Economic Highlights

New Delhi, 1 April 2013

BRICS Bank

CHANGING WORLD ECONOMICS?

By Shivaji Sarkar

Is world economics in for a change? Perhaps, if the BRICS Bank comes into existence. It would impact the form of development financing and reduce dependence on the Breton Woods institutions, World Bank and International Monetary Fund (IMF).

The Durban summit of BRICS – Brazil, Russia, India, China and South Africa last month has taken a modest but concrete step in gluing its members together. Until now it has been a loose group for yielding pressure for formulation of world policies. The stated goal of the new bank is to provide its members with a way to pool money for investment in targeted infrastructure projects among themselves.

It is a modest beginning with seed capital of $50 billion, to be contributed equally by the five members. China wants it to be $100 billion, but all others are facing foreign exchange crunch. Beijing’s central bank has $ 1.2 trillion foreign reserves and over $60 billion arrives annually in direct investment by investment bankers flushed with cash.

Even though the others are not in a position to contribute more, they all want that each should have equal control over the new bank. The Durban summit has so far given the conceptual clearance. It has yet to decide on where the bank would be located and when it might start. The meetings over a year would try to solve these issues as well as the one to create an emergency reserve of $100 billion. China proposes to contribute $ 41 billion, India, Russia and Brazil $18 billion each and South Africa $5 billion.

Undeniably, it is a major international development. The ASEAN group despite having formed long before even BRICS was mooted has yet to come up with a development bank. Other development banks such as the Asian Development Bank and African Development Bank are offshoots of the WB.

The world is watching the move. The US expects it to function in cooperation with the international financial institutions. International rating agency Goldman Sachs Asset Management chairman Jim O’Neil states: “This could become a World Bank in future due to the increasing influence of emerging countries”.

Indeed, BRICS is being viewed as the world’s biggest market and economies of the future. Together the group of five account for 25 per cent of global GDP and 45 per cent of the world’s population. They control a quarter of the world’s land mass and quarter of its economy at $13.5 trillion.

If it sails well, as most expect it to, in the coming decades it may shift the pivot of the world economy from western nations. The WB and IMF had come up to help the World War II ravaged countries. But it has served them well as the two institutions’ goal of reducing poverty the world over has been more cosmetic.

Currently, countries gain access to international capital, including Chinese, through loans from the WB and IMF. They leverage it through imposing policies that are often not suited for these economies. Since the European crisis, the institutions are preoccupied with giving aid to the Euro zone for stabilising economies that are in trouble.

The World Bank's net lending has plummeted over the past few years, even as it keeps shopping loans to the likes of Brazil, Turkey, Russia and China, sometimes on hugely generous terms.

Now, the creation of a BRICS development bank could offer countries a way to negotiate for infrastructure loans much more directly. For countries such as India, this is expected to hedge currency volatility as also may help in managing forex crisis, resulting from severe current account deficit, or simply put rising imports and falling exports.

India expects it to create a political and business clout, as hinted by Prime Minister Manmohan Singh. Whether it would be able to counter or match the Chinese influence needs to be observed. The bank could be helpful in promoting trade within BRICS nations and its achievements could be much bigger than being just political. With respect to economics, BRICS countries, barring South Africa, have become much bigger much more quickly than expected, even if they have lost some momentum in the past 12 months.

Their achievements are remarkable as their collective GDP in 2011 increased by around $2.3 trillion, equivalent to the size of Italy's GDP. By 2015, the combined size of BRICS seems highly likely to become as big as the US’ and they are set to become as big as the G7 by 2027, are international assessments.

The IMF too says it is watching. It needs to. As the bank is set up and expands it would have to include provisions for extending assistance to other economies in Asia, Africa and Latin America. And this is precisely where it would be in conflict with the WB and the IMF.

The move to set up a bank is for India an expensive proposition given that the country is passing through a severe economic and financial crisis with the current account deficit touching a record. Thus, it is being seen more as a hedge against future developments rather than trying to solve the present crisis. 

Additionally, the proposed bank is not without its conflict within. The growing influence of China concerns all not only Russia and India. Even the African countries are apprehensive. They do not want China to gobble up their emerging economies through cheap exports and ruin them.

India, importantly, is viewed as moderate. The initiative taken by it is being seen as a move for changing the world order. Despite some murmurs in South Africa, where the opposition finds funding the venture not so useful for its stagnating economy, the bank is being given wide support. Brazil, which has developed important trade links with China, sees in this a platform for diversification.

While opportunities are wide for India, the path is not easy. China would like to use it to counter every gain that New Delhi may perceive to be having. Big powers including the US are indeed watching every move of BRICS and its individual nations for it has the capacity to transform the world economy, including patterns of world trade and finance. It has potential.

If it functions as perceived, the five nations, with their expanse across the globe, may not only emerge as the largest economic bloc but also address unfulfilled Millennium Development Goal (MDG) objective of poverty alleviation in a more inclusive and meaningful manner through distribution of wealth and creation of the largest number of jobs. --- INFA

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