What’s in a name? BRICS and the global financial architecture

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LogoIn this article Pooja Jain and Sarah-Jane Cooper-Knock explore plans by the BRICS countries to establish their own development bank and currency reserve. What impact are these developments likely to have on the global financial architecture?

Language matters: It shapes how we think about, and act in, the world around us. Jim O’Neil is a man who is well aware of the power of words or, more precisely, initials. Back in 2001, that he wrote a paper focusing on the emerging economies of Brazil, Russia, India, and China, entitled, ‘Building Better Global Economic BRICs’. This nifty acronym was quickly picked up and thrown around in debates on the global balance of power. Arguably, it also helped to craft an alliance of sorts between these four countries, who met for their first summit in 2009. O’Neil himself has persisted in playing geo-political boggle, exploring the role of MIKT (Malaysia, Indonesia, South Korea and Turkey), but it is his earlier creation that has continued to capture the imagination of politicians, academics, and journalists. South Africa joined the club in 2010, never has a plural been so diplomatically useful.

In recent years, much has been made of the ‘rise of BRICS’. The UNDP, for example, claimed that the group had undergone a ‘striking transformation into dynamic major economies with growing political influence’. Their collaboration has been seen as part of a broader growth in South-South cooperation. Lately, the intention of BRICS countries to launch a development bank and the currency stabilisation fund has garnered a great deal of attention. The idea was first mentioned back in 2011, and reiterated earlier this year. Some have suggested that these organisations could raise a fundamental challenge to the World Bank and the IMF. But how likely are such challenges to occur? And what effect would they have if they did?

It is certainly nothing new to note that global political and economic power are closely tied. Despite reforms, many developing countries have very little voice inside organisations like the International Monetary Fund or the World Bank, which affects the parameters of the possible at a national level, politically and economically. In contrast, the US currently has the requisite number of votes in the Fund and the Bank to veto all major decisions. As Treasury Secretary Jack Lew argued, this means the US ‘have a controlling voice when we need to… it’s something that our international leadership depends on’.

But it is a big leap from here to suggest that the BRICS bank and reserve could meaningfully alter the status quo. Firstly, the amounts in question are still relatively limited. Altogether, BRICS have pledged $82 billion for the currency reserve and commentators question how much impact this could really have. The total subscribed capital of the IMF fund is currently $360bn and the Special European firewall by the IMF stands at $456bn. Similarly, the development bank will be capitalised with $50bn. This is less than the World Bank committed in loans, grants, equity investments and guarantees in the last year alone. Whilst China is pushing for higher capitalisation, other states are resisting. Some have suggested that, if they had wanted to launch a meaningful challenge to the Bretton Woods institutions, BRICS would have simply added their political and economic muscle to the Bank of the South, which was established back in 2007 by then President of Venezuela, Hugo Chavez. Currently, the Banco del Sur already has a capitalisation of $7bn.

Instead of judging these regional moves on the extent to which they challenge the Bretton Woods institutions, we should perhaps see them as largely complementary to the existing global financial architecture. Certainly, the countries’ own rhetoric at this year’s summit suggested as much, as did their commitment of capital to those institutions. The World Bank and IMF themselves have acknowledged the need for regional initiatives that service needs in ways that they are not currently willing or able.  The BRICS initiative could well fit that bill: their development bank, for example, is focused on infrastructural projects in middle-income countries, where the World Bank is hardly exhausting demand for loans. Moreover, it might not be out of the question for the BRICS currency reserve to make use of the IMF, much like the Chiang Mai Initiative, to avoid the awkwardness of imposing conditionalities on allies. Ultimately, many key decisions about how these initiatives will function still remain to be made.

In making these decisions, much will depend on the degree to which these countries are able to make decide on the parameters of regional collaboration and leverage change at a global level as a unit. Officials may be hopeful that such collaboration is achievable in the wake of their joint stance on Syria.  But economically, we cannot overlook the differences between the BRICS: their relative power far from equal, and this will undoubtedly affect the coherence of their bargaining positions on political-economic issues. South Africa’s standing in the group is particularly weak. It is expected to provide the minor share of the funds for the currency reserve: a predicted $5billion in contrast to the $18billion offering from Russia, Brazil and India, as well as the $41 billion from China. This reflects the fact that South Africa’s GDP is only equal to China’s sixth largest province. But it is not alone in being dwarfed by East Asian giant. Despite the potential that other countries have shown in terms of resources and growth rates, it is China that puts the economic meat on the RIBS of this partnership. Although the BRICS development bank may not weigh in impressively next to the World Bank, China itself gave more loans to poor countries between 2009 and 2010 than the Bretton Woods institution.  Such an asymmetry in power may not be as important were it not for the fact that the political system and economic templates that these countries pursue also differ radically. The fact BRICS split their votes between different candidates for the World Bank Presidency back in 2012, is symptomatic of fact that their desire to act as a bloc has not yet trumped their desire to pursue national advantage in the global financial architecture.

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