Eroding international economic governance or strengthening it? The case of the creation of the BRICS Bank and of the CRA

Bruno De Marco Lopes

On July 14-16, the BRICS (Brazil, Russia, India, China and South Africa) will gather for its 6th summit. The key announcements we have been told to expect include the creation of a development bank (BRICS bank) and a currency reserve agreement (CRA). These initiatives are considered huge steps towards the consolidation of the BRICS grouping as a global player. They may also suggest a sign of fragmentation of global economic governance. At a time in which the legitimacy and efficiency of the Bretton Woods institutions have been questioned, the creation of the BRICS bank and of the CRA has been perceived as a threat to the economic order maintained by the West and may represent an undermining of international economic governance. I argue, however, that rather than being a threat to the global economic order, the creation of a new development bank and of a scheme such as the CRA only will strengthen the global economic order and that these initiatives can be perceived as an answer by the BRICS to the sluggish pace of the reforms of the International Monetary Fund (IMF) and the World Bank. The BRICS have insisted that these new institutions are designed to complement current international economic arrangements, pointing to the kind of international governance the BRICS envisage for the future (BRICs Leaders 2012).

The idea of creating a development bank and a currency reserve agreement first came up at the fourth BRICS summit in New Delhi in 2012 (BRICs Leaders 2012). However, this idea seems to be rooted in the 2008 financial crisis and in the slow pace of quota and governance reforms in the IMF. Therefore, rather than trying to erode the current global financial architecture, these initiatives should appear to have the aspect of trying to fill gaps of lack of representation in international financial institutions and of creating mechanisms capable of dealing with new contemporary financial problems. They are more complementary in nature than competitive with the current financial structure.

The structure of the development bank and the operational guidelines of the CRA have not yet been released in detail, but the information that has been published allows us to make some inferences. The BRICS bank will be created, apparently, with a starting capital of USD50 billion (each member contributing equally) and its main objective will be to finance infrastructure and sustainable development projects in the developing world. As opposed to the World Bank, the loans of the institution probably will not have conditionalities. Furthermore, loans will be provided at lower costs if compared to market rates – on concessional terms, in other words. The BRICS expect to double the bank’s capital in five years. BRICS members will hold approximately 55% of the shares of the bank and new members can join the bank with as little as USD100,000 per share (Soto 2014). It is expected that the BRICS bank will start its operations in 2016.

The CRA will be created as an emergency fund and will likely be used to forestall short-term liquidity pressures. The arrangement might allow for its members to have USD100 billion at their disposal. As opposed to the BRICS bank, in which the members will have equal shares, China will be the largest contributor with some USD41 billion, while Brazil, Russia and India will each contribute USD18 billion. South Africa will provide the smallest contribution, USD5 billion. The resources of the CRA will be available only to the BRICS and a technical committee will analyze each request for funds before making the resources available (Paraguassu 2014).

 

Moving from design to the operational stage

Perhaps the first hurdle for the creation of the BRICS development bank is its very implementation. Questions such as what the bank’s norms will be, who will run the institutions and decide what projects will be funded, and where the bank will be located are still unanswered. A number of these questions will probably continue to be unanswered, even after the 6th summit in Fortaleza (Brazil). In addition to that, one wonders how fast the BRICS legislatures are going to approve this initiative. To complicate the scenario, later this year, Brazil will hold a presidential election and it is hard to say if an opposition party would defend the creation of the Bank if it were to secure governmental control.

In regard to the headquarters, rumors are that Shanghai (China) will host the bank (Ninio 2014). The Chinese government attempted to push forward a proposal in which it would invest more money than the other members in the bank. The other members refused because they wanted to be equals. Giving China the headquarters appears to be a way to allow the bank to be organized in an egalitarian form.

 

Main implications for international economic governance

Is defiance of the status-quo order the main reason for the BRICS bank creation? It doesn’t seem that such a narrow and simplistic view explains the Bank’s creation.. They seem to be boosting their international status by signaling that they can be “responsible stakeholders” in the current world order. At the same time that they are still pushing for the reform of the IMF and the World Bank within the rules of these institutions (BRICS Leaders 2013). Currently, there is a gap between the available resources allocated by multilateral development banks to fund infrastructure projects and the quantity demanded (Griffith-Jones 2014). The BRICS bank would be therefore an important step in filling this gap.

Any analysis of the creation of the BRICS bank leads almost inevitably to wondering how much the experience China has acquired with the Chinese Development Bank (CDB) and how much knowledge Brazil has gained with its Brazilian National Development Bank (BNDES). Both banks have funded infrastructure projects in Africa and South America without any ‘strings attached’. Actually, in these kinds of projects, these banks tend to favor their domestic companies. BNDES, for instance, can only fund infrastructure projects in which Brazilian firms are responsible for the contract. There will probably be similar logic with the BRICS bank.

Other important issue that has been raised includes what kind of environmental and human rights standards the BRICS bank will adopt (Beattie 2014). These types of standards have been in the spotlight for international civil society, which has played a major role in making the World Bank adopt them (which made their policy of loans more complex). Since neither the CDB nor the BNDES impose these kind of standards in their current policy of loans, there has been a certain fear that the BRICS may jeopardize these global standards.

In turn, the creation of the CRA – an idea advanced by the Brazilian government – is an answer to the lack of political resolve involved in the IMF’s reform (Yukhananov 2013). In the discussions at the G20 on the reform of the IMF, the BRICS have conditioned their support to the institution to its reform. They increased their participation in the New Arrangement to Borrow (NAB) on these terms. Notwithstanding that after 4 years that the G20 leaders agreed upon the IMF’s quota reform at the summit in Seoul, nothing has been done. The BRICS are therefore creating an arrangement on which they can rely.

 

Strengthening, not eroding

Rather than a threat to international economic governance, the BRICS bank will help to advance reforms in the financial system (Griffith-Jones 2014). Its creation has emphasized the ineffectiveness of the current architecture of the financial order and has paved the way for related debate. Furthermore, the BRICS are willing to put more money towards projects of development. Skeptics may argue that they are doing this in detriment to environmental and human rights standards, which would be a major setback. However, being a multilateral initiative, the BRICS bank will be probably pressed to be a transparent institution and to be attached to some standards. Furthermore, it will have to be accountable to its members’ societies.

Whether or not it is a threat to the current order, the BRICS bank will have to overcome a first challenge: to become an existing and functioning institution. Its creation in Fortaleza (Brazil) will be the first step, but there will be much more work to be done after that. The BRICS will have to demonstrate that their political will is strong enough to set a new institution into the global economic order and that what they envisage for the international economic governance can be advantageous for every nation.

 

References

BRICs Leaders. “Fourth Summit: Delhi Declaration and Action Plan,” March 29, 2012. http://brics6.itamaraty.gov.br/category-english/21-documents/68-fourth-summit.

Soto, Alonso. “EXCLUSIVE – BRICS Emerging Nations close to Launching Bank; to Start Lending in 2016.” Reuters. Accessed July 2, 2014. http://in.reuters.com/article/2014/05/29/brics-banking-idINKBN0E92DI20140529.

Paraguassu, Leandra. “Para Governo Brasileiro, Não Há Muito O Que Fazer – Economia.” Estadão, June 28, 2014. http://economia.estadao.com.br/noticias/geral,para-governo-brasileiro-nao-ha-muito-o-que-fazer-imp-,1520040.

Ninio, Marcelo. “Banco de Desenvolvimento Dos Brics Terá Sede Na China,” June 8, 2014. http://www1.folha.uol.com.br/mercado/2014/06/1466848-banco-de-desenvolvimento-dos-brics-tera-sede-na-china.shtml.

BRICS Leaders. “Fifth Summit: eThekwini Declaration and Action Plan,” March 27, 2013. http://brics6.itamaraty.gov.br/category-english/21-documents/69-fifth-summit.

Griffith-Jones, Stephany. “Guest Post: A New BRICS Bank to Mark Global Shift.” Financial Times. 2014. Accessed July 2, 2014. http://blogs.ft.com/beyond-brics/2014/06/03/guest-post-a-new-brics-bank-to-mark-global-shift/.

Beattie, Alan. “A BRICS Bank: Can It Outdo the World Bank?” Financial Times. Accessed July 2, 2014. http://blogs.ft.com/beyond-brics/2014/06/19/a-brics-bank-can-it-outdo-the-world-bank/.

Yukhananov, Anna. “Analysis – Stalled IMF Reforms Could Leave Fund on Shaky Ground | Reuters,” October 2, 2013. http://uk.reuters.com/article/2013/10/02/uk-imf-reforms-analysis-idUKBRE9911A420131002.

 
 

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