IMF: BRICS Bank Aims to Rewrite the Rules of Development
BY ANA SWANSON, SHREY VERMA
JULY 11, 2014
On July 15, the action in Fortaleza will shift from the football pitch to the political high table.
The Brazilian seaside city that has hosted many of this year's FIFA World Cup games is scheduled to holdthe 2014 BRICS Summit, where leaders from Brazil, Russia, India, China, and South Africa will meet to establish a long-awaited development bank that aims to balance the influence of the IMF and World Bank.
Called "New Development Bank," the BRICS bank is expected to foster greater financial and development cooperation among emerging markets.
The plans have yet to be finalized, but reports say each of the BRICS countries may contribute $10 billion in initial capital to the entity, which will have a maximum value of $100 billion.
The bank will also establish a $100 billion reserve fund, with China contributing $41 billion, Brazil, Russia and India giving $18 billion each, and South Africa contributing $5 billion.
But the establishment of the development bank, a historic challenge to the Western-dominated international system, shows the five emerging economies are taking their partnership seriously.
The accomplishment appears that much more significant when viewed against the backdrop of the United States' continued failure to endorse IMF reforms.
The BRICS -- a group that represents more than 40 percent of the world's population, about a quarter of global output, and nearly all of the world's current growth -- looks set to regain its geopolitical "mojo."
Putting Wealth to Work
The purpose behind creating the BRICS's New Development Bank is twofold. First, the bank will benefit emerging markets by putting excess capital to work in financing large infrastructure projects.
The BRICS countries have combined foreign-currency reserves of $4.4 trillion that will enable them to inject new vigor into long-term infrastructure financing in the developing world.
Financing carried out through the BRICS bank will likely not only entail lower borrowing costs, but also fewer conditions than similar financing arrangements with the World Bank and the IMF.
Asian countries that have balked at this kind of interventionism may find BRICS bank loans appealing.
Second, the new entity will function as a currency reserve to aid countries in times of crisis and external shocks, especially against massive currency fluctuations caused by changes in monetary policy in advanced economies.
Since the financial crisis, the United States has embarked on a massive bond-buying program known as quantitative easing (QE) in an attempt to reinvigorate its domestic economy.
By pushing U.S. interest rates to historic lows, this flood of easy money also spurred financial flows into emerging markets, which have offered investors higher returns.
But now that the U.S. Federal Reserve has begun scaling back or "tapering" its QE program, that flow of funds to emerging markets has begun to reverse -- sparking concerns that an exodus of portfolio investment could destabilize emerging markets.
A currency reserve for emerging markets is the best way to soften the blow. While the proposed reserve will not be large enough to rein in exchange rates in the long term, it could help cushion the short-term impact of capital outflows and exchange-rate volatility.
India's Modi Moment
The BRICS bank could open up the possibility for new and virtuous cycles of trade and financial flows among emerging economies.
If India succeeds in building out its industrial capacity, upgrading its infrastructure, and urbanizing its economy, it could trigger the next commodity boom that will benefit Brazil, Russia, and South Africa.
Such a transition in India would likely depend on a new "tide of liquidity" originating not only from the United States and other developed markets, but also China.
Flush with capital, China is already emerging as the banker to the developing world.
The renminbi is the fastest-growing major currency in the world today and is the second-most commonly used currency in trade finance.
Access to renminbi financing through the BRICS bank could spur greater capital flows and streamline trade between China and the rest of the BRICS, including India.
This possibility makes a compelling case for a new financial entity outside the control of the United States and Western Europe.
Brave New World
At the ADB, the United States and Japan can play arbiter to such disputes. But this mechanism may be absent in the BRICS bank, where China will likely exercise greater leverage due to its economic strength.
Even so, the political significance of the New Development Bank should not be lost on anyone.
The BRICS summit comes on the heels of significant geopolitical shifts in recent months. The Russian invasion of Crimea has reignited frictions between the West and Moscow, prompting a new Asian realignment between Russia and China.
The $400 billion gas deal between the two countries is the first major global energy transaction that seeks to bypass the U.S. dollar.
Even as the BRICS forge stronger economic and investment ties, the grouping could also strengthen due to converging security interests.
The three major stakeholders, Russia, India and China, already share common security and economic interests in a post-2014 Afghanistan, raising the possibility of a trilateral framework of cooperation in the strife-ridden country.
Buoyed by a rising tide of rapid economic growth, the BRICS have shifted the global economic balance toward the developing world in recent years.
However, the international monetary system remains unipolar in character and dominated by the West.
If the BRICS succeed in their upcoming negotiations, the New Development Bank could mark a significant step toward a multipolar financial order.
