana, Central African Republic,
Chile, China, Cöte d’Ivoire, Cameroon, Congo, the Democratic Republic of the, Congo,
Colombia, Comoros, Costa Rica, Cuba, Cyprus, Czech Republic, Djibouti, Dominica,
Dominican Republic, Algeria, Ecuador, Egypt, Eritrea, Estonia, Ethiopia, Fiji, Micronesia,
Federated States of, Gabon, Georgia, Ghana, Guinea, Gambia, Guinea-Bissau, Equatorial
Guinea, Grenada, Guatemala, Guyana, Honduras, Croatia, Haiti, Hungary, Indonesia,
India, Iran, Islamic Republic of, Iraq, Israel, Jamaica, Jordan, Kazakhstan, Kenya,
Kyrgyzstan, Cambodia, Kiribati, Saint Kitts and Nevis, Korea, Republic of, Kuwait, Lao
People’s Democratic Republic, Lebanon, Liberia, Libya, Saint Lucia, Liechtenstein, Sri
Lanka, Lesotho, Lithuania, Latvia, Morocco, Monaco, Moldova, Republic of, Madagascar,
Maldives, Mexico, Marshall Islands, Macedonia, the former Yugoslav Republic of, Mali,
Malta, Myanmar, Montenegro, Mongolia, Mozambique, Mauritania, Mauritius, Malawi,
Malaysia, Namibia, Niger, Nigeria, Nicaragua, Nepal, Nauru, Oman, Pakistan, Panama,
Peru, Philippines, Palau, Papua New Guinea, Poland, Democratic People’s Republic of
Korea, Paraguay, Qatar, Romania, Russia, Rwanda, Saudi Arabia, Sudan, Senegal, Singapore,
Solomon Islands, Sierra Leone, El Salvador, San Marino, Somalia, Serbia, South Sudan,
Sao Tome and Principe, Suriname, Slovakia, Slovenia, Swaziland, Seychelles, Syrian Arab
Republic, Chad, Togo, Thailand, Tajikistan, Turkmenistan, Timor-Leste, Tonga, Trinidad
and Tobago, Tunisia, Turkey, Tuvalu, Tanzania, Uganda, Ukraine, Uruguay, Uzbekistan,
Saint Vincent and the Grenadines, Venezuela, Viet Nam, Vanuatu, Samoa, Yemen, South
Africa, Zambia, and Zimbabwe.
b3508_V3_Ch06.indd 146 11-02-2020 13:43:46

(a) (b)
Figure 3. Electricity losses, economic cycles, and political regimes in developing countries between
1970 and 2015.
Note: The dark-grey solid line and shaded area represent a linear fit with a 95% confidence interval.
Source: World Development Indicators (the World Bank).
tted by least squares. Results confirm that losses are almost a-cyclical in autocra-
fi
cies (Figure 3(a)) and strongly counter-cyclical in democracies (Figure 3(b)). As
shown in Figure 3(b), losses increase when the output-gap is negative and decrease
when the economy moves toward the upper side of the business cycle. The differ-
ence in the slopes between democracies and autocracies is statistically significant
and economically relevant. While economic cycles have no significant effect on
electricity losses in Latin American autocracies, democracies with income growth
two points below the trend (i.e. 0 in the X-axis of the plot) are expected to have
about 5% more of electricity losses than a democracy growing two points above
the expectation.
The evidence suggests some support to the theoretical logic outlined before.
Electricity losses are strongly counter-cyclical in democracies but not in autocra-
cies, which would indicate that political leaders pressured by electoral competition
provide informal insurance in developing countries.
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Figure 4: Electricity losses and economic cycles in BRIC countries.

Note: The dark-grey solid line and shaded area represent a linear fit with a 95% confidence interval.
Source: World Development Indicators (the World Bank) and Polity IV dataset from Marshall and
Jaggers (2010).
Now, how do the BRICs square with the aforementioned logic? Figure 4
replicates the analysis for each of the BRIC countries. Interestingly, the two
democratic countries over the period, Brazil and India, have the most counter-
cyclical evolution of transmission and distribution losses, as indicated by the
negative slopes. As also shown in Figure 4, the weakly democratic Russia and the
authoritarian China have both lower levels of losses and lower counter-cyclicality
of TDL.
This is, of course, only very descriptive data and conclusions should be made
with caution. Even so, one can speculate that democratization in China and Russia,
involving more responsiveness of political incumbents toward their citizens, may
also contribute with changes in the patterns in irregular transfers, as long as informal
arrangements are a viable political strategy to protect different income groups.
Moreover, this is a clear example of how political change in BRIC countries, when
desirable, also involves several important challenges; while protecting vulnerable
groups is always positive and often more likely under democracy, the politics of
insurance under electoral competition may produce suboptimal outcomes such as
the expansion of informal transfers.
b3508_V3_Ch06.indd 148 11-02-2020 13:43:49

Concluding Remarks
This chapter describes unconventional forms of social insurance and discusses the
implications of political regime change for such policies in developing countries and
BRICs. The main argument is that democratic incumbents from developing coun-
tries are challenged with the need to provide insurance in highly volatile contexts,
where consumption-smoothing mechanisms are inexistent. In such contexts, I find
some evidence pointing in the direction that democracies provide informal insur-
ance while autocracies, if any, do it to a lesser extent. An example of this political
strategy is the provision of irregular access to basic services.
Irregular access to electricity may work as a program of informal transfers to
smooth consumption in developing countries. I show descriptive evidence that
electricity losses are counter-cyclical in democratic countries but not in autocracies.
While the main purpose of this chapter is to discuss an argument about informal
social insurance in developing countries, as well as to provide some descriptive
evidence, more research is needed regarding both the robustness of the findings and
the mechanisms implied in the causal chain.
The implications of the logic proposed here are important for the authoritarian
China and the not fully democratic Russia. As their other two BRIC counterparts
Brazil and India demonstrate, democracy seems to be highly correlated with counter-
cyclicality of electricity losses in these countries. Pensiveness of electricity theft, used
as a consumption-smoothing policy, should warn about vicious traps and perverse
consequences. The notion that informality provides outside options to smooth con-
sumption is not new (Rosenzweig, 1988). When politicians stimulate such a type of
behavior, the results are not only problematic in terms of aggregated efficiency, they
also deepen existing inequalities between formal and informal sectors. Those who do
not pay the bill and are informally allowed to consume irregular energy only get access
to a lower quality service while increasing their risk to human life and material loss.
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PART III
Labor Market Informality,
Mobilization, and Preferences
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CHAPTER 7
How the Labor Force is Mobilized:

Patterns in Informality, Political Networks,
and Political Linkages in Brazil
Soledad Artiz Prillaman* and Jonathan Phillips†
Nuffield College, University of Oxford, UK

*
†
Department of Government, Harvard University, Cambridge, USA
Introduction
The 40–60% of Latin American workers in the informal sector experience the state
very differently from their formal counterparts. But they also experience the politi-
cal process in a markedly different way. As a result of their historical and spatial
marginalization, economic vulnerability, and institutional barriers, informal workers
have been mobilized into very different political networks. Yet, in recent decades,
the boundary between the formal and informal labor forces has blurred. Workers
transitioning into/out of formality find themselves exposed (1) to new sources of
information about politicians and the experiences of other citizens; (2) to political
actors with different motivations and resources; and (3) to new kinds of political
ideas, technologies and promises. This chapter descriptively documents the relation-
ship between informality and political experience with a particular focus on how
labor market status shapes access to political networks. It additionally highlights the
important spatial variation in the concentration of informality and documents the
descriptive correlation of this variation with the nature of political ties and linkages.
157
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158 S. A. Prillaman and J. Phillips
As a result, this chapter provides one of the first approaches to understanding

informality as both an individual and a collective identity.
Latin American labor markets have traditionally been segmented between those
with formal employment and those without (Schneider, 2009). Since the late 1990s,
however, there have been large and rapid changes in the structure of the labor force.
This is due in large part to economic liberalization generating structural shifts in
the economy and ushering in a wave of deindustrialization (Portes and Hoffman,
2003). Alongside these macroeconomic shifts, there have been massive changes
in the macropolitical context, including the third wave of democratization and
accompanying overhauls of the policy space. In most Latin American countries,
this has led to the extension of the State through welfare programs. Prior to these
macroshifts, the division between the informal and formal labor force was stable,
with little movement of individuals between the formal and informal work forces.
Over the last 30 years, however, this stark boundary has blurred, resulting in more
flexible labor market boundaries. In general, this resulted in immediate declines in
public sector and formal employment (Portes and Hoffman, 2003). As we will show,
over time, however, formalization has again increased, in Brazil in particular.
Changes in the structure of the labor force bear important consequences for
macropolitics and political behavior. An established literature in the comparative
political economy of industrialized democracies demonstrates how the division
between those with secure employment — “insiders” — and those without secure
employment — “outsiders” — affects political institutions, social policy, and party
strategy (Rueda, 2005; Lindvall and Rueda, 2014; Palier and Thelen, 2010; Iversen
and Stephens, 2008; Iversen and Soskice, 2009). A burgeoning literature in Latin
America extends this to a developing context where informality defines a salient
labor market cleavage separating insiders and outsiders. This literature documents
the particular ways that informality shapes policy decisions and party organization
(Carnes and Mares, 2013; Garay, 2017, and in the contributions to this volume).
Class and employment status have long been considered the foundation of
important political cleavages. Furthermore, the workplace has been shown to be a
critical place for political socialization, discussion, and mobilization (Pateman, 1970;
Elden, 1981; Collier and Collier, 2002; Frye et al., 2014). Because of the formative
political influence of workplace and the socializing consequences of regular labor
market interactions, informality can impact political behavior in meaningful ways.
Previous work across Latin America has shown that informal workers have different
political preferences, particularly as it pertains to non-contributory social policies
(Carnes and Mares, 2013). In Mexico, Altamirano Hernandez (2015) documents
how informality translates into partisanship and party strategy, arguing that infor-
mality is associated with both lower partisanship and greater use of clientelistic
appeals by politicians. Baker and Velasco-Guachalla (2018), however, argue that
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How the Labor Force is Mobilized 159
the growing fluidity between the informal and formal labor markets (Schneider,
2013) and intrahousehold heterogeneity in labor market status (Maloney, 1999)
result in few differences between informal and formal workers in terms of political
participation and party and policy preferences.
While these macropolitical outcomes, such as partisan affiliation and social
policy preferences, have been identified, the micropolitical processes by which
informality generates alternative policy frames, new linkages to politicians, and
alternative political identities have received limited attention. Understanding how
informality reshapes political connection, organization, and competition will help
provide a more comprehensive model of political behavior as responsive to shifts in
the labor market. Tracing the micromechanisms is also vital to separating the effects
of individual labor market status from the effects of place and the local labor market
environment (as Zucco et al. (2010) demonstrates for exposure to social policy).
Reflecting a growing understanding of the role of personal connections and daily
experiences in political mobilization and socialization, we argue that one important
mechanism underlying the political differences between informal and formal
workers regards access to and the composition of political networks. Specifically,
we hypothesize that informal workers will have fewer political ties in the workplace
as a result of the fragmented and insecure nature of informal work. We further
argue that informal workers will have less access to clientelist offers because they
are relatively harder to identify, coordinate, and monitor. These effects, however, are
expected to be mediated by the local labor market context and the political power of
informal workers. Changes in the structure of the labor market are likely to generate
changes in the ways politicians seek to mobilize citizens and the political strategies
that citizens themselves perceive as feasible.
This chapter seeks to understand the distinct ways in which workers are
mobilized into politics depending on the formality of their employment and its
change over time. Using both census and survey data from Brazil, we demonstrate
that informal workers have fewer political connections, less work-based political
discussion, and less access to clientelist offers than formal workers. We further show
that these effects are exacerbated in regions with the highest rates of informality in
the labor force, but may be mitigated by temporal reductions in informality. These
results compel a deeper understanding of informality as a political identity critical
in the formation of micro-level political networks and linkages.
How the Labor Force is Mobilized

In what some have deemed the “undermobilization hypothesis”, it has been argued
that informal workers are less likely to be collectively organized because of the
inherent challenges in coordinating socially atomized workers across generally low
b3508_V3_Ch07.indd 159 11-02-2020 13:44:46

visibility, fragmented, and small enterprises (Roberts, 2002; Baker and Velasco-
Guachalla, 2018). This hypothesis is an extension of the robust evidence that the work-
place has long been a key place for political mobilization (Collier and Collier, 2002).
A primary example is evidenced by the historic role of unions in political mobilization
(Dix, 1989; Leighley and Nagler, 2007; Rosenstone and Hansen, 1993), which is
further argued to reinforce the particular mobilization of formal sector workers.
Evidence documenting (or contradicting) this hypothesis tests the relation-
ship between informality and political participation and partisanship (Baker and
Velasco-Guachalla, 2018). However, this skips over the informal and non-institutional
processes of political organization and network-building that are most likely to affect
informal workers. What is lacking is an understanding of how informality mediates
political discussion inside and outside of the workplace, political connections, and
linkages with political elites. It is these processes which are likely to drive changes in
participation and partisanship, and which allow us to explain those broader outcomes.
We explore the link between individual informality and political ties directly and
argue that informality affects the political mobilization of workers both through its
effect on individual political discussion and network-building and also by condition-
ing the nature of political linkages with candidates and politicians. We further argue
that labor market status should not be studied in isolation but instead labor market
identity must be considered within the local labor market context.
First, informality is likely to shape individual political behavior through its effect
on social and political networks.1 We know that who you associate with matters
for political engagement and preferences (Putnam, 2001). Furthermore, political
connections are a function of social connections more generally (Sinclair, 2012)
and therefore access to social and economic networks importantly conditions the
availability of political ties (Artiz Prillaman, n.d.).
Informal workers, we argue, face higher burdens to political connection than
formal workers. This is a direct consequence of the social isolation of informal work.
Informal workers tend to be self-employed or employed in small and marginal
enterprises and many are employed in seasonal, contract, or transient work. This
makes the development of stable social networks rooted in the workplace difficult
and instead suggests that core social connections would happen outside of the
workplace, such as in the household and the broader community. The non-existence
or superficiality of workplace connections for informal workers further limits
the potential for sustained political discussion in the workplace. Further, due to their
1
It is worth noting that there are many other ways in which informality is likely to shape
individual political behavior, such as through exposure to political ideas and information.
It is beyond the scope of this chapter to explore all of these possible mechanisms.
b3508_V3_Ch07.indd 160 11-02-2020 13:44:46

distance from the state, they lack important shared experiences and identities, or a
common reference point for framing political opinions.
In aggregate, this suggests that as informality rises so does the likelihood of
politics happening outside of the workplace. In part this is simply a function of
the greater scale and visibility of informality in the local labor market as described
above. However, informal workers also do not live in a vacuum but instead exist
within household and communities of other informal and formal workers. As the
concentration of informality increases, networks incorporating informal workers
become more politically important. This therefore increases the potential political
power of informal workers and allows for political coordination to occur in ways
compatible with informal workers’ interests.
Second, we argue that informality will also affect the ways that workers establish ties
and linkages with politicians, and particularly will make it more difficult to engage in cli-
entelistic linkages, even where there is a greater preference for clientelist offers. Informal
workers have been shown to prefer clientelistic appeals over programmatic appeals
(Levitsky, 2003; Altamirano Hernandez, 2015). Others have argued that informal
workers have less of a stake in many programmatically delivered policies, particularly
welfare policies that have historically been tied to formal employment in Latin America
(Haggard and Kaufman, 2008; Carnes and Mares, 2013). Further, the fragmented nature
and diversity of informal work makes it difficult to identify a common interest or policy
preference among informal workers (Baker and Velasco-Guachalla, 2018).
Despite the greater preference for clientelist appeals among informal workers, we
argue that informal workers will receive fewer of these appeals than formal workers.
The disparate and transient nature of informal work makes it difficult and relatively
more costly for clientelist politicians to mobilize informal workers. Informal workers
are (1) poorly connected within the informal workplace, (2) difficult to identify and
contact, and (3) costly to monitor. In combination, this makes delivery of clientelist
appeals more costly for informal workers as compared to their formal counterparts
who are easier to identify and contact. Similarly, the difficulties of locating and moni-
toring informal workers suggest that politicians are likely to switch their mobilization
strategies away from personal visits. As a result, we argue that informal workers will
have less exposure to clientelist politicians and offers as compared to formal workers
despite their relative preference for clientelist offers over programmatic offers.
Defining and Measuring Informality

We center our empirical study in Brazil. As the largest economy in Latin America
and having undergone significant political and economic shifts in recent decades,
Brazil provides a fruitful testing ground to explore the linkages between labor
b3508_V3_Ch07.indd 161 11-02-2020 13:44:46

market status and political networks. Brazil has a large informal work labor force
and has experienced large changes in informality rates in recent decades (Portes
and Hoffman, 2003). Furthermore, since democratization in 1985, Brazil has also
experienced large changes in the structure of political networks.
A distinct advantage, however, of working in Brazil is the availability of
relevant data. A key challenge to the study of informality cross-nationally is
creating a common definition of informality. Economic definitions of infor-
mality have focused on characteristics, such as enterprise scale, low pay, and
employee productivity, but these traits do not connect naturally with theories
of political engagement which are the focus of this volume (Maloney, 1999;
Henley et al., 2006). Instead, it is how these economic activities are embedded
in relationships between employees, employers and the state which provides the
fuel for political contestation, identity, and discussion. Workers formulate their
opinions on politics and politicians based on the gains and losses they perceive
in their personal accounts with the state, and the collective experience of these
gains and losses. Informality is characterized by the distance between economic
activity and the state, with informal firms and enterprises predominantly falling
outside the scope of any gains and losses in their transactions with the state. As
Maloney and Saavedra-Chanduvi (2007) emphasize, this distancing may be the
result of active exclusion by the state, or a form of “exit” (Hirschman, 1970), as
economic actors evade the state. Either way, informal work is a multi-dimensional
situation and a matter of degree rather than kind, reflecting the vast range of
state regulations which businesses and employees can fail to comply with, and
the multiplicity of state organizations to which they may be more or less visible
(Hussmanns, 2004).
To simplify the analysis and contextualize it within Brazil, we use a definition
of informality which focuses on employees’ own circumstances rather than those
of their employers, and on a single consistent and widely understood labor market
boundary which reflects the social construction of informality in the local context.
In Brazil, this boundary of demarcation is the possession of a signed work card
(carteira de trabalho assinada) that both increases the visibility of employees to
the state for purposes, such as taxation and labor rights enforcement, and entitles
them to social protection, such as unemployment insurance. Related definitions
have been used in academic research in Brazil for decades, including the work
of Merrick (1976) in Belo Horizonte who studied worker membership of social
security institutes, and more recently the work of Fairris and Jonasson (2016)
and Baker and Velasco-Guachalla (2018) in explaining changes in the size of the
informal sector. An additional benefit of this definition is its ease of measurement
b3508_V3_Ch07.indd 162 11-02-2020 13:44:46

for the entire population using the Brazilian Census, described in detail in the
following sections.
The Changing Patterns of Informality in Brazil

Figure 1 plots the percentage of the labor force that is informal for each census
weighting area in Brazil. The average census weighting area has an informality rate
of 27.2%. This average rate, however, fails to capture the vast regional variation
% Informal
Workers 20 40 60
Figure 1: Map of 2010 informality rate by census weighting area.
b3508_V3_Ch07.indd 163 11-02-2020 13:45:20

across the country in informality. This variation further reveals systematic patterns
in the spatial distribution of informality. There is a clear division in labor market
structures between the prosperous formal sectors in the South, Southeast and
parts of the Center–West regions, where less than a quarter of the population are
employed informally, and the relatively poorer North and Northeast where over
half the population are employed informally. Local patterns are also visible, with
the major cities of the littoral Northeast and the agro-industrial corridor of highway
BR-364 running parallel to the Bolivian border exhibiting significantly higher rates
of formal employment.
Reduction in
% Informal
Workers 0 10 20 30
2000−2010
Figure 2: Percentage reduction in the rate of informal employment between 2000 and 2010 by
municipality.
b3508_V3_Ch07.indd 164 11-02-2020 13:45:27

Brazil has also seen significant changes in informality over the past decade.
Figure 2 geographically maps the average reduction in the population rate of
informality across municipalities in Brazil and demonstrates a remarkable formali-
zation of the labor force over the decade. Changes in informality between 2000
and 2010 can only be consistently measured at the level of the municipality — a
geographically larger unit than the census weighting sector. Figure 2 illustrates
that during this period there was a nationwide process of formalization that
affected every region (i.e. that the vast majority of municipalities saw a reduction
in informality over the period.), albeit of varying degrees. Only in small pockets
of the interior cerrado of the Northeast was informality unchanging, and only
in the already-formalized region of Saũo Paulo did informality rates fail to fall
substantially. In the average municipality, informality fell by 17.1% points from
2000 to 2010.
This process of formalization was highly equalizing: Figure 3 highlights that
this decline in informality was concentrated in the places that experienced the
highest rates of informality in 2000. Figure 3(a) plots the municipality rate of
informality in 2000 against the municipality rate of informality in 2010. Points
along the dashed line would indicate no change in the informality rate. Instead, we
see that most points fall below this line, signaling declines in the rate of informality
from 2000 to 2010. Figure 3(b) plots the municipality rate of informality in 2000
against the change in the municipality rate of informality from 2000 to 2010. The
negative correlation of this data demonstrates that the regions with the highest
% Points Change in Informality from 2000 to 2010
0.25
0.6
% Informality in 2010
0.00
0.4
−0.25
0.2
−0.50
0.00 0.25 0.50 0.75 1.00 0.00 0.25 0.50 0.75 1.00
% Informality in 2000 % Informality in 2000
(a) (b)
Figure 3: Changes in the rate of informal employment between 2000 and 2010.
b3508_V3_Ch07.indd 165 11-02-2020 13:45:30

% Excess
Female
Informality −10 0 10 20 30 40
Figure 4: Difference between female informality rate and male informality rate in 2010 by census
weighting area.
rates of informality in 2000 were also the regions with the greatest decline in
informality from 2000 to 2010.
It is worth noting that informality affects women more frequently than men.
As Baker and Velasco-Guachalla (2018) notes, it is common for households to have
members from both the formal and informal labor forces. Figure 4 plots the differ-
ence between the informality rate for women and the informality rate for men in
a given census weighting sector in 2010. Positive values signal greater informality
among women. The average census weighting area exhibits informality rates of
b3508_V3_Ch07.indd 166 11-02-2020 13:46:01

8.7% points higher for women as compared to men. As Figure 4 further illustrates,
this is a consistent national pattern affecting both the more advanced manufactur-
ing and knowledge economy sectors in the South and the less developed economy
of the North. The only exception to this uniform picture appears to be a narrow
swathe of the interior of the Northeast away from the coast where formality rates
are more equal.
Data and Method

Brazilian Census Data
The salience of the Brazilian signed work card means that it is a central measure in
the national census, providing a rare opportunity to measure in detail the distribu-
tion, change, and concentration of informality. We draw on both the 2000 and
2010 censuses which explicitly ask respondents whether they have a signed work
card (IBGE, 2000, 2010). For our measure of informality, in 2000 we use variable
V0447 to create a binary indicator of informality indicating whether a respondent is
employed without a signed work card or as an unpaid apprentice, domestic worker
or subsistence producer (conditions which also entail the lack of a signed work
card). In 2010, we use variable V0648 to create a binary indicator of informality
indicating whether a respondent is employed without a signed work card or works
without remuneration.
While the data is a census of Brazilian residents, it is only available at aggregated
geographic units. Wherever possible, our analysis uses the most geographically
disaggregated version of the census data available — the census weighting area. Each
unit therefore represents a geographic area that is more granular than a municipality.
Further, the census weighting areas do not normally coincide with administrative
boundaries within the municipality. This provides maximum variation, provides
a more precise definition of the local labor market, and allows us to minimize the
risk of confounding from the distinct political experiences of specific states or
municipalities.
To compare data from the 2000 and 2010 censuses and therefore changes
in the rate of informality, however, the lowest unit of aggregation possible is the
municipality — a larger geographic unit than census weighting units. Municipalities
in Brazil are administrative units of local government with elected officials. In total,
Brazil has 5,570 municipalities. In addition to capturing informality and change in
informality from 2000 to 2010 at the municipality level, we additionally measure
the average income in the municipality and include this as a control in all analyses.
b3508_V3_Ch07.indd 167 11-02-2020 13:46:06

Brazilian Electoral Panel Study
The data sources available to measure political experiences and networks are much
thinner. This lack of availability of data linking labor market status and political
outcomes has limited research to date. Our hypotheses require us to measure indi-
vidual informality in addition to aggregate rates of informality, further restricting
the suitable datasets. We use the Brazilian Electoral Panel Surveys, conducted as
separate panels in 2010 (Ames et al., 2016) and 2014 (Rennó et al., 2016), as the
most comprehensive and detailed data source for the outcome variables. The 2010
panel conducted a three-wave sample in March, August and November 2010 cover-
ing 4,611 unique respondents in 16 states and 60 municipalities. The 2014 panel
conducted a seven-wave sample covering 3,151 unique respondents in 22 states
and 118 municipalities. Both datasets were merged with the census data at the level
of the weighting area. Given differences in variables across the two waves, we will
focus our analysis on the 2010 panel. Limited results from the 2014 panel can be
found in the appendix.2
The analysis considers two key sets of outcome variables: engagement in
political networks and forms of linkage to political actors. The first allows us to
evaluate how informality reshapes political networks and the location of political
discussion. To measure political networks, we use a binary measure of whether
the survey respondent personally knows a politician or someone campaigning
for a politician.3 To measure the most salient political discussion networks, we
utilize a question from the BEPS survey that asked respondents which people
they discuss politics with, allowing only one answer.4 From this, we created three
different binary measures of whether the respondent reports discussing politics
at work, outside of work such as with friends and family, or whether they report
never discussing politics.
2
While the 2010 dataset includes variables more closely aligned to our outcome of interest
of political experiences and networks, it provides only a subjective measure of individual
informality, “unemployed but working informally”. While this is less precise than explicitly
asking about the possession of a signed work card, we believe that in the Brazilian context
there is a decade–long social understanding of informality that is tightly tied to possessing
a signed work card. The 2014 dataset provides data from this more consistent definition of
informal employment.
3
Respondent knows a politician or candidate personally or knows a person who is cam-
paigning for a politician or candidate.
4
Person with whom the respondent talks about politics.
b3508_V3_Ch07.indd 168 11-02-2020 13:46:06

The second set of political linkage measures allow us to evaluate how infor-
mality correlates with exposure to a range of political mobilization practices,
particularly clientelist practices. To measure exposure to clientelist offers, we uti-
lize responses to a question on frequency of encountering clientelist offers (offers
of food, favor or other benefits in return for their vote or support). Additionally,
we include a binary indicator of whether the respondent was offered money to
campaign for a candidate. We also include binary indicators of other forms of
contact with candidates during campaigns, including whether the respondent had
been called by a candidate, been mailed a campaign flier, or received a home visit
during the campaign. In addition, the appendices examine changes in participation
and political interest.
Empirical Approach
The available data allow only for a descriptive evaluation of the relationship between
informality, both at the individual and locality level, and political networks and link-
ages. We do not claim that any of the results we present are causal, but instead aim
to paint a pattern of likely reinforcing relationships that provide deeper insights into
the experiences of informality. The empirical models that follow are OLS regressions
of individual informality, local informality rates, and their interaction on the above
noted political outcomes. These regressions control for an indicator of being out of
the labor force to ensure the base category is formal workers, gender, age, income,
education, whether the respondent is a beneficiary of Bolsa Família (a conditional
cash transfer welfare program), and municipality average income. Standard errors
are clustered at the census sector level. We run an additional set of regressions
to evaluate how the change in informality, as measured by the percentage point
reduction in informality in a municipality from 2000 to 2010, is correlated with
political outcomes. In these regressions, we additionally control for the base rate of
informality in the municipality in 2000.
Informality and Political Mobilization in Brazil

How does being informally employed correlate with the political networks and
discussions in which Brazilians are engaged? Tables 1 and 2 report the regression
coefficients linking informality with political networks and political linkages
respectively.
The results in Table 1 suggest that controlling for individual socioeconomic
characteristics and neighbourhood characteristics, including average income and
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b3508_V3_Ch07.indd 170
Table 1: Regression estimates of the relationship between the rate of informality and political networks using 2010 BEPS survey.

Personal Political
Connections Talk Politics: Work Talk Politics: Friends Never Talk Politics
% informality in local area 0.309 0.310 0.257*** 0.334*** 0.129 0.085 -0.142 -0.213
(0.192) (0.207) (0.081) (0.091) (0.093) (0.103) (0.127) (0.139)
Informally employed -0.005 -0.004 -0.046* 0.039 0.059** 0.009 -0.103*** -0.181**
(0.048) (0.099) (0.024) (0.045) (0.027) (0.054) (0.034) (0.073)

Local informality × informal worker -0.003 -0.342** 0.201 0.317
(0.389) (0.160) (0.205) (0.258)
Not working -0.058 -0.058 -0.050*** -0.051*** -0.001 -0.001 -0.013 -0.012
(0.043) (0.043) (0.018) (0.018) (0.019) (0.019) (0.028) (0.028)
Female -0.081** -0.081** -0.061*** -0.062*** -0.070*** -0.069*** 0.084*** 0.085***
(0.036) (0.036) (0.016) (0.016) (0.017) (0.017) (0.025) (0.025)
Age 0.001 0.001 0.001** 0.001** 0.001** 0.001** -0.001* -0.001*
(0.001) (0.001) (0.001) (0.001) (0.001) (0.001) (0.001) (0.001)
Income 0.021 0.021 0.009* 0.009* -0.002 -0.002 -0.029*** -0.029***
(0.013) (0.013) (0.005) (0.005) (0.006) (0.006) (0.008) (0.008)
Education 0.014** 0.014** 0.006** 0.006** 0.006** 0.006** -0.026*** -0.026***
(0.006) (0.006) (0.003) (0.003) (0.003) (0.003) (0.004) (0.004)
CCT beneficiary 0.124*** 0.124*** 0.042** 0.042** 0.088*** 0.088*** -0.126*** -0.125***
(0.042) (0.042) (0.019) (0.019) (0.023) (0.023) (0.029) (0.029)
Avg income in local area -0.0001 -0.0001 -0.00001 -0.00001 -0.00003* -0.00003* 0.0001** 0.0001**
(0.00004) (0.00004) (0.00002) (0.00002) (0.00002) (0.00002) (0.00003) (0.00003)
Constant 0.387*** 0.387*** -0.013 -0.029 0.043 0.052 0.860*** 0.875***
(0.116) (0.117) (0.045) (0.046) (0.051) (0.052) (0.073) (0.074)
N 792 792 1,766 1,766 1,766 1,766 1,766 1,766
R2 0.047 0.047 0.035 0.037 0.037 0.038 0.065 0.066
“6.5x9.75”
Notes: Local area clustered standard errors in parentheses. *p < 0.1; **p < 0.05; ***p < 0.01.
11-02-2020 13:46:07
b3508_V3_Ch07.indd 171
“6.5x9.75”
Table 2: Regression estimates of the relationship between the rate of informality and political linkages using 2010 BEPS survey.
Frequency of Received
Clientelist Offers Received Phone Call Received Mail Contact Received Home Visit Vote-Buying Offer
% informality in 0.217** 0.278** -0.103 -0.045 0.447*** -0.288** 1.116*** 1.111*** -0.082 -0.074
local area (0.107) (0.118) (0.103) (0.107) (0.137) (0.146) (0.177) (0.196) (0.078) (0.083)
Informally employed -0.076** 0.0002 0.016 0.079 0.033 0.207** -0.006 -0.011 -0.047* -0.039

(0.030) (0.059) (0.029) (0.062) (0.042) (0.082) (0.040) (0.084) (0.024) (0.033)
Local informality × — -0.321 — -0.286 — -0.780*** — 0.022 — -0.036
informal worker — (0.216) — (0.185) — (0.249) — (0.356) — (0.095)
Not working -0.079*** -0.080*** -0.009 -0.011 -0.022 -0.026 -0.002 -0.002 -0.011 -0.011
(0.024) (0.024) (0.026) (0.026) (0.036) (0.036) (0.035) (0.035) (0.023) (0.023)
Female -0.028 -0.029 -0.015 -0.016 -0.063** -0.066** -0.040 -0.040 -0.068*** -0.068***
(0.021) (0.021) (0.023) (0.023) (0.031) (0.031) (0.030) (0.030) (0.019) (0.019)
Age -0.003*** -0.003*** 0.002** 0.002** 0.003** 0.003** -0.0002 -0.0002 -0.003*** -0.003***
(0.001) (0.001) (0.001) (0.001) (0.001) (0.001) (0.001) (0.001) (0.001) (0.001)
Income 0.003 0.003 0.015* 0.014* 0.020* 0.020* 0.011 0.011 -0.001 -0.001
(0.007) (0.007) (0.009) (0.009) (0.011) (0.011) (0.010) (0.010) (0.008) (0.008)
Education 0.004 0.004 0.004 0.004 0.015*** 0.014*** 0.007 0.007 0.001 0.001

(0.003) (0.003) (0.003) (0.003) (0.005) (0.005) (0.005) (0.005) (0.002) (0.002)
CCT beneficiary 0.107*** 0.106*** 0.001 0.001 0.005 0.006 0.022 0.022 0.017 0.017
(0.025) (0.025) (0.023) (0.023) (0.034) (0.034) (0.037) (0.037) (0.025) (0.025)
Avg income in local 0.00005* 0.00005* 0.00004 0.00004 0.0001 0.0001 0.00001 0.00001 -0.00001 -0.00001
area (0.00003) (0.00003) (0.00003) (0.00003) (0.00004) (0.00004) (0.00003) (0.00003) (0.00003) (0.00003)
Constant 1.227*** 1.216*** -0.066 -0.075 0.039 0.017 -0.088 -0.088 0.244*** 0.243***
(0.063) (0.064) (0.078) (0.078) (0.100) (0.101) (0.096) (0.097) (0.059) (0.059)
N 2,957 2,957 800 800 798 798 800 800 797 797
R2 0.027 0.028 0.041 0.043 0.093 0.100 0.083 0.083 0.054 0.054
11-02-2020 13:46:07
informality rates in the labor market, those in informal employment are significantly
more likely to discuss politics than formal sector workers, but when they have those
discussions they are more likely to take place among friends and family and less
likely to take place in the workplace. While they are no more or less likely to have
personal political connections, these findings suggest that informal workers’ political
engagements and interactions are at least equally as common as formal workers’ but
less public.
However, Table 1 also demonstrates that workplace political discussion is
more common in areas with a higher rate of informality. While this might appear
in c ontradiction to the negative correlation between individual informality
and workplace discussion, an analysis of the interaction between individual and
collective informality paints a clearer picture. Figure 5 plots the marginal effect of
individual informality conditional on the rate of informality in the census weighting
sector and shows that the the negative correlation between individual informality
and workplace discussion is increasing in the percentage of the population that is
informal.
This suggests that workplace discussion among informal workers becomes even
less frequent when the rate of informality is higher in the labor market. The gap in
workplace discussion between formal and informal workers is concentrated among
labor markets dominated by informal work. Symmetrically, it is only in the most
informal labor markets that informal workers substitute for the lack of workplace
discussion by increasing their discussion of politics among friends.
Figure 6 further cements this relationship by demonstrating that the positive
effect of the percentage of informality in a local area on workplace discussion is
only significant for the formally employed. Areas with high rates of informality
are the same areas where formal sector workers are most likely to discuss politics
at work.
In short, there are two responses to informality depending on the labor
market context: where they are in the minority, informal workers behave similar
to formal workers; where they are in the majority, informal workers simply shift
the location of their political debate from the workplace to more private settings
among friends.
Table 2 considers the relationship between individual and collective informal-
ity on outcomes related to alternative political linkages. Controlling for the same
potential confounders, Table 2 suggests that informal employees experience fewer
clientelist and vote-buying offers but on average appear no more or less likely to be
contacted by a politician either by phone, mail or in person. This is in line with the
hypothesis that informal workers are harder to target and monitor for clientelistic
exchanges. Figure 7 reports the marginal effect of individual informality conditional
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Personal Political Connections Talk Politics: Work

0.1
0.2
Marginal Effect for Informality

0.0
0.0 −0.1
−0.2
−0.2
−0.3
0.2 0.4 0.6 0.2 0.4 0.6
% Informal in Local Area % Informal in Local Area
CI(Max − Min): [−0.424, 0.413] CI(Max − Min): [−0.362, −0.014]
Talk Politics: Friends Never Talk Politics

0.2
0.2
0.1
0.0
0.1
−0.1
0.0 −0.2
0.2 0.4 0.6 0.2 0.4 0.6

CI(Max − Min): [−0.084, 0.296] CI(Max − Min): [−0.101, 0.441]
Figure 5: Marginal effects of individual informality conditional on percentage of informality in

local area.
on the percentage of informality in the census weighting area from the interaction
regressions. It further highlights that this negative relationship is strongest when
local informality is high.
There is a positive correlation between the percentage of informality in the
census weighting area and the frequency of receipt of clientelist offers. Looking
at the marginal effect of local informality conditional on individual informality,
Figure 8 demonstrates that this positive effect of local informality on frequency
of clientelist offers only holds for those who are formally employed. Figure 8 also
b3508_V3_Ch07.indd 173 11-02-2020 13:46:08

1.0
Marginal Effect for % Local Informality

0.4
0.5 0.2
0.0
0.0
−0.2
0 1 0 1
Individual Informality Individual Informality
CI(Max − Min): [−0.779, 0.759] CI(Max − Min): [−0.665, −0.025]

0.6
0.6
0.3
0.4
0.0
0.2
0.0 −0.3
0 1 0 1
Figure 6: Marginal effects of percentage of informality in local area conditional on individual
informality.
shows that all people are more likely to receive a home visit from a politician in
areas with higher rates of informality. This supports the broader literature that notes
the c oncentration of clientelism and personalized politics in informal settings, but
s uggests that clientelist responses are targeted towards the easily identifiable formally
employed.
The null average effects of informality on interactions with politicians also
disappear when we consider the influence of the local labor market (see Figure 5).
b3508_V3_Ch07.indd 174 11-02-2020 13:46:09

Frequency of Clientelist Offers Received Phone Call

0.1
0.1
0.0

0.0
−0.1
−0.2 −0.1
−0.3 −0.2
0.2 0.4 0.6 0.2 0.4 0.6

Received Mail Contact Received Home Visit
0.2 0.2
0.1
0.0
0.0
−0.2
−0.1
−0.4
−0.2
0.2 0.4 0.6 0.2 0.4 0.6

CI(Max − Min): [−0.775, −0.081] CI(Max − Min): [−0.333, 0.35]
Received Vote−Buying Offer

0.1
0.0
−0.1
−0.2
0.2 0.4 0.6

% Informal in Local Area
CI(Max − Min): [−0.237, 0.193]
Figure 7: Marginal effects of individual informality conditional on percentage informality in

local area.
b3508_V3_Ch07.indd 175 11-02-2020 13:46:10


0.50

0.00
0.25
−0.25
0.00
−0.50
−0.25
−0.75
−0.50
0 1 0 1
0.0
1.5
−0.5
1.0
−1.0
0.5
−1.5
0.0
0 1 0 1
0.25
0.00
−0.25
−0.50
0 1
Individual Informality
CI(Max − Min): [−0.435, 0.355]
Figure 8: Marginal effects of percentage of informality in local area conditional on individual
informality.
b3508_V3_Ch07.indd 176 21-02-2020 10:58:22 AM

This average masks a bias towards targeting the minority labor segment with phone
calls and mails. Thus, in formalized contexts, it is informal workers who are targeted,
and in informal labor markets it is formal workers who are targeted.
In sum, this suggests that when informal workers are few in number, they
are just as likely to be the subject of clientelist appeals, but where they are in the
majority it appears that politicians may prefer to target formal sector workers,
perhaps reflecting their greater ability to influence broader networks of voters or
the greater ease of mobilization through broader political networks and easier
identifiability.
Gender and Informality
It is worth noting the significant differences in the political behavior of men and
women. Table 1 reveals that women are less likely to have personal political con-
nections or to talk about politics at work or with friends than men. Furthermore,
Table 2 shows that women are less likely to receive clientelist and vote-buying offers
than men. This is unsurprising given the vast literature on the gendered nature of
political behavior (Burns et al., 2001; Artiz Prillaman, n.d.).
Table A.1 further reveals that all significant effects of individual informality on
political networks only hold for men. This is unsurprising given the disconnected
and isolated informal work often borne by female workers. Furthermore, Table A.2
shows that the effects of individual informality and local informality on clientelistic
offers also hold only for men. Essentially, this suggests that informality as a political
identity may be more salient for men than for women (Tables A.3–A.7). Further
research is needed and warranted to better understand the gendered dynamics of
informality and its consequences for political behavior.
Evaluating Changes in Local Informality
Tables 3 and 4 supplement the above findings by focusing on how reductions in local
informality from 2000 to 2010 at the municipal level have altered the different politi-
cal experiences of the formally and informally employed, controlling for individual
characteristics and the municipal percentage of informality and municipal average
income in 2000. Table 3 highlights that where reductions in informality have been
most rapid, all workers have been increasingly active in political debate, and have
shifted that debate increasingly to the workplace and away from friends and family.
Contrary to the results for levels of informality, Figure 9 demonstrates that these
effects of reductions in informality hold for both formal and informal workers and
the effect size is even substantively larger for informal workers.
b3508_V3_Ch07.indd 177 11-02-2020 13:46:10

b3508_V3_Ch07.indd 178
Table 3: Regression estimates of the relationship between the change in informality and political networks using 2010 BEPS survey.

Talk Politics
Personal Political
Connections Work Friends Never Talk Politics
Women Men Women Men Women Men Women Men
Reduction in % informality in -0.242 0.086 0.452*** 0.394** -0.699*** -0.496*** -0.803*** -0.852***
local area (0.340) (0.382) (0.164) (0.187) (0.155) (0.178) (0.215) (0.247)

Informally employed -0.008 0.159 -0.077*** -0.102** 0.072** 0.162*** -0.075** -0.098
(0.052) (0.097) (0.025) (0.042) (0.029) (0.050) (0.036) (0.061)
Change in local informality × — -1.214** — 0.198 — -0.700*** — 0.172
informal worker — (0.589) — (0.316) — (0.249) — (0.347)
Not working -0.023 -0.023 -0.072*** -0.072*** 0.010 0.010 0.011 0.011
(0.046) (0.045) (0.020) (0.020) (0.022) (0.022) (0.030) (0.030)
Female -0.093** -0.094** -0.055*** -0.055*** -0.069*** -0.071*** 0.084*** 0.084***
(0.039) (0.039) (0.017) (0.017) (0.019) (0.019) (0.026) (0.026)
Age 0.001 0.001 0.001* 0.001* 0.002** 0.002** -0.001 -0.001
(0.001) (0.001) (0.001) (0.001) (0.001) (0.001) (0.001) (0.001)
Income 0.026* 0.026* 0.013** 0.013** -0.003 -0.003 -0.030*** -0.030***
(0.014) (0.014) (0.006) (0.006) (0.007) (0.007) (0.008) (0.008)
Education 0.017*** 0.017*** 0.004 0.005* 0.008*** 0.008*** -0.025*** -0.025***
(0.006) (0.006) (0.003) (0.003) (0.003) (0.003) (0.004) (0.004)
CCT beneficiary 0.107** 0.105** 0.044** 0.044** 0.085*** 0.084*** -0.115*** -0.115***
(0.044) (0.044) (0.020) (0.020) (0.024) (0.024) (0.030) (0.030)
Avg income in local area -0.00003 -0.00004 -0.00002 -0.00002 -0.00002 -0.00003 0.00002 0.00002
(0.00005) (0.00005) (0.00002) (0.00002) (0.00002) (0.00002) (0.00003) (0.00003)
% informality in local area in 0.393** 0.348* 0.211** 0.216** 0.169* 0.153 -0.189 -0.185
2000 (0.195) (0.197) (0.084) (0.085) (0.095) (0.095) (0.129) (0.130)
Constant 0.316** 0.294** -0.055 -0.051 0.069 0.052 0.979*** 0.983***
(0.128) (0.127) (0.053) (0.054) (0.060) (0.060) (0.080) (0.081)
“6.5x9.75”
N 671 671 1,510 1,510 1,510 1,510 1,510 1,510
R2 0.049 0.054 0.057 0.057 0.047 0.051 0.078 0.078
11-02-2020 13:46:11
b3508_V3_Ch07.indd 179
Table 4: Regression estimates of the relationship between the change in informality and political linkages using 2010 BEPS survey.
“6.5x9.75”
Frequency of Clientelist Received Mail Received Vote-Buying
Offers Received Phone Call Contact Received Home Visit Offer
Women Men Women Men Women Men Women Men Women Men
Reduction in % informality in -0.200 -0.524** 0.067 0.030 0.351 0.218 -1.232*** -1.083*** -0.104 -0.017
local area (0.232) (0.263) (0.193) (0.228) (0.267) (0.295) (0.278) (0.327) (0.127) (0.151)
Informally employed -0.101*** -0.268*** 0.024 0.006 0.069 0.001 -0.014 0.062 -0.047* -0.002

(0.033) (0.063) (0.033) (0.053) (0.045) (0.081) (0.045) (0.077) (0.027) (0.047)
Change in local informality × 1.208*** 0.135 0.494 -0.554 -0.321
informal worker (0.421) (0.330) (0.506) (0.428) (0.213)
Not working -0.104*** -0.100*** -0.009 -0.009 -0.001 -0.001 0.009 0.009 -0.006 -0.006
(0.027) (0.027) (0.029) (0.029) (0.039) (0.039) (0.040) (0.040) (0.026) (0.026)
Female -0.034 -0.033 -0.015 -0.015 -0.051 -0.051 -0.074** -0.075** -0.075*** -0.076*
(0.023) (0.023) (0.025) (0.025) (0.034) (0.034) (0.034) (0.034) (0.021) (0.021)
Age -0.002** -0.002** 0.002** 0.002** 0.003** 0.003** 0.00005 0.00002 -0.002*** -0.002*
(0.001) (0.001) (0.001) (0.001) (0.001) (0.001) (0.001) (0.001) (0.001) (0.001)
Income 0.003 0.003 0.014 0.014 0.017 0.017 0.008 0.008 -0.011 -0.011
(0.008) (0.008) (0.010) (0.010) (0.013) (0.013) (0.012) (0.012) (0.008) (0.008)
Education 0.006* 0.007* 0.006 0.006 0.020*** 0.020*** 0.010* 0.010* 0.004 0.004

(0.003) (0.003) (0.004) (0.004) (0.005) (0.005) (0.005) (0.005) (0.003) (0.003)
CCT beneficiary 0.116*** 0.116*** -0.005 -0.005 0.006 0.006 0.036 0.036 0.022 0.021
(0.028) (0.027) (0.026) (0.026) (0.036) (0.036) (0.041) (0.041) (0.027) (0.027)
Avg income in local area 0.0001** 0.0001** 0.0001 0.0001 0.0001*** 0.0001*** 0.00000 0.00000 -0.00000 -0.0000
(0.00003) (0.00003) (0.00004) (0.00004) (0.00004) (0.00004) (0.00004) (0.00004) (0.00003) (0.0000)
% informality in local area 0.289*** 0.323*** -0.084 -0.079 -0.303** -0.285** 1.140*** 1.120*** -0.078 -0.090
in 2000 (0.111) (0.112) (0.108) (0.111) (0.142) (0.144) (0.178) (0.179) (0.083) (0.085)
Constant 1.180*** 1.205*** -0.094 -0.091 -0.097 -0.088 -0.075 -0.085 0.261*** 0.255*
(0.074) (0.073) (0.093) (0.092) (0.107) (0.107) (0.111) (0.111) (0.065) (0.065)
N 2,482 2,482 678 678 676 676 678 678 675 675
R2
0.033 0.037 0.047 0.048 0.108 0.109 0.097 0.099 0.061 0.062
11-02-2020 13:46:11

Marginal Effect for Reduction in % Informal in Local Area

1.00
0 0.75
0.50
−1
0.25
−2
0.00
0 1 0 1
CI(Max − Min): [−2.454, 0] CI(Max − Min): [−0.333, 0.733]

0.0
0.0
−0.5
−0.5
−1.0
−1.0
−1.5
0 1 0 1
Figure 9: Marginal effects of reduction in percentage of informality in local area conditional on
individual informality.
In addition, however, it appears that rapid reductions in informality have

widened the gap between the formal workers who have sustained personal political
connections and the informal workers who have lost those connections. Figure 10
shows that, for informal workers, reductions in local informality reduce the likeli-
hood of receiving clientelist offers, however, for formal workers, reductions in local
informality increase the likelihood of receiving clientelist offers. In this way, for-
malization appears to have homogenized the form and frequency of political debate
across the two labor market sectors but has maintained a sharp barrier preventing
informal workers from obtaining more personal political connections.
b3508_V3_Ch07.indd 180 11-02-2020 13:46:12



1.0
0.5
0.5
0.0
0.0
−0.5
−1.0 −0.5
0 1 0 1
CI(Max − Min): [0.48, 1.933] CI(Max − Min): [−0.629, 0.875]

0
1.5
1.0
−1
0.5
0.0 −2
−0.5
0 1 0 1
0.0
−0.5
0 1
Individual Informality
CI(Max − Min): [−0.986, 0.333]
Figure 10: Marginal effects of reduction in percentage of informality in local area conditional
on individual informality.
b3508_V3_Ch07.indd 181 21-02-2020 10:58:24 AM

Conclusion
In much of the world, how you engage in the labor market conditions how you
engage with the state. While attention has been paid to the ways that labor market
status affects demand for policies, much less attention has been focused on the
ways that formal and informal labor markets experiences shape the fundamental
building blocks of political behavior — political discussion, political networks, and
politician linkages. Furthermore, it is critical that we do not evaluate these labor
market experiences in a vacuum. The experiences of formal and informal workers are
importantly affected by the labor markets in which they live. This chapter provides
an attempt to shine a light on these relationships by descriptively relating individual
and local aggregate informality with measures of political communication, networks,
and politician linkages.
The findings in this chapter paint a clear picture of two entirely different political
experiences depending on labor market status. For formal worker, politics as usual
happens in the workplace, with strong political connections and access to politicians
and clientelist offers. For informal workers, politics happens at home and in the
community but without the same level of ties to political mobilizers.
First, informal workers are less likely to be politically engaged in the workplace
and this is especially true in geographic regions with highly informal labor markets.
This does not mean that informal workers are less politically engaged than formal
workers. To the contrary, the evidence suggests that informal workers are at least
as engaged in political communication as formal workers but that this discussion
happens outside of work with friends and family.
Second, informal workers have less access to clientelistic linkages and offers
and again this is especially the case in regions with highly informal labor markets.
In contrast, formal workers appear to have greater access to clientelistic offers and
greater workplace political discussion in regions with highly informal labor markets.
Third, this political segmentation between formal and informal workers has
declined in regions where informality has also declined.
The results from this chapter highlight important patterns between the nature of
political organization and labor market status. Many unanswered questions remain.
Future research with access to more detailed and specific sources of data should
detail the nature of political discussion and connection among formal and informal
workers and aim to identify the causal linkages between labor market status and
political mobilization. Our results also hint at important implications of gender in
understanding the relevance of labor market identity for politics but further study
is needed to more clearly articulate the differential experiences of male and female
workers.
b3508_V3_Ch07.indd 182 11-02-2020 13:46:13

b3508_V3_Ch07.indd 183
Appendix
“6.5x9.75”
A.1 Gender and Informality
Table A.1: Regression estimates of the relationship between the rate of informality and political networks using 2010 BEPS survey by gender.
Talk Politics
Personal Political

Connections Work Friends Never Talk Politics
Women Men Women Men Women Men Women Men

% informality in local area 0.226 0.405 0.212** 0.505*** 0.015 0.130 -0.137 -0.316
(0.280) (0.315) (0.108) (0.156) (0.116) (0.178) (0.179) (0.220)
Informally employed -0.005 -0.006 -0.020 0.087 -0.021 0.031 -0.183 -0.180*
(0.149) (0.135) (0.066) (0.064) (0.073) (0.076) (0.119) (0.095)
Local informality × informal worker 0.434** 0.285* -0.033 -0.104 0.037 0.025 0.916*** 0.912***
(0.154) (0.170) (0.052) (0.075) (0.068) (0.077) (0.106) (0.104)
Not working -0.117** 0.015 -0.037* -0.066** -0.011 -0.011 -0.007 -0.013
(0.058) (0.067) (0.022) (0.031) (0.025) (0.030) (0.038) (0.042)
Female 0.001 0.001 0.001 0.001 -0.0002 0.003*** -0.0004 -0.002*
(0.002) (0.002) (0.001) (0.001) (0.001) (0.001) (0.001) (0.001)

Age 0.002 0.038** 0.006 0.012 -0.012 0.005 -0.031*** -0.025**
(0.018) (0.017) (0.007) (0.008) (0.008) (0.008) (0.012) (0.010)
Income 0.012 0.015* 0.005* 0.008** 0.010*** 0.001 -0.024*** -0.028***
(0.007) (0.008) (0.003) (0.004) (0.003) (0.004) (0.005) (0.005)
Education 0.149*** 0.095 0.016 0.070** 0.100*** 0.067* -0.146*** -0.094**
(0.056) (0.061) (0.022) (0.033) (0.028) (0.037) (0.039) (0.044)
CCT beneficiary -0.036 0.066 -0.043 -0.568*** 0.238 0.134 0.177 0.414
(0.622) (0.515) (0.272) (0.219) (0.291) (0.283) (0.445) (0.332)
Avg income in local area -0.00004 -0.0001 -0.00001 0.00000 -0.00000 -0.0001** 0.00003 0.0001**
(0.0001) (0.0001) (0.00002) (0.00003) (0.00003) (0.00002) (0.00004) (0.00004)
N 438 354 923 843 923 843 923 843
0.042 0.043 0.017 0.033 0.039 0.042 0.065 0.056
11-02-2020 13:46:13
R2
b3508_V3_Ch07.indd 184

Table A.2: Regression estimates of the relationship between the rate of informality and political networks using 2010 BEPS survey by gender.
Frequency of Clientelist Received Mail Received Vote-Buying
Offers Received Phone Call Contact Received Home Visit Offer
Women Men Women Men Women Men Women Men Women Men
% informality in 0.071 0.561*** -0.137 0.135 -0.260 -0.278 0.883*** 1.480*** -0.141** 0.034

local area (0.151) (0.189) (0.115) (0.205) (0.161) (0.273) (0.256) (0.294) (0.071) (0.169)
Informally employed -0.009 0.045 0.069 0.099 0.280** 0.118 0.084 -0.028 -0.039 -0.023
(0.077) (0.084) (0.092) (0.088) (0.120) (0.118) (0.112) (0.118) (0.036) (0.057)
Local informality × 1.274*** 1.107*** 0.009 -0.185 0.033 -0.115 -0.081 -0.178 0.156*** 0.253**
informal worker (0.086) (0.093) (0.093) (0.134) (0.122) (0.168) (0.121) (0.147) (0.056) (0.105)
Not working -0.097*** -0.065* -0.049 0.053 -0.014 -0.024 -0.020 0.043 -0.015 0.011
(0.033) (0.037) (0.033) (0.045) (0.047) (0.058) (0.045) (0.057) (0.027) (0.043)
Female -0.002*** -0.003*** 0.002 0.002 0.002 0.003* 0.001 -0.002 -0.002** -0.004***
(0.001) (0.001) (0.001) (0.001) (0.001) (0.002) (0.001) (0.002) (0.001) (0.001)
Age 0.007 -0.001 0.015 0.012 0.012 0.019 0.018 0.004 -0.004 0.002
(0.009) (0.010) (0.011) (0.013) (0.015) (0.016) (0.013) (0.014) (0.011) (0.012)
Income 0.001 0.009** -0.0003 0.010 0.005 0.027*** 0.005 0.011 0.002 0.001
(0.004) (0.004) (0.003) (0.006) (0.006) (0.008) (0.006) (0.007) (0.003) (0.004)
Education 0.116*** 0.096** -0.017 0.028 -0.035 0.051 0.025 0.036 0.025 0.010
(0.033) (0.038) (0.027) (0.039) (0.043) (0.053) (0.049) (0.055) (0.028) (0.043)
CCT beneficiary -0.366 -0.449 -0.189 -0.401 -0.650* -0.703** -0.498 0.158 0.036 -0.123
(0.261) (0.309) (0.283) (0.270) (0.390) (0.353) (0.493) (0.471) (0.089) (0.173)
Avg income in local 0.00003 0.0001* 0.00003 0.00005 0.0001 0.0001 -0.00003 0.0001 -0.00002 0.00000
area (0.00003) (0.00004) (0.00004) (0.0001) (0.00005) (0.0001) (0.00003) (0.0001) (0.00002) (0.00005)
N 1,557 1,400 441 359 439 359 441 359 440 357
R2 0.027 0.031 0.059 0.047 0.084 0.131 0.061 0.119 0.030 0.051
“6.5x9.75”
Notes: Local area clustered standard errors in parentheses. *p < 0.1; **p < 0.05; *** p < 0.01.
11-02-2020 13:46:13
b3508_V3_Ch07.indd 185
A.2 Alternative Participation Outcome Measures
“6.5x9.75”
Table A.3: Regression estimates of the relationship between the rate of informality and political participation using 2010 BEPS survey.
Requested Help from Local
Registered Voter Government Attended Protest Worked for Election Convinced for Election
% informality in 0.227** 0.244** -0.047 -0.094 0.030 0.035 -0.003 -0.008 0.082 0.118
local area (0.097) (0.105) (0.091) (0.096) (0.045) (0.050) (0.085) (0.087) (0.088) (0.095)

Informally employed 0.050* 0.073 0.003 -0.063 -0.023** -0.017 0.006 0.0004 -0.030 0.016
(0.026) (0.056) (0.024) (0.058) (0.012) (0.024) (0.031) (0.047) (0.024) (0.050)
Local informality × — -0.094 — 0.264 — -0.025 — 0.026 — -0.195
informal worker — (0.209) — (0.218) — (0.080) — (0.170) — (0.186)
Not working 0.015 0.015 -0.009 -0.008 -0.010 -0.011 -0.047** -0.047** -0.060*** -0.060***
(0.020) (0.020) (0.018) (0.018) (0.010) (0.010) (0.024) (0.024) (0.018) (0.018)
Female -0.071*** -0.071*** 0.008 0.009 -0.011 -0.011 -0.051*** -0.051*** -0.040** -0.040**
(0.018) (0.018) (0.017) (0.017) (0.009) (0.009) (0.019) (0.020) (0.016) (0.016)
Age 0.003*** 0.003*** 0.001 0.001 -0.0001 -0.0001 -0.001 -0.001 0.0001 0.00004
(0.001) (0.001) (0.001) (0.001) (0.0003) (0.0003) (0.001) (0.001) (0.001) (0.001)
Income 0.007 0.007 0.0004 0.0002 0.003 0.003 -0.0004 -0.0004 0.001 0.001
(0.006) (0.006) (0.005) (0.005) (0.003) (0.003) (0.007) (0.007) (0.005) (0.005)

Education 0.013*** 0.013*** -0.003 -0.003 0.004*** 0.004*** -0.0001 -0.0001 -0.004 -0.004
(0.003) (0.003) (0.003) (0.003) (0.001) (0.001) (0.003) (0.003) (0.003) (0.003)
CCT beneficiary 0.049** 0.049** 0.021 0.021 -0.0005 -0.001 0.024 0.024 0.040** 0.040**
(0.022) (0.021) (0.020) (0.020) (0.010) (0.010) (0.026) (0.026) (0.020) (0.020)
Avg income in local 0.00000 0.00000 -0.00003* -0.00003* 0.00001 0.00001 0.00001 0.00001 -0.00001 -0.00001
area (0.00002) (0.00002) (0.00001) (0.00001) (0.00001) (0.00001) (0.00002) (0.00002) (0.00002) (0.00002)
Constant 0.055 0.052 0.181*** 0.191*** 0.014 0.013 0.137** 0.137** 0.298*** 0.291***
(0.057) (0.057) (0.049) (0.050) (0.027) (0.027) (0.060) (0.061) (0.051) (0.052)
N 2,927 2,927 2,199 2,199 2,993 2,993 798 798 2,975 2,975
R2 0.020 0.021 0.006 0.007 0.013 0.013 0.028 0.028 0.011 0.011
11-02-2020 13:46:14
b3508_V3_Ch07.indd 186

Table A.4: Regression estimates of the relationship between the rate of informality and political interest using 2010 BEPS survey.
Frequency of News
Political Interest Consumption External Efficacy Internal Efficacy
% informality in local area 0.435** 0.382* -0.159 -0.249 1.863*** 2.041*** 0.894*** 1.029***
(0.186) (0.201) (0.207) (0.216) (0.381) (0.405) (0.339) (0.366)

Informally employed 0.018 -0.049 0.043 -0.072 -0.033 0.197 -0.249*** -0.077
(0.049) (0.106) (0.054) (0.121) (0.099) (0.213) (0.087) (0.189)
Local informality × informal worker — 0.284 — 0.481 — -0.985 — -0.738
— (0.402) — (0.445) — (0.839) — (0.693)
Not working 0.007 0.007 0.004 0.005 0.023 0.020 -0.107 -0.109
(0.038) (0.038) (0.040) (0.040) (0.079) (0.079) (0.072) (0.072)
Female -0.256*** -0.255*** -0.105*** -0.103*** -0.092 -0.094 -0.659*** -0.661***
(0.034) (0.034) (0.036) (0.036) (0.070) (0.070) (0.063) (0.063)
Age 0.001 0.001 0.004*** 0.004*** -0.002 -0.002 0.006*** 0.006***
(0.001) (0.001) (0.001) (0.001) (0.003) (0.003) (0.002) (0.002)
Income 0.056*** 0.056*** 0.037*** 0.036*** 0.052** 0.052** 0.021 0.022
(0.012) (0.012) (0.011) (0.011) (0.023) (0.023) (0.021) (0.021)
Education 0.035*** 0.036*** 0.028*** 0.028*** -0.032*** -0.032*** 0.071*** 0.071***
(0.005) (0.005) (0.006) (0.006) (0.011) (0.011) (0.009) (0.010)
CCT beneficiary 0.089** 0.089** 0.121*** 0.122*** 0.065 0.065 -0.016 -0.017
(0.040) (0.040) (0.045) (0.045) (0.086) (0.086) (0.075) (0.075)
Avg income in local area -0.00001 -0.00001 0.0001** 0.0001** -0.0002** -0.0002** -0.0001 -0.0001
(0.00003) (0.00003) (0.00004) (0.00004) (0.0001) (0.0001) (0.0001) (0.0001)
Constant 1.546*** 1.556*** 2.848*** 2.864*** 3.104*** 3.071*** 2.877*** 2.853***
(0.105) (0.106) (0.115) (0.116) (0.222) (0.223) (0.196) (0.197)
N 2,988 2,988 3,004 3,004 2,871 2,871 2,899 2,899
R2 0.060 0.060 0.029 0.030 0.027 0.028 0.070 0.071
“6.5x9.75”
11-02-2020 13:46:14
A.3 BEPS 2014 Analysis

Table A.5: Regression estimates of the relationship between the rate of informality and political
interest using 2014 BEPS survey.
Political Interest External Efficacy
% informality in local area -0.842*** -1.022*** -0.000 0.000
(0.200) (0.232) (0.000) (0.000)
Informally employed -0.022 -0.154 -0.000 0.000
(0.047) (0.095) (0.000) (0.000)
Local informality × informal — 0.557 — -0.000
worker — (0.349) — (0.000)
Not working 0.007 0.013 0.000 0.000
(0.046) (0.046) (0.000) (0.000)
Female 0.183*** 0.185*** -0.000 -0.000
(0.036) (0.036) (0.000) (0.000)
Age -0.006*** -0.006*** -0.000 -0.000
(0.001) (0.001) (0.000) (0.000)
Income -0.071*** -0.070*** -0.000 -0.000
(0.017) (0.017) (0.000) (0.000)
Education -0.050*** -0.051*** 0.000 0.000
(0.008) (0.008) (0.000) (0.000)
CCT beneficiary 0.0004 0.003 -0.000 -0.000
(0.042) (0.042) (0.000) (0.000)
Avg income in local area -0.0001*** -0.0001*** 0.000 0.000
(0.00004) (0.00004) (0.000) (0.000)
Constant 3.951*** 3.982*** 1.000*** 1.000***
(0.133) (0.134) (0.000) (0.000)
N 2,896 2,896 2,385 2,385
R2
0.049 0.050 0.500 0.500
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networks using 2014 BEPS survey.
Talk Politics Talk Politics Regularly: Talk Politics
Regularly: Family Work or Friends Regularly: Social Media
% informality in 0.465*** 0.512*** 0.374*** 0.338*** -0.127** -0.192***
local area (0.102) (0.114) (0.099) (0.111) (0.064) (0.072)
Informally employed 0.032 0.066 0.016 -0.011 -0.056*** -0.103***
(0.024) (0.049) (0.024) (0.048) (0.018) (0.034)
Local informality × — -0.146 — 0.113 — 0.200*
informal worker — (0.180) — (0.176) — (0.108)
Not working -0.016 -0.017 -0.047** -0.046* -0.017 -0.016
(0.024) (0.024) (0.023) (0.023) (0.018) (0.018)
Female -0.029 -0.030 -0.081*** -0.081*** -0.013 -0.012
(0.018) (0.018) (0.018) (0.018) (0.013) (0.013)
Age 0.002*** 0.002*** 0.002*** 0.002*** -0.003*** -0.003***
(0.001) (0.001) (0.001) (0.001) (0.0004) (0.0004)
Income 0.040*** 0.040*** 0.040*** 0.040*** 0.016** 0.016**
(0.008) (0.008) (0.008) (0.008) (0.007) (0.007)
Education 0.031*** 0.031*** 0.030*** 0.030*** 0.017*** 0.017***
(0.004) (0.004) (0.004) (0.004) (0.003) (0.003)
CCT beneficiary -0.001 -0.001 0.003 0.003 0.054*** 0.055***
(0.021) (0.021) (0.021) (0.021) (0.013) (0.013)
Avg income in local 0.00004** 0.00004** 0.00003* 0.00003* 0.00002 0.00002
area (0.00002) (0.00002) (0.00002) (0.00002) (0.00002) (0.00002)
Constant -0.130* -0.139** -0.074 -0.067 0.022 0.034
(0.067) (0.068) (0.066) (0.067) (0.043) (0.044)
N 2,894 2,894 2,890 2,890 2,822 2,822
R2 0.050 0.050 0.061 0.061 0.088 0.089
b3508_V3_Ch07.indd 188 11-02-2020 13:46:15

participation using 2014 BEPS survey.
Attended Political Party
Meetings Attended Protest
% informality in local area -0.393*** -0.345*** 0.061 0.083
(0.094) (0.104) (0.062) (0.073)
Informally employed -0.025 0.010 -0.010 0.006
(0.024) (0.046) (0.016) (0.031)
Local informality × informal — -0.149 — -0.068
worker — (0.182) — (0.105)
Not working 0.035 0.034 0.035** 0.035**
(0.022) (0.022) (0.017) (0.017)
Female 0.017 0.016 -0.032*** -0.033***
(0.018) (0.018) (0.012) (0.012)
Age -0.002*** -0.002*** -0.001*** -0.001***
(0.001) (0.001) (0.0004) (0.0004)
Income -0.013 -0.013 0.022*** 0.022***
(0.008) (0.008) (0.007) (0.007)
Education -0.019*** -0.018*** 0.013*** 0.013***
(0.004) (0.004) (0.003) (0.003)
CCT beneficiary 0.025 0.024 0.006 0.005
(0.021) (0.021) (0.013) (0.013)
Avg income in local area 0.00003* 0.00003* 0.0001*** 0.0001***
(0.00001) (0.00002) (0.00001) (0.00001)
Constant 3.083*** 3.075*** -0.049 -0.052
(0.063) (0.064) (0.045) (0.045)
N 2,884 2,884 2,848 2,848
R2
0.023 0.023 0.056 0.056
b3508_V3_Ch07.indd 189 11-02-2020 13:46:15

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CHAPTER 8
Redistributive Preferences in
Contemporary Brazil
Luis Maldonado and María Constanza Ayala
Institute of Sociology, Pontifical Catholic University

of Chile, Santiago, Región Metropolitana, Chile
Introduction
Standard models of redistributive politics assume that the poor support has more
redistribution than the non-poor (Korpi, 2006; Meltzer and Richard, 1981). Yet,
Latin American countries present a different pattern. While Latin America is one the
regions of the world with the greatest income inequality, studies show that prefer-
ences for redistribution do not clearly differ among income groups in the region
(Blofield and Luna, 2011; Cramer and Kaufman, 2011). As Kaufman (2009) points
out, this “inconvenient fact” has important implications for our understanding of
behavioral assumptions of political economy models.
Our chapter aims to evaluate this problem through an examination of redistributive
preferences in contemporary Brazil. Following the distinction between old and new
cleavages (Naumann, 2014), we focus on two main topics. First, prominent explana-
tions of social policy attitudes focus on old cleavages that generated important social
divisions in modern societies, such as conflicts between poor versus rich, disputes
among different political ideologies and labor market segmentations (Huber and
Stephens, 2001; Meltzer and Richard, 1981; Rueda, 2006). We consequently examine
the roles of old cleavages in explaining the redistributive preferences of Brazilian
citizens, focusing on the heterogeneity of attitudes between formal and informal
193
b3508_V3_Ch08.indd 193 11-02-2020 13:47:23

194 L. Maldonado and M. C. Ayala
workers. Following recent evidence for Latin American countries (Baker and
Velasco-Guachalla, 2018; Berens, 2015), we argue that informal and formal sector
workers have similar redistributive preferences. Furthermore, we develop a set of
expectations for income and political ideology in Brazilian society.
Second, studies suggest that new cleavages, such as age and ethnic boundaries,
have emerged in several political economies during the last decades (Brooks et al.,
2006; Naumann, 2014). These factors should be important predictors of voters’
preferences. Thus, we also evaluate the association of new cleavages with support for
redistribution in Brazil.1 Given the relevance of racial cleavages in Brazilian politics
(Bueno and Dunning, 2017), we focus on this social divide and expect significant
associations with redistributive preferences. Our paper also explores interactions
between race, labor market, and political segmentations.
This study combines a qualitative analysis of the Brazilian institutional context
with an original analysis of quantitative information from Latin American Public
Opinion Project (LAPOP) surveys for the period of 2008–2017. The analysis of this
information provides the opportunity to evaluate a case study that is especially inter-
esting. Brazil is one of the most unequal societies in the world (CEPAL, 2017; Higgins
and Pereira, 2014) and, thus, it should be a fertile social space for the emergence of
polarized attitudes about redistribution. However, scholars have noted that cleavages,
such as class, ideology or ethnicity, have not played major roles in shaping political
outcomes in Brazilian society (Mainwaring, 1999; Samuels and Zucco, 2014). Given
this political and social arrangement, Brazil is a least-likely case in which cleavages
are expected to shape policy preferences. To the extent that income or ideology
influences redistributive attitudes among Brazilian voters, we consequently gain
confidence in the external validity of theoretical assumptions of prominent theoreti-
cal explanations in the literature. Finally, Brazil is a middle-income country that
offers an evidence-rich environment in which most of the determinants that are
important to redistributive preferences are measured in an accurate way and allows
for cross-national comparison across Latin American countries.
The remainder of this study is organized as follows. The first section discusses
the main arguments in the literature of redistributive preferences and the empirical
evidence in Latin America. The second section presents the case of Brazil, focusing
on the main characteristics of this welfare model. The third section discusses the
1
We use the concept of cleavage in a weak sense (Goerres, 2009). Old cleavages are conflict
lines along which actors align themselves and relevant political actors mobilize their voters.
New cleavages — for example, age — are not the same kind of cleavage, but they are a nec-
essary condition for the generation of a cleavage if, for example, preferences present a high
level of stratification by generation.
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Redistributive Preferences in Contemporary Brazil 195
research design of this chapter. The fourth section presents the results, and the final
section features the conclusions.
Literature
Material interests and values are the most prominent determinants of social policy
beliefs (Rehm, 2016). Both factors are implicitly linked to old cleavages. Regarding
values, left–right ideology is as an important source of policy attitudes that emerged
as a product of the state–market cleavage in industrial societies (Lipset and Rokkan,
1967). Citizens with left ideology support policies that reduce inequalities by
promoting universal interventions of the state into the market. By contrast, right
ideology is associated with supporting the market as source for solving social
problems (Feldman and Steenbergen, 2001; Jaeger, 2006).
With respect to material interests, power resources theory (PRT) and the
Meltzer–Richard model (MRM) are two particularly important theoretical frame-
works. For the PRT (Huber and Stephens, 2001; Korpi, 1989), the distribution of
power resources between labor and capital is the key for the development of the
welfare state, emphasizing the power of unions and left parties for the expansion
of public benefits. Following PRT, we can expect that less affluent citizens who are
dependent on wage labor support social spending to protect themselves against
economic risks. Although income and class are different concepts, MRM formulates
a similar proposition (Meltzer and Richard, 1981). The poor will support social
spending, as they are the net beneficiaries. On the contrary, the rich will oppose
support for state responsibility in welfare provision because this means higher rates
of taxation that they will have to pay, making them net payers who contribute more
than they consume. Put otherwise, the rich always lose from social policies, whereas
the poor are the winners.2 In PRT and MRM, we consequently see that the conflict
between labor versus capital or poor versus rich is a prominent cleavage that explains
political preferences. On the basis of both theories, we can expect that support for
redistribution should be higher among less-affluent voters.
In the context of welfare state retrenchment, authors of previous studies suggest
that the emergence of new conflict lines are important factors for explaining policy
preferences in contemporary Western democracies (Pierson, 1996). The new cleav-
ages represent conflicts between beneficiaries of the welfare state who defend their
entitlements and the net payers who support reforms and cutbacks (Naumann,
2014). One of the most prominent new conflict lines is the intergenerational cleavage
2
Iversen and Soskice (2006) label this property of MRM the “non-regressivity assumption.”
b3508_V3_Ch08.indd 195 11-02-2020 13:47:23

in advanced democratic societies, as they experiment with the process of massive

population ageing. We consequently can expect that age affects political preferences.
In fact, empirical evidence indicates significant age-related differences in welfare
state preferences in OECD countries (Busemeyer et al., 2009). In the literature, other
new lines of conflict are social groups with interests defined by gender or migrant
status. Social groups defined by these categories have collective interests in ensur-
ing that social benefits will be not cut (Lohmann and Zagel, 2016; Schmidt-Catran
and Spies, 2016). Furthermore, political economists suggest that exposure to risk
(understood as uncertainty regarding future income as a product of an economic
shock) is what determines redistributive preferences in contemporary societies
(Iversen and Soskice, 2001; Rehm, 2016). When individuals’ risk aversion is high,
this theory predicts that the demand for insurance against future income shocks
increases for those with a larger income, as those who are better off have more to
lose than those who are disadvantaged.
Redistributive Preferences in Latin America
Latin American welfare states share a set of common elements that are relevant to
understanding the demand for redistribution in the region. One of these is the high
percentage of workers engaged in informal labor markets. Most self-employed people
and those working in the informal sector either remain formally excluded from
the social insurance system due to a lack of legal coverage or are excluded de facto
due to their lack of effective contributions to the social security system (Huber,
1996). Because of this characteristic, when speaking about Latin American welfare
states, some authors use terms such as “informal welfare regimes” or “truncated
welfare states” (Huber and Stephens, 2012). In such institutional contexts, Holland
(2016) argues that the poor should demand low redistribution because the access to
benefits for them is very restricted. In other words, the “non-regressivity assumption”
of MRM is not fulfilled.
Another common element is the conservative profile of Latin American welfare
states in the period leading up to the 1980s. The conservative profile seems to rely
on the fact that Latin American welfare states have taken the shape of the male
breadwinner family model that is common in southern European countries and
have protected this model by introducing stratified and corporatist social insurance
schemes and job protection (Barrientos, 2009). These schemes were granted between
the early 1900s and 1925 to key occupational sectors in a group of pioneer countries
(Argentina, Chile, Cuba and Uruguay). Over the next decades, this kind of welfare
model spread to the rest of the region (Huber, 1996; Mesa-Lago, 1978).
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In the 1990s and 2000s, most Latin American welfare systems suffered a
liberalization of their social policy profiles. Barrientos (2009) argues that such
changes in social policy in Latin America provide a rare example of a shift in welfare
regimes from a “conservative/informal” profile to a “liberal/informal” arrangement.
In the 2000s, public discontent with reforms, combined with the political left turn in
several Latin American countries, generated the expansion of the welfare spending
in areas such as monetary transfers and health (Pribble, 2014).
At this juncture of institutional change, redistributive preferences in the region
present several very interesting characteristics. Regarding class or income cleavage,
the evidence in the region is inconclusive. While some studies provide evidence in
favor of PRT and MRM (Gaviria et al., 2007; Morgan, 2007; Pederson and Shekha,
2016), research suggests a null effect of income (Dion and Birchfield, 2010; Kaufman,
2009). More recent evidence indicates that the association between income and
redistribution is not linear (Carnes and Mares, 2015). Furthermore, Berens (2015)
shows that redistributive preferences do not differ between formal and informal
workers in Latin America. Baker and Velasco-Guachalla (2018) argue that the
standard views about the differences between both segments are grounded in a
dualist conception of the labor market that assumes little overlaps between informal
and formal sectors. These authors test expectations that are derived from dualist
theories with survey data from 18 Latin American countries and find minimal
evidence for dualist arguments. They suggest that their findings are consistent with
a revisionist perspective of informality that sees formal an informal labor markets
as highly integrated.
Compared with income, the evidence about political ideology is clear. Studies
indicate that left ideology increases the likelihood of supporting public welfare
provision (Berens, 2015; Carnes and Mares, 2015; Kaufman, 2009). In respect
to new cleavages, evidence about redistributive preferences in Latin American
countries is limited, but studies of electoral behavior indicate that demographic
characteristics — such as gender, race or age — have strong explanatory power
(Carling and Love, 2015). Carnes and Mares (2015) found a positive but decreasing
effect of age on policy preferences. Recent evidence for 10 Latin American countries
with LAPOP data for 2012 indicates that age is not associated with redistributive
preferences (Berens and von Schiller, 2017).
Finally, studies of redistributive preferences in Brazil are scarce. Earlier research
has found little evidence of associations between cleavages and political outcomes
in Brazil (De Micheli, 2018; Mainwaring, 1999). However, studies about contem-
porary Brazilian politics suggests that income and race play a significant role in
shaping political behavior (Bueno and Dunning, 2017; De Micheli, 2018). Yet, to
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our knowledge, studies that connect these findings with redistributive preferences
do not exist.
The Brazilian Case and Hypotheses

As with most of welfare systems in Latin America, the Brazilian social policy
arrangement emerged in the first decades of the 20th century under corporatist
lines (Huber, 1996). This policy profile persisted roughly until the 1980s. During
the 1990s, Brazilian society experienced a liberal cycle under the government of
Fernando Henrique Cardoso (1995–2002) that was characterized by reforms in favor
of the market and expansions of social policy.
The results of public investments during the last decades can be seen in
contemporary Brazilian society. As Table 1 illustrates, public social spending in
Brazil in 2014 is over the mean of Latin America, indicating that contemporary
Brazilian welfare state ranks in the group of Latin American countries with the high-
est social spending (Draibe, 2007). However, it is lower than the public investment
in OECD countries. Post-authoritarian governments also extended the coverage of
social benefits to less affluent citizens, mainly through social assistance programs,
such as the conditional cash transfers (CCTs) program Bolsa Familia (Hunter and
Sugiyama, 2009). CCTs provide non-contributory benefits to the poor, supporting
social service (education and health) and non-contributory pensions. Despite the
extension of the coverage, social assistance benefits are characterized by low mon-
etary size, limiting their socioeconomic impact (De La O, 2015). Recent evidence
suggests that CCTs have an impact on the electoral behavior of segments of Brazilian
voters (De Micheli, 2018).
Table 1: Institutional characteristics of Brazil.

Coverage of Informal Income
Public Social Contributory Social Employment in Inequality
Spending in 2014 Insurance in 2012 2005 (GINI) in 2015
OECD 34.0 — 34.4 0.315
Latin America 10.0 38.9 49.3 0.467
Brazil 12.2 55.8 33.7 0.548
Notes: Informal employment is measured as a percentage of salaried workers without access to a pension. Public
social spending as percentage of GDP. In the case Latin America and Brazil, public social spending is at level of
central government. Expenditure data for OECD represent information of 28 members of European Union.
Source: Keely (2015) for income inequality, Carnes and Mares (2013) for informal employment, CEPAL (2017) for
public social spending, Levy and Schady (2013) for coverage of social insurance.
b3508_V3_Ch08.indd 198 11-02-2020 13:47:23

Besides these important developments of welfare in Brazil, legacies of the cor-

poratist system persist. Although the coverage of social security of Brazil is higher
than the average coverage in Latin America, note in Table 1 that approximately
one-half of workers do not have access to insurance benefits. The reason for this
limited coverage lies in the fact that programs in the Brazilian social security system
are based on contributions made by workers that are employed in specific sectors
of the formal economy, leaving a significant portion of the labor force without
access to these benefits (Huber and Stephens, 2012). As Table 1 shows, many of
these workers are in the informal sector of the economy. Limited coverage and
significant informality consequently suggest that the truncated character of Latin
American welfare states persists as a feature of the contemporary Brazilian social
policy profile.
Despite the truncation of the welfare systems, workers do not persist in this labor
status over the course of their lives. Perry et al. (2007) examine longitudinal data for
Argentina, Brazil and Mexico collected for the period between 1980 and 2000. Their
findings suggest that the probability that an informal worker has access to the formal
sector is 0.45 in Brazil, which is the highest among the three analyzed countries. This
characteristic of the Brazilian labor market indicates that a high mobility between
the formal and the informal sectors interacts with a truncated welfare arrangement.
On the basis of this institutional pattern, Baker and Velasco-Guachalla (2018) argue
that political differences between formal and informal workers should not exist, as
both groups share the same economic interests. This brings us to our first hypothesis:
the redistributive preferences of Brazilian workers do not differ by sector of the labor
market (H1).
As a result of investment in social policy, the contemporary Brazilian welfare
state also shows important effects on the social structure of the country. Brazil has
one of the highest levels of inequality in Latin America. As Table 1 indicates, the
Gini coefficient of this country is above the average of the other countries in the
region. Over the last decade, however, inequality has decreased in Brazil. Holland
and Schneider (2017) show that the Gini index and poverty rate decreased by 5.9
and 12.0 points, respectively, in Brazil during the period between 2000 and 2010.
Higgins and Pereira (2014) analyze data on household incomes and taxes for
2008–2009 and find that all taxes and transfers (direct and indirect taxes, direct
and in-kind transfers and indirect subsidies) reduce inequality by 24%. Compared
with in-kind transfers in education and health, direct taxes and transfers have a
low impact, however. Both income components reduce inequality only by 6%. One
explanation for this pattern is the low level of tax collection. Income tax accounts
for 1.4% of GDP in Latin America, compared to 8.4% in advanced democracies
b3508_V3_Ch08.indd 199 11-02-2020 13:47:23

(Holland and Schneider, 2017). In Brazil, less than 10% of the economically active
population pays personal income taxes (Higgins and Pereira, 2014).
At this juncture of low tax collection, it is hard to think that the MRM mecha-
nism justifies an effect of income on redistributive preferences in Brazil, as there are
no net payers in the electorate who contribute more than they consume. However,
this does not mean that structural effects are null. Studies indicate the relevance
of education for the demand for redistribution, as credentials are associated with
political knowledge. Citizens who present a high political sophistication also tend to
support government involvement in policy areas (Bartels, 2016). These conjectures
about income and education lead us to our second and third hypotheses: income
does not affect redistributive preferences (H2), and people with high credentials
support high redistribution (H3).
In respect to the rest of the cleavages, our analyses are guided by the following
expectations. As said in the literature section, the evidence for political ideology
consistently shows that egalitarians and left ideology support demands for redis-
tribution in Latin American countries. We consequently expect that citizens who
have left-leaning political ideology will be more supportive of redistribution (H4).
In respect to new cleavages, race appears to be a salient characteristic of Brazilian
context.3 Despite Afro-Brazilians constituting approximately one-half of the total
population, substantial race-based inequities are revealed in labor market discrimi-
nation and earning disparities (Bueno and Dunning, 2017; Telles, 2004). As a result
of the high correlation between race and income, CTT programs strongly target
Afro-Brazilians (black and pardo citizens). De Micheli (2018) shows that around
70% of CCT recipients during the period of 2014–2016 were Afro-Brazilians. It
follows that this last group should have strong material interests for demanding
redistribution. This leads us to our last hypothesis: Afro-Brazilians will be more
supportive of redistributions (H5).
In sum, contemporary Brazilian contexts are characterized by significant
developments of social policy and important reductions of inequality. However,
these social advances are embedded in a policy arrangement characterized by
truncated welfare provision, informality, high labor market mobility and low
taxation by the state. In such an institutional context, how are the redistributive
preferences of Brazilian citizens displayed? How are the associations of old and new
cleavages aligned with the displayed redistributive preferences of Brazilian citizens?
3
Following the common practice in quantitative studies of race in Brazil (De Micheli, 2018),
we use the concept of race in terms of individuals’ self-classification into categories based
largely on skin color.
b3508_V3_Ch08.indd 200 11-02-2020 13:47:23

We derived a set of expectations as a response to these questions. In the following

section, we present the research design to evaluate the hypotheses.
Research Design
Data Sources and Variables
The analyses of this study are based on nationally representative survey data from
the AmericasBarometer, collected by the LAPOP. This is a periodic survey that
collected data from 34 countries in America. We use data only for Brazil from the
2016–2017 round, which had a sample size of 1,532 individuals. Its sample design
is representative of the five major regions of the country, the size of municipali-
ties, the urban and rural levels within municipalities and all individuals of voting
age. Considering that some variables (e.g. income) were missing data, we applied
multiple imputations to preserve the total sample (Van Buuren and Groothuis-
Oudshoorn, 2011).
Concerning the variables that are used in this study, the dependent variable is
the preference of the individuals regarding the distributive role that the government
should assume. The question used consigns the following: “The Brazilian govern-
ment should implement strong policies to reduce income inequality between the
rich and the poor. To what extent do you agree or disagree with this statement?”
This question is the most common operationalization of redistributive demand in
cross-comparative studies (Rehm, 2016). Respondents were presented a 7-point
scale on which to indicate their answers, with one denoting strong disagreement and
seven indicating strong agreement. We recoded the original variable into a dummy
variable, distinguishing between those who show high support for a government
policy of gap reduction (categories 6 and 7) from the rest (categories 1–5).
We use several variables to measure old cleavages. Regarding the conflict lines
among income groups, our measure is the total monthly income of the household.
Respondents were classified in deciles,4 which we use as a continuous variable in our
analyses. In addition to income, we capture material interests by using the educa-
tional level and employment status. Respondents’ education is measured with a set of
dummies that captures primary (reference category), secondary and tertiary educa-
tion. Regarding employment status, we identify the following categories: informal,
4
We also test income groups in quartiles, where we aggregate a fifth category that denotes
persons with missing income information. In this exercise, we use the first and second
quartiles as the reference category. Findings are robust in this alternative specification.
b3508_V3_Ch08.indd 201 11-02-2020 13:47:23

formal, unemployed, and other (students, housekeeping, and retired).5 These factors
are used as dummies in the models, using “informal” as the reference category. We
use the category “self-employed” to indicate informal employment. Although there
are shortcomings in this measure — this variable does not capture informal work-
ers who are salaried employees — studies indicate that there is a strong correlation
between self-employment and informal activity (Loayza and Rigolini, 2011).6
In addition to income groups, we measure ideological conflict lines by using
variables of political ideology. Respondents’ political orientation was measured
originally based on their self-placement on a 10-point scale, with 1 indicating left
and 10 specifying right. We recode answers into three categories: left (1–4; refer-
ence category), right (7–10) and center (5–6). In addition to political ideology, we
incorporate a dummy variable in which one corresponds to individuals who identify
with a political party.
The last group of variables concerns new cleavages. We include gender and age
to capture potential new sources of conflict. We measure this variable by using a
linear specification plus a quadratic effect. In respect to H5, we include the following
set of dummies to capture race: white (reference category), black (preto) or pardo
(mixed-race) and other (such as Indian or Asian).
Taking into account the literature, we add a set of control variables: household
size (number of people), urban or rural areas and region of residence (central-west,
north as reference, northeast, south, southeast). Additionally, we include a variable
to measure social trust (“speaking of the people from around here, would you say
that people in this community are very trustworthy, somewhat trustworthy, not very
trustworthy or untrustworthy?”), individuals’ social mobility experience (downward
mobility as reference, status quo and upward mobility), a scale of attendance to
religious meetings (0 for individuals who never attend to one for individuals who
attend weekly religious meetings, where monthly or yearly attendance are intermedi-
ate values) and a dummy variable to identify individuals who experience a lot or
some fear of being a direct victim of homicide on a daily basis. Finally, we control for
the marital status (married) and the household conditional cash transfer presence.
5
We construct two versions of employment status considering the concerns in the literature
toward the measure of informality. In the version used in this study, we measure informal-
ity as self-employed individuals. We also tested informality from self-employed and unpaid
workers. The findings are consistent with our main results.
6
Berens (2015) also uses the category “self-employed” to measure informal work, but she
adds an additional restriction based on information of access to health insurance. LAPOP
2016–2017, unfortunately, does not include this kind of information.
b3508_V3_Ch08.indd 202 11-02-2020 13:47:23

Methods of Analysis
The empirical findings of this chapter are generated from two different analyses. First,
we present a descriptive overview of the variables under analysis: socioeconomic
situation, political ideology and sociodemographic characteristics,7 segmented by
the redistributive preference of the individuals. Second, we show a logistic regression
analyses using imputed and weighted data. We estimate four models, one for each
cleavage and one with all the variables, including controls. We also explore interac-
tions with additional regression models.
Findings
Cross-National Evidence and Profiles of Redistributive Preferences
The first part of our analysis illustrates descriptive patterns of redistributive prefer-
ences in Brazil. An analysis of the last round of LAPOP surveys indicates that 56.39%
of Brazilian voters represents a high demand for redistribution in 2016. Compared
with other Latin American countries (Figure 1), Brazil ranks close to the mean of
preferences in the region but lower than preferences in pioneer Latin American
welfare states. Furthermore, the time series indicates significant changes in the
recent past. LAPOP surveys registered a demand for redistribution of 70.66% in
2008 and 70.20% in 2012. Compared with 2016, high support for redistribution has
consequently decreased 14 points during the last 8 years.
To identify profiles of support for redistribution among Brazilian citizens,
Table 2 shows descriptive information (proportions and means) about the asso-
ciations between cleavages and redistributive preferences. As mentioned in the
discussion of the literature, the socioeconomic differences between individuals are
some of the most important sources of attitudes about redistribution. In Table 2, we
observe, however, no strong differences among income deciles exist. Furthermore,
the respondents’ mean income deciles are distributed in a similar manner between
the group that shows greater support for redistribution and those who are less
supportive (low and medium). In the case of educational level, the support for high
redistribution resembles the distribution of this variable in the population in that the
demand for government intervention is clearly higher in the case of persons with the
highest credentials. The distribution of attitudes among occupations in the popula-
tion also does not differ from the two groups under comparison. However, notice the
presence of differences among students, housekeeping and retired persons. In this
7
Descriptive information for the control variables are listed in appendix Table A.1.
b3508_V3_Ch08.indd 203 11-02-2020 13:47:24

Figure 1: Redistributive preferences in Latin America in 2016/2017 Percentages.

Notes: Values include population weights. High support is generated on the basis of the question
“The Brazilian government should implement strong policies to reduce income inequality between the
rich and the poor. To what extent do you agree or disagree with this statement?”. We transform the
original 7 points response scale into a categorical variable with values of one (categories 6 and 7) and
0 (categories from 1–5). The value of one means high support.
Source: Own elaboration on the basis of Brazilian LAPOP 2016/2017 round.
last case, the support for low/medium redistribution is higher than the demand for
high redistribution at 37.40% vs. 28.95%, respectively. By contrast, the support for
high redistribution is higher than the demand for low/medium redistribution in
the case of formal and informal employees, 24.62% vs. 29.63% for the former, and
19.71% vs. 23.40% for the second.
Regarding political ideology, the results are mixed concerning the literature. The
support for distribution is lower for persons with right-leaning values and higher
for respondents who position themselves in the center. However, the demand for
redistributive interventions is not very high for persons with left political ideology.
Moreover, the demand for redistribution is very low among people who identify with
a political party. In respect to new cleavages, persons who identify as black or pardo
present the highest demand for redistribution. Interestingly, white individuals have
a greater presence in the group with lower support for redistribution. Regarding
age, both groups of preferences present the same averages. The same happens
with gender. In the next section, we test these associations, which are suggested by
descriptive analyses, using a multivariate regression analysis.
b3508_V3_Ch08.indd 204 11-02-2020 13:47:24

Table 2: Redistributive preferences of individuals and the cleavages’ variables (proportions and
means) in Brazil, 2016.
Low or Medium Support High Support All N
Income decile (mean) 4.96 5.17 5.08 1443
Educational level
Primary education 29.51 24.24 26.69 400
Secondary education 63.56 66.14 64.84 972
Tertiary education 6.94 9.61 8.47 127
Employment status
Informal 19.71 23.4 21.82 334
Formal 24.62 29.63 27.43 420
Unemployed 18.27 18.01 18.01 276
Other 37.4 28.95 32.74 501
Political orientation
Left 27.22 27.99 27.59 390
Center 40.54 44.1 42.49 600
Right 32.23 27.91 29.92 422
Political party identification 15.38 9.39 17.2 264
Age (mean) 38.4 38.64 38.56 1532
Race
White 33.76 28.03 30.51 461
Black or Pardo 54.28 61.38 58.37 882
Other 11.96 10.6 11.12 168
Female 51.56 49.38 50.4 772
Total N 664 858 1522
Notes: Values include population weights. Proportions do not include missing data. High support is generated on
the basis of the question “The Brazilian government should implement strong policies to reduce income inequality
between the rich and the poor. To what extent do you agree or disagree with this statement?”. We transform the
original seven points response scale into a categorical variable with values of one (categories 6 and 7) and 0 (categories
from 1–5). The value of 1 means high support and 0 denotes low or medium support.
Determinants of Redistributive Preferences
Figure 2 shows the associations between indicators of cleavages and redis-

tributive preferences. The dots of plots indicate point estimates (logit regression
coefficients), and lines illustrate 95% confidence intervals from binary logistic
b3508_V3_Ch08.indd 205 11-02-2020 13:47:25

(a)
(b)
(c)
Figure 2: Determinants of redistributive preferences in Brazil, 2016.

Note: Estimations based in regression models of Table A.2.
b3508_V3_Ch08.indd 206 11-02-2020 13:47:26

regressions with demand for redistribution as the dependent variable (one is high
support). Here, the coefficients are interpreted as odds. Hence, a value greater
than 0 indicates a positive effect, and a value lower than 0 indicates a negative
effect. The vertical black lines in the plots denote the absence of association
(coefficient equals 0).8 In general terms, the findings of regressions differ with
descriptive analysis, as multivariate models show significant differences for several
independent variables.
Figure 2(a) provides evidence for material interest’s measures. The findings
suggest that the coefficient of income is not statistically significant. Thus, our evi-
dence is not consistent with standard models of redistributive preferences. Higher
educational levels are associated with an increase in support for redistribution.
Compared with persons with primary education, secondary and tertiary credentials
clearly increase the odds of the demand for redistribution, but the coefficient is
statistically significant only at 90% in the last model. In respect to employment
status, formal and informal workers do not show statistical significance. This
finding aligns with our expectations (H1). In contrast with the general pattern,
findings for students, housekeeping and retired persons confirm our descriptive
analysis. Being students, housekeeping or retired decreases the odds of demand for
redistribution.
Figure 2(b) shows estimates for political variables. Compared with people on
the left of the ideology scale, being neutral is not associated with redistributive
attitudes. But respondents who have right-leaning preferences show lower odds of
supporting redistribution than individuals with left-leaning preferences. However,
p-values indicates a high uncertainty in the estimates. These results clearly differ
from existing evidence for Latin America (Berens, 2015; Carnes and Mares, 2015;
Kaufman, 2009). Furthermore, findings suggest that party identification is also not
associated with the demand for redistribution.
Regarding new cleavages — Figure 2(c) — the estimate for gender is not s tatically
significant. In contrast, age and age squared show a quadratic pattern. One more
respondent’s year increases the demand for redistribution. Nevertheless, higher age
is associated with a decrease in the support for redistribution. More interesting, we
notice strong associations between race and redistributive preferences. Estimates of
members of the black and the pardo group are highly significant (p < 0.01), and they
8
Lighter colored dots represent estimates based on models that include only cleavage
easures, and black dots denote regressions with all independent variables, including con-
m
trols. For categorical variables, we omit the reference category. The full regression models
are displayed in Table A.2.
b3508_V3_Ch08.indd 207 11-02-2020 13:47:26

mean that being black or pardo increases the odds of the demand for redistribution
by 84%. This finding is in line with research about the salience of race for politics in
contemporary Brazil and confirms our hypothesis (H5). To further delve into the
importance of individuals’ race in their attitudes toward redistribution, we tested
interaction effects between race and socioeconomic and political cleavages, but no
statistically significant interaction terms were observed. The models are available in
the appendix (Tables A.3 and A.4).
Finally, we also found interesting results for some control variables. 9 Our
findings indicate that social mobility experience presents a statistically significant
association with preferences. Furthermore, increases in the trustworthiness of the
community are associated with higher support for redistribution. This last finding
confirms studies that indicate the importance of social trust to evaluate redistributive
preferences (Kuziemko et al., 2015).
Conclusions
This chapter examined associations between cleavages and redistributive
preferences in Brazil in recent years. In this respect, one of our main findings
confirms our expectation about the null differences between the redistributive
preferences of informal and formal workers. As Baker and Velasco-Guachalla
(2018) point out, this result may reflect weak associations between policy
beliefs and occupations, as labor biographies are characterized by high mobility
rates in the course of the life of workers. Future research should evaluate this
conjecture by using longitudinal information (e.g. microeconomic panel data).
Furthermore, it is also necessary to understand how high labor mobility rates
complement truncated welfare systems. Following Schneider (2013), these two
macro characteristics may conform to an institutional complementary system
that reproduces the hierarchical capitalism that characterizes the political
economies of the region.
In respect to income, we expected null effects. The findings confirm our hypoth-
esis. Considering the literature, these results are not consistent with standard models
of redistributive politics, such as the MRM. We suggest at least two alternative
explanations for these results: truncation and risk. Regarding the first mechanism,
following Holland (2016), the poor’s demand for redistribution is restricted because
it is in the economic interests of the poor living in truncated welfare systems to
9
Coefficients for control variables were estimated but not shown in tables in the appendix.
b3508_V3_Ch08.indd 208 11-02-2020 13:47:26

present this kind of attitude: the poor do not support more welfare benefits than
the non-poor because transfers are not redistributed in their favor. The second
explanatory mechanism focuses on the role of exposure to risk and suggests that the
uncertainty of future income may explain the redistributive preferences of voters in
Brazil. High labor mobility rates support not only the existence of poverty exits but
descending social mobility. Therefore, the demand for insurance against unexpected
shocks may affect motives for redistributive spending (Iversen and Soskice, 2001;
Rehm, 2016). To our knowledge, studies that evaluate both explanatory mechanisms
in Brazil and other Latin American countries do not exist. Future research should
consequently produce developments in these fields.
The results are consistent with our prognoses for education. The analysis indi-
cates that high credentials are associated with support for redistribution. Following
the literature in political science (Feldman and Zaller, 1992), this finding may reflect
the relevance of political information as micro sources that capture the actual way
citizens think about policy issues. Political awareness led us to the findings about
political ideology. We found a weak association between the extreme poles of the
ideological scale and the demand for redistribution. Political information may also
explain this result. As Bartels (2016) shows, for the US, ideology translates into policy
opinion, but only for people with high political sophistication. Uninformed citizens
cannot recognize the policy implication of their ideologies. It follows that perhaps
political ideology is not connected with redistributive preferences in Brazil because
the level of political information is low for a significant portion of the electorate.
Future research should examine this mechanism by producing direct measures of
political awareness.
Finally, we found a robust and significant association between race and
redistributive preferences. Given the strong targeting of CCT on Afro-Brazilians,
this finding should be explained by a self-interest mechanism. Recent studies also
suggest the political implications of this pattern. As De Micheli (2018) illustrates,
benefits mobilize Afro-Brazilians to participate in elections. Following Bueno and
Dunning (2017), how the strong demand for redistribution among Afro-Brazilians
relates with persistent ethnic inequalities in political representation in Brazil is an
open question.
Acknowledgments
This project was supported by CONICYT/FONDECYT REGULAR/1160921,
CONICYT/FONDAP/15110017, and CONICYT/FONDAP/15130009.
b3508_V3_Ch08.indd 209 11-02-2020 13:47:26

Appendix
Table A.1: Redistributive preferences and the control variables (proportions and means) in Brazil,
2016.
Low or Medium
Support High Support All N
Household size (mean) -3.74 3.77 3.76 1530
Urban 86.53 87.48 87.06 1334
Region
Central-West 7.59 6.62 7.05 107
North 7.6 6.62 7.05 107
Northeast 26.3 27.44 26.94 414
South 14.04 15.82 15.04 230
Southeast 44.47 43.51 43.93 674
Social trust
Untrustworthy 17.23 12.88 14.85 223
Not very trustworthy 49.72 47.42 48.41 726
Somewhat trustworthy 16.07 22.13 19.44 292
Very trustworthy 16.98 17.57 17.31 260
Social mobility
Downward mobility 44.5 49.21 47.16 721
Status quo 36.69 34.03 35.13 537
Upward mobility 18.81 16.76 17.71 271
Attendance at religious meetings (mean) 0.64 0.63 0.64 1529
A lot or some fear 57.28 62.51 60.23 922
Married 28.48 31.62 30.22 463
Conditional cash transfer 27.39 26 26.61 407
Total N 664 858 1522
Notes: Values include population weights. Proportions do not include missing data. High support is generated on
the basis of the question “The Brazilian government should implement strong policies to reduce income inequality
between the rich and the poor. To what extent do you agree or disagree with this statement?”. We transform the
original seven points response scale into a categorical variable with values of one (categories 6 and 7) and 0 (categories
from 1–5). The value of one means high support and 0 denotes low or medium support.
b3508_V3_Ch08.indd 210 11-02-2020 13:47:26

Table A.2: Logistic regression models. Log of odds.

Income Political New All
Cleavage Cleavage Cleavage Variables
Income decile -0.01 -0.00
(0.02) (0.02)
Educational level (ref: primary)
Secondary 0.19 0.26
(0.12) (0.14)
Tertiary 0.47* 0.41
(0.22) (0.25)
Employment status (ref: informal)
Formal -0.02 0.02
(0.15) (0.16)
Unemployed -0.22 -0.16
(0.18) (0.19)
Other -0.42** -0.31*
(0.15) (0.16)
Political orientation (ref: left)
Center 0.06 -0.12
(0.13) (0.14)
Right -0.25* -0.25
(0.13) (0.15)
Political party identification 0.26 0.22
(0.14) (0.14)
Race (ref: white)
Black or Pardo 0.31** 0.40**
(0.12) (0.13)
Other 0.08 0.20
(0.18) (0.19)
Female -0.12 -0.02
(0.10) (0.12)
Age 0.05** 0.03
(0.02) (0.02)
Squared age -0.00** 0.00
(0.00) (0.00)
Intercept 0.31 0.31*** -0.87* -1.16*
(0.18) (0.08) (0.34) (0.58)
AIC 1500.4 1499.6 1495.4 1514.6
Null deviance 2099 2099 2099 2099
Residual deviance 2079.4 2091.2 2080.8 2035
Number of observations 1532 1532 1532 1532
Household size 0.02
(0.03)
(Continued )
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Table A.2: (Continued )
Income Political New All
Cleavage Cleavage Cleavage Variables
Urban area 0.08
(0.17)
Region (ref: north)
Central-West -0.07
(0.28)
Northeast 0.22
(0.23)
South 0.32
(0.25)
Southeast 0.12
(0.22)
Social trust (ref: untrustworthy)
Not very trustworthy 0.22
(0.16)
Somewhat trustworthy 0.61**
(0.19)
Very trustworthy 0.40*
(0.20)
Social mobility (ref: downward mobility)
Status quo -0.25*
(0.13)
Upward mobility -0.18
(0.16)
Attendance at religious meetings -0.09
(0.14)
A lot or some fear 0.19
(0.11)
Married 0.08
(0.13)
Conditional cash transfer -0.05
(0.14)
Intercept 0.31 0.31*** -0.87* -1.16*
(0.18) (0.08) (0.34) (0.58)
AIC 1500.4 1499.6 1495.4 1514.6
Null deviance 2099 2099 2099 2099
Residual deviance 2079.4 2091.2 2080.8 2035
Notes: *** p < 0.001, ** p < 0.01, * p < 0.05 (two-tailed test). Standard errors in parenthesis. Dependent variable is
demand for redistribution (one is high support).
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Table A.3: Logistic regression models with race and socioeconomic cleavages. Log of odds.
Principal Interaction Principal Effects Interaction Effects
Effects Income Effects Income Employment Employment
Income decile 0.03 -0.02
(0.02) (0.04)
Employment status (ref: informal)
Formal 0.01 0.10
(0.15) (0.27)
Unemployed -0.23 -0.70
(0.17) (0.36)
Other -0.44** -0.10
(0.14) (0.27)
Race (ref: white)
Black or Pardo 0.34** 0.21 0.31** 0.40
(0.12) (0.28) (0.12) (0.26)
Other 0.10 0.55 0.09 0.57
(0.18) (0.43) (0.18) (0.41)
Race: Black or Pardo*Income decile 0.03
(0.04)
Race: Other*Income decile -0.08
(0.08)
Race: Black or Pardo*Formal -0.04
(0.34)
Race: Black or Pardo*Unemployed 0.74
(0.42)
Race: Black or Pardo*Other -0.28
(0.33)
Race: Other*Formal -0.74
(0.55)
Race: Other*Unemployed 0.23
(0.61)
Race: Other*Other -0.55
(0.51)
Intercept -0.11 -1.17 0.25* -1.30
(0.14) (0.61) (0.14) (0.60)
AIC 1497.6 1515.6 1493.8 1517.6
Null deviance 2099 2099 2099 2099
Residual deviance 2088.6 2031 2076.8 2025
Notes: *** p < 0.001, ** p < 0.01, * p < 0.05 (two-tailed test). Standard errors in parenthesis. Dependent variable is demand for
redistribution (one is high support). Values include population weights. Control variables were included but estimations are not
shown.
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Table A.4: Logistic regression models with race and political cleavages. Log of odds.
Principal Interaction Principal Interaction
Effects Political Effects Political Effects Political Effects Political
Ideology Ideology Party Party
Political orientation (ref: left)
Center -0.07 -0.27
(0.13) (0.27)
Right -0.23 -0.26
(0.13) (0.23)
Political party identification 0.25 0.37
(0.14) (0.25)
Race (ref: white)
Black or Pardo 0.30* 0.38 0.30** 0.44***
(0.12) (0.20) (0.12) (0.14)
Other 0.07 -0.07 0.07 0.16
(0.18) (0.30) (0.18) (0.21)
Race: Black or Pardo*Center 0.10
(0.33)
Race: Black or Pardo*Right -0.02
(0.30)
Race: Other*Left 0.84
(0.51)
Race: Other*Right 0.16
(0.44)
Race: Black or Pardo*Political party -0.29
(0.32)
Race: Other*Political party 0.29
(0.52)
Intercept 0.16 -1.13 0.03 -1.31*
(0.11) (0.59) (0.10) (0.59)
AIC 1497.2 1520.2 1496.2 1516.4
Null deviance 2099 2099 2099 2099
Residual deviance 2087.2 2030.8 2088.4 2032.4
Notes: *** p < 0.001, ** p < 0.01, * p < 0.05 (two-tailed test). Standard errors in parenthesis. Dependent variable is demand for
redistribution (one is high support). Values include population weights. Control variables were included but estimations are not
shown.
b3508_V3_Ch08.indd 214 11-02-2020 13:47:27

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CHAPTER 9
Understanding Informality in China:

Institutional Causes and Subsequent
Measurement Issues
Yujeong Yang* and Wei-Ting Yen†
Department of Political Science,

*
State University of New York College at Cortland, NY 13045, USA

†
Department of Government, Franklin and Marshall College,
Lancaster, PA 17603, USA
Introduction
Since the market reform of the late 1980s, the Chinese labor market structure has
experienced major changes. One of the most important changes is the rapid growth
of labor informality. In the socialist era, most Chinese urban workers participated in
the formal labor market as the majority of them were employed in state-owned enter-
prises, provided with life-long employment security and a wide range of employment
benefits. The labor market today is totally different from that of the pre-1980s. The
Chinese labor market is now fragmented and stratified with the emergence of work-
ers with different employment positions. Labor informality has grown consistently
and rapidly and has become the main mode of employment (Cooke, 2008). Properly
measuring the size of labor informality in China and understanding its sources have
become more important than ever.
However, measuring the size of labor informality in China is not an easy task.
For one thing, the concept of labor informality is in and of itself opaque. There
219
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220 Y. Yang and W.-T. Yen
is a lack of agreement among researchers as to what defines labor informality.

Consequently, researchers conceptualize labor informality differently depending on
the research questions asked. For another, the concept of labor informality originally
emerges as a residual term defining the labor force left out of the formal sector, or
more specifically, out of the wage–employment relationship (Hart, 1973). Therefore,
we rely on national labor market contexts to define what is formal to understand
what is informal, leaving the concept of labor informality highly contingent upon
national contexts. Studies of labor informality based on other parts of the world
might not explain China’s labor informality well enough due to every country’s
distinctive nature of labor informality. Put differently, the proxies used in Latin
America might not be useful in Asia because labor informality is defined differ-
ently. The abovementioned reasons complicate the measurement processes of labor
informality in China. As such, pinning down what labor informality is in China and
how we should approach the concept are challenging tasks.
One factor contributing to conceptual opaqueness is the various institutional
causes of labor informality from region to region (if not country to country). In
this chapter, we explore the institutional origin of labor informality in China and to
compare it with other parts of the world. Labor informality is a combination of both
voluntary members and involuntary members (Maloney, 2001; Perry et al., 2007).
By focusing on the institutional causes, this chapter explains why workers are in the
informal sector involuntarily. We show that the conceptualization of labor infor-
mality has its political root in China and, hence, leads to distinctive measurement
challenges. To illustrate how China’s labor informality has its unique characteristics,
we compare China to Latin America, specifically to Brazil.
The chapter argues that, compared to Latin America, China’s labor informal-
ity is the result of (1) the emphasis on labor contracts under its socialist doctrine,
and (2) the trajectory of the welfare state development. The first factor leads to the
possibility of overlooking a subgroup of informal sector workers who hold labor
contracts but still suffer from employment insecurity; the second factor leads to the
suggestion that the ‘social insurance access’ is not a suitable criterion to measure
the size of labor informality in China. The second factor also distinguishes China
from Brazil regarding their labor informality composition. While the possession of
labor contract and participation in social insurance programs are important aspects
of formal employment in Brazil, identifying informal employment using the same
criteria may yield inaccurate estimates of informal employment in China.
Regarding the measurement issues, established scholarship had reached
consensus that the self-employed workers are part of labor informality (International
Labour Organization, 2002). Following the distinctive origin of labor informality in
China, the chapter also identifies three other precarious employment types in the
formal sector that should be considered as informal jobs. These job types include
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Understanding Informality in China 221
(a) those without labor contracts; (b) part-time workers with labor contracts; and
(c) dispatched workers with labor contracts.
We use our conceptualization of labor informality to measure labor informality
in China, and the existing survey data show that the size of labor informality in
China has increased from 17.38% in 2012 to 25.06% in 2014. The increase in China’s
labor informality is attributed not only to the growth of the self-employed but also
to the expansion of formal sector precarious employment. The growth of informal
employment in the formal sector contrasts with Brazil where the size of the formal
sector informal employment has decreased from 58.5% in the 1990s to 47.2% in the
2000s (Charmes, 2009: p.36).
This chapter starts by providing an overview of the terms currently used by the
international community to study labor informality. It is a useful exercise to fix what
these terms refer to as researchers sometimes use these terms to mean different ideas
in different studies. Next, we review the historical development of labor informality
in Latin America, specifically in Brazil, which is ensued by a detailed discussion on
the causes of labor informality in China. We then discuss and propose the ways in
which labor informality should be measured in China, and use existing survey data
to provide an overview of China’s labor market informality. The chapter measures
the size of labor informality using two rounds of nationally representative labor
survey data of 2012 and 2014, and ends with the political and policy implications
for studying informal economy in China.
Definition of Labor Informality

Though the concept of labor informality is evolving and remains controversial,
it is still useful to provide an overview of the terminology currently used by the
international community. At the theoretical level, the definition of labor informality
“is concerned with the characteristics of jobs, rather than the economic units to which
they belong” (Charmes, 2009: 28). The defining characteristics of labor informality are
jobs that “have no written contract and lacks social protection” (Charmes, 2009: 28).
Researchers may refer to this phenomenon as informal employment or the informal
sector. In this chapter, labor informality and the informal employment are interchange-
able terms we use to refer to all jobs falling under the category of labor informality.
Under this definition, labor informality/informal employment is comprised
of two parts: informal self-employment (i.e. informal employment in the informal
sector) and informal wage–employment (i.e. informal employment in the formal
sector). Informal self-employment consists of own-account workers, who are self-
employed people with no employees; employers, who are self-employed people with
paid employees; unpaid contributing family workers; and members of producer’s
cooperatives (wherever these exist) (Chen, 2008). Another term we use to refer to
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informal self-employment is the informal sector. On the other hand, informal wage–
employment consists of people who work in a wage–employment r elationship but
who are without adequate (or any) legal and social protection. Groups that belong
to this category include: (a) informal employees, who are unprotected employees
with known employers (regardless of enterprise sizes)1; (b) casual workers, who
exchange their labor for income on daily/seasonal basis that have no fixed employers;
and (c) subcontracted workers who produce for piece-rate from small workshops
(Chen, 2008). According to Chen (2008), across the developing world, informal
self-employment is composed of more share of labor informality than informal
wage–employment. As we show in the following sections, the prevalence of informal
self-employment was indeed the case in most Latin American countries, including
Brazil. Yet, we will show that informal self-employment was never a meaningful
category in China until the 1980s.
Labor Informality in Latin America
Before we jump to the discussion of labor informality in China, we first discuss the
phenomenon in Latin America. This section serves as the reference point to which
we compare China’s labor informality later in the chapter. In Latin America, the
institutional origin of labor informality is associated with the continent’s welfare
state type. Latin America’s welfare state is a Bismarckian welfare state, which is
characterized by insurance-based social policies. Such insurance-based security
regime is not a coincidence, but a deliberate policy choice along with the produc-
tion regime choice across countries in Latin America (Haggard, 2008; Wibbels and
Ahlquist, 2011). The social insurance model directly contributes to the rise of labor
informality in Latin America. This section details the reasons behind Latin America’s
prevalent labor informality phenomenon and its trend overtime; we will pay special
attention to the Brazil case.
1
Another labor market classification that might be confusing is that the existing literature
defines enterprises with fewer than five workers as informal enterprises, and enterprises
with more than five workers are formal enterprises. Some researchers would classify all the
employers and their paid employees working in micro-enterprises with fewer than five
workers as part of the labor informality (e.g. Charmes, 2009). However, we find this way
of classification confusing as it mixes both informal self-employment and informal wage–
employment. From the employee perspectives, as long as they are not protected with legal
contract and social protection, they are considered informal employees. It does not matter
how big the firm is.
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The Cause: Development Strategy and Social Insurance
To trace how the Bismarckian welfare state is related to labor informality, it is

important to first understand why social insurance was the common social policy
type in Latin America. In a nutshell, the social insurance model emerged as a
companion policy along with the development strategy in early years for many
Latin American countries. The dominating development model was the import–
substitution–industrialization (ISI) strategy, which reached its peak as the policy
choice in the 1950s and 1960s. The ISI strategy involves two parts. On the one
hand, government subsidizes the chosen industrial sectors to begin the process of
industrialization. The chosen industries usually produce commodities that were
supposed to be imported from overseas. On the other hand, the government helps
eliminate the international competitors by either setting higher trade barriers or
manipulating the exchange rate (or both).2
What accompanies the ISI strategy is the social insurance-based welfare state.
This is a strategic combination that happened not just in Latin America, but also in
other ISI-oriented economies. Wibbels and Ahlquist (2011) argue that to promote
and to implement the ISI strategies successfully, governments need to cultivate the
labor force suitable for the ISI class structure. As a result, countries adopting the ISI
model are also inclined to adopt the social insurance model, which can easily have a
narrow range of beneficiaries and would help maximize the beneficiaries’ wage over
time. Due to the contributory nature of social insurance policies, such policy model
tends to protect only the better-off of the formal sector and strengthen the existing
social hierarchy, especially in the developing world (van Ginneken, 2003). These are
usually workers associated with the ISI-related industries. Together, these policies
create the privileged working and middle classes that serve both as the central labor
force and the core consumers of the products they produce.
Brazil followed the ISI plus social insurance path described in Wibbels’ and
Ahlquist’s argument. Among all the Latin American countries, Brazil was one of the
first countries to adopt the ISI model. In the 1930s, Brazil joined Chile, Argentina,
Uruguay, and Mexico and became the first batch of the ISI strategy followers. The
protectionism strategy emerged against the backdrop that the world just came out
of the 1929 Great Recession, and the Keynesian ideology of big government started
to gain its popularity (Haggard, 2008). The ISI model was promoted strongly by the
then populist leader Getúlio Vargas, who was the president of Brazil from 1930–1945
2
To learn more about the ISI strategy and its evaluation, see Bruton (1998). To learn more
about why some countries are more likely to adopt the ISI strategy, see Wibbels and Ahlquist
(2011).
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to 1951–1954. His successor, Juscelino Kubitschek de Oliveira (1956–1961), d eepened

the ISI industrialization furthermore. During that time, Brazil successfully estab-
lished automobile and steel industries. The ISI strategy has also created a strong
and organized labor force in Brazil. Between the 1970s and the 1980s, the unioniza-
tion rate in Brazil was more than 35%. Even though the rates decreased to 24.8% in
the 1990s after the debt crisis, the strength of the unionized labor in Brazil was still
stronger than other countries in the region. For instance, around the same time,
the unionization rate was 4.4% in Guatemala (Inter-American Development Bank,
2003).
When Getúlio Vargas became the leader of Brazil, he not only focused on
fostering the economy through a series of tariff and quotas, he also passed several
legislative bills to provide pension and health insurance to a number of occupational
groups. According to Malloy (1979: 19), the passage of social insurance programs
was a top-down effort to link the “potentially powerful groups into dependency
relationship” with the state, and to stratify the society internally into competing
groups all of which have to rely on the state.
The Consequence: Measures and Trends of Labor Informality

in Latin America
The direct impact of the insurance-based social protection regime is that it defines
what labor informality is (or is not) in Latin America. In Latin America, the most
prominent conceptualization of labor informality follows the “legalistic/social
protection” criteria (e.g. Perry et al., 2007; Baker and Velasco-Guachalla, 2018).
That is, labor informality is when workers are in an employment relationship that is
“not subject to standard labor legislation, taxation, social protection, or entitlement
to certain employment benefits” (International Labour Organization, 2002). Even
though the legal criterion (i.e. whether one is employed with a labor contract) and
the social protection criterion (i.e. whether one enrolls in the public-run social
benefit programs) are distinct, Baker and Velasco-Guachalla (2018: 173) argue that
the two criteria overlap to a great deal in the Latin American context, precisely
because a social insurance-based welfare state means that “a formal employment
contract brings with it enrollment in the state-run social security system”. In other
words, the early development of social insurance policies leads to the fact that a labor
contract usually includes the publicly mandated social benefit. When an employer
avoids providing a legally binding labor contract, they are usually trying to avoid the
social benefit an employer is obligated to pay for. As such, it is the social protection
programs that divide Latin America’s labor market into the formal and informal
employment (Levy, 2008; Levy and Schady, 2013).
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Under the Bismarckian welfare state, as mentioned above, workers are

considered employed informally when they are not registered under any social
insurance programs (e.g. public pension and health insurance, etc.). Hence, one
usual proxy used in survey data to approach a worker’s formal/informal status is
related to whether they enroll in public-run social insurance policies or not. For
instance, Baker and Velasco-Guachalla (2018) used related survey items in the
Latin America Public Opinion Project (LAPOP) to identify whether a worker is
in an informal wage–employment relationship or not. The survey item they use
asks whether respondents have social security (in the 2006 and the 2008 wave) or
health insurance (in the 2008 wave) thorough their employers (Baker and Velasco-
Guachalla, 2018).
On the size of labor informality, the average share of the non-agricultural
informal employment in Latin America is 54.2% before 2000. While Brazil had
the share of labor informality dropped from 60% point to 51% point within 10
years, countries, such as Argentina and Bolivia, experienced an increase of labor
informality during the same period (Charmes, 2009: 34). Because the social security
regime is highly connected to the labor market regime, the major form of labor
informality in Latin America is informal self-employment. In the 1990s, informal
self-employment constituted 61% of the non-agricultural informal employment
while informal wage–employment made up the other 39%. The pattern is almost
identical across Latin American countries. Brazil has a more balanced composition
of labor informality in the region as informal self-employment only leads informal
wage–employment by 6% points at the 53% versus 47% difference in the 2000s
(Charmes, 2009: 36).
Such a balanced composition is also a reflection of a relatively higher social
insurance coverage rate in Brazil. Compared to other countries in the region, 55.8%
of the employed workers aged above 20 are covered in contributory social insurance
programs in Brazil, ranking Brazil as the fourth most covered country (Levy and
Schady, 2013: 201). Overall, because the social insurance coverage directly links to
the size of labor informality, there is a strong and negative correlation between the
two in Latin America (see Figure 1). When the social insurance coverage is larger,
labor informality is smaller, and vice versa. The solid black dot is where Brazil stands
relative to other countries in the region.
To sum up, this section briefly discussed the institutional cause of labor
informality in Latin America. Due to the early development of the social insurance
models in the region, the size of labor informality in Latin America is directly
related to employers trying to avoid paying for the state-run social insurance benefit.
As such, three characteristics can best summarize the informal employment in
Latin America. First, informal self-employment constitutes the most part of the
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90%
Coverage of Social Insurance Policy
80%
70%
60%
50%
40%
30%
20%
10%
0%
0% 10% 20% 30% 40% 50% 60% 70% 80%
The Share of Labor Informality
Figure 1: The relationship between labor informality and social insurance coverage.
Source: Charmes (2009) and Levy and Schady (2013).
informal employment. Second, the higher the social insurance coverage, the lower
the informal employment size. Third, enrollment in any state, run social insurance
programs or not is a good proxy for labor informality.
Chinese Labor Informality in Historical Perspective

In this section, we turn our focus to China. We trace the rise of labor informality
in China through the historical perspective. We show that China’s small informal
employment in early years was attributed to its communist ideology, and how the
phenomenon of labor informality has grown rapidly after China began its market
reform after 1978. Moreover, because social benefit in China is tied closely to the
household registration system, labor informality in China, then, is related to firms
hiring rural migrant workers who are not entitled to social benefits in urban cities
under the household registration system. We trace in detail the various types of
labor informality arising in China over the last three decades.
Labor Informality in the Early Market Reform Era (~1990s):

The Growth of the Informal Sector
Compared to other developing countries, China has relatively small informal

employment. The underdevelopment of the informal employment is attributable
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to its socialist legacy. While labor informality has existed in China even under the
socialist economic system, it was not recognized as a fully developed concept (Chen
and Hamori, 2013). Before the economic openness and reform started in the late
1980s, most urban workers were employed in state-owned enterprises (SOEs) and
were provided with generous employment-based welfare benefits, such as housing,
education, pension benefits, health care. Hence, there was little room for the informal
employment to emerge in the urban labor market. Under the socialist economic
system, the informal employment could not squeeze in the rural labor market as
well because individual rural workers were affiliated with collective lands and the
products were managed by the communes.
The informal employment emerged and started to develop with the market
reform in the late 1980s. The informal employment began to grow from the Chinese
rural areas. Rural economic activities started to be arranged on the basis of c ontracts.
Individual rural workers provided a contracted number of products to the town-
ship government and sold the surplus products at the informal urban market.
Rural decollectivization also played a role in facilitating the growth of the informal
employment by releasing a large number of workers who previously engaged only
in agriculture and not in other forms of economic activities. An increasing number
of rural workers participated in economic activities in the informal sector —
unregulated and under-monitored economic sector — by selling small food or fruits
or by repairing shoes, bicycles, or keys (Cook, 2008). The economic activities of these
self-employed workers are unregulated and under-monitored by the state.
While the size of the informal sector has grown rapidly since marketization, the
divide between formal and informal labor was not fully developed as a concept that
stratifies the labor market. Until then, the rural–urban dichotomy was more decisive
than the emerging divide between formal and informal labor (Cooke, 2008). The
divide between formal and informal labor reinforced the divide between urban and
rural labor markets, rather than cross-cutting the divide between urban and rural
labor market, as the informal employment rises mostly from the rural areas whereas
the urban formal labor market remains insulated from the shock of marketization.
The dichotomy between the formal and informal employment has gained
importance as the informal employment penetrated the urban market. The informal
employment has emerged in the urban market in the form of informal private
enterprises since the early 1990s. These informal private enterprises are composed
of less than seven employees or are usually owned and managed by an individual or
by a family. These enterprises are regulated and monitored not as strictly as formal
enterprises, such as the SOEs, collective enterprises, or foreign enterprises. The
growth of these informal enterprises in the urban labor market has been rapid and
has contributed a lot to the urban employment (Huang, 2009).
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Labor Informality in the Market Reform Era (mid-1990s to early 2000s):

Labor Informality’s Contagion to Formal Sector
In its early stage of the market reform, the size of labor informality grew due to the
emergence of the informal self-employment. Starting from the late 1990s, however,
labor informality has permeated into the urban formal sector. The urban economy
previously predominated by the SOEs has become diversified with the rise of private
enterprises and foreign enterprises and the restructuring of the SOEs. The newly
emerging formal sector — foreign and private enterprises — has become a large
consumer of informal employees.
Most foreign enterprises and emerging private enterprises were focused on
export-oriented and labor-intensive industries. In order to attract these firms’
investments to their own localities, local governments have strived to secure a
stable supply of cheap and low-skilled labor. Hiring urban workers, however,
was not a cost-efficient deal for many foreign firms. Under the Chinese house-
hold registration system (i.e. the hukou system), urban workers were entitled to
various welfare benefits provided by their employers. Hiring urban workers was
inevitably accompanied by an increase in labor costs. In this context, Chinese
local governments loosened their restriction on rural-to-urban migration and
encouraged rural workers to migrate to urban areas and to work in foreign and
private enterprises. Profit-motivated foreign and private firms could thus reduce
labor costs by employing these migrant workers as they were exempt from the
obligation to provide employment-based welfare benefits to these workers (Knight
et al., 1999). These migrant workers received lower wages than urban workers,
were exposed to various forms of labor exploitation and experienced a high level
of employment insecurity.
These migrant workers often lacked written labor contracts, were compensated
with lower wages, and experienced a high level of employment insecurity. They could
not claim employment-based welfare benefits their formal counterparts could claim.
While the concept of employment relationship built on labor contract was intro-
duced in the Labor Law of 1994, many workers entering the emerging foreign and
private firms did not establish a formal relationship with their employers due to their
lack of knowledge. Employers in the emerging economic sector took advantage of the
nascent and incomplete institutional arrangements and the lack of migrant workers’
legal knowledge and successfully hired them with lower wages. Firms did not inform
workers about the existence or the role of labor contract or even discouraged workers
from signing the labor contracts for employer’s fear of increasing labor costs. These
worker–employment relationships could not be monitored, managed, or regulated
properly by relevant authorities or local governments as their employment relations
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with the firms were not built on labor contracts. Nor were there proper regulations
to protect the informal employed workers from various forms of labor abuse. The
restructuring of SOEs in the late 1990s has further facilitated labor informalization
in the formal sector. Many laid-off workers generated by the SOE reform engaged
in short-term, part-time, non-standard jobs created in the formal sector.
It was then that the Chinese authority officially recognized the existence of
labor informality. In 1996, the Shanghai labor authority introduced the concept of
“non-standard flexible employment” to indicate various forms of labor informal-
ity characterized by temporary, fixed-term, casual workers in the formal sector
and the self-employed (Wang et al., 2016). Chinese government has deliberately
avoided describing these non-standard workers as informal and adopted the term
of “flexible” worker instead in order to dilute the negative connotation and to reduce
the delegitimizing effect that the term “informal” may bring to the society.
This new group of informal workers, who are employed in the wage —
employment relationship but without written labor contracts, are similar to the
self-employed or employees in small-scale private business in that they are all in
informal wage–employment that has a high level of employment insecurity. Yet,
this new group of informal workers is different from informal self-employment in
that they are employed in formal sector enterprises that are subject to government
regulation. It makes an important difference between informal wage–employment
workers and informal self-employed workers. A research comparing these two
groups under labor informality found important differences between the two. In
China, informal wage-employed workers lacking labor contracts earn lesser money
and have lower level of subjective well-being than informal self-employed workers.
Yet, they work shorter hours and are provided with better social protection than
informal self-employed workers (Liang et al., 2016). These differences come from
the fact that the formal sector is regulated more intensively by the state regulation
and is affected more directly by labor regulations and laws. The differences between
the two groups loom larger with the implementation of the Labor Contract Law of
2008, which I am turning to now.
Labor Informality in the 2010s: The Emergence of Dispatch Workers
The Chinese labor market in the 2010s has experienced major changes with the
implementation of the Labor Contract Law (LCL) of 2008. While the concept of
labor relationship built on labor contracts has been introduced since the 1994 Labor
Law, it was not until the enactment of the 2008 LCL that employment contract
requirement has fully been implemented. The 2008 LCL was enacted in response to
the growing level of social instability caused by the poor treatment against migrant
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workers. For the Hu Jintao-Wen Jiabao administration that rose in power with the
catchphrase of “harmonious society”, maintaining social stability and reducing labor
discontents have become important issues. By enacting a more enforceable and
protective labor law, the Chinese government tried to improve workers’ working
environment and to reduce social instability (Meng, 2017; Gallagher et al., 2014;
Li and Freeman, 2015). With the implementation of the LCL of 2008, the Chinese
government has made it mandatory for workers to sign labor contracts with their
employers. Employers were punished when they failed to sign labor contracts with
their employees within a month from the commencement of employment relations.
The implementation of the LCL enabled workers to possess a higher sense of employ-
ment security and claim various labor rights.
Whether the Labor Contract Law of 2008 reduced the size of informal labor,
however, is subject to debate. The passage of the LCL has certainly increased the
proportion of workers with labor contracts (Gallagher et al., 2014). The proportion
of contracted worker has increased not only within the urban worker group but also
in the migrant worker group. With the implementation of the law, workers gained
power to file labor disputes, to claim their social rights, and to protect themselves
from rampant labor abuse. The strict enforcement of labor regulations, however,
ironically incentivized employers to hire workers indirectly or through non-standard
ways so that they can reduce the higher labor cost associated with stable employment
positions. This creative implementation of the LCL and business’s exploitation of the
LCL created a large number of non-standard workers whose employment positions
are not necessarily in violation of the labor contract law but remain still precarious,
the so-called “precarious employment” (Cook, 2008; Swider, 2015). Dispatch worker
is the most common form of these precarious jobs.3 Employment precariousness
has transmitted not only to vulnerable industries or private enterprises susceptible
to higher labor cost but also to the well-protected sectors such as state-owned
manufacturing enterprises (Park and Cai, 2011b). In the worst case, dispatch
workers compose more than two-third of full time employees at SOEs (CLB, 2013).
The state has overlooked, if not facilitated, the growth of this new type of precarious
employment to boost labor market flexibility (Wang et al., 2016).
Nevertheless, whether to see these precarious workers as informal sector workers
or not remains a controversial issue. Some argue that precarious workers should be
classified as formal workers in that precarious workers establish formalistic labor
relations with their employers, at least in paper (Gallagher et al., 2014). Others,
on the other hand, see precarious workers as informal workers (Ren and Peng,
3
Different terms are used to indicate this group of workers — dispatch workers, subcon-
tracted workers, agency workers.
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2007; Park and Cai, 2011a; Wang et al., 2016). Precarious workers are paid less or
irregularly and experience a higher level of job insecurity. They also receive less
welfare benefits than formal sector workers. Some labor agency firms have bar-
gained with the local labor bureau and social insurance companies so that they can
allow these labor agency firms to provide only limited social benefits to the agency
workers (Wang et al., 2016). They are hardly monitored by labor authorities due to
the complexity of the employment relationship they have with the firms they are
working for. In this regard, some even evaluate that the LCL has unintentionally
contributed to an increase of informal wage–employment in the formal sector,
rather than eradicating it. The increase in the number of precarious workers (i.e.
informal wage-employed workers with labor contracts) is a new phenomenon that
has received relatively fewer attention from the previous literature on Chinese labor
informality. This chapter considers the size of the precarious workforce in measuring
the size of labor informality in China.
Labor Informality and the Revision of the Labor Contract Law in 2013
The over-expansion of precarious workers, especially explosion in the number of

dispatch workers, has worried the Chinese government about its ramification on
its economic development and social stability. The Chinese government’s turn to
domestic-consumption-oriented model also played a role in motivating the state
to revise the LCL in a way that prevents employers from taking advantage of the
loopholes of the law and hire workers informally without being caught by the labor
contract law. The revised labor contract law of 2013 restricts the use of dispatch
workers, stipulates the 6-month limit on using temporary workers and sets the
maximum percentage of dispatch workers in a firm’s total employees. Yet, many
observers cast doubt on the effectiveness of the revised law in reducing the abuse
of non-standard employment and are suspicious that employers will find a way to
circumvent the new law.
Measuring the Size of Labor Informality in China

Following the discussion on the rise of labor informality in China, this section
focuses on the ways in which we can measure China’s labor informality. It has been
a challenge to measure labor informality accurately in China, partly due to the
government’s neglect on purpose. Therefore, we provide various ways of measuring
China’s labor informality and discuss the job categories that should be included
under labor informality.
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The Difficulty of Measuring Chinese Labor Informality
Measuring the size of labor informality in China is challenging. Despite the

substantial increase in the size of labor informality, the Chinese government has
shown little enthusiasm in understanding the size and source of its informal labor
(Park et al., 2012). While the Chinese official statistics provides a remote estimate
of labor informality, they are far from being consistent (Zhou, 2013). The Chinese
government’s lack of effort to understand its labor market informality is in sharp
contrast to other large uneven developing countries, such as India, where the govern-
ment intervenes proactively in measuring the size of informal employment. Even in
reports produced by the International Labour Organization (ILO), where the size
of informal employment of various countries is reported, the size of Chinese labor
informality is either not reported or is represented by the size of informal employ-
ment of four large cities in China.
The Chinese government’s lack of enthusiasm in understanding the nature of
its labor informality is also evidenced by the term it uses to describe the informal
economy. The term “informal employment” as a concept was first introduced by the
Shanghai authority in 1996. Yet, the Chinese government has deliberately avoided
using the term “informal (非正规, feizhenggui)”. Instead, the Chinese government
adopted a term “flexible (灵活, linghuo)” employment in order to dilute the negative
connotation that the term “informal” may bring to the society (Cook, 2008). The
Chinese government’s denial of “informal” economy has delayed the attempt to sys-
tematically examine the extent and characteristics of the Chinese labor informality,
not to mention enactment of relevant policies and regulations regarding informal
employees (Liang et al., 2016). While burgeoning literature on Chinese labor infor-
mality approximates the size of the informal sector by using various survey data,
this lack of official statistics or publicly available firm-level surveys complicates deep
understanding of the Chinese labor informality.
Measuring the size of labor informality in China is also challenging because the
sources of labor informality have been changing and have become diversified over
the past few decades. Labor informality comes both from wage–employment and
self-employment. Two key characteristics distinguish the two categories (Hart, 1985).
First, wage–employment is monitored and regulated by the state and the relationship
between employers and most employment relationships are built on explicit labor
contracts. It is possible, however, for employers to hire workers informally by not
establishing their relationship based on labor contracts. Economic globalization and
price competition have facilitated the informal employment in the wage relation-
ship. Self-employment, on the other hand, is not subject to state’s regulations. The
employment relationship is not built on a written contract. Most workers outside of
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wage–employment are either self-employed or employees in small enterprises not

regulated by the state. Their employment relationships are characterized by high
flexibility and instability.
Estimates from Official Statistics Using the Residual Methods
There have been important and meaningful academic attempts to measure the size
of the Chinese labor informality. One of the major approaches is to estimate the size
of informal economy at the macro level by using national-level official statistics and
the other is to use various survey data.
Most researches using official statistics adopt the residual approach in which the
size of labor informality is measured by the gap between the total urban labor force
and the number of formal employees (Park and Cai, 2011b; Cook, 2008; Huang,
2009; Hu and Zhao, 2006; Zhang et al., 2015). The number of total urban labor force
comes from the annual sample surveys of the entire population conducted by the
National Bureau of Statistics (NBS). The number of formal employees is estimated
as the number of workers counted and reported by urban firms of different owner-
ships (Park and Cai, 2011a).The Chinese official statistics further breaks down the
number of reported workers by four different ownerships; (1) state-owned enter-
prises; (2) collective enterprises; (3) other enterprises; and (4) private enterprises
and self-employed.
There is a debate regarding which workers are supposed to be considered as
“formal (sector) workers”. Some works treat the entire number of reported workers
as the size of formal sector workers. In calculating the size of labor informality, these
works subtract the number of reported workers from the number of total urban
labor force (Park and Cai, 2011a; Zhang et al., 2015). The gap between the number
of total labor force and of registered workers implies that there are uncounted urban
labor forces. These uncounted workers, by definition, are informal in a sense that
their employment status is not counted by the formal system. It is likely that these
workers’ employment stability or security cannot be monitored and managed very
effectively.
Other works share the point that “uncounted” workers reflect the size of infor-
mal workers but they are different in that they treat workers in private enterprises
and self-employed as “informal sector” workers (Huang, 2009; Hu and Zhao, 2006).
These works subtract the sum of formal sector workers — the number of employees
in state-owned enterprises, collective enterprises, and other enterprises — from
the number of total employment. This approach provides a larger estimate of the
size of labor informality as it treats not only “uncounted” workers but also private
enterprise- and self-employed workers as informal workers.
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While this approach is widely used, this residual approach may provide a limited
and potentially flawed description of the size and characteristics of Chinese labor
informality. First, it is not clear who constitute the “uncounted” worker group.
Some argue that the number of uncounted workers is likely to capture the number
of informal employees in formal sectors (Hu and Zhao, 2006). Others, on the other
hand, interpret this number as the number of workers in informal sectors such as
unregistered private and self-employed sectors (Park and Cai, 2011a). This unclarity
and limited information on uncounted worker group makes it hard to understand
the changing nature of Chinese informality and diverse sources from which labor
informality is created.
Moreover, the post mid-2000s estimate of labor informality measured by the
residual approach is suspected to be systematically biased and is not likely to capture
the changes in Chinese labor informality. Until the mid-2000s, the size of labor
informality measured by the residual approach was approximately equal to other
estimates of labor informality in urban China (Chen and Hamori, 2013). Hence, the
residual estimate was broadly used to grasp the chances in Chinese labor informality.
Since the mid-2000s, however, the estimate from the residual method has started to
show bigger mismatch with estimates from other surveys and reports.
The residual estimate shows a decreasing trend of the size of uncounted workers
(see Figure 2). Some might interpret this as decrease of informal wage-employed
workers after the strict enforcement of the LCL. Yet, various survey data and reports
witness an increase, not decrease, in both informal wage–employment and informal
self-employment after the implementation of the LCL (Liang et al., 2016). Estimates
from individual-level surveys (see the following section) also show that the size of
informal wage–employment has grown and occupied the largest portion of labor
informality in China. The decreasing number of uncounted workers since the late-
2000s from the residual approach is not likely due to actual downsizing of labor
informality in wage–employment relationships but is more likely due to the changes
in the reporting system. For most research projects that adopted the residual method,
this potential systematic bias was less of a problem because they stopped measuring
the size of the informal sector using the residual method before 2008 — the year the
LCL was implemented. For a more recent update of the size of labor informality, the
residual estimate is likely to suffer from this potential systematic bias.
Not only does the residual approach provide a flawed estimate of the number of
informal wage-employed workers, it also risks an underestimation of the size of labor
informality in wage–employment relationship by treating all workers in formally
registered firms as formal workers. As discussed, labor informality exists even in
formally registered sectors and with different forms — those who are without labor
contract and various forms of precarious workers with labor contract. The residual
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Shanghai labor authority Labor Contract Law (2008)

60
of informal employment (1996)

50
Private Sector Workers

& Self-employed (%)
40
30
20
Non-countable Workers (%)

10
0
19 9
19 0
19 1
19 2
19 3
19 4
19 5
19 6
19 7
19 8
20 9
20 0
20 1
20 2
03
20 4
20 5
20 6
20 7
08
20 9
20 0
20 11
20 2
20 3
20 4
15
8
9
9
9
9
9
9
9
9
9
9
0
0
0
0
0
0
0
0
1
1
1
1
19
20
20
year
Figure 2: Changes in the Chinese labor market and labor informality using the residual method.
estimate of labor informality will collapse these worker groups and obfuscate the
understanding of the changing nature of Chinese labor informality and various
sources from which labor sector workers are generated.
Estimates from Survey Data
To supplement the limitation coming from the residual approach, many resort to
individual-level survey data. Survey estimates of labor informality may not provide
information on longitudinal changes in Chinese labor informality as the residual
estimates do. Yet, they provide a more nuanced information on Chinese labor
informality as they provide detailed information on differences in employment
sectors, employment positions, and social economic characteristics of workers who
constitute different informal sector worker groups. Most survey estimates of labor
informality, for example, provide a breakdown of informal self-employment and
informal wage–employment.
Most researches identify the self-employed workers as informal sector workers
(Cook, 2008; Park and Cai, 2011a). For labor informality in wage–employment
relationship, the possession of labor contract is adopted as the core criterion in
deciding a worker’s employment position (Liang et al., 2016; Park et al., 2012;
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Chen and Hamori, 2013). Another variant of this approach is to examine not only
a worker’s possession of labor contracts but also his/her social insurance (pension,
health insurance, unemployment insurance) participation status (Park et al., 2012).
While the possession of labor contract and participation in the social insurance
program are important aspects of formal employment, identifying labor informality
by focusing only on the possession of labor contract and participation in social insur-
ance program may yield an inaccurate estimate of the size of labor informality. While
the possession of labor contract is a necessary condition for formal employment,
it is not a sufficient condition for formal employment. Cooke (2008), for example,
criticizes that defining labor informality in terms of the lack of a labor contract
and social insurance coverage may risk tautology and fail to capture precarious
employment — such as formal sector workers who are contracted as temporary
workers or workers who are employed indirectly by labor dispatch agencies. These
“precarious” workers have a higher level of employment insecurity even when they
signed labor contracts (Cook, 2008; Swider, 2015).
This chapter tries to capture the size of this precarious employment in addition
to the size of labor informality captured by the number of employees lacking labor
contracts. We define precarious employment as wage workers with labor contracts
who are employed indirectly by labor dispatch agencies, are paid on non-regular
basis, and are employed as a part-time worker and estimate the size of this worker
group.
A Snapshot of Chinese Labor Informality in the 2010s
This section describes the recent changes in Chinese labor market and composi-
tion of labor informality using two nationally representative survey datasets. As
discussed, survey data are limited in providing a longitudinal description of develop-
ment of Chinese labor informality. It is because there are only a few survey projects
that were conducted over years with consistency.
The China General Social Survey is a widely used survey that was conducted
over various years, starting from 2003. The most recent round of survey was
conducted in 2013. Figure 3 describes longitudinal changes in the composition of
non-agricultural employment in China that the CGSS captures. The dark grey area
and medium dark grey area show the size of employees in the formal sector, while
the medium dark grey area captures the size of precarious workers in the formal
sector, defined by workers who do not have fixed employers or are hired indirectly
by labor dispatch agencies. Many of them are likely to lack labor contract. The dark
grey area captures the size of the formal sector employees who are hired directly by
fixed employer. Although both workers are in the formal sector, workers hired by
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100
Informal Sector Workers (%)

80
Formal Sector Precarious Workers (%)

60
40
Formal Sector Employees(%)

20
0
2006 2008 2010 2012

Year
Figure 3: Labor employment by sectors.
fixed employers have higher levels of job security. Yet, this does not mean that all
formal sector employees are formal. There can be workers without labor contracts
or are employed temporarily. The light grey area captures the size of the informal
sector employees and includes employees in petty enterprises (getihu), employees
who work for family business, or self-employed.
The size of informal sector (light grey area) is growing while the size of formal
employment (dark grey area) is shrinking. The increase of labor informality in China
is attributable not only to the growth of the informal sector but also to the expansion
of precarious employment formal sector in the (in medium dark grey area). The
growth of formal sector labor informality is in contrast to Brazil, where the size of
formal sector informal employment has decreased from 58.5% in the 1990s to 47.2%
in the 2000s (Charmes, 2009).
Two rounds of a most recent nationally-representative survey, China Labor
Dynamic Surveys of 2012 and 2014, show a similar trend with more detailed
breakdown of labor informality (see Figures 4 and 5). According to the survey, the
size of informal self-employment has increased from 17.38% in 2012 to 25.06%
in 2014.
Formal sector employees with labor contract occupy 41.05% and 36.23% of the
entire non-agricultural workforce in 2012 and 2014, respectively. Yet, 20.69% and
21.9% of these contracted workers are either employed indirectly by labor dispatch
agencies, paid weekly or daily wages, or are employed as part-time workers.
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Figure 4: 2012 Chinese workers’ employment composition.
Figure 5: 2014 Chinese workers’ employment composition.
In 2012, slightly more than a half (50.32%) of formal sector employees lacked
labor contracts, taking 41.57% of entire non-agricultural workforce in China. The
proportion of formal sector employees lacking labor contracts increased in 2014 to
51.2% of the formal sector employees.
Overall, both macro-level statistics and micro-level survey data evidence the
growth of labor informality in China. A further breakdown of employment status
and job characteristics show that the growth of Chinese labor informality is attribut-
able both to the growth of informal sector and the growth of informality within the
formal sector.
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Conclusion and Implications

The goal of this chapter is to introduce the institutional causes of informality in
China and the subsequent measurement issue. To better illustrate how China’s
informality has a distinctive origin from other BRIC countries, we use Brazil as
the representative case of Latin America for comparison. The major takeaways are
as follows.
First, compared to Brazil, and other Latin American countries, where labor
informality largely takes the form of informal self-employment, the Chinese labor
market has started with a relatively small segment of informal self-employment.
The small size of the informal self-employment is directly attributed to China’s
socialist legacy. In China, the market reform of the late 1980s has increased the
size of the informal sector, creating a large number of informal sector employees
(Park et al., 2012). Yet, as marketization deepens, labor informality has spread to
wage–employment relationship. The increased demand for cheap and low-skilled
labor from the growing number of foreign and private enterprises has facilitated the
labor market dualization, increasing both the size of informal self-employment and
informal wage–employment.
Second, due to the household registration system in China, social benefit is
tied closely to an individual’s birth place. As such, even though the “legal/social
protection” criterion can be combined and viewed as the same thing in Brazil, it
should be used separately in China. In China, a labor contract is not associated
with state-run social insurance benefit. In Brazil, employers would purposely
avoid signing the labor contract to alleviate paying for the social benefit costs. In
China, employers can sign labor contracts without paying a lot of (if any) social
benefit. This is why we observe a rise of informal employment in the formal sector
in China. Dispatched worker is a classic example. By law, dispatched workers have
labor contracts, but with a third party, not with the firm they work in. For employers,
the purpose of having a third party, which is usually a firm that is solely responsible
for sending dispatched workers, signing the labor contract is to help alleviate the
labor costs and to lessen the benefit package employers must pay out. In this regard,
dispatched workers are also subject to high job insecurity and low (to zero) social
benefit, which makes their circumstance almost the same as other informal workers,
even though dispatched workers have labor contracts. To sum up, having a labor
contract or not does not really define labor formality/informality in China.
Third, the size and composition of labor informality are highly affected by
government policies. Brazil’s Bismarck style welfare state incentivizes employers
and excludes workers from the formal sector (or more precisely, the wage–
employment relationship). The social insurance-based welfare state results in
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informal self-employment-based labor informality in Brazil. In China, there has been

an increase of informal wage–employment jobs due to the implementation of the
Labor Contract Law of 2008. While the law has increased the proportion of workers
with labor contracts, it has also created many precarious workers, such as part-time
workers or dispatch workers.
Some implications can be derived from the conclusion. At the theoretical level,
the diverging paths and sources of labor informality have made Chinese informal
workers highly heterogenous. They have been treated differently in the labor market
and received different types of benefits from their employers or from the state.
Such heterogeneity also distinguishes China’s labor informality from other BRIC
countries’ labor informality. Hence, in order to better grasp the size and nature of
the Chinese labor informality, it is essential to understand various paths from which
labor informality is generated. If we only define labor informality with the “no labor
contract and no social benefit” criterion, like how we did in Brazil, we may fail to
capture precarious employment, workers with labor contracts but without enough
social benefit and job security, as a form of informal employment in China. In this
chapter, we take the initial step and discuss how we should measure informality in
China given the various sources of labor informality.
A related issue is that it begs further theoretical debate on whether the current
conceptualization of labor informality can travel across countries. We are in need
of better dataset that can produce more internationally comparable data on labor
informality. Due to the data availability issue, many of the studies out there only
use “self-employment” as the proxy for labor informality (e.g. Berens, 2015). The
“self-employment” proxy is not only not comprehensive but also not really useful
for cross-national comparison. How to create better proxies for labor informality
for cross-national analysis is an important question to be explored as the next step.
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CHAPTER 10
Insiders, Outsiders, and the Politics of

Employment Protection: Insights from the
Brazilian Case

Introduction
Why do informal workers remain unprotected by the state in developing countries
despite prolonged periods of sustained economic growth and political democracy?
For many observers, at the heart of this problem are the employment protection rules
that increase employer cost to fire and hire workers. These rules determine the level
of individual job security for those holding a formal job. Moreover, in combination
with contributory social security and unemployment schemes, compliance with
labor market regulations also determines access to social insurance. Advocates of
deregulation argue that the consequence of strict rules in the labor market is that
only a small share of formal labor is protected while households that depend on
informal jobs perceive lower incomes and remain vulnerable to the ups and downs
of the economy. This controversial position is partially based on the insider–outsider
theory of the labor market (Saint-Paul, 2000; Lindbeck and Snower, 1988).
Prominent theoretical accounts of insider–outsider theory suggest that only
insider workers benefit from employment protection legislation (EPL) at the expense
of outsiders. In developed nations, the insider–outsider model of the labor market
243
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has been extended to a political model in which conflicting labor market policy
preferences shape partisan strategies with respect to labor market policies (Rueda,
2005, 2007). A central aspect of this model is that rational workers must have consist-
ent preferences for employment protection (as well as other passive and active labor
market policies). Research in developed countries gives support to these predictions:
labor market outsiders tend to have more preferences for deregulation and active
labor market policies that enable them to become insiders.
In developing countries, the dramatic division between formal and informal
workers is often seen as the equivalent process of labor market segmentation between
insiders and outsiders. Yet, recent research suggests that understanding the politics of
employment protection in developing countries may be more complex than simply
applying the insider–outsider model to the problem of labor informality. Some
recent works on formal–informal workers’ political preferences show that labor
market groups vary too little and do not show the expected level of polarization
given the existing large differences in employment vulnerability, wages and access
to social protection.
Unexpected political similarity between insiders and outsiders in developing
countries may be rationalized by considering existing criticisms to this theory in the
context of developed economies. One important challenge emerges from the strong
political and academic debate on whether EPL is detrimental for outsiders or it is in
the interest of those with vulnerable jobs. Other scholars point out the heterogeneity
of labor market outsiders as well as the need for moving beyond conceptualizing
labor market groups by the current job category instead of more suitable risk-based
conceptualizations of “insiderness” and “outsiderness”. These challenges are not only
important in the context of developed nations but also informative of the potential
reasons for why the insider–outsider model may not find strong empirical support
in developing countries. Moreover, the existing literature in developing countries
also provides important reasons why the insider–outsider theory may fail to account
for workers’ labor market preferences. The more cited reasons are, among others, the
level of integration between formal and informal sectors (i.e. workers’ transitions),
the consequences of low enforcement, and the formation of broad labor coalitions
facilitated by multi-dimensional policy preferences.
This chapter shows the extent to which the insider–outsider model helps to
describe the politics of employment protection in one of the BRIC countries: Brazil.
Existing evidence on differences between Brazilian formal and informal workers with
respect to their policy and political preferences provide only marginal support to
the insider–outsider model. This is puzzling given that Brazil has strict labor regula-
tions, though imperfectly enforced, and a large informal sector covering two-third
of business, 40% of GDP, and 35% of employees (Ulyssea, 2018).
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Insiders, Outsiders, and the Politics of Employment Protection 245
This chapter first reviews the insider–outsider theory of the labor market and
its implications for workers’ preferences about employment protection legislation.
Second, a discussion on some theoretical and empirical challenges to the insider–
outsider model is provided. Third, it follows a review of evidence on formal–informal
workers’ preferences for both employment protection and political preferences in
Brazil. Finally, the chapter closes with a discussion on the adaptability of the insider–
outsider model to understand labor market preferences in developing countries.
Employment Protection Rules, Dualization,

and Labor Market Preferences
Dualization in Developed Nations
EPL constrains the ability of firms to dismiss workers as they would do in the absence
of regulation. While, in principle, this type of protection should benefit labor against
the interest of capital, many have argued that labor market institutions protecting
employment only benefit a group of privileged workers rather than the entire work-
ing class (Saint-Paul et al., 1996; Saint-Paul, 2000). The argument says that employ-
ment protection benefits the employed because these workers can create artificial
monopoly power and bid up wages (Lindbeck and Snower, 2001; Saint-Paul, 2000).
The introduction of EPL increases the employment tenure of many low-productivity
jobs which would be destroyed otherwise. In turn, such benefits for the employed
workers translate into costs for the unemployed ones because regulation reduces the
number of available jobs offered by risk-averse employers. The argument has been
then generalized to broad categories of “insiders” and “outsiders”. As a result, the
existing research not only considers the unemployed as labor market outsiders, but it
also includes other non-standard workers such as those with temporary employment
contracts (Rueda, 2005). The intuition is that outsiders are all workers for whom
EPL represents a barrier that increases the cost of entry into good quality, protected
insider jobs. The growing process of segmentation between secure and unstable jobs
is known as “dualization” of the labor market (Palier and Thelen, 2010; Rueda, 2005,
2007; Saint-Paul, 2002).
Crucially, the insider–outsider model helps to derive neat predictions about
policy and political preferences. The immediate implication for EPL preferences is
that labor market outsiders should demand lower employment protection because
this would increase labor mobility and chances of exit from unemployment and
precarious employment (Rueda, 2005: 64). To the contrary, insiders (i.e. the perma-
nently employed) should prefer maintaining the rules that grant market power to
them and increase their salaries and job tenures above the competitive benchmark.
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An important number of studies have analyzed insider–outsider differences in

preferences for different types of labor market policies in advanced democracies
(Rueda, 2005, 2007; Emmenegger, 2009a). Others have focused on insider-outsider
differences in party preferences (Lindvall and Rueda, 2014) and preferences for
different social policies (Burgoon and Dekker, 2010). In the empirical literature,
workers who are in stable employment are often considered as insiders, while all the
unemployed, involuntary fixed-term employed, and involuntary part-time employed
workers are coded as outsiders (Rueda, 2007; Emmenegger, 2009a; Lindbeck and
Snower, 1988, 2001; Saint-Paul, 1998, 2002). While the insider–outsider model has
direct implications regarding preferences for employment protection, the litera-
ture has focused on preferences for different types of policies that either protect
the unemployed with transfers (passive labor market policy) or actively help the
unemployed to find new jobs (active labor market policy). Surprisingly, research
that analyzes explicit preferences for employment protection legislation (instead of
broad proxies) is scarce and confined to the world of developed nations (Guillaud
and Marx, 2014).
Labor Informality in Developing Countries
While research on insider–outsider preferences often looks at developed countries, in

the developing world labor markets are divided and show a stark difference between
formal and informal workers. As the literature often equates “outsiderness” to labor
informality, the central question is whether there is a formal–informal divide in
workers’ preferences for labor protection and political attitudes.
One plausible intuition is that insider–outsider differences in developing
countries should be easier to observe because dualization is far more dramatic than
in developed nations. In developing countries, such as Brazil, the main expres-
sion of dualization is the division between workers being protected by often rigid
labor market regulations and not being protected at all by any mandatory rule (i.e.
informality). A widely accepted definition of labor informality is the “legalistic”
or “social protection” conceptualization (Perry et al., 2007). Workers are informal
‘‘if their employment relationship is not subject to standard labor legislation, taxa-
tion, social protection, or entitlement to certain employment benefits” (International
Labour Organization [ILO] and International Labour Office, 2002). In practice, two
main groups of informal workers exist: informal self-employed workers and informal
wage earners (Perry et al., 2007). Small enterprises like bars, restaurants, or haircut-
ters make up the vast majority of the total number of enterprises and they usually
engage in underground activity operating outside of state regulations and taxation
(Gërxhani and Gerxhani, 2004; Johnson et al., 1997; Schneider, 2005).
b3508_V3_Ch10.indd 246 11-02-2020 13:48:58

The causes of labor informality have been long debated. One account con-
ceptualizes informality as the result of a process of exclusion (Harris and Todaro,
1970). This view is closely linked to the insider–outsider model described before
insofar as informal workers are excluded because of the legal barriers that protect
formal jobholders. It is because of this reason that EPL has been accused of creating
a rigid environment comprising wage rigidities as well as regulations, such as high
labor taxes or firing restrictions.1 Standard theory of dual labor markets sustains
that markets are segmented by wage setting in the formal sector. Workers unable
to enter the formal sector due to labor market rigidities enter the disadvantaged
(less well-paid, less protected) sector to avoid unemployment (Harris and Todaro,
1970). Informal workers are thus self-employed in marginal economic activities or
employed in small firms with low productivity levels (Hart, 1973; Sethuraman, 1976;
Tokman, 1978; Fields, 2009).
This perspective is consistent with the idea that the size of informal sector
is significantly affected by the institutional settings and regulations, such as the
“ regulation of entry” and costs of start-up business (Auriol and Warlters, 2005;
Djankov et al., 2002; Hibbs and Piculescu, 2010; Ulyssea, 2010). Seminal work by
Djankov et al. (2002) shows that firms face significant “entry costs”, such as registra-
tion and license fees, to be able to operate formally. These authors find that stricter
entry regulation is associated to a greater relative size of the unofficial economy and
larger employment in the informal sector. Indeed, a large literature sustains that
lowering entry costs should decrease informality (Ulyssea, 2010; Djankov et al.,
2002; Auriol and Warlters, 2005).
Job security rules have clear impacts on labor market dynamics. Empirical
research confirms theoretical expectations that rules discouraging dismissals and
temporary contracts lengthen durations in different labor market states (employ-
ment, unemployment, not in the labor force) and, accordingly, reduce flows between
these states (Betcherman, 2015). Cross-country studies show that EPL explains
a significant variation in job and worker flows (Caballero et al., 2013; Micco and
Pagés, 2006; Haltiwanger et al., 2008). Case studies in Latin America have also linked
reductions in EPL with lower job tenure and higher turnover (Saavedra and Torero,
2004; Hopenhayn, 2004). To the extent that rigid labor employment protection rules
create exclusion in the labor market, the insider–outsider model would predict that
informal workers should oppose these rules and formal, protected workers should be
the main supporters of employment protection. Moreover, if from the point of view
1
Whether driven by segmentation (presence of wage rigidities) or distortions more
generally, the (reductive) effect of regulations on the number of vacancies that open in the
formal sector is similar (Perry et al., 2007: 106).
b3508_V3_Ch10.indd 247 11-02-2020 13:48:58

of the insider–outsider model workers have consistent preferences for labor market
rules, they should also exhibit distinct political preferences and political attitudes.
Therefore, what is the empirical support for the insider–outsider model of labor mar-
ket preferences? To what extent are informal and formal workers politically distinct?
Empirical Evidence for Insider–Outsider Models of Politics

Preferences for Labor Market Policies
Analyzing labor market preferences is important to understand the political

economy of labor market policies. For instance, the outsider group size may be
correlated with policy change, but this would only provide for indirect evidence of
causal mechanisms: i.e. Spain deregulated employment protection in times when
outsiders outnumbered insiders (Dolado et al., 2002; Bentolila et al., 2012). Supply-
side arguments of labor market policies need to rest on solid assumptions about the
distribution of workers’ preferences.
The seminal work of David Rueda (2005, 2006) argues that social democracy and
trade unions only represent the interests of labor market insiders: that is, insiders
benefit from minimizing labor turnover which requires strict job security regula-
tions. Hence, labor market insiders support EPL, while outsiders (e.g. unemployed
or part-time workers) and capitalists oppose them. The political consequence is that
insiders disproportionally vote for Social Democratic (left) parties, which, together
with trade unions, are the main actors pushing for labor market regulations. The
macro-level relationship between partisanship and EPL has found empirical support
in several studies (Botero et al., 2004; Rueda, 2005; Saint-Paul, 1996, 2002).
Yet, EPL is not the only labor market policy that governments may implement.
Labor market outsiders can benefit from active (i.e. job creation) and passive labor
market policies (i.e. unemployment benefits). Labor market insiders, on the other
hand, do not benefit from these LMPs and have to finance them ultimately via taxes
(Rueda, 2006). According to this argument, labor market outsiders should be more
supportive of active and passive LMPs than insiders. Rueda uses Eurobarometer to
analyze a dependent variable that measures an individual’s willingness to pay taxes to
create new jobs: level of agreement with the statement I would be ready to pay more
tax if I were sure that it would be devoted to creating new jobs. The results indicate
that the probability of agreeing goes up by 7.5% if an individual is an outsider rather
than an insider and by 11.2% if an individual is an outsider rather than a member
of the upscale group.
Schwander and Haüsermann (2013), in turn, offer a conceptualization and
measurement of labor market insiders and outsiders based on their respective risk
b3508_V3_Ch10.indd 248 11-02-2020 13:48:58

of being atypically employed or unemployed. In an analysis of 18 advanced nations,

they confirm the impact of labor market vulnerability, indicating a potential for
politicization of the insider–outsider conflict. The main findings are as follows: Being
an outsider increases the likelihood of agreeing that the government is (definitely
or probably) responsible for providing a job for everyone by about 6% points when a
welfare regime-specific, dichotomous operationalization is used. If a country-specific
continuous measure of “outsiderness” is used, a change from the highest to the
lowest value of “outsiderness” has an effect of 15% points (from 78.5% to 63.4%) on
the likelihood that a respondent agrees that the government should provide a job
for everyone. More importantly, passive labor market policy preferences also show
insider–outsider differences. Schwander and Haüsermann find that outsiders have
somewhat stronger preferences for passive labor market policies insofar as outsiders
are more likely to agree with the statement that the government should spend more
on unemployment benefits. The difference between insider and outsider preferences
is 4.2% points when considering their welfare regime-specific, dichotomous meas-
ure. For a change from the maximum to the minimum level of their continuous
measure of outsiderness, the change in support for unemployment is between 13.1
and 14.4 points.
Setting aside the important debate of how to conceptualize and measure insiders
and outsiders, the existing evidence shows that factors that increase the insiders’
vulnerability to unemployment can align their interests with those of outsiders.
These factors could be, for example, a decrease in the level of employment protec-
tion and an increase in the instability of the unemployment rate. Indeed, insiders
increase their support for active labor market policies by 10% if they feel insecure
about their jobs (Rueda, 2006). Therefore, parties that want to represent the interests
of labor as a whole face a strong political dilemma between catering to a small core
constituency of powerful insiders and providing entry options to a large number of
unorganized labor market outsiders (Rueda, 2005, 2014). This dilemma is, however,
lessened in situations where a larger group of insiders is at risk. As a consequence,
left parties may be more inclined to support pro-outsider policies that constituencies
of vulnerable insiders may demand. As left parties make stronger emphasis on active
and passive labor market policies, outsiders are likely to become supportive of left
parties, which they otherwise tend to oppose.
The prediction that some of the insider–outsider policy preferences can con-
verge with higher insider vulnerability finds support in both developed nations
(Rueda, 2005) and developing countries (Carnes and Mares, 2014; López-Cariboni
and Menéndez, 2018). Carnes and Mares (2014) attribute the expansion of non-
contributory pensions in the developing world to the effects of deindustrialization
on employment vulnerability. They argue that deindustrialization raises the demand
b3508_V3_Ch10.indd 249 11-02-2020 13:48:58

for transfers to the informal sector by (a) increasing the aggregate share of “vulner-
able” or informal employment and (b) threatening the employment security of
formal wage earners. Their argument of preference formation explains the reasons
for a broad coalition of formal and informal workers in support for protection for
outsiders. From a related angle, Garay (2016) stresses that outsiders mobilize suc-
cessfully when they are able to coalesce with insider organizations (unions) in favor
of non-contributory policies that provide protection for informal workers. In turn,
left-wing governments would channel this increased demand for pro-outsider pas-
sive labor market policy.2 Note, however, that this line of argumentation is not about
preferences for employment protection rules. In that sense, the argument is similar
to that of Rueda (2005, 2007) in which left governments can implement alternative,
active or passive labor market policies without changing the status quo in EPL.
Research on preferences for employment protection legislation in developing
countries is dramatically scarce, and direct tests of workers’ preferences for EPL are
inexistent. One line of argumentation goes back to the origins of dualism in develop-
ing nations. Developing projects based on import–substitution–industrialization
(ISI) have been characteristic for creating high levels of labor market segmentation,
where a group of powerful labor market insiders is able to protect ex ante employ-
ment protection even long after the exhaustion of the development project (Rueda
et al., 2015). First, workers in the import-substituting sector were economically
and politically privileged. As a result, import-substituting countries produced
uncontested labor markets (Murillo, 2000; Mesa-Lago, 1997; Haggard, 1990) in which
insiders earn above competitive wages, and firms in imperfectly competitive product
markets also charge more than the competitive prices (Lindbeck and Snower, 2002).
The labor market power of industrial labor results from their condition of being both
a scarce production input and as a key domestic consumer of the manufactured
output (Mallet, 1970). These increased wage differentials and promoted government
policies limited the arbitrage between urban and rural wages. As a consequence, the
risks of not being employed in a protected industrial job exacerbated (Iversen and
Soskice, 2001) and so did the demands for restrictive labor market rules and generous
social insurance programs (Rueda et al., 2015; Wibbels and Ahlquist, 2011).
After the implementation of the ISI model, rigid labor markets, such as Brazil,
were characterized by employment guarantees, high severance pay requirements,
2
Recent research has started to analyze the effects of dualization on politics and policies in
developing countries (Carnes and Mares, 2013, 2014, 2015, 2016; Carnes, 2014a, 2014b;
Baker and Velasco-Guachalla, 2018; Holland and Schneider, 2017; Berens, 2015a, 2015b).
Accounts on social protection in developing countries build on the insider–outsider model
to explain the effect of informal employment on the provision of non-contributory social
policy (Carnes and Mares, 2013, 2014).
b3508_V3_Ch10.indd 250 11-02-2020 13:48:58

high minimum wages, and long-term contracts (Heckman et al., 2000; Botero et al.,
2004). Tight rules in dual labor markets implied ex ante employment protection and
transfer benefits targeted to formal workers employed in strategic inward-oriented
industries (McGuire, 1999; Huber et al., 2006). From this perspective, and consist-
ently with the insider–outsider model, the persistence of large informal sectors
in developing countries seems to be a consequence of differences in the level of
protection against unemployment (Rueda et al., 2015). More importantly, this type of
analysis suggests that formal workers should be the main labor market group backing
up EPL. Because of the centrality of EPL for the very survival of insiders, unionized
formal workers spent important resources blocking labor deregulation even when
being forced to accept other undesirable macroeconomic reforms, such as trade
liberalization and privation of state-owned enterprises (Murillo and Schrank, 2005;
Murillo, 2001). However, this topic remains largely under-studied in the empirical
literature analyzing individual-level preferences for employment protection.
One important account of the evolution of EPL in Latin America sustains that
union density exerts its influence on the laws that govern the collective action of
workers, while skill levels impact the laws that govern individual employment
relations (Carnes, 2014b). While the argument of Carnes is strongly based on
the relationship between workers’ skills and social policies — emphasized in the
literatures on “varieties of capitalism” (Hall and Soskice, 2001) — as well as in power
resources approaches (Esping-Andersen, 1985; Huber and Stephens, 2001), it is still
consistent with the insider–outsider model insofar as more skilled workers are more
likely to be formal and therefore prefer stronger EPL.
The most direct evidence regarding preferences for labor regulation in devel-
oping countries probably comes from a recent study by Berens and Kemmerling
(2016). The authors analyze survey data form 18 Latin American countries
(Latinobarometer, 2005) that contain the following question: How much protected
do you feel [under] the labor law in (country)?: (1) very protected, (2) fairly protected,
(3) a little protected or (4) not at all protected. However, the wording in Spanish/
Portuguese refers to the perception of worker protection and not one’s own feeling
of protection: Cuán protegido por la ley laboral cree Ud. que se sienten en (país) los
trabajadores?. The authors argue that the variable is weakly correlated with individual
perceptions of job-security and therefore it measures people’ assessment about the
capacity of the labor law to protect workers in general. Berens and Kemmerling
(2016) find that formal workers are significantly more likely to think that workers
are protected by the employment rules than informal workers.3
3
They also show evidence about that contextual data, such as the level of collective labor
rights matters. Informal workers are skeptical of labor regulations when collective labor
protection — as measured by Mosley (Mosley 2010) — is relatively high.
b3508_V3_Ch10.indd 251 11-02-2020 13:48:58

Insider–Outsider Political Behavior
The existing literature has documented that insiders and outsiders are politically
different in advanced democracies. For example, the unemployed participate less
in politics (Lorenzini and Giugni, 2012; Marx and Picot, 2013), have lower trust
in political institutions (Sani and Magistro, 2016), feel less politically efficacious
(Marx and Nguyen, 2016), and are more supportive of “leftist” political parties
(Emmenegger, 2009b; Marx and Picot, 2013) and policies, such as redistribution
(Cusack et al., 2006). Lindvall and Rueda (2014) sustain that when major left
parties cater to insiders’ demands, outsiders will be forced to either abstain from
voting or consider alternative options, which may range from radical left support
(as in Sweden in 1998) to extreme right parties that receive voter support of the
unemployed (as in France, Finland and other European countries). These findings
are often hard to compare as the operationalization of the insider–outsider divide
may vary from one study to another. Rovny and Rovny (2017) consider four different
operationalizations of insiders and outsiders and find two main systematic results:
(a) outsiders are less likely to vote for the major right than insiders, and (b) outsiders
are more likely to abstain from voting.
Another important difference between labor market outsiders and insiders is the
fact that workers with vulnerable employment tend to behave like pure economic
voters. That is, those who have lower employment protection rely more on the
general success of the economy, and therefore their evaluations about government
performance are sensible to the evolution of the economy. Singer (2013) analyzes
survey data from Latin America and Eastern Europe and provides evidence that
workers who feel higher risks of unemployment place significantly greater weight
on sociotropic evaluations of the government than do those with more secure
employment situations. Consistent with this finding, Singer (2016) sustains informal
workers who are excluded from employment law and welfare safety nets, have their
fortunes tied to economic fluctuations and therefore have strong incentives to focus
its evaluations of the incumbent on his or her perceived economic competencies.
His analysis of the Argentinean electoral data finds support for this claim. Using
comparative international data from the Comparative Study of Electoral Systems
(CSES), Singer (2011a) also finds that the political salience of economic performance
rises with individual status of unemployment and economic vulnerability. Moreover,
in a different study on the American state legislative elections, Singer (2011b) shows
evidence suggesting that economic safety‐nets that reduce vulnerability to poverty,
such as unemployment insurance programs, lower the salience of the economy and
provide electoral cover for incumbent politicians during economic slowdowns.
In a similar vein, Marx (2014) shows evidence that compared to permanent workers,
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temporary workers (or outsiders) were more likely to hold the government responsible
for their poor economic situation and vote against it in the 2009 German election.
In sum, there is evidence suggesting that insiders and outsiders have different
policy preferences that may translate into political behavior. However, the most
basic claim of the insider–outsider model regarding a conflict around employment
protection legislation does not remain unchallenged. The existing debate opens the
possibility that observed political differences between insiders and outsiders may
not be necessarily originated in a struggle around labor market regulations.
Challenges to the Insider–Outsider Model
Insider–outsider theory has been criticized from different viewpoints and

approaches. This section revises only some of the empirical and theoretical chal-
lenges, which are relevant to the extent to which labor market preferences are
translated into politics.
A strong intuition in the insider–outsider model of labor market preferences is
that outsiders are negatively affected by rules that reduce their chances to access to
good, secure jobs. One counterargument presented by Tsakalotos (2004) suggests
that deregulation, even when benefitting outsiders at the expense of insiders, also
changes the power balance towards employers. When insiders lose the power that
underpins their privileges, they are weakened not only with respect to the outsiders
but also with respect to state and private sector employers. This increases the risk of
triggering a process of regulatory change that, in the long term, may be damaging
to all workers and not just the current insiders. If deregulation reduces the power of
insiders against capital, there is room for an unstable political situation. The net effect
of such deregulating context potentially harms today’s outsiders to a larger extent
than the costs they pay for the status quo, i.e. rigid labor market rules governed by
the insider worker preferences. In this context, outsiders may have little incentive to
support liberal reforms and therefore their opposition to deregulation is not irrational.
In turn, the work by Emmenegger (Emmenegger, 2009a) raises alternative
criticisms to the insider–outsider model of labor market preferences and politics.
A first claim is that the insider–outsider theory of employment and unemployment
makes strong assumptions about workers’ rationality and may therefore overestimate
labor market polarization of policy preferences. Second, the insider–outsider theory
is criticized because it may ignore the role of policy packages offered by parties. In a
policy bundle, job security regulations cannot be separated from other issues, and as
a result, outsiders may have no other choice than voting for left (Social Democratic)
parties, even when they would not approve parts of the offered policy package such
as over-regulation of the labor market. Finally, the insider–outsider theory may also
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disregard reasons why outsiders could support job security regulations as much as
labor market insiders do. In line with previous arguments (Tsakalotos, 2004), these
reasons are long-term expectations, the power balance between capital and labor,
and intra-household relationships.
In an analysis of survey data from the International Social Survey Programme
(ISSP), Emmenegger finds conflicting evidence with the insider–outsider model in
a sample of 14 developed countries. In the wave of 1996, respondents were asked
whether they supported governmental action for declining industries to protect jobs.
In the 1997 wave, respondents were asked how important do you personally think
each item is in a job: job security?. It should be noted that the two dependent variables
are only proxies for labor regulation and none of them directly captures preferences
for reform in labor market rules. The findings suggest that the self-employed are
the group most critical of job security given the negative effects in both dependent
variables. Part-time, temporarily employed, and non-employed respondents have
similar preferences for job security, being less supportive of labor market regulations
than insiders. However, unemployed respondents are significantly more supportive
of job security regulations. In sum, labor market insiders and unemployed people are
very supportive of job security regulations. The remaining labor market o utsiders,
that is, the temporarily, part-time employed, and non-employed people, are more
critical while “upscales” and self-employed people are rather hostile towards job
security regulations. The finding that unemployed and insider workers have similar
attitudes toward labor market regulations is at odds of the insider–outsider model.
Emmenegger speculates that future expectations of the unemployed may be a reason
why they support labor regulations. The unemployed, he argues, are currently looking
for new jobs and hope to get full-time, permanent jobs in the near future.
Yet, the empirical literature often faces strong limitations to offer credible tests
of insider–outsider preferences for labor regulation itself. In an insightful study,
Guillaud and Marx (2014) use the French Electoral Study 2012 to analyze the support
for employment protection among different labor market groups. They make use of
a question on the single employment contract: Would you be in favor of or against
the establishment of a single employment contract replacing temporary and permanent
contracts? It would be easier to fire someone than with a permanent contract but
severance payments would increase with seniority. The survey was conducted when a
salient policy proposal regarding the implementation of a single type of employment
contract was being debated in France. Therefore, the authors use information about
respondents’ attitudes towards real alternatives of policy reform. Moreover, France
is known for its segmented labor market (Palier and Thelen, 2010) and strict labor
market regulation on dismissals (Venn, 2009). Hence, the main preconditions for
insider–outsider arguments seem to apply.
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As in other studies aiming at testing insider–outsider preferences for labor

regulations, the key explanatory variable in Guillaud and Marx (2014) is individuals’
employment status. They label permanent workers as insiders, and distinguish two
outsider groups: temporary contracts and the unemployed. Interestingly, the authors
find that temporary workers do not differ significantly from permanent workers
(insiders) regarding preferences for employment protection. Contrary to the findings
by Emmenegger (2009), these authors only confirm the insider–outsider argument for
the unemployed, who show greater support for deregulation. They interpret the fact
that temporary workers do not differ significantly from permanent workers (regarding
preferences for employment protection) as an indication that future expectations
play an important role in shaping labor market preferences. The intuition here is that
the prospect of obtaining a permanent employment contract is more remote for the
unemployed than for the temporary workers. An important implication for insider–
outsider theory is that this model may overemphasize the relevance of employment
protection for temporary workers, often considered as labor market outsiders. The
authors advice against treating distinct labor market groups as a composite outsider
category and call for group-specific theoretical arguments that provide a rationale for
the effect of unemployment and temporary work on policy preferences.
However, it should be emphasized that the evidence from Guillaud and Marx
(2014) is not entirely against the insider–outsider model. They do find important
differences between wage-earners on the one hand and the self-employed and
unemployed on the other. The self-employed and unemployed support the single
employment contract more significantly than wage-earners, which can be interpreted
as a preference for deregulating the protection of permanent, insider workers. In a
developed country, the self-employed often employ workers themselves, therefore
it is more likely that they are reacting as employers than as labor market outsiders.
More importantly, the significant result for the unemployed in Guillaud and Marx
(2014), indicates that the insider–outsider argument is relevant for this group.
However, this evidence is not robust to alternative measures of the dependent
variable. Even so, the substantive effect shows that the unemployed are about
11% points more likely to support the single employment contract (i.e. deregulation)
than permanent workers.
Another challenge to the insider–outsider model of labor market preferences
refers to the causal link between labor market status and preferences for employment
protection. Recent research shows that the socioeconomic background simultane-
ously determines both the risk of getting unemployed and political socialization
experiences from early childhood onwards (Wehl, 2018). This argument builds on
previous fi ndings suggesting social status of parents is positively related to both
labor market success (Gregg and Machin, 2001) and egalitarian or leftist orientations
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(Rekker et al., 2015) of the offspring. Wehl (2018) argues that social immobility
together with stability in individuals’ political pre-dispositions are strong enough
forces to create a non-causal relationship between unemployment and labor market
attitudes. Analysis of data from the fourth wave of the European Social Survey (ESS
2008) includes 31 countries. The main dependent variable is a 11-point scale of how
much responsibility the government should have in (a) ensuring a reasonable standard
of living for the unemployed and (b) in creating new jobs for everyone, who wants one.
The evidence supports the claim of no causality between unemployment and policy
attitudes, while such evidence is less strong for passive labor market policy attitudes.
Her study analyzes. The evidence suggests that individuals’ preferences may reflect
those of insiders and outsiders not because of current changes in job status but due
to early socialization and inherited political beliefs and socioeconomic status from
their parents.
Even when the consequences of written labor regulations may be potentially
large, they are also dependent on another key policy, which is the level of enforce-
ment. An existing important literature analyzes the causes and consequences of EPL
enforcement. For instance, Almeida and Ronconi (2016) observe that the targeting
of labor inspections is at odds with the assumption that agencies exclusively focus
on reducing violations. Instead, they find that labor inspections are biased toward
large firms, operating in industries with lower tax evasion, and with a smaller share
of low-skilled workers. If, in essence, governments target firms that are more likely to
comply after being inspected, the evidence could suggest that inspection agencies are
concerned about both avoiding job destruction and collecting revenues rather than
reducing violations (Almeida and Ronconi, 2016). As long as workers are embedded
in an environment with strong EPL but low compliance, they may not observe the
“dualizing” consequences of EPL because the labor market may look relatively more
integrated than segmented. Indeed, cross-country analyses by Caballero et al. (2013)
and Micco and Pagés (2006) find that the effect of EPL on job and worker flows is
very important where the rule of law is strong and may largely disappear where the
rule of law is weak. Similarly, Almeida and Pool (2017) find that the extent to which
trade affects labor market outcomes depends on the de facto stringency of the labor
regulations faced by plants. The authors exploit data from Brazilian industries and
show plants facing stricter enforcement of the labor laws increase employment by
less than plants facing fewer inspections.4 Their results confirm that EPL limits job
4
Interestingly, recent research shows that governments may use enforcement of EPL regula-
tion as a compensatory policy against negative shocks form liberalization. There is evidence
suggesting that, had enforcement of labor regulations been stricter in Brazil, the effect of
import competition on trade-displaced workers’ employment outcomes could have been
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creation if de jure regulations are more stringent.5 The implication of this literature
for the insider–outsider model is that preferences for EPL may depend on the level
of enforcement.
Research in labor economics in developing countries shows that much of the
entry into informality is voluntary in nature (Levy, 2010; Maloney, 2004; Perry et al.,
2007; Bosch and Esteban-Pretel, 2012). One argument is that informal workers
choose to stay in the informal sector because they have a “comparative advantage”
such that they would not necessarily be better off in the formal sector (Maloney,
2004; Günther and Launov, 2012). For example, for many workers in micro-firms
with relatively low levels of human capital, accumulating experience in the informal
sector often enables them to get a formal job later. Other longstanding views in
development economics emphasize the role of informal markets in providing outside
options to smooth consumption (Morduch, 1995; Rosenzweig, 1988). Households
can smooth consumption by borrowing and saving, accumulating non-financial
assets, adjusting labor supply and relying on formal and informal (family networks)
insurance arrangements. These mechanisms generally help workers to protect con-
sumption patterns from income shocks (Morduch, 1995: 104). In practice, important
contributions find support for the exclusion view of informality (Loayza, 2011), while
others suggest that both types of informalities coexist (Perry et al., 2007; Gunther
and Launov, 2012; Fields, 2005; Radchenko, 2014). This is an important challenge to
the insider–outsider model because the model assumes a segmented labor market
where those in the informal sector are excluded from the good quality jobs. When
informality is voluntary, predictions about preferences for EPL and other social poli-
cies cannot be directly derived from the standard insider–outsider model.
Another challenge to the application of the insider–outsider account in develop-
ing countries comes from the fact that EPL may protect workers without creating
labor market rigidities. That is, EPL in dualistic labor markets, in which the share of
permanent workers is shrinking, may not affect firms’ decisions regarding employ-
ment adjustment. Sofi and Kunroo (2017) exploit EPL variation across Indian states
and find EPL does not hinder employment reallocation while reducing the labor
turnover. This suggests that the efficiency in the labor market is not negatively
affected by EPL, and at the same time, employment protection rules are beneficial
for enterprises and workers.
The empirical literature testing individual preferences is quite scarce in developing
countries. For instance, Berens (2015a) analyzes preferences for redistribution and
social policies based on pooled survey data from the Latin American Public Opinion
much more adverse than it actually was (Dix-Carneiro and Kovak, 2017; Ponczek and
Ulyssea, 2017).
5
See also Almeida and Carneiro (2005) and Kanbur and Ronconi (2018).
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Project (LAPOP) 2008 and 2010. While informal workers are significantly more
likely to be at economic risk than their formal counterparts, they are, however, not
more supportive in social policy and redistribution. Moreover, this is also the case
in insecure environments reflected by higher unemployment rates. One interpreta-
tion is that the findings provide no support for the insider–outsider model probably
because the labor market is not so segmented. A similar conclusion is reached by
Baker and Velasco-Guachalla (2018) who analyze political and policy preferences of
Latin American workers. I pay more attention to this study in the following section
dedicated to the case of Brazil.
Labor Market Preferences and Insider–Outsider

Politics in Brazil
Individual Employment Protection Legislation in Brazil
and Labor Market Outcomes
Until the recent labor overhaul of the labor law,6 Brazil has on paper one of the least
flexible labor markets in the world. All employees must have a work permit where the
employment history of the worker is registered (carteira de trabalho). Permit holders
are entitled to several benefits, such as retirement pension, unemployment insur-
ance, and severance payments. The labor code in Brazil is also difficult to change
because it is largely written into the Brazilian constitution. The 1988 constitution
strongly increased the degree of worker’s protection (Barros and Corseuil, 2004).
The protections involve a maximum working period of 44 hours a week, a maximum
period for continuous shift work of 6 hours, a minimum overtime pay of 1.5 times
the normal hourly wage, paid leave of at least four-third of the normal wage, and a
paid maternity leave of 120 days. Moreover, employers must contribute to the social
security system and to a job security fund (FGTS). The FGTS is basically a severance
pay individual account, which accumulates as long as a worker remains employed
with the firm. Since 2001, employers make monthly contributions (equivalent to
the 10% of the employee’s wage). For an employer, firing a worker with a wage of
R$100 involves a disbursement of approximately R$165 (Cardoso and Lage 2007),
which makes Brazil an example of rigid labor regulations. Except for the firing index,
6
Brazil implemented a labor reform in 2017 which introduces flexible working hours, facili-
tates part-time work, relaxes workers’ holidays and cuts the statutory lunch hour to 30 min-
utes. Importantly, the reform also scraps dues that all employees must pay to their company’s
designated union, regardless of membership. Also, collective agreements between employ-
ers and workers will overrule many of the labor code’s provisions.
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Table 1: Regulation costs in Brazil in comparative perspective.

Hiring Index Firing Index Payroll Taxes
Mean (155 countries) 36.7 35.9 16.3
1st quartile 11.0 20.0 8.0
2nd quartile 33.0 40.0 14.7
3rd quartile 61.0 50.0 23.8
Maximum 100.0 100.0 55.0
Brazil 67.0 20.0 26.8
Latin America 40.5 29.5 15.9
OECD: high income 30.1 27.4 20.7
Source: Ulyssea (2010) based on the Doing Business database (World Bank).
Brazilian firms face labor costs that are well above the Latin American average, being
located at the top quartile of the distribution in 155 countries (see Table 1).7
In practice, employment protection legislation in Brazil makes firing formal
workers comparatively more costly than in other countries from Latin America
(Almeida and Carneiro, 2012). For instance, mandated advance notice before
dismissal to workers is combined with the obligation that employers, in the interim
period, should grant workers 2 hours a day to search for a job. This interim period is
at least 1 month long. Moreover, employers cannot change the worker’s wage within
this period. As a consequence, about 25% of paid hours are not worked, without
considering the intrinsic drop in motivation before dismissal which may involve a
25% decline in production (Barros and Corseuil, 2004). Whenever a worker is fired
without cause, he/she has the right to receive a compensation from the employer on
top of what was accumulated in the worker’s job security fund (the penalty equals to
a 40% of the accumulated fund during the worker’s tenure with the firm).8 Because
dismissal costs increase with the duration of the work contract, employment protec-
tion legislation in Brazil makes the status of “insiderness” an increasing function
of job tenure.
From the expected effects of employment protection legislation, Brazil exhibits
large insider–outsider differences in labor market outcomes. Since the constitutional
reform in 1988, the size of the informal sector increased in Brazil (see Figure 1).
7
Doing Business database, available at www.doingbusiness.org.
8
Some authors have found that regulations of severance payment in Brazil may induce
several workers to force their dismissal. This has the potential to increase turnover rates
and increase firm’s costs even more (Neri, 2002).
b3508_V3_Ch10.indd 259 11-02-2020 13:48:58

Labor informality and share of informal salaried workers

as percentage of informal labor (secondary y-axis)
Controlled formal–informal wage gap and unemployment
Figure 1: Labor informality and formal–informal wage gap in Brazil (before and after the
constitutional reform of 1988).
Source: Ulyssea (2010) based on Monthly Employment Survey (PME).
Substantial increases in the fixed costs of hiring formally were seen as responsible for
this trend in informality in the Brazilian labor market (Ulyssea, 2010). Interestingly,
existing research downplays the impact of other liberalizing reforms, such as trade
liberalization during the 1990s, on informal employment’s growth, while changes in
b3508_V3_Ch10.indd 260 11-02-2020 13:49:00

labor market regulation seemed to have played a major role (Goldberg and Pavcnik,
2003; Bosch et al., 2012). Moreover, the rise in labor informality was accompanied by
a larger share of informal salaried workers in the total informal employment. Before
the constitutional reform, the share of informal wage earners was suffering a signifi-
cant drop, but then increased up to 50% of informal labor in the early 2000s. This
is important because as opposed to the informal self-employed, informal salaried
workers are those who correspond more closely to the standard queuing view of
the segmented labor market (Bosch and Maloney, 2010). Together with the increase
in informality, both the unemployment rate and the wage gap between formal and
informal workers (controlled by standard covariates in Mincerian regression) also
increased. In sum, the evidence suggests a clear division between labor market
insiders and outsiders, which, in turn, should provoke political differences between
labor market groups.
Labor Market Preferences and Workers’ Political Polarization
Survey data on preferences for labor market regulations are scarce and often not
directly asking about labor regulations per se. Potentially relevant information
is the insider–outsider difference in the perception of feeling protected by the
labor code. The Latinbarometer has collected this data in 1997, 2000, 2001, and
2005. The question is worded as follows: How protected do you feel by the labor
law in Brazil? Here, I take the percentage of respondents who report feeling “very
protected” or “fairly protected” as the outcome of interest. Informal workers
are those who declare to be “self-employed”, “farmer/fisherman”, or “informal”
worker. Formal workers are those who fall in any the of the following categories:
“salaried employee in a public company”, independent or salaried “Professional
(doctor, lawyer, accountant)”, “salaried senior management”, “salaried middle
management”. Figure 2 shows the evolution of insider–outsider differences in
the perception of feeling protected by the labor law for each type of workers. In
general, evidence suggests that informal workers feel less protected by the labor
law than formal workers.
However, the differences between formal and informal workers in perceptions
about EPL are only moderate and vanish in 2001 and 2005. Only in 1997 and 2000,
these differences are statistically significant in the formal worker category at 7 and
9% points, respectively, who are more likely to feel protected by EPL than informal
workers. The main change observed in 2001 is the fall in perceptions of protection
among formal workers. In 2005, both formal and informal workers reach their
highest level of perception that EPL protects workers in Brazil, and therefore, there
is no significant difference. This descriptive evidence provides only weak support
to the insider–outsider model of labor market preferences.
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Figure 2: Proportion of formal and informal workers who feel protected by the labor law.
Note: The spikes denote a 95% confidence interval.
Now, I turn to the revision of existing evidence regarding political polarization

between formal and informal workers in Brazil. In an important recent study, Baker
and Velasco-Guachalla (2018) analyze the extent to which labor market groups vary
in terms of political behavior and policy preferences. Their work aims at testing some
political implications of the insider–outsider model in Latin American countries. In
particular, they analyze three claims grounded in the “dualist” conception of labor
markets: (a) that informal workers are less politically engaged than formal-sector
workers, (b) that informal workers are more right-leaning in vote choice and issue
attitudes, and (c) that informal workers are more favorable toward non-contributory
social policies. First, the “undermobilization hypothesis” suggests that informal
workers are less likely to be collectively organized and to participate in politics. Lack
of mobilization would reflect social atomization and absence of visible common
interests among informal workers, which ultimately prevents informal workers to
overcome collective action problems. Second, the “right-leaning hypothesis” states
that informal workers are less supportive of the political left than formal workers.
Because of lower mobilization and unionization rates, informal workers have weaker
ties with left parties. Informal workers are also less receptive of ideological discourses
b3508_V3_Ch10.indd 262 11-02-2020 13:49:01

and class-based politics. Closely linked to this idea is the fact that informal workers
are more prone to enter into clientelistic exchanges (Roberts, 2002; Levitsky, 2003;
Huber and Stephens, 2012).9 Third, it has been said that informal workers also have
stronger preferences for non-contributory policies that can protect outsiders from
income risk and poverty. Hence, they should prefer means-tested and universalistic
social assistance, such as cash transfers and minimum pension programs, that have
been increasingly implemented in many developing countries (Garay, 2016; Carnes
and Mares, 2014, 2016). Using data from the Latin American Public Opinion Project
(LAPOP) in 18 countries, Baker and Velasco-Guachalla (2018) provide country-by-
country evidence for these hypotheses.
The authors find little support for the three hypotheses. Here, I concentrate
on their results for Brazil. We have already seen that segmentation in the Brazilian
labor market is only weakly related to preferences for employment protection rules
(see Figure 2). The insider–outsider model would also predict that informal workers
should demand passive or active labor market policies that protect outsiders. Baker
and Velasco-Guachalla find no support for informal workers being more supportive
of the Bolsa Familia program that targets conditional cash transfers to the informal
poor. The Brazilian Electoral Panel Study 2014 (BEPS 2014) includes the f ollowing
question: Now let’s talk about social policies. Some types of programs, like Bolsa
Família, use resources from taxes paid by everybody to benefit some people of low
income. Other types of programs, like the INSS, use resources from taxes paid by those
with a signed workers booklet and benefit only those who pay. Which type of policy do
you prefer? (1) Policies that benefits some with taxes paid by everyone, like the Bolsa
Familia. (2) Policies that benefit those who pay, like the INSS. (3) Both or indifference
or neither [Not read]. The authors also create a means-test index as a dependent vari-
able, which is an index from five binary questions asking for approval/disapproval
of different anti-poverty social policies. The results indicate that informality has
a significant effect on the support for the means-test index, though the effect size
is only one-fifth of a standard deviation of the dependent variable. Also, informal
workers do not show significantly more support for the Bolsa Familia than formal
workers. This evidence is consistent with the idea of broad coalitions of formal and
informal labor supporting non-contributory policy in developing countries (Carnes
and Mares, 2014; Garay, 2016; Holland and Schneider, 2017; López-Cariboni and
Menéndez, 2018).
Regarding political mobilization, Baker and Velasco-Guachalla find that, in
contradiction with the undermobilization hypothesis, Brazilian informal workers
For instance, recent studies in India find informal workers to be more clientelistic and pro-
9
market than formal workers (Milner and Rudra, 2017; Wibbels, 2017).
b3508_V3_Ch10.indd 263 11-02-2020 13:49:01

are more likely to participate in politics (protesting, campaigning, etc.) than formal
workers, and they participate in elections as much as formal workers do. The authors
show that there is no significant difference between formal and informal workers in
their patterns of vote stability and partisan attachments. Finally, Brazilian informal
workers are not more likely to support right-leaning policies than formal workers.
Taken together, Brazilian formal and informal workers only have mild differences
with respect to preferences for EPL and non-contributory policy. These differences,
precisely because they are not large enough, are not observed to have a clear cor-
relate with the political behavior of insiders and outsiders. In sum, the evidence
fails to provide an unambiguous support for the insider–outsider model of politics
in Brazil.
Discussion
There are several possible reasons why formal and informal workers do not show
substantial polarization in preferences for employment protection legislation, and
consequentially, their political preferences do not either diverge.
One debate in labor economics is whether developing countries have segmented
labor markets. A large empirical literature has shown evidence against the segmented
market view. This stream of research in Brazil finds significant job mobility across
sectors or workers reporting being better, off by taking up an informal job (Curi and
Menezes-Filho, 2006; Barros et al., 1990). When interpreting the null findings for the
insider–outsider model, Baker and Velasco-Guachalla say the following: “The reason,
we think, lies in the insights of the revisionist model, which has found the formal
and informal sectors to be more integrated than was long thought” (2018: 177).
Indeed, a key assumption of the insider–outsider model is that labor market
regulations impose rigidities in the labor market. Despite high costs and rigidities
imposed by regulation in Brazil, they may not generate large enough barriers to
workers’ mobility between formal and informal sectors (Ulyssea, 2010). Table 2
presents the mobility pattern of Brazilian workers from 2003 to 2005. The transition
Table 2: Transition matrix in the Brazilian labor market (January 2003–2005).
Formal Salaried Informal Salaried Unemployed Self Employed
Formal salaried 84.9 7.2 4.7 3.2
Informal salaried 24.3 53.6 8.4 13.7
Unemployed 23.5 25.3 38.7 12.6
Self employed 7.1 13.2 4.0 75.7
Source: Ulyssea (2010) based on Monthly Employment Survey (PME).
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matrix displays the probability of moving from employment and unemployment

status, where the rows indicate the original status and the columns the worker’s
destination after a 12-month period. Therefore, the level of stability for every job
status is captured by the diagonal’s elements of the matrix. While the formal sector
presents a significantly lower exit probability than the informal one, the transition
rate from the formal to the informal sector is much lower than in the opposite direc-
tion. Ulyssea (2010) interprets this fact as evidence that workers’ mobility is higher
to what the dualistic model of the labor market would predict.
If Brazilian workers can enter into the formal sector, prospects of upward
mobility may lead outsiders to anticipate and adopt insider preferences (Tsakalotos,
2004). Future expectations of upward mobility (Benabou and Ok, 2001; Guillaud,
2013) may partly explain the lack of significant differences between preferences
and attitudes of formal and informal workers. This effect may be more significant
if there is a context of formalization in the labor market. Indeed, higher entry rates
from informality to formal labor in Table 2 are consistent with the decreasing trend
of informality since the early 2000s shown in Figure 3.
The aforementioned evidence opens the important discussion of the nature
of informality in Brazil. Despite Brazil being more segmented than other Latin
American countries, such as Mexico, many informal workers are able to offer
reasons why they would not take a formal job. In 1990, in Brazil, two-third of
informal self-employed would not leave their current jobs for jobs with signed work
contracts, while one-third of informal salaried workers would not change their work
for a formal one (Perry et al., 2007). While this supports the idea that much of the
informal employment is voluntary rather than involuntary, it also shows that the
composition of informality between salaried informal workers and self-employed
informal workers matters. As the self-employed workers increase relative to the
informal wage earners, voluntary informality may be also higher. As explained by
Berg (2011), the rise in formality rates in Brazil was driven by an increase in the
percentage of wage earner workers with signed labor cards. This group made up
34.5% of the total employed in 2008. More importantly, between 1999 and 2008,
this category grew at an average annual rate of 6.6%, while the growth rate between
1992 and 1999 was only 0.7%. In turn, the job growth of non-contributing self-
employed workers declined from an annual rate of 3.9% in 1992–1999 to 1.3% in
1999–2008. Hence, the observed blurring in differences regarding preferences for
EPL in 2005 (see Figure 2) may be potentially due to a larger share of voluntary
relative to involuntary informality in Brazil since 1999 onwards.
The first main implication is that the insider–outsider model may not accurately
predict workers’ preferences because the assumption that EPL segments the labor
market may be too strong for the case under analysis. Yet, it is important to see that
b3508_V3_Ch10.indd 265 11-02-2020 13:49:01

Figure 3: Share of informal employment in Brazil (1992–2008).

Note: ILO definition of informality: Informal workers are private sector and domestic workers who do
not have a signed labor card, self-employed workers and employers who do not contribute to the social
security system, unremunerated workers, and workers who produce and build for their own use. Formal
workers are private salaried workers and domestic workers with a signed labor card (carteira assinada),
government workers and military, as well as employers and self-employed workers who contribute to
the Brazilian social security scheme (Previdência). Workers aged 16 years and older. Rural areas of the
Northern states not considered. Missing data for 1994 and 2000.
Source: Calculations based on Berg (2011) using the Brazilian national household survey IBGE/PNAD.
this does not invalidate the insights from the insider–outsider model. Instead, it
opens the room for finer grained hypotheses. Precisely, the second implication is that
the insider–outsider model (i.e. the effect of “outsiderness” on preferences for EPL)
may be conditional on other variables that affect the extent to which EPL segments
the labor market. These variables are likely to be alternative explanations of the size
and composition of labor informality.
Indeed, there are multiple reasons for the rise in formal employment in Brazil
during the 2000s. Economic growth and real exchange rate depreciation fostering
the export boom may have improved the conditions in the Brazilian labor market
(Baltar et al., 2006). More importantly, the costs of entry were reduced since the
introduction of the SIMPLES law that facilitated registration and lowered the rate
of taxation for small businesses. The government also increased the enforcement of
the labor law through more inspections and jurisprudence. For instance, between
b3508_V3_Ch10.indd 266 11-02-2020 13:49:02

1996 and 2008, the number of workers registered as a result of inspection increased
from 268,000 to 669,000 (Berg, 2011). Other policies affecting the structure of public
spending, access to domestic credit, and the export profile may have also affected
the process of formalization (Cardoso Jr, 2007).
Interestingly, enforcement of the labor law may have negative consequences
for the level of employment, therefore the government has positive incentives to
implement deliberate non-enforcement. Political models of enforcement, as in
Holland (2015) and Feierherd (2017), argue that non-enforcement of law is an
available tool for politicians to purse political goals to build support among
different voter groups: enforcing the labor law among firms where compliance
tends to be higher and not enforcing it in firms that are likely to remain informal.
Despite the general trend of increasing enforcement, there is large variation across
different Brazilian regions. For instance, recent research shows that Brazilian
governments may have used enforcement of EPL regulation as a compensatory
policy against negative shocks form liberalization. Lower enforcement of labor
regulations in Brazil reduced the effect of import competition on trade-displaced
workers’ employment outcomes (Dix-Carneiro and Kovak, 2017; Ponczek and
Ulyssea, 2017). Enforcement policy may affect the consequences of EPL and
therefore insider–outsider preferences. However, this line of research has not been
sufficiently explored in the literature.
Baker and Velasco-Guachalla (2018) discuss other potential explanations
for the high degree of convergence in political preferences between insiders and
outsiders. One of them is the fact that left-wing governments in Latin America
have implemented policies that benefit both insiders and outsiders with the aim of
building political support (López-Cariboni and Menéndez, 2018). For instance, the
left in Brazil has maintained high levels of EPL together with the implementation
of cash-transfer programs targeted at outsiders (e.g. Bolsa Familia). These policies
may help increase the outsider support for parties that are traditionally backed up
by labor market insiders. Suggestive evidence comes from the realignment of Lula’s
electoral support before and after the implementation of cash transfers for the poor
informal sector. Figure 4 shows this important change: The x-axis represents the
mean Human Development Index per district (which is a variable that captures well
the targeting of the Bolsa Familia program) and the y-axis represents the change in
the Lula’s vote share between the presidential elections of 2002 and 2006. As it can
be observed, Lula increased its basis of political support among the poorest districts,
where most households are recipients of the cash-transfer program. Conversely, in
most developed areas, Lula even lost some electoral support. However, these effects
did not occur for the Workers’ Party in Brazil, which may have failed to claim the
credit for the implementation of pro-outsider policy (Handlin, 2013).
b3508_V3_Ch10.indd 267 11-02-2020 13:49:02

Figure 4: Change of Lula’s electoral support between 2002 and 2006 across levels of Human
Development Index.
Source: Based on data from Zucco (2008).
Concluding Remarks
This chapter has revised the literature on insider–outsider models and its potential
implications for political preferences among different types of workers. Those who
are covered by job security rules have longer job tenure and lower turnover rates.
The insider–outsider model predicts that EPL may potentially have a negative effect
on those outside its protective umbrella. However, this argument has been contested
on the grounds that it is unclear whether deregulation of the labor market brings
the expected benefits for labor market outsiders. An important empirical question
is whether formal and informal workers in developing countries show policy and
political preferences that reflect the dualization of the labor market.
The analysis of Brazilian data shows that labor market preferences are not
substantially different between formal and informal workers. Understanding why
this is the case is politically and economically important. One possibility is that
the labor market in Brazil is not being substantially segmented by the labor law,
and instead, EPL only benefits workers without harming the efficiency of the labor
market. Moreover, informal workers may be supportive of labor regulations if they
have the expectation of becoming formal workers in the future in the context of
b3508_V3_Ch10.indd 268 11-02-2020 13:49:03

steady increase of formalization. The small differences between insiders and outsid-
ers with respect to political preferences, such as voting for the left, may also be the
result of policies implemented by programmatic governments aimed at building
political support of both insiders and outsiders. In sum, the Brazilian experience
shows that even when EPL may be strict and potentially divisive, it does not translate
into a clear political cleavage in terms of policy preferences.
This is by no means the reason to disregard some of the insights from the
insider–outsider model. Instead, the model is useful to guide future research and
finer grained analysis of the labor market. There exist several potential reasons
for the absence of clear formal–informal differences in workers’ preferences. This
chapter has emphasized problems of measurement and identification of insiders
and outsiders, the existence of heterogeneous outsiders and voluntary informality,
the consequences of different active and passive labor market policies other than
EPL, and the degree of enforcement of labor laws. Yet, future research should also
consider other alternatives that may explain the convergence of insider–outsider
preferences. For instance, workers may form their preferences at the household level,
and therefore combinations of formal informal workers within a single household
may blur differences in individual preferences. Also, the so-called “lighthouse effect”,
whereby some EPL norms, such as the minimum wage, impose a benchmark for
unskilled labor throughout the economy including the informal sector where it is
not binding. Finally, the politics of EPL may be more about class-based politics than
insider–outsider divisions. If this was the case, workers may have markedly different
preferences from capital, whereas the insider–outsider model could only explain
differences at the margin between formal and informal workers.
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b3508_V3_Ch10.indd 276 11-02-2020 13:49:04

CHAPTER 11
Conclusions

Informality has different negative consequences for living conditions in developing

countries. At the individual level, having an informal job or being the owner of a
hidden firm increases risks and uncertainty, curbs future productivity, and lowers
expected income. At the aggregate level, informality may also be negative for col-
lective social outcomes, such as eroding the fiscal contract and decreasing the sense
of citizenship. Part I has analyzed the challenge of tax revenue in BRICs within the
context of opening world markets. Globalization challenged governments to find
alternative sources of revenue, while at the same time, more developed societies
demanded increasing public goods and services. Income growth enabled the BRICs
to shift from trade and corporate taxes to more efficient and viable sources such
as indirect consumption taxes (e.g. VAT). However, consumption taxes are not
necessarily an adequate tool to fight informality. To the contrary, consumption taxes
contribute to income inequality and can perfectly coexist with high levels of informal
labor. BRIC governments have been changing their revenue sources in a similar
direction but at very different velocities. As explained in Chapter 2, income growth
can help governments to increase tax collection without necessarily introducing
profound reforms to the tax system and reducing informality. Revenue mobilization
needs a strong administrative capacity to shrink the informal economy. But citizens
should also believe that paying taxes is fair. In both respects, BRIC countries have
a lot more to improve. The general conclusion arising from Chapter 2 is that BRIC
277
b3508_V3_Ch11.indd 277 11-02-2020 13:49:31

countries have increased their tax revenue in the context of moderate changes in
revenue sources, but they still show important signs of weak administrative capacity
and potential erosion of the fiscal contract.
Indeed, consolidating a fiscal contract is a major challenge for countries with
large informal sectors such as the BRICs. Chapter 3 discusses the links between
informal employment and tax compliance, two related but theoretically distinct
phenomena. The theoretical discussion in this chapter suggests that area-specific
non-compliance (i.e. informal labor) is contagious and may affect other areas (i.e. tax
evasion). For example, informal workers who are unprotected by existing regulations
may become more prone to violate norms in other areas. Yet, understanding the links
between informality and compliance probably demands considering heterogeneous
informal workers and their motivations to enter into or opt out of informal employ-
ment. The chapter makes a political argument, by which voluntarily self-employed
workers may be less likely to engage in tax evasion and more likely to vote relative
to excluded, informal salaried workers. The broader implication for BRIC nations is
that labor market informality may be quite problematic for the general fiscal contract
and the sense of citizen responsibility where informal labor results from a logic of
exclusion. More importantly, policy makers and actors interested in broadening
the tax base should consider tax evasion not in isolation but linked to labor market
dynamics and politics.
An interesting example is tax aid in BRICs. We have learned form Chapter 4 that
tax aid is correlated with higher overall tax revenue and with reforms that increase
income tax revenue, which is mostly paid by the rich. These policies have several
advantages in terms of equity concerns, especially where consumption taxes are the
biggest revenue source for all BRICs today. Also, tax aid may be counterbalancing
the aid curse because general aid is known to decrease income tax revenue relative
to consumption tax revenue. However, tax aid has a positive effect on the shadow
economy and may not be broadening the tax base, that is, tax aid in BRICs seems
to increase revenue by taxing already formalized taxpayers more, not by bringing
in new taxpayers. An implication of the chapter is that governments are not using
their increased extractive capacity to provide incentives that make firms and workers
enter into the formal sector.
Part II brings important insights on the political economy aspects of informal
settlements and basic service provision. Chapter 5 provided a theoretical argument
and detailed empirical evidence about the role of social capital for the ability of slum
dwellers to demand local public goods. In particular, slum dwellers become more
effective in attracting goods and services as their level of social trust and connected-
ness increases. Moreover, the mechanism is that social capital allows for electoral
coordination among slum members which, in turn, increases the chances of being
rewarded with public investment. The major contribution of the chapter is that, in
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Conclusions 279
the context of electoral competition and democratic politics, social capital among
the urban poor is vital for reducing the allocation of clientelistic goods relative to
programmatic goods and services. This is good news because it shows that building
social networks among the poor helps to improve their capacity to independently
elevate political demands. However, the bad news is that opportunistic governments
have no incentive in promoting social capital within the urban poor because their
electoral strategies will become costlier. It is for this reason that the author makes
the interesting policy implication that other non-governmental actors such as NGO
or Development Agencies should be in charge of implementing grassroots activities.
Relatedly, Chapter 6 analyzed the provision of informal basic services. In
particular, the chapter finds that electricity losses — which over time variation is
mostly due to irregular consumption — move counter-cyclically in democracies
but not in autocracies. This suggests that deliberate non-enforcement of the law
increases when politicians have incentives to protect dislocated and poor voters
during negative income shocks. The implication is that democratization increases
the informal provision of insurance for the lower class. Country-specific evidence
for the BRICs is consistent with the same patterns. Democratic cases such as Brazil
and India show counter-cyclical electricity losses, while non-democratic (or fully
democratic) cases such as Russia and China present no significant cyclicality.
Deliberate non-enforcement is a policy that governments implement in various
different areas, such as the labor market, tax collection, street vending, etc. The
chapter expanded the existing knowledge, showing that informal service provision
may be used to cushion income shocks by redistributing income from electricity
bill payers to non-payers. This suggests that governments may not always have a
clear incentive to formalize access to basic services because they would lose a cheap
and potentially effective policy tool to compensate the discontent among the poor
during bad economic times.
Part III has analyzed different aspects of labor informality, political mobilization,
and preferences. Chapter 7 shows that informal and formal workers in Brazil are
different in their political networks and linkages. The chapter is novel in the sense
that it establishes a clear connection between different types of work and political
mobilization. It brings a new perspective by describing how individual and local
level of informality variates with political communication, networks, and politician
linkages. Informal workers are assumed to be relatively harder to identify, coordinate,
and monitor than their formal counterparts. As a consequence, the chapter shows
that politicians target less clientelistic offers to informal workers. Moreover, the local
labor market context increases these differences. As local informality rises, formal
workers gain relatively more clientelistic offers. These findings are important because
they reveal key political differences between insiders and outsiders. Moreover, these
findings suggest the broad implication that where informality is high, politicians may
b3508_V3_Ch11.indd 279 11-02-2020 13:49:31

become more programmatic to deal with informal workers (i.e. targeting conditional
cash transfers) and more clientelistic to deal with formal ones.
Despite differences in political linkages and networks, Chapter 8 shows that
Brazilian formal and informal workers show no significant differences in redistribu-
tive preferences. The study combines a qualitative analysis of the Brazilian insti-
tutional context with an original analysis of survey data from the Latin American
Public Opinion Project (LAPOP) for the period of 2008–2017. The authors interpret
weak associations between policy beliefs and occupations at the light of high level
of fluidity in labor market transitions between the formal and the informal sectors.
Instead, the evidence suggests that education and race are associated with support
for redistribution. Hence, the insider–outsider labor market division seem to be a
non-significant cleavage in the redistributive politics of Brazil.
Importantly, labor market informality is tremendously heterogeneous among
BRICs. This requires paying attention to measurement issues, and also to the history
and causes of informality in diverse countries such as the BRICs. Chapter 9 analyzes
the transformation of the Chinese labor market documenting the rise of labor
informality. The chapter revises the debate of measuring informality in China and
explains why the proxies used in Latin America might not be useful in the context of
Asia. Labor informality and its political roots in China lead to distinctive measure-
ment challenges. The chapter develops a thorough analysis of the institutional origin
of labor informality in China, offering comparisons with other areas in the world.
China’s labor informality is the result of labor contracts under its socialist doctrine
and a particular history of welfare state development. A subgroup of informal sector
workers who hold labor contracts but are still highly exposed to insecurity should
be better understood as outsiders. Hence, “social insurance access” is not a suitable
criterion to measure the size of labor informality in China. This calls for further
theoretical debate whether current conceptualizations of labor informality can travel
across countries.
Finally, Chapter 10 abstracts form important measurement issues and revisit the
question of preferences for employment protection legislation. The chapter shows
that the predictions of the insider–outsider model are only weakly supported with
descriptive Brazilian survey data. This is puzzling given that Brazil has strict labor
regulations, though imperfectly enforced, and a large informal sector. Moreover,
many political economy models of labor market policies are often based on the
insider–outsider model and applied to the problem of informality in developing
countries. If workers do not differ substantially in their preferences, then more
research is needed to explain, both theoretically and empirically, when the distribu-
tion of preferences for employment protection predicted by the insider–outsider
model may or may not hold.
b3508_V3_Ch11.indd 280 11-02-2020 13:49:32

Index
A C
ability to tax, 33 CAF, 67
administrative capacity, 33 chain reactions, 66
administrative procedures, 60 China, 57–58
Afrobarometer, 62 China General Social Survey, 236
age, 194, 196–197, 201–202, 204–205, 211 China Labor Dynamic Surveys, 237
aid curse, 92, 95 Chinese government, 15
All-China Federation of Trade Unions, 15 choose informality, 63
Argentina, 70–71 citizenship responsibilities, 55
Argentine Panel Election Study (APES), 62 civic activities, 68
authoritarian country, 3 civic duty, 66, 70
autocracy, 142, 144–145, 147, 149 civic engagement, 55
clientelism, 46, 158–159, 161, 169,
B 172–174, 177, 180, 182
barriers to trade, 34 collective actions, 72
basic services, 142, 278–279 communism, 37
benefits definition, 61–62 compliance, 53–56, 60–61, 63–64, 66,
Bismarckian welfare state, 222–223, 225 72–74, 256, 278
Bolsa Família, 169, 267 compliance with civic responsibilities, 54,
Brazil, 57, 59, 62, 246, 258–260, 263, 265, 66
279–280 compliance with labor market regulations,
Brazilian Electoral Panel Study (BEPS), 62 54
Brazilian Electoral Panel Surveys, 168 conditional cash transfer, 198, 202, 210, 212
Brazilian formal and informal workers, conditional cooperation, 65–66
264 conservative, 197
Brazilian labor market, 260 conservative profile, 196
Brazilian tax revenue, 57 consumption-smoothing, 142
bureaucracy, 13 consumption tax, 56, 89, 92, 95
281
b3508_V3_Index.indd 281 11-02-2020 13:50:16

282 Index
contributions to social security, 59 economic vulnerability, 61

corporate income taxes, 33 efficiency, 43
corporate tax, 89, 277 electoral coordination, 103–105, 108–110,
corruption, 46, 64 115, 119–120, 122, 124–127, 131
cost–benefit calculation, 54, 64, 66 electricity theft, 140
cost of punishment, 66 Employment and Unemployment Survey
cost of the fine, 64 in India, 61
counter-cyclical, 142–144, 147, 149 employment protection legislation (EPL),
counter-cyclical evolution of transmission 13, 245–246, 248, 251, 256, 280
and distribution losses, 148 employment protection rules, 243
counter-cyclical in democratic countries, employment-related benefits, 72
149 enforcement, 54, 143, 257, 266
counter-cyclical informal transfers, 145 enforcement agencies, 71
counter-cyclical social spending, 140 enforcement of EPL, 267
credible commitments, 64 enforcement of the labor law, 267
entry, 68
D entry barriers, 60
deindustrialization, 158 entry into informality, 68
deliberate non-enforcement, 15–16 evasion, 63
demand for irregular access to electricity, exclusion, 67–68
145 exit view, 68
democracy, 3, 139–140, 142, 144–149 experienced formal and informal, 63
democratic governments, 140 exposure to risk, 196
democratic leaders, 140
democratic political competition, 145 F
democratic political institutions, 3 fairness, 65–66, 70
democratization, 142, 144, 158, 279 fear of punishment, 63
deterrence, 63–64, 66, 73 field experiment, 64–65
development, 11 fiscal contract, 32, 47, 54–55, 64, 66
disenchantment, 71 flexibility, 69
dispatched workers, 221, 229–231, 239–240 forbearance, 16, 140
donor, 83, 85, 87–88, 91–92, 96 foreign aid, 92
dualistic approach, 5 formal and informal employees, 204
dualistic labor markets, 257 formal and informal workers, 8, 193, 197,
dualization, 245 199, 207
dynamic effects, 73 formal employment, 70
formalization, 158, 165, 180
E formal sector, 142
economic development, 45
economic growth, 3, 41 G
economic liberalization, 158 gender, 166, 177, 182
economic voting, 71 general taxes on consumption, 33
b3508_V3_Index.indd 282 11-02-2020 13:50:16

Index 283
geography, 164, 167 in-group members, 72

Germany, 65 insider–outsider model, 243–246,
globalization, 33, 38, 277 253–255, 257, 261
globalized world, 61 insider–outsider policy preferences,
government, 198, 200–201, 203, 205 249, 254–255
government competence, 65 insiders, 243
institutional causes, 219–220, 225, 239
H institutional context, 64, 71
health coverage, 63 institutional weaknesses, 64
health insurance (referring to seguro de institutions, 13
salud/seguro social), 62 instrinsic motivation to pay taxes, 65
heterogeneity among informal workers, 67 insurance, 142
horizontal relationships, 65 International Labor Organization (ILO),
household registration system, 226, 228, 54–56, 61
239 international organizations, 33, 87
hukou status, 13 international tax assistance, 84
involuntary, 68, 70
I involuntary informal employment, 71
IMF, 39, 87–90 involuntary informality, 71–72
inclusive government institutions, 45 involuntary informal labor, 60
income cleavage, 197 involuntary informal workers, 67, 72
income inequality, 193, 204–205, 210 irregular access to basic services, 140,
income tax, 54, 83, 85, 89, 91–95 142–143, 149
India, 57 irregular access to electricity, 142, 149
India Human Development Survey, 61 irregular access to energy, 143
indirect consumption taxes, 277 irregular electricity consumption, 142–143
individual income taxation, 41 irregular transfers, 148
inequality, 81, 86 ISI, 223–224
inequity aversion, 65 Israelis, 71
informal basic services, 279
informal employment, 55, 73 L
informality, 31, 54–55, 57, 61, 66–67, laboratory experiment, 64
73–74, 280 labor contract law, 229–231, 240
informal labor, 56, 59, 68 labor contracts, 220–221, 228–232,
informal provision of insurance, 140 236–240
informal salaried workers, 69–70, 261 labor informality, 11, 15, 54, 246, 280
informal sector, 5, 7, 55, 57–58, 157, 196, labor inspections, 256
199 labor law in Brazil, 261
informal self-employed, 261 labor law protection, 72
informal settlements, 278 labor market dualization, 61
informal workers, 53–54, 58, 63, 73, 202, labor market exclusion, 55
243–244, 252 labor market institutions, 59, 72
b3508_V3_Index.indd 283 11-02-2020 13:50:16

284 Index
labor market preferences, 255 new informal or formal workers, 63

labor market regulations, 66 non-compliance, 59, 72–73
labor regulation, 71, 73, 254, 256 non-enforcement of the law, 279
Latin America, 64, 69, 251 non-governmental actors, 279
Latin America and the Caribbean, the non-technical losses, 143
Afrobarometer, 61–62
Latin American countries, 56, 251 O
Latin American Public Opinion Project official development assistance, 88
(LAPOP), 61–62 old cleavages, 193, 195, 201
Latin American workers, 258 out-group member, 72
leader, 104, 109, 111, 114–115, 117–118, outsiderness, 72
120–122, 124, 128 outsiders, 158, 243
left–right ideology, 195 over-compliance, 64
left-wing governments, 267 own-account workers, 55
legalist account, 7
legalist, definition, 62 P
legalistic definition of informality, 61 payment of taxes, 64, 277
legally enforce compliance, 71 payroll taxes, 59–60
local public goods, 103, 106, 108–109, perception of feeling protected by the
112–114, 121, 127–128 labor law, 261
logistic regression analyses, 203 policy preferences, 15, 159, 161, 194–195,
logistic regression models, 211, 213–214 197
logit regression coefficients, 205 political cleavages, 208
low state-capacity, 64 political ideologies, 193–194, 197, 200,
low tax morale, 58 202–204, 209, 214
political mobilization, 158–160, 182,
M 279
market reform, 219, 226–228, 239 political networks, 159–162, 168–169, 177,
material interests, 195, 200–201, 207 182
measure of informality, 58, 280 political participation, 160
migrants, 13 political polarization between formal and
migrant workers, 226, 228 informal workers, 262
mobility from informal to formal sectors, political preferences, 158
69 political socialization, 158–159
modern taxes, 37 political variables, 207
multinational corporations, 34 post-communist countries, 38
poverty, 8, 44, 81, 86, 89
N precarious employment, 220–221, 230,
National Bureau of Statistics, 233 236–237, 240
natural resources, 36 preferences, 248, 279
new cleavages, 193–194, 197, 200, 202, preferences for employment protection
204, 207 legislation, 250
b3508_V3_Index.indd 284 11-02-2020 13:50:16

Index 285
productive view, 61 Russia, 57

programmatic politics, 161 Russia Longitudinal Monitoring Survey of
progressive taxation, 64 HSE, 61
property taxes, 69–70 Russian Federation, 61
prosocial behavior, 65
provision of (or willingness to provide) S
services, 65 segmentation hypothesis, 61
psychological responses, 72 segmented labor market, 257
public goods, 64–65, 70, 83, 89, 96, self-employed workers, 55, 57, 62, 69,
278 196, 202, 246
public pension scheme, 60 self-employment, 57–58, 60, 69, 221–222,
public services, 105 225, 228–229, 232, 234–235, 237, 239–240
public social spending, 198 self-interest, 70
punishment, 63 shadow economy, 10, 32, 278
signed booklet (carteira assinada), 62
Q size of the informal sector, 59
quasi-voluntary compliance, 39, 64–65 slum, 8, 10, 278
slum dwellers, 103, 105–108, 110,
R 118–121, 128–129, 278
race, 194, 197, 200, 202, 205, 207–209, 211, social capital, 103–106, 108–111, 113,
213–214 115–117, 119–120, 122, 124–130,
reciprocity, 65–67 278–279
redistribution, 32 social exclusion, 72
redistributive capacity, 34 social insurance-based welfare state,
redistributive politics, 193 223–224, 239
redistributive preferences, 194, 196–197, social insurance programs, 220, 224–226
199–200, 203–205, 207–210 socialist legacy, 227, 239
regulation of entry, 13, 247 social norms, 54, 65
regulatory costs, 59 social policy attitudes, 193
relevant tax authorities, 62 social policy beliefs, 195
residual approach, 233–235 social protection, 61, 162
responsibility attribution, 71–72 social security benefits, 8
revenue bargaining, 38 social security contributions, 55, 60,
revenue capacity, 35 67–68
revenue generation, 32 social security (seguro social), 62, 142
revenue maximizers, 45 socioeconomic impact, 198
revenue mobilization, 277 socioeconomic situation, 203
rewards for tax compliance, 64 spouse, 63
rich, 64 state capacity, 15, 33
risk of audit, 64 state-owned enterprises (SOEs), 13, 219,
risk of being caught, 63, 66 227, 233
rural workers, 227–228 state-run enterprises, 36
b3508_V3_Index.indd 285 11-02-2020 13:50:16

286 Index
street vendors, 60 U
structuralist approach, 7 Udaipur, 103–105, 107, 109, 118, 120–121,
survey, 58, 62, 66–67 127, 131
survey data, 57, 67 uncounted workers, 233–234
survey instruments, 62 undermobilization hypothesis, 159
switches between formal and informal unemployed workers, 71
sectors, 69 unemployment, 72
unfair, 65
T United Nation’s Sustainable Development
tariffs, 34 Goals, 61
tax administration, 42, 85–86, 89, 92–93 United States, 71
tax aid, 84–85, 87–92, 94–96, 278 unofficial economic activity, 3
taxation, 70, 162 unofficial economy, 10
taxation–representation, 83–84, 95 unpaid worker, 62
tax base, 85, 278 upward mobility, 265
tax collection, 83–84, 89–90 urban workers, 219, 227–228
tax competition, 34
tax compliance, 54, 63, 65–67 V
tax enforcement, 83 value-added taxes (VAT), 34, 39, 59–69,
taxes, 70 70, 85, 95
tax evasion, 31, 34, 54, 59, 65, 69, 84–86, VAT collection, 60
89–90, 92 VAT gap, 35
tax intake, 42 vertical relationships, 65
tax mix, 35, 42 voluntarily exit, 69
tax morale, 39, 57–58, 65 voluntary, 60, 67–68, 70
taxpayers, 45 voluntary informality, 257
tax rates, 59 voting, 67, 70, 72
tax revenue, 31, 83–85, 87–96, 278
tax state, 31 W
tax structure, 65 welfare systems, 198, 208
tax threshold, 84, 89–90 withholding consumption taxes, 67
transit from formal to informal, 63 workers, 69
transition matrix, 264 Workers’ Party in Brazil, 267
transmission and distribution losses World Bank, 87–91
(TDL), 140–141, 148 World Values Survey (WVS), 57–59,
trust in public institutions, 64 61–62
b3508_V3_Index.indd 286 11-02-2020 13:50:17

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About the Contributors xiii

Samik Chowdhury holds a PhD in Economics from Jawaharlal Nehru University,

Simantini Mukhopadhyay is an Assistant Professor at the Institute of Development

Sripad Motiram is an Associate Professor at the University of Massachusetts,

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Chapter 1 BRICS: The Political Economy of Non-Inclusive Growth 1

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Chapter 6 Sustainable Development and BRICS: Unity Amid Diversity? 99

Chapter 8 Inclusive Finance: India Through the BRICS Lens 143

Chapter 9 Gender, Education, and Programma Bolsa Familia in Brazil 197

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non-inclusive? What are the different dimensions of such non-inclusivity? Will

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China’s constraints to shift the policies appear more political-economic; India

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including technological advancements, there has been a marked progress in financial

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BRICS: The Political Economy

Biju Paul Abraham

Chapter 1 BRICS: The Political Economy of Non-Inclusive Growth 1

Chapter 6 Sustainable Development and BRICS: Unity Amid Diversity? 99

Chapter 8 Inclusive Finance: India Through the BRICS Lens 143

Chapter 9 Gender, Education, and Programma Bolsa Familia in Brazil 197