The impact of the BRICS’ Contingent Reserve Arrangement (CRA) and the New Development Bank (NDB)

11 October 2014

•

Sponsor: Center for Economic and Policy Research (CEPR)

Panelists: Mark Weisbrot (Co-Director, Center for Economic and Policy Research), Nancy Alexander (Director, Economic Governance Program of Heinrich Boell Foundation), Aldo Caliar (Director, Centre for Concern)

This panel will look at the potential impact of the new BRICS’ (Brazil, Russia, India, China, South Africa) driven institutions. Can the CRA help prevent balance of payments crises in the coming years? How can it manage to provide sufficient and timely balance of payments support and still have a low default rate, without imposing harmful conditions? And how will the NDB choose investment projects that are socially beneficial? What are the implications of these new institutions for the IMF and World Bank?

Nancy Alexander

Changing paradigm of investment, and civil society needs to catch up with that process
Many new initiatives, from within the Bank, role of BNDES, Latin American Development Bank (CAF), Asian Infrastructure Bank, and west feeling threatened
Interestingly two big new facilities are being launched, the World Bank’s Global Infrastructure Facility announced yesterday with a host of corporations – its intention is to serve the new development bank and thee AIIB and to get their noses into as much business as possible
If you read the new newsletter you can read much of these new initiatives
NDB (BRICS Bank) will have a one nation one vote system for the BRICS for up to 55% of the shareholding, developed countries 20% and other emerging and developing countries is 25%.
What kind of bank will this be? Any single country can have up to 7% leaving perhaps very little for developing countries
China will be the location, =India president, Russia as chair
South Africa will be the first regional hub
Initially the focus will be on regional pipelines of ‘bankable’ projects in Africa
This pipeline is representative of energy projects, the so-called PIDA
This represents a sweeping global consensus on number of sectors, but much of the clarity needed on what will be ultimate investments is absent
Governance rules remain unclear, and risk of little transparency, consultation/participation, and environmental and social safeguards. Best practice approaches on country and regional level remain nevertheless inadequate
Final note – the mechanisms by which much of the anticipated funds will be pooled has uncomfortable echoes with the lessons of the financial crisis

Notably the Evaluation of the PPPs done by the Bank and IFC – found no additionality from private sector involvement. No results were provided as the evaluations are done at project construction, not of subsequent impacts

There is also no systemic discussion of contingent liabilities associated with PPPs. Everyone should understand that this is equivalent to external debt. Before the long-term investors and pension funds enter, the term de-risking is cited, e.g. guaranteeing pensioners’ and taxpayers money to the profits of the investors. An article from the Korea Development Institute shows how hundreds of PPPs left a legacy to our children to pay through the nose

Aldo Caliari

What are the implications of this nascent stage of significant
The statements at the launch of these institutions represent counter-narrative to the Western domination of the last 4 decades
What we see emerging is a challenge to that, and though on their own they may not reflect sizable institutions, their statements for example on tax contrast to many exercises still led by developed countries
The role of UNCTAD is interesting, having historically provided a counter-balance to the leading global institutions, having noted that a crisis was due to happen and has challenged paradigms on conditionality, on FDI, role for developing country policies, and yet it has been under pressure as its four yearly planning process whereby developed countries sought to reduce its budget, narrow its mandate (including to exclude it from examining sources of the global financial crisis).
BRICS cast its lot with UNCTAD

Human rights: another narrative monopolized by western countries who present themselves as custodians and champions of human rights, but if you examine what has occurred in the last few years, in terms of human rights negotiations in different for a – last June a proposal to create a treaty establishing human rights obligations on transnational corporations followed a report by Amnesty International it revealed that corporations can violate and continue to violate rights despite judicial processes

In June a treaty was proposed to codify existing obligations on corporations – the number of western ‘champions’ of human rights voted for this treaty was zero.

The impacts of foreign debt on human rights in countries with excessive debt – these western champions voting to reform this system is typically zero.

Hence these examples show the double standards in an existing hegemonic narrative

Regarding the post-2015 agenda – another area where developed countries have been promoting two big things.

Firstly there is a common but differentiated obligation which they are trying to remove

Secondly they have promoted that ODA is essentially dead though not in so many terms, arguing for changes to the manner in which ODA occurs and that it should be ‘modernised’ as part of an argument against public funding, and arguing that development objectives be fulfilled by investors, and insisting that developing countries embed frameworks for investment.

Nancy just described what that means, removing frameworks of protection and so on.

The statements from Fortaleza set out the need to defend public assistance in the form of ODA and common but differentiated responsibilities.

Hence the BRICS are saying ‘we are here’ and represent a challenge to the norms of how to address questions, which is a very important statement geopolitically.

The statements have a remarkable number of comments relating to individual countries, countless examples. The G7 communiques have also presumed to discuss concerns of other countries’ situations, and these statements by BRICS indicate their view that they are an alternative pole of power.

Though essentially diplomatic about the existing Bretton Woods institutions, the inference of what they have launched such as the CRA reflect a direct rebuke to the BWIs, including the unreformed governance of the IMF that has stalled in US Congress.

They are ready to consider alternatives if the US does not move forward, though they are not explicit, and have fostered here this week very serious discussions about what that plan b represents. People are thinking very seriously about the current bilateral credit arrangements within the IMF but without requiring US approval, and necessitating a vote in each case of a different system, or perhaps de-linking the quota from the governance structures, which have historically always been together.

When discussing the World Bank it is even clearer, that they indicate the Bank’s strategy depends on more “democratic structures” and a host of other longstanding developing country positions

These institutions are going to be more open to leaving policy space intact, and move away from conditionalities, and this space will be nevertheless potential to create the necessary frameworks of human rights

Mark Weisbrot

Here in Washington there is not this sense that democracy should extend to the world, rather than states, and the acceptance is that in the foreign policy establishment (including the media) and elsewhere that the global governance system should remain a form of dictatorship
What has changed since the rules were written to favour rich countries (and their corporations) in 1944, at a time when the US was the only standing industrial power in the world
China is already in some measures larger than the US economy and this gap will only widen and in our lifetimes at that.
Changes will occur far more rapidly and irrespective of whether Lagarde tells Germany to spend more to end recession – the Germans certainly don’t care
IMF notably where it has influence directly still recommends austerity – it is post-modern, and the IMF says one thing and does the other and most of the media does not notice. IT is significant that their rhetoric has changed, but it won’t change the reality of what they do as the governance remains unchanged
The latest proposed changes move the vote of developing countries by 4% – the changes are cosmetic. China’s changes – with the largest economy and one sixth of the world’s population – with 3.6 % of the votes, while the UK has 4.3%.
The changes will not make a difference – it’s not the voting that matters, it hardly votes

Developing countries do not use the voice that they have in the IMF – hence the voting structure changes reflect a future project, but not in the foreseeable future.

Why does this happen?

Look at Latin America – they have achieved independence in the last 15 years, having left IMF agreements and subject to a US-led influence over their economic policy via their institutions and the creditors’ cartel. This is a massive geopolitical change.

They fought losing battles within the OAS until they created their own organisation, without the US and Canada (CELAC). Similar press coverage was dismissive, but nevertheless CELAC states coordinate their position within OAS.

They’ve changed the structure of international relations so much that even US-sympathetic states taking collective positions antagonistic to the United States, such as Colombia has done

Change will probably not happen gradually and in a structured way

As Aldo said, it’s a germinal project and a possible moment of changes

In my opinion the CRA is the most important aspect of this set of institutions, as crises are often forgotten about until they re-occur. Will states in future be like Ukraine going to the IMF or have the freedom to suffer only a 1.5 year recession as the US was able to do by enjoying ownership of its own policy.

The BRICS are indicating that the US will no longer be in charge of crises states, if it is staffed by capable people and enjoys political

Note that CRA currently has a 30% provision limit requiring an IMF programme, which is disturbing – and reveals the problem of politics within those five states and whether to adopt a neoliberal or alternative path.

Institutions: BRICS International Monetary Fund (IMF) World Bank Group

Search the Bretton Woods Project site

The impact of the BRICS’ Contingent Reserve Arrangement (CRA) and the New Development Bank (NDB)

Share

Sign up to receive our alerts directly in your inbox