Tuesday, 26 August 2014 00:53
A brand new International Financial Institution (IFI) has emerged hot on the heels of and from among the debris, flotsam and jetsam of the 2014 Football World Cup in Brazil.
The World Cup was won by Germany, reinforcing the reality of German domination of, among other things, the ‘Beautiful Game’ and in other areas, personified by Angela Merkel’s political and economic domination of the ‘real’ power politic in Europe.
The leaders of the BRICS nations – Brazil, India, Russia, China and South Africa – who think of themselves as the new emerging powers, have met in the city of Fortaleza, Brazil, at the sixth BRICS annual summit, and agreed on forming the ‘New Development Bank’ with a capital of $ 100 billion and an Emergency Reserve Fund. Initially the Bank will start with $ 50 billion capital.
The Emergency Fund, which was branded as Contingency Resave Arrangement, will also have $ 100 billion, and is aimed at helping developing nations avoid short-term liquidity pressures, promoter further cooperation among the BRICS, strengthen the global safety net and complement existing financial arrangements.
This new institution is clearly a competitor for the World Bank (IBRD - International Bank for Reconstruction and Development) and other regional banks such as the Asian Development Bank and the African Development Bank. Russia’s Finance Minister quipped that they are trying to conjure a mini World Bank and a mini IMF!
Quaint third world branding habit
Somewhat unimaginatively, it seems the bank is going to bear the name ‘New Development Bank’. Somewhat incongruously, but again in a sort of familiar way, one is reminded of the quaint third world branding habit – that when – say, a tea boutique, the common rural and urban institution serving tea and snacks – fast food, short eats or ‘shorteese’ in the new indigenous vernacular or whatever opens up at a roadside junction, the most common name is ‘Junshun Hotel’ – the eatery at the junction. After some years of successful operations, a rival starts up, to give competition, on the other side of the road – and named – you guessed it – ‘New Junshun Hotel’!
On Sri Lanka’s roads one sees these institutions all the time – ‘Barrier Hotel’ and ‘New Barrier Hotel’; ‘Station Hotel’ and ‘New Station Hotel’; ‘Princes Restaurant & Bakery’ and ‘New Princes Restaurant and Bakery’! The BRICS leaders have certainly been conscious of their emerging economy roots at the time they chose the name ‘New Development Bank’!
The acronym BRICS was first thought up by Jim O’Neill – Chief Economist at Goldman Sachs of New York – as a marketing ploy to name his investment thesis about the growth opportunity in large emerging markets, of Brazil, Russia, India, and Russia.
South Africa, not a part of the original grouping, was added later. O’Neill, now wonders whether Nigeria would not be more deserving – BRINC. In fact Singapore’s leader, the now retired Lee Kuan Yew, commented that the BRICS ‘are different countries, on different continents, that just happen to be growing faster than other combinations of countries on those continents, so somebody said, ‘Why not bring them together and present them as a global force?’
Their fundamentals differ: Russia, Brazil and South Africa are commodity exporters; China, manufactured goods; India, services. There is also a trust deficit. Russia and India have a history of disagreements with China. Russia and Brazil are far from credit worthy. But the BRICS have over time combined to be a political force of some capacity in the world’s corridors of power and now seem to be attempting to pool and use their economic clout.
The BRICS now make up a quarter of the global economy, with China poised to overtake the US as the world’s leading economy, based on domestic purchasing power this year. Together the BRICS are seeking to use their clout to create institutions that reflect their new status.
The BRICS leaders heralded the New Development Bank (NDB) with the ‘Fortaleza Declaration’. Brazilian President Dilma Roussef declared that ‘based on sound banking principles, the NDB will strengthen cooperation among our countries and will supplement the efforts of multilateral and regional financial institutions for global development.’
Pork barrel politics
Although heralded as ‘New’, the NDB was very traditional, in sense of the politics of the Pork Barrel – dividing up the pork – the benefits, in classic, ‘pork barrel politics’ style. Reportedly, after a brief tussle with India, China was given the headquarters of the NDB to be located in the financial powerhouse of Shanghai. India was given the consolation prize of appointing the NDB’s first President, which will rotate among members every five years.
A Brazilian will head the NDB’s Board of Directors. A Russian will head the Board of Governors. Is that all accounted for? Everybody got a piece of pork? Nope – South Africa has been left out, so it will get a Regional Centre for Africa to be set up concurrently with the headquarters in Shanghai, no doubt headed by a South African! Reminds of that classic Sinhala saying – roughly translated – ‘When the serving spoon is your hand, serve yourself first!’
Critics have already labelled the grouping as ‘Gangster Economies’! They point out that the majority of the BRICS do not adhere to democratic principles of governance and transparency. The governance and accounting standards imposed on borrowers by other IFIs, especially the IMF, is a matter most populist autocratic nations have been complaining about, say the critics. The NDB will make available lots of question-free cheap money to autocratic dictators, free of prudential concerns.
The critics also point out the BRICS are currently some of the most resource rich countries in the world and unless the NDB has strict rules of governance and transparency following the investment of their funds, there is the possibility of looting of resources on a high order. They point out that if the headquarters of the NDB was located in Mumbai, India, instead of Shanghai, the freedom of the India media and the independence of the Indian Judiciary will hold BRIC officials to a much-higher standard of accountability.
Brazil, India and South Africa are democracies, while Russia and China are autocracies; can they co-habit peacefully? The critics caustically point out the BRICS have followed in the footsteps of the World Bank and the IMF in dividing up the jobs in the NDB by nationality, about which they complain bitterly of the inherent unfairness in the case of the two established IFIs, the WB and the IMF! As President Kennedy quipped, in another context: ‘They are going back to what they complained about.’
Analysts point out that each of the BRICS is most strongly connected to the grouping through their individual relationship with China. China in turn sees the other BRICS as a source of energy and minerals which China needs to fuel its economic growth. China also needs access to the other BRICS markets since they have a vast consumer base. China needs collaboration at various international fora and will try to develop the BRICS as a political grouping on international trade and strategic issues.
Roberto Damas, an economist as the Insper business school in Sao Paulo, Brazil, says that, within the BRICS grouping, ‘Without a shadow of doubt the principal country from an economic standpoint is China.’ The relations between China and Brazil are seen as particularly important. Chinese President Xi Jinping made a State visit to Brazil after the BRICS summit and the BRICS leaders had a joint meeting with other Latin American leaders at Brasilia too. The China-Brazil axis symbolises the direction the BRICS nations’ relationship could develop. Latin America generally and Brazil in particular have progressed from being mere suppliers of iron ore and other minerals, soya beans and other agricultural produce, to consumers of Chinese manufactured goods and also a destination of Chinese investment in adding value to raw material and unprocessed goods such as crude oil and also Chinese investments in infrastructure. China needs access to natural resources feed its economic growth and natural resources are one thing that Brazil and the other BRICS have in abundance, unexploited fully, just at this time. Brazil also offers China a starting point to access other Latin American countries. President Xi after the Brasilia summit visited Venezuela and Argentina, where China has energy investments, and old ally Cuba.
The other big BRICS member, India, sees China as an ally and an important commercial partner in the battle to press Western nations on international trade negotiations. In the same way, Russia and South Africa market their natural resources to China.
Russia is also attempting to use China and the other BRICS as diplomatic buffer against Western pressure on developments in Ukraine. In fact Vladimir Putin made statements at the summit that Russia had been exposed to sanctions attacks by the USA and its allies over allegations on Ukraine. Putin further said: ‘Together we should think about a system of measures that would prevent the harassment of countries that do not agree with some foreign policy decisions made by the US and their allies.’
After the downing of the Malaysian Airlines aircraft over Eastern Ukraine, controlled by pro-Russian forces, the volume of this type of crescendo will rise. Putin’s fellow BRICS leaders dutifully issued a bland statement, expressing ‘deep regret’ about the Ukraine conflict, and further said ‘we call for a comprehensive dialogue, the de-escalation and restraint form all actors involved’.
Putin also stated that he would propose regular consultations between the five BRICS countries’ foreign ministers to coordinate their positions on regional conflicts at the United Nations General Assembly. Such a strategy, Putin said, should be aimed at ‘counteracting individual states attempts to impose on the international community the policy of displacing unwanted regimes and promoting unilateral solutions to crisis situations’.
Emerging BRICS effect
BRICS Trade Ministers also met at Brazil and renewed their commitment to the World Trade Organization deal reached in Bali in December 2013 to implement measured to smooth Customs procedures among member nations.
The emerging BRICS effect was visible, with India seemingly backing down on its objection to the parallel talks on food security and trying to block the Bali deal together with South Africa’s support, if there was not sufficient progress on India’s food security demands.
New Delhi has now made it clear that progress on food security is still a condition on the Bali WTO deal’s implementation to the world’s consternation. Brazil was particularly keen to solve the Bali impasse. Brazil also badly needed to revive the multilateral trading system to make up for the lack of its own bilateral trade agreements. The cracks in BRICS are already showing.
Principle of equality
Will the BRICS be a new hegemonistic force among the world’s powers? Like the Empires of old and the dominant blocs of today? Will the world be merely swapping one set of hegemonic powers, which control the World Bank and the IMF for another set?
Brazilian President Dilma Roussef was questioned by journalists on this, at the post-summit press conference. Her response: ‘I don’t believe that the format of the new BRICS will promote a hegemony,’ dismissing suggestions that they are recreating the Bretton Woods institutors but with China at the helm, as the difference.
Brazil’s Finance Minister Guido Mantega said that one of the big differences between the BRICS vision of a new global financial infrastructure and the existing Bretton Woods system was the principle of equality among all five stakeholder nations. He said: ‘In the BRICS bank we will have equal power, this is the fundamental point.’
The BRICS chief’s post will rotate along all stakeholders once in five years. He explained that in the Bretton Woods institution, the IMF Head was a European, the World Bank was an American. This has spread even to the regional development banks – the Asian Development Bank is always headed by a Japanese.
Journey has only just started
Analysts point out that the creation of the NDB shows that a new set of economically powerful nations had emerged which did not accept the post World War II international economic assumptions. The emergence of the BRICS bank was a result of the aspirations of these emerging nations not being accommodated in the Bretton Woods set up.
World economic governance has, as a result, fragmented into multiple centres of power, competing for influence, and less able to cooperate in delivering global economic and financial stability. It can be said that the NDF was born out of frustration with the Breton Woods institutions. But to assume that this hypothesis is already a reality would be a mistake. The journey has only just started.
As Lee Kuan Yew pointed out, the BRICS nations were the ones that at a given time, just happened to be growing the fastest, in economic terms, on their respective continents. They are not as united as they presently attempt to show. Each has different and unique systems of governance and internal accountability for a start. They face formidable operational challenges, going forward.
Even Jim O’Neil, of Goldman Sachs, who coined the word BRICS, says: ‘I never dreamt that they would work together as a political group. But I always thought that biggest rationale for them to act together is how little global economic governance has advanced.’
On Chinese domination of the NDB, O’Neil pointed out that China’s economy was already 1 1/2 times the other four BRICS combined. He predicted that China’s economy would equal that of the US by 2027 and catch up with the Group of 8 economies by 2037. China’s economy is now 28 times South Africa’s. Income per person in India is 1/10th that of Russia.
That point is well made. The BRICS with a 25.5% stake in the world economy still have only 10.3% votes in the IMF. Compare this with the USA, with 19.2% of the global GDP, having 16.8% of IMF voting rights. Or China with 16.1% of world GDP, a mere 3.8% of IMF voting rights. Britain, France, Germany and Italy have a combined share of 17.6% of the IMF votes, while only having 13.4% share of the world’s GDP. The BRICS by contrast have 10.3% of the IMF vote but 25% of the global economy.
The BRICS in reality may be just another disparate group bound together only by their frustrations with the existing global financial system, rather than having strong shared interests which they can work together to achieve. Chinese President Xi, may be, sees himself as today’s Chou En Lai, who as China’s Prime Minister at that time led the Non Aligned Movement. Xi may be seeing a geopolitical role for himself and China, today making the BRICS an alternative force to US-led hegemony over the global economic system.
Motivated by ‘unmet expectations’
Marcos Troyjo, Co-Director of the BRIC Lab forum at Columbia University, says: ‘China wants to go on being taken, especially among its Asian neighbours and in Africa and Latin America, as one of them, as a power from the south, a developing nation. The BRICS bank will end up providing a service to China in that regard. It gives China a sort of still emerging nation status when in reality it is a major economic super power.’
According to Zhao Xijung of the School of Finance of Renmin University in Beijing, China’s motivation for getting involved in the BRICS bank is motivated by ‘unmet expectations’ over issues with the existing IFI such as World Bank, IMF and ADB. But he said China will also look for a better return for its vast pile of US dollar currency reserves, which recently it invested in US Treasuries, risk losing value in the future.
Brazil, India and South Africa are likely borrowers from the BRICS bank to fund their infrastructure needs. The BRICS would be a welcome option to them, if it is, as expected, less bureaucratic and highly conditional, than the present lending by the World Bank and the IMF. China will provide most of the funding. For the contingent reserve arrangement, China is providing $41 billion, Brazil, Russia and India -$18 billion and South Africa $5 billion.
But analysts point out that getting the BRICS bank up and running will no easy task. Rules of operation will have to be worked out and the NDB will need to develop capacity to monitor the borrowers and check what is being done with its money.
The real test for the NDB will come when one of its members runs into trouble and demands a big loan. How will its counterparts react? This highlights the fundamental issue for the BRICS as potential leaders of the world’s economy, as pointed out earlier, is trust.
A new player on the global financial system, the NDB will have to take on the existing competitors, who will certainly be pushed to improve their performance by the competition. In the NDB, decisions to approve requests for liquidity support from a country will be taken by a simple majority using weighted voting. More involved decisions will be taken by consensus, implying a vote for each country.
If the NDB delivers on its potential, it could be as effective as what the aggressive Chinese Exim banks have been for developing countries as an alternative to the World Bank and other established IFIs.
If it falters, it could go the way of innumerable other initiatives to establish an alternate voice for developing nations such as the Latin American Free Trade association, which fizzled out, over time. Or, due to contradictory governance views, what has happened concerning the USA Export Import bank could happen, questions whether it should be shut down, allegedly for being guilty of crony capitalism.
"Getting the BRICS bank up and running will no easy task. Rules of operation will have to be worked out and the NDB will need to develop capacity to monitor the borrowers and check what is being done with its money. The real test for the NDB will come when one of its members runs into trouble and demands a big loan. How will its counterparts react? This highlights the fundamental issue for the BRICS as potential leaders of the world’s economy, as pointed out earlier, is trust"
(The writer is a lawyer, who has over 30 years of experience as a CEO in both State and private sectors. He retired from the office of Secretary, Ministry of Finance and currently is the Managing Director of the Sri Lanka Business Development Centre.)