BRICS: Unfinished business
A bank of the world’s five biggest emerging markets is in the making; but is it more about leverage than real money?
In Brazil, the World Bank does not get asked to build things or pay for things, not anymore. Brazil knows how to build a school and clinics and roads, says Marcelo Giugale, the banks director of economic policy and poverty reduction programmes for Africa. They dont need us. They have plenty of money, and access to money. In fact, the World Banks financing is probably a rounding error in the gross financing plans of most middle-income countries. We are very small, because they can access private money very easily. So they dont call us to build a road or a school or a clinic.
Giugales example illustrates how the traditional development bank model, which combined cash with conditionality and an intellectual monopoly on what worked, has been undermined consistently over the past decade by new sources of finance and new philosophies about what drives development.
The geography of world poverty has changed substantially, with more people below the poverty line in middle-income countries than in low-income ones. Those middle-income countries such as Brazil, India, Russia, China and South Africa (Brics) are also, to varying degrees, geopolitical forces in themselves. They have bilateral aid programmes and offer development advice based on their own, very different models.
Very gradually, too, they are starting to align with one another. The first Brics summit was held in 2009 and was billed as a meeting to discuss how the then four economies could work more closely to promote their collective interests on a world stage still dominated by the industrialized economies of the West. South Africa joined the association in 2011, and despite the countries divergent political outlooks and historical grievances, they have moved steadily towards a more formalized set of structures and institutions to rival the old orders.
In March 2012, the group announced that it was preparing to create a direct alternative to the World Bank, to invest in infrastructure and other projects within the five countries, and potentially in other emerging markets. Eighteen months later, they revealed a provisional capital structure, which would give the institution $50 billion. Many elements remain unfinished, however, and there are major questions still unanswered about the banks theoretical approach, staffing and shareholding.
There is certainly strong interest in some circles especially among stakeholders in the Brics countries, who are frustrated by their interactions with the traditional development banks, says Johannes Linn, a former World Bank vice-president for Europe and Central Asia, and now a non-resident fellow at the Brookings Institution.
But there are also strong countervailing forces, especially around the question of which country is to take a lead most obviously China. But China is not widely trusted, even among its Brics peers, and itself traditionally prefers bilateral, rather than multilateral initiatives. So, I conclude that it will likely take a while for this tension to be resolved.
Beyond the bullish rhetoric, the five countries are as divided by their interactions with each other as they are united by a desire for access to the top tiers of global economic governance.
Their economies are structured very differently. South Africas economy is one-twentieth the size of Chinas; Russias is heavily dependent on gas and oil; Indias on industry, services and agriculture. In the spaces where they do not compete with one another, there are often fears that Chinese products will flood any market too open to it, meaning that even South Africa, a close ally of Beijing, has reason to complain about the impact of Chinese industry on its own manufacturing sector.
Trading with each other in a more open format could have major benefits for the group, which combined represents between 20% and 25% of the world economy. The balance of commodity importers and exporters, agricultural, manufacturing and mining-led economies could be mutually beneficial.
The global financial crisis in 2008 and the resulting, ongoing economic malaise in developed markets hastened the rebalancing of the world economy and gave greater primacy to those higher-growth nations with favourable demographics and foreign reserves. It seemed in 2009 that a new, multipolar world was fast approaching. The rise of the Brics group is a manifestation of that new order. But 2013 has not been a good year for the five.
Chinas high growth looks likely to moderate, and a new Politburo is bedding down, leading to continued uncertainty about the direction of its economic reforms and international stance; so far though, it has avoided the worst of the emerging market slump. Indias growth slowdown and the nearly 25% collapse in its currency have weakened sentiment, while Brazil too has hit some serious hurdles concerning the inclusiveness and sustainability of its growth model, now that external conditions have weakened. South Africas 2009 recession exposed the serious structural weaknesses in the countrys economy and the persistent inequality that has undermined the governments economic legitimacy. Russias pugnacious stance on US intervention in Syria has also raised the spectre of worsening relations between the Kremlin and the West, which may not sit well with other members of the Brics. Its growth slowed down, prompting analysts to worry about its oil-fuelled model.
Recent economic difficulty has forced movement on one of the Brics groups multilateral ambitions. Between May and early September, the rupee, rand, real and rouble fell against the dollar by 25%, 17%, 15% and 8%, respectively.
The plan, to provide a combined currency pool linking countries with large current account surpluses China and Russia with those in deficit, gives the group of leading emerging economies an alternative, formal mechanism to manage external shocks. China has committed $41 billion, Brazil, India and Russia $18 billion each, and South Africa $5 billion.
Some market analysts have warned that the $100 billion contingency reserve arrangement could not be enough to offset the tapering of the US quantitative easing programme, and that if called upon to defend the four currencies that can move against the dollar, the fund may prove to be a paper tiger.
Although it has been interpreted by some analysts as a major step towards the institutionalization of their relationships, Peter Chowla, coordinator of the Bretton Woods Project, a monitoring institution for the multilateral finance sector, says that it was a relatively easy task. The model for the fund existed in the Chiang Mai Initiative, the multi-currency swap arrangement between the countries of the Association of South-east Asian Nations (Asean).
Its largely because they had something to follow, they have a much better outline of how the contribution and usage structure is going to work. That is not so true for the development bank, because they dont have a model they like to follow, because none of the regional development banks have universal appeal, theres nothing they can pick up and use.
I think were at the stage where theyre finding difficulty agreeing on the practicalities. I dont get the sense that they have retreated from the idea, but they clearly have not made progress on how to actually implement it.
PRESSURE FOR REFORM
The structures will be central to the banks effectiveness as a vehicle for development financing. The whole reason the World Bank works is that it has a better credit rating than the countries that borrow from it. So if your Brics bank doesnt do that, its not clear that theres a good function for it, Chowla says.
Part of the reason why the Brics countries are pushing strongly on alternative institutions is to put stronger pressure on reform in the ones that theyve got, he adds.
Setting up an alternative financial structure is likely to have been a direct result of developed countries reluctance to give up ownership
of the architecture of international development. The Brics, and other emerging markets, have long wanted the World Bank to increase its capital and expand its activities.
Theyve been asking for this for a decade. At every round of capital top-up at the World Bank they ask for more and they get rejected, Chowla says. Since the financial crisis, developed countries have kept capital increases constrained. With capital injections come voting rights. Theres been consistent demand for the institutions to lend more and to be bigger, particularly from the developing country government perspective, for the large infrastructure projects. But, he adds, this never happened.
Whether it is because of intra-Brics coordination or just part of the general pressure within the development industry to become less monopolistic, multilateral institutions do seem to be moving away from their western-centric heritage albeit slowly. Since the unprecedented, open race for the successor to Robert Zoellick at the helm of the World Bank in 2012 threw up an 11th consecutive American president, despite a strong challenge from Nigerian Ngozi Okonjo-Iweala, emerging markets candidates have fared better in international organizations.
The elections in 2013 of the Brazilian Roberto Azevêdo as director-general of the World Trade Organization, and of Yi Long, a former Chinese vice minister of finance, to head the UNs Industrial Development Organization, both point to greater leadership from the global south in previously northern dominated structures.
Ben Leo, who leads the study of the Bretton Woods institutions at the Centre for Global Development in Washington DC, thinks that the issue of leadership at the bank and other institutions may have been overblown.
I dont think that the World Bank is undermined by having a leader from the developed world or the US specifically, he says. That day is going to come, but I dont think were there yet. We still live in a world where the substance of what the leadership is pursuing and how well theyre listening to and responding to their shareholder countries priorities, I think that remains the most fundamental question.
Jim Kim, the new head of the World Bank, took a consultative approach early on, Leo says, which resulted in a stated commitment to focus on income disparity and the bottom 40% of earners worldwide, issues of considerable importance to those emerging powers.
He did actively seek out views from his client countries, and the middle-income countries in particular had quite a lot of influence in shaping that, Leo says. [Kim] did listen to them and he did respond to them.