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.
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.
SEE ALSO: IMF eyes ‘Plan B’ for reforming itself without U.S.
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.
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.
The new bank will help China find productive uses for its growing wealth and huge $3 trillion in currency reserves, he said, while Brazil should excel at managing aid programs for poorer countries given its already established success at using its own development bank to provide assistance to poorer nations “without all the conditionality and all the trappings around the old institutions.”
Loans from the IMF and World Bank are usually coupled with unpopular austerity measures requiring privatization of government-controlled sectors of the economy, liberalization of interest rates and exchange rates, removal of price controls and other market-oriented reforms long championed by the U.S. and the West. Such stringent conditions are less likely to be championed by the BRICS countries and attached to the loans they approve.
While it represents a rebuff for the U.S. Congress, the near doubling of global aid available for poorer countries through the proposed BRICS bank will be “good news” for Africa, Latin America and Asia, where most of the bank’s future beneficiaries reside, Mr. Nehru said. He estimated that the new development bank will help to address about $1 trillion in unmet financing needs for building roads, bridges, electrical grids, water and sewer systems and other critical infrastructure in the developing world.
With China and Brazil already active in providing financing, expertise and economic advice to other developing countries, the new bank promises to “strengthen South-South engagement [and] provide another avenue to advance the regional and global strategic interests of the bank’s five founders,” he said.
Tired of waiting
The BRICS started pressing for greater representation at the IMF and World Bank in the last decade, but this year they apparently ran out of patience waiting for the advanced industrial powers to adopt the modest changes they sought. Even before the latest IMF reform bogged down in Congress, European nations for years fought efforts to pare down their overrepresentation on the IMF board by giving some of the voting share of some small European nations like Luxembourg to China and other emerging giants.
Moreover, both the U.S. and Europe have balked at giving up their traditional leadership roles at the Bretton Woods institutions, both of which are headquartered in Washington. Following tradition, the IMF continues to be headed by a European — Ms. Lagarde was a former French finance minister — despite attempts by developing nations to sponsor their own candidate, while the World Bank’s president has always been an American.
The BRICS are establishing what they consider a more equitable governance scheme, with the headquarters of their new bank to be located in Shanghai, and the first president to be appointed by India. Under the compromise announced in Brazil, Russia will chair the bank’s board of directors, and the bank’s first field office — which will provide aid to the fast-developing continent of Africa — will be located in South Africa.
South African President Jacob Zuma, in Washington this week with the U.S.-Africa summit, said there was broad discontent on the continent with the IMF and other Western-dominated institutions.
“There has been a concern from the African leaders that the existing banks that had been there before have not succeeded in producing an example country that was helped successfully and is now thriving and doing everything,” he told a National Press Club luncheon.
The BRICS institution, Mr. Zuma said, “is going to do things differently. No country will go to the BRICS’ bank and say, ‘I need to be rescued, and find itself not being rescued.’”
Eventually, organizers say, all other nations in the developing world will be welcome to join the bank, though the five founding members reserved a minimum 55 percent voting share for themselves, ensuring they will always maintain control.
While the BRICS pledged that the bank will follow “sound banking policies,” its lending practices seem likely to depart significantly from the stiff lending requirements laid down by the IMF, whose presence lending in a country is seen as a “green light” by most private investors, who rely on IMF-imposed reforms to make countries safe for investment.
While all of the BRICS countries themselves have adopted market reforms in recent years, their adherence to Western market principles varies considerably, ranging from the mostly free market-style economic system in South Africa to the state-sanctioned oligarchy in Russia. In the government-guided market economy in China, the ruling Communist Party still issues five-year plans, including detailed blueprints for the country’s economic development.
China not only is not wedded to such Western principles as free trade and floating currencies, it remains one of the biggest obstacles to those principles in various trade forums today. Moreover, Beijing has rankled U.S. and European leaders by lending to and doing business with rogue regimes like Iran, Sudan and North Korea, disregarding their human rights records while not demanding reforms in return.
But Mr. Nehru said China and the other BRICS will be under pressure to adopt higher lending standards and demand key governmental reforms in the countries they aid through the new BRICS bank if they hope to augment the bank’s capital by borrowing money in the financial markets. An estimated $75 trillion in pension funds, insurance funds and other major investment funds are available to help them finance development in the emerging world, but the support is not unconditional.
Private investors “demand high-quality projects in countries with strong governance and legal standards,” even if China or other BRICS members ordinarily do not, Mr. Nehru said. “These global realities make it imperative for the BRICS bank to establish the highest operational, prudential and corporate governance standards. Otherwise, its impact will remain marginal.”