Opinionista Patrick Bond 20 September 2013

Are BRICS of any use for rebuilding the collapsing global financial architecture?

Much has been made about the possibilities of BRICS in helping to stabilize the chaotic financial climate. But the BRICS experiment won’t stand or fall on narrow grounds of development finance; there are geopolitical factors to consider as well. Do the BRICS New Development Bank and Contingent Reserve Arrangement differ significantly from their Western analogues?

In its most recent world public opinion survey, the Pew Research Centre found that only a third of South Africans identified “international financial instability” as a major threat (third highest, after climate change and Chinese economic competition) compared to 52% of those polled across world (for whom it was a close second, after climate change at 54%).

Our relative ignorance is a shame, for since freedom was won in 1994, the SA currency (the rand) has collapsed seven times by more than 15% within a few weeks, a miserable record bested only by the late Zimbabwe dollar. I think our society’s rather blasé attitude reflects soothing messages coming from the financial industry and its government allies.

For example, in late August as the rand started to tank, finance minister Pravin Gordhan intoned, “We have a floating exchange rate, which will be able to absorb some of the shocks emerging from events that we have little control over at this time”.

Actually, it is precisely because that the rand “floats” without the kinds of flotation-type protection we had in earlier years – especially local exchange controls (the “finrand” from 1985-95) and the US financial regulations destroyed during the late 1990s by the Clinton administration so New York bankers could earn higher profits – that our currency is so very, very volatile.

The float will get far more turbulent once the vast balance of payments deficit caused by the flight of profits and dividends to former SA companies now mainly listed on overseas stock markets pushes the SA foreign debt above $150-billion. That point will arrive in 2014, leaving us the same ratio of debt to GDP that PW Botha encountered 30 years earlier (after which nothing could stay the same).

But Gordhan sometimes shows a panicky side. In a Financial Times interview during a US monetary policy conference last month, he complained of his peers’ “inability to find coherent and cohesive responses across the globe to ensure that we reduce the volatility in currencies in particular, but also in sentiment”.

The following week, at the St Petersburg G20 meeting, Gordhan joined others in the Brazil-Russia-India-China-South Africa (BRICS) network to congratulate themselves about a forthcoming BRICS New Development Bank and Contingent Reserve Arrangement (CRA).

But could these two infants challenge the Bretton Woods Institutions in the chaotic world financial environment in the coming years? Nearly seven decades after the World Bank and International Monetary Fund (IMF) were established to restore Western interstate banking following the Depression and World War II, BRICS stands at the verge of replacing Washington and its neoliberal ideology with South-centred, state-aided capital accumulation.

That is the rhetoric, at any rate. But especially in the last few weeks, the question of whether BRICS strategies are profoundly different from – or rather reinforcing of – the global financial architecture’s self-destruction remains to be answered. After all, one of the CRA’s objectives, according to South African Treasury officials, is to “complement existing international arrangements”.

As for the BRICS bank, critical details regarding institutional leadership and location were promised initially at the Durban Summit in March and then in Russia prior to the G20 finance ministers and heads of state summit. The details did not materialise at either meeting, but there are sufficient indications available of what might be expected.

A $50-billion BRICS bank capitalization wouldn’t initially challenge the World Bank (which lends almost that much every year). And a $100-billion CRA would quickly be exhausted in the event of a more serious financial meltdown. Perhaps these sums can be increased in coming years, since they are pitiable amounts to face off against emerging-market financial melting of the sort witnessed since the mid-1990s, where numerous countries have needed a $50-billion package overnight so as to halt financial looting.

Financial Times, 5 September 2013

The BRICS economies face upheaval in 2013. To illustrate, in recent weeks trillions of dollars worth of paper assets have shifted around, driving quite intense currency crashes in most BRICS. As a result of an announced change in US Federal Reserve policy in which a bit less artificial stimulation (“Quantitative Easing”) will be provided to banks thanks to Fed “tapering”, interest rates more than doubled over a few weeks, leading to dramatic outflows from emerging markets and the crash of the South African rand, Brazilian real, Russian rouble and especially the Indian rupee.

Swedish economist Anders Aslund of the Peterson Institute for International Economics was scathing in a Financial Times article in late August: “The BRICS party is over. Their ability to get going again rests on their ability to carry through reforms in grim times for which they lacked the courage in a boom”. Former South African opposition party leader Tony Leon added, in Business Day, “The investor community’s love affair with developing-market economies has soured. The romance has been replaced by recrimination”.

And Goldman Sachs banker Jim O’Neill was asked by the Wall Street Journal last month about the acronym he had created a dozen years earlier: “If I were to change it, I would just leave the ‘C’”. The Economist opined, “The Great Deceleration means that booming emerging economies will no longer make up for weakness in rich countries”.

The Economist, 27 July 2013

Tempting as it is to write off the more neoliberal of BRICS-pessimist commentators, their confidence grows from several countries’ deep-seated problems, not just momentary financial fluctuations. Yet one BRICS member will potentially thrive, and in my visit to three Shanghai universities last week to discuss the (re)brewing economic crisis, I was struck by how insistent Chinese scholars defended the “reform-minded status quo” (sic) strategy.

As reported last week in the China Daily (reflecting official sentiments), local experts predict that the BRICS bloc is already breaking up in material ways, leaving only China to push ahead through the storm. As Tsinghua University economist Li Dokui remarked, the end of the US Fed’s Quantitative Easing is “good news for the renminbi” because it need no longer rise in value – but meantime, “the concept of the BRICS may vanish, leaving just China versus other emerging economies”. According to Merrill Lynch economist Lu Ting, “China will be largely immune to the impact due to its sustained current-account surplus, low foreign debt, huge exchange reserves, high savings and capital controls”. Offering official multilateral acknowledgment of severe danger, deputy IMF managing director Zhu Min warned that if China opens its capital account by liberalizing the currency, it would “exacerbate” the global crisis – which is typically an observation an IMF man would repress.

There are, however, some who believe the BRICS can help fix problems caused by the end of the commodity cycle, by fiscal austerity and by credit constraint. Yet strategies advocated by BRICS leaders have so far had no discernible effect on financial volatility. Within the IMF, for example, Chinese voting power has risen substantially but left no genuine change in the institution’s agenda. As University of Delhi professor emeritus Achin Vanaik argued at a Fudan University “Rising Powers” workshop last week, “The Asian Monetary Fund and Chiang Mai Initiative, originally seen as countervailing financial power, ended up not opposing but complementing the IMF”.

As for the World Bank, its presidency was grabbed by Barack Obama’s nominee Jim Yong Kim in 2012, without a united response from the BRICS. The Brazilians nominated a progressive economist, Jose Antonio Campo; the South Africans nominated neoliberal Nigerian finance minister Ngozi Okonjo-Iweala; and the Russians supported Kim. As for China, the reward for not putting up a fight was getting leadership of the Bank’s International Finance Corporation for Jin-Yong Cai, while an Indian, Kaushik Basu, was made World Bank chief economist. And also reflecting assimilation not antagonism, in 2012 the BRICS contributed $75-billion to the recapitalization of the IMF, which meant that while China’s voting share increased, Africa’s decreased.

Thus it was reasonable to ask, with scepticism, whether the BRICS leaders were really serious about challenging Bretton Woods. After all, there was an alternative already in place that they could have supported: the Bank of the South. Founded by the late Venezuelan president Hugo Chavez in 2007 and supported by Argentina, Bolivia, Brazil, Ecuador, Paraguay and Uruguay, Banco del Sur already has $7-billion in capital. It offers a more profound development finance challenge to the Washington Consensus, especially after Ecuadoran radical economists improved the design.

Instead, a much more durable reflection of the commitment to stabilizing world finance – rather than radically changing the most unfair and intrinsically destabilizing components – is China’s ongoing financing of Washington’s massive trade deficit, by continuing to hold more than $1.3-trillion of Treasury Bills. The Chinese refuse to sell sufficient T-Bills in order to genuinely weaken Washington’s power, and to set up a new currency that the world could more democratically manage, instead of the Fed with its bias to the interests of the world’s largest banks.

Notwithstanding rhetoric about increasing use of BRICS currencies, not much more is being done to end the destructive system in which the US dollar has world “seignorage”, i.e. it is the world’s reserve currency, no matter how badly Washington officials abuse that power. If China really wants the renmimbi to one day take its place, the pace at which this is happening is agonizingly slow.

Worse still, in close alignment with Washington, South Africa explicitly supports financial liberalization. SA Reserve Bank deputy governor Daniel Mminele acknowledged last November that Pretoria opposed global regulation such as the “Robin Hood tax” on financial transactions that was supported by more enlightened countries, including those from Europe being roiled by global financiers.

Meanwhile South Africa’s own precursor to the BRICS bank, the Development Bank of Southern Africa (DBSA), has been run in a “shoddy” way, according to the new chief executive Patrick Dlamini last December, implying that corruption had been tolerated. Dlamini then announced both a 40% cut of his 750-strong staff, starting with environmentalists and social specialists, and a massive increase in privatisation financing. “Are the right people leaving the DBSA?”, asked Business Day’s development reporter Carol Paton. “The reason why the bank got itself into a financial mess in the first place was bad investments from which it hoped to make some money. It still has not come clean about what the bad investments were.”

In contrast, the man tasked with ensuring the DBSA’s revitalization in the region is Mo Shaik, who trained as an optometrist but became the leading spy in the Zuma government. But because of his gossiping of political secrets to US embassy officials (later published by WikiLeaks), because of notorious political squabbling which he often lost (e.g. a decade ago when accusing the national public prosecutor of being an Apartheid-era spy), and because he had no development finance experience, Shaik’s appointment to a top DBSA job last year was generally considered bizarre.

The BRICS experiment won’t stand or fall on narrow grounds of development finance. There are geopolitical factors to consider, for while the world economy is now working against BRICS, turbulent relations between the BRICS and the G7 actually left Russia far stronger after the G20 summit. In St Petersburg, the BRICS unanimously backed Vladimir Putin’s attempt to peacefully revolve the Syrian crisis once chemical weapons were apparently used by the Assad regime against rebels, leading to Barack Obama’s threat to bomb Damascus. Brazil also took a tough stance against the US National Security Agency; president Dilma Roussef was so furious about Obama’s snooping on her (and parastatal oil giant Petrobras) that she cancelled a Washington trip scheduled for next month.

But the “talk-left” that is so common in the BRICS foreign policy milieu is invariably negated in the “walk-right” by Treasury and central bank officials. So the dangers grow greater, not because of a South-North political confrontation, but because of the lack of an economic one. DM

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