By Daya Thussu
LONDON, Jul 22 2015 (IPS)

The formal opening of the BRICS Bank in Shanghai on Jul. 21 following the seventh summit of the world’s five leading emerging economies held recently in the Russian city of Ufa, demonstrates the speed with which an alternative global financial architecture is emerging.

The idea of a development-oriented international bank was first floated by India at the 2012 BRICS summit in New Delhi but it is China’s financial muscle which has turned this idea into a reality.

Daya Thussu

The New Development Bank (NDB), as it is formally called, is to use its 50 billion dollar initial capital to fund infrastructure and developmental projects within the five BRICS nations – Brazil, Russia, India, China and South Africa – though it is also likely to support developmental projects in other countries.

According to the 43-page Ufa Declaration, “the NDB shall serve as a powerful instrument for financing infrastructure investment and sustainable development projects in the BRICS and other developing countries and emerging market economies and for enhancing economic cooperation between our countries.”

The NDB is led by Kundapur Vaman Kamath, formerly of Infosys, India’s IT giant, and of ICICI Bank, India’s largest private sector bank. A respected banker, Kamath reportedly said during the launch that “our objective is not to challenge the existing system as it is but to improve and complement the system in our own way.”

The launch of the NDB marks the first tangible institution developed by the BRICS group – set up in 2006 as a major non-Western bloc – whose leaders have been meeting annually since 2009. BRICS countries together constitute 44 percent of the world population, contributing 40 percent to global GDP and 18 percent to world trade.“Our objective is not to challenge the existing system as it is but to improve and complement the system in our own way” – Kundapur Vaman Kamath, head of the New Development Bank (NDB)

In keeping with the summit’s theme of ‘BRICS partnership: A powerful factor for global development’, the setting up of a developmental bank was an important outcome, hailed as a “milestone blueprint for cooperation” by a commentator in The China Daily.

The Chinese imprint on the NDB is unmistakable. The Ufa Declaration is clear about the close connection between the NDB and the newly-created Asian Infrastructure Investment Bank (AIIB), also largely funded by China. It welcomed the proposal for the New Development Bank to “cooperate closely with existing and new financing mechanisms including the Asian Infrastructure Investment Bank.” China is also keen to set up a regional centre of the NDB in South Africa.

If economic cooperation remained the central plank of the Ufa summit, there is also a clear geopolitical agenda.

The Global Times, China’s more nationalistic international voice, pointed out that the establishment of the NDB and the AIIB will “break the monopoly position of the International Money Fund (IMF) and the World Bank (WB) and motivate [them] to function more normatively, democratically, and efficiently, in order to promote reform of the international financial system as well as democratisation of international relations.”

The reality of global finance is such that any alternative financial institution has to function in a system that continues to be shaped by the West and its formidable domination of global financial markets, information networks and intellectual leadership.

However, China, with its nearly four trillion dollars in foreign currency reserves, is well-placed to attempt this, in conjunction with the other BRICS countries. China today is the largest exporting nation in the world, and is constantly looking for new avenues for expanding and consolidating its trade relations across the globe.

China is also central to the establishment of the Shanghai Cooperation Organisation (SCO), a Eurasian political, economic and security grouping whose annual meeting coincided with the seventh BRICS summit. Founded in 2001 and comprising China, Russia, Kazakhstan, Kyrgyzstan, Tajikistan and Uzbekistan, the SCO has agreed to admit India and Pakistan as full members.

Though the BRICS summit and the SCO meeting went largely unnoticed by the international media – preoccupied as they were with the Iranian nuclear negotiations and the ongoing Greek economic crisis – the economic and geopolitical implications of the two meetings are likely to continue for some time to come.

For host Russia, which also convened the first BRICS summit in 2009, the Ufa meeting was held against the background of Western sanctions, continuing conflict in Ukraine and expulsion from the G8. Partly as a reaction to this, camaraderie between Moscow and Beijing is noticeable – having signed a 30-year oil and gas deal worth 400 billion dollars in 2014.

Beijing and Moscow see economic convergence in trade and financial activities, for example, between China’s Silk Road Economic Belt initiative for Central Asia and Russia’s recent endeavours to strengthen the Eurasian Economic Union. The expansion of the SCO should be seen against this backdrop. Moscow has also proposed setting up SCO TV to broadcast economic and financial information and commentary on activities in some of the world’s fastest growing economies.

Whatever the outcome, it is clear that a new international developmental agenda is being created, backed by powerful nations, and to the virtual exclusion of the West.

China is the driving force behind this. Despite its one-party system which limits political pluralism and thwarts debate, China has been able to transform itself from a largely agricultural self-sufficient society to the world’s largest consumer market, without any major social or economic upheavals.

China’s success story has many admirers, especially in other developing countries, prompting talk of replacing the ‘Washington consensus’ with what has been described as the ‘Beijing consensus’. The BRICS bank, it would seem, is a small step in that direction.

Edited by Phil Harris    

The views expressed in this article are those of the author and do not necessarily represent the views of, and should not be attributed to, IPS – Inter Press Service. 

Excerpt:

By Shyam Saran
NEW DELHI, Jul 23 2014 (IPS)

The sixth BRICS Summit which has just ended in Brazil marks the transition of a grouping based hitherto on shared concerns to one based on shared interests.

Since the inception of BRICS (bringing together Brazil, Russia, India, China and South Africa) in 2009, it has been seen as a mainly flag waving exercise by a group of influential emerging economies, with little in terms of convergent interest other than signalling their strong dissatisfaction over persistent Western dominance of the world economic, financial as well as security order, but unable to fashion credible alternative governance structures themselves.

However, with the Fortaleza Summit finally announcing the much awaited establishment of the New Development Bank (NDB) with a 50 billion dollar subscribed capital and a Contingency Reserve Arrangement (CRA) of 100 billion dollars, the monopoly status and role of the Bretton Woods institutions – the World Bank and the International Monetary Fund (IMF) – stand broken.

Shyam Saran

True, it may take the NDB and the CRA considerable time and experience to evolve into credible international financial institutions but that clearly is the intent.

BRICS leaders have kept the door open for other stakeholders, but will retain at least a 55 percent equity share. They have also been careful to declare that these new institutions will supplement the activities of the World Bank and the IMF, and this has also been the initial response from the latter.

Nevertheless, the emergence of an alternative source of financing with norms different from those followed by the established institutions will alter the global financial landscape irreversibly.

It may be noted for the future that the one component of the global financial infrastructure where Western companies still remain supreme is the insurance and reinsurance sector. Global trade flows, in particular energy flows are almost invariably insured by a handful of Western companies which also determine risk factors and premiums.

In Brazil, the BRICS countries have given notice that they will examine the prospect of pooling their capacities in this sector. A more competitive situation in this sector can only be a positive development for developing countries.“The emergence of an alternative source of financing [BRICS Bank] with norms different from those followed by the established institutions will alter the global financial landscape irreversibly”

The BRICS initiatives were born out of mounting frustration among emerging countries that even a modest restructuring of the governing structures of the Bretton Woods institutions, to reflect their growing economic profile, was being resisted. The commitment made in 2010 at the G20 to enlarge their stake in the IMF remains unfulfilled while the restructuring of the World Bank is yet to be taken up.

The longer the delay in such restructuring, the more rapid the consolidation of the new BRICS institutions is likely to be. It is this factor which played a role in helping resolve some of the differences among the BRICS countries over the structure and governance of these proposed institutions.

The setting up of the BRICS institutions owed a great deal to the energy and push displayed by China. It is doubtful that the proposals would have been actualised had China not put its full weight behind them and showed a readiness to accommodate other member countries, in particular India. Russia became more enthusiastic after being drummed out of the G8 and subjected to Western sanctions.

Chinese activism on this score must be seen in the context of other parallel developments in which China has also been the prime mover and sometimes the initiator. These are:

1. The proposal for setting up an Asian Infrastructure Investment Bank (AIIB) to fund infrastructure and connectivity projects in Asia, in particular, those which would help revive the maritime and land “Silk Routes” linking China with both its eastern and western flanks. The parallel with the NDB is hard to miss.

2. The consolidation of the Chiang Mai Initiative Multilateralisation (CMIM) and the associated Asian Multilateral Research Organisation (AMRO) among the Association of Southeast Asian Nations (ASEAN) + 3 (China, Japan and the Republic of Korea). The CMIM is now a 240 billion dollar financing facility to help member countries deal with balance of payments difficulties. This is similar to the 100 billion dollar CRA set up by BRICS.

AMRO has evolved into a mechanism for macro-economic surveillance of member countries and provides a benchmark for their economic health and performance. This would enable sound lending policies and may very well be linked in future to the AIIB. The CMIM and the AMRO thus provide building blocks which could serve as the template for the NDB, the CRA and the AIIB.

3. In addition to the CMIM and the AMRO, there are ongoing initiatives within ASEAN + 3 to develop a truly Asian Bond Market which could mobilise regional savings into regional investments through local currency bonds. To support this initiative, a regional Credit Guarantee and Investment Facility has been established. A Regional Settlement Intermediary is proposed to facilitate cross-border multi-currency transfers.

These developments are taking place just when there is a rapidly growing Chinese yuan-denominated bond market, the so-called dim-sum bonds, which have become an important source of corporate financing. This reduces the dependence on euro and U.S. dollar-denominated bonds. The NDB could tap into this market to build up its own finances.

It is important to keep in mind this broader picture in assessing the significance of the decisions taken at the Fortaleza Summit. In systematically pursuing a number of parallel initiatives, China is attempting to create an alternative financial infrastructure which would have it in the lead role. The dilemma for other emerging countries is that there appear to be no credible alternatives, especially since the Western countries are unwilling to cede any enhanced role to them.

The Fortaleza Summit marks the beginning of the end of the post-Second World War Western dominance of the global economic and financial order. The existing institutions will now have to share space with the new entrants and may be compelled to adjust their norms to compete with the latter.

The prime mover behind the establishment of a rival network of financial institutions is China, whose global profile and influence is likely to increase as the various building blocks it has put in place come together to shape a new global financial architecture. This is still in the future but the trend is unmistakable. (END/IPS COLUMNIST SERVICE)

Excerpt:

Chandrasekhar Chalapurath, an economist at Jawaharlal Nehru University in New Delhi, talks about development banks in India, at the International Seminar on the BRICS Bank. Credit: Mario Osava/IPS

By Mario Osava
FORTALEZA, Brazil, Jul 17 2014 (IPS)

The creation of BRICS’ (Brazil, Russia, India, China and South Africa) own financial institutions was “a disappointment” for activists from the five countries, meeting in this northeastern Brazilian city after the group’s leaders concluded their sixth annual summit here.

The New Development Bank (NDB) and the Contingent Reserve Arrangement (CRA), launched Tuesday Jul. 15 at the summit in the northeastern Brazilian city of Fortaleza, represent progress “from United States unilateralism to multilateralism,” said Graciela Rodriguez, of the Brazilian Network for the Integration of Peoples (REBRIP).

But “the opportunity for real reform was lost,” she complained to IPS at the International Seminar on the BRICS Bank, held in this city Wednesday and Thursday Jul. 16-17 as a forum for civil society organisations in parallel to the sixth summit.

The format announced for the NDB “does not meet our needs,” she said.

The NDB will promote “a new kind of development" only if its loans are made conditional on the adoption of low-polluting technologies and are guided by the Millennium Development Goals and their successors, the Sustainable Development Goals. -- Carlos Cosendey, international relations secretary at the Brazilian foreign ministry
The bank’s goal is to finance infrastructure and sustainable development in the BRICS and other countries of the developing South, with an initial capital investment of 50 billion dollars, to be expanded through the acquisition of additional resources.

“We want an international system that serves the majority, not just the seven most powerful countries (the Group of Seven),” that does not depend on the dollar and that has an international arbitration tribunal for financial controversies, said Oscar Ugarteche, an economics researcher at the National Autonomous University of Mexico.

“It is unacceptable that a district court judge in New York should put a country at risk,” he told IPS, referring to the June ruling of the U.S. justice system in favour of holdouts (“vulture funds”) in their dispute with Argentina, which could force another suspension of payments.

“We need international financial law,” similar to existing trade law, and an end to the dominance of the dollar in exchange transactions, which enables serious injustice against nations and persons, like embargoes on payments and income in the United States, he said.

“Existing international institutions do not work,” and the proof of this is that they have still not overcome the effects of the 2008 financial crisis, said the Mexican researcher.

Major powers like the United States and Japan have unsustainable debt and fiscal deficits, yet are not harassed by the International Monetary Fund (IMF), in contrast to the treatment meted out to less powerful nations, particularly in the developing South.

During the seminar, organised by REBRIP and Germany’s Heinrich Böll Foundation, oft-repeated demands were for civil society participation, transparency, environmental standards and consultation with the populations affected by projects financed by the NDB.

These demands have not yet been included in the NDB but may be discussed during its operational design over the next few years, while the group’s parliaments ratify its approval, said Carlos Cosendey, international relations secretary at the Brazilian foreign ministry, in a dialogue with activists.

Participants at one of several panels at the International Seminar on the BRICS Bank, held Jul. 16-17 in Fortaleza, Brazil. Credit: Mario Osava/IPS

Cosendey said that a disadvantage of the multilateral bank was the need for its regulations not to be confused with infringement of national sovereignty of member states. The political, cultural, legal and ethnic differences between the five countries could pose a major obstacle to the adoption of common criteria, he said.

The NDB can be constructive “if it integrates human rights” into its principles and presents solutions for the social impacts of the projects it finances, said Nondumiso Nsibande, of ActionAid South Africa, an NGO.

“We need roads, other infrastructure and jobs, as well as education, health and housing,” but big projects tend to harm poor communities in the places where they are carried out, she told IPS. It is still not known what levels of transparency and social concern the bank will have, she said.

In the view of Chankrasekhar Chalapurath, an economist at Jawaharlal Nehru University in New Delhi, the NDB will alleviate India’s great needs for infrastructure, energy, long distance transport and ports. However, he does not expect it to make large investments in one key service for Indians: sanitation.

Having an Indian as the bank’s first president, as the five leaders have decided, will help attract more investments, but he said people’s access to water must remain a priority.

Cosenday said the NDB will promote “a new kind of development.”

But Chalapurath told IPS that this will only happen if its loans are made conditional on the adoption of low-polluting technologies and are guided by the Millennium Development Goals and their successors, the Sustainable Development Goals, as well as human rights and other best practices.

Adopting democratic processes within the bank will facilitate dialogue with social movements, parliaments and society in general, he said.

Incorporating environmental issues and gender parity is also essential, said Ugarteche and Rodriguez, who regards this as necessary in order to make progress towards “environmental justice.”

Not only roads and ports need to be built; even more important is the “social infrastructure” that includes sanitation, water, health and education, said Rodriguez, the coordinator of the REBRIP working group on International Economic Architecture.

Mobilising resistance to large projects that affect local populations in the places they are constructed will be part of the response to the probable priority placed by the NDB on financing physical infrastructure projects, she announced.

The social organisations gathered in Fortaleza, with representatives from Brazil, India, China, South Africa and other countries that are not members of the group, are preparing to coordinate actions to influence the way the bank and its policies are designed, and to monitor its operations and the actions of the BRICS group itself.

Brazilian economist Ademar Mineiro, also of REBRIP, said there was potential for national societies to influence the format and policies of the NDB, and time for them to organise and mobilise. “It is an unprecedented opportunity,” he told IPS.

Russia did not originally support the BRICS bank, preferring private funding. But Mineiro said its position changed after the United States and the European Union involved multilateral financial institutions like the World Bank in sanctions against Moscow for its annexation of Crimea, a part of Ukraine.

BRICS evolved “from the economic to the political,” with its members demanding more power in the international system. The alliance is one of the pillars of the Chinese strategy to conquer greater influence, including in the West, said Cui Shoujun, a professor at the School of International Studies of Renmin University in China.

“The BRICS need China more than the other way round,” he told IPS, adding that the Chinese economy is 20 times larger than South Africa’s and four times larger than those of India and Russia.

As well as seeking natural resources from other countries, among the reasons why China has joined and supports BRICS is strengthening the legitimacy in power of the Communist Party through internal stability and prosperity, the academic said.

(END)

The Sixth BRICS Summit which ended Wednesday in Fortaleza, Brazil, attracted more attention than any other such gathering in the alliance’s short history, and not just from its own members – Brazil, Russia, India, China and South Africa.

Two external groups defined by divergent interests closely watched proceedings: on the one hand, emerging economies and developing countries, and on the other, a group comprising the United States, Japan and other Western countries thriving on the Washington Consensus and the Bretton Woods twins (the World Bank and the International Monetary Fund).

The first group wanted BRICS to succeed in taking its first big steps towards a more democratic global order where international institutions can be reshaped to become more equitable and representative of the world’s majority. The second group has routinely inspired obituaries of BRICS and gambled on the hope that India-China rivalry would stall the BRICS alliance from turning words into deeds.The stature, power, force and credibility of BRICS depend on its internal cohesion and harmony and this, in turn, revolves almost wholly on the state of relations between India and China. If India and China join hands, speak in one voice and march together, then BRICS has a greater chance of its agenda succeeding in the international system.

In the event, the outcome of the three-day BRICS Summit must be a disappointment to the latter group. First, the obituaries were belied as being premature, if not unwarranted. Second, as its more sophisticated opponents have been “advising”, BRICS did not stick to an economic agenda; instead, there emerged a ringing political declaration that would resonate in the world’s trouble spots from Gaza and Syria to Iraq and Afghanistan.

Third, and importantly, far from so-called Indian-China rivalry stalling decisions on the New Development Bank (NDB) and the emergency fund, the Contingency Reserve Arrangement (CRA), the Asian giants grasped the nettle to add a strategic dimension to BRICS.

With a shift in the global economic balance of power towards Asia, the failure of the Washington Consensus and the Bretton Woods twins in spite of conditionalities, structural adjustment programmes and “reforms”, financial meltdown and the collapse of leading banks and financial institutions in the West, there had been an urgent need for new thinking and new instruments for the building of a new order.

Despite the felt need and multilateral meetings that involved developing countries, including China and India which bucked the financial downturn, there had been no sign of alternatives being formed.

It is against this backdrop – of the compelling case for firm and feasible steps towards a new global architecture of financial institutions – that BRICS, after much deliberation, succeeded in agreeing on a bank and an emergency fund.

From India’s viewpoint, this summit of BRICS – which represents one-quarter of the world’s land mass across four continents and 40 percent of the world population with a combined GDP of 24 trillion dollars – was an unqualified success. The success is sweeter for the National Democratic Alliance (NDA) government led by the Bharatiya Janata Party (BJP) because the BRICS summit was new Prime Minister Narendra Modi’s first multilateral engagement.

For a debutant, Modi acquitted himself creditably by steering clear of pitfalls in the multilateral forum as well as in bilateral exchanges – particularly in his talks with Chinese President Xi Jiping, with Russian President Vladimir Putin and with Brazilian President Dilma Rousseff – and by delivering a strong political statement calling for reform of the U.N. Security Council and the IMF.

In fact, the intensification and scaling up of India-China relations by their respective powerful leaders is an important outcome of the meeting in Brazil, even though the dialogue between the Asian giants was on the summit’s side-lines. Nevertheless, Modi and Xi spoke in almost in one voice on global politics and conflict, and on the case for reform of international institutions.

The new leaders of India and China, with the power of their recently-acquired mandates, sent out an unmistakable signal that they have more interests in common that unite them than differences that separate them.

Against this backdrop, Indian Prime Minister Modi’s outing was significant for other reasons, not least because of the rapport he was able to strike up, in his first meeting, with Chinese President Xi. The stature, power, force and credibility of BRICS depend on its internal cohesion and harmony and this, in turn, revolves almost wholly on the state of relations between India and China. If India and China join hands, speak in one voice and march together, then BRICS has a greater chance of its agenda succeeding in the international system.

As it happened, Modi and Xi hit it off, much to the consternation of both the United States and Japan. They spoke of shared interests and common concerns, their resolve to press ahead with the agenda of BRICS and the two went so far as to agree on the need for an early resolution of their boundary issue. They invited each other for a state visit, and Xi went one better by inviting Modi to the Asia-Pacific Economic Cooperation meeting in China in November and asking India to deepen its involvement in the Shanghai Cooperation Organisation (SCO).

Modi’s “fruitful” 80-minute meeting with Xi highlights that the two are inclined to seize the opportunities for mutually beneficial partnerships towards larger economic, political and strategic objectives. This meeting has set the tone for Xi’s visit to India in September.

Although strengthening India-China relationship, opening up new tracks and widening and deepening engagement had been one of former Indian Prime Minister Manmohan Singh’s biggest achievements in 10 years of government (2004-2014), after a certain point there was no new trigger or momentum to the ties. Now Xi and Modi are investing effort to infuse new vitality into the relationship which will have an impact in the region and beyond.

As is the wont when it comes to foreign affairs and national security, Modi’s new government has not deviated from the path charted out by the previous government. BRICS as a foreign policy priority represents both continuity and consistency. Even so, the BJP deserves full marks because it did not treat BRICS and the Brazil summit as something it had to go through with for the sake of form or as a chore handed down by the previous government of Manmohan Singh.

Before leaving for Brazil, Modi stressed the “high importance” he attached to BRICS and left no one in doubt that global politics would be high on its agenda.

He pointed attention to the political dimension of the BRICS Summit as a highly political event taking place “at a time of political turmoil, conflict and humanitarian crises in several parts of the world.”

“I look at the BRICS Summit as an opportunity to discuss with my BRICS partners how we can contribute to international efforts to address regional crises, address security threats and restore a climate of peace and stability in the world,” Modi had said on eve of the summit.

Having struck the right notes that would endear him to the Chinese leadership, Modi hailed Russia as “India’s greatest friend” after he met President Vladimir Putin on the side-lines of the summit.

India belongs to BRICS, and if BRICS is the way to move forward in the world, then BRICS can look to India, along with China, for leading the way, regardless of political change at home. That would appear to be the point made by Modi in his first multilateral appearance.

The five BRICS leaders pose for the cameras at the sixth annual summit in the Brazilian city of Fortaleza. Credit: Agência Brasil/EBC

By Mario Osava
FORTALEZA, Brazil, Jul 16 2014 (IPS)

The BRICS alliance (Brazil, Russia, India, China and South Africa) launched the New Development Bank (NDB) and Contingency Reserve Arrangement (CRA) during its sixth summit, institutionalising a new financial architecture for the emerging powers.

Two other agreements, one for Cooperation among Export Credit and Guarantees Agencies and another on Cooperation for Innovation among national development banks, complete the structure established Tuesday Jul. 15 by the five heads of state in the northeastern Brazilian city of Fortaleza.

The BRICS Summit concludes Wednesday with a meeting between the five leaders and the presidents of the Union of South American Nations (UNASUR) held in Brasilia, as well as several bilateral meetings.

The NDB and CRA are not being created “against anyone,” but as a “response to our needs,” said the summit host, Brazilian President Dilma Rousseff, at a press conference after the meeting with Vladimir Putin (Russia), Narendra Modi (India), Xi Jinping (China) and Jacob Zuma (South Africa).

BRICS leaders reject interpretations that the mechanisms have been created in opposition to or as alternatives to the World Bank and the International Monetary Fund (IMF), part of the Bretton Woods global financial system established in the 1940s.

The NDB will complement existing multilateral and regional financial institutions, whose lack of resources constrain financing of infrastructure projects in developing countries, according to the summit’s final declaration, signed by the participating heads of state.

The CRA, a mechanism through which the five countries make available a total of 100 billion dollars from their reserves, is a currency pool that provides financial security for its members, without departing from the IMF, summit speakers said.

If one of the BRICS countries wishes to borrow more than 30 percent of the sum it is entitled to, in order to overcome threats to its balance of payments, it will have to face questions from the IMF about conditions of payment, said the Brazilian finance minister, Guido Mántega.

Brazil, Russia and India can withdraw up to the value of their contributions of 18 billion dollars each. South Africa may take out twice the five billion dollars it will contribute to the mechanism, and China up to half its 41 billion dollar commitment.

The new institutions “consolidate” the BRICS alliance, Mántega said. Before they become operational, they must be ratified by the countries’ parliaments, he said.

The bank and the reserve fund are so constituted as to prevent aspirations of dominance, Rousseff said. The countries will have equal shares in the NDB, of 10 billion dollars each, and equal voting rights. The capital may later be doubled.

Bank presidents and its governing councils will be appointed on a rotating basis.

China will contribute 41 percent of CRA funds but decisions will be taken by a broader majority, reaching consensus for the negotiation of larger loans, Mántega said.

But the NBD headquarters will be located in the Chinese city of Shanghai, and it will be difficult to avoid the economic and monetary weight of the Asian power from translating into greater decision-making power for Beijing.

The NDB’s composition avoids inequalities at the outset, but equal participation is only a formality as “in practice the future trend will be towards greater Chinese influence,” according to Carlos Langoni, former president of the Brazilian Central Bank.

To be effective, the bank will have to increase its initial capital of 50 billion dollars, recruiting new financing resources, and in this as well as in crises the “dominant role” of the country offering most capital and guarantees is an influential factor, added Langoni, who is the present director of the World Economics Centre at the Getulio Vargas Foundation.

China is interested in diversifying its investments, in multilateral and regional institutions as well as bilaterally. In recent years it has become the largest investor in Latin America.

It already participates in several regional financial mechanisms, such as the Chiang Mai Initiative, similar to the CRA and involving countries of the Association of Southeast Asian Nations, and it is seeking to establish the Asian Infrastructure Investment Bank, as an alternative to the Asian Development Bank in which Japan has decisive influence.

Langoni believes that the BRICS, with the CRA resting on “mega-economies” with their enormous currency reserves, will in the long term be able to “grow faster and have more weight than the IMF, which is already facing difficulties raising funds because of its rules.”

However, the IMF will remain the most powerful multilateral financial body over the next decade, he said.

The rise of the BRICS reflects a multipolar world, as the alliance includes military powers like Russia and China, nuclear powers like both these countries and India, and “moderators” without military ambitions like Brazil and South Africa.

Progress in strengthening and institutionalising the group at its Fortaleza summit could help reduce border tensions existing between China and India, or between Russia and the West, Langoni said.

In his view, what cements the group is its “frustration over the action of multilateral bodies, particularly the IMF,” in the face of the financial crises. These institutions are very complex and made up of a large number of countries.

The BRICS countries can operate with greater ease with their own financial instruments, which can also supply their urgent needs for investment in infrastructure, especially in Brazil and India, he argued.

The BRICS “found their identity” by working with the Group of Twenty (G20) industrial and emerging countries to defend the stimulation of growth, rather than recession-inducing austerity, after the 2008 global financial crisis, Mántega pointed out. Later they came to demand reform of the IMF, which spearheaded response to the crisis.

Some reforms to grant emerging countries greater participation in IMF decision-making were approved by the G20, but then stalled because they were rejected in the U.S. Congress.

The IMF is regarded as extremely undemocratic, because the United States has power of veto and some countries of the industrial North have a majority of votes, in contradiction with the present correlation of economic forces and the weight of emerging powers.

The absence of reforms “negatively impacts on the IMF’s legitimacy, credibility and effectiveness.” The reforms must lead to the “modernisation of its governance structure so as to better reflect the increasing weight of emerging markets and developing countries (EMDCs),” says the Fortaleza Declaration, signed by the five BRICS leaders.

Mega-projects like the Itaipú hydropower station shared by Brazil and Paraguay could in future be financed by the new fund and new bank to be launched by BRICS leaders in the Brazilian city of Fortaleza. Credit: Mario Osava/IPS

By Mario Osava
FORTALEZA, Brazil, Jul 12 2014 (IPS)

The first common institutions to be set up by Brazil, Russia, India, China and South Africa – the BRICS – are financial, and have arisen as a result of reforms to an international system that continues to largely ignore the growing influence of emerging countries.

But the Contingency Reserve Arrangement (CRA), the BRICS countries’ monetary fund, will also be unbalanced in the composition of its resources, leading to the possible reproduction of these inequalities. The cement that binds the BRICS together is their aspiration to wield more power in international economic bodies.

The CRA and a development bank will be formally established at the Sixth BRICS Summit, to be held in Brazil on Tuesday Jul. 15 in the northeastern city of Fortaleza and on Wednesday Jul. 16 in Brasilia. On Monday, preparatory meetings will take place between ministers, members of the business community and the group’s central banks.

The reserve fund will have 100 billion dollars to come to the rescue of any of its members suffering an exchange crisis. China would contribute 41 percent of the total, South Africa – the smallest partner – five percent, and the other countries 18 percent each.

These percentages reflect the size of each country’s economy. However, participation in the New Development Bank (NDB), the other instrument that will be established at the summit, will be on the basis of equal shares: 10 billion dollars each and equal voting rights for each member.

This is the big difference between the NDB and the World Bank, of which it is a reflection. “The NDB is democratic,” Christopher Wood, a researcher for the South African Institute of International Affairs in Johannesburg, told IPS.

This aspect of the NDB is also very different from the CRA, where China, as the largest country, “will probably have a disproportionate influence,” but it is hoped that the design of the institution will prevent it from being overly one-sided, Wood said.

Negotiations have been under way to create the development bank and the monetary mechanism since 2012, and now only a legal review is required before they are signed by the five BRICS leaders in Fortaleza, announced José Alfredo Graça Lima, the undersecretary- general for political affairs at the Brazilian foreign ministry.

BRIC, an acronym coined in 2001 by U.S. economist Jim O’Neill for the four emerging powers that are changing the shape of the world, began to hold meetings of heads of state and government in 2009, forming “a coalition” that was joined by South Africa in 2011.

“It is not a bloc” that adopts common policies for trade and other sectors, Brazilian diplomats said in response to critical observations about the discrepancies between the countries in different economic or political international forums.

The huge countries, or “whale-economies,” are getting to know each other and have expanded their dialogue. They have “a positive role in democratising international relations,” Graça Lima said.

Cooperation between the five countries is already ongoing in more than 30 areas, and their societies are also interacting through business and academic forums and other means, said Flavio Damico, the head of the Brazilian foreign ministry’s department of inter-regional mechanisms.

But the cement that binds the BRICS together is their aspiration to wield more power in international economic bodies. “The structure of power and privileges” of the global financial and political system “has remained set in stone” since 1945, and will have to change “to adjust to present reality,” he said.

The blocking of a proposed reform of the International Monetary Fund (IMF) in the U.S. Congress spurred the BRICS countries to make headway with their own solutions. The CRA will probably “not substantially change the world economic order in the short term, but it certainly could erode the centrality of the IMF in the long run,” said Wood.

The CRA is being formed in the context of persistent after-effects of the 2008 financial crisis and the “systemic imbalances in the global economy, perpetuated by the monetary policies of advanced economies, such as the United States and the European Union,” Vivan Sharan, an expert on BRICS with the Observer Research Foundation in India, told IPS.

With the “monetary safety net,” BRICS will be signalling “lesser levels of dependence on Bretton Woods institutions such as the IMF, which urgently requires structural and governance reform,” he said. But the group is not aiming at “a recalibration of the global economic order,” he said.

Brazilian economist Fernando Cardim, professor emeritus of economics at the Federal University of Rio de Janeiro, doubts the CRA will be successful. Its resources will be too few, as its entire funds would not even be able to protect Brazil alone from mass capital flight, he argued.

Moreover, it will not necessarily prevent potential intra-BRICS strife, as China will have decisive powers “similar to or even greater than those of the United States over the IMF,” and is likely to wield power with less subtlety, he said.

But the BRICS institutions are not seeking to substitute for or confront the IMF or the World Bank. The CRA’s goal is to “complement” them, as “an additional line of defence” for the five countries, which are not facing balance of payment difficulties, according to Graça Lima.

The IMF’s resources total 937 billion dollars, more than nine times the value of CRA funds, and it will continue to play a key role for the CRA itself and other monetary mechanisms created to combat financial crises, Wood said.

In the Chiang Mai Initiative, a similar mechanism adopted by the Association of Southeast Asian Nations after the region’s 1997-1998 crisis, and which is backed by China, South Korea and Japan, countries must first request IMF assistance if they wish to draw a large loan from the funding pool, said Wood.

The NDB, already known as the BRICS Development Bank, is less controversial, although it has drawn criticism from social and environmental activists. The plan is for it to begin financing infrastructure and sustainable development projects in two years’ time, after obtaining parliamentary approval from member countries.

Its starting capital of 50 billion dollars is limited in comparison with the needs of BRICS members and other developing countries that could benefit from loans and even join the bank. It is less than the amount loaned annually by Brazil’s National Bank for Economic and Social Development (BNDES).

The Indian government, for instance, estimates that one trillion dollars are needed for financing domestic infrastructure projects over the next five years, around half of which is to come from the private sector.

However, new sources of funding are important because Indian infrastructure projects are facing serious liquidity challenges, as they are over-dependent on banking sector finance due to “the non-existence of a robust corporate bond market,” said Sharan in New Delhi.

“South Africa has a lot to gain,” as the NDB will focus on large infrastructure projects, a common problem amongst all the BRICS, and can offer long-term financing which is often difficult to obtain, particularly from the private sector, Wood said.It will also support project preparation, like surveying work, which often needs to be done before financing for the project can be accessed.

The NDB is authorised to double its funds, but its key importance is that co-financing projects acts as a catalyst, by reducing the risk and cost burden for other lenders and so attracting resources from private investors and national and multilateral development banks around the world, according to Wood and the Brazilian diplomats.

With additional reporting from Ranjit Devraj in New Delhi and Brendon Bosworth in Johannesburg.

By Shyam Saran
NEW DELHI, Sep 17 2013 (Columnist Service)

The eighth G20 Summit convened in St. Petersburg on Sept. 5-6, 2013 was dominated by the Syrian crisis, deflecting attention from the mandate of the gathering to serve as the premier forum for international economic coordination.

When leaders of the most influential countries meet it is inevitable that the pressing political issues of the day take centre stage.

Shyam Saran

The G7 too began as a forum for economic consultation and coordination among the world’s advanced market economies in 1975, to cope with the fallout of the 1973 oil crisis.

Just three years later, in 1978, the G7 issued its first Political Declaration and became, thereafter, the political, security and economic steering committee of the most powerful nations.

The G20 has taken its first steps in the same direction and it is likely that its role as a political and security forum will evolve steadily though informally at first. This trend will be reinforced if the United Nations Security Council remains a relic of a bygone international order.

That the G20 provided a platform on which the U.S. and Russia initiated steps leading to an eventual understanding on Syria’s chemical weapons is an indication of the potential political utility of the forum. These steps were taken against a strong prevailing sentiment at the summit against a military strike against Syria, favoured by the U.S. and some, but not all, of its allies.

The emerging economies were able to reflect some of their key concerns in the Summit declaration. The unconventional monetary policies pursued by reserve currency countries such as the U.S. and lately Japan, involving significant injections of liquidity into the system and keeping interest rates at zero or near zero, have confronted emerging economies like Brazil and India with volatile capital flows and exchange rate instability.

The declaration acknowledged for the first time that monetary policies pursued by advanced economies should be “calibrated and clearly communicated”. This falls short of a coordinated approach of the G20 but will help calm markets by promising greater predictability.

Developing countries would also take satisfaction over the G20 consensus, reflected in the declaration that the profits of transnational corporations should be taxed in the country where they are generated. African countries, in particular, have been victims of the tax avoidance practices of such companies.

An Indian proposal to create an infrastructure financing facility at the World Bank to extend funding for infrastructure projects in developing countries will be the subject of a study. However, in a situation of financial stringency in most developed economies, it is doubtful whether any significant financing window for this purpose will see the light of day soon.

The leaders of BRICS (Brazil, Russia, India, China and South Africa) met on the sidelines of the G8 summit. Their deliberations focused on two landmark initiatives which were announced at their fifth regular summit in Durban on Mar. 27.

On the New Development Bank (NDB) it has been agreed that its initial capital will be 50 billion dollars, a somewhat modest amount given the expectations aroused when the proposal was first made. India had wanted a figure closer to 100 billion dollars.

It is still not clear how the equity will be distributed among the five partners. China has been willing to contribute a larger share but it is reported that Russia wanted each to have an equal share. South Africa is unable to contribute a significant amount given the smaller size of its economy.

On the Contingency Reserve Arrangement (CRA), the leaders announced a figure of 100 billion dollars, with China contributing 41 billion, Brazil, India and Russia 18 billion each, and South Africa five billion.

The CRA will serve as a multi-country currency swap mechanism which will help the BRICS deal with balance of payments problems. It is similar to the Chiang Mai initiative among ASEAN, China, Japan and South Korea, but which is currently 240 billion dollars and partially linked to a parallel though partial International Monetary Fund aid programme.

Whether the CRA will follow a similar pattern is not yet clear. Nevertheless China’s role as a leading partner among the BRICS is now amply apparent. It is possible that the equity distribution in the NDB may follow a similar pattern.

It may be noted that none of the BRICS members forms part of the U.S.-sponsored Trans Pacific Partnership (TPP) or the Trans-Atlantic Trade and Investment Partnership (TTIP) – regional trade arrangements which will fragment the global trading system and marginalise the emerging economies. It is surprising, therefore, that this challenge did not figure in the deliberations of the BRICS nor at the G-20 either.

China’s pre-eminence in the BRICS is a trend likely to be reinforced with the current economic slowdown and economic difficulties being faced by most emerging economies, in particular Brazil, India and South Africa.

Russia is a special case, not an emerging economy in the same category as the other BRICS members. It has escaped economic distress thanks to rising energy prices in the wake of spreading turmoil in the Middle East.

China’s economy is likely to decelerate in the coming months. Its growing debt, now over 200 percent of GDP, is causing concern. If the Chinese economy undergoes a major crisis as some analysts predict, its role as the prime mover in BRICS would certainly diminish.

For the present, however, China, with its seven percent growth and its three trillion dollars of foreign exchange reserves, is likely to be acknowledged as the most emerged of the emerging countries.

(END/COPYRIGHT IPS)

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