Round The World

New Delhi, 2 June 2015

BRICS Bank & US Response

NEW WORLD BANK IN OFFING?

By Amrita Banerjee

Research Scholar, JNU, New Delhi

The year 2014 was truly momentous for the international political economy. On one side, it marked the 70th anniversary of the Bretton Woods agreement, which reshaped the international financial system by creating both the International Monetary Fund (IMF) and the World Bank.  On the other side it marked the creation of the ‘BRICS Bank’, a new multilateral development bank, inaugurated by Brazil, Russia, India, China, and South Africa in the 6^th BRICS Summit at Fortaleza, Brazil. This new development, however, was mainly seen as a counterweight to the U.S. and Europe dominated financial institutions and was based mainly in politics surrounding the control of the IMF.

In spite of the Bretton Woods system being in existence, the need of such a bank was felt by the BRICS countries mainly because the working of the Bretton Woods Twins were full of analomies like the skewed quota system, strings attached loan policies, the unequal voting rights of the member countries and the head of the institution being invariably selected from either America or Europe.

In short, this system seems to represent the frozen power and economic realities of the post 1945 World and in spite of the repeated request for reforms in these financial institutions by the developing countries, the situation remained dead locked. Jim O’Neill, the economist from Goldman Sachs who coined the term ‘BRIC’ even said that the BRICS Bank is ‘a permanent sign that global governance is a mess’.

Headquartered in Shanghai, the New Development Bank (NDB), has $50bn in initial capital and planned to finance infrastructure and sustainable development projects (much like the World Bank), and $100bn initial capital in the Contingent Reserve Arrangement (CRA) to provide assistance to members in financial difficulty (much like the IMF).The coming of the bank within just five years of the establishment of BRICS forced the world to take notice. The rapid progress in the BRICS made Washington jittery and fearfully suspicious. But this response is not felt in all the American circles uniformly.

Specifically, the U.S. response to the BRICS Bank remains divided. Some dismiss the idea of a BRICS bank especially its lending capability as they believe that with a total capitalization of $100 billion, its lending would remain modest and nowhere close to what the World Bank spends every year. They feel that BRICS, even collectively, are still too small in global financial terms to act independently of the U.S. dollar or compete with the established international financial systems. Also the NDB’s future would be doomed in an event of a sudden global breakdown because it would mean catastrophic financial consequences for all of the BRICS nations who contribute towards the bank’s reserve.

There is yet another group that has called the establishment of NDB as the new Bretton Woods moment for the emerging powers. However, they debate the intentions for such a move. They speculate the strategic orientation of the emerging powers resting on two basic questions: whether they seek to increase their influence within the international order or they seek to revise or overturn it.

A deeper analysis reveals that the BRICS’ desire to create a Bank is both an economic and a political need. Economic because this bank would provide an increasing flow of finances to the infrastructure projects, a mission-critical for China, India and Brazil to grow and Russia to recover. The developmental loan would not have any social and environmental conditions attached to them unlike the World Bank loans. Political because it would reinforce the voices of the emerging powers and further strengthen multipolarity.

The U.S. is especially concerned about China’s role in the NDB considering the fact that it just wanted a multilateral vehicle for lending activities in Asia, Africa and Latin America under the friendlier face of the Global South’s new development bank. They feel that Beijing is carrying on with its Marshall Plan in every corner of the globe. This portfolio itself suggests that China wants dollar to crash. To foster its economic interests viz-a-viz Washington, Beijing also launched the Asian Infrastructure Investment Bank (AIIB) to weaken Washington’s financial hold in the world.

However, Washington is yet to take BRICS seriously because it feels that the BRICS countries are united only in economic terms but not in strategic spheres. For example--- China has border issues with both Russia and India. Also, there are complicated status issues within the group: Brazil, South Africa, and India would hardly trade in their second-tier status in institutions dominated by the West for other such institutions dominated by China.

Americans also believe that the BRICS countries might be doing well in recent times because of their adoption of western style markets but in the long run the growth in these countries might not be consistent due to widespread corruption, environmental and social limits infesting these countries. Also if the adequate reforms are brought about in both the IMF and the World Bank, NDB would lose its steam.

Certain strategists also add that merely the establishment of NDB isn’t a serious problem as it does not have profound geopolitical repercussions like the BRICs have not yet proposed their own trading bloc; they aren’t trying to stop the planned Trans Pacific Partnership anchored by the U.S;  they still stand committed to the WTO principles, they aren’t planning a Euro-style currency bloc, they don’t have treaties of mutual defence and support, and they continue to embrace all the status quo institutions of international relations such as the UN, WTO, G20, and the various development banks.

In this sense, they regard NDB as a complement and not exactly a substitute for the existing financial institutions. Since the BRICS collectively account for more than 25 per cent of the GDP and 40% of the world’s population, they can effectively champion the causes of the less developed nations as well as provide much needed additional finance. Also, this decentralization of the global financial power would ease the Bretton Woods twins in its lending role to a great extent. In a given scenario, Washington can also join NDB as a member country if it so wishes provided that the BRICS capital share does not fall below 55%.

Thus the U.S. reactions to the formation of the BRICS bank have been a mixed bag. BRICS Bank is a signal for a pressing need to alter the present financial architecture of the world so that the United States being the sole superpower can bring about reforms and make the financial system more inclusive. What is true today is that the BRICS countries have been responsible for most of the growth in the world economy since the 2007–2008 financial crisis. In this regard, a collective effort by them to alter the frozen realities should not be snubbed but rather welcomed and encouraged. ---INFA

(Copyright, India News and Feature Alliance)