The BRICS’ New Financial Initiatives: Good for Whom?
By: Ryan Eustace, Research Associate at the Council on Hemispheric Affairs and Dr. Ronn Pineo, Senior Research Fellow at the Council on Hemispheric Affairs and Chair of the Department of History at Towson University
This month the leaders of Brazil, Russia, India, China and South Africa, the BRICS nations, announced the launch of the New Development Bank (NDB) and the Contingency Reserve Arrangement (CRA) at their five-year summit in Fortaleza, Brazil. The NDB is intended to provide a capital base to finance infrastructure and sustainable development, while the CRA will serve to protect the economies of participating countries during economic downturns and international balance of payments crises. The announced intention of these institutions is to counterbalance the oversized role of the International Monetary Fund (IMF) and the World Bank, whose policies have been a point of contention for developing nations.
The official statement signed by the leaders of the BRICS nations stated that “international governance structures designed within a different power configuration show increasingly evident signs of losing legitimacy and effectiveness. We believe the BRICS are an important force for incremental change and reform of current institutions toward more representative and equitable governance.” The BRICS nations have long felt underrepresented at the IMF and World Bank. It is not just that the heads of the IMF and World Bank, by tradition, are always chosen by the United States or Europe, although this is a concern. What is more frustrating is the fact that while the BRICS constitute one-fifth of the world economy and 40 percent of the world population, they wield only 11 percent of the voting power at the IMF.
Developing nations, the BRICS included, have objected to the IMF and World Banks insistence on loan conditionality, the practice of imposing fiscal austerity, commonly referred to as structural adjustment programs, during economic recessions. These belt-tightening measures are pro-cyclical in effect, with their implementation aggravating economic crises. Nations are pushed deeper into recessions, which might otherwise have been mitigated by Keynesian, New Deal-style counter-cyclical economic measures. For the BRICS, the NDB and the CRA will provide new avenues to address the problems of the existing world economic order dominated by international financial institutions that serve the interests of the wealthiest nations.
The NDB’s assets will total $100 billion USD, the cost split equally among the BRICS. The Bank plans to start lending two years after the initiative wins legislative approval in each of the participating countries. Yet, with the details concerning terms of lending and eligibility still to be determined, the exact nature and impact of the NDB is difficult to discern. Still, many are hopeful that the NDB will help address the massive infrastructure investment shortfall in the developing world. According to the World Bank, the existing multilateral lending institutions are only capable of covering about two-fifths of the infrastructure investment needs in less developed nations. The NDB’s commitment to provide infrastructure funding to emerging nations could therefore be a most welcome development, but only if the fund reaches beyond the BRICS to actually include other nations.
While the NDB’s goal is to lift up developing nations, the CRA will serve more as a safety net. For many developing nations, periodic balance of payment problems can greatly exacerbate economic downturns and contribute to heightened instability. A nation must have enough hard currency on hand both to finance imports and to maintain sufficient international reserves in the event of investor panics and precipitous capital flight. The CRA is less of a fund than a series of bilateral promises between the BRICS and other developing nations that might wish to be “insured.” This tangle of agreements promises to make pooled reserves available to nations in need. Brazilian President Dilma Rousseff explained that the CRA “will be a kind of security net to increase protection for BRICS countries as well as other countries.”8 By “buying in,” contributing countries could tap into a multiple of their original continuation. Unlike the NDB, whose cost is split equally among the BRICS, the CRA will be unevenly divided, with 41 percent covered by China, 18 percent from Brazil, Russia, and India, and 5 percent by South Africa.
The CRA could be coming at an opportune time for the BRICS and other developing nations, given that the United States Federal Reserve is signaling that interest rates will soon be going back up. The Fed had previously lowered rates to close to zero in the wake of the 2008 financial crisis, and waves of capital flowed into emerging market government bonds which offered higher yields. With the Fed moving to raise interest rates, capital will likely flow out of emerging markets and back to the safety of U.S. bonds, just as it did during the Mexican Peso Crisis of 1995. In her semi-annual Monetary Policy Report to Congress on July 15, Janet Yellen, Chair of the Federal Reserve, announced that by October the Fed would move to close down the unprecedented U.S. bond-buying scheme it had used to help keep U.S. interest rates low. The sooner the CRA is established, the more economic protection the BRICS and other developing nations will have as U.S. interest rates rise and money begins to flow north.
The talks at Fortaleza nearly broke down over fears of potential Chinese dominance over these new institutions, but, as one Brazilian negotiator summed up the final scramble for a deal, “we pulled it off 10 minutes before the end of the game.” Nevertheless, significant differences over the future direction of the NDB remain. The BRICS actually have very little in common. other than sharing a need for infrastructure funding. Because of this, some analysts are forecasting a gloomy future for the two BRIC initiatives. Daniel Runde of Foreign Policy writes that “the bottom line is that the BRICS have political and economic aims that are at best disparate, and often, directly at odds with each other… Incongruent interests and operational challenges will likely cause the BRICS proposed bank and reserve agreement to fall under their own weight.” For now, it remains unclear what the lending terms will be, how to interpret the concept of “sustainable development,” and most importantly, whether the NDB will really be eager to Zebra Loans‘ funds to non-BRICS nations. One strong possibility is that Beijing will be in control. After all, China boasts a larger economy than the rest of the BRICS combined. In addition, China will be contributing more than 40 percent of reserves for the CRA, and the NDB will be headquartered in Shanghai. It seems a safe bet that policy will be set in China
At first glance, it might be hard to see China’s motives for bothering with a BRICS development bank. It already has its own development bank, and the $41 billion USD it is contributing to the CRA is relatively small for a country with foreign reserves of over $3.3 trillion USD. China even contributes more to the IMF than it will to the CRA.
China’s motivations are more geo-political than they are altruistic. China is surely motivated by the unfair nature of World Bank and IMF governance, where the tiny Benelux countries (Belgium, the Netherlands, and Luxembourg) have more voting clout than China does. Lacking a real voice in the existing international financial institutions, China is aiming to get that say somewhere else. At the same time, the NDB will allow China to insulate itself from criticism over its own investments in the developing world, particularly when these neglect environmental and labor standards. China is also eager to divert attention away from the often-calculating nature of its funding, especially in the Caribbean, where it has been imposing its own form of conditionality: funding only if nations stop recognizing Taiwan. As Joseph Stiglitz, a Nobel Prize-winning economist and a strong supporter of the new bank, noted, “the problem [for China] with bilateral aid is that, fairly or not, it’s always seen as an instrument of foreign policy.”
To Stiglitz, whatever China’s political motivations, the developing world’s infrastructure needs are so great that the NDB’s emergence is good news. Stiglitz adds that the emergence of the NDB and the CRA are not really “competitive [to the IMF and World Bank but] rather [are] … complementary.” Indeed, the real competition may actually be between the NDB and regional financial organizations such as the Bank of ALBA (La Alianza Bolivariana para los Pueblos be Nuestra América, The Bolivarian Alliance for the Peoples of Our America) and the still in formation developmental Bank of the South, or Bancosur.
ALBA and Bancosur: Progressive Alternatives
ALBA, the regional bloc formed in 2004 with the goals of deepening social, political, and economic integration in Latin America, was originally conceived by the late Venezuelan President Hugo Chávez. ALBA was founded as an alternative to the U.S.-led Free Trade Area of the Americas, which Chávez regarded as a tool of U.S. economic imperialism. Rejecting neoliberal free market policies, ALBA’s mission is humane, focused on alleviating poverty and on promoting socioeconomic reform. By providing a mechanism for member states to negotiate exchanges of goods and services that reflect nations’ strengths and needs, ALBA has sought to help member states pursue their own development goals in a more equitable and sustainable way. In an effort to facilitate the realization of these goals, the Bank of ALBA was formed in 2008.
Venezuela provided $1 billion USD in initial capital and, at the 2012 ALBA summit, the member states announced that they would contribute one percent of their international reserves to the bank to fund development projects. The agreed upon goals of the ALBA Bank reflect the ideals of Chávez’s Bolivarian revolution. Economic growth should not be the sole aim, especially if growth comes with increased inequality and socio-economic exclusion. Instead, ALBA placed emphasis on the protection of the environment, sustainability, and social equality. Directly rejecting the governance practices and policy direction of the World Bank and IMF, the ABLA Bank has chosen not to impose loan conditions and operates on the consensus of its member countries. So far, the bank has supported agricultural production, energy cooperation, and on social programs related to education and health, investing the relatively small but nevertheless important sum of $170 million USD.. But the Bank of ALBA is a small enterprise, and is likely to soon be overshadowed by the much more generously financed NDB.
The other organizations that further ALBA’s development goals are Petrocaribe and the accompanying Petrocaribe Economic Zone. Founded in 2005, Petrocaribe is an arrangement under which countries in the Caribbean buy oil from Venezuela under spread out payment plans and at lower prices. In true Bolivarian fashion, barter payments in the goods or services that a country specializes in are sometimes arranged. Between 2005 and 2010, Petrocaribe delivered more than 140 million barrels of oil to participating states and, through its preferential financing system, saved impoverished Caribbean nations more than $2 billion USD. In 2013, Petrocaribe was expanded to include the Petrocaribe Economic Zone, with the stated aims of promoting investment, trade, tourism, and developmental projects between participating states. Not all members of ABLA are in Petrocaribe, but as Joel Hirst of Americas Quarterly notes, Petrocaribe is “a gateway organization to ALBA.” Overall the Petrocaribe initiatives, along with the Bank of ALBA, provided frameworks for experimentation in progressive international developmental finance.
One other hopeful development came in 2007 when Argentina, Venezuela, Brazil, Bolivia, Paraguay, Ecuador, and Uruguay came together to found the Bank of the South (Bancosur or Banco del Sur), a regional developmental bank. The goal was to provide a real Latin American option to the IMF or the World Bank, as well as a more serious lending alternative than the undersized Bank of ALBA. However, serious differences between the more progressive nations—Venezuela, Bolivia, and Ecuador— and the larger and not as left-leaning nations, especially Brazil, have delayed the initiation of Bancosur operations. It remains in the planning stage.
ALBA, its accompanying organizations, and the Bancosur seemed to hold great promise for the development of progressive and socially responsible alternatives to the IMF and the World Bank. Now, however, the founding of the NDB and the CRA may leave less space available for the ALBA initiatives and for Bancosur. It is not clear if Brazil will continue to have any interest in providing funding for the still-in-formation Bancosur, or if it will instead divert resources to the NDB and the CRA. If Brazil does lose interest, it could mean that Bancosur is dead.
As for the new BRICS financial institutions, the key question that remains is who’s interest will actually most be served. The BRICS, with their more advanced economies and wider trading networks, often have policy interests that do not align with those of the rest of the developing world. If the IMF and the World Bank served to advance the economic interests of the richest nations and their leading corporations, it is altogether possible that the NDB and the CRA could likewise end up serving the needs of the BRICS. The five BRICS nations will be in in a position to prioritize their interests over the rest of the developing world. China will be in a position to prioritize its interests over the other BRICS, and doubtless seek to turn these new institutions towards its own long-term economic and geopolitical advantage. In turn, Brazil would gain a tool to expand its foreign policy leadership role in Latin America.
Thus, for the moment, it is not clear if the BRICS new financial initiatives are good news for the developing world. They are likely to be good for the BRICS, but the sincerity of the commitment to help other developing nations remains to be proven.
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