Sceptics wonder whether the BRICS has enough in common to build a strong alliance.
At the latest summit in Fortaleza, Brazil, BRICS (Brazil, Russia, India, China and South Africa) countries launched a slew of initiatives, including two new international financial institutions: a new development bank and a joint monetary fund. Proclaimed as a 'new era of global power structures', the founding of the BRICS's New Development Bank (NDB) has been celebrated as a 'historic moment' and the 'growing prestige' of the group.
The BRICS countries currently have the world's largest foreign currency reserves, and the new institution offers an opportunity to invest those savings at a profit. China contributed $41 billion to the capital stock; India, Brazil and Russia each paid $18 billion, and South Africa's share is $5 billion.
Each of the five BRICS countries will contribute an equal $10 billion share to the NDB's $50-billion capital base [despite big differences in the countries' population sizes and economic weight].
In NDB, all shareholders are equal. Its seat will lie in Shanghai and presidency will change every five years, rotating among the BRICS countries. The first president of the NDB will be from
India.
In addition to the new bank, a new monetary fund was also launched at the Fortaleza summit. The five leaders signed a memorandum establishing a Contingent Reserve Arrangement (CRA) - a $100-billion contingency fund, which member states can draw on in financial emergencies when their foreign exchange reserves become dangerously depleted.
The CRA, thus, is meant to provide an alternative to International Monetary Fund's emergency lending. In the CRA, emergency loans of up to 30 per cent of a member nation's contribution will be decided by a simple majority. Bigger loans will require the consent of all CRA members.
The IMF [International Monetary Fund] has welcomed the move to set up a new BRICS development bank. IMF Managing Director Christine Lagarde has said in a statement: "I would like to congratulate....on hosting a successful meeting of the BRICS leaders in Fortaleza, Brazil, and especially on establishing the Contingent Reserve Arrangement.... IMF staff would be delighted to work with the BRICS team dedicated to this project with a view to reinforcing the cooperation among all parts of the international safety net intended to preserve financial stability in the world....The IMF has a very strong relationship with all the BRICS nations, which are key members of this institution. We look forward to further strengthening our collaboration."
In fact, the CRA's establishment is in part driven by the BRICS countries' unhappiness with the lack of progress in reforming IMF's governance. The developing countries are incensed at the US failure to approve World Bank and IMF reforms.
The US and Europe have dominated the IMF's councils since the Fund's establishment [at the end of the World War II], when developing countries had small economies
and little say in international affairs.
A draft package of reforms was agreed in 2010, aimed at providing greater representation to the emerging countries, reflecting the increase in their relative economic weight, wherein a modest 6.0 per cent shift of IMF voting rights in favour of developing and emerging nations was among the provisions.
But the draft reforms have not been adopted, because changing the IMF's governance would require the US to pass suitable enabling legislation, and the US Congress has refused to cooperate.
At the last annual Spring Meeting of World Bank and IMF member nations in April, a communiqué was released that used unusually blunt language to express member nations' anger at US intransigence. BRICS leaders expressed the same frustration in the communiqué from the Fortaleza summit: "We remain disappointed and seriously concerned with the current non-implementation of the 2010 IMF reforms, which negatively impacts on the IMF's legitimacy, credibility and effectiveness."
There has been a serious financing gap for the developing countries. The IMF and the World Bank usually provide emergency funds and they are not usually targeted at infrastructure development.
The BRICS bank, on the other hand, will offer financing in the area of public sector works — infrastructure — in developing
countries.
The BRICS now really has a direction to go ahead. If the bank clicks, it will be a friend of world commerce, providing the ailing economies with a parallel forum to borrow, trade and invest.
The seed fund can be a big success if it doesn't hit bureaucratic snags.
Some are comparing the significance of the BRICS bank to the Bretton Woods summit in 1944 [which provided the basis for the modern system of central banking and foreign exchange as well as the creation of the World Bank, then called the International Bank for Reconstruction and Development, and the IMF].
But it is too early to comment. The activities of the BRICS will be keenly watched once its operation starts gathering steam.
Questions are already being raised whether four of the BRICS member countries might simply be paying to move from U.S. financial hegemony to dominance by another economic superpower: China.
Reuters Breakingviews columnist Andy Mukherjee worries that NDB lending might be less careful than the World Bank in the matter of vetting projects on sustainability criteria.
The NDB "could help ease the $1.4 trillion-a-year infrastructure financing gap in developing nations….but also could open the doors wide for projects that are social and environmental disasters".
There is another issue: will CRA's mission be parallel to that of the IMF and can it provide emergency funds to governments faced with a sudden shortage of hard currency, especially of US dollars, the dominant currency in global trade and finance?
How the CRA's lending conditions will differ from the IMF's 'conditionalities' in as much as for decades IMF emergency loans have been extended to developing countries only if they have agreed to limit public spending, open their economies to foreign investment, abolish tariffs, deregulate markets, privatise state-owned firms, and take other measures consistent with the so-called "economic policy agenda?"
Dealings with the huge challenges that are being faced by the developing world, especially the minnows, call for careful consideration.
Financial crises can occur developing countries when (i) international investors suddenly pull large amounts of hard currency out of a country because of worries over its banking system's solvency, a change in interest rates, or some other financial factor, (ii) a nation runs into dollar shortages if the price of its main export collapses, (iii) the price of a developing country's main export drops suddenly, etc.
An international financial architecture that is more conducive to overcoming development challenges has been awaited for long. After all, this is not the IMF or World Bank where the US has a veto power in major decision-making processes. Emerging economies want to gain more independence from the developed industrial world.
Dr B K Mukhopadhyay is a Management Economist.
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