Faruque Ahmed
The establishment of BRICS Bank comprising Brazil, Russia, India, China and South Africa has come at a time when the existing global financial institutions like the World Bank (WB), IMF and Asian Development Bank (ADB) are increasingly failing to meet the growing demand for funding huge infrastructure development projects in the developing nations.
These multilateral financial institutions dominated by the western powers were suffering from fund shortage while remaining captive at the same time of the western decision makers. They follow a policy of selective lending to developing countries and their major projects and use the lending primarily taking into consideration how it would further their political leverage and financial control over the recipient nations.
However, in all fairness, it should be mentioned that the WB, IMF and ADB are also overloaded with loan requests in recent years and new organizations like BRICS financial institutions may add more capital and choices before global financial system to support major infrastructure projects. There is a growing need for funding socio-economic activities also in areas such as health, education and expansion of social services.
More competition likely
In view of this perspective, experts believe that the launching of BRICS Bank has come at the right moment to make the global financial architecture broad-based for funding the need of the developing world breaking the monopoly of the WB and IMF which often work against the interest of the poor nations and the especial needs of the middle income countries.
However, it remains to be seen how BRICS institutions make their presence felt. But one should not have the doubt that given their normal growth under efficient management, the WB, IMF and ADB and other such institutions would come under pressure in the coming years to undertake reforms to make them more acceptable to the emerging economies. The world may be happy to see new challengers to ensure better services.
It is interesting that the WB and IMF are not making their comments public on the launching of the BRICS financial institutions. Meanwhile, the ADB has already announced a 10-point strategic plan to bring changes in its policy regime and field level operations to bring it closer to the specific needs of the people in its member nations.
The just concluded 6th summit of the BRICS nations in Brazilian city of Fortaleza has also decided to set up a Contingency Reserve Arrangement (CRA) along with the BRICS Bank. It aims at making available the urgently needed balance of payment support to member states once it comes into operation.
Nations were so far dependent on IMF loan for balance of payment support at critical moment and the institution was using tough socio-political conditions to secure restructuring of the economy and financial institutions of the applicant nations to the advantage of the western economies, regardless of how it affects the recipients’ domestic politics.
BRICS Bank (BB) will have an initial authorized capital of $100 billion while it will start with a paid up capital of $50 billion and analysts believe that it may begin lending from 2016.
Funding of new facilities
With its head office at Shanghai, it will have an Indian chairman to begin with. Similarly, the CRF will have $100 billion funding. Basically it will be a currency swap arrangement allowing for emergency support to BRICS countries facing balance of payment crisis. China promised to contribute $41 billion to the fund while $18 billion each by India, Russia and Brazil. South Africa will contribute $5 billion to the fund.
Initiated in mid-2009, BRIC became BRICS in 2010 with South Africa’s joining the group to set up the new financial institutions. Their key objectives were to have a bigger say in global financial order challenging the monopoly of the western countries. BRICS represents 40 percent of the global population; 18 percent of global trade and having $4 trillion in combined foreign reserves. Estimates suggest that “the large foreign reserves of BRICS and many developing economies in Asia have been mostly invested in the US Gilt-edged Securities and Sovereign Wealth Funds over the years. Despite the low yield in such securities and funds, the bulk of the reserve surpluses of emerging and developing economies have been invested in them mainly due to the strength and international standing of US dollar. Had these reserves been invested in emerging and developing economies, they would have not only bridged the massive infrastructure deficit of those countries but also uplifted millions of people out of poverty.”
Economics and Social Survey for Asia and the Pacific- 2010 carried out by ESCAP showed if $800 billion per annum was allocated to the Asia-Pacific region, the infrastructure deficit in the region could have been covered in a couple of years. ESCAP in fact, argues that “the rate of return on investing part of the reserves in the region would have been higher than the returns from the US market, and for this purpose only 5 percent of the $5 trillion reserves in the region could have been used to create an Infrastructure Fund”.
China still serious for AIIB?
Such thinking has influenced the Chinese leadership with their largest investment in US securities to promote an Asian Infrastructure Investment Bank (AIIB), similar to Japan’s initiative to set up the Asian Development Bank (ADB) in 1966, reports said.
Such thinking influenced all BRICS leaderships who were convinced of the benefits of their surplus savings and foreign reserves from establishing a new development bank, particularly for funding major infrastructure projects. The idea of setting up the BRICS Bank thus came to the fore.
It has been estimated that close to $1 trillion funding is required per annum to meet the infrastructure deficit in emerging economies and developing countries. The existing local, regional, and multilateral banks cannot meet this requirement and the new BRICS Bank will be able to supplement the existing banks’ contribution, in addition to making the global financial system competitive.
“The launch of the BRICS Bank and CRA will be a concerted step for reshaping the Western dominated international financial system. It will be the first step to challenge the domination of the US influenced WB and the IMF and the US dollar power,” analysts said.
Japan had taken an initiative to set up such an institution soon after the East Asian Financial crisis of 1997 but it had to abandon the move on pressure from IMF and US Treasury. BRICS has walked over such resistance.
Its financial institutions may now slowly work to bring about reforms in global financial system. In fact, the BRICKS nations – Brazil, China, India, Russia, and South Africa, the global emerging economic powers – have the potentials to bring pressures on western dominated institutions to reform and comply.
But questions remain whether China will abandon its plan to set up the Asian Infrastructure development Bank after the establishment of BRICS Bank and CRA. Moreover, will the BRICS Bank give large loan at concessional rates? Again will the CRA provide balance of payment support in more liberal terms? We have to wait and see.
Source: Weekly Holiday
