Brickbats for the BRICS bank?

23 July 2014 by John Weeks


Group photo of the BRICS leaders, Dilma Vana Rousseff (president of Brazil), Manmohan Singh (prime minister of India), Valdimir Putin (president of the Russian Federation), Xi Jinping (president of China), and Jacob Zuma (president of South Africa).

For many years officials of governments in African, Asian and Latin American have urged the creation of a “development” bank that they would control. On Tuesday 15 hopes become reality in Forteleza, Brazil with the formal creation of the New Development Bank by the leaders of the so-called BRICS group of countries (Brazil, Russia, India, China and South Africa).

This event raises several political questions for progressives: 1) what is a type of “bank” do the BRICS leaders propose, 2) why is it needed, 3) are these the appropriate leaders to organize and control the new institution, and 4) is it something progressives should view favourably?

The BRICS proposal has two parts, a “development” bank and a US$ 100 billion reserve of international currencies. The former has similarities to the operations of 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.

, while the latter would have some functional kinship with the 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
. At this point the plans for the second — short term support for balance of payments Balance of payments A country’s balance of current payments is the result of its commercial transactions (i.e. imported and exported goods and services) and its financial exchanges with foreign countries. The balance of payments is a measure of the financial position of a country vis-à-vis the rest of the world. A country with a surplus in its current payments is a lending country for the rest of the world. On the other hand, if a country’s balance is in the red, that country will have to turn to the international lenders to meet its funding needs. problems — remain a work process. Those for the first are quite clearly specified.

A little tedious background is necessary. An international “development” bank is a non-profit Profit The positive gain yielded from a company’s activity. Net profit is profit after tax. Distributable profit is the part of the net profit which can be distributed to the shareholders. , cross-country, public sector institution that makes loans to governments for long term projects, either directly productive ones (e.g., a hydro-electric dam) or supportive of productive activities (e.g., roads and highways). A development bank’s sine qua non lies in offering loans at more favourable terms than private banks.

In addition, African, Asia and Latin America each has a regional development bank (the African Development Bank, the Asian Development Bank, and the Inter-American Development Bank). Why is another one needed?

The answer is simply stated — global power and its changing distribution over the last fifty years. The proposals for the IMF and the World Bank at the end of WWII assigned voting power to the contribution of each member government to the capital base of the institution. In contrast, each country would have had one vote in the International Trade Organization (ITO), proposed at the Havana conference of 1947-1948 to regulate world trade. The reader will not be startled to learn that opposition from US government resulted in the early death of the ITO.

In practice the IMF and World Bank voting shares conformed to the demand of the US government to have control of both institutions. The governments of the countries that emerged as the victors in WWII held the overwhelming majority of votes in both the IMF and the World Bank with the US government grabbing the largest 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. .

The institutional power held by the United States, Great Britain, France and Canada became increasingly disproportional to their economic power as the Federal Republic of Germany (“West Germany”) and Japan emerged to be major economic actors (this anomaly would be even greater in the UN Security Council with no permanent seat for either). Bitter complaints about this imbalance resulted in marginal adjustments to voting shares among the developed countries, but peanuts for the economically blossoming BRICS.
The first complain by the BRICS governments that prompts the new bank is lack of power. They want a financial institution in which they hold the controlling shares. Closely related to this aspect of institutional power is the long-standing opposition — even outrage — among governments in the developing world at the policy conditions attached to IMF and World Bank loans (and grants for the latter).

In the World Bank the use of these well-known and notoriously anti-development conditions substantially increased with the institution’s shift from “project lending” — most of it for infrastructure — to “budget support”. In the 1970s almost all World Bank lending went to projects. In the 1980s came the Latin American debt crisis and with it a massive shift in the World Bank to loans directly to governments with their use not specified.

For example, in place of a requirement that US$ 200 million to Zambia be used to build a hydro-electric damn, conditions would require the government to privatize public enterprises, savagely cut government employment, and drastically slash public sending. The implicit and frequently explicit purpose of these conditions was to convert the recipient governments to extreme neoliberal economic policies. Brazil (in the 1980s) and Russia (in the 1990s) especially suffered from this ideological driven “structural adjustment”. All the regional development banks joined into the neoliberal conditionality game with varying degrees of enthusiasm.

In summary, the BRICS bank would provide a less ideological source of lending for infrastructure, and in doing so shift some power in global governance away from the governments of the G7 countries. It would appear that any government in the developing world could qualify to join and apply to borrow. However, it is a bit geographically challenged to describe it as the development bank of the “South” given that Russia is one of the founding members, the largest founding member is entirely north of the Tropic of Cancer except for a tiny sliver (China), and a third was entirely north of the equator the last time I checked a world map (India).

Setting aside pedantries about location, is this Gang of Five likely to shift international lending in a humane and flexible direction as Oxfam hopes? I am told by a friend advising the India government on the BRICS bank that unlike for the IMF and World Bank each country will have one vote. This is encouraging, but how in practice it will affect decision making remains to be seen (after all, formally the WTO WTO
World Trade Organisation
The WTO, founded on 1st January 1995, replaced the General Agreement on Trade and Tariffs (GATT). The main innovation is that the WTO enjoys the status of an international organization. Its role is to ensure that no member States adopt any kind of protectionism whatsoever, in order to accelerate the liberalization global trading and to facilitate the strategies of the multinationals. It has an international court (the Dispute Settlement Body) which judges any alleged violations of its founding text drawn up in Marrakesh.

has one vote per member). The largest contribution to the capital base is from China, whose record on investments in Africa is nothing short of appalling (see my discussion of Chinese capital in Zambia).

Given the BRICS objection to US domination of the IMF and World Bank, I would have expected them to take the obvious lesson that they should not locate the institution in the territory of the largest member. It seems that such is not the case (see “BRICS bank to be headquartered in Shanghai”). The warm endorsement of the New Development Bank by the president of the World Bank suggests complementarily rather than tension between it and the Bretton Woods “Twins”.

How should progressives react to the BRICS bank? Many predict or at least hope that the new lending institution will improve the access of middle and low income countries to financing for infrastructure. This is likely to be realized, because World Bank project loans not only carry neoliberal conditions, the procedures to obtain them are extremely bureaucratic. If the BRICS bank can operate less bureaucratically than the World Bank, that would be a substantial gain in itself.

However, it is worth asking what to me is the obvious question — why is it necessary for countries to borrow to built a new airport (for example)? The problem is never “money”. Any government of a country that has its own currency can borrow from the 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
(this would not apply to the 14 members of the West and Central African currency zones). Only one reason comes to mind for borrowing abroad, that the project may require substantial imports. Thus, the purpose of the borrowing is to obtain US dollars, yen, renminbi, etc.

Since the purpose of the loan is to obtain foreign currency, the process by which the BRICS bank reviews and assesses specific projects involves the same unnecessary bureaucracy that we find in the World Bank. The suspicion comes to mind that the purpose of the BRICS bank, as a project funding bank, is to link the finance to construction firms and materials suppliers in the BRICS themselves. Certainly, the Chinese government is notorious for doing this (see “China insists on ’tied aid’ in Africa”).

Much better than a project bank for the “South” would be an institution providing long term loans in foreign currencies. This would have several major advantages over the BRICS bank. First, the loans could be made on the basis of a judgement about the ability of the government to repay, not a narrow assessment of specific projects. This rather difficult judgement is the de facto basis of all loan repayment — can the country’s export sectors generate the foreign exchange to service the debt?

Second, the borrowing country’s external debt would increase by the foreign currency component of the project. The rest would be financed domestically. This arrangement would be in line with the famous advice of John Maynard Keynes in 1933, “let goods be homespun whenever it is reasonably and conveniently possible, and, above all, let finance be primarily national” (emphasis added).




Photo : Group photo of the BRICS leaders, Dilma Vana Rousseff (president of Brazil), Manmohan Singh (prime minister of India), Valdimir Putin (president of the Russian Federation), Xi Jinping (president of China), and Jacob Zuma (president of South Africa).

John Weeks

Professor Emeritus, SOAS, University of London

Other articles in English by John Weeks (2)

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