The BRICs Bank as a Means to Conjure a Mini-World Bank and Mini-IMF - Case Study Example

THE BRICS BANK AS A MEANS TO CONJURE A MINI-WORLD BANK AND MINI-IMF The BRICS Bank as a Means to Conjure a Mini-World Bank and Mini-IMF Introduction In the last decade international economy has witnessed drastic fundamental changes especially with the emerging economies establishing the national development bank. According to Pilling, the countries forming the southern bloc have significantly increased their value in the global growth domestic product and economic growth since the 2007 economic crisis (2014). Brazil, Russia, India, China and South Africa (BRICS) are the countries spearheading the revolution with their share of world total as well as foreign exchange reserves having grown tremendously in the past decade. The fact that these developing economies have indispensable savings and foreign exchange reserves to fund the new development bank that could make an impact on investment becomes clear for such an institution to be created. However, the institution comes rather as a complement and not a substitute for the existing global institutions such as World Bank and IMF both in the private and public sector. The new development banks existence will strengthen the voice of theses developing economies and a shift from the veto power enjoyed by the western countries in the World Bank and IMF matters. Although international monetary fund provides short-term balance payments financing such funding though is in most cases insufficient since it is tied to inappropriate conditionality. Li & Carey assert that to bridge the gap the BRICS establishment of the new development bank will help in building on the experiences of these emerging economies and supplement the existing financial institutions for the member states and other low-income economies globally (2014). However, the need for similar and conventional approaches for BRICS, development bank with existing global financial institutions is quite challenging. China takes the forefoot in matters of development among the member states with its constant demand for raw materials and trading opportunities that lead to its strong economic associations globally. Whereas Brazil and South Africa focuses on regional stability and development, Russia, on the other hand, complies with the traditional multilateral donor structure in many aspects. Although BRICS are pursuing the distinction to western donors, size, major areas and institutions settings of foreign assistances continue to draw differences among them. Similarities and Differences between World Bank and IMF and the Proposed BRICS Institutions The BRICS bank‘s goal is to better serve the needs of its member countries and those of other developing economies through allocation of more capital to invest in long-standing infrastructural development and a central goal for high growth rate emerging market countries. Similar to World Bank and IMF in offering aid although BRICS provide assistance unconditionally and the principle of non-interference in state matters is an essential aspect of their operations. Comparatively BRICS bank shares many essential features with the IMF and World Bank not only limited to the scope of lending but also to capital level and geographical coverage of their lending. The basis of the bank has been built to focus on major infrastructural needs and sustainable development in emerging and developing countries. According to Manning, the scope of lending of BRICS bank was defined in the 2013 Durban summit as mobilizing resources for infrastructural development and sustainable projects in BRICS states and other world emerging economies (2015). Infrastructure concerns mainly include the provision of clean and safe drinking water, electricity and transport for sustainable growth. Sustainability in the world economy is of concern, and more states are moving towards greener economy in which investment is broadly to include infrastructural investment in the form of renewable energy such as solar wind and others. All these are aimed at improving living conditions of people and hence alleviate poverty as part of the millennium development goals. Funding of development projects is similar to that of World Bank and IMF although it is specific of who gets the funding. In order to have such significant impact on World Bank and IMF, BRICS bank needs to expand its lending scale. World Bank in the current system loans money to developing countries and other emerging economies. Similarly, the BRICS bank will be lending to these developing countries with potential tradeoffs between the speedy growth of a portfolio of loans and their quality. Although the scale of operation is necessary, the high quality of loans is a priority since it maximizes the development impact of the projects and thus reduces chances of defaulting. Repayment of the loan is a common characteristic of both the World Bank and BRICS bank as the interests are reinvested in the bank thus allowing capital expansion that will facilitate future lending. On the capital level, the BRICS bank total capital is set at around $50 billion which shall be contributed proportionately by the member states. However, only 20% will be initially paid, and countries will be obliged to make more contributions so as to increase the lending reserve to ensure stable future lending capacity (Griffit-Jones 2014). Just like to the World Bank members and non-BRICS members could also contribute capital with developed countries contributing more and in this case China will be considered to increase its capital proportion. In this case, China will account for a higher share paid in the capital which will be advantageous as China will command high reserves thus increase in lending levels of BRICS bank. Similarly, there is a potential disadvantage as it will create excessive dominance in governance and decision making of the BRICS bank comparable to World Bank dominance by United States. Wade & Vestergerd (2014) affirm that, the BRICS bank could also allow emerging and developing countries to participate as members thus broadening its membership base globally to beat par with that of World Bank. Therefore, the BRICS bank will increase the role of BRICS states in global governance and development of financial institutions that will be advantageous but it ought to provide sufficient weight to its governance and other growing economies. Like World Bank and other development banks, BRICS bank will only finance part of the total cost of a project with the rest co-financed by other sources such as the private sector and government. The World Bank has its headquarters established in the capital of the country contributing largest share of capital and since China is expected to make more capital share contribution then the headquarters of BRICS bank will be stationed in one of the chinas cities. The BRICS bank presents an actual challenge to IMF and World Bank although analysts predict the problem to be negligible given its limited capital base. The growth of BRICS bank signals the disgruntlement with United States policies dominantly applied in IMF and World Bank. The governance structure will be more equitable compared to world bank and IMF whose structures that Mateseo, Duttagupta & Goyal (2009) describe as being archaic and skewed with the united states controlling over 17% veto power and the old western economies whose GDPs are negligible compared to those of emerging economies like China. On matters of legitimacy, the IMF and World Bank are imperfect institutions that leave their loan recipients in wanting situations due to draconian policies such as structural adjustments. Schwartz (2000) explains that, the structural adjustment policies have long been criticized because of their harsh measures such as ending subsidies, lowering wages and limiting of domestic spending that works to the West and is always seen as a feature of neo-colonialism. Although IMF does not ask for collateral when lending nations they, however, prescribe stringent economic policies that these countries must follow. Comparatively BRICS money shall be given without any structural adjustment policies or any attachments so that recipient nations can freely choose how to deal with their moments of economic setbacks. Presumably the BRICS bank and their reserve find will increase the portfolio of loans to maximize developmental impact while keeping defaults at a minimum thence there will be no need for structural adjustments. BRICS will want to reduce their dependence on the United States dollar unlike the World Bank and IMF that whose foreign currency reserve and foreign exchange transactions are solely in US dollars. BRICS states are unwilling to accept the IMF prescriptions to remain dependent on the preparation of the Federal Reserve to give dollars to their central banks (D’Arista 2008). On the other hand, BRICS want to reduce dependence or do away with it hence their establishment of the contingent reserve arrangement. Reducing the dependence of the US dollar as a global currency is a drive that will fit chinas strategy of making their Yuan a global currency. The establishment of BRICS may face an inherent risk of their undertaking that may threaten its success. Unlike for IMF and World Bank whose operations have established, the BRICS bank will face problems between the members states such as India and China have been having a territorial dispute. But regardless this they will have to be united to solve economic issues that will focus on smooth running of the bank. The structural disparities between China and other BRICS members are at the centre of the bank. The bank will also be under threat from trading disputes among these emerging economies unlike for the case of IMF and World Bank institutions that are fully established. However in spite of the challenges that BRICS bank will face it offers a critically new development Avenue as it even seeks to provide World Bank and IMF with an alternative. BRICS Bank as an Alternative to Developing of the Economy The BRICS bank has the possibility of providing an alternative to development for emerging economies in terms of lending. Their development finance comes without stringent measures attached and more so in reinstating the power of recipient nations to design their policies. The BRICS bank also intends to make the process of lending faster and cheaper as opposed to the complicated and expensive processes of World Bank. The capital contributed by members will raise the BRICS’ capital in international markets. The BRICS bank will set up an emergency reserve fund that set to bail members in times of financial crises. As part of the BRICS bank goal, Kralikova says that, there is a proposal for members to combine their foreign exchange reserves to protect its members from short-term liquidity volatility (2008). The emergency funds will be available to individual members in the event that they experience balance payment problems. The initiative appeals for most nations that are still developing and occasionally experience economic instability. The move is seen as an alternative to IMFs failure to deal with global monetary crises that have left the emerging economies in a wanting state. For instance during the mini financial crisis of 2014 among the emerging economies experienced capital flight due to the sudden easing of united states monetary stimulus. The Federal Reserve took the action without consulting the developing states due to the global dominance of the US dollar. Therefore in such situations the emergency fund will provide an escape route as the states can borrow quickly to support the imbalance in payments. Among the developing world, Africa will stand to benefit most from the BRICS bank as there is a proposal to set up a BRICS-Africa Council whose responsibility is to accelerate trade and investment between BRICS states and Africa (Gumede 2014). With Africa being at the developmental stage, it needs a reliable source of financing one that does not come with a lot of restrictions. The bank could also offer finance for infrastructure not only for its members but also to Africa. Given the financial burdens experienced after the global crisis, securing finance for infrastructural development has been an issue for African states due to the limited sources of funding. BRICS bank provides a way to finance and build Africa’s manufacturing sectors that will be crucial for meeting the growing demands for jobs hence reducing inequality and poverty. The presence of the BRICS bank that operates without adherence to structural adjustment policies will strengthen low-income nations thus leading to the development of more dependent relevant development policies. It will be supportive to development in that it will provide alternatives that do not come with strict punishing conditions. The bank will also help third world nations secure enhanced investment deals in their negotiations with multilateral banks and the private sector. In addition, the competition posed by the BRICS bank to the World Bank and IMF may bring accountability inclusivity and responsiveness something that has not been there. Conclusion The BRICS coalition can best be seen as a collective effort for securing greater leverage in the longstanding institutions such as World Bank and IMF thus be a champion for the developing countries and emerging economies in decision-making. Although it may not be an unreasonable goal, it may also not be that exciting since the BRICS agenda does not trump the members existing individual obligations as IMF and World Bank members. The BRICS have high expectations although they not necessarily have to be vulture-like on the opportunities that will be possible in a multi-polar world. The shift is about to take place and soon or later as the world will not be revolving around the united states anymore. However it is justifiable to extrapolate from the current trends the trajectory for the world economy, but it will be unreasonable to make assumptions that it cannot be successful. If the agenda of BRICS does not come to reality, the alliance will not have any moral ground to hold, and it may eventually collapse. The BRICS idea is welcome with the World Bank remaining positive that the institution has potential of working with them to improve the quality of peoples lives. References DArista, J. (2008). "Replacing the failed Washington consensus." Journal of Post Keynesian Economics 30(4): 523-540. Gumede, W. 2014. Bricks development bank: challenges and opportunities for Africa. the foreign poliy centre. Online: http://fpc.org.uk/articles/661 [accessed 19 April 2015] Griffith-Jones, S. (2014). A BRICS development bank: a dream coming true? (No. 215). United Nations Conference on Trade and Development. Li, X., & Carey, R. (2014). The BRICS and the International Development System: Challenge and Convergence?. Králiková, K. (2014). BRICS: Can a marriage of convenience last?. European View, 13(2), 243- 250. Manning, J. 2015. Can the BRICS new development bank compete with the world bank and the IMF? International banker online at : http://internationalbanker.com/banking/can-brics-new-development-bank-compete-world-bank-imf/ [accessed 19 April 2015] Mateos y Lago, I., R. Duttagupta and R. Goyal (2009). The debate on the international monetary system, International Monetary Fund. Pilling, D. 2014. The BRICS bank is a glimpse of the future. Financial times, 30th july 2014 online available at: http://www.ft.com/intl/cms/s/0/f7b876a0-170e-11e4-b0d7-00144feabdc0.html#axzz3Xpq9uDTP [accessed 19 April 2015] Schwartz, A. J. (2000). "Do we need a new Bretton Woods" Cato J. 20: 21. Wade, R. & Vestergaard, J. 2014. Bricks bank ought to be welcomed by poorer countries. Financial times. 6 august 2014. Online available at: http://www.ft.com/intl/cms/s/0/ee7ab07e-1bfc-11e4-9db1-00144feabdc0.html#axzz3Xpq9uDTP [accessed 19 April, 2015] Read More