The
BRICS grouping of the emerging markets made up of Brazil, Russia, India, China
and South Africa came up with a bold decision to create its own development
bank which will rival the US backed World Bank and International Monetary Fund.
This is a bold decision in that the BRICS are not only breaking with a
traditional establishment but have clearly stood up to the inequities of
Bretton Woods through action rather than mere rhetoric. However, is the financial
world and the BRICS countries themselves ready for a new development bank. Will
the BRICS bank outdo the World Bank and IMF and create a new financial order?
One
thing for certain is that the BRICS grouping is more united by common dislike
for a world financial system whose influence comes from Washington, London,
Paris, Berlin and Tokyo. This goes
beyond economic spheres but politics plays a significant role too. China and
Russia want to have more say in world politics, South Africa wants to play a
leading role as Africa’s messiah, and India and Brazil have equally become
important such that they can’t be just ignored in world affairs.
This
then poses a unique problem. Being
united by a common enemy rather than goal does not sustain a relationship. Most
of the reasons BRICS countries have put up for the establishment of their own
development bank are more to do with the dislike of Bretton Woods rather than
what they would want to achieve out of their own bank.
This
is much evident in the wrangles which have dogged this establishment on who
gets the first presidency, which country hosts the headquarters and who
provides what stake. These are petty issues which cannot be allowed to take
centre stage in a grouping which wants to concentrate on real business.
The
developing world cannot agree more to the notion that the World Bank and the
IMF are bullies when it comes to the provision of financial packages. They
force nations to dance to their own tunes. Some of the stringent measures the
Bretton Woods institutions have always maintained include the unpopular budget
cuts, privatisation, deregulation and opening up of economies. Harsh and
unpopular as they seem to be, measures which come from Bretton Woods are meant
to sprout economic efficiency. BRICS do want these preconditions imposed on
them but still one would question the rationality of such thinking because in
any credit provisioning scenario, stringent measures have got to be in place.
Credit
risk is a demon in the world of finance and with the BRICS countries proposing
a New Development Bank which will play an active role in supporting other
developing nations they cannot simply ignore a stringent credit rationing
process just like the one employed by World Bank and the IMF. Ignoring such
measures will only expose themselves to enormous risk which the developing
world bears.
The
BRICS have proposed a $100 billion fund which will provide relief to member
countries faced with short term currency problems and persistent Balance of
Payments problems. They have dubbed it the Contingent Reserve Arrangement (CRA)
and would want to model it around the Chiang Mai Initiative (CMI) of the
Association of South East Asian Nations although the CMI employs some of the
IMF recommendations. The biggest contribution to this $100 billion currency
reserve pool will come from China which will churn out $41 billion. Brazil,
Russia and India will contribute $18 billion each and South Africa will provide
$5 billion.
Currently
the South African economy is gripped with labour unrests, a huge external debt
which is 38.2% of the total Gross Domestic Product and stagnant economic
growth. Recently Standard and Poor’s downgraded South Africa’s credit rating to
BBB, one notch above the junk status. Is South Africa therefore able to afford
the $5 billion it is required to contribute at a time its economy is sneezing
and coughing all at once. Considering that everything the BRICS wishes for has
come into place is South Africa going to be afforded the same treatment as
other nations in the grouping considering its low $5 billion capital
contribution and mountain of economic challenges.
Turning
the attention to India and Brazil one can look no further than the unconvincing
budget that was recently announced by the Indian Finance Minister in New Delhi
and the protests that were staged by Brazilians, mainly civil servants, in Rio
de Janeiro and other cities just before the World Cup. It clearly shows that
these countries have more pressing problems which are bigger than just focusing
on a BRICS bank. As things stand China and Russia are the only nations which
enjoy the comfort of having time off and contemplating on a BRICS bank largely
because they can simply afford it. China has got the highest foreign reserves
in the world and Russia’s economic health has become stronger by each year.
The
global lender which BRICS countries have tentatively named the New Development
Bank will also initially start with a capital base of $100 billion with each
member country contributing $10 billion and the rest coming from other
countries which might be interested in signing up to the idea. As stated
earlier some of the member countries will not afford that amount. Affordability
is not only constrained to resources but rationality and economic thinking have
to be put into perspective. To an ordinary South African, Indian or Brazilian
it does not make sense to have their government pooling resources for a
development bank when they still have domestic economic problems in place and
still can deal with already established institutions like the World Bank and
IMF.
For
the $50 billion balance BRICS countries expect it to come from the
contributions of countries which will or might sign up. However the question
which begs an answer is whether the developing countries out of BRICS have
warmed up to the idea. Most of the developing countries still have obligations
with the IMF and World Bank. Some countries mostly African and those from the
Middle East still have their fiscal requirements supported by agencies with IMF
and World Bank backing and they will not simply pull that plug for the sake of
a new development bank with new ideologies. On top of it most developing
countries cannot afford (both in resources and economic rationality) to invest
in the New Development Bank.
A
doomsayer as we might seem to be the idea of a BRICS bank requires rational
thinking and analysis because the current developments do not lead to an
articulate product. The BRICS countries need to be guided by a common goal
rather than expressing themselves as a co-operation of different characters
with a mutual enemy.
The
World Bank President Jim Kim said, “…We think that the need for new investments in infrastructure
is massive, and we think that we can work very well and cooperatively with any
of these new banks once they become a reality."
WE HOPE THAT THE BRICS BANK BECOMES A
REALITY TOO MR PRESIDENT!!
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