BRICS BANK: Building purpose
Talk of creating a development bank serving the Brics nations could exert pressure on existing multilaterals
In the wake of the financial crisis, the idea of setting up a new bank may not look like the best use of financial resources. But when the proposal comes from five of the fastest-growing countries, it is clear that something radical is going on.
The leaders of Brazil, Russia, India, China and South Africa used the fourth summit of the Brics group named after the initial letters of its five members to unveil plans for a new development bank.
In a joint statement they pledged to look at setting up a new development bank for mobilizing resources for infrastructure and sustainable development projects in Brics and other emerging economies and developing countries.
At first glance the statement seems to add to evidence that the Brics countries are prepared to put their money where their mouths are. It is significant in the sense that if it takes off it will give the Brics some focus, says Stephen Gelb, a development economist at the University of Johannesburg in South Africa.
It obviously wont be the only focus, but it will be one potentially significant process in which the countries will engage and help give the idea of the Brics some real purpose.
However, while the idea grabbed headlines around the world, the single paragraph out of the 4,100-word Delhi Declaration left more questions than answers.
There was no sign of the banks likely size, the expected timetable to set it up or many clues about its role within an increasingly crowded development aid universe. Instead they tasked their finance ministers to examine the feasibility and viability of such an initiative and set up a joint working group for further study, to report back by the next summit in 2013.
According to Andrew Naylor, Asia Pacific director of Cicero Group, a financial research firm, the plans were watered down during the summit talks. India, in particular, is concerned that a Brics bank doesnt become a vehicle to promote Chinese influence in the rest of the emerging world, he says.
For some observers, the move looks more like sabre-rattling by these powerful countries over the way the international financial system is run. The reference to a new development bank follows a toughly worded section of the statement demanding governance reform of the World Bank and IMF.
Nicolas Véron, a senior fellow at Bruegel, a Brussels-based economic policy think-tank, said it was unclear whether the Brics bank was a real proposal. Speaking from Washington where he is a visiting fellow at the Peterson Institute for International Economics, he says the question is whether this is a threat to the World Bank or a substantial project in and of itself. It is too early to say, and I am not sure that even the leaders of the Brics have a firm answer to that question.
So it could depend on the response of incumbent western countries. One way to look at it is that it is a way to say give us some more balanced governance of the Bretton Woods institutions or we will create our own system outside of the World Bank.
This is why the details of the bank become so important. Gelb says its establishment is not imminent and will take three to five years. What happens will depend on what happens to the Brics as a group, between the Brics countries and between the Brics and the rest of the G20, he says.
That will determine whether they will take it forward or whether it will just be an initiative that will wither away.
BRETTON WOODS PROTOCOLS
The Brics and other fast-growing economies have long complained that governance of the two Bretton Woods institutions is still fixed in the post-war era of the 1940s. What has particularly angered them is an unspoken agreement that has meant that the IMF is always run by a European and the World Bank by a US citizen.
It was therefore ironic that the Brics failed to propose their own candidate or unite behind the two non-US candidates Ngozi Okonjo-Iweala of Nigeria or Colombias José Antonio Ocampo. In the end the US candidate Jim Yong Kim was elected on April 16 to replace Robert Zoellick, who stands down at the end of June.
Véron acknowledges the irony but says the Brics members were simply unable to agree on a candidate: It is politically more difficult to form a common position on something positive like a common candidate or indeed a Brics bank that would be a reality and not just an idea.
Whether the bank becomes a negotiating tool or a new player depends on how the long-term financial reform debate goes, Véron believes.
One option is that the West reluctantly accepts the need for more wholesale reform of the World Bank and IMF that puts them under greater Brics control. Or we can have an outcome in which this does not happen and the Brics go their own way, he says.
I dont think that would be the best outcome for the Brics nor would it be the best outcome for the West, but it is becoming a more tangible possibility.
If the Brics were to become a player in the development sphere, it would certainly be able to pack a punch. The five countries represent 43% of the worlds population, 18% of its GDP and perhaps most importantly attract 53% of global financial capital.
These are countries that have substantial financial resources and foreign exchange reserves to bring to bear, Gelb says.
According to Lloyds Bank, the Brics countries alone hold foreign exchange reserves of some $4.3 trillion, up from some $260 billion in 2000. While India holds $300 billion to $400 billion, China has six times that amount.
Potentially it could be very big, but it depends on how much muscle they want to give it, says Gelb. That in turn depends on how significant the countries see the Brics grouping.
Michael Lim, a senior fellow at the Socio-economic and Environmental Research Institute in Malaysia who has written a report on the issue for think-tank South Centre and Unctad (the United Nations Conference on Trade and Development), says these economies are flush with foreign reserves that are not only not well utilized but also cost ineffective.
They should consider setting aside a percentage of the reserves to fund one or several regional development banks.
Another factor that will determine the size and shape of the new bank is whether they want to establish it as a competitor, not just to the World Bank but also to regional banks such as the Asian Development Bank and the African Development Bank (AfDB).
The African Development Bank is not seen as a wildly effective or dynamic organization, and having a bit of competition might be a good thing, Gelb says.
Ciceros Naylor says China has concerns about the ADB due to the influence of Japan, which always provides the head of the organization and most of its funding.
It would not be a bad idea to have some healthy competition among several development banks, Lim says. Not so much in terms of profitability but in terms of other social indicators such as good governance, employment generation, stable growth.
If the bank were to become a reality, it might have a very different mandate from regional banks such as the AfDB that serve their continent or the World Bank, which attempts to deal with issues across the world.
Gelb says this raises key questions about what the lending and spending criteria of this new body would be given that four of the five countries are in different regions from each other. What their common interest is becomes an interesting question, he says. If Malawi wants to come and borrow, what criteria will they use, and will South Africas voice be a bit louder because its in its region?
The outgoing president of the World Bank, Robert Zoellick, caused surprise last month when he appeared to come out in favour of a Brics bank.
Speaking in New Delhi, he said pushing middle-income countries such as China and India out of the World Bank system and forcing them to look for resources elsewhere would be a mistake of historic proportions.
However, Naylor believes Zoellick was worried that it would be difficult to get a new bank off the ground given the differing interests of the Brics countries. It would also take a long time to build up the expertise of an institution such as the World Bank or ADB, he says.
The task of tackling poverty in low-income countries and meeting the UN Millennium Development Goals while keeping middle-income countries onside will be a major challenge for Zoellicks successor. Some commentators believe that the long-term implications could go well beyond simply governance reform.
John Browne, a former UK MP who is now senior economic adviser to Euro Pacific Capital, believes a Brics bank would have the resources to challenge western-based institutions within five to 10 years. The duel between these international banks may be the arena where the world decides what sort of money it really prefers, he says.
The contenders will be the debased fiat money of the Anglo-American led debtor nations and a currency backed by the nations whose citizens are awash with savings and whose economies churn out needed goods.
Against that backdrop, some experts believe a Brics bank could become a way for China to push the renminbi as an international currency. It certainly could be part of Chinas careful and patient strategy to build the renminbi into an international reserve currency, Gelb says.
That could be Chinas interest in the bank, and if they want to use it to promote the renminbi, it is more likely that the bank will happen because they wont see it as just something to talk about.
Véron says: Obviously a big question is how China will interact with the other Brics because it dominates the group.
Again the debate comes back to governance. Were the World Bank to start making loans in renminbi as well as in dollars or the IMFs Special Drawing Rights which are backed by dollars, euros, sterling and yen this may take some of the steam out of Chinas energy for its own bank.
Gelb says China has other reasons to establish an alternative bank even if it does secure some reforms. Does it want to be in a position where it has more influence in a bank that is still based in Washington where the US retains a lot of influence?
The jury is clearly out on a lot of these unanswered questions. But this does not mean it is a non-starter.
I would not go so far as to say this is an impossible project. If there is no progress in reform of the Bretton Woods institutions governance you could imagine the Brics bank becoming a reality, Véron says. I am not sure I would bet on it, but it cannot be dismissed.
It is easy to be cynical about the proposal, but the fact that they articulated it in the way that they did brings us closer to a situation where the Brics organizing an economy around themselves becomes a more concrete prospect for the world economy.
There is already a sign of that the Brics cable. Straight after the summit the Brics Business Forum announced plans to lay a 34,000km cable from Russia to Brazil via China and India.
But the old world order still seems intact. The cable will end up in the US.