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The BRICS New Development Bank: Force or farce?

14664765842_71555a78c1_zBrazil. Russia. India. China. South Africa.

What do all of these countries have in common? Not much. But as the leading developing economies of the world, collectively known as BRICS, the group gathered once again for its sixth annual summit last week. This time, much more than usual was accomplished.

At this year’s meeting in Brazil, building upon the last two summits and years of preparation, the New Development Bank (NDB) was officially announced. As many have already noted, this new BRICS-led institution directly rivals the Bretton Woods institutions led by the United States. Like the World Bank, the NDB will act as a multilateral development bank and support capital-hungry emerging economies; like the IMF, the also newly-minted Contingent Reserve Arrangement (CRA) will act as an international lender during economic crises.

But, with already existing development banks for every region of the world, why is this newcomer so pivotal at this moment in history? To answer this, let’s take a look at some history.

Old world, new friends

In the final years of WWII, after one previous war and two decades of economic turmoil between the two, the Allied nations gathered in New Hampshire for the United Nations Monetary and Financial Conference. Better known as the Bretton Woods Conference, this meeting gave rise to a new international monetary framework and the famed institutions mentioned above.

Almost simultaneously, the US began its ascent to world political and economic dominance. Never before had the modern world seen such a superpower, and–coincidentally–never before had the same world seen so many nations work together for economic and monetary stability. Naturally, national interests played a role in the conference: all of the new institutions would be headquartered in Washington, the US dollar would become the global anchor currency, and ultimately, the US could successfully replace Britain as the world’s geopolitical and economic hegemon.

Indeed, the world of international financial institutions is an old one. Since 1944, both the World Bank and the IMF have operated efficiently, although not without widespread controversy. Amidst this incessant protest against systems favoring Western/European nations over developing ones, it was almost guaranteed that rising powers would eventually sidestep Washington and create their own institutions. Though the US Fed’s ominous exit from quantitative easing has played a recent role, the impetus for this new BRICS initiative is largely created by Congress’ failure to pass much needed IMF quota reform. Pivot to Asia? Not quite enough. With countless political crises on the table, Obama and most of his administration have turned a blind eye to all international finance issues.

(Courtesy of the IMF)

Courtesy of the IMF

In this old world, the BRICS nations have forged a new group of powerful friends. This nascent club will undoubtedly recognize nations for what they are truly worth–China has the world’s second largest economy, yet a layman would never discern this from vote allotments in the World Bank and IMF (see visual above). But how will this club of almost-developed nations operate? Are these new friends actually, well, friends? Though in theory the BRICS’ system will look similar to that of Bretton Woods, the political dynamics in this relatively bipolar group stand in stark contrast to those of the largely multipolar World Bank and IMF. The long term success of this project will be fundamentally tied to its systems, policies, and the goodwill and cooperation of its increasingly restive member states.

Fail to plan, plan to fail

From the few days of negotiations and planning, it seems as if the NDB and CRA are ready for launch. Leaders set the initial capital of the bank at 50 billion US dollars, and mandated another $100 billion for the contingency fund. And in full multilateral spirit: the bank will be headquartered in Shanghai with a regional center in South Africa, the first president will be Indian, and the first chairs of the Board of Governors and Board of Directors will be Russian and Brazilian, respectively. Everyone is happy, right? Not until some lingering questions are answered:

1. What currency will this bank use for its exchanges and reserves?

This is perhaps the most pressing question still left unanswered. Will the Chinese RMB be chosen as the natural underdog in an ostensibly impossible race to rival the US dollar as the world’s currency of trade? What will the other four friends think? Though a lot is left to be determined policy-wise, this post outlines an interesting, viable option for a new financial architecture.

2. Who takes the leadership role, if anyone?

During the Bretton Woods Conference, it was clear the US was the emerging leader as the top creditor in the world at that time (the wartime economy helped quite a bit too). Nowadays China holds that spot, with almost 4 trillion US dollars in its foreign exchange coffers. Remember that new $100 billion Contingent Reserve Arrangement? $41 billion will be supplied by China alone. As the BRICS bank gains ground, expect to see some jostling over who gets to hold the reins. Will the bank be commanded by the largest contributors? That would only perpetuate the equity problems that plagued the IMF. Will geopolitical status determine leadership? If so, small developing nations will have to face Russia, China, or both at once–a daunting task in any shape or form.

3. What about human rights and the environment?

In the summit’s Fortaleza Declaration, the five members’ commitment to “human rights” was mentioned eight different times. One look at Tibet, Ukraine, or women in India, and almost all legitimacy to those claims is lost. Questionable claims at a summit are a potential good start, but these nations will have to start addressing human rights violations at home before BRICS is seen as a true contender for world leadership. Another game-changing factor will be how the NBD deals with growing environmental issues. The World Bank has long eschewed investments relating to coal, appeasing Mother Nature but leaving the lights off in many developing nations. The NBD will likely take a more lenient approach. Striking a balance on this and other environmental issues is key, as is addressing the concerns of environmental groups and NGOs. Expect human rights and the environment to arise in discussions for years to come.

Without cogent solutions to these three questions, or at least some semblance of a long-term plan to address them, the BRICS bank will face early uphill battles to achieve legitimacy and truly rival the big players. Indeed, some scholars have predicted an early failure for this unlikely partnership.

If the NDB does ever become a successful multilateral development bank, there will still be questions: everything not bank-related.

Just a bank, or much more?

Going back to the years immediately after WWII, with the Soviet Union uncomfortably close to war-torn nations struggling to recover, economic support became the weapon of choice for the Truman administration. As then Secretary of State George Marshall said in his speech announcing the Marshall Plan:

It is logical that the United States should do whatever it is able to do to assist in the return of normal economic health in the world, without which there can be no political stability and no assured peace.

With that Plan–and the Truman Doctrine preceding it–US policymakers stumbled upon the inextricable relationship between economics and geopolitics.

So is this rejuvenated BRICS partnership merely economic, or are there political motives as well?

Though so many have labeled the NDB as an attempted counterweight against US and European dominance, that might not be the intent or outcome. Even the Brazilian president Dilma Rousseff claims they “don’t have the slightest interest in renouncing [the IMF]”, though the NDB “will always have a different stand” concerning developing nations. And with over 40 percent of the world’s population under their wings, the BRICS nations absolutely have a stake in international peace and security.

But on the other hand, a closer Russia and China is a scary thought. Both have strong positions in geopolitics and international institutions, robust militaries and nuclear weapons, resilient economies–and both have been quite troublesome recently in surrounding sovereign territories, to put it nicely. Although it is highly unlikely BRICS will become some sort of Global South entente rivaling the West, the other three democracies will have to keep Russia and China in line. As in the past, economic friendships can quickly turn into global political/military alliances (see: NATO).

The future of BRICS and its proudly created project is still unclear, and many policies still need to be drawn out. Only time will tell whether the New Development Bank shakes up global economics and development, or world politics, or even nothing at all.

But for a lot of developing nations, infrastructure projects in need of funding, and investment institutions with extra cash, time is a limited commodity. As the age-old adage goes: Time is money.

-JW

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This entry was posted on July 24, 2014 by in International Institutions.

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