Are BRICS any use for rebuilding the collapsing global financial architecture?

19 September 2013 by Patrick Bond


In its most recent world public opinion survey, the Pew Research Centre found that ‘international financial instability’ is considered a major threat by 52 percent of those polled was a close second, after climate change at 54 percent).

Here in South Africa, after the lifting of local exchange controls and thanks to US financial deregulation during the late 1990s –so New York bankers could earn higher profits – our currency became very volatile, and we recently joined Turkey, Brazil, Indonesia and India named by Morgan Stanley the ‘fragile five’ currencies.

‘Emerging’ economies start submerging


Financial Times, 5 September 2013

South African finance minister Pravin Gordhan seemed to panic during a Financial Times interview last month, complaining of the world elites’ ‘inability to find coherent and cohesive responses across the globe to ensure that we reduce the volatility in currencies in particular, but also in sentiment.’

The following week, however, on the sidelines of the St Petersburg G20 G20 The Group of Twenty (G20 or G-20) is a group made up of nineteen countries and the European Union whose ministers, central-bank directors and heads of state meet regularly. It was created in 1999 after the series of financial crises in the 1990s. Its aim is to encourage international consultation on the principle of broadening dialogue in keeping with the growing economic importance of a certain number of countries. Its members are Argentina, Australia, Brazil, Canada, China, France, Germany, Italy, India, Indonesia, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, USA, UK and the European Union (represented by the presidents of the Council and of the European Central Bank). Summit, Gordhan joined others in the Brazil-Russia-India-China-South Africa (BRICS) network to congratulate themselves about a forthcoming BRICS ‘New Development Bank’ and Contingent Reserve Arrangement (CRA).

Could these two infants challenge the Bretton Woods Institutions in the coming years’ chaotic world financial environment? Nearly seven decades after the World Bank World Bank
WB
The World Bank was founded as part of the new international monetary system set up at Bretton Woods in 1944. Its capital is provided by member states’ contributions and loans on the international money markets. It financed public and private projects in Third World and East European countries.

It consists of several closely associated institutions, among which :

1. The International Bank for Reconstruction and Development (IBRD, 189 members in 2017), which provides loans in productive sectors such as farming or energy ;

2. The International Development Association (IDA, 159 members in 1997), which provides less advanced countries with long-term loans (35-40 years) at very low interest (1%) ;

3. The International Finance Corporation (IFC), which provides both loan and equity finance for business ventures in developing countries.

As Third World Debt gets worse, the World Bank (along with the IMF) tends to adopt a macro-economic perspective. For instance, it enforces adjustment policies that are intended to balance heavily indebted countries’ payments. The World Bank advises those countries that have to undergo the IMF’s therapy on such matters as how to reduce budget deficits, round up savings, enduce foreign investors to settle within their borders, or free prices and exchange rates.

and International Monetary Fund IMF
International Monetary Fund
Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.

http://imf.org
(IMF) were established to restore Western interstate banking following the Depression and World War II, the BRICS stand at the verge of replacing Washington and its neoliberal ideology with South-centred, state-aided capital accumulation.

That is the rhetoric, at any rate. But especially in the last few weeks, the question of whether BRICS strategies are profoundly different from – or instead reinforcing of –the global financial architecture’s self-destruction remains to be answered. After all, one of the CRA’s objectives, according to South African Treasuryofficials, is to ‘complement existing international arrangements.’

Even so, a $50 billion BRICS bank capitalization wouldn’t initially challenge the World Bank (which lends almost that much every year). And a $100 billion CRA would quickly be exhausted in the event of a more serious financial meltdown.

Perhaps those sums can be increased in coming years, since they are pitiable amounts to face off against emerging-market financial melting of the sort witnessed since the mid-1990s. Since then, numerous countries have required a $50 billion package overnight to halt financial looting.

Financial backlash against BRICS

To illustrate, in recent weeks trillions of dollars worth of paper assets have shifted around, driving quite intense currency crashes in most BRICS. As a result of an announced change in US Federal Reserve FED
Federal Reserve
Officially, Federal Reserve System, is the United States’ central bank created in 1913 by the ’Federal Reserve Act’, also called the ’Owen-Glass Act’, after a series of banking crises, particularly the ’Bank Panic’ of 1907.

FED – decentralized central bank : http://www.federalreserve.gov/
policy in which a bit less artificial stimulation (‘Quantitative Easing’) will be provided to banks thanks to Fed ‘tapering’, interest rates Interest rates When A lends money to B, B repays the amount lent by A (the capital) as well as a supplementary sum known as interest, so that A has an interest in agreeing to this financial operation. The interest is determined by the interest rate, which may be high or low. To take a very simple example: if A borrows 100 million dollars for 10 years at a fixed interest rate of 5%, the first year he will repay a tenth of the capital initially borrowed (10 million dollars) plus 5% of the capital owed, i.e. 5 million dollars, that is a total of 15 million dollars. In the second year, he will again repay 10% of the capital borrowed, but the 5% now only applies to the remaining 90 million dollars still due, i.e. 4.5 million dollars, or a total of 14.5 million dollars. And so on, until the tenth year when he will repay the last 10 million dollars, plus 5% of that remaining 10 million dollars, i.e. 0.5 million dollars, giving a total of 10.5 million dollars. Over 10 years, the total amount repaid will come to 127.5 million dollars. The repayment of the capital is not usually made in equal instalments. In the initial years, the repayment concerns mainly the interest, and the proportion of capital repaid increases over the years. In this case, if repayments are stopped, the capital still due is higher…

The nominal interest rate is the rate at which the loan is contracted. The real interest rate is the nominal rate reduced by the rate of inflation.
more than doubled over a few weeks, leading to dramatic outflows from emerging markets and the crash of the South African rand, Brazilian real, Russian rouble and especially the Indian rupee.

Swedish economist Anders Aslund of the Peterson Institute for International Economics was scathing in a Financial Times article in late August: ‘The BRICS party is over. Their ability to get going again rests on their ability to carry through reforms in grim times for which they lacked the courage in a boom.’ Goldman Sachs banker Jim O’Neill was asked by the Wall Street Journal last month about the acronym he had created a dozen years earlier: ‘If I were to change it, I would just leave the “C”.’ The Economist opined, ‘The Great Deceleration means that booming emerging economies will no longer make up for weakness in rich countries.’

Tempting as it is to write off the more neoliberal of BRICS-pessimist commentators, their confidence grows from several countries’ deep-seated problems, not just momentary financial fluctuations. Yet one BRICS member will potentially thrive, and in my visit to three Shanghai universities last week to discuss the (re)brewing economic crisis, I was struck by how insistent Chinese scholars defended the ‘reform-minded status quo’ (sic) strategy.

The Economist - 27 July 2013

As reported last week in the China Daily (reflecting official sentiments), local experts predict that the BRICS bloc is already breaking up in material ways, leaving only China to push ahead through the storm. Remarked Tsinghua University economist Li Dokui, the end of the US Fed’s Quantitative Easing is ‘good news for the renminbi’ because it need no longer rise in value – but meantime, ‘the concept of the BRICS may vanish, leaving just China versus other emerging economies.’

According to Merrill Lynch economist Lu Ting, ‘China will be largely immune to the impact due to its sustained current-account surplus, low foreign debt, huge exchange reserves, high savings and capital controls.’ Offering official multilateral acknowledgment of severe danger, deputy IMF managing director Zhu Min warned that if China opens its capital account by liberalizing the currency, it would ‘exacerbate’ the global crisis – which is typically an observation an IMF man would repress.

BRICS behave

There are still some who believe the BRICS can help fix global-scale problems caused by persistent capitalist crisis, the end of the commodity cycle, fiscal austerity, durable financial deregulation and recent credit constraint combined with new bubbles. Yet strategies advocated by BRICS leaders have so far had no discernible effect on financial volatility.

Within the IMF, for example, Chinese voting power has risen substantially but left no genuine change in the institution’s agenda. As University of Delhi professor emeritus Achin Vanaik argued at a Fudan University ‘Rising Powers’ workshop last week, ‘The Asian Monetary Fund and Chiang Mai Initiative, originally seen as countervailing financial power, ended up not opposing but complementing the IMF.’

As for the World Bank, its presidencywas grabbed by Barack Obama’s nominee Jim Yong Kim in 2012, without a united response from the BRICS. The Brazilians nominated a progressive economist, Jose Antonio Campo; the South Africans nominated neoliberal Nigerian finance minister Ngozi Okonjo-Iweala; and the Russians supported Kim. As for China, the reward for not putting up a fight was getting leadership of the Bank’s International Finance Corporation for Jin-Yong Cai, while an Indian, Kaushik Basu, was made World Bank chief economist. And also reflecting assimilation not antagonism, in 2012 the BRICS contributed $75 billion to the recapitalization Recapitalization Reconstituting or increasing a company’s share capital to reinforce its equity after losses. When the banks were bailed out by the European States, they were most often recapitalized with no conditions attached and without the States having the decision-making power their participation in the banks’ capital should have given them. of the IMF, which meant that while China’s voting share Share A unit of ownership interest in a corporation or financial asset, representing one part of the total capital stock. Its owner (a shareholder) is entitled to receive an equal distribution of any profits distributed (a dividend) and to attend shareholder meetings. increased, Africa’s decreased.

Thus it was reasonable to ask, with skepticism, whether the BRICS leaders were really serious about challenging Bretton Woods. After all, there was an alternative already in place that they could have supported: the Bank of the South. Founded by the late Venezuelan president Hugo Chavez in 2007 and supported by Argentina, Bolivia, Brazil, Ecuador, Paraguay and Uruguay, Banco del Sur already has $7 billion in capital. It offers a more profound development finance challenge to the Washington Consensus, especially after Ecuadoran radical economists improved the design.

Instead, a much more durable reflection of the commitment to stabilizing world finance – rather than radically changing the most unfair and intrinsically destabilizing components – is China’s ongoing financing of Washington’s massive trade deficit, by continuing to hold more than $1.3 trillion of Treasury Bills. The Chinese refuse to sell sufficient T-Bills in order to genuinely weaken Washington’s power, and to set up a new currency that the world could more democratically manage, instead of the Fed with its bias to the interests of the world’s largest banks.

Notwithstanding rhetoric about increasing use of BRICS currencies, not much more is being done to end the destructive system in which the US dollar has world ‘seignorage’: i.e., it is the world’s reserve currency, no matter how badly Washington officials abuse that power. If China really wants the renmimbi to one day take its place, the pace at which this is happening is agonizingly slow.

Worse still, in close alignment with Washington, South Africa explicitly supports financial liberalization. SA Reserve Bank deputy governor Daniel Mminele acknowledged last November that Pretoria opposed global regulation such as the ‘Robin Hood tax’ on financial transactions that was supported by more enlightened countries, including those from Europe being roiled by global financiers.

BRICS development banking?

Meanwhile South Africa’s own precursor to the BRICS bank – the Development Bank of Southern Africa (DBSA) – has been run in a ‘shoddy’ way, according to the new chief executive Patrick Dlamini last December; he implied that corruption had been tolerated. He then announced both a 40 percent cut of his 750-strong staff, starting with environmentalists and social specialists, and a massive increase in privatisation financing. But Dlaminiadmitted this week that the Bank suffered a net loss of $83 million in 2012-13 due to ‘impairment losses on development loans of $160 million and revaluation losses on financial instruments Financial instruments Financial instruments include financial securities and financial contracts. of $40 million.’ Its lending volume last year was only $1.8 billion, after reaching $3.4 billion two years earlier.

The BRICS’ largest development finance institution, the Brazilian National Economic and Social Development Bank (BNDES) has also been exceptionally destructive in its massive lending portfolio, now in the range of $80 billion annually, more than twice the World Bank’s. Warns Carlos Tautz from Instituto Mais Democracia, ‘If the Brics Bank is mirrored on BNDES, this reveals a probable lack of transparency and omissions in governance.’

The China Development Bank and the Export-Import Bank of China have had some positive impacts especially in expanding solar technology and avoiding the imposition of Washington Consensus policies. But as Boston University scholar Kevin Gallagher shows, they can be severely destructive in sites as diverse as Burma, Honduras and Gabon.

In other words, when more announcements about a BRICS New Development Bank and CRA are made next year at the summit in Fortaleza, Brazil, don’t expect much that would either stabilise or destabilise world finance; the BRICS appear now merely as a legitimating device.

Legitimation and localisation of global financial chaos

In contrast, the G20 has in past years been a much more substantive site for elite worry over world finance, having been resurrected in November 2008 to deal with the global meltdown just after Lehman Brothers collapsed and world payment systems nearly froze. A few months later, in April 2009, the G20 was central to the push for re-empowering the IMF, first through increased Special Drawing Rights allocations and other grants of $750 billion to stimulate the world economy, and later, in a full recapitalisation in 2012, to generate more bailout financing options for European bankers, at the expense of structural adjustment Structural Adjustment Economic policies imposed by the IMF in exchange of new loans or the rescheduling of old loans.

Structural Adjustments policies were enforced in the early 1980 to qualify countries for new loans or for debt rescheduling by the IMF and the World Bank. The requested kind of adjustment aims at ensuring that the country can again service its external debt. Structural adjustment usually combines the following elements : devaluation of the national currency (in order to bring down the prices of exported goods and attract strong currencies), rise in interest rates (in order to attract international capital), reduction of public expenditure (’streamlining’ of public services staff, reduction of budgets devoted to education and the health sector, etc.), massive privatisations, reduction of public subsidies to some companies or products, freezing of salaries (to avoid inflation as a consequence of deflation). These SAPs have not only substantially contributed to higher and higher levels of indebtedness in the affected countries ; they have simultaneously led to higher prices (because of a high VAT rate and of the free market prices) and to a dramatic fall in the income of local populations (as a consequence of rising unemployment and of the dismantling of public services, among other factors).

IMF : http://www.worldbank.org/
for poor and working people.

The St Petersburg G20 did make minor progress on rationalizing corporate taxation and reducing one of the greenhouse gases (HCFs) that should have been covered by the 1987 Montreal Protocol. Still, more durable critiques of both G20 power and BRICS supplication are needed. Some of these were developed at the St Petersburg Counter-Summit by the Post-Globalisation Initiative and its international guests. A rousing declarationemerged and alternative strategies were debated at our meetings, but the overarching fear was of inadequate civil society response to the bubbling economic and military crises, not to mention worsening climate-related destruction.

There are critical geopolitical factors to consider too, for while the world economy is now working against BRICS, turbulent relations between the BRICS and the G7 actually left Russia far stronger after the G20 summit. In St Petersburg, the BRICS unanimously backed Vladimir Putin’s attempt to peacefully revolve the Syrian crisis once chemical weapons were apparently used by the Assad regime against rebels, leading to Barack Obama’s threat to bomb Damascus. Brazil also took a tough stance against the US National Security Agency; president Dilma Roussef was so furiousabout Obama’s snooping on her (and parastatal oil giant Petrobras) that she canceled a Washington trip scheduled for next month.

But the ‘talk-left’ that is so common in the BRICS foreign policy milieu is invariably negated in the ‘walk-right’ by Treasury and central bank Central Bank The establishment which in a given State is in charge of issuing bank notes and controlling the volume of currency and credit. In France, it is the Banque de France which assumes this role under the auspices of the European Central Bank (see ECB) while in the UK it is the Bank of England.

ECB : http://www.bankofengland.co.uk/Pages/home.aspx
officials. So the dangers grow greater, not because of a South-North political confrontation, but because of the lack of an economic one.

Patrick Bond Bond A bond is a stake in a debt issued by a company or governmental body. The holder of the bond, the creditor, is entitled to interest and reimbursement of the principal. If the company is listed, the holder can also sell the bond on a stock-exchange. directs the University of KwaZulu-Natal Centre for Civil Society; his books include Looting Africa (Zed 2006) and Against Global Apartheid (Zed 2003).



Patrick Bond

is professor of political economy at the Wits University School of Governance in Johannesburg and co-editor of BRICS: An anti-capitalist critique (published by Haymarket, Pluto, Jacana and Aakar).

Other articles in English by Patrick Bond (73)

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