Almost exactly 70 years after the signing of the Bretton Woods agreement, five major emerging economies, known collectively as BRICS, have created new institutions that would initially supplement and could eventually replace the World Bank and the International Monetary Fund, which have failed to respond adequately to the needs of a changing world.
The five countries – Brazil, Russia, India, China and South Africa – announced the creation of a New Development Bank with an authorized capital of US$100 billion and an initial subscription of US$50 billion. Also announced was the setting up of a US$100 billion fund to help developing economies tide over “short-term liquidity pressures”.
It is significant that these countries, which are rivals in many ways – especially China and India – managed to overcome differences. While China could easily contribute more, in the end it was decided that each founding member would subscribe US$10 billion.
But the bank’s size means that its ability to finance projects will be limited.
The inequities of the existing system, which deny an appropriate voice to developing countries, are obvious.
According to World Bank figures, the gross domestic product of Brazil, Russia, India and China together was more than US$15 trillion in 2013, far greater than that of Germany, France, Britain and Italy combined. Yet, in the IMF, these four emerging countries only have 10.3 percent of the vote compared with the 17.6 percent held by the four European nations.
This anomaly has long been recognized and, in 2010, the IMF’s board of governors agreed on reforms, including increasing the voting power of emerging economies by 6.2 percent. However, this never happened.
The United States Congress has refused to approve President Barack Obama’s funding plan for the IMF, blocking an increase in voting power for the emerging economies.
On one level, the BRICS bank can be seen as a supplement to existing institutions. As stated in a BRICS declaration, the new bank “will supplement the efforts of multilateral and regional financial institutions for global development”.
In that spirit, Jim Yong Kim, president of the World Bank, said he welcomed such new establishments. “There is more than enough business for everybody,” he said.
The World Bank has estimated that South Asia alone needs to invest about US$250 billion a year to bridge the infrastructure gap over the next 10 years, while East Asia needs about US$600 billion annually.
The new BRICS bank, which is expected to start lending in 2016, will have a regional office in South Africa. Sub-Saharan Africa has huge infrastructure and developmental challenges and the new bank, established by developing countries, is expected to have a better understanding of these challenges than western-led institutions.
On a different level, however, the BRICS actions can be seen as a challenge to the Bretton Woods system and an attempt to create a new world order, with emerging economies assuming global leadership.
The New York Times reported that the new BRICS bank and contingency fund “reflect ambitions of forging a new global economic framework”.
The newspaper The Hindu editorialized that the new bank “signals the start of a new global financial order”.
China is by far the largest economy in the five-member grouping, with a GDP greater than the four others combined. The new BRICS bank will be headquartered in Shanghai and will enhance that city’s role as a financial center.
The online edition of the People’s Daily, the official Chinese newspaper, said: “In the long term, the NDB will help to rebuild the international financial order and break the major powers’ monopoly of the international financial system. The mechanism of joint development will be open to more developing economies, and form an emerging force.”
The new BRICS bank is also likely to reduce the influence of the US dollar. Already, countries such as Russia, China and India are seeking to make greater use of their own currencies.
As Akshay Mathur wrote in the Financial Times, “since trade payments will be made in five local currencies, a new settlement system will have to be created, outside of the dollar-based system cleared by the US Federal Reserve.” That is to say, there will have to be a mechanism for settlement in local currencies.
This, no doubt, will enhance the attractiveness of the renminbi, China’s national currency, which Beijing has been touting as an international currency.
If the West responds rationally to the BRICS challenge, reform of existing institutions may be hastened. If not, these institutions are likely to be superseded in time by new global forces.
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