 "Why the BRICS bank is a signal of reform of the old economic order")
The decision by the five-nation BRICS grouping - Brazil, Russia, India, China and South Africa - to set up a New Development Bank based in Shanghai and headed by an Indian in its first six years, is yet another powerful signal of the emergence of a new world economic and political order.
The naysayers will, of course, pick holes in the structure, focus and potential limitations of the new bank. But they will be proved wrong in due course. The very fact that such a bank is becoming reality shows that the old western hegemony in the political and economic institutions created after the second world war is going to be seriously challenged.
Let’s be clear: the New Development Bank is not just about setting up yet another bank. It represents a new political will among new and emerging powers in the world to challenge the old architecture of growth. It contains within it several politico-economic messages. Among them:
One, the World Bank and the IMF are no longer as relevant to the growing parts of the world as they once were. They have to be substantially reformed. Over the last 20 years, it has been obvious that the growth impetus has shifted to Asia and also Africa. The World Bank and the IMF, dominated by the US and Europe, cannot function with limited voting powers for the new tigers. BRICS seeks to challenge their power structure.
Two. the political institutions created to maintain peace - the UN and its security council - will also face the pressure for change from new, emerging powers like India, South Africa, Brazil, and Indonesia, not to speak of the other economic giants excluded from the current power structure following defeat in the world war: Germany and Japan, for example. In the current UN power hierarchy, only China and Russia have clout apart from the US - and both were accidents of history. Two political pygmies, the United Kingdom and France, are relics of that same war history and need to be downgraded. While the BRICS Bank will do nothing to change the reality at the UN immediately, since China itself may oppose some changes, the mere fact that the node of economic power is shifting from US-Europe to Asia and Africa is a signal that things have to change.
Three, more directly, the setting up of the BRICS bank and the $100 billion currency stabilisation fund will signal the emergence of new international currencies to challenge the US dollar’s hegemony. In the initial years, the Chinese yuan will get internationalised first, followed by the Indian rupee after about a decade of strong growth in India’s economic and trade shares. Even though the dollar will continue to remain the biggest international currency for the foreseeable future, its share will start falling as the yuan rises. The world will have the dollar, euro, the yen and the yuan as it main currencies over the next decade. The dollar will not remain the only option for the settlement of global trades, especially when intra-Asian, African and Latin American shares of global trade start picking up in the decades ahead.
This is not to suggest that the New Development Bank is going to have a dream run. Given the political suspicions of India and China against one another, a lot would depend on how these two Asian giants will settle the disputes of the past - especially the border issue. Under Narendra Modi and the new Chinese leadership under Xi Jinping and Li Keqiang, India and China probably have their best chance ever to get the past behind us. Also, unlike the UPA government under Manmohan Singh, Modi has the advantage of having his own majority in parliament and is expected to rebalance its relationship with the US by focusing on its Asian interests. In fact, the Look East policy articulated by Manmohan Singh is more likely to develop flesh and bones under the Modi administration.
However, there is no getting away from the fact that China will be a very important pole in the new security and financial architecture of the future.
In the new BRICS bank, for example, even though initial shareholdings are equal among all five founders, the $100 billion currency stabilisation fund already shows a preponderance of Chinese influence. According to The Economic Times, “China is expected to make the biggest contribution, $41 billion, followed by $18 billion each from Brazil, India and Russia and $5 billion from South Africa.”
This is, of course, logical, since China has the biggest surpluses and foreign exchange reserves in the world (nearly $4 trillion, or more than one-and-a-half times the size of the Indian economy). Just as the US was the dominant economic power after World War II, China will be the dominant economic powerhouse in the next two decades - even as India starts closing the gap around the same time if it gets its policies right.
But the Chinese weight will also be counter-acted by the addition of new members to the BRICS Bank, as other regional heavyweights such as Indonesia, Vietnam, Argentina and some African countries join it in due course.
The bank could also face other initial issues. Unlike the World Bank and the IMF, which enjoy Triple A ratings in the markets and can thus raise cheap resources for lending, the BRICS Bank will face the hurdle of the lower credit ratings of its constituents. While the foreign currency ratings of India, Brazil, South Africa and Russia have BBB- ratings, only China has AA- - somewhat comparable to the Bretton Woods twins.
So loans from the new institution will be a little costlier than what the World Bank may offer, but this could improve once it establishes a track record. The critical issue is that it could have different lending criteria, different norms from the Bretton Woods twins. These are still to be evolved, but Arvind Virmani, former Chief Economic Advisor and former Executive Director of the IMF, believes the new bank will be critical for funding infrastructure in the third world.
Writing in The Economic Times , he says: “A New Development BRICS Bank has the potential to intermediate…the savings from the surplus emerging economies to developing economies with a deficit of finance for infrastructure investment, thus accelerating economic growth of developing and emerging economies.” Emerging economies need about $1.2 trillion annually for new greenfield infrastructure projects annually.
The bank, of course, is not going to begin lending for a while, and there are many difficulties to be negotiated over the next two years when it gets set up, but there is little doubt about its significance.
Business Standard is one of the doubters. It says that the idea of “the development bank, which will lend to projects, is a questionable decision.” What, it asks, “is the purpose of the BRICS Bank? After all, both India and China have questions about governance in their banking sectors; is it the case that a new bank, such as this, is likely to help matters? India itself is unlikely to need it.”
The editorial surely misses the point. Banking governance everywhere is poor, or else we would not have the global financial meltdown of 2008 or the euro crisis of two years ago. The key message lies not in whether the BRICS Bank will be able to create proper governance structures, but in its larger mission of challenging the hegemony of economic institutions created by the west in a different era for different purposes.
What will ultimately determine the success of the BRICS Bank is not just better governance, but the performance of its underlying economies. ET probably gets it right when it notes that “the performance of the new bank will depend on how well (or badly) each nation runs its domestic economy and finances.”
If you believe that competition is vital for reform and change, the BRICS Bank is the harbinger of that change. It is an early signal of reform of the old economic order. High time.