The BRICs Bank Examined
While the International Money Fund’s (IMF) Annual Meetings in Washington, D.C. this week are sure to dominate headlines in financial circles, especially given weak economic growth worldwide, perhaps we should be paying more attention to a relatively new initiative on the part of Brazil, Russia, India, China, and South Africa – the so-called BRICS nations – who together comprise 20% of world GDP and 40% of the world’s population. Earlier this summer, the leaders of the five nations announced the creation of several new institutions in the sectors of international finance and banking, bringing up some deep questions for observers of the global economic system.
The first is a fund called the New Development Bank – an entity with $50 billion in funds ($10 billion from each nation) that will offer cheap loans to low and middle-income countries for infrastructure and “sustainable development” projects. It described itself recently announced that Both entities aim to reduce worldwide poverty by providing financial and technical assistance to developing nations.
Second, the countries announced the creation of the Contingency Reserve Arrangement (CRA), which provides the five nations with liquidity protection in the event of balance of payments problems. Nations may tap this fund if they do not have sufficient currency to pay their debts on time. Although the treaty establishing the fund proclaims that it will “contribute to strengthening the global financial safety net and complement existing international monetary and financial arrangements,” it remains to be seen whether or not the CRA will serve as a companion to the IMF or as a competitor. And the same can be said about the New Development Bank – to what extent will it replace, rather than enhance, the role of the World Bank in the international development regime?
The BRICs proposals have generated a wide variety of opinions from finance ministers, economists and academics – while they have been welcomed at the highest levels of the World Bank and IMF, the bold initiatives have generated questions concerning the potential motives and effects of the BRICs bank and its founding nations.
A Natural Development?
There is some truth in the statement that the BRICs bank is merely the next step in a decades-long trend towards the establishment of deeper economic and financial ties between BRICS nations and other developing countries. Last year, the total value of exports from developing countries to other developing countries surpassed that of exports to advanced economies; China, in particular, has involved itself heavily in projects in Africa and other resource-rich regions, whereas American and European investments have lagged. As the BRICS nations continue their ascent on the international scene, it seems only natural for them to further cement their relationship with other rising nations, whether by institutionalizing a more formal framework for aid and lending or by increasing foreign investment. Many argue that such actions will serve to further integrate nations into the global economy, allowing millions more to experience higher standards of living and the economic benefits of having a greater say in the international system.
A Reaction Against the Status Quo?
But the creation of the New Development Bank and RCA also in part reflects lingering frustration at the United States’ continued failure to ratify several changes to the IMF quota and voting system. The proposed reforms would have increased the BRICS quotas (and therefore their voting power and borrowing limits within the IMF) but have stalled in the United States Congress. Even though this is a result of domestic political gridlock, not active opposition on the part of the United States (the Obama administration is actually a strong proponent of ratifying the reforms), the upshot is the same: frustration and disillusionment with Washington and the existing system.
More broadly, some have gone on to say that the New Development Bank represents a direct challenge to the current global order led by the United States and European powers. Developing nations have long aired their grievances over instances of alleged exploitations and unfair policies pushed by more powerful advanced nations – perhaps the BRICS desire to position themselves as a fairer and more open alternative to the West for such assistance. It is likely that loans from the New Development Bank will come with fewer strings attached than those from the IMF and World Bank – a direct response to the controversial practice of conditionality embedded in the existing institutions’ modus operandi. Such leniency reflects the BRICS nations’ desire to access developing countries’ natural resources and consumer markets, but it may also elicit accusations from the West that the BRICS are undermining good economic and political governance for their own gain, at great long-term costs to the inhabitants of poorer nations. While the extent to which the New Development Bank and Contingency Reserve Agreement will affect existing institutions remains to be seen, the announcement nonetheless is another indication of the dynamism that is still changing the politics and polarity of the international economic system. We are seeing China taking on a more prominent role as it tries to walk the fine line between taking international leadership (as evidenced by its 41% share in the CRA) and promoting a more egalitarian air within international institutions as it tries to set itself apart from the existing order and its discontents.
The $100 billion in the RCA reserved for member countries can also be seen as an attempt (albeit a minor one) by the BRICS to reduce the power of existing institutions and by extent the United States, to grant access to funds in case of political qualms. For example, the fund could theoretically help Russia thwart Western sanctions over its actions in Ukraine, providing the BRICS nations with a sense of added immunity and independence in political and economic matters on the international scene. The RCA is another instance showing how the West has lost leverage over other nations in recent decades – what remains to be seen is the extent to which this actually affects national actions.
Some even say that the asymmetry of the New Development Bank, combined with a substantial history of intra-BRICS disagreement over macroeconomic policies (such as China’s historical decision to keep the yuan artificially undervalued) poses challenges to the institution’s governing capability and coherence. Indeed, history is filled with similar proposals, each of which generated lots of fanfare at the time but amounted to little more than promises on paper without any real capacity.
The BRICS nations are clearly devoted to the idea and spirit of these new institutions – the bank hopes to make its first loan by 2016 – but the actual effects remain to be seen. Either way, you can’t help but point to the creation of these entities as yet another instance of how the world is still in the midst of an uncertain transition.
The big winner in all of this seems to be developing nations. The New Development Bank will provide such nations with more bargaining power as they seek loans, and they will have more options for financing infrastructure and other development-related projects that hopefully will serve to further raise the living standards of those most in need.