Bumpy road ahead of BRICS

BRICS, the acronym for an association of five major emerging economies -- Brazil, Russia, India, China, and South Africa -- came into existence presumably to lessen global economic supremacy of the USA and its European allies and additionally inform the world at large of its growing economic strength. It stole the limelight particularly after its latest summit in Fortaleza, Brazil from 15-17 July, 2014. The five giants of the developing world earlier agreed in principle to create a development bank to provide initial funding for infrastructure projects worth $4.5tn in a potentially historic challenge to western-dominated financial institutions.
The BRICS members are all developing or newly industrialised countries, but they are distinguished by their large, fast-growing economies and significant influence on regional and global affairs; all five are G-20 members. The acronym has come into widespread use as a symbol of the apparent shift in global economic power away from the developed G7 economies towards the developing world.
As for the future power of the BRICS economies, projections vary widely. Some sources suggest that they might overtake the G7 economies by 2027. Others argue that although the five BRICS countries are developing rapidly, their combined economies are not expected to be able to eclipse the combined economies of the current richest countries of the world before 2050.
BRICS nations have 43 per cent of the world's population and 20 per cent of global economic output. However, they have been blocked from gaining greater voting rights at the IMF, largely because of opposition in the U.S. Congress. Some observers see the new bank as a competitor to the IMF and World Bank that will provide funds to developing countries to build infrastructure and shore up their economies to better handle crises.
The BRICS nations also plan to establish a reserve fund to which China will make the biggest contribution - $41 billion. The fund is a concrete form of multilateral cooperation and despite China's growing economic power, it wants to be seen as an egalitarian player in the bank's establishment and financing decisions.
The New Development Bank is expected to be based in Shanghai and have an Indian citizen as its first chief executive. Sceptics say the bank faces challenges over whether the creditor nations will use the institution to promote their own national interests only.
But with China's growing economic might, many expect it could become a powerful international force. It could also help promote other currencies, such as China's yuan, as an alternative to the present global finance system, dominated by the U.S. dollar.
The new bank could help developing countries move ahead despite sanctions imposed by the West. When more and more geopolitical events take place, such as, Iran, or Ukraine, the more dollars are in use and the US gains greater control over the financial architecture. But in multi-currency architecture, the U.S. will lose that grip and other countries will remain in control of their currency and can continue to conduct trade without being sanctioned.
For the leaders of the BRICS countries, the announcement in July of their agreement to establish a "New Development Bank" (NDB) and a "Contingent Reserve Arrangement" (CRA) was a public-relations coup. The opportunity for a triumphal group photo was especially welcome for Brazilian President Dilma Rousseff, in light of her country's ignominious World Cup defeat and slack economy, and for Russia's President Vladimir Putin, given the international reaction against his government's support of the rebels in Ukraine.
The agreement was also an opportunity for the five countries to reiterate their dissatisfaction with the World Bank, the International Monetary Fund, and the role of the dollar in the global monetary system. The BRICS possesses just 11 per cent of the votes in the IMF, despite accounting for more than 20 per cent of global economic activity. The US Congress refuses to ratify the agreement reached in 2010 to correct this skewed state of affairs. And the United States has displayed no willingness to renounce its anachronistic privilege of nominating the World Bank's president.
Meanwhile, the share of the dollar in global foreign-exchange reserves remains more than 60 per cent, while 85 per cent of global foreign-exchange transactions involve the dollar. Given the reluctance of underrepresented countries to sign up for the IMF's precautionary credit lines, central banks desperate for dollars can obtain them only from the Federal Reserve. Federal Reserve was reasonably willing in providing dollar swaps in the last crisis in 2008; but there is no guarantee that it will behave similarly in future.
Thus, the BRICS' dissatisfaction with the status quo is also understandable. The question is whether their NDB and CRA will make a difference.
The logic for the NDB is compelling. The BRICS, and developing countries generally, have immense infrastructure needs. China may not have an infrastructure deficit, but it has something else: large construction companies that welcome the opportunity to undertake additional projects abroad. Hence the incentives of the NDB's prospective creditors and borrowers are happily aligned.
Moreover, there already is a proliferation of regional development banks, from the Inter-American Development Bank and the Asian Development Bank to the more modestly capitalised African Development Bank. These institutions co-operate with the World Bank.
There is no reason why the NDB should create problems, either. With initial capital of just $100bn, it is too small to make a major contribution to global infrastructure needs. But inadequate capitalisation can be corrected over time.
The CRA - intended to lessen the BRICS' dependence on the dollar - is another story. The five participants agreed to earmark $100bn of their foreign-exchange reserves for swap lines on which all members are entitled to draw.
But here the interests of prospective borrowers and lenders are not obviously compatible. The next BRICS country experiencing a crisis will want to draw on the CRA. But the other members will hesitate to lend more than token amounts, especially if there are repayment doubts. In contrast to development finance, the incentives of potential lenders and borrowers are not aligned.
Permitting the lenders to impose policy conditions on borrowers and to monitor their compliance can redress this problem. But imposing conditionality on sovereign states is a delicate matter - especially when the countries involved are as large and diverse as the BRICS. It is difficult to imagine Brazil, for example, accepting policy conditions laid down by China.
Other attempts to establish networks of swap lines and credits, such as the Chiang Mai Initiative, which was negotiated in the wake of the Asian crisis, have been bedevilled by the same problem. The Chiang Mai network is even larger than the CRA. But, given the divergent interests of lenders and borrowers, it has never been used - not even in 2008, at the height of the global financial crisis.
The architects of the Chiang Mai Initiative attempted to finesse the problem by requiring countries that draw more than 30 per cent of their swaps to negotiate a programme with the IMF. Ironically, the "Treaty for the Establishment of a BRICS Contingent Reserve Arrangement" contains exactly the same provision. So much, then, for the CRA as an alternative to the IMF.
Quite a few countries, including Bangladesh, have expressed their willingness to join the newly-formed BRICS bank though the multilateral development bank is yet to decide whether it would include any country outside the five founder nations.
As BRICS moves ahead with its declared objectives, few important questions surface. Is BRICS going to bring about any qualitative change in world economic architecture, or is it just about shifting of world economic leadership from one block to another?
For understandable reasons, success of BRICS shall depend largely on the attitude of the world economic overlords towards it and there is a hidden risk of incurring the wrath of western dominated global economic powers. It is less likely that the BRICS is going to have a smooth sail.  
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