BRICS Bank: Opportunities And Limitations

BMI View: Proposals to create a new 'BRICS' bank capable of rivalling the World Bank and IMF could potentially be a game-changer in the global economy, at least over the long term. However, there are significant obstacles to creating and managing such an entity in the near term.

As the leaders of the BRICS (Brazil, Russia, India, China, and South Africa) nations meet in Durban for their annual summit, proposals have emerged for the creation of a new development bank to rival the World Bank, and possibly even the IMF. If the new BRICS bank were to come into existence, it could have far reaching cons eq uences for the global economy, b ecause it would mean that there would be a real alternative to the Western-dominated World Bank and IMF. This alternative anchor would further reinforce the notion that global wealth and power is shifting east and south.

The Rationale For A 'BRICS Bank'

There are three main factors driving the creation of a ' BRICS Bank ' .

Firstly, the world's leading financial institutions, the World Bank and IMF, remain dominated by Western countries, i.e., the US and Europe. The so-called Bret t on Woods institutions were created in 1944, before the end of World War II, and many feel that their leadership and decision-making powers clearly do not reflect the contemporary global economy, in which China, Brazil, Russia, India , and South Africa are now much bigger players.

Secondly, the BRICS nations are in a position to afford to be able to create such a bank. They have a combined US$4.4trn worth of foreign currency reserves, of which China has US$3.3trn. During the global financial crisis of 2008-2009 , Brazil actually contributed US$10bn to the IMF, rather than the other way round. The BRICS countries are also arguably much more financially experienced than ever before, with India, Brazil, and Russia having overcome severe financial crises in the 1990s and come under relatively prudent management . As emerging nations, the BRICS may also feel that they are better placed than the US and Europe to understand the challenges and nee ds of other developing countries.

Thirdly, the BRICS states are becoming increasingly assertive, politically, with all five acting as major economic and geopolitical powers in their respective regions. Furthermore, the BRICS countries reflect every continent in the world except North America, and perceive themselves collectively to represent the 'global south'.

What Would 'BRICS Bank' Look Like?

At the time of writing, it is unclear whether other developing countries would be allowed to participate in 'BRICS Bank', but we assume that this would be the case , for otherwise the scope of the new lender would be too limited . The proposals indicate that 'BRICS Bank' would mainly be focused on infrastructure development, which is a key priority of Brazil and India in particular, as well as other developing nations. China reportedly favours initiating the bank with US$100bn in capital, whereas India is said to favour US$50bn, which would dovetail with Russia's suggestion that each founding member should contribute US$10bn.

In addition, there are discussions about creating a pool of foreign currency reserves for the purposes of rescuing countries in financial crisis. This could potentially be modelled on the Chiang Mai Initiative, which consists of China, Japan, South Korea, and 10 Southeast Asian countries and has access to US$240bn of emergency funds.

There are major question marks surrounding the conditions under which 'BRICS Bank' would lend to other countries. The World Bank and IMF typically lends through a range of conditions, such a s a commitment from the borrower to public spending cuts, greater transparency, reduced corruption, and free market reforms. It is unclear if 'BRICS Bank' would impose such stringent conditions. If 'BRICS Bank' were to be more casual in its terms of lending, then it could emerge as a more attractive option than the World Bank and IMF, raising questions about their raison d'etre. The decline of Western financial influence would mean reduced political influence.

Potential Obstacles To Management Of ' BRICS Bank '

Although the BRICS nations clearly want to see global financial institutions that reflect their rising power, there are significant obstacles to the creation and smooth running of 'BRICS Bank'. Chief among these is the issue of which country gets the biggest say in its decision-making.

Geopolitics: China , Russia, and India are all geopolitical competitors. China and Russia are competing for influence in Central Asia and the Far East; India and China are rivals in Southeast Asia, the Himalayan region, the Indian Ocean, and also Africa. All three regard themselves as emerging or re-emerging world powers and would thus want to exert a big a sway as possible in 'BRICS Bank'. As the richest and most powerful member, China would be its natural leader, but any attempt by Beijing to dominate the lender would cause resentment in Moscow and New Delhi. This could paralyse the new bank in a time of crisis.

Divergent economic interests: The BRICS group is economically incoherent to say the least, and this will affect their priorities. Brazil and Russia are already middle-income, highly urbanised economies, whereas China and India are still low-income countries that have massive rural populations. This means they have differing development challenges. Meanwhile, Brazil, Russia, and South Africa are big commodity exporters, whereas China and India are major importers. In addition, the original four BRIC countries are all competing against one another economically. For example, China's demand for Brazilian commodities is leading to fears in Brazil of a dependency relationship and concerns that Brazilian manufactured goods will be outcompeted by China. Furthermore, in demographic terms China and India stand out with more than a billion people each, whereas Brazil and Russia have less than 200mn people. Brazil, India, and South Africa are all 'young' countries, whereas China and Russia are ageing rapidly. Finally, South Africa, due to its smaller population and economy, doesn't rank as highly as the other BRIC states, which are all in the top 10 world's biggest economies.

Lack of ideological coherence: China and Russia are both quite state-directed economies, whereas India has moved away from this model and Brazil has been more laissez-faire than the other four BRICS for many years. Politically, Brazil and India are both vibrant democracies, whereas Russia, China, and South Africa are de facto or de jure one-party states. This lack of ideological coherence will also affect 'BRICS Bank's' world view. Furthermore, even if 'BRICS Bank' were to become fully operational, China and Russia could still pursue unilateral assistance to other countries outside the framework of the new lender.

US can undermine 'BRICS Bank': After the 1997-1998 Asian financial crisis, Japan attempted to establish an 'Asian Monetary Fund', but was thwarted from doing so by the US, which wanted the IMF to remain the dominant global crisis-beating institution. Now, as momentum for 'BRICS Bank' builds, Washington can still exert influence on the BRICS states, because all or most of them probably still value their relationship with the US above their ties with fellow BRICS states - although this may eventually change.

Global Problems Require Global Solutions

With the world increasingly interconnected, as evidenced by the severity of the 2008-2009 crisis, the smooth functioning of the global economy will require coordination by the major economies. This is evident from the way that the G-20 has come to supersede the G-7 or G-8. Thus, if 'BRICS Bank' does come into existence, it would be unlikely to work unassisted. The World Bank and IMF have decades of experience behind them, and would still serve a purpose.

This article is tagged to:
Sector: Country Risk, Infrastructure, Freight Transport
Geography: Global, Brazil, China, India, Russia, South Africa

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