Sunday, July 20, 2014

BRICS Challenge Western-Run International Finance System

The leaders of the BRICS nations – the emerging markets of Brazil, Russia, India, China and South Africa – announced in Brazil the launch of a $50 billion development bank this week. The move by the five nations is in response to the Western influence of the US-dominated World Bank.

Though it will be much smaller and less funded, the new bank is an attempt to counterbalance the hegemony of US and Western banking interests. In essence, it is an attempt to expand the financial relevance of the world's emerging economies.

The BRICS also set up a $100 billion currency reserves pool to help countries manage their short-term liquidity troubles during a currency crisis. The decision presents a small, but potentially growing, challenge to the International Monetary Fund (IMF), which is based in Washington, DC.

The World Bank finances development projects around the world, and the IMF is the lender of last resort to countries that don't have the dollars to pay their foreign debt.

Unable to exert more influence over the World Bank and IMF, the BRICS will now gain greater control over the funding decisions that directly affect them.

Though China is one of the world's two largest economies, it has less voting power in the IMF and World Bank than Belgium, the Netherlands and Luxembourg. Yet, China has 1.3 billion people, while those three European nations have less than 30 million people combined.

Belgium — a county with 11 million people and a $508 billion economy — has more IMF votes than Brazil — a nation of 199 million people and a $2.2 trillion economy.

Frustrated that their economic weight is not reflected in global financial institutions, the BRICS countries have now established one of their own.

In the process, they have suddenly carved out a larger role for themselves in international finance.

At the least, they have created some global competition for international lending.

Initially, the bank will have $50 billion in capital, divided equally among its five founders. The bank will start with just $10 billion in cash put in over seven years and $40 billion in guarantees, and it won't start lending until 2016. However, capital is planned to eventually grow to $100 billion.

To put this in perspective, subscribed capital in the World Bank is $223 billion.

The development bank, which will be based in Shanghai, intends to fund development and infrastructure projects in developing nations. India will lead operations for the first five years, followed by Brazil and then Russia.

The BRICS nations banded together in 2009 to press for a large role in the global financial system created by Western powers in the post-World War II Bretton Woods agreement.

Given that they account for almost half the world's population and about a fifth of global economic output, the BRICS' influence will likely continue to grow.

In fact, other nations, such as Indonesia, Mexico and Turkey, could ultimately join the development bank.

The bank is the biggest undertaking and the most significant achievement of the BRICS in their five-year partnership.

When the BRICS first announced their intention to form the bank in April of 2013, it was greeted with great skepticism in the West. But the emerging nations have shown their willingness to coordinate, cooperate and act.

Wary, and weary, of the terms and conditions applied by IMF and World Bank, the BRICS can now turn to one another for the financing of their development and infrastructure needs.

The US and, more broadly, the West may not have taken seriously this challenge to their supremacy in the world economy a year ago. But it's a good bet they're paying attention now.

Moreover, the creation of the development bank is not the end of the BRICS' ambitious plans.

These nations have previously called for an end to the dollar's singular role in international trade and the settlement of debts.

For example, since crude oil is bought and sold in dollars, the BRICS have publicly voiced their interest in collaborating in non-dollar oil payments. Their hope is to have an alternative payment system in place by 2018.

In 2012, the BRICS announced plans to extend credit to each other in their own currencies, with the goal of eventually replacing the dollar with their own currencies for trade amongst themselves.

That's a direct challenge to the dollar's role as the world's reserve currency.

So, the development bank may be just the beginning. It may take a few more years, but the BRICS are determined to increase their role and influence in international finance and credit, while simultaneously diminishing that of the US and the West.

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