Establishment of an international development bank by the BRICS nations (Brazil, Russia, India, China & South Africa) this week was a major step change in international finance & power 2 years after work on it began, although it was played down in much of the Western media.
One question asked was whether it would be a competitor for the IMF (International Monetary Fund) & World Bank. With initial subscribed capital of $US50 billion and initial authorised capital of $US100 billion, it was seen as a much smaller entity. Its initial reserve fund (contingent reserve arrangement) will be $US100 billion.
But initial size is not the point. The BRICS nations’ leaders reiterated their annoyance that the IMF & World Bank were sticking to having European & US presidents and had failed to become more democratic. The BRICS’ New Development Bank will enable – and probably encourage – a move away from the US greenback as international reserve currency, and it will set up a tussle for influence.
It may see China, India & Russia agreeing on issues where previously they would have taken individual positions that reduced their combined effect, but that will only happen if they get over their annoyance and forge a positive course to lead the world’s many struggling nations; if not, the whole venture could collapse.
The international financial crisis that got underway in 2007 can be attributed to financial structures in the US getting out of control, and the US’s subsequent focus on measures to improve its domestic situation, particularly quantitative easing, have highlighted the need for other countries to take greater control over their affairs.
The Foreign Policy website, on its South Asia Channel, highlighted both fortuitous & concerning features of US policy from other countries’ perspectives: “Since the financial crisis, the US has embarked on a massive bond-buying programme known as quantitative easing (QE) in an attempt to reinvigorate its domestic economy. By pushing US interest rates to historic lows, this flood of easy money also spurred financial flows into emerging markets, which have offered investors higher returns. Foreign direct investment into BRICS nations reached $263 billion last year, accounting for 20% of global foreign direct investment, up from 6 % in 2000, according to the UN Conference on Trade & Development.
“But now that the US Federal Reserve has begun scaling back or ‘tapering’ its QE programme, that flow of funds to emerging markets has begun to reverse – sparking concerns that an exodus of portfolio investment could destabilise emerging markets. That fear is especially acute in India, which has run continuous current account deficits over the years and experienced a currency crisis last year.”
Each founding nation got something from this week’s agreement: The first chair of the board of governors will be from Russia, the first chair of the board of directors from Brazil, the first president of the bank from India, the headquarters will be in Shanghai and a regional centre will be established in South Africa.
The 5 leaders said after their meeting at Fontaleza in Brazil the reserve arrangement “will have a positive precautionary effect, help countries forestall short-term liquidity pressures, promote further BRICS co-operation, strengthen the global financial safety net and complement existing international arrangements”.
They said their development banks had made progress in strengthening ties between the 5 countries, would also look at pooling insurance & reinsurance capacities and would advance major changes to combat tax evasion: “We believe sustainable development & economic growth will be facilitated by taxation of revenue generated in jurisdictions where economic activity takes place.
“We express our concern over the harmful impact of tax evasion, transnational fraud & aggressive tax planning on the world economy. We are aware of the challenges brought by aggressive tax avoidance & non-compliance practices. We therefore affirm our commitment to continue a co-operative approach on issues related to tax administrations and to enhance co-operation in the international forums targeting tax-base erosion & information exchange for tax purposes.”
Looking for information about the Fontaleza declaration has taken me in interesting directions: the status of media sources will also change.
Prime-source Western media such as the New York Times, Wall Street Journal and major agencies like Bloomberg & Reuters habitually present information from the perspective of their origins. Western media will quote Western sources, but habitually represent information from other sources as less reliable.
Oddly, I found the wording of the declaration on the Dispatch News Desk, Pakistan. Several of the more thoughtful articles were on the Lowy Institute website in Australia.
Links: Dispatch News Desk, Pakistan, Fontaleza declaration
Foreign Policy, South Asia Channel, Move over, IMF: BRICS bank aims to rewrite the rules of development
Lowy Interpreter, Did the BRICS score in Brazil?
Lowy Interpreter, The BRICS bank and China’s growing web of development financing
Lowy Interpreter, China’s determination to be a great power
Podcast: ‘The future of the renminbi’ – Wing Thye Woo & Stephen Grenville
Attribution: Declaration, multiple sources.