The Big C in BRICS

“China does not acknowledge the old logic of ‘when a country is strong it must dominate’,” – China on accusations it would use BRICS to dominate other countries

How The Fractious BRICS Institutions Might Burnish China’s Influence

by SB Veda with Contributions from Staff

The month of July saw the eyes of the World focused on Brazil, which hosted an event that may prove in time to be the beginning of a grand project in global affairs. No – We are not referring to the football World Cup, though that event of little consequence to the lives of Asians got stratospheric coverage in India by comparison. Rather, we refer to the meeting of BRICS nations, namely Brazil, Russa, India, China and South Africa, which took place on July 15 in Brazil at which time two new Global Financial institutions were announced, the New Development Bank (NDB) and Contingent Reserve Arrangement (CRA) boasting combined capitalization of $US 150 Billion.

The coverage that did occur in India was largely devoid of analytical depth – and, to use a sports analogy, tantamount to cheerleading. The Economic Times, no less, referred to it as a “Win-Win” situation, quoting an unnamed Brazilian diplomat, who seemed still entranced by the spectacle of the FIFA soccer tournament, saying, “We pulled it out 10 minutes before the end of the game”. Making it sound like everyone gained, he went on, “The Chinese got the headquarters. The Indians got the first presidency. The South Africans got a regional headquarters. We were happy to facilitate all this. And the Russians were happy that finally there is a bank that could challenge the IMF and World Bank”

In reality, the political contest between member nations was fierce: China and India wanted the bank’s headquarters – India lost this battle but won the argument with Brazil over who should hold the first five-year rotating presidency; the wrangling nearly scuttled the deal. The BRICS leaders settled on Shanghai as headquarters and an Indian, yet to be named as the first President. But a Brazilian is to chair the board of directors and a Russian the board of governors. The management of any institution with different centers of influence, as BRICS appears to be establishing, is deeply problematic. The President, Board of Governors and Board of Directors will surely pull in different directions, each determined by competing interests, leaving many to wonder, who will steer the ship, especially when global financial waters become choppy?

Although each nation is to get an equal share of the $50 Billion NDB pie, this is the lesser of the two funds, and it is the height of naiveté to think that each participant would wield influence and benefit, overall, in any kind of equitable fashion when there will be disproportionate contributions to the larger contingency fund. The reality may well be one that Indian policy-makers and people alike are loathe to admit: that the net-gainer in all of his will be rival Asian neighbour and increasingly powerful global heavyweight, China – not necessarily in loans but certainly in influence.

The basic problem lies in supply and demand: The World Bank estimates that South Asia alone requires $2.5 trillion over the next ten years, so $US 50 billion earmarked for “sustainable projects” in the NDB and $US 100 Billion for members with urgent financial difficulties in the CRA is tantamount to a drop in the monetary bucket. The NDB fund will ultimately rise to US$100 Billion but one could argue that this is still an order of magnitude lower than it should be.

Cash-rich China indicated that it was willing to chip in more. But India and Brazil, happy to use the bank as a politically palatable way to tap Chinese cash but wary of its dominance as much as they are of the West’s, insisted on an even split among more conservative members.

South Africa could only afford to contribute $10 billion, and serve as headquarters for the African continental branch. With the most daunting challenges in infrastructure development, education penetration, and poverty reduction lying in that continent, many in the wonder if South Africa’s membership was simply a means to burnish Jacob Zuma’s severely embattled presidency.

Herein lies the biggest obstacle to the visionaries, or as some might view – the upstarts of the Brazilian summit: Other than being of a substantial size and bearing the label ‘developing’ (the reason why economists at Goldman Sachs, an investment bank, coined the term in 2001), the BRICS members have little in common. The Chinese economy is 28 times the size of South Africa’s, and despite being an ostensibly communist country, its labour force are less protected than socialist India. Income per person in India is one-tenth that in the citizenry in Russia but Indians enjoy more freedoms than the average Russian. And, while all face infrastructure challenges, the democracies (Brazil, India, and South Africa) go about erecting it differently, some say less efficiently, than authoritarian regimes (China and to a great extent, Russia).

Such disparity will make it tremendously difficult for the centers of influence in BRICS to agree on even basic principles, like to whom (other than themselves) shall they lend money – and on what terms. Basic questions such as how “sustainable development” is defined, are at issue. It took the Bretton Woods institutions (who established the rules by which the World Bank and IMF lend money) decades to deal with such issues, and the result was far from satisfactory to nations at large; and it is worth noting that these institutions were and continue to be dominated by like-minded liberal democracies. Under the circumstances, how BRICS will function is far from clear.

Still China will likely play the definitive role in moving the institution forward, and the reason lies in it’s the emerging super-power’s desire to create a rival global institution to the World Bank, and shape the development of lesser centers of global influence.

China will invest the most money but also gain the most control over the US$100 billion currency reserve pool set up alongside the new US$50 billion development bank.
The founding members of the bank, to be headquartered in Shanghai, will subscribe equally to the bank’s start-up fund of US$50 billion, though the contributions to the US$100 billion CRA will vary significantly, with China investing US$41 billion to US$18 billion each from Brazil, Russia and India, and just US$5 billion from South Africa.

Accordingly, voting rights in the CRA will also reflect the contributions, with China holding a commanding 39.95% vote compared to 18.10% each for Brazil, Russia and India, and a 5.75% vote for South Africa.

The new development bank and the CRA will be mutually independent with separate tasks. Citing a Thursday press release from the People’s Bank of China, the country’s central bank, the official Xinhua news agency reported that the bank will focus on long-term financing for infrastructure in developing countries, while the CRA will provide short-term financial assistance to BRICS members when they face balance of payments pressure.

According Nobel Prize-winning Economist, Joseph Stiegler, such aid always has strings attached, and with the largest share of votes, China will be pulling those strings.

For more, click on the following link: BRICS Expands China’s Influence

2 Comments on “The Big C in BRICS

  1. I was wondering about BRICS, and the new Development Bank. I can’t believe some publications are saying it’ll rival the IMF and World Bank. The amount of money committed is so small in comparison to demand – thanks for pointing that out. This post and the related article were very informative. Keep it up!

  2. China looms large on the world stage, ever increasingly. I am curious to see how democracies like India and Brazil will manage to deal with autocratic societies like China (and increasingly Russia for whom India has been almost a client-state in the defense realm for decades). Great article.

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