With just a couple of small gestures at their annual summit, the world’s biggest emerging economies have made the West seem a little less indispensable.
On the summit’s first day, the BRICS bloc of nations has approved a new development bank to compete with Western-dominated institutions such as the World Bank. And on the sidelines, China and Brazil announced a currency-swap agreement worth $30-billion (U.S.) that will allow them to conduct trade in each other’s currencies without needing the U.S. dollar.
The BRICS nations – Brazil, Russia, India, China and South Africa – are slowly chipping away at the decades-old edifice of the global financial architecture. By creating their own bank and expanding their currency deals, they are signalling that the developing world doesn’t need its traditional Western creditors any more.
Though there is no consensus yet on the location and financing of the new bank, its launch will escalate the pressure to reform the World Bank and the International Monetary Fund to give greater influence to developing nations. The political pressure has been growing for years, but the bank will give new muscle to BRICS as they challenge the tradition that Americans and Europeans should run the IMF and the World Bank.
“This really helps the credibility of BRICS as a group, and it shows that it’s a forum to be taken seriously,” said Catherine Grant-Makokera, an analyst at the South African Institute of International Affairs. “The BRICS nations are using their cash-rich status as leverage for reform.”
A statement on Tuesday by the BRICS Business Forum, representing business leaders from the five nations, made clear their ambitious goals. “The world economic order is changing, and the process of developing economic policy agenda at the global level should reflect this,” the statement said.
“While there is a realization even amongst the developed countries about the increasing economic weight of emerging economies, this is not fully reflected in the governance model of global institutions such as the IMF and World Bank. We shall continue to work alongside our governments to gradually usher in governance reforms at multilateral institutions.”
It’s a message that might be difficult to ignore. As its leaders often emphasize, BRICS already boasts 45 per cent of the world’s population, 30 per cent of global output and 17 per cent of world trade, and it is responsible for 50 per cent of global economic growth over the past decade.
As the dollar and the euro lose their influence, the currencies of the BRICS nations have become collectively known as the “five Rs” – the real, ruble, rupee, renminbi and rand. China, especially, has pushed for a greater role for its currency in global trade, and other BRICS nations have supported the idea of diversifying the currency basket.
Yet the BRICS bloc, whose acronym was inspired by the catchphrase of a Goldman Sachs economist, has struggled to translate its impressive growth statistics into concrete action. The new BRICS-led bank, designed to lend money for infrastructure projects across the developing world, is the biggest step that BRICS have taken to challenge the global financial system since the bloc’s first formal summit in 2009. Another key step could be an agreement on a currency crisis fund, based on pooled foreign-exchange reserves of up to $240-billion, which the BRICS nations are negotiating.
The new BRICS bank is seen as a potentially crucial source of funds for African infrastructure projects. It is often touted, for example, as a likely financier for a massive expansion of nuclear energy in South Africa, a goal of many politicians here. And it could be useful for cross-border projects, which tend to be neglected by traditional creditors.
But despite its potential, the BRICS bank has been delayed by disputes over its financial structure, its mandate and where its headquarters should be located. China, India and South Africa have all quietly lobbied for the headquarters, and the delays in resolving this question have exposed the weaknesses and divisions within the bloc itself.
The amount of the bank’s seed capital is still uncertain, although some supporters have recommended $50-billion in initial capital, funded by a $10-billion contribution from every BRICS member. This would be a relatively modest amount, but even this small amount could be unaffordable for South Africa, which is by far the smallest of the BRICS members.
Another key question is whether the bank’s members would be limited to the five BRICS nations, or whether it would expand to include others. The growing use of the term “BRICS-led bank” is an official hint that the bank will be expanded beyond the core five members.
It could take up to five years to overcome all of these issues and get the new bank off the ground, Ms. Grant-Makokera predicted.