1. New BRICS Development Bank and Contingent Reserve Fund. Dramatic shake-up of the global financial system, dominated by Western multinationals since the Second World War
After two years of protracted negotiations, the leaders of Brazil, Russia, India, China and South Africa (BRICS) signed a treaty to launch a BRICS Development Bank when they met at a BRICS summit in the northern Brazilian city of Fortaleza on 15 July 2014.
In documents prepared for the summit, the planned BRICS Development Bank is called the ‘New Development Bank (NDB)’. BRICS countries also set up a $100bn currency reserves pool to help members if they are hit by short-term liquidity crises. The BRICS grouping also signed a memorandum of understanding on cooperation among BRICS export credit insurance agencies to boost trade. South African President Jacob Zuma said “We recognised the huge potential for BRICS insurance and reinsurance markets to break new ground and pool our capacities”.
The BRICS Development Bank will rival the US and European-led World Bank and its private lending affiliate, the International Finance Corporation (IFC), which have dominated development finance since the Second World War. The BRICS Development Bank has been positioned as a bank that will provide developing countries with alternative funding. This development finance comes without the punishing strings attached and particularly reinstating the power of recipient countries to make their own policies.
In addition, the BRICS Development Bank also promises to make lending processes faster, simpler and cheaper, as opposed to the current protracted, complicated and expensive processes undertaken by the World Bank. The BRICS Development Bank will have start-up capital of $50bn, which will be built over time to $100bn. As part of this start-up fund, countries will each put in $10bn in cash over seven years and $40bn in guarantees, which will be used to raise capital on international markets. The BRICS Development Bank will start lending in 2016 and membership will be open to other countries, but the capital share of the BRICS will not be allowed to drop below 55 per cent.
The BRICS bank will be ratified by the parliaments of the individual BRICS member states. The investment rules, management and leadership will be negotiated after ratification of the treaty establishing the bank. The BRICS account for almost half the world’s population and one-fifth of global economic output.
The World Bank sits on a fund of $223bn. The World Bank will lend $61bn by the end of 2014. The UN Conference on Trade and Development forecasts that in a decade the BRICS Development Bank could lend $3.4bn. The bank and the contingent reserve fund will be the first visible, real and practical joint programme of the BRICS countries – which have been under pressure to show that they can act in concert as an emerging market grouping, given their diversity of interests, priorities and global locations.
2. New BRICS emergency fund set up to protect members against financial crises
One of the potential mutually beneficial policies on the BRICS agenda has been the proposal that members should combine their estimated $240bn in foreign exchange reserves to protect individual members from short-term liquidity volatility. The idea would be that the funds would be accessible to individual members as an emergency fund if they experience balance of payment problems.
The BRICS members have set up a $100bn contingency reserves pool (called the Contingent Reserve Arrangement – CRA), denominated in US dollars. This is to help members who face sudden foreign capital flight. China will contribute $41bn to the reserve, Russia, Brazil and India $18bn each and South Africa $5bn. This new contingency reserve fund is also seen as an alternative to the International Monetary Fund (IMF).
The contingency reserve fund will be based on the Chiang Mai Initiative, the emergency fund established by the Association of Southeast Asian Nations (ASEAN) in May 2000. The Chiang Mai Initiative is aligned to the IMF and its rules. If a member of the ASEAN countries is in financial difficulty, it must follow IMF reforms if it wants to access more than 40 per cent of its (the member’s) borrowing quota.
The BRICS members are yet to decide on the final details of the reserve. BRICS, African and developing countries have failed to get industrial nations to give them a greater voice in decision-making at the World Bank and IMF. These institutions continue to advance punishing and inappropriate structural adjustment programmes on developing countries. Policies which dominant industrial countries themselves would never implement in their own economies in return for funding.
The new BRICS contingency reserve fund is also seen as an alternative to the IMF’s much criticised failure to deal with global monetary crises, which have often left developing countries worse off. In January 2014 a mini-financial crisis among many emerging markets saw many experience capital flight, partially following the sudden easing by the United States of its monetary stimulus. The Federal Reserve did this without consulting emerging markets likely to be affected due to the global dominance of the US dollar. On this occasion, the BRICS failed to coordinate their responses to the flight of capital from emerging markets.
The BRICS contingency currency pool will be held as part of the reserves of each BRICS country and will be used to support members experiencing balance-of-payments difficulties. If, for example, China is in a financial crisis, it would be eligible to ask for half of its contribution, South Africa for double its contribution – because of its relatively smaller contribution, and Russia, Brazil and India for the amount they originally contributed to the pool. Brazilian President Dilma Rouseff said at the launch: “It will help contain the volatility faced by diverse economies as a result of the tapering of the United States’ policy of monetary expansion”. The launch statement declared the Contingency Reserve Arrangement would help BRICS countries to deal with ‘short-term liquidity pressures, promote further BRICS co-operation, strengthen the global financial safety net and complement existing international arrangements’.
The BRICS Development Bank and the contingency reserve fund are the first real and practical attempts by developing countries to create an alternative monetary, development finance and trade system. Arguably, this rivals both the Bretton Woods Institutions and ironically the dominance of the US dollar currency – given that the BRICS capital reserves are actually held in US dollars.
3. Differences between members over the BRICS Development Bank has delayed the ratification of the bank and reserve fund until now
Given the diversity of interests of BRICS members, it is not surprising that it has not only been very difficult to get the members to agree on priorities, but it is also very difficult to get them to act in concert. The BRICS have been under pressure to show that it is not just a loose grouping or a talk shop – but a real global emerging force to be reckoned with. Finally agreeing on the BRICS Development Bank and the reserve fund give the grouping a cohesive joint programme to formalise the alliance.
After a long period of negotiations, the BRICS have only been able to agree to establish the bank, but have disagreed on most of the important details. They could not agree on where the envisaged bank would be located, how it should be capitalised or how its funding model would work.
One of the big debates was whether every member will have equitable shareholding, with equal voting rights – in spite of the potential domination of China. The World Bank and IMF do not exercise the principle of equal voting – with Western countries having a bigger say in decisions. Whether other countries should join later was also a thorny issue. India, for example, wanted the founders to allow non-BRICS to join at a later stage. India also wanted to ensure the name of the bank was not exclusionary.
Where the bank should be situated has also been a bone of contention. China wanted the BRICS bank to be located in China. However, other BRICS countries, in particular India, feared that if the bank was based in China, it would be dominated by Chinese financial institutions, such as the China Development Bank. India also wanted the bank to be located in India, as a counterweight to possible Chinese domination.
South Africa wanted the bank to be based in Africa, as a ‘neutral’ location. South Africa has been lobbying to have the new BRICS Development Bank based in Johannesburg as it would essentially serve as an African infrastructure bank. In 2013, South African President Jacob Zuma told delegates at the World Economic Forum on Africa in Cape Town “Africa feels the bank should be established here, particularly because the greater need for the bank is on the continent of Africa”.
However, South Africa’s argument that a BRICS bank should be an African-based one was simply too narrow. Countries such as China and India see a BRICS bank as a global bank, competing with the World Bank and IMF, rather than a specifically Africa focused. India has argued for a BRICS Development Bank to use budget surpluses from BRICS countries to invest in other developing countries, not necessarily in Africa alone.
It was decided that the bank will be based in Shanghai. The bank’s first chair of the board of governors will be from Russia, the chair of the board of directors from Brazil and the president of the bank will be from India. The BRICS development bank’s regional office will be based in South Africa.
Having contributed the largest amount, there is a real danger that China, whose foreign exchange reserves are three times larger than those of the four other member states combined, will dominate the BRICS foreign reserves pool. The big question is whether China would have a significant command over the new bank – and its future practices. India in particular, has pushed for equitable shareholding, with equal voting rights for all members, regardless of their economic weight.
4. What could the BRICS bank offer Africa?
BRICS countries have proposed setting up a BRICS-Africa Council to accelerate trade and investment between BRICS countries and Africa.
Africa desperately needs reliable and cheaper long-term development finance, which is not consistent with the restrictive World Bank and IMF conditions. A typical example has been Joyce Banda, the former Malawian President, who in May this year lost the elections partly because she was forced to introduce ruinous reforms by the IMF, including devaluation of the currency and abolishing subsidies for the vulnerable and help to farmers, in return for development aid. These reforms unleashed widespread popular anger. A BRICS Development Bank may offer new hope to African and developing countries such as Malawi.
The bank could also be a source of finance for infrastructure, not only for member states, but also for Africa. It could potentially provide the finance for development and infrastructure Africa so desperately needs.
Finance for infrastructure is often difficult to secure for African countries. Given the financial difficulties experienced in the aftermath of the global financial crisis – that many industrial economies in Western Europe and North America still find themselves in – traditional sources of funding may also dry up for Africa. But the BRICS could provide finance to build Africa’s manufacturing sectors – crucial for meeting the expanding demand for jobs and thereby significantly reducing inequality and poverty.
The mere presence of a BRICS bank which does not adhere to the World Bank and IMF’s structural adjustment philosophy may strengthen the hands of African governments to develop more independent and relevant national development policies. The BRICS Development Bank may also offer African countries new development aid alternatives which do not come with punishing conditions.
For most of the post-war period, African countries were not given the ‘policy space’ to make independent economic or political decisions . Without question, African countries need to grasp the opportunity that the BRICS Development Bank provides for developing quality development policies.
The bank could also help Africans secure better investment deals in their negotiations with traditional multilateral banks and the private sector. The establishment of a BRICS Development Bank and the prospect of new competition may also finally bring accountability, responsiveness and inclusivity to the World Bank and IMF – which have long been in short supply.
The BRICS Development Bank offers African countries the potential for new ideas on development, sustainable technologies and institutional innovation. The World Bank and IMF not only appear to suffer from a crisis of credibility in the developing world, but also from a poverty of ideas. As a case in point, the two institutions largely failed to resolve or mitigate the effects of the recent global financial crises, whether in individual economies or regionally (e.g. the Eurozone crises).
5. The BRICS bank: No panacea for Africa and developing countries
Of course, the very difficult issues of deciding on the investment rules, management and leadership of the new BRICS Development Bank will only be negotiated after the ratification of the treaty establishing the bank.
There is no guarantee that a BRICS Development Bank would not attach as onerous a suite of conditions as the World Bank or other development financial institutions. In addition, it might not prioritise the development and infrastructure policies important to African economies. The reality is that only if to ameliorate risks, the BRICS Development Bank is likely to attach conditions to its lending to Africa and developing countries. Most individual current BRICS development banks, such as the Brazilian Development Bank (BNDES) lend at market rates to African countries. Or, in the case of the China Development Bank, aggressively pursue commercial interests abroad.
There is also absolutely no guarantee that the envisaged BRICS inspired development bank would be more development-oriented than the Bretton Woods Institutions or other global or regional development agencies. Of the BRICS countries, only South Africa has foreign investment guidelines – which are rarely enforced – to hold local companies to account, in terms of good governance, respect for human rights and the environment when operating overseas.
Although the BRICS development founders have said they will allow African and other developing countries to secure shares in the new bank, it is not yet clear whether the bank would be just another club, not unlike the World Bank is for the rich. The BRICS bank could be merely the preserve of large emerging powers.
Africans will have to learn the lessons from their unequal and disadvantageous engagement with traditional development institutions and strike smarter partnerships, through African development banks, state-owned enterprises and the private sector, as well as the BRICS Development Bank.
6. What can BRICS civil society groups do to ensure the BRICS Development Bank provides more accountability than the World Bank and IMF?
The jury is still out as to whether the BRICS Development Bank and the contingent reserve fund will be substantially different in their development approaches compared to the World Bank and IMF – which they have so passionately criticised. Furthermore, the big question remains whether the BRICS bank will be based on good corporate governance. BRICS civil society groups, the media and academics will have to work together to ensure the BRICS Development Bank pursues lending that is ecologically sustainable, promotes inclusive economic growth and development and bases its operations on good corporate governance.
The very first thing that BRICS civil society groups will have to do is to monitor the investment activities of the BRICS Development Bank and make certain such information is widely available. BRICS civil society groups do not currently have sufficiently broad-based platforms in BRICS institutions to influence decision-making. This is a major shortcoming, which BRICS civil society groups will have to agitate for.