IFI governance


BRICS challenge IFIs

Out of the frying pan into the fire?

8 April 2013

Large middle-income countries jointly initiated alternatives to the World Bank and IMF in March, but advocates are not satisfied with either set of institutions. While challenge to the IMF has been welcomed, civil society actors fear that a new development bank would serve “vested interests” and could lead to “exploitation”.

At a leader-level summit in late March, Brazil, Russia, India, China and South Africa (BRICS) announced their preliminary agreement to set up multilateral institutions for both development finance and emergency financial support. Progress was faster than expected, largely due to BRICS anger at the failure of rich countries to sufficiently include them in the governance of the Bank and Fund (see Update 85), or adequately respond to their calls for greater lending (see Update 77, 70). South African finance minister Pravin Gordhan told journalists after the summit that “the roots of the IMF and World Bank still lie in the post-World War II environment. The reforms that have been undertaken so far … are inadequate in terms of reflecting current economic and other realities around the world.”

The so called BRICS Bank (see Update 80) will focus on infrastructure finance. Pre-summit analysis suggest a bank with $50 billion in capital, and that South Africa offered host the institution. However, details on the exact financial contributions, location and governance structure of the bank were discussed, but not agreed, in the summit. An agreed Contingent Reserve Arrangement (CRA), to pool foreign exchange reserves among the BRICS countries, was announced to be $100 billion and is modelled on the Chiang Mai initiative, an Asian reserve pool that involves China, Japan, South Korea and the 10 members of the Association of South East Asian Nations (ASEAN, see Update 73). However, in contrast to the Chiang Mai initiative, which was doubled in size last year to $240 billion (see box), the BRICS CRA is not expected to have any formal link to the IMF. Though not formally announced, India’s finance minister revealed that China is expect to contribute $41 billion, Russia, India and Brazil $18 billion each, and South Africa $5 billion.

It's important that the BRICS Bank and the CRA do not repeat these mistakes

Proliferating regional arrangements

The BRICS are not the only multilateral grouping working on new institutions. In South America, the Banco del Sur is still on the drawing board, despite being announced in 2007 and formally agreed in 2009 (see Update 65, 56). Uruguay became the fifth country, following Venezuela, Ecuador, Bolivia, and Argentina, to ratify the accord for its creation in March 2012. However, ratification in Brazil has been stalled in the parliament, and in Paraguay the removal of president Fernando Lugo from office in June 2012 knocked regional cooperation off course.

Asian regional financial cooperation has proceeded more smoothly, with the ASEAN +3 grouping agreeing to double the size of the Chiang Mai Initiative Multilateralisation (CMIM, see Update 73, 67) in May 2012. The move brought the value of the CMIM up to $240 billion, and at the same time other reforms were brought in, including lengthening the maturities of loans, introducing a precautionary facility, and an increase in the proportion of loans that can be accessed without an IMF programme in place to 30 per cent. The strengthening of the arrangement was built upon the greater trust placed in the independent ASEAN +3 Macroeconomic Research Office (AMRO), which conducts surveillance on behalf the CMIM. CMIM members envision increasing the IMF-de-linked portion to 40 per cent in 2014.

The BRICS countries have not yet decided whether either institution would have a mandate to operate outside their own five countries. These details are to be decided over the next year, with leaders meeting again in September on the sidelines of the G20. A full agreement is expected in 2014 and the institutions to be operational by 2015.

Competition or cooperation?

For years civil society organisations have been encouraging the creation of regional financial institutions as rivals to the Bank and Fund (see Update 80, 73, 56), but these new initiatives may not really be in competition with the Washington-based lenders. In the run up to the summit, the Brazilian minister for development, industry and foreign trade Fernando Pimenetel said: “The objective of the BRICS development bank is not to be a rival to any existing multilateral organisation. … I would like to reiterate that the goal is not to rival any other organisation but actually to offer alternatives.” The World Bank formally welcomed the BRICS announcement saying it “stand[s] ready to work closely with the new bank to end poverty and build shared prosperity throughout the developing world.”

The World Bank’s chief economist Kaushik Basu has expressed support for the BRICS Bank over the last months in many lectures about the role of the emerging markets in the global economy. In South Africa in mid March he argued that “there is a need for such a bank” and that the World Bank welcomed it, highlighting infrastructure needs in developing countries. He said: “there are regions and pockets that sitting in Washington you are not able to provide for. There is indeed scope for [it].”

These notes chime with the thinking of the UN Development Programme, whose mid-March Human Development Report focuses on the Rise of the South. It argued for “coherent pluralism”, saying: “The challenge facing the multilateral system in response to the rise of the South is not a false choice between globalism and regionalism or between older structures devised and managed by the traditional powers of the North and newer arrangements responding to the needs of the developing world. Rather, it is integrating, coordinating and in some cases reforming these institutions so that they can all work more effectively together.” It went on to argue: “New institutions will be more effective if they work in concert with existing regional and global institutions, filling gaps in funding and investment.”

There seems to be a default division of responsibilities being created. The World Bank’s new strategy – which is being developed this year (see Update 85, 84, 83) – looks to be focusing the institution on the absolute poor with both of its goals concentrating on the poorest people in the world, but with a strong focus on economic growth. Meanwhile the BRICS Bank looks to be focussing on infrastructure in middle-income countries, an area where the World Bank has insufficient resources to engage. They may find a confluence of interests in the areas of infrastructure in low-income countries, which looks to be a big theme for this year’s IDA replenishment (see Update 85).

The CRA, on the other hand, looks to be a more direct challenge to the IMF. Kavaljit Singh, of Indian NGO Madhyam, agreed: “In a western-dominated financial world since the middle of last century, the idea of a BRICS reserve fund looks very exciting and promising. In a post-crisis world full of financial risks and uncertainties, the reserve pool could potentially reshape the global financial architecture of the 21st century by providing a concrete alternative financing mechanism to poor countries facing balance of payment difficulties or impending financial crises.”

Sameer Dossani of NGO ActionAid International argued “If the CRA does not include harmful economic conditions, is expanded to more countries, and if it can play more than a symbolic role in terms of stabilising international financial flows, it may mark a new era in global development, one in which workers and poor communities are not made to suffer for the excesses of international bankers.”

Demanding a third approach

Civil society reactions to the BRICS announcement have overall been sceptical and cautious. Alfredo Tjiurimo Hengari of the South African Institute of International Affairs was doubtful the initiatives offered a genuine alternative which would help smaller countries in Africa or elsewhere. In the newspaper Windhoek Observer, he wrote that the BRICS group “is not independent from existing global power structures. It seeks to reinforce these power structures through a voice that is not substantively an alternative, but merely one of continuity.”

ActionAid International’s chief executive Joanna Kerr commented on “the real-life impact of harmful World Bank and IMF conditions on loans. Their preferred recipe of budget cuts, privatisation and liberalisation too often harms nations and their poorest citizens. It’s important that the BRICS Bank and the CRA do not repeat these mistakes.”

Dorothy-Grace Guerrero of Bangkok-based NGO Focus on the Global South focused on the role of China in the BRICS because it “is seen as the top contender to the North”. She wondered whether “it is turning out to be a ‘sub-imperialist’ power that will continue the same or more intense practices of exploitation and extraction of natural resources from poorer countries to further enrich itself? Social movements and activist academics are increasingly wary that the economic model it is advancing is the same unsustainable and unjust paradigm that facilitates accumulation of wealth by a few while resulting in the dispossession and pauperisation of the already marginalised and powerless.” Justin Fong of China-based Moving Mountains concurred with that assessment: “The leadership of the BRICS are among the vested interests that make up the status quo. It is more accurate to say that the BRICS are merely seeking to diversify their financial portfolios which in the long-run will most definitely include accepting financial stakes of non-BRICS nations.”

Bobby Peek of South African NGO Groundwork said: “What the BRICS are doing is nothing more than what the North has been doing to the South, but as the region resists such practices from the North, it must also be bold enough to resist its fellow countries in the South.”

The contrast of possibilities between BRICS institutions being a positive force for change or continuing exploitation led Dossani to argue that: “It’s too early to know which of these will happen, but poor communities and their allies in civil society must push for the former. There’s too much at stake to sit on the sidelines.” Peek likewise suggested that civil society groups “build a strong criticism that demands equality instead of new forms of exploitation.”

Carlos Tautz of Brazilian NGO Instituto Mais Democracia said: “For the first time in history, civil society organisations have the opportunity to monitor an international financial institution from its birth.” Tautz summarised demands being made of the new institutions: “1) a wide public information policy, including norms of transparency; 2) international accountability criteria; 3) prior to disbursements, an open process for discussion and decision-making with people potentially affected by the projects; 4) the deliberative decision-making space to include civil society organisations of the countries impacted; and 5) a norm against any violation of human rights.” He concluded “we do not need more non-transparent and undemocratic public institutions such as the IMF and World Bank.”