- The Washington Times - Tuesday, August 5, 2014

With Congress balking at reform legislation giving large, emerging economic powers a greater say in the International Monetary Fund, some of the world’s top rising economies have decided to establish their own aid bank to compete with the Western-led IMF for clients in the developing world.

Meeting in Brazil last month, the so-called BRICS countries agreed to start a New Development Bank with $100 billion in capital. China will contribute nearly half, or $41 billion, of the total, with Russia, Brazil and India chipping in $18 billion apiece and South Africa contributing $5 billion. The five emerging giants will maintain majority control over the new institution.

The new bank is a clear slap at the IMF, the U.S. and its allies, who have hesitated for years to make changes in the IMF and World Bank to reflect the fact that China, by some measures, is close to overtaking the U.S. as the world’s largest economy, while nearly half the world’s economic activity now occurs in the developing world. In an added show of defiance and disenchantment with the West, the BRICS said they would establish a major new alternative pool of $100 billion in currency reserves that they would maintain and control outside the IMF.


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The new institutions have the potential to “change the institutional landscape” for global finance that was established by the U.S. and its European allies after World War II, said Vikram Nehru, a senior associate at the Carnegie Endowment for International Peace. Once the new bank starts borrowing in global financial markets, it is likely to outstrip the size of the World Bank, with annual lending of $34 billion, he said.

“This is the direct result of the obduracy of the advanced countries, which have steadfastly refused to alter the governance structures in the World Bank and the IMF to reflect the growing role of the BRICS in the global economy,” he said. Together, the five BRICS countries generate about a quarter of the world’s economic output and hold 40 percent of the world’s population.

The amount of the new bank’s initial funding is identical to the $100 billion increase in IMF lending authority approved by most IMF members, but it has been blocked by largely conservative opposition on Capitol Hill. Legislation that would allow the IMF funding increase to go into effect, along with governance changes giving a modestly increased voice on the IMF’s board of directors to the major emerging economies, has been stalled in Congress since 2012.

Most of the increased funding sought by the IMF would come from China and IMF members other than the U.S. in exchange for greater voting shares. The U.S. voting share and contribution to the IMF would remain essentially unchanged under the legislation. It is not clear whether the establishment of the new bank will make China and other developing countries less willing to fork over their pledged contributions should the Congress ever approve the legislation.

Seeking cooperation

IMF Managing Director Christine Lagarde sought to paint the best face on the BRICS‘ revolt and establish a cooperative relationship with the new aid bank. She pleaded earlier this year for patience from China and its allies to give U.S. legislators more time to act. Senate Democrats have supported the IMF reforms, but House Republicans have refused to go along with including them in various spending measures before Congress, despite personal lobbying by Ms. Lagarde.

“The IMF has a very strong relationship with all the BRICS nations,” Ms. Lagarde said. “IMF staff would be delighted to work with the BRICS team dedicated to this project with a view to reinforcing the cooperation among all parts of the international safety net intended to preserve financial stability in the world.”

But other observers didn’t try to varnish the truth.

“It reflects a fundamental change in global economic and political power,” said Joseph Stiglitz, former Clinton economic adviser, World Bank economist and Nobel Prize-winning economist. “The BRICS countries today are richer than the advanced countries were when the World Bank and the IMF were founded. We’re in a different world. At the same time, the world hasn’t kept up. The old institutions have not kept up,” he told Democracy Now!.

“The U.S. is not playing the economic role and the leadership role that it did at one time,” he added. “We all believe in democracy, but a democracy says it shouldn’t be just assigned to one country.”

The U.S. has exercised veto power over major IMF decisions for decades and would continue to do so under the reform legislation. Many developing countries view Congress‘ refusal to approve the IMF reforms as just the latest power play by Washington aimed at holding them back.

The BRICS have “legitimate grievances” with the U.S., the IMF and World Bank, and now they’ve found a constructive way to pursue their own goals, said Mr. Stiglitz.

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