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BRICS 'development bank' must aim effectively to end Bretton Woods Institutions' disparities

Atul K Thakur,Senior Associate Editor, INCLUSION, 8 September 2014

There is enough merit lies in the BRICS claim that the international financial system has worked against their interest. Rajan and others must heed to this truth.

The move to establish BRICS bank is meant to provide patient money and risk capital to long term projects and not aimed at challenging the existing multilateral financial institutions like the IMF and the World Bank, the RBI Governor Raghuram Rajan has said in a speech at an event organised in Chicago on Friday by the Chicago Council on Global Affairs.

In verbatim, his views came as: "I don't think it was primarily meant to challenge the existing multilateral institutions but it certainly is saying look we have plenty of money ourselves, why don't we put some of this money to use in a way that benefits us rather than necessarily depending on the multilateral institutions to change which is taking much more time than anybody thought of".

This is quite surprising from him, seeing he is heading India’s Central Bank and India is going to get the first Presidency of the new bank, would be headquartered at Shanghai. Rajan’s remarks certainly have potential to start a serious debate, about the future course of old mammoth discriminatory financial institutions, which have underwent almost no practical changes (mildly he admitted this time too) towards the need of the developing countries since their inception and on wake of sea of changes in the fundamental orders in the world.

As in collective reckoning, the consensus among the BRICS countries (Brazil, Russia, India, China and South Africa) to establish a New Development Bank (NDB) and a Contingent Reserve Arrangement (CRA), finally emerged out of their dissatisfaction with the ultra conservative Bretton Woods Institutions, such as the World Bank, International Monetary Fund (IMF) and the unflinching extremes of west-centric dollar dominating global monetary system.

The US has been ruling the multilateral institutions – and the BRICS that include five super-performing economies with over 20 per cent contribution in the global economic activity, posses just 11 per cent of the votes in IMF.

Adding more jerks to the adversities, the IMF's precautionary credit lines found reluctant receivers in underrepresented countries – that made central banks of these sides desperate for dollars to obtain the credit from the Federal Reserve only. The Fed played a proactive role during the height of global economic crisis in 2008, but not necessarily the similar policy will be replicated ahead too.

The BRICS countries’ inhibition in such scenario is forthcoming but rational – and their beliefs in NDB and CRA have sufficient logical traction. The NDB aims to meet with the credit requirements of heavy infrastructural projects – although the demand for credit will not be equal from these five countries, as they are into different development stages. But for meeting additional needs of infrastructure creation, the NDB has a balanced approach in terms of activating the prospective creditors and borrowers at same platform.

So, the business proposition of NDB is free from contention. However, the Bretton Woods institutions and the flocks of economists nurtured through their legacy have reservation on it, as this new development bank will promote regional co-operation unlike the already existing Inter-American Development Bank, Asian Development Bank and African Development Bank. That apprehension is totally misplaced, as the NDB with seed capital of just $100 billion or even with an incremental outlay will be not able to challenge the might of an established and mighty, IMF or World Bank – but it would be surely a beginning for BRICS to chart a new course for them in meeting with the bundled challenges of long-term finance.

Intently, the CRA intended to lessen the BRICS dependence on the Fed and dollars, showcases something different than the NDB. It is allocated $100bn – for swap lines, accessible to all five-nation members. With no permanency of lending and borrowing structure, the idea of CRA may not work as expected. But it would be naïve to reject it too early, as the potential of closer co-operation among the BRICS can unleash conducive impacts on its functioning.

Remarkably, these arrangements by the BRICS were made to counter the persisting discriminatory policies of the giant financial lenders – as in the case of IMF, it has changed everything but not its conservative structure, aligned in favour of the western countries. There is enough merit lies in the BRICS claim that the international financial system has worked against their interest. Rajan and others must heed to this truth.

Policymakers from the BRICS have been vociferously airing their views about the partial policy stances of the rich countries’ institutions, disguised as ‘multilateral agencies’. Earlier, Raghuram Rajan, was one among them, who aptly identified rich countries for pursuing selfish policies with no thought of their negative impact on emerging economies. Will he recall it now?

And the economic bubbles, their temptation of falling and making the global financial system on toe is something never amiss the scene. The Bretton Woods institutions in their present shape will be keeping such threats alive, so the notion of getting adrift from the crisis would be rather too simplistic at this point of time.

Hence, the space is for an alternative financing arrangement – first at regional, and next on the international level. This new bank is capable of bringing that, although initially with limited impact. China has been lending in Africa and that made good effects but it also violated many basic procedures – the BRICS bank has to move cautiously on this, as carrying forward the legacy of any one country out of those five would be against its collective foundational spirit. So, the mode of operation must be carried forward with a standard set of norms, never to be tempered with any one member’s discretion.

The BRICS bank has immense potential to bank with the huge number of roads, power plants and sewerage systems, as those all need large-scale funding. With the long-term capital base of the bank and meeting with the financing demands of these projects, the purpose of its establishment would be justified.

However, the new bank is not completely free from the challenges. Among the shortcomings it has, is its relatively small size, seeing it will have to work on international level. Also as Ben Steil and Dinah Walker of the US-based Council on Foreign Relations note that, China, India and Brazil have borrowed $66bn from the World Bank alone – more than the entire subscribed capital of the BRICS bank. That indebtedness may hamper these countries to go too agile in promoting policies in favour of their new bank and finally to counter the influence of the World Bank – possibly, there may be temporary ambiguity in loyalty.

Moreover, the BRICS bank will be facing adjustment related issues with the different political systems of the five member countries – as the differences between the systems in India and China are far too wide to be adjusted so easily. The new bank will have to look on the ethical concerns, include that related to the handling of natural resources by the projects, it would be financing. Its articles, which ensure that the founders will never see their voting rights drop below 55 per cent, must be scrapped or made more democratic. As this particular clauses make the idea of BRICS bank, less democratic than claimed.

Beyond even an iota of doubt, the Bretton Woods institutions are symbolising the spent time of empire, which are on verge of ruining after a painfully long saturation phase. The rest world, including former colonies have changed in the recent decades – so, the experiments like BRICS bank outlines positively where the future is – apparently, its on the side of emerging economies. Rajan should see the turning point of history little more cautiously, wishfully like he once saw the spectre of global financial crisis as early as in 2005– and delivered memorable Jackson Hole lecture.

(Atul K Thakur can be reached at atul@skoch.in)

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