IFI governance


Building alternatives BRICS by BRICS

5 April 2012

With the future of the World Bank up for grabs in the presidency race and the IMF facing a resource crunch, many developing countries are pursuing alternatives to the Washington-based lenders, with Brazil, Russia, India, China and South Africa even mooting a joint BRICS Bank.

The United Nations Conference on Trade and Development (UNCTAD) issued a report in early February warning against the existing global financing system and criticising “finance-driven globalisation” in advance of the late April UNCTAD conference. UNCTAD defines finance-driven globalisation as “financial deregulation, concerted moves to open up the capital account, and rapidly rising international capital flows” which allow “financial markets and institutions [to] become the masters rather than the servants of the real economy, distorting trade and investment, heightening levels of inequality, and posing a systemic threat to economic stability.”

The UNCTAD report finds: “Neither IMF nor the World Bank, having abandoned their original raison d’être to the siren calls of unregulated financial markets, have been able to forge a vision of a post-crisis world economy consistent with changed economic and political realities. This failure points to a wider hiatus in global governance.” It also argues that “under present arrangements, most countries almost invariably find themselves obliged to adjust to the shocks associated with [finance-driven globalisation] through domestic retrenchment.”

abandoned their original raison d'etre to the siren calls of unregulated financial markets

Instead, UNCTAD calls for a new global deal based on the concept of “development-led globalisation”, which will involve “the appropriate mixture of reflation, redistribution and regulatory measures … to turn tentative recovery into an inclusive and sustainable future.” This will require both national policy space and “replac[ing] unruly and pro-cyclical capital flows with predictable and long-term development finance, to regain stability in currency markets and to support expansionary macroeconomic adjustments.”

Rise of the BRICS

The development of alternative models seems to be led by large emerging markets. An early March meeting of the BRICS (Brazil, Russia, India, China, and South Africa) Academic Forum in New Delhi saw the airing of a proposal for a so-called BRICS Bank, a new development bank which could serve as a competitor or a complement to the World Bank. The Indian foreign minister hosted an experts meeting in mid March to develop plans for the bank.

At end March, a BRICS leaders meeting in India commissioned a joint working group of their countries’ finance ministries “to examine the feasibility and viability” of a new development bank that would “supplement the existing efforts of multilateral and regional financial institutions.” In early April, World Bank president Robert Zoellick argued that the World Bank and his successor need to work with any such new bank and be engaged with the BRICS or risk making a “mistake of historic proportions”.

The large emerging markets are already more important sources of finance to other developing countries than the World Bank. A February report from the think tank Inter-American Dialogue, The New Banks in Town: Chinese Finance in Latin America, finds that 2010 commitments by Chinese banks to Latin America were larger than those of the World Bank, Inter-American Development Bank and the US Export-Import Bank combined. In comparing the loans, the report finds that “Chinese banks impose no policy conditions on borrower governments but do require equipment purchases and sometimes oil sale agreements. The financing terms in oil sale agreements seem to be better for the South Americans than most people believe. Chinese finance does operate under a set of environmental guidelines, but those guidelines are not on par with those of its Western counterparts.”

An early March IMF working paper also examined the impact of emerging market financing to low-income countries (LIC), concurring with the Inter-American Dialogue findings that “BRIC assistance has been, by and large, complementary to aid from traditional donors” because the large emerging markets tend to focus on infrastructure while donors focus on poverty alleviation.  However, the paper notes that with BRIC finance “concerns have been raised over debt sustainability, pace of employment creation, labour practices, and competition with local firms. While none of these concerns is uniquely related to BRIC financing and has been debated in the past in relation to financing from other sources, they underscore the importance of managing the broader repercussions of the LIC-BRIC engagement.”

People or profit focussed?

These concerns have also been echoed in civil society organisations: “It seems their plan is to create a new pole of global power, in spite of the diverse interests among BRICS members,” wrote Carlos Tautz of the Brazilian NGO More Democracy Institute.  He added that NGOs “have already opened our eyes to the absolute lack of transparency regarding the BRICS Bank and will follow this process closely. We plan to replicate the work of Brazilian organisations that are criticising the dramatic negative impacts of megaprojects funded by the Brazilian national development bank (BNDES) in other Southern countries.”

Jayati Ghosh, of the New Delhi-based Jawaharlal Nehru University, wrote: “Much of recent South-South interaction (including amongst BRICS) has been corporate-led, which has determined the focus on trade and investment. To the extent that companies everywhere have similar interests (the pursuit of their own profits) it is not surprising that older North-South patterns are replicated. But surely the focus should be to democratise the interaction itself, to work out the ways in which the patterns of trade and investment flows can be altered to emphasise the creation of decent employment.”

IMF resources boost from the BRICS?

Agreement on a increase to IMF resources continues to be elusive. Christine Lagarde, managing director of the IMF, continued her global tour trying to raise money to boost the IMF’s pool of resources by $500 billion (see Update 79). In February and March she visited India and China. The Chinese so far only agreed to coordinate with Japan in response to the IMF request.

German chancellor Angela Merkel claimed that Brazil was willing to increase its IMF contribution, “in proportion to its quota”. The US remains resolutely opposed, with US treasury secretary Tim Geithner telling the US Congress in mid March that the Treasury had “no intention to seek additional US resources for the IMF.” The end March BRICS statement effectively linked an IMF resources boost to progress on their demands for greater voting rights at the institution.