Tuesday, 03 April 2012
Like a superhero that bursts through the doors, making an entrance, the BRICS announced their plan this week: A joint development bank for the bloc. (File photo)
At first, it wasn’t immediately obvious to many what a BRICS bank would achieve. The group of fast-growing emerging markets – Brazil, Russia, India, China, and South Africa – having a joint bank to their name … Why? Who would stand to gain?
Up until 2010 it was not yet clear how the countries were moving forward as one, let alone mull over the idea of forming a regional development bank. At first they were just the BRIC bloc, minus South Africa, they had been slowly crawling into the business mainstream.
Not powerful enough to be identified as a fully-fledged economic bloc by the average Joe, but still persistent, BRICS then grew with their African addition. Their self-professed plan to feed off each other with discussions over growth schemes and projections came to a peak last week with their fourth annual summit in New Delhi.
Up until 2010 it was not yet clear how the countries were moving forward as one, let alone mull over the idea of forming a regional development bank. At first they were just the BRIC bloc, minus South Africa, they had been slowly crawling into the business mainstream.
Not powerful enough to be identified as a fully-fledged economic bloc by the average Joe, but still persistent, BRICS then grew with their African addition. Their self-professed plan to feed off each other with discussions over growth schemes and projections came to a peak last week with their fourth annual summit in New Delhi.
Then, like a superhero that bursts through the doors, making an entrance, they announced their plan: A bank for the BRICS.
Let’s return to this superhero analogy later.
Rather than seeing it as potential competition or rival for the World Bank, the Asian Development Bank and their multilateral counterparts, I’ve chosen to look at it as just another offering that is pinning its hopes on too much.
The bloc has met difficulties in setting out a long-term agenda because they are hampered by internal differences and have “nothing in common,” argues the Financial Times’ Martin Wolf. Collectively, the five members now account for roughly 18 percent of the world’s GDP, 43 percent of its population, 15 per cent of global trade and hold 40 percent of global currency reserves. And according to the BRICS Trade and Economic Research Network, these five countries account for 18 percent of global trade and attract 53 percent of global financial capital. Pretty impressive numbers, but apart from their value in bulk, their differences remain.
“They are not natural allies because the differences in values are quite important,” argues Wolf, who explains that South Africa, Brazil, and India are very vibrant and complicated democracies, whereas China is something “completely different.”
The differences between China and India in particular could put a dampener on how resilient the BRICS are against the huffs and puffs of the world’s dominant economies. A boundary dispute that keeps cropping up between the two linger, while India’s concerns over China’s relationships with neighbors, particularly Pakistan, and rivalry between the two over Tibet, still loiter sullenly backstage.
Also, international geopolitical circumstances still weigh on the strength of their economic ties. Take their recent stances on the ongoing Syrian conflict, for instance, when they were split down the middle with China and Russia vetoing an Arab League-Western resolution in the Security Council while South Africa and India voted in favor.
And while they are a group that stands to become the world’s most dominant economies in the next few decades, with the International Monetary Fund suggesting that their GDP will surpass that of the Euro area before 2015, this still does not outweigh the power of the continued domination of the world’s current developed powers. A whole network of big regional development banks places a question mark over the power and influence a new global lender from the emerging world will be able to harness.
“What’s not clear to me is whether this is a bank that would operate everywhere using BRICS money in some way, or whether it would be a BRICS bank,” says Wolf.
“We have enough official banks, and it would make far more sense to improve the governance of what we have than to start creating completely new institutions,” he adds.
But what the BRICS are banking on is that international global lenders have seen dark days in recent years.
“The IMF and the World Bank [have seen] their influence reduced significantly over the past decade,” Xiang Songzuo from Bank of China said at the BRICS summit. “Particularly the previous financial crisis and current financial crisis made me believe they had not played the salvation role in preventing the crisis,” he added.
But plugging a new product based on the failures of those already existing on the market is a valid but cheap shot. The reality is that as much as the BRICS say that the world will benefit from a brand new global lender, they are only doing this to boost their economic influence. A joint development bank and a united stock index will make them more credible as an entity; the superhero’s entrance (to save the day from the recent economic perils of the IMF and the World Bank and fruitless blocs, such as the EU) will attract more attention and they will win protection.
By protection, I mean their new influence on the international arena would probably make their group less sensitive to sanctions from the West, analysts continue to say. And meanwhile, they have hailed a new agreement to provide credit to each other in local currencies as a new channel to facilitate economic growth in times of crisis and promoting trade and investment in local currencies as well as to cut transaction costs. But again, a reference here is made to faults of a product already on the market: the dollar. The currency swap deal is also seen as a step to replace the dollar as a reserve currency in trade between BRICS.
“The euro and dollar are no longer seen as unquestionable monopolies in the role of reserve currencies. Clearly the world needs more reserve currencies.” Yaroslav Lissovolik, the chief economist at Deutsche Bank told Russia Today this week.
So while the BRICS continue to remind the world that global dominant powers reached their heyday a few years ago and have since been tumbling, they will continue to move from strength to strength under the premise of “the BRICS are what the international financial system needs now,” as the co-director of bloc’s research group recently said.
The bloc will continue to examine the proposal of BRICS development bank, funded and managed by the group and other developing countries, but for this to happen, the BRICS must start building from within. Not to idealistically expect one happy family, the hope is that high walls between India and China do not to interfere in their fiscal ventures. And while the countries may all have been packaged to the world with the overused term “global powers,” it is important to remember that the BRICS are each at different growth stages with a mix of growth forecasts (some positive, some not); paving the way for possible inconsistencies or the group simply not moving together in harmony.
(Eman El-Shenawi, a writer at Al Arabiya English, can be reached at: eman.elshenawi@mbc.net.)
Let’s return to this superhero analogy later.
Rather than seeing it as potential competition or rival for the World Bank, the Asian Development Bank and their multilateral counterparts, I’ve chosen to look at it as just another offering that is pinning its hopes on too much.
The bloc has met difficulties in setting out a long-term agenda because they are hampered by internal differences and have “nothing in common,” argues the Financial Times’ Martin Wolf. Collectively, the five members now account for roughly 18 percent of the world’s GDP, 43 percent of its population, 15 per cent of global trade and hold 40 percent of global currency reserves. And according to the BRICS Trade and Economic Research Network, these five countries account for 18 percent of global trade and attract 53 percent of global financial capital. Pretty impressive numbers, but apart from their value in bulk, their differences remain.
“They are not natural allies because the differences in values are quite important,” argues Wolf, who explains that South Africa, Brazil, and India are very vibrant and complicated democracies, whereas China is something “completely different.”
The differences between China and India in particular could put a dampener on how resilient the BRICS are against the huffs and puffs of the world’s dominant economies. A boundary dispute that keeps cropping up between the two linger, while India’s concerns over China’s relationships with neighbors, particularly Pakistan, and rivalry between the two over Tibet, still loiter sullenly backstage.
Also, international geopolitical circumstances still weigh on the strength of their economic ties. Take their recent stances on the ongoing Syrian conflict, for instance, when they were split down the middle with China and Russia vetoing an Arab League-Western resolution in the Security Council while South Africa and India voted in favor.
And while they are a group that stands to become the world’s most dominant economies in the next few decades, with the International Monetary Fund suggesting that their GDP will surpass that of the Euro area before 2015, this still does not outweigh the power of the continued domination of the world’s current developed powers. A whole network of big regional development banks places a question mark over the power and influence a new global lender from the emerging world will be able to harness.
“What’s not clear to me is whether this is a bank that would operate everywhere using BRICS money in some way, or whether it would be a BRICS bank,” says Wolf.
“We have enough official banks, and it would make far more sense to improve the governance of what we have than to start creating completely new institutions,” he adds.
But what the BRICS are banking on is that international global lenders have seen dark days in recent years.
“The IMF and the World Bank [have seen] their influence reduced significantly over the past decade,” Xiang Songzuo from Bank of China said at the BRICS summit. “Particularly the previous financial crisis and current financial crisis made me believe they had not played the salvation role in preventing the crisis,” he added.
But plugging a new product based on the failures of those already existing on the market is a valid but cheap shot. The reality is that as much as the BRICS say that the world will benefit from a brand new global lender, they are only doing this to boost their economic influence. A joint development bank and a united stock index will make them more credible as an entity; the superhero’s entrance (to save the day from the recent economic perils of the IMF and the World Bank and fruitless blocs, such as the EU) will attract more attention and they will win protection.
By protection, I mean their new influence on the international arena would probably make their group less sensitive to sanctions from the West, analysts continue to say. And meanwhile, they have hailed a new agreement to provide credit to each other in local currencies as a new channel to facilitate economic growth in times of crisis and promoting trade and investment in local currencies as well as to cut transaction costs. But again, a reference here is made to faults of a product already on the market: the dollar. The currency swap deal is also seen as a step to replace the dollar as a reserve currency in trade between BRICS.
“The euro and dollar are no longer seen as unquestionable monopolies in the role of reserve currencies. Clearly the world needs more reserve currencies.” Yaroslav Lissovolik, the chief economist at Deutsche Bank told Russia Today this week.
So while the BRICS continue to remind the world that global dominant powers reached their heyday a few years ago and have since been tumbling, they will continue to move from strength to strength under the premise of “the BRICS are what the international financial system needs now,” as the co-director of bloc’s research group recently said.
The bloc will continue to examine the proposal of BRICS development bank, funded and managed by the group and other developing countries, but for this to happen, the BRICS must start building from within. Not to idealistically expect one happy family, the hope is that high walls between India and China do not to interfere in their fiscal ventures. And while the countries may all have been packaged to the world with the overused term “global powers,” it is important to remember that the BRICS are each at different growth stages with a mix of growth forecasts (some positive, some not); paving the way for possible inconsistencies or the group simply not moving together in harmony.
(Eman El-Shenawi, a writer at Al Arabiya English, can be reached at: eman.elshenawi@mbc.net.)
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