Brics bank: requiem for a dream

Sid Verma
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Incensed by their failure to reform, Brics policymakers have established a flawed rival to the World Bank and IMF. Rhetoric aside, the west dismisses emerging-market dissent over the broken financial architecture at its peril.

IMF SV leaders at table
Brics leaders announce the establishment of their new development bank in July

It was never meant to be this way. Chastened in the post-Lehman climate and by misadventures in the Middle East, Barack Obama’s presidency was hailed as an historic opportunity to moderate US unilateralism and boost global governance, from foreign policy to economic. As the shift in the centre of financial gravity in favour of emerging markets took root, hopes in 2008 snowballed that the governance of the international financial system – from capital-market regulation to the monetary system – would reflect the newfound clout of developing markets.

Meanwhile, the IMF’s flexibility in lending policies and shift from unbridled free market dogma, combined with the G20’s dethroning of the G7 as the principal forum for global economic co-operation, all boosted the spirit of multilateralism.

Fast-forward to late 2014: international trade negotiations remain on a knife edge, Russia is reeling from the ill effects of western sanctions, and the Brics are making concerted attempts to diversify away from the dollar and the Bretton Woods’ institutions. Meanwhile, efforts to reform the IMF, from quotas to its leadership process, have collapsed, with the blame falling squarely upon a fiscally conservative US House of Representatives, ideologically unwedded to multilateralism.

Six years after the collapse of the global economy that triggered unprecedented co-ordination between world leaders, fears of competitive exchange-rate devaluations, via FX interventions or over-zealous monetary easing, and trade skirmishes, continue to cast a shadow over the demand-deficit-ridden global economy.

And yet multilateral institutions are unable to breathe life into monetary coordination at an inflection point for the global economy, despite a cyclical rebound in growth. Europe continues to export deflation. Hopes of a spirited US recovery to power exporting nations remain dashed. Current account surplus nations, such as Germany, China and Japan, are either unwilling or unable to boost aggregate demand. And emerging markets remain hostage to Fed-induced capital cycles.

Joseph Joyce, professor of international economics at Wellesley College, and a keen observer of globalization, says: "The Bric nations are seeing a breakdown of US domestic policy. They want to develop their own institutions so they have their options and shape events. At present, they are not calling for the IMF to be shunned. They are being cautious, and not burning the bridges."

International institutions remain hopelessly unrepresentative. The Bric nations account for 20% of global output but represent just 10.3% of the IMF quota while Europe is allocated 27.5% with an 18% share of global GDP. The US maintains its power of veto.

Muscular posture

For proponents that fear economic coordination is fragmenting as emerging economies assert a muscular posture on the international stage, the establishment of the New Development Bank (NDA) in July, by Brazil, Russia, India, China, South Africa (Brics) is the watershed for a new order. Joyce adds: "The principal forum for global economic discussions, IMF and G20, are proving ineffective and losing relevance. If a lot of emerging markets move to different arrangements, it carries with it the risk of a crisis if global co-ordination breaks down."

The NDA’s mission statement mimics the existing Bretton Woods’ institutions, the World Bank and IMF, which were set up after the Second World War, boasting strong US leadership, to stabilize the global monetary system. At present, the NDA’s arsenal is modest but a precedent has been established. The five countries aim to provide loans for capital programmes, principally infrastructure, with a current maximum allowable capital of $100 billion, while boosting monetary stability, through the establishment of a $100 billion central bank swap loan, the Contingent Reserve Arrangement (CRA).

The problem is the rest of the world must find dollars to buy energy, conduct trade settlement and service dollar debts
Charles Gave

The bank is to be based in Shanghai, and the Brics will contribute to the CRA according to their respective size, underscoring China’s clout. The presidency will rotate, starting with India, while Beijing will not assume formal leadership until 2021. Other developing countries, from low- to middle-income, will also be able to contribute capital and apply for funding but their voting shares will be capped so as not to dilute the founders.

Russian president Vladimir Putin, with characteristic fanfare, articulated the NDA’s grand ambition in July. "The international monetary system … depends a lot on the US dollar, or, to be precise, on the monetary and financial policy of the US authorities. The Brics countries want to change this." Thanks to Russia’s misadventures in Ukraine, and subsequent western sanctions, Putin has helped to de-dollarize the country’s economy – but for all the wrong reasons.

Rogério Studart, the World Bank’s executive director for Brazil and eight other Latin American countries, who was involved in discussions in the NDA’s establishment, says it will serve as a conduit for capital financing for cross-border infrastructure. As a result, the NDA will "complement existing multilateral institutions, boost the efficiency of domestic savings and develop capital markets", including the potential issuance of 30-year bonds in local currencies after a credit rating is established in two years, he says.