How will BRICS really benefit SMEs?

Will small businesses in Brazil, Russia, India, China and South Africa benefit from these countries being part of the BRICS? With the 7th BRICS summit last week in Ufa in Russia, the question is — is there really anything in it for SMEs?

The biggest potential benefit for small businesses would be access to a wider export market. But the BRICS are far off from achieving a free trade agreement.

What free trade?

This was confirmed this week by Russia’s first deputy economic development minister Alexei Likhachev, who was quoted this week as saying that the bloc is not psychologically ready” to sign a free trade zone deal but may sign an agreement on deeper economic integration in the next five years.

The biggest stumbling block is that members don’t offer sufficient goods and services that are complementary to one another. They all are heavy exporters of cheap raw materials, with China gaining most from its demand for raw materials, even though the demand has slacked off a bit recently.

Some progress is being made in looking at increasing value-added exports. At last year’s summit in Fortaleza, Brazil the South African government released a study that identifies South Africa’s top 20 value-added products with a revealed comparative advantage in each BRICS market.

Another problem is that the members — particularly India and Brazil — still discriminate against one another through high tariff barriers, buy local demands for procurement and investment restrictions, says the Global Trade Alert in this report.

The report notes that since 2008 BRICS governments have introduced 1 451 policies that favour domestic commercial interests over foreign ones, equivalent to 32% of such measures world-wide.

Discussion at Ufa may look at the idea of establishing a barrier-free e-commerce zone between all members. This could make online sales to customers outside their respective borders easier. But protectionist India has already said it will not back such an agreement, reports The Hindu.

Just allowing all those from BRICS member states to have visa-free access to one another’s respective countries would be a start. Brazilians are best off in this regard — they can visit Russia and South Africa without requiring a visa. Russians and South Africans can also visit Brazil free visa.

Banking on it

Even the much anticipated US$100-billion New Development Bank which was launched at last year’s BRICS summit and is set to get start operating by the end of this year may only benefit small businesses indirectly — as it plans to focus on investments in infrastructure and renewable energy.

Such investments – particularly in Sub-Saharan Africa and South East Asia could if they come off, boost businesses by for example lowering transport costs and improving electricity generation and by attracting big companies to set up on the continent which small businesses could then supply.

Business council

The annual summits also include a business forum meeting co-ordinated by a business council. But these contain mostly high-level debates with little of substance for entrepreneurs. The real value may be in the networking possibilities these facilitate.

But if the 2011 Sanya summit in China is anything to go by South Africans should be concerned. The main problem is that the South African government had opted to invite along Black Economic Empowerment (BEE) big whigs who were out to sell their black credentials to fellow BRICS businessmen. Few had started a business from the ground up.

That summit included people Faizal Motlekar, executive chairman of BEE investment company Motlekar Holdings (which at the time was an investor in construction giant Group Five). He told the writer (who attended the summit) that he mainly came to support the South African government and was not necessary there to look for business opportunities

Then there was Mxolisi Sikhakhane, head of BEE investors Energie Blue Corporation which has investments in the property sector, financial services and mining, who had held a meeting with a Chinese steel-producing company which was looking to invest in a manganese mine and was looking to partner with various investors as well as a BEE partners.

In contrast India sent people like GS Ahluwalia, (part of India’s business delegation of about 50 business people) the country head of Indian motorcycle manufacturer TVS Motor Company, who were directly involved in the company themselves and not just an investor.

This really raises the question – who among South African business people will really benefit and why are such people as Sikhakane and Motlekar seemingly so close to the government?

Benchmarking

For now the BRICS bloc could some significance for researchers and policymakers looking to share information and carry out benchmarking of their support and finance programmes against one another.

But the risk is that with the heavy state involvement in the economies of all BRICS countries, the five may learn all the wrong lessons and adopt policies that end up choking SMEs and wasting millions of tax payers money (such as BNDES in Brazil — see this earlier post).

Better may be to benchmark entrepreneurship policies in BRICS countries against other emerging economies such as Malaysia, Kenya, Chile and Colombia, as well as those in developed countries too.

For more on BRICS statistics download the 2014 BRICS joint statistical publication here.

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