Introduction

In an era marked by significant shifts in global economic governance, the emergence of the BRICS bloc (Brazil, Russia, India, China and South Africa) represents a significant pivot towards multilateralism, offering a fresh perspective on economic integration and cooperation among emerging economies.¹ Amid discussions on global financial reforms, the concept of an optimum currency area (OCA) within the BRICS bloc emerges as a compelling proposition, promising to redefine economic interdependence and enhance financial stability within this dynamic collective. This group of nations, by virtue of their rapid economic growth and increasing geopolitical influence, presents a unique case for exploring the prospects and challenges of enhanced economic integration, including the ambitious prospect of forming an OCA. Given the complex interplay of economic policies, structural diversities and geopolitical considerations, analysis of the challenges and prospects of such integration calls for a comprehensive literature review. The motivation behind this inquiry stems from the pressing need for a global financial architecture that better accommodates the interests and needs of developing countries, especially those of the Global South.

The current global financial architecture, dominated by the US dollar, poses limitations, especially in addressing the challenges faced by emerging and developing economies.² Many of these countries grapple with the challenges of fulfilling debt obligations while some are at considerable risk of defaulting on their loans. According to the United Nations Conference on Trade and Development (UNCTAD), in 2021 global debt reached an all-time high of $303 trillion, representing a 10% increase over 2020. The UNCTAD report also highlighted the fact that 60% of low-income countries were facing the imminent threat of debt distress.³ One must note that the global economic landscape in 2020 was significantly impacted by the COVID-19 pandemic, resulting in an overall reduction in economic growth rates worldwide.⁴ The international monetary system thus faces multiple challenges, including the increasing burden of debt, the recurrence of financial crises and the sluggish pace of reform. In addition, the dominance of the US dollar in international transactions and its implications for global debt dynamics, trade imbalances and financial stability underscore the relevance of exploring alternative models of economic cooperation and integration.⁵ These challenges have led to a renewed interest in currency unions to promote economic integration and stability in the global financial landscape.

This article, therefore, delves into the discourse surrounding the BRICS’ potential to contribute to a more equitable and efficient global financial system, through the lens of optimum currency area theory.⁶ By synthesising findings from a broad range of research, the article aims to explore the prospects and challenges of the BRICS’ economic integration, providing a comprehensive literature review of the current state of such integration. The aim was not to conduct new empirical analysis but to synthesise and evaluate the current academic discourse, identifying key themes, insights and gaps in the literature. The article will focus on providing the international context for BRICS integration, including an overview of current initiatives and a review of the OCA theoretical framework, followed by empirical insights from OCA studies. Then the article moves to a discussion of findings, providing the key prospects and challenges of BRICS economic integration followed by a conclusion and a set of recommendations.

BRICS in international context

An overview of the BRICS from an economic perspective provides impetus for further investigation into the value of the members’ economic integration. As of 2023, according to UNCTAD,⁷ the BRICS’ economies collectively accounted for over 25% of global economic output, with 42% of the global population. It is well documented that between 1990 and 2015, the BRICS’ economies underwent a remarkable transformation and experienced a significant increase in their combined share of global economic output, moving from 5.85% to 21.6%; this substantial expansion implies that the BRICS contributed to roughly a quarter of global economic output, with a cumulative nominal GDP of $14.9 trillion.⁸ Collectively, the BRICS’ economies also held as of 2023 an estimated $4 trillion in consolidated foreign exchange reserves and attracted about 11% of global foreign direct investment. The BRICS countries, collectively, have an economic potential to surpass the economies of the Group of the Seven (G7) wealthiest countries by the year 2050.⁹

Viewed as a whole, BRICS has maintained relatively significant economic growth rates. Several factors could contribute to this phenomenon, including some members’ large populations, abundant natural resources, and rapid economic reforms.¹⁰ The distinctive characteristics of BRICS make it an illustrative model of developing and emerging economies. Moreover, BRICS seeks to enhance its international standing and create opportunities both within the group and globally. While they portray themselves as promoting various objectives, the unqualified claim that they consistently achieve these goals lacks full support at this time, however, and it is important to acknowledge the divergence in economic, social and political priorities of its members.¹¹

Still, the features noted above collectively paint a picture of the BRICS bloc as a dynamic and evolving economic entity. The BRICS, it is proposed here, represent a significant shift in global politics and economics. Their combined strength has given them influence on the world stage, challenging traditional divisions. As they continue towards efforts to deepen cooperation, the BRICS may yet prove to be the bloc to reshape international development and economic policies, especially after the 2023 expansion to include Saudi Arabia, Egypt, Ethiopia, Iran, and the United Arab Emirates. In particular, as analysis below will demonstrate, the group is actively seeking to enhance its role on the global stage through concerted efforts in economic development, financial stability, and institutional cooperation.

Current BRICS initiatives

The BRICS bloc presents a collective endeavour towards reshaping the dynamics of global economic development and growth. Since the coalition’s formal establishment in 2009, BRICS has embarked on several initiatives to strengthen political and economic cooperation both within the bloc and with other emerging economies worldwide.¹² This can be seen in its numerous institutions and mechanisms launched, aimed at providing new alternatives for fostering global sustainable development, infrastructural advancement and financial stability.

Among key initiatives are the annual BRICS Summits, held since 2009.¹³ The first formal BRICS summit took place in Yekaterinburg, Russia in 2009. The early focus on investment prospects gradually changed to become reform of the international financial architecture, with an invitation to South Africa to join the bloc in 2011 before the expansion noted above.¹⁴ BRICS summits now cover various topics, including trade, finance, development, energy, and technology,¹⁵ and aim to facilitate cooperation, policy alignment, and joint initiatives among these major emerging economies.

The New Development Bank (NDB) is another initiative of the bloc. Founded in 2015 at the BRICS Summit in Fortaleza, Brazil, it is considered a cornerstone of the BRICS. With a financing capacity by now of $32.8 billion, the NDB offers financial assistance for infrastructure and sustainable development projects not only in the BRICS nations but also in other emerging economies.¹⁶

Another cornerstone is the Contingent Reserve Arrangement (CRA), supported by a dedicated resource pool of $100 billion, which provides a mutual support mechanism for short-term balance of payments pressures, enhancing the financial safety net of member countries.¹⁷

Complementing these financial instruments, the BRICS Business Council (BBC) and the BRICS Think Tank Council (BTTC) function as platforms of intellectual support, facilitating private sector partnerships and providing policy recommendations, respectively.¹⁸ These institutions underscore the bloc’s commitment to deepening economic ties and intellectual exchange, laying the groundwork for potential macroeconomic policy coordination.

The New Development Bank (NDB)

The current global economic dynamics are still characterised by competition and a prevailing Western hegemony. Reliance on funding denominated in US dollars is identified as a source of financial vulnerability for many developing and emerging economies, as the significant US dollar funding costs exert pressure on domestic economies.¹⁹ This situation poses risks to emerging economies with substantial levels of U.S. debt, as their borrowing capacity may be restricted due to limited alternatives for securing finance.²⁰ The NDB represents a cornerstone of the BRICS countries’ efforts to forge a more balanced and equitable global financial architecture. The establishment of the NDB can be seen as a pivotal step toward consolidating the economic aspirations of the BRICS nations. Envisioned as an alternative to the traditional Western-dominated financial institutions, the NDB aims to address the infrastructure and sustainable development needs of emerging markets and developing countries, with a focus on BRICS members. Founded with the objective of supporting public or private projects through loans, guarantees, equity participation and other financial instruments, the NDB focuses on infrastructure and sustainable development projects within the BRICS countries and other emerging economies.²¹ The New Development Bank actively aligns its mission with the United Nations’ 2030 Sustainable Development Goals (SDGs)²² by prioritising investments that focus on areas such as renewable energy, water management, transportation, and urban development. In 2016, the NDB disbursed its inaugural loans totalling $811 million, with Brazil receiving $300 million, China receiving $81 million, India receiving $250 million, and South Africa receiving $180 million.²³ One of the NDB’s distinctive features is its approach to financing projects in local currencies, aiming to mitigate the currency risk associated with dollar-denominated loans. The bank’s efforts to finance development projects in local currencies are particularly noteworthy, as this approach mitigates exchange rate fluctuations, currency risk and promotes financial stability among member nations. This innovative approach not only enhances financial stability for project beneficiaries but also reinforces the use of BRICS currencies – the Brazilian real, Russian ruble, Indian rupee, Chinese renminbi, and South African rand – in international transactions, thereby promoting currency diversification in foreign exchange reserves and subtly laying the groundwork for greater currency cooperation among member states.²⁴

The NDB holds significant implications for international development financing. The NDB’s activities are instrumental in enhancing economic ties and financial cooperation among the BRICS nations. By facilitating investment in critical infrastructure, the bank plays a key role in laying the groundwork for more integrated and cohesive economic policies within the bloc.²⁵ Furthermore, the NDB’s focus on funding projects in local currencies could be seen as a foundational step towards the long-term goal of establishing a common currency among BRICS nations, reinforcing the use of member states’ currencies in cross-border transactions and reducing reliance on dominant global currencies. This approach exemplifies the commitment of BRICS countries to deeper integration and challenges conventional models of international development financing, which at this time predominantly flows from North to South.²⁶

Despite its achievements and ambitious goals, the NDB faces challenges in scaling its impact and navigating the complexities of international finance. Operationalising the vision of equal voice for all member countries, managing diverse economic priorities, and ensuring efficient project implementation are ongoing challenges. Moreover, the NDB’s efforts to contribute to the economic resilience of the BRICS nations occur against a backdrop of fluctuating global economic conditions, which require adaptive strategies and robust financial governance.²⁷
The NDB remains central to the bloc’s global economic cooperation efforts, offering a development financing model. In short, the bank plays a significant role in fostering economic integration and promoting the use of local currencies, which are key aspects of currency union discussions. Despite the challenges of economic convergence and policy harmonisation, the NDB’s initiatives are important steps towards a potential currency union. The NDB’s success is crucial for the future economic integration of the BRICS economies and the potential establishment of a common currency.

BRICS currencies in international settlement

The strategic initiatives by BRICS nations to enhance the role of their currencies in international settlements represent a critical step towards economic independence and integration. Amidst the backdrop of a global financial system heavily dominated by the US dollar, BRICS countries have increasingly sought to assert their financial sovereignty by promoting the use of local currencies in cross-border transactions.²⁸ This move is not only a hedge against currency risks associated with the volatility of major reserve currencies but also could serve as a foundational step towards the establishment of a common currency. The push for greater use of BRICS currencies in international trade and finance has been facilitated through various bilateral and multilateral agreements. Notably, the establishment of currency swap lines among BRICS nations has emerged as a practical mechanism to boost trade and investment flows without the immediate need for dollar-based transactions. These arrangements enable BRICS countries to exchange their local currencies up to a predetermined amount, fostering trade liquidity and financial stability. As emphasised by Jan Kregel, this approach helps to alleviate the challenges that emerging and developing countries face with their trade deficits.²⁹

Moreover, while it is not necessary for only one currency to obtain the status of an international reserve currency, historically, the US dollar has held pre-eminence in this role. For currency internationalisation to be viable among the BRICS members, one of their currencies needs to attain the status of an international reserve currency. Currency internationalisation involves the process by which a country’s currency transitions from being primarily domestic to serving international functions across national borders.³⁰ Such a currency would need to be widely accepted, stable, and trusted by central banks and financial institutions worldwide. in that context, the internationalisation of China’s renminbi is already a significant endeavour. The use of Chinese renminbi as a reserve currency for foreign transactions has been steadily increasing as more institutions adopt it. Equivalency, achieving equal status with the IMF’s Special Drawing Rights (SDR), is seen as an appealing objective by those who envision the BRICS’ potential to fundamentally challenge the existing financial system. The inclusion in 2016 by the IMF of China’s currency as a new reserve currency, with the value of the SDR of 1.0174³¹ in the IMF’s reserve currency basket, presents significant opportunities for both developed and developing countries in terms of international trade and investment. This internationalisation is further supported by the Russia–China Investment Bank and the Asian Infrastructure Investment Bank (AIIB).³²

In this context, the use of BRICS currencies for international settlement serves to facilitate smoother international trade and investment transactions outside and within the bloc. Additionally, leveraging the BRICS currencies in international settlements serves to reduce transaction costs and enhance efficiency in cross-border payments, underscoring the bloc’s move forward toward integration. It also promotes currency diversification, provides an alternative to the dominant reserve currencies, and contributes to a more multipolar global financial system.³³ By streamlining payment processes and reducing dependency on Western financial channels, BRICS nations are laying the groundwork for a more interconnected and self-reliant economic bloc. Yet, the issue of capital account convertibility for the currencies of BRICS remains a subject of ongoing deliberation. Endorsing the use of BRICS currencies in international settlements would involve crucial requirements including the development of deep financial markets, robust infrastructure, harmonisation of regulations, and effective risk management frameworks. Ensuring liquidity, convertibility, and international acceptance of BRICS’ currencies are factors to consider.³⁴

The Optimum Currency Area (OCA) theory

The OCA theory remains a pivotal framework in the discourse on currency unions or monetary integration, offering insights into the conditions under which multiple economies could benefit from adopting a common currency. The theory was popularised by the seminal works of Robert Mundell in the 1960s,³⁵ building upon earlier works by Abba Lerner.³⁶ Later extended and refined by Peter Kenen³⁷ and Ronald McKinnon,³⁸ the OCA theory has evolved to encompass a broad spectrum of criteria and considerations that highlight the complexities of economic integration. It has since become the foundational framework for examining regional monetary integration initiatives around the world, including those in Europe, Asia, Africa, the Gulf, and Latin America.³⁹

The theory suggests that for countries to benefit from a currency union, they need certain economic characteristics or criteria in place to enable the smooth absorption of shocks. The theory posits that the more fully these criteria are met, the more likely the region will prosper as a currency union, thereby maximising economic efficiency and stability while minimising the costs associated with relinquishing national monetary policies.

Traditional versus new OCA theory

The ‘traditional’ OCA theory provides the foundation for OCA analysis, outlining criteria for forming a currency union. These criteria emphasise economic similarities and shock adjustment mechanisms, labour mobility, trade openness, fiscal transfers, and synchronised business cycles.⁴⁰ However, the theory has been criticised for focusing on the costs of currency union formation and neglecting potential benefits. Critics argue that a currency area can strengthen economies and align with the conditions of the traditional OCA theory. The challenges in evaluating and reconciling these criteria led to the development
of a new OCA theoretical model in the 1970s.⁴¹

The ‘new’ OCA theory challenges traditional assumptions and expands to include relationships beyond geographical or political boundaries. It adopts a cost–benefit analysis framework, emphasising the trade-off between giving up national monetary policy and gaining economic efficiency. The theory highlights potential economic benefits of a currency union, such as increased competitiveness, demand stimulation, and export enhancement.⁴² It suggests that countries can benefit from a common currency even if they don’t fully meet traditional criteria.⁴³ By shifting the focus onto benefits rather than costs, this theory asserts that even if countries do not fully meet all traditional criteria, they can still experience the advantages of a common currency through cooperative management of monetary policy. The theory gained prominence during the European monetary integration era, challenging the effectiveness of exchange rates as adjustment tools and the need to evaluate OCA criteria before forming a currency area.⁴⁴ The theory posits that political commitment can foster economic policy harmonisation and that OCA criteria can evolve or be influenced by the currency union itself. This concept is known as OCA theory endogeneity.⁴⁵ This perspective underscored the dynamic nature of OCA criteria and their interaction with the integration process, gaining relevance in the context of the European Economic and Monetary Union (EMU).

The OCA criteria

The first category of OCA criteria aims to reduce member countries’ vulnerability to asymmetric shocks. These criteria focus on factors such as similarity in economic structure, high level of openness to interregional trade, and limited specialisation. Countries with similar economic structures are less susceptible to asymmetric shocks, while trade openness can help offset the impacts of asymmetric shocks. Additionally, countries that are not overly specialised in a particular industry are less vulnerable to shocks in that industry.⁴⁶ The second group of criteria facilitates adjustment to asymmetric shocks, as the fundamental premise of OCA theory is that regions more likely to be exposed to symmetric shocks, or possessing mechanisms for absorbing asymmetric shocks, may find it optimal to adopt a common currency. The criteria in this category include factor mobility, homogeneity of preferences, and the presence of mechanisms for digital payments. Labour and capital mobility aid countries in adjusting to asymmetric shocks, while countries with similar preferences are more likely to agree on the appropriate policy responses to such shocks. Transfer payments can also mitigate the impacts of asymmetric shocks by providing financial support to affected countries.⁴⁷ For example, macroeconomic shocks are inherently unpredictable. Their nature and persistency, along with their impact, significantly influence the costs associated with joining a currency union. Costs arise when shocks affecting country participants in different regions are asymmetric. Asymmetric shocks indicate that shocks or economic distortions are country-specific.⁴⁸ Moreover, asymmetric shocks lead to the need for real exchange rate adjustments or reallocation of production factors, as this affects inflation and unemployment. Thus, shock asymmetries are viewed as an indicator to assess whether a set of countries can enter into a currency union. Since a monetary union implies that the nominal exchange rate can no longer fluctuate to assist in the adjustment to specific shocks, the costs associated with losing monetary policy autonomy increase with the level of shock asymmetry across countries.⁴⁹ The role of exchange rate adjustments is to absorb asymmetric shocks that may arise while using a flexible exchange rate regime.⁵⁰

By adhering to the Optimum Currency Area criteria, policymakers and economists can evaluate the feasibility and potential benefits of implementing a common currency in a specific region. These criteria offer a valuable framework for assessing the viability of currency unions. However, it is crucial to recognise that these criteria are not absolute. As posited by the new theory, there are endogenous factors as well. The determination of whether to establish a currency union is inherently political, and additional factors such as political willingness and public approval may also influence the decision-making process. Therefore, while the OCA criteria provide valuable guidelines, the ultimate decision regarding currency union formation involves a complex interplay of economic, political, and social considerations.

Empirical insights on OCAs in the literature

A wealth of literature on OCAs provides valuable insights into the empirical tools and practical implications of establishing an OCA. Studies spanning various global regions, including Europe (such as the European Monetary Union), Asia (such as ASEAN), South America (such as MERCOSUR), Africa (such as SACU), and the Middle East (such as the Gulf Cooperation Council), offer valuable context for understanding the complexities and challenges of achieving economic integration. One critical element in this process is the establishment of an OCA, which aims to create a unified currency zone with shared monetary policies and exchange rates.

In their 2019 study, for instance, Mohsen Khezri, Muhamed Zulkhbri and Reza Ghazal employed a quantitative analysis using macroeconomic variables such as price levels, interest rates, exchange rates, and GDP to assess whether the member nations of the Shanghai Cooperation Organization (SCO) possess the fundamental prerequisites to establish a monetary union. The SCO consists of eight nations: China, India, Kazakhstan, Kyrgyzstan, Russia, Tajikistan, Pakistan, and Uzbekistan. Their findings revealed asymmetric responses of central banks in these countries to internal and external shocks, as well as differences in the impulse responses of macroeconomic variables to various types of shocks, which contraindicated a currency union.⁵¹ The implications of these findings regarding currency unions are significant as understanding the asymmetric responses of central banks to shocks and the varying impact on macroeconomic variables is crucial for designing effective monetary policies within a currency union. Alireza Kazerooni and Somayeh Razzghi in their 2014 study assessed the potential for a common currency area among the members of the D-8 group, which included Turkey, Bangladesh, Egypt, Indonesia, Iran, Malaysia, Nigeria, and Pakistan. They employed as well a quantitative analysis to assess the shocks symmetry in the group. The findings revealed positive correlation analysis in Turkey, Malaysia, Nigeria, and Pakistan. Additionally, the magnitude and speed of response to these shocks, as indicated by impulse, were consistent across these countries. Based on these findings, the authors concluded that forming a currency union would only be viable within a subgroup (Turkey, Malaysia, Nigeria and Pakistan) of the D-8.⁵²

Hem Basnet and Gyan Pradhan in 2017 explored the concept of economic interdependence within Mercosur, focusing on the analysis of shared trends and cycles among member countries. Utilising an autocorrelation test, the researchers uncovered a strong long-term co-movement in key macroeconomic variables, including real output, investment, and intra-regional trade. This analysis suggests robust macroeconomic interdependence within Mercosur economies, alongside a significant correlation in long-term exchange rate movements. Accordingly, their findings lend support to the notion of currency
union within Mercosur.⁵³

In the context of the BRICS countries, T G Saji in a 2019 study used a quantitative analysis model to examine the possibility of a currency union among BRICS countries. The study focused on comparing real exchange rate market behaviour. Findings indicated disparities in market behaviour, suggesting strengthening policy cooperation, particularly in monetary management, which would need to improve in order to enhance the prospects of a robust currency union among members.⁵⁴ Chee-Heong Quah’s 2016 study assessed monetary integration feasibility within BRICS countries by reviewing the classical OCA theory criteria against the bloc. While results were inconclusive, the study hinted at China’s potential role in monetary integration.⁵⁵These studies have sparked interest in analysing the possibility of BRICS as an OCA, emphasising the need for rigorous econometric analyses to understand unique data characteristics in these countries.

These studies are examples of empirical analysis regarding establishing OCAs among unconventional groups of countries. Their findings underscore the importance of such factors as the compatibility of economic structures and the existence of shock absorption mechanisms, taking into account the political economy of monetary unions.

OCA theory applicability to the BRICS

Applying the OCA framework to the BRICS would involve a similar meticulous assessment of economic convergence among member countries. This could include analysing GDP growth rates, inflation rates, and fiscal policies to identify similarities and divergences. Moreover, considering the symmetry of economic shocks they confront, and whether the BRICS economies respond similarly to global financial crises and commodity price fluctuations, would be critical in assessing their readiness for a currency union.

The OCA theory provides a structured approach to examine how closely the bloc aligns with the ideal conditions for monetary integration and what steps might be necessary to address any disparities. This theoretical lens is instrumental in assessing the potential economic implications of deeper financial integration among the BRICS nations and forms the basis for such subsequent analysis. In the context of the BRICS nations, applying the OCA framework presents a unique set of challenges and opportunities.⁵⁶ It could involve evaluating the extent to which these countries share economic characteristics and are subject to symmetric economic shocks.⁵⁷ It would allow for an analysis of whether the potential economic benefits of a common currency – such as enhanced trade and investment flows – outweigh the costs associated with reduced monetary policy autonomy. The economic diversity of BRICS nations, in terms of development levels, economic structures, and policy frameworks, raises further questions about their compatibility in light of traditional OCA criteria. Additionally, the likelihood of asymmetric shocks and varying degrees of monetary and fiscal policy coordination further complicates the picture.⁵⁸

However, the willingness of BRICS countries to pursue deeper integration, evidenced by initiatives such as the NDB and the CRA, suggests a potential alignment with the new OCA criteria. These efforts indicate a growing recognition of the benefits of economic cooperation and policy convergence which could, over time, enhance the alignment of economic policies and conditions among member states, potentially enhancing the bloc’s rationality as a currency area.

Empirical reviews specifically focusing on the BRICS⁵⁹ highlight the bloc’s evolving economic landscape. They suggest varied degrees of economic convergence within the BRICS, with notable disparities in inflation control, fiscal discipline, and external debt levels. However, increased trade and investment linkages among these nations hint at a growing economic interdependence that could foster conditions favourable to a currency union, these studies find. Moreover, the nuanced picture that emerges from the empirical literature suggests that while hurdles remain, the strategic alignment and collaborative endeavours of BRICS countries may progressively foster an environment conducive to a successful currency union.

BRICS economic integration: OCA as a strategic next step?

Drawing upon these theoretical frameworks and empirical analyses, discussion moves to scrutinise the rationale behind considering the BRICS as a potential OCA, juxtaposing the economic diversity of the bloc members against the backdrop of increasing integration efforts. As emerging economies with limited investment resources, the BRICS nations can significantly enhance infrastructure and overall economic growth by attracting more foreign direct investment (FDI). However, achieving this objective requires addressing currency risks, promoting stable long-term investments, dismantling trade barriers, and minimising transaction costs. The instability of exchange rates, particularly for developing and emerging countries like those in the BRICS bloc, presents a significant challenge.⁶⁰ This challenge is further compounded by factors such as political dynamics, geographical constraints, and socio-economic uncertainties. The idea of establishing an OCA emerges as a potential strategy to enhance trade, promote economic harmony, and foster overall financial integration among these nations. This would, it is theorised, mitigate the uncertainties associated with currency volatility, advancing the collective objectives of BRICS.

So while the economic and political diversity of its member states pose significant challenges to the conventional criteria of OCAs, the strategic imperatives for enhanced economic cooperation and the pursuit of greater autonomy in the global financial system offer compelling reasons to explore this possibility. The formation of a BRICS currency union could have profound implications for the global financial system. By reducing reliance on dominant global currencies, such a union could enhance the financial sovereignty of emerging markets and developing economies.

The transition to a common currency would, however, entail navigating complex negotiations around sovereignty, economic policies, and the management of asymmetric shocks. The success of such an endeavour would significantly depend on the BRICS’ ability to address internal disparities and external challenges, including responses from established financial institutions and markets.

Challenges and prospects of BRICS economic integration

The diverse natures of the BRICS economies – ranging from commodity-driven Russia and South Africa to the manufacturing and service-oriented economies of China and India –highlight the first challenge to their OCA potential. This diversity extends to economic indicators such as inflation rates, GDP growth, and fiscal policies, which are not synchronised across the bloc.⁶¹ Despite these challenges, the BRICS members have demonstrated a commitment to policy dialogue and coordination, particularly through their yearly summit and the establishment of cornerstone institutions such as the NDB and the CRA, as outlined above.

Achieving a high degree of economic convergence, aligning monetary and fiscal policies, and building robust financial institutions are prerequisites that demand sustained collaborative efforts. Moreover, the varying levels of economic development, inflation rates, and fiscal disciplines among BRICS nations pose significant hurdles to the immediate realisation of a common currency. So, while proponents argue that BRICS share political objectives, promote economic cooperation, enhance infrastructure development, and boost developing nations’ global economic exposure,⁶² others cite heterogeneity in BRICS economies, policy preferences, and external influences as challenges to currency union viability.⁶³

The BRICS group is indeed characterised by a profound economic heterogeneity, spanning different continents and embodying diverse economic models from resource-driven economies to global manufacturing hubs. This diversity extends to key economic indicators, as noted above. Despite these disparities, the empirical review reveals an intriguing trend towards economic convergence, driven by strategic trade agreements, investment flows, and shared development goals among the BRICS nations. Thus, the analysis of the BRICS’ economic structures and policies elucidates both challenges and opportunities for monetary integration. While the divergence in economic cycles and policy responses underscores the complexity of achieving policy synchronisation, the ongoing policy dialogues and efforts to coordinate responses to global economic crises hint at an underlying potential for convergence.

As noted earlier, the establishment of the New Development Bank and the Contingent Reserve Arrangement marked significant milestones in the BRICS’ journey towards economic and financial integration. These institutions are not merely financial mechanisms but also platforms for policy coordination, offering the BRICS an opportunity to align their monetary and fiscal policies more closely. Such synchronisation is pivotal for an OCA, as it facilitates a unified response to asymmetric shocks and enhances the stability of the proposed monetary union. Furthermore, the BRICS’ collective initiatives in infrastructural development and sustainability projects underscore a shared commitment to long term
economic objectives, reinforcing the bloc’s potential for deeper integration. The strategic alignment of policies, particularly in response to external economic shocks, is critical for laying the groundwork for a successful currency union.

Towards a more multipolar financial order?

The prospect of a BRICS currency union raises significant considerations for the global financial system. By potentially reducing the bloc’s reliance on dominant global currencies, a BRICS currency could introduce a new dimension of financial sovereignty for emerging economies. However, the ambition of establishing a common currency carries with it the challenge of navigating complex intergovernmental negotiations, harmonising diverse economic policies, and managing the geopolitical implications of such a move. Additionally, the global financial architecture is at a crossroads, with the BRICS nations playing an increasingly influential role. The formation of a BRICS OCA could signal a shift towards a more multipolar financial order, offering an alternative model of economic cooperation and integration. Nonetheless, the success of this endeavour centres on the BRICS’ ability to transcend the disparate economic approaches within the group and to forge a path towards genuine policy synchronisation and economic convergence.

Conclusion

This article presented a comprehensive literature analysis of the prospects and challenges of BRICS economic integration, with particular reference to the complexities surrounding potential common currency establishment among these diverse nations. While significant economic diversity and policy disparities exist within the BRICS, there’s a trend towards convergence driven by increasing trade linkages and efforts to coordinate policies. The establishment of institutions like the NDB and the CRA signals the BRICS’ commitment to economic stability within the bloc, laying the groundwork for potential common currency realisation. If indeed the BRICS aim to establish an OCA, policymakers need to prioritise initiatives fostering trade integration, infrastructural connectivity, and financial stability while embracing flexible monetary cooperation frameworks. This analysis acknowledges limitations in fully capturing the complexities of BRICS integration due to economic, political, and social heterogeneity, as well as the dynamic nature of global economic conditions. Indeed, this work’s reliance on the OCA theoretical framework and existing empirical studies might lead to analytical neglect of some relevant factors affecting the BRICS’ potential as a currency union. These aspects underscore the necessity for future research that delves into these complex interrelations and emerging trends. In particular, understanding the specific types of shocks experienced by each country and their implications for policy coordination and effectiveness would provide valuable insights regarding the viability of a BRICS currency union.

This article, which appears Open Access in the South African Journal of International Affairs (Volume 31.2), will be followed in 2025 with a special issue entitled ‘The BRICS expanded: Shaped by – or shaping – the global order?’.

BRICS Economic Integration: Prospects and Challenges

Amid the evolving global economic landscape, the BRICS nations have emerged as proponents of economic multilateralism, challenging traditional paradigms of economic governance and integration.

Introduction

BRICS in international context

Current BRICS initiatives

The New Development Bank (NDB)

BRICS currencies in international settlement

The Optimum Currency Area (OCA) theory

Traditional versus new OCA theory

The OCA criteria

Empirical insights on OCAs in the literature

OCA theory applicability to the BRICS

BRICS economic integration: OCA as a strategic next step?

Challenges and prospects of BRICS economic integration

Towards a more multipolar financial order?

Conclusion

9 Oct 2024

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