Friday, 1 August 2014

Could new BRICS bank rival IMF for top spot?

Earlier this month the five nations of the BRICS (Brazil, Russia, India, China and South Africa) came together in Brazil to finalise plans for a New Development Bank (NDB).

At one point in the not-too-distant past, the BRICS was considered more an investment gimmick created by Goldman Sachs to sell more financial goods in some of the world’s fastest-growing countries than a true alliance. That was then, this is now. 

The grouping agreed the bank will start lending in 2016 with an initial capital base of $US50 billion. Each member is to contribute $US10 billion to the fund, with plans to increase capitalisation to $US100 billion over the next five years. If UN estimates are correct low and middle-income countries will require more than $1 trillion each year in infrastructure investment, the NDB might offer a new route to secure funds.

As another layer to the new safety net, the BRICS members created a separate Contingency Reserve Arrangement (CRA) to provide liquidity protection for member states. This fund will hold an estimated $US100 billion, making it one of the smaller funds in a long list of development banks. Liquidity of this size would be unlikely to last very long in a global financial crisis, but it would assuage the worst effects of a regional or domestic crisis inside BRICS countries.

This new bank is part of the ongoing process by which non-Western developing countries are building mechanisms for loans with fewer conditions than those issued by multilateral Western institutions. New Zealand Initiative director Oliver Hartwich says this isn’t the first time an alternative financial structure has been attempted.

“The Euro was established with the same ambition in mind to rival the US reserve currency and you can see where that’s ended. And if the Europeans with their economic firepower and perhaps more homogenous countries can’t get it to work, why would we be more optimistic about the BRICS?” Mr Hartwich says.

Russia, regardless of the current headlines, is a declining power. South Africa is riven with internal struggles and relies on a mining industry with decreasing profit margins. China and India are geopolitical rivals. None of the members align significantly on any important issue.

“Why would [the NDB] work any better with these countries involved? Is it really a long-term strategic sustainable partnership? Are these partners reliable enough for such an undertaking?” Mr Hartwich asks.

The alliance isn’t ignoring global economic reality, it’s responding to it. South-south trade is now generating more than $US2.2 trillion more than north-south trade. China is Africa’s largest investor, Brazil has more embassies in Africa than the UK does, and India is a massive contributor to African foreign aid. But their geopolitical perpendicularity will make concessions about which projects to fund tougher to decide.

Perhaps the only bond linking the BRICS together is a desire to get out from under the hegemonic umbrella of the United States. Even in the UN assembly, where all the BRICS members can vote equally, they often cast their opinions in line with each other. Even if the vote is simply silence. Most of the BRICS countries want to gain some protection from an admittedly arbitrary American-led system such as the US Federal Reserve choosing to taper its quantitative easing. They’d also like a safety net in case any one of them is pushed out of Western institutions.

The NDB will soften a hard landing from potential future financial crises within the BRICS system. The last few years have been extremely worrisome for the West and developing countries fear the foreign direct investment spigot might be turned off.

“The BRICS proposal seems to be about the unease about traditional financial institutions in the world economy being too close to the old West. Developing economies are looking quite frustrated at the state of the IMF being so heavily involved in the European debt crisis for instance,” says Mr Hartwich.

He says creating the bank and safety net is both a political gesture of a deep dissatisfaction of the status-quo financial mechanisms and a step towards an independent alternative. The official statement from their meeting in Brazil said “international governance structures designed within a different power configuration show increasingly evident signs of losing legitimacy and effectiveness.”

The BRICS is sure to remain inside the Western-led financial order, because that is where the money is. Rather than break up the world system, they are instead trying to shape the dynamics to be more in their favour. Since the IMF and World Bank won’t change their ways to appease the BRICS, they are going it alone. However, US think tank Brookings Institute suggests the bank isn’t a belligerent counter to the current world order.

From the BRICS’ perspective, they had little reason to cooperate when their economies were growing. Competition pulled them apart. But as that growth levels off a certain necessity has given the alliance new life.

Decades, not years, will determine whether the BRICS Development Bank and Contingency Reserve Arrangement ever rival Western-led institutions. Then again, in the very long run - by which time it is predicted China’s economy will overtake the US economy - the BRICS bank may turn out to be the stronger of the two options after all.

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