Can BRICS change global finance order?

The IMF chief, Christine Lagarde’s infirm statement congratulating BRICS leaders upon establishing a Contingent Reserve Arrangement during their meeting in Fortaleza, Brazil, said more than the actual text.
The IMF headquarters in Washington. (Internet photo)
The IMF headquarters in Washington. (Internet photo)

The IMF chief, Christine Lagarde’s infirm statement congratulating BRICS leaders upon establishing a Contingent Reserve Arrangement during their meeting in Fortaleza, Brazil, said more than the actual text.

Quite understandable because a successful BRICS Development Bank (BDB) will be a direct brick thrown at the IMF and the World Bank’s current hegemony over global financial status quo.

The two have played the role of ‘global finance Police’ for decades, during which they authored a financial system upon which over 200 economies stand. They have retained near monopoly over development loans and have seen desperate countries toil to meet strict conditionalities before accessing funding.

The IMF and World Bank reign has registered success and disaster in almost equal measures — helping dozens of developing countries to chart successful economic paths on one side but also leading the world to a near economic shutdown in 2008, on the other hand. 

That is evidence that there’s no shock-proof system and the mantra of reforming, especially the IMF for a more inclusive international financial order, has been gaining ground with the BRICS nations among those singing loudly for emerging economies to be given more powers in decision making. 

Unfortunately, calls for reform have hitherto been blocked especially by the USA, by far the biggest stakeholder in the 188-member Fund. For example, the US Congress in January refused to ratify a capital increase for the IMF agreed four years ago. Technically, the 2010 reform would double the IMF’s equity capital to $720bn and shift six percentage points of total quota to developing countries as well as moving two of the 24 IMF directorships from Europe to developing countries.

The announcement of BDB could actually put pressure on the US to allow reforms and this makes October 12, 2014 a very critical date in IMF’s history as it’s the set deadline for reforms during the organisation’s annual meetings in Tokyo, Japan.

The reforms would be a rebalance of voting powers within the IMF and USA which holds 16.7 percent voting rights has a lot at stake. At the centre of the BDB is China, the World’s second largest economy but with just 3.8 percent voting clout slightly more than Italy’s 3.1 percent. If those reforms are passed, China’s voting clout is set to double to 6 percent.

In April, Britain urged the US Congress to stop delaying approval of reforms, warning that failure to ratify “is bad for the institution and bad for the international community.”

During IMF’s annual meetings, there’s no doubt that those agitating for reforms will have a solid brick to throw at the opposition in form of this proposed BDB and could Americans yielding.

But can a BRICS development bank really turn tables on the current hegemony?

To answer that, one has to look at the members that form the grouping. In China, India, Russia, Brazil and South Africa, the BRICS make up 40% of the world population. And in China, the group also has the most trading economy in the world. This simply means that the group is a major client the IMF cannot afford to lose.

That could be why the IMF chief sounded mollifying in her statement when she said: “The IMF has a very strong relationship with all the BRICS nations, which are key members of this institution. We look forward to further strengthening our collaboration.”

Technically, the IMF is actually offering help to BRICS to build their own fund. In doing so, the IMF would remain dominant and a patron of this potential rival by possibly designing its modus operandi — only time will tell whether the BRICS can let this happen or not.

But no matter what happens, the BDB imitative will be a nice addition to options from which countries can source funding for critical projects such as infrastructure, whose funding resources available is in deficit.

For instance, it’s estimated that while there is over $1 trillion annual demand for infrastructural funding from countries, the World Bank can only afford about $60billion. This deficit has increased competition for loans and enhanced World Bank’s monopoly while creating excuse for more stringent conditionalities. 

These conditionalities have hurt developing countries such as those in East Africa, most. For instance, recently, the World Bank had to withhold a loan to Uganda over the passing of what was seen as an offending law against gay rights.

While the BDB will in principle be for members, there’s talk that other developing economies such as Rwanda will be welcome to seek alternative funding.

There has also been a buzz regarding where the BRICS Bank will be located and African countries in particular have been excited following indications that South Africa could win the hosting rights. How that helps the continent is not immediately clear but going by who is contributing how much to the bank, China could be the obvious destination.

China is expected to contribute the bulk of the capital worth $41 billion while Brazil, India and Russia will chip in with $18 billion each and South Africa $5 billion.

But this BRICS development also prompts the question as to whether ‘group financing’ could be the future development model for likeminded nations. For instance, in BRICS one has five emerging powers creating a reserve fund to help each other with balance of payment difficulties. Russia could be the first to benefit from such a move given its ongoing trade sanctions battle with Europe.

From regional economic blocks, there seems to be a new discourse where members want to customize their resources and build more independence — from currencies to own banks. The East African Development Bank (EADB) in which Rwanda has a 1 percent stake is a good example aiming to promote development in East Africa.

 

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