Yves here. Quite a few readers have contended that the commitment by the BRICS countries to create a developing country challenger to the World Bank represents a serious blow to the dollar hegemony.
While rising anger against the US use of its currency/banking system dominance to further geopolitical ends is well warranted, translating that into effective counter-measures is something else completely. This article does a solid job of explaining the focus the new development bank, which is infrastructure projects, and lowering expectations as far as shaking up the current international financial architecture is concerned. But it can still make considerable progress on issues that are important to its sponsors.
By C.P. Chandrasekhar, Professor of Economics, Jawaharlal Nehru University, New Delhi, India. Extracted from an article first published as the H T Parekh Finance column in the Economic and Political Weekly
The argument that the creation of the BRICS Bank could make a significant difference to the global financial architecture should not be pushed too far. In the final analysis development banks are instruments of state capitalist development. Such specialised institutions are needed because of the shortfalls in the availability of long-term finance for capital-intensive projects in market economies, resulting from the maturity and liquidity mismatches involved. Resources mobilised are from those wanting shorter maturities and greater liquidity, and sums lent are to projects that are large and illiquid with long gestations lags and long-term profit profiles.
In non-market economies, allocations for such investments can be made through the budget and financed with taxes or the surpluses generated by state-owned enterprises. If the instruments are state capitalist, they are unlikely to serve non- or anti-capitalist objectives that sacrifice private profit to deliver social benefit. So the best that can be expected of the NDB is that it would serve better the interests of capitalist development in the less developed countries (with some concern for sustainability and inclusiveness) than would multilateral banks that are dominated by and serve as instruments of the developed countries.
Whether even this difference would be material depends on three factors. The first is the degree to which the emergence of the NDB alters the global financial architecture and perhaps, therefore, the behaviour of the institutions currently populating it. The second is the degree to which the BRICS bank can differ in its lending practices from the institutions that currently dominate the global development-banking infrastructure. And, the third is the degree to which a development bank set up as a tool of state-guided development by governments in countries pursuing capitalist and even neoliberal development trajectories can indeed contribute to furthering goals of more equitable and sustainable development.
As noted earlier, the establishment of the new development bank does make a difference to the global financial architecture. More so because of the relatively large authorised capital base of $100 billion and the paid-up capital commitment of $50 billion. Though established as far back as 1944, the capital base of the IBRD (the core lending arm of the World Bank) is only $190 billion of which only $36.7 billion is available as actual equity, the rest being “callable capital” that countries have committed to provide when called upon to do so. So even at inception the NDB seems significant in size compared to rivals still controlled by the developed industrial countries.
Regarding operational practices, there are clear signals that the new development bank’s lending is to be focused on large infrastructural projects that are seen as central to the development effort. Both cash-strapped developing country governments and the private sector are unable or unwilling to fully fund the lumpy investments involved in these long-gestation projects, making the role of development financing institutions crucial to development. An infrastructural focus has therefore been a characteristic feature of many of the currently existing multilateral development finance institutions as well. So if the NDB is to be different from the World Bank or regional development banks like the Asian Development Bank, the difference would have to be reflected in the choice of projects within the infrastructural space, in the terms on which large loans are provided, and in the concern it shows for keeping development sustainable and inclusive. Inasmuch as the institution has been established by a set of emerging nations that do not exercise hegemonic power in the international economy, it is possible that lending behaviour could reflect such differences, which possibly accounts for the discomfort of the currently dominant institutions.
However, the new development bank is fundamentally not detached from the global financial system. Being a bank, even if a specialised one, it must ensure its own commercial viability. And it must do so when a large part of the resources it lends would be mobilised from the market. While guarantees from the governments of its shareholding countries would improve the institution’s rating and reduce its borrowing costs, those costs will have to be borne. So any form of socially concerned lending that does not yield a return adequate to cover costs and deliver at least a nominal profit will be ruled out. There is only so much an institution whose activities are constrained by market realities can do.
In addition, the procedures finally adopted would be influenced by the nature of the governments that control the new institution, and paths of development pursued in countries that associate with the bank either as providers of finance or borrowers. The NDB does not decide on the projects that come up for lending. It would only choose among projects that apply for lending support. In that choice, the norms that shareholding governments apply in their own contexts would play a role. Moreover, wanting to be seen as respectful of the sovereign interests of borrowing countries, the NDB would be careful not to frame its lending rules in ways that threaten the policy sovereignty of borrowing countries. If the countries that approach the institution are pursuing neoliberal strategies, there may be clear limits in terms of what the new development bank itself can achieve.
There are other reasons why the NDB may not live up to the expectations it has generated in some circles. To start with, the new development bank not only keeps membership open to any United Nations member, but provides for a category called non-borrowing members, which can as a group acquire, with the consent of the board, shares that gives them voting power of up to 20 per cent of the total. This gives developed countries entry into the bank’s decision-making apparatus. Along with the declared possibility that the International Financial Institutions would be granted the status of observers in the meetings of the Board of Governors, a presence and voice for the developed countries in the NDB seems likely. They could exploit that presence and differences in degree of developed country dependence among the BRICS, to reduce the effectiveness of the NDB as an “alternative” institution.
This possibility is signalled by features of article 5 in the treaty establishing the Contingent Reserve Arrangement, which specifies the maximum borrowing limits and the terms of borrowing by members of the arrangement. The article specifies a maximum borrowing limit for each member, which is a multiple of the financial commitment made by the member. Access to 30 per cent of this maximum (the delinked portion) is available to a member based only on the agreement of the ‘Providing Parties’. The remaining 70 per cent (the IMF-linked portion) can be accessed in part or full only if, in addition to the agreement of the providing parties, the Requesting Party can provide evidence of “an on-track arrangement between the IMF and the Requesting Party that involves a commitment of the IMF to provide financing to the Requesting Party based on conditionality, and the compliance of the Requesting Party with the terms and conditions of the arrangement.” This substantially dilutes the role that the CRA can play as an alternative to IMF in offering balance of payments support to a distressed economy. If the CRA is being made a mere extension of the IMF, the possibility that the NDB can imitate the World Bank is also real.
It may be too much to expect the NDB (as some NGOs do) to adhere to sustainable development norms that its financing pattern does not permit and the governments backing the organisation do not respect. But, as noted, there are indications that the NDB and the CRA may not be too different from and completely independent of the World Bank and the IMF. Formally these institutions introduce more plurality into the international financial and monetary landscape. But in practice their presence does not guarantee significant difference. The decision of the BRICS to set up mini-versions of the World Bank and the IMF seems to be more a symbolic declaration of resentment at the failure of the US and its European allies to give emerging countries a greater say in the operations of the Bretton woods institutions. It may also reflect an effort by each member of the BRICS grouping to leverage this show of strength to extract as much benefit as it individually can from any changes in the international system. The desire to redress the obvious inequities in the global financial system seems far less important.
So a first effort of democratic forces in the BRICS countries and elsewhere should be to pressure the governments involved to act in ways that differentiate the NDB and CRA from the currently dominant global institutions in terms of funding patterns, rules and terms. If in the process the NDB is forced to show greater respect for norms of sustainable and inclusive development than the Bretton Woods institutions do, that would be a major advance.
Antiaméricanisme or yankee go home has been around since the 19th century. This stems from others having a relentless negative view on American soft and hard power. Clearly the BRICS are in this camp and are fed up. Challenging the IMF and World Bank dominance is a welcome sign, but the same game will be played, like the author states.
The BRICS aren’t challenging the IMF; in the 9th paragraph Professor Chandrasekhar states that to access roughly 70% of potential financing the borrower ‘provide evidence of “an on-track arrangement between the IMF and the Requesting Party that involves a commitment of the IMF to provide financing to the Requesting Party based on conditionality, and the compliance of the Requesting Party with the terms and conditions of the arrangement.”‘
Wow. Apparently academics in India writing about sensitive social science topics can be as wordy, indirect, and irrelevant as American academics.
My take on the Fortaleza declaration was that some ex-second world and third world countries have come to the conclusion that there is something squirelly now with US and EU leadership, and they should set up international institutions that can function as replacements if needed for the current ones, which tend to be American and European controlled. The projected bank is a small project to see if these different countries can cooperate. If they can make the bank work, they can do more ambitious projects later.
This is an outgrowth of the non-aligned movement that India has helped led in the past. The differences are that instead of a third force is a bipolar world, the attempt is to provide a second force in an unipolar world, by folding in the former principals of the Communist bloc. Also, this is more workable entente of the largest regional powers and less an attempt to replicate the UN. This translates into a higher likelihood of success.
I don’t think anyone anticipated US elites going postal on one of the regional powers so soon after the entente was made public.
“US elites going postal.” No sh*t.
The author has no concept that the NDB may create its OWN capital by MMT. The aim of bank borrowing should be limited to FOREIGN EXCHANGE only (which central banks cannot print). Otherwise, it financializes government needlessly to pay bondholders for what the central banks can print themselves.
India is way behind China in recognizing this. Its central bankers are the most tunnel-visioned of the BRICS.
Prof. H, I wish you would elaborate on this just another paragraph because I felt this article described a defacto new branch of the IMF. This paragraph describes same-old-same-old privateer banking: “However the new (BRICS) development bank is not detached from the global financial system. Being a bank – even a specialized one – it must insure its own commercial viability and it must do so when a large part of the resources it lends would be mobilized from the MARKET. While guarantees from the governments of its shareholding countries would improve the institution’s rating and reduce its borrowing costs, those costs will have to be borne. So any form of socially concerned lending that does not yield a return adequate to cover costs and deliver at least a nominal profit will be ruled out. There is only so much an institution whose activities are constrained by market realities can do.”
So what is really going on here. It looks like pure cooperation in global finance designed to extract probably an 8% return. (Goldman Sachs sucking 8% out of Africa as we speak.) I think that destroys any hope of sustainable development from the get-go.
Is the NDB a sovereign currency issuer? No (so far as I can tell). So how can it create it’s own capital “by MMT”? Or what exactly do you mean by that?
This is an interesting thought and seems to be alluding to using their collective currencies to create activity rather than saying there is no currency available so no activity can take place.
They don’t need USD to facilitate trade and use of labor. And they would be best to stay away from financialization anyway.
Private banks have obviously not done a good job in their ‘creation’ of money and MMT recognizes the fraud and need for better regulation. Public banks as pushed by Ellen Brown and seen as more of a utility to put money to use in a more local manner seems to have a place here.
What’s kind of exciting is that the answer seems to be we don’t know how significant it is going to be. It’s another component of the multipolar world where Washington can no longer simply dictate how everybody operates. Washington’s response to any country that tries to leave the ‘global financial system’ has been sanctions, regime destabilization, and/or overt military intervention. It’s actually pretty ironic. Try to use a currency other than the dollar, and the US makes it more difficult to use the dollar…
Given the massive activities of the US national security state, practically begging for war with Russia and constantly complaining about China, one could certainly conclude that the BRICS bank is a potentially rather quite significant development.
On the other hand, it could be everybody is working behind together the scenes and the public posturing is all for show. Qui sait?
The new bank may not be that threatening on its own, but it is probably feared as being a foothold to be followed by other measures that will undermine the hegemony of the US dollar.
Even if the new bank is limited to infrastructure projects, there just happens to be a nice country south of the equator shut out of the international debt markets that could benefit from it.
We may find out soon just how independent this development bank really is. Argentina should pursue some financing from it for their own infrastructure and flip the bird at the U.S. Grab some popcorn and watch the Wall Street pigs squeal.
Banking is much like nuclear energy; incredible potential, but you just know it’s not going to end well.
Crude oil bank, NOT currency bank is better for BRICS
I should think this NDB, in whatever form it evolves, will become a critical buffer for the member countries when the next major Western financial crash occurs (bigtime). And afterwards, many countries will seek to realign themselves with the BRICS. Fool me twice…
There are various elements of this comfortable, Indian and global status quo-affirming piece one could isolate and dispute or query or add to, but I’m with Ed (above) in terms of what BRICS were setting out to develop after too many years of the likes of Paulson and Geithner (the US Treasury) at the IMF, i.e., the capacity to evolve away from a punishingly US-centric definition of ‘pie’ and how to slice it, and an increasingly irrational and paranoid Western elite.
The fact that the US, as Ed notes, has already placed both global peace and economic security on the table because one BRICS principal, Putin, has dared just to put a foot on the field, ought to inform this piece in some manner, but doesn’t. I rather suspect the Chinese, Russians and others (perhaps including some in India’s former ruling Party) had envisaged at minimum a decade to prove their ‘competence’ still within the IMF system for a full partnerhip in exercise of power, or take their then-client-base outside IMF control if need be down the line somewhere. But clearly, even that is too much. The US is in full competitor pre-emption mode and simultaneously running a Bin Laden 2 program to whip up enough media war frenzy to cover all the bases. ISIS achieved the US goal of knocking over al-Maliki and succeeding finally in the quite deliberate triggering of a huge new wave of de-humanization and demonizing of Muslims in terribly informed Western minds, just as the monumental pile of misinformation re Ukraine is intended to paint Putin as a Hitler or Stalin.
China of course wants to exist, and to be Chinese, so proceeding with the Bank as a serious project with or without Putin or Russia could still make long-term Chinese sense (how else were they ever going to get some return on their useless dollars). On the other hand, the US, in its current self-induced-concussion frame of mind, could conceivably try to run the table and tackle China now rather than later. Who in 1995 would’ve believed any of what’s happened from about ’97 to today?