In Pink Floyd’s album The Wall, depicting the horrors of England’s boarding school, Roger Waters portrays Pink, a young man in permanent conflict with the harsh reality of life. In order to lessen the pains brought upon him, Pink decides to retreat from the world behind a wall that, brick by brick, he gradually builds around himself.
This is probably with the hectic melody in mind and the same feeling of frustration that the BRICS embark in the creation of a development bank. By a move that risks challenging the Western-made international system, the BRICS are laying the first brick of the new world order. On the other side of the rising wall stand the International Monetary Fund (IMF) and the World Bank, institutional legacies of the post-war Bretton Woods system.
Although a reform for a better representation of emergent countries in the IMF is being completed, the BRICS have repeatedly questioned the legitimacy of those institutions. For the most part, the World Bank and the IMF are indeed seen as bastions of Western interests. Worse, as the BRICS economies grow in size, the once-valued assistance of the two pillars of Bretton Woods is becoming redundant. The World Bank’s support to the BRICS, which are all upper-middle-income countries, is gradually shifting from the provision of financing to the delivery of expertise. As the volume of loans to the BRICS (still at a hefty US$8 billion in 2012) steadily wanes, Brazil, Russia, India, and South Africa are compelled to look elsewhere to finance their development. China, with a better credit rating and a larger reserve of cash, can now afford to turn its back on the Bretton Woods institutions.
At the same time, emerging economies are increasingly asked to contribute to the cost of their operations. Most recently, at the occasion of the replenishment of the International Development Association (IDA) – the concessional lending arm of the World Bank to the poorest countries – the BRICS had to chip in US$500 million. Facing higher fees, for little clout and diminishing services, the BRICS have decided to go their own way.
A decade after James O’Neill coined this clever acronym, the BRICS (South Africa joined in 2010) are cementing their cooperation. The outline of the new development bank is expected to be unveiled at the occasion of the fifth BRICS summit hosted by South Africa later this month. A few features have been made public. Much like the World Bank, it will provide financing and technical assistance for development projects in infrastructure, primarily in the energy and transport sectors. The upstream selection of projects will reflect the BRICS competencies and priorities. In particular, the bank is likely to finance projects in politically-sensitive areas where the World Bank has refused to venture, most notably in nuclear energy.
In a memo, the South Africa-based Standard Bank, said to be close to the negotiators, says the BRICS bank will have a seed capital of US$50 billion. It may seem little : combined, the public and private windows of the World Bank provide as much new financing annually through loans and equity. But were the BRICS to contribute equally, the fiscal burden for South Africa, the poorest member of the group, would represent as much as 2.4% of GDP (as opposed to 0.13% for China).
At the same time, the BRICS have very different needs in terms of investment volume. According to the World Bank, India’s financial gap in infrastructure will be an astounding US$1 trillion over the next five years. Russia, having inherited the Soviet Union extensive infrastructure network, is doing just fine.
These discrepancies highlight the dilemma faced by the BRICS, a colourful group of countries of various sizes, needs, and capabilities but attached to a formal equality by virtue of national sovereignty.
Down one road, an absence of clear leadership will hamper the formation of a common policy. In a working paper on the BRIC’s philosophies for development financing published last year, the IMF thoroughly illustrates the various, incompatible priorities of the BRICs’ development assistance policies. Down the other road, the development bank risks being hijacked by China – and potentially Russia – which are more prone to use the bank as a political tool to support their assertive foreign policy.
That those five countries – of various sizes, needs, and capabilities – are setting up a joint financial institution is an achievement ; and a rather auspicious convergence of interests. Brazil, India, and South Africa see it as a catalyst for closing their investment gaps in infrastructure, opening new markets overseas, and stepping up their influence in the developing world. For Russia and China, this is a peaceful, innovative way to raise their international standing and export their know-how.
The deployment of the bank is likely to be gradual over the years, with the first projects expected to occur within the BRICS themselves. In the medium term, Africa is bound to become a prime recipient of development finance. Followed by Turkey and South Korea, the BRICS are dramatically scaling up their presence in Sub-Saharan Africa. The region, which has largely been spared from the global downturn (GDP growth is expected to reach a mouth-watering 5.5% in 2013), is rich in manpower and natural resources. Accordingly, this month’s summit is themed BRICS and Africa : Partnership for Development, Integration and Industrialisation. In the long run, eligibility to the bank financing could be open to all developing countries.
Reactions in developed countries have been mixed. Notwithstanding the irrational anxiety of a post-Western world, many hear in the announcement of a BRICS development bank a wake-up call to the World Bank. In an interview with the Financial Times last year, Robert Zoellick, former head of the World Bank, epitomised this lukewarm reception. “I am enough of an economist that I am not a monopolist,” he said astutely. But he added : “if the World Bank cannot continue on the path I have tried to [take it] to be a good partner for India [and the middle-income countries], they will go elsewhere”. The monopoly of the IMF has also been questioned. Last month, South Africa’s finance minister suggested “pooling of [the BRICS] members’ foreign exchange reserves with the view of using them to support each other at times of balance of payments or currency crisis.” The institutionalization of the BRICS could also have larger consequences on the international financial system. In particular, the prominence of the U.S. dollar as a universal exchange currency could be threatened, as the BRICS increasingly seek to trade with and lend to one another in their own currencies.
Criticisms also include fears of the BRICS bank lowering international standards for development finance. The BRICS’ commitments in terms of conditionality and debt sustainability, as well as environmental and social safeguards are, at best, questionable. It is unclear whether facilitating trade with the BRICS or maximising the social impact will be the prime criteria for the selection of infrastructure projects. Nor it is certain that the BRICS will not revert to the system of ‘tied’ aid, which circumscribes procurements from foreign bidders.
Roger Waters, Pink Floyd’s songwriter, later explained that, as he was adding bricks to protect himself from the injurious external world, Pink was “convincing himself” that his isolation was desirable. The end of the song is unambiguous : upon the completion of the wall, Pink spirals into the dark recesses of his dementia. As they venture into creating parallel institutions, the BRICS must keep in mind that a common distaste for the Western-made international system alone is not sufficient ground on which to build lasting institutions.
Studies mentioned :
Simon Freemantle and Jeremy Stevens, The BRICS Development Bank : Cautious Optimism, Standard Bank, February 2013
Nkunde Mwase and Yongzheng Yang, BRICs’ Philosophies for Development Financing and Their Implications for LICs, IMF Working Paper, March 2012