The rise of the BRICS offers valuable policy lessons for other emerging countries. Source: Kommersant
The countdown to the end of the Bretton Woods era has begun. With a view to reshape the global financial architecture long dominated by Western countries, the leaders of Brazil, Russia, India, China and South Africa (BRICS) are working on a joint development bank that could be a reality in 2014.
However, those wedded to the sanctity of the 1944 Bretton Woods Agreement – which established the International Monetary Fund (IMF) and the World Bank – wonder whether such a bank is needed. The answer is there is a place for a development bank that is more in sync with the needs of developing countries.
1. An idea whose time has come
The centre of gravity of the global economy has moved from the West to the East. Plus, the emerging economies are mostly net creditors to developed nations, as they account for 75 percent of the world’s total currency reserves. And yet the power of wealth distribution remains in the hands of Western countries.
This dichotomy exists because those who control money also control the flow of wealth. As per the Bretton Woods Agreement, 44 countries agreed to fix their exchange rates by tying their currencies to the US dollar. American leaders assured the rest of the world the dollar was dependable by linking the US dollar to gold. “Nations also agreed to buy and sell US dollars to keep their currencies within 1 percent of the fixed rate. And thus the golden age of the US dollar began.”
The BRICS are now in a position to undo this fraud and divert the flow of wealth in a more equitable direction.
Plus, a big-ticket economic alliance has large financial requirements and transactions. Why conduct it through Western banks when you can have your own BRICS Bank?
Finally, it’s about declaring you have arrived, sort of a coming of age party.
2. Channelling all that liquidity
The BRICS countries cumulatively hold more than $4.4 trillion in export earnings. Even if just 1 percent of these reserves are committed to the BRICS Bank, it would be a viable alternative funding source for development projects in emerging and poor countries.
There is another compelling reason – self interest. The export earnings are largely in US dollars. Each day these reserves are held, they depreciate in value. This is because the US is recklessly printing more dollars, thereby debasing its own currency.
More dollars floating around in the global markets means the BRICS’ dollar holdings are worth less with each passing day. In effect, the BRICS are subsidising the American economy.
3. Detoxifying global banking
Western banks have spewed financial toxin into the global economy. The numerous cases of rate fixing and cheating and the endemic corruption in the financial hubs of New York and London have necessitated a divorce from this system.
South African International Relations Minister Nkoana-Mashabane says thedecision to set up the BRICS Bank was made “as a result of the need to change the way business is conducted in international finance institutions”.
4. The world needs a new growth model
The World Bank is not really a world bank, it’s an American bank. With majority stakes held by the United States and its allies, it was created to further Western interests around the world.
To illustrate, here’s a question: How many countries have the IMF and the World Bank lifted out of poverty over the past 60 years? The answer: approximately zero.
Take Africa, which requires around $100 annually for infrastructure development. The World Bank has for several years been the largest multilateral financier of development infrastructure in the continent, but the total money committed in 2012 towards projects in Sub Saharan Africa, for instance, was just $12 billion.
The other multilateral lender in the continent, the African Development Bank, has had to grapple with shortages of funds which almost led to its collapse in 1995.
There are two reasons why Western institutions have been unable to erase global poverty from the countries they have worked with.
The first reason is the West never intended to help. In fact, their mission was exactly the opposite – to create poverty and dependency. When World Bank and IMF consultants descend on a developing country, their prescription for prosperity sounds compelling: focus on large projects, privatise (water and power) utilities, sell majority government stakes in national oil companies, and finally open up the local market to global (translation: Western) companies.
The World Bank model is orientated towards mega projects – such as dams. This focus on large projects in mostly small countries worked extremely well for advancing Western interests. It helped kick back bribes to the ruling elites in these countries, fostering an incestuous relationship between these elites and the Western institutions they ushered in.
Needless to say the model never worked for the ordinary people in whose name the projects were being funded. Indeed, from the start the motive was to trap these countries into a vicious debt cycle in order to grab their resources and make them pliant states.
The second reason why the Bretton Woods twins have screwed up is misplaced priorities. Western banks and consultants do not seem to understand that poor countries do not really require mega projects. What they need are more humble projects such as roads, electricity, clean drinking water, healthcare, education, ICT, sanitation and affordable public transport. Give the people the basics and they will take care of the rest – such as create jobs, wealth and skyscraper skylines.
The BRICS Bank is expected to focus on this critical infrastructure challenge facing developing countries.
5. BRICS have set a good example to follow
Detractors of the BRICS alliance like to say corruption is widespread in India, China and Russia. And they are right. What they cannot deny is the fact that despite such corruption these countries are collectively lifting at least a hundred million people out of poverty and moving them into the middle class each year.
Then there’s the Janus Syndrome. The two-headed Greek deity, Janus, has one face facing the future and the other focussed on the past. The syndrome is most evident in India, where one half of the country enjoys unprecedented prosperity, basking in spectacular 21st century projects such as the Moon and Mars missions, while the other half wallows in 19th century problems.
The relentless rise of the BRICS despite such contradictions not only offers hope but also valuable policy lessons for developing countries.
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