Now that the jeroboams of champagne have been drained by the delegations from the five BRICS nations over their announcement of two new financial institutions, is there more flash than flesh? J. BROOKS SPECTOR takes a first look.
As most people already know, a senior salesman’s fancy patter and flashy packaging to encourage the sale of sovereign debt bonds under the Goldman Sachs flag (and thus yield an attractive commission) was the immaculate conception of the BRICS group – rather than any initiative by one of the members of the now formalized grouping. Initially, uber-salesman Jim O’Neill had defined the rapidly rising economies of China, Russia, Brazil and India as the go-go places for those-in-the-know, who should invest their smart money with Goldman Sachs’ picks in those markets and get a jump on things, before everyone else figured it all out as well.
But, in a strange quirk of the world’s political-economy, the chief marketeers, er, top leadership, of the aforementioned four nations decided there actually was a geopolitical niche for some kind of international grouping to breathe real life into O’Neill’s marketing prospectus. And, as a bit of a lagniappe, a pasella, such a grouping could also become a nice, easy way to kick a bit of sand in the faces of the West and the international financial institutions the West had under its protective wing – or nefarious control – depending on just how one felt about them, because of the iniquities of the weight of control over those institutions, relative to the actual strength of the BRIC economies.
In the fullness of time, i.e., some three years ago, determined to expand the BRIC franchise into Africa, after a full-court press’ worth of lobbying by South Africa to be picked for the team, and then a decision to favour local South African vanity from the likes of China, the local folks were publicly invited to take one basic BRIC and make BRICS out of it. Some acronyms just write themselves, it seems. Of course that happened just before the revaluing of the Nigerian economy meant that country’s economic heft was actually bigger than South Africa’s so perhaps there is now just a tinge of buyer’s remorse afoot, but they’ll never tell.
Anyway, at last year’s BRICS summit in Durban, in an effort to turn the heretofore rather insubstantial but glitzy meetings into something more substantive, the leaders had publicly agreed to launch a BRICS bank and an international financial stabilization fund, along with the more usual business forums and the like. More sand in the face of the West, perhaps. In this effort to supplant the place of the now-venerable Bretton Woods financial arrangements and institutions, this new bank was going to become an agile competitor to the World Bank, while the new international stabilization fund would become a fearsome alternative to the International Monetary Fund. A key rationale for establishing these institutions was to set up some international financial competition not subject to the western dominance via its voting shares – shares that lean to the West even as relative levels of the western economies versus the BRICS ones had been shifting the BRICS’ way in recent years as a result of years of high growth, led by China, India and Brazil.
And so, at the just-concluded BRICS summit in the Brazilian coastal town of Fortaleza – perhaps scheduled to show off Brazil’s much anticipated victory celebration, after they had won this year’s World Cup against some hapless opponent (thereby proving that some things just can not be pre-programmed with 100% certainty) – the formal establishment of these two BRICS multilateral financial institutions was announced with much fanfare. For the bank, creatively named the New Development Bank (NDB), the assessment of its initial capitalization of $50 billion was to be divvied up among the five member nations in equal shares, with each making initial $2 billion contributions, stretched out over a seven-year period.
The remainder of the capital would constitute a kind of international promissory note on the five nations’ sovereign guarantees. Once the bank actually begins to come into being, the five nations would have an equal vote in the governing of the new institution, and the long-term plan is to eventually round out the bank’s capitalization at the $100 billion mark. Eventually.
Meanwhile, the $100 billion intended for the financial stabilization fund is to be apportioned in spread roughly consistent with the economic heft of the five member nations. The fund’s purpose is to be a safety net ready to help tamp down the exchange rate furies that would begin to rage should one of the member nations face a future currency crisis. For this Contingent Reserve Arrangement, as it is to be called, each nation’s central bank is supposed to earmark funds that could be used in the event of one of those crises that send a national currency spinning like a lopsided top. For this specific pool of funds, at the meeting in Brazil, the BRICS nations agreed that China would contribute $41 billion, South Africa would ante up $5 billion, while the other three nations would set aside $18 billion each – for a total of $100 billion.
But, is there really a need for this pair of new institutions? Ousmène Jacques Mandeng of Pramerica Investment Management has noted, “Development finance is already crowded. Apart from the multilateral and regional institutions, there are several such sub-regional institutions as the Caribbean Development Bank, the Islamic Development Bank and myriad national development banks like China Development Bank and Brazilian Development Bank (BNDES). BNDES is now much bigger than the World Bank in terms of gross disbursements; it even has branches in South Africa, the UK and Uruguay. Overlap and duplication, conflicts between national, regional and multilateral interests are frequent and unavoidable – making the case for another development bank underwhelming.” Hmm.
Discussing the presumed governing principle of the new bank, the Financial Times reported, “Guido Mantega, Brazil’s finance minister, said one of the big differences between the Brics’ vision of a new global financial architecture and the existing US-centred system was the principle of equality among the stakeholders. ‘In the Brics bank, we will have equal power,’ he says…. ‘Unlike the IMF, whose leadership is always European, and the World Bank, whose president is chosen by the US, the Brics bank will have a five-year rotating presidency, with each country getting a turn’….”
In the run-up to this year’s summit, in fact, from the moment of the announcement of this bank last year, the big questions were inevitably going to be: where would the bricks and mortar of this new bank actually be headquartered – and who would be in charge of it. While South African government types kept punting the idea that Johannesburg, well, actually, Sandton, was perfect for this role and that it was in the running, in the end, South Africa didn’t even make the short list of finalists. Shanghai and Mumbai did. And the ultimate choice was, not surprisingly, Shanghai.
Writing for the Institute for Security Studies, veteran foreign news editor Peter Fabricius explained, “South African officials professed to be confident that the four other members would graciously step back and allow their newest member to take the bank. After all, were not South Africa and Africa’s development needs the most dire? But even before they reached Durban, the South Africans were shocked to discover that everyone wanted to host the bank and vigorous negotiations ensued. The Russians jumped the gun last week by leaking that Shanghai would get the bank, and that South Africa had not even been shortlisted as New Delhi was the only alternative. Despite this, President Jacob Zuma and his team – particularly Trade and Industry Minister Rob Davies – continued to lobby at Fortaleza. When it became clear that China really wanted the bank and would very likely get it, Zuma pulled out his fallback position, a regional centre for South Africa…. Spin doctors hailed the decision as a triumph for South Africa and for Africa, of course, although it looked more like a consolation prize.” In the end, while India gets to pick the bank’s head, Brazil will provide the first chairperson of the board of directors and Russia first chairperson of the board of governors.
And South Africa seems to have gotten the international financial equivalent of the Miss Congeniality crown. That’s the runner-up prize given to a beauty contest entrant who is not the prettiest or most talented one, but the most “congenial” one. On the face of it, such a decision may be a warning bell about the benefits South Africa will actually accrue from the NDB, in comparison to its planned significant investment in the two financial structures (relative to the size of its economy), and the fact that the country is already scrambling for the capital it needs for its own already planned infrastructure development needs.
Given the enormity of China’s entry into Africa, including its hunger for the continent’s commodity resources, as a market for its exports, and due to its predominant capital involvement in the NDB, it may be reasonable to assume there will be pressure to bend the bank’s disbursements toward helping underwrite Chinese infrastructure projects and absorbing some of the risk of such projects in the less salutary, wilder parts of the continent. And given its own competitive instincts vis-à-vis China, India might well be right behind its Asian rival in trying to turn things its way, given the fact that it will have a hand on the bank’s tiller.
Of course that just gives rise to other questions about this bank’s structure and operations. Aside from the interesting point that the NDB’s capitalization arrangements are still denominated in US dollars, despite the fact that one of the rationales for it in the first place was to reduce BRICS dependence on the US dominance of the global financial system, even if its members carry out their financial pledges, it doesn’t exactly look like it will be able to go toe-to-toe with the World Bank any time soon. In its current model, the NDB’s funds would equal less than 4% of the World Bank’s resources. Moreover, it is going to have to invest its capital not on loan somewhere in order to generate income. Most analysts argue that the bank would put some in US treasury bonds or something similar, despite the fact this would be in the very capital markets it presumably wants to supersede.
Beyond that, a key motivating factor for the NDB has been to get beyond the conditionalities of the gimlet-eyed guardians who manage the World Bank’s loan processes, and insist on intrusive things like reasonable rates of return, government transparency and protections against corruption and backroom dealing.
Over the past decade or so, a key factor in Chinese involvement abroad has been an avowal of a doctrine of non-intervention in the domestic arrangements of countries receiving loans or aid instead of those sometimes-messy requirements for transparency and the like. The challenge is that so many of the very loans the NDB would most likely be involved in would be for big money government projects and lots of opportunities for problems – as well as the chance such loans could be determined for political reasons rather than for their investment or development merits.
In this regard, Fabricius adds, “Perhaps the clue to the perceived need for the NDB in Africa might be found in its lack of conditionality in lending money, which South African officials have hinted at, though this has not been stated publicly. Will it therefore fill that risky gap that the likes of the World Bank and private lenders dare not, by financing questionable projects, until they become bankable? In any case, the decisions at Fortaleza taken as a whole, made very clear – if it was not clear before – that the overall priority of BRICS is much bigger than development and more ideological. It is nothing less than creating an alternative pole of financial and economic power to that of the West…. As one South African official said, a Shanghai base fitted much more closely, ‘the broader BRICS goal of developing an alternative financial architecture removed from London, New York and Frankfurt.’ It also of course represents China’s own global ambitions.”
The Financial Times underscored this point, noting, “Chinese leader Xi Jinping sees a geopolitical role for the Brics as part of his new push to set up an alternative to US ‘hegemony’. ‘China wants to go on being taken, especially among its Asian neighbours and in Africa and Latin America, as one of them, as a power from the south, a developing nation,’ says Marcos Troyjo, co-director of the BRICLab forum at Columbia University. ‘This bank will end up providing a service for China in that regard. It gives China a sort of still-emerging nation status when in reality it is a major economic superpower.’ ” While China has “unmet expectations” about the World Bank, IMF or Asian Development Bank, Zhao Xijun, deputy director of the School of Finance at Renmin University in Beijing, argues that China is also seeking some better returns for its horde of foreign currency reserves, most of which are currently invested in US Treasuries, and about which there are fears that they might value in the future.
In dealing with South Africa’s motivations, meanwhile, Fabricius warns, “An alternative pole in the hitherto unipolar world clearly offers South Africa alternatives. But it should tread carefully, to avoid its own interests – and even its national identity – being swamped by more powerful hegemons as surely as those Western ones it is supposedly trying to flee.”
In any case, despite these geopolitical goals, the NDB will end up needing their own conditionalities to choose between competing demands for investments in addition to coming up with ways to evaluate the ability of borrowers to repay the loans or for the various projects to be evaluated on developmental, environmental, and regional economic integration terms – as well as any of a half dozen other grounds. Otherwise the decisions on such loans could simply become political tugs of war between the BRICS members’ political goals.
Some observers seem to think the results are rather less important than the announcement would seem to argue for. As Ousmène Jacques Mandeng of Pramerica Investment Management notes, “[F]or those seeking hard evidence of what this summit signifies, it may be a damp squib. The five countries share little beyond subscription to a marketing acronym dreamt up by Goldman Sachs. Unlike many multilateral groupings, they are geographically far-flung, depriving them of the relevance of contiguity. They vary vastly in size and heft – China’s economy is 24-times larger than South Africa’s – suggesting that attempts at equality in power sharing could be a struggle. But it is in the profound levels of co-operation required to organise and run such a bank that the Brics grouping confronts its stiffest test. As the group’s largest creditor nation, much of this burden is likely to fall on China. But Beijing is so unaccustomed to acting as a multilateralist that its ability to exercise effective leadership must be in question.”
Regardless, even before the NDB opens its doors, the respective parliaments of the five member nations need to ratify the agreement and the respective levels of funding envisioned for the two institutions. While that would almost certainly be near-automatic in China and probably Russia as well, given the political realities in the other three nations, there is likely to be hard questions about these financial commitments in the coming months and years ahead.
Even if the respective parliaments make their commitments, the Financial Times notes potential potholes in the pathway. “‘The agreement deserves applause,’ says Douglas Rediker at the Peterson Institute for International Economics in Washington, ‘but it’s a small first step in creating a new institution on the global stage worthy of being spoken about in the same breath as the IMF and the World Bank.’ The fund and the bank embody a set of rules that members know they must operate by, Mr Rediker says, and have a strong capacity both to monitor their borrowers and to enforce conditions on their loans. The test of the new Brics institutions will come when one of the members runs into trouble and demands a big loan. How will its counterparts react?”
For those who see the NDB and the financial stability institution as a panacea for the imbalances in the world financial institutions, there are miles to travel and years to go before the NDB releases its very first dollar, renminbi, rand, real, rupee or rouble to a BRICS-designated development project. In the meantime, the rest of the international financial community likely will see these potential developments as a challenge to them to become more competitive and more effective as international lenders – and for the commercial markets to find new ways to reach out to the world’s fastest-growing economies as well. DM
Photo: Presidents Dilma Rousseff (C) of Brazil, Vladimir Putin (L) of Russia, Xi Jinping (2R) of China, Jacob Zuma (R) of South Africa and Indian Prime Minister Narendra Modi (2L) pose for the family photo during the opening event of the 6th Summit of the BRICS in Fortaleza, Brazil, 15 July 2014. EPA/Jarbas Oliveira
Brics nations to create $100bn development bank on BBC
Shanghaied in Fortaleza: South Africa discovers its place in the BRICS pecking order on ISS Today
Emerging economies: Taking a stand in the Financial Times
The Brics try to reshape the world in the Financial Times
Russia and China Plan Own Rating Agency to Rival Western Players in the Financial Times
BRICS’ nations to form development bank to rival World Bank, IMF in the Los Angeles Times
Can BRICS development bank become a rival to the World Bank? in the Christian Science Monitor
Brics nations to host bank headquarters in Shanghai at Business Day
The Brics try to reshape the world at the Financial Times
Bladerunner (1980s version) is a visual feast due in large part to the Hollywood Actors Strike. This allowed the designers an extra three months to refine the sets and props.