In its eThekwini Declaration of 27 March 2013, the fifth BRICS summit at Durban proposed the formation
of a New Development Bank. This raises the question whether this new
financial institution is intended to challenge the traditional role of the
World Bank and the IMF, and indeed, whether the BRICS group can ever rise above
being an acronym talk-shop amongst disparate and often rival nations.
In “BRICS without mortar” Click here, Joseph Nye, Harvard University professor and former Chairman of
the US National Intelligence Council, reiterated his earlier scepticism that “BRIC
is not likely to become a serious political organization of like-minded
states.” His doubt is premised on their vastly different economic sizes, growth
rates, economic models, political ideologies as well as geopolitical rivalry. He
points out that a year has elapsed since the new development bank idea
was first mooted. Yet the Durban Summit was no nearer to announcing details of
how this idea was going to work.
To be
sure, these observations are valid. For example, India views China as allying
strategic ports and outposts in a “string of pearls” stretching from Myanmar,
Sri Lanka and Pakistan surrounding India. In addition, long-lasting territorial
disputes between China and India continue to be a source of friction. Russia is
wary of China’s growing economic influence in Central Asia and in her
sparsely-populated far eastern territory. Brazil, for her part, sets great
store on its near neighbour, the United States, both as the extant superpower
and as the world’s largest market. The
BRICS leaders themselves are only too aware of these realities.
However, zero-sum,
binary, all-or-nothing thinking is becoming less and less productive. So is the
concept of permanent geopolitical power blocs. In an increasingly multilateral
and multi-polar world, countries may choose to cooperate on some issues while
adopting a rival position over others.
As far as
the BRICS are concerned, there are two important imperatives.
First, all
BRICS members adopt a strategy of avoiding to belong to a rigid bloc, guarding
their respective sovereignty jealously. Second, strategic sands are shifting to
provide more common grounds and avenues for cooperation between them
than people used to think.
For
example, since March 2013, China has overtaken the U.S as Brazil’s largest
trading partner, a historic milestone since the 1930s. Likewise, China has
become South Africa’s largest trading partner and is set to become India’s
largest trading partner within a few years.
As for Russia, China’s new President Xi chose it as his first port of call
and the two sides have agreed energy
deals including a tripling of oil exports to China by Rosneft to
45-50 million tonnes, possibly by 2018.
According to an article in The
Diplomat, this will make China the largest consumer of Russian oil. This
would be of huge strategic importance to Russia if the European Union should
switch its energy imports from Russia to the United States. This prospect is
quite likely in the wake of the current American shale gas revolution, turning
the latter as an energy-exporter. This will be given impetus when a free trade
agreement now being mooted is concluded between the United States and the EU.
The World
Bank and the IMF are Bretton Woods institutions conceived and led by the U.S. and
a few major European powers. Since the end of the Second World War, they have
been setting the political tone and economic agendas for the developing world. In
“Making Globalization Work” (Norton, 2006, Preface),
Joseph Stiglitz (Nobel laureate 2001) exposed how these institutions, which he
views as reflecting the vested interests of advanced nations, came up with recipes
not always proved to be in the best interests of debtor countries. Examples
include the “shock therapy” for the
former Soviet Union and the IMF programs worsening the East Asian financial
crisis.
Now, world
power dynamics has dramatically changed. Together, BRICS nations account for more than
40% of the world's population, one-fifth of the world's gross domestic product,
and half of the global economic growth. According to a research report by
BBVA in March 2013 Click here, global growth will be decidedly driven by the Emerging
and Growth Leading Economies (EAGLEs). Between 2012- 2022, these emerging markets are expected to contribute 68% to world growth. The BRICS countries
are top of the pack, led by China and India, both with a higher share than the
U.S. In contrast, the G7 economies will add a mere 16%.
Not only do the BRICS now have the financial
wherewithal, their development paths have largely been the outcome of their own
hard struggles, rather than the largess of Bretton Woods institutions. They are
therefore inclined to feel that their own development models, albeit not
identical with one another, may offer useful experience for the developing
world while their combined financial muscle may provide the latter with much
needed infrastructural and other capacity-building projects better geared to
local realities.
These initiatives could supplement the
efforts of the World Bank and the IMF at a time when their resources are
stretched in meeting the growing demands for development funding. The BRICS approach
to solving developmental issues is also likely to be better received than some World
Bank/IMF prescriptions of pre-mature liberalism with a Washington Consensus
bias.
In view of the massive tailwind of the West’s
continuing quantitative easing monetary policies, the eThekwini Declaration calls for the creation of a
Contingent Reserve Arrangement (CRA) with an initial size of $ 100 billion as an
additional financial safety net for developing countries. This would further
consolidate the BRICS influence in the developing world.
Pending further clarification, the objectives of
the BRICS bank are already relatively focused. Africa, a continent on the
prowl, is targeted. According to The
Economist, over the 10 years to 2010, six of the world's 10 fastest-growing
economies were in sub-Saharan Africa. However, the lack of capacity-building infrastructure
such as transport, schools and hospitals has locked many African countries in a
poverty trap of aid addiction. So a BRICS bank geared to infrastructural
development in Africa is extremely timely.
The main challenge for
the new development bank is how the pooled financial resources are to be disbursed
in the light of competing priorities amongst the BRICS members. Such possible
differences of opinions may also apply to other regions outside Africa. An agreed
mechanism must be found so that any such differences are settled quickly and
amicably.
Another challenge is the
sharing of the financial burden, at least initially, pending the exploration of
other options such as tapping into global capital markets. On the one hand, all
Members want to be treated as equals. On the other, there is little doubt that
China is best able to come up with the lion’s share. As other BRICS members are
wary of China’s dominant position in the BRICS bank, China herself may not
necessarily seek one, at least not a veto power similar to that of the United
States in the IMF. How to come up with a burden sharing formula while
apportioning agreeable decision-making powers may tax the vision and ingenuity
of BRICS members.
Amongst
the BRICS, China’s economy and foreign currency reserve are respectively bigger
than the rest of the group combined. Given China’s economic clout, including
her position as the largest trading partner for most BRICS members and the
center of the global production and supply chain, even if all BRICS members
have equal voting powers, the final decision-making may well be loaded in favour of China. For
the bank to work, as an overweight member, China must tread carefully in
building trust and solidarity, not unlike the early days when China adopted the
“ASEAN way” of friendship, equality, and consensus in her relation with ASEAN
member countries.
As always,
the devil is in the detail. The Durban declaration calls for the respective Finance Ministers and Central Bank Governors to
negotiate and conclude the necessary agreements to establish the new
Development Bank and the Contingent Reserve Arrangement, with progress to
be reviewed at the next BRICS meeting in September 2013.
China already
has an extensive financial footprint all over Africa, supported by an array of
well-funded Chinese national institutions including China’s giant state-owned
banks. A
China-Africa Development Fund was established in March 2007 with $1 billion of initial funding envisioned
to grow to $5 billion in the future. China’s
total direct investment in Africa comes to some $40 billion. In addition, in
July 2012, loans of $20 billion were promised to
African governments for infrastructure and agriculture in the next three years.
China has now surpassed the US and European
countries to become Africa’s largest trading partner, with two-way trade worth
nearly $200 billion in 2012.
It begs the question why, with such a predominant presence in Africa, China is still
interested in a BRICS bank targeting Africa.
The probable
answer is that China wants to build greater solidarity
amongst BRICS countries and with the developing world as a whole as a powerful
counterweight against the West. The BRICS bank is a useful alternative to the
Bretton Woods financial institutions while Africa is its best theatre for BRICS
Members especially China. In
face of mounting negative backlash, China doesn’t want to be seen as seizing
the lion’s share of investments in Africa. As an added advantage, the
likely delivery of early results of BRICS bank projects in Africa would open up
avenues for quickening the internationalization of the RMB, the Chinese yuan,
in keeping with China’s desire to play a greater role in the global financial
architecture.
All the other BRICS members equally want to position
themselves as global players. As the largest nation in South America, Brazil
sees Africa as a huge market for its multinationals, including agricultural
products such as food, seeds and machinery, with bilateral trade expanding from
$4 billion in 2002 to $20 billion in 2010 Click here. As recently highlighted in
Yale Global Online, it doesn’t always see eye to eye with the superpower next
door Click here. Likewise, Indian companies
have invested in key sectors like automobile, engineering, chemicals, banking,
IT, telecom, drugs, pharmaceuticals, healthcare, education and services. A case
in point is Bharti Airtel's recent acquisition of 15 telecom operations in
sub-Saharan Africa for $10.7 billion Click here. Not
to be outdone, with its Soviet-era ties with Africa, Russian
conglomerates have joined in the scramble, not only for the continent’s natural
resources, but also, as in the case of Russia’s Renaissance Group, in
capitalizing on Africa’s nascent financial sector Click here.
In the final analysis,
each of the BRICS members sees its own benefits for the eThekwini Declaration to
deliver. In a world gravitating towards the Emerging and Growth Leading
Economies including the BRICS, when Africa, the vast frontier of the developing
world, is about to take-off, there is a lot of common direction for the BRICS
to set aside their differences and cooperate in making at least the BRICS bank
project a success.
Like steel Lego
pieces of different shapes and sizes, or like chemical elements of different
characteristics, the BRICS can still dovetail and bind as required where it
suits their best interests.
