July 17--This week's announcement by the presidents of Brazil, Russia, India, China and South Africa -- the so-called BRICS countries -- that they will create their own international financial institution was greeted with polite skepticism and some criticism in Washington D.C. But on this issue, the BRICS are doing the right thing.
At the BRICS summit in Fortaleza, Brazil, the leaders of the world's biggest emerging markets -- a mixed bag of dictatorships and democracies -- announced the creation of a development bank and a lending bank with $100 billion in capital each, that will be used as alternatives to the Washington-based World Bank and International Monetary Fund.
The BRICS' New Development Bank (NDB) will be based in Shanghai, China. After a diplomatic struggle between China -- as the biggest economy, it wanted to run the bank -- and the rest, it was agreed that the institution's top executives will be from Russia, India and Brazil.
Chinese President Xi Jinping and his colleagues emphasized that the BRICS don't want to replace the World Bank and the IMF, but the Chinese president made it clear that the idea will be to "improve the world's governing system" and to "widen" emerging countries' representation in key international decisions.
In fact, they have a point: despite a lot of talk about expanding emerging markets' voting rights at the World Bank and the IMF, these institutions have not changed substantially since they were created at Bretton Woods in 1944. The United States and European countries retain a much greater representation in both institutions than their current share of the world economy.
In addition to being frustrated by their smaller representation, the BRICS argue that their New Development Bank may be better suited to help developing countries than the IMF or the World Bank.
Brazil and India, for instance, desperately need to improve their infrastructure, and area in which China has great expertise (although we should hope that China's infrastructure experts don't recommend their fellow BRICS members to eradicate villagers at gunpoint to build roads and bridges).
And they add that the World Bank has been constrained by its environmental rules to make major loans for infrastructure in emerging countries. The new Shanghai-based bank will be able to make more loans for infrastructure with more realistic environmental standards, they say.
The big question, however, is whether the BRICS new financial institutions will materialize.
First, the BRICS are doing this at a time when their economies are heading down. China, which was growing at 10 percent annually over the last decade, is projected to grow at 7.5 percent this year, while India's growth has slowed to 5.4 percent, and Russia and Brazil are expected to grow by a pitiful 1 percent each this year.
Second, it won't be easy to solve internal differences between the BRICS. Despite their warm embraces at the Fortaleza summit, the leaders of China and Brazil are locked in a bitter dispute about bilateral trade. China complains about Brazil's growing protectionism, while Brazil complains that China is only buying raw materials, while invading it with manufactured goods.
In addition, there will be disputes over who runs the new institutions. China's economy -- the world's second-largest -- is bigger than that of the four remaining BRICS members together, and the Chinese don't have a tradition of putting money into projects in which they don't run the show.
Third, the recent history of similar -- although somewhat smaller -- efforts to launch alternative development banks doesn't bode well for the newly created institutions.
In 2009, the presidents of Brazil, Venezuela, Argentina, Bolivia, Ecuador, Paraguay and Uruguay announced with great fanfare the creation of a Bank of the South. The bank was supposed to have an initial capital of $20 billion and to replace Washington-based financial institutions, but it never took off. It made big headlines when it was announced, and it vanished shortly thereafter.
Fourth, even if the BRICS banks take off, they will be limited in size. The group's lending institution's $100 billion capital would be much smaller than the IMF's $837 billion.
My opinion: The idea of creating new international financial institutions to make additional loans to those made by the World Bank and the IMF is good. The more, the merrier. And if the proposed Shanghai-based bank will help China become a better world citizen, and contribute more in development aid to developing countries, so much the better.
Whether it will happen, and whether it won't follow the steps of the ill-fated Bank of the South, is a different story.
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