Building with BRICS

INWARD INVESTMENT
By Shirley Redpath, Thursday, May 9th, 2013

As all five of the BRICS nations have their own development banks, the debate
continues on whether one monetary bank should be implemented to benefit
infrastructure, and which country should house it
The headlines seemed to say it all: “BRICS nations fail to launch new bank” – Aljazeera; “BRICS fail
to launch bank to challenge West” – The Jakarta Globe. The BRICS nations’ March summit in
Durban, South Africa ended without the funding and modus operandi of a BRICS development bank,
first mooted by India at the 2012 summit, being fleshed out.
While many observers were quietly smug, participants at the summit seemed to think proceedings
went rather well. The host, President Jacob Zuma of South Africa later said, “We are satisfied that
the establishment of a new development bank is feasible. We have decided to enter formal
negotiations to establish a BRICS-led new development bank.” One might wonder if a BRICS
development bank is actually needed.
At an estimate, there appear to be over 100 national and international development aid agencies
already at work. All of the five BRICS nations currently have their own national development banks,
as does all of the G7 group of nations. some countries on the economic sick list like Spain, Italy and
Ireland, oil-rich nations from the Middle East and tiny states like Liechtenstein and Slovakia.
Building stronger banks
Among the international development banks are the African (AfDB), Inter-American (IADB), Asian
(ADB), Andean (CAF), and European (EBRD and European Investment Bank). Most of the other 23
multilateral agencies grew out of Bretton Woods initiatives designed to create monetary stability
among independent member states – the World Bank and IMF.
Traditionally, development banks were intended to channel public money into major infrastructure
projects that were too large and long-term to be financed from other commercial sources. In most
cases the argument in support of using public finance was the social and economic benefits of
bringing transportation, communication, environmental and production facilities to an area. The
same argument supported the extension of funding from richer nations to those in the so-called
developing world.

Often, however, fund providers couldn’t resist the urge to attach conditions that recipients saw as
unfair restrictions on their commercial and sovereign rights. Increasingly, the IMF and World Bank
have been seen as being dominated by the west and operating a western political agenda, a view
supported by the fact that those institutions have consistently drawn their chiefs from either Europe
or the US, despite a growing percentage of financial contributions coming from emerging economies.

Traditionally, development banks were intended to channel
public money into major infrastructure projects that were
too large and long-term to be financed from commercial
sources
The outgoing President of the World Bank Robert Zoellick acknowledged that “policy makers [of the
bank] will need to break free of old constraints to connect the private sector to public policies”.
Zoellick has also expressed his support for the idea of a BRICS bank, saying, “If they decide they
want another financing vehicle – fine. Let’s figure out how to work with it… I’m enough of an
economist that I’m not a monopolist.”
A new paradigm
“The BRICS believe that Bretton Woods is archaic and too focused on the US and European world
view,” says Brent Eastwood, International Affairs Analyst with the Langley Intelligence Group
Network. “They believe that they are the dynamic and essential world economies and that they are
the real engines of growth.”
Together, the BRICS nations make up 40 percent of the world’s population and 25 percent of global
GDP in terms of purchasing power parity. According to an IMF forecast in January 2012, the five
BRICS countries were expected to contribute 56 percent of the world’s growth in GDP for the year,
compared to just nine percent from the G7 group of nations. Current estimates put BRICS-held
foreign currency reserves at $4.4trn.

Source: IMF. Figures post 2012 are IMF estimates.

Trade within the group surged to $282bn last year, from $27bn in 2002, and estimates suggest it
may reach $500bn by 2015.Trade with the rest of the world soared from $1trn in 2002 to $4.3trn in
2008. To help fund the estimated $4.5trn in infrastructure spending needed over the next five years
without having to resort to the condition-bound finance offered by the World Bank, BRICS nations
plan to create a new model of south-south co-operation and financing.

The initial plan is for each country to kick in $10bn to fund a development bank whose stated goals
are to support infrastructure investment and increased commerce between themselves. “The idea for
this bank is a win-win,” says global management and strategy consultant, Kathleen Brush.
“Developing countries are becoming increasingly wealthy. They should be taking on a bigger role
and they should focus in their backyards, where they have a lot to gain by neighboring economic
development. “It also makes sense that developing countries might have different terms for the loans
than those from the developed country led World Bank. They are probably more sensitive to the
challenges of developing countries.”

Source: IMF. Figures post 2012 are IMF estimates.

A difference in opinion
Clearly, the devil is going to be in the detail. The first issue to be ironed out is location. The siting of
World Bank headquarters in Washington DC is seen as evidence of US control over its affairs.
Not surprising, then, that China, as the largest economy in the group, wants the BRICS development
bank headquarters to be located in China, and others in the group are wary. Other key decisions
include what currency it will use, how much each country will contribute and how much influence
each will have over the bank’s affairs.
“Obviously there are many unanswered questions for this scheme, including who runs it, how will it
be paid for, and how will it work,” says Eastwood. “It could take years to iron all that out. But they
seem to have agreed in principle on the concept. I take that at face value and I take it seriously.”
There are also cultural and internal governance issues to be dealt with. Writing for Bloomberg,
Leonid Bershidsky points out that Vladimir Putin’s recent suggestion that some of the country’s
accumulated reserve funds of $172bn might be used to stimulate Russia’s economy has opponents
worried that enormous amounts of that wealth could just end up in the hands of corrupt officials.
“None of the five BRICS nations rank in the top ten countries for ease of doing business,” notes
Nzube Ufodike, founder of place4BRICS. “As a result, the main challenge a BRICS bank will face
will be one of perception. Many will expect it to be corrupt or inefficient. “On the plus side, many
banks in these [as well as other emerging] countries have robust financial ratios that are the envy of
western banks and financial institutions. It will be interesting to see the final structure of a BRICS
bank in terms of governance, financials, remit and long-term goals.”
Common enemy
There are many reasons why the plan should not work. Without the dominant leadership seen in the
US-led Bretton Woods institutions, BRICS partners will struggle to find common ground. Although
each of the five economies enjoys an enviable rate of growth, they are vastly different in size,

composition and regulation. They have different forms of government, have fought bitter wars with
each other and work toward very different foreign policy objectives.
Yet they have a mutual bond – the BRICS nations share a frustration and disillusionment with the
western-dominated IMF and World Bank. Associate Professor of International Relations at
Georgetown University, James Vreeland points out that the IMF and World Bank, responding to US
concerns over the problem of ‘moral hazard’. The promise of liquidity during economic crises
tempting governments in lesser-developed countries to spend with abandon, have traditionally
imposed conditions on their loans that demanded the implementation of austerity policies.
These conditions led to lower economic growth in recipient countries – despite the fact that
industrialized countries responded to economic crises with stimulus packages, and managed to
rebound more quickly. Even more painful were the ‘structural adjustment programs’ imposed by the
IMF that required recipients to open up their economies to foreign corporations, focusing their
investments on providing cheap labor and commodities for richer nations rather than developing
their own industrial base.
In 2005 Brazil started a new trend; the country paid off its IMF loans early in order to free itself from
conditionality – and many other emerging economies decided to do the same. The IMF was facing
declining revenue flows until the global financial crisis hit in 2008, when, ironically, it was the debtstrapped countries of the developed world that was knocking at its doors.
“The world is drifting towards a major global rebalancing, which will involve a significant realignment
of global currencies,” says Jan Dehn, Co-Head of Research at Ashmore Investment Management.
“At the heart of this rebalancing lies a conflict between the Heavily Indebted Developed Countries
(HIDCs) as debtors – and emerging markets – as creditors. Emerging markets largely funded the
excessive spending in the HIDCs. Rebalancing on the global economy will likely involve a fight over
how to distribute the eventual losses arising from the decades of excessive debt-fueled spending by
the HIDCs.”
Working through old problems
What worries some observers in the west – as well as in recipient countries – is that as emerging
economies start to flex their economic muscles in the international arena, they are showing how well
they have learned the lessons of what has often been called economic imperialism. In this respect
China has been leading the way, loaning large sums of money to countries in Latin America and
Africa, which the recipients are expected to use to buy Chinese provided goods and China-led
projects to extract natural resources.

Together, the BRICS nations make up 40 percent of the
world’s population and 25 percent of global GDP in terms of
purchasing power parity
In a recent article in the Financial Times, the governor of Nigeria’s central bank Lamido Sanusi
writes, “China is no longer a fellow underdeveloped economy – it is the world’s second-biggest,
capable of the same forms of exploitation as the west. It is a significant contributor to Africa’s
deindustrialization and underdevelopment.”
Transparency is also an issue. The BRICS countries still have large domestic populations struggling
with poverty, so may not want to publish the extent of their international loans and aid. When aid
money is transferred ‘under the radar’ of international inspection it becomes easy for corrupt
governments to redirect its use to their own political aims.

“It is noteworthy that the global ‘best practice standards’ adopted and required by the World Bank
and its affiliates, as well as other leading donor institutions, are not necessarily promulgated by the
BRICS,” notes law partner Walter White, who has worked with many international development
agencies and chaired the board of the Central Asian American Enterprise Fund. “It would be a
shame if the new BRICS institutions backed away from fair labor policies, commitment to
enhancement of the conditions for women, global standards for corporate social responsibility, noncompliance with EU and US sanctions and a variety of other seemingly critical standards.”
But now it would appear that the west would not be able to dictate social and economic objectives to
the rest of the world for much longer. Although the proposed new development bank has taken all
the headlines, the latest BRICS summit was the scene for many other bilateral agreements that will
actually move emerging countries away from the US dollar dominated trade and institutions.
China and Brazil, the two powerhouse economies in the bloc, agreed a bilateral currency swap line
that will take up to $30bn of trade annually out of the US dollar. The Joint Business Council was
formed to encourage trade and investment between members, and a joint foreign exchange reserve
pool was created of up to $240bn to help members ride out economic crisis without resorting to the
western dominated Bretton Woods institutions.
“I would argue that emerging markets are not acting nearly quickly or decisively enough, and
certainly not employing the power they possess,” Jan Dehn summarizes. “Today, emerging market
central banks control some 80 percent of the world’s foreign exchange reserves, or $8.7trn. It should
therefore be entirely clear that emerging markets have sufficient resources to completely control
global currencies, and hence the unwinding of global imbalances. What is now required is the
exercise of leadership.”