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 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.
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