BRICS announce $200B challenge to world financial order

After years of railing against the Western-dominated global financial order, a powerful bloc of the world’s emerging economies has finally done something about it.

On Tuesday, the BRICS nations — Brazil, Russia, India, China and South Africa — formally introduced their long-awaited $100 billion development bank, to be headquartered in Shanghai, and a currency reserve of the same size, institutions that aim to be both competitor and antithesis to the World Bank and International Monetary Fund.

The New Development Bank (NDB), announced at the sixth BRICS summit in Fortaleza, Brazil, has been billed as an answer to decades of grievances in the developing world about a global financial architecture that critics say the United States and Western Europe have exploited to enforce the subservience of the developing world.

“The BRICS bank will be one of the major multilateral development finance institutions in this world,” Russian President Vladimir Putin said Tuesday.

The hotly anticipated announcement was seen as a watershed moment for a coalition that has struggled to prove it is anything more than an acronym with 20 percent of the global GDP and a shared distaste for the unipolar world order. Since its first summit in 2009, the group has struggled to institutionalize its otherwise incoherent grouping, which is often at loggerheads politically and is too geographically disparate for a security framework to be viable. It even has discordant views on how to manage trade, which has precluded a trade partnership from materializing.

Negotiations hit an impasse Tuesday and were nearly derailed as the two nations vying for supremacy within the bloc, India and China, pleaded their respective cases for hosting the bank’s headquarters. India apparently relented in return for the first five-year presidency of the bank, which should be up and lending by 2016.

Though at first the NDB will bankroll badly needed infrastructure projects in the BRICS nations, other countries will be permitted to buy in and apply for funding.

The impetus for launching a bank run by the emerging world was born amid the global financial crisis of 2008, when economic turmoil and imprudent financial planning by the U.S. and Europe sent shock waves through the less industrialized world. The West had lost credibility as the world’s financial manager, a role it has held undisputed since world leaders meeting in Bretton Woods, New Hampshire, set up the IMF and a predecessor to the World Bank in 1944.

At the same time, the U.S. Congress has refused to approve a draft deal that would restructure the Washington-based Bretton Woods institutions to boost voting power for China and other developing nations, which feel shut out even though they now contribute substantial funding.

“What the BRICS are doing is showing they’re going to play a greater role in the global financial system, one way or another,” said Peter Hakim, president emeritus of the Inter-American Dialogue, a think tank that focuses on Western Hemisphere affairs.

Despite the ambitious rhetoric of BRICS officials, their projects are not the first of their kind, nor will they compete with the 66 years of development experience under the World Bank’s belt or with the liquidity of the $755 billion IMF. Most economists describe the BRICS bank as complementary, rather than a rival, to the World Bank — in fact, the World Bank president himself has welcomed the BRICS’ venture as a means of filling the vast funding gaps in rapidly developing countries.

But the BRICS have also promised to do things differently, offering no-strings-attached loans that do not permit the lender to meddle in a country’s domestic affairs.

That lofty promise is a direct affront to the World Bank and IMF, whose "one size fits all" loan programs mandate unpopular austerity measures and budget cuts while encouraging rapid export production — a model that developing world economists say stunts a poor country’s domestic institutions, undermines its leadership and molds it into a commodities workshop for the West. Argentina, whose IMF-imposed budget cuts in the 1990s hastened the country toward default, is often held up as the poster child for Bretton Woods reform.

In contrast to the World Bank, the NDB will begin as an egalitarian venture among the BRICS, with each founding nation contributing $10 billion (before the bank’s value is doubled at some point) and holding equal voting power. Even though China's economy is larger than that of the other four members combined, the country has agreed to hold an equal stake in the bank — a sticking point for India that has delayed an agreement for two years.

China will hold a larger stake only in the currency reserve, which is a sort of emergency fund, like the IMF, that is meant to protect BRICS nations from another global crisis.

“This could really be the seeds of the next Bretton Woods that in the long run replaces the international financial institutions,” said Kevin Gallagher, a director of the Global Economic Governance Initiative at Boston University. “And that would be the West’s fault, because they haven’t let those institutions adapt to the realities, needs and expertise of the 21st century.”

The BRICS no-strings-attached approach does not mean its development bank will give away billions to fund infrastructure projects in other countries merely to serve an ideological point. “No development bank hasn’t had some sort of political influence,” Hakim noted. “It’s very hard to believe these loans will be apolitical.”

Where the BRICS bank might differ from its Western-led rival, Hakim said, could be its aversion to conditionality on the basis of governance principles. The West has long leveraged its economic clout to back up moral opprobrium against regimes and governments who abuse human rights or stifle democracy. The U.S. and European sanctions regime against Russia over the crisis in Ukraine is a fresh wound for the BRICS nations, which all notably abstained from the U.N. vote that overwhelmingly declared Russia’s annexation of Crimea illegal.

Putin, who has virulently accused the West of victimizing the rest of the world through its development programs, on Tuesday called for his fellow BRICS leaders to “help prevent the harassment of countries that do not agree with some foreign policy decisions made by the U.S. and their allies.”

Few details are available about how the BRICS bank will make spending decisions or fold in new members, two points that need to be worked out if the group has designs on competing with Bretton Woods one day. Economists also note that the once-roaring BRICS have lost some of their thunder in the past couple of years; Brazil and India have seen their explosive growth rates slacken somewhat, while Russia’s has ground to an anemic 0.03 percent.

But the new institutions will, if nothing else, put more weight behind BRICS demands for greater representation in the World Bank or IMF. Now that they can offer easy money to developing nations that are wary of exploitative loans from institutions some call “neocolonial,” the West might have to take BRICS proposals more seriously.

“The new institutions will be sort of a moral model to juxtapose against the IMF and World Bank,” said Gallagher. “They'll give the BRICS more political clout when arguing about the perceived injustices of those institutions. They can point to their bank and show how to balance voting power and all that the right way.”

Now it’s only a matter of translating ideology into unified action — something that has tripped them up in the past.

“It’s an historic moment,” Gallagher said. “But let’s see and let’s hope the BRICS put their money where their mouth is and lead by example.”