Saleh Akram :
International financial institutions like the World Bank and the IMF are dominated by the western world and the share of the dollar in global foreign-exchange reserves remains more than 60%, while 85% of global foreign-exchange transactions involve dollars. The roots of the World Bank and IMF still lie in the post-world War II environment. The reforms that have taken place are still inadequate in terms of addressing the current environment. There exists a discriminatory environment where certain parts of the world are over-represented.
Perennial predominance of America and Europe over the World Bank and IMF prompted the leaders of Brazil, Russia, India, China and South Africa – known as the Brics, to sit together on stage in a highly symbolic show of unity in Durban, South Africa. The keynote phrase was “new paradigm” – and western politicians were conspicuously absent. The five giants of the developing world in principle agreed to create a development bank to provide initial funding for infrastructure projects worth $4.5tn, in a potentially historic challenge to western-dominated financial institutions.
The development bank is the first institution of the informal Brics forum, which launched in 2009 amid the global financial crisis, representing 43% of the world’s population and 18% of trade. The Brics bank is positioned as a financial institution that will provide developing countries with alternative funding minus the punishing strings attached to World Bank lending, which strip recipient countries of the power to make their own policies. It also promises to make lending processes for developing countries faster, simpler and cheaper.
BRICS, the acronym for an association of five major emerging national economies: Brazil, Russia, India, China, and South Africa, came into existence presumably to bifurcate global economic supremacy of USA and its European allies, and additionally inform the world at large of its growing economic strength. It stole the limelight particularly after its latest summit in Fortaleza, Brazil from 15 to 17 July, 2014.
The BRICS members are all developing or newly industrialised countries, but they are distinguished by their large, fast-growing economies and significant influence on regional and global affairs; all five are G-20 members. The acronym has come into widespread use as a symbol of the apparent shift in global economic power away from the developed G7 economies towards the developing world.
As for the future power of the rapidly developing of the BRICS economies, projections vary widely. Some sources suggest that they might overtake the G7 economies by 2027, while others argue that their combined economies shall not be able to eclipse the combined economies of the current richest countries of the world before 2050.
BRICS nations have 43 percent of the world’s population and 20 percent of global economic output. However, they have been blocked from gaining greater voting rights at the IMF, largely because of opposition in the U.S. Congress.
The BRICS have received both praise and criticism from numerous quarters. Holding a summit for the first time on African soil, they disappointed many by admitting that they have not yet resolved differences over how much seed capital the bank will start with or where it will be headquartered. Various technical details also remain to be agreed. Skeptics say the bank faces challenges over whether the creditor nations will use the institution to promote their own national interests.
But with China’s growing economic might, many expect it could become a powerful international force. It could also help promote other currencies, such as China’s yuan, as an alternative to the present global finance system, dominated by the U.S. dollar.
The new bank could help developing powers get around sanctions imposed by the West. When more and more geopolitical events take place, such as, Iran, or Ukraine, the more dollars are in use and the US gains greater control over the financial architecture. But in multi-currency architecture, the U.S. will lose that grip and other countries will remain in control of their currency and can continue to conduct trade without being sanctioned.
The BRICS possesses just 11% of the votes in the IMF, despite accounting for more than 20% of global economic activity. The US Congress refuses to ratify the agreement reached in 2010 to correct this skewed state of affairs. And the United States has displayed no willingness to renounce its anachronistic privilege of nominating the World Bank’s president.
Meanwhile, the share of the dollar in global foreign-exchange reserves remains more than 60%, while 85% of global foreign-exchange transactions involve dollars. Given the reluctance of underrepresented countries to sign up for the IMF’s precautionary credit lines, central banks desperate for dollars can obtain them only from the Federal Reserve. Federal Reserve was reasonably willing in providing dollar swaps in the last crisis in 2008; but there is no guarantee that it will behave similarly in the future.
Thus, the BRICS’ dissatisfaction with the status quo is also understandable. The question is whether their NDB and CRA will make a difference.
The logic for the NDB is compelling. The BRICS, and developing countries generally, have immense infrastructure needs. China may not have an infrastructure deficit, but it has something else: large construction companies that welcome the opportunity to undertake additional projects abroad. Hence the incentives of the NDB’s prospective creditors and borrowers are happily aligned.
Moreover, there already is a proliferation of regional development banks, from the Inter-American Development Bank and the Asian Development Bank to the more modestly capitalised African Development Bank. These institutions co-operate with the World Bank.
There is no reason why the NDB should create problems, either. With initial capital of just $100bn, it is too small to make a major contribution to global infrastructure needs. But inadequate capitalisation can be corrected over time.
The CRA – intended to lessen the BRICS’ dependence on the dollar – is another story. The five participants agreed to earmark $100bn of their foreign-exchange reserves for swap lines on which all members are entitled to draw.
But here the interests of prospective borrowers and lenders are not obviously compatible. The next BRICS country experiencing a crisis will want to draw on the CRA. But the other members will hesitate to lend more than token amounts, especially if there are repayment doubts. In contrast to development finance, the incentives of potential lenders and borrowers are not aligned.
Permitting the lenders to impose policy conditions on borrowers, and to monitor their compliance, can redress this problem. But imposing conditionality on sovereign states is a delicate matter – especially when the countries involved are as large, proud, and diverse as the BRICS. It is difficult to imagine Brazil, for example, accepting policy conditions laid down by China.
Other attempts to establish networks of swap lines and credits, such as the Chiang Mai Initiative, which was negotiated in the wake of the Asian crisis, have been bedevilled by the same problem. The Chiang Mai network is even larger than the CRA. But, given the divergent interests of lenders and borrowers, it has never been used – not even in 2008, at the height of the global financial crisis.
The architects of the Chiang Mai Initiative attempted to finesse the problem by requiring countries that draw more than 30% of their swaps to negotiate a program with the IMF. Ironically, the “Treaty for the Establishment of a Brics Contingent Reserve Arrangement” contains exactly the same provision. So much, then, for the CRA as an alternative to the IMF. And, if inclusion of that provision was not revealing enough, then there is the fact that the Brics’ commitments to the CRA are expressed in US dollars.
The NDB makes sense for the Brics, and it has a future. But the CRA is empty symbolism, and that is how it will be remembered.
Quite a few countries, including Bangladesh have expressed their willingness to join the newly-formed BRICS Bank though the multilateral development bank is yet decide on whether it would include any country outside the five founder nations.
As BRICS move ahead with its declared objectives, few important questions surface. Is BRICS going to bring about any qualitative change in world economic architecture, or is it just about shifting of world economic leadership from one block to another?
For understandable reasons, success of BRICS shall depend largely on the attitude of the world economic overlords towards it and there is a hidden risk of incurring the wrath of western dominated global economic powers. It is less likely that the BRICS is going to have a smooth sail.
Finally, leadership, social or economic, is bound to have political undertones. Experts forecast, China will be a lesser possibility as far as exercising its political influence is concerned, but very little can be predicted about other members.
A new development bank, launched by leading emerging nations, has stolen the G20’s thunder. But it remains to be seen if it can pose a real challenge to US dominance of global finance.
(Saleh Akram is a well-known TV personality and writes on economic issues.)
