BRICS EXPANDS CHINA’S INFLUENCE
Since 2009, BRICS leaders have been gathering in what has primarily been a symbolic exercise, highlighting and promoting the idea that a strategic shift is underway in the global economy from the developed to the largest and fastest growing developing economies, which will require recalibrating global governance and political leadership. However, as developed economies have slowly recovered from the global financial crisis of 2008, and the economies of BRICS nations have slowed, the utility of largely symbolic meetings has been questioned to the point where the importance of the BRICS itself is unclear to many but the most dedicated advocates.
The situation changed dramatically at the Fortaleza, Brazil, meeting on July 15 where the BRICS leaders advanced an agenda of concrete actions, including the establishment of a $50 billion BRICS “New Development Bank” and a $100 billion contingent reserve arrangement designed initially to address global balance of payments pressures within the bloc. Operations are planned to begin in 2016. Given China’s overwhelming economic size vis-à-vis its BRICS partners (some 70 percent of overall GDP), Beijing’s voice will carry greater weight on issues of highest importance. For example, after much debate, the location of the new BRICS bank will be Shanghai; compromise was reached on the leadership, which will rotate among the founding five members.
At the same time, the implications of an international financial institution underwritten by the BRICS are uncertain but potentially significant. It is unclear whether the bank will directly compete with the World Bank or IMF, which are much larger, or regional development banks, or even existing national development banks. But it’s worth noting that China’s initial contribution to the new bank will be only a little less than its paid in capital at the World Bank, and the other BRICS nations will actually contribute more to the new entity than they do to the World Bank.
A key question is the value added for potential borrowers of using the BRICS bank rather than existing global financial institutions. Until the charter of the bank and the procedures are finalized, there is no clear answer. But from a borrowing perspective, one of the most onerous aspects of going to international financial institutions for assistance is the conditionality that goes with lending programs. Over the years, the World Bank, IMF and others have added numerous additional layers of obligations that go well beyond straight financial obligations for repayment and, often, economic restructuring. Now, conditionality often includes social development requirements including poverty alleviation, environmental protection, human rights and gender equality, anti-corruption and other topics in addition to the traditional financial and economic requirements. This is on top of politically sensitive steps which may be required as part of any economic restructuring such as the reduction or elimination of certain subsidies, improved competition policy, central bank independence and the like.
These obligations can be highly intrusive and are often resented by borrowers. At the same time, they are a primary means by which the Westernized international community has promoted the broader dissemination of a vision consistent with its values. To the extent borrowing nations have the option to approach the BRICS bank for assistance that is not conditioned with non-financial obligations, they may find it to be a more attractive proposition. That will both enhance the importance of the BRICS, while also potentially undercutting one of the most important and effective tools that the international community has relied upon in the post-war era to promote policies designed for good governance and economic development. This could become most readily apparent in sectors that the BRICS nations deem strategic, such as the energy and extractive sectors, which are among the sectors worldwide most fraught with environmental, social and local community complications. Established international financial institutions normally consider these matters; the BRICS bank might not.
HOW CHINA’S INTERESTS ARE SERVED
China is the world’s second-largest economy and has a larger GDP than the other four BRICS combined. It is, for example, 17 times larger than South Africa, the smallest member, which joined at China’s behest in 2010. And, in the years since O’Neill lumped China with the others, this gap has widened even more: China accounted for 40 percent of all global growth in the five years following the collapse of Lehman Brothers in 2008. China looms so large that it is the largest trading partner of the other four members, but none of the four even rank in China’s top five.
The New Development Bank, to be headquartered in Shanghai, only reinforces this dominance. Although each BRICS country will contribute $10 billion to the bank’s capital stock, China will provide 40 percent of a $100 billion Contingency Reserve Arrangement — more than twice the amount of any other country.
Nevertheless, for a country with $3.3 trillion in foreign currency reserves, $40 billion is pocket change. China has paid more than that to the IMF, an institution the NDB is modeled after. China earmarked a cool $200 billion in the China Investment Corporation in 2007, and it has its own development bank already.
So why is China bothering with a BRICS Development Bank?
The political machinations at the World Bank and IMF provide one explanation. For years, economists have criticized the two institutions for imposing onerous conditions on loans to developing countries, which often must agree to painful “structural readjustment” programs to receive cash infusions. The World Bank and IMF, by tradition, are respectively led by an American and a European, and the world’s wealthiest states have consistently refused to increase the developing world’s voting share within each institution. According to Anna Snyder, an analyst at the New York-based economic consultancy Rhodium Group, the NDB is a natural consequence of these frustrations.
“The formation of the bank is clearly a response to the fact that the IMF and World Bank wouldn’t move on the voting share issue with emerging markets,” she said.
The NDB also provides a vehicle for China to insulate itself from criticism of its own investment strategy in the developing world. As Beijing has sought a larger role on the global stage, Chinese companies have increased their investment footprint throughout Africa, often working with regimes — like Sudan — whose human rights records bring global reproach and sanctions. While Chinese firms have built factories and transportation networks in several countries on the continent, Africans have accused them of neglecting environmental standards and failing to improve the living conditions of the population. The joint nature of the NDB will allow Beijing to make investments under a multilateral umbrella, all while providing developing countries with less stringent conditions than those offered by the IMF and World Bank.