BRICS NATIONS AND DEVELOPMENT BANK
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The leaders of the five Brics countries have signed a deal to create a new $100bn (£58.3bn) development bank and emergency reserve fund.
The Brics group is made up of Brazil, Russia, India, China and South Africa.The capital for the bank will be split equally among the five participating countries.The bank will have a headquarters in Shanghai, China and the first president for the bank will come from India. At first, the bank will start off with $50bn in initial capital.
The emergency reserve fund – which was announced as a “Contingency Reserve Arrangement” – will also have $100bn, and will help developing nations avoid “short-term liquidity pressures, promote further Brics cooperation, strengthen the global financial safety net and complement existing international arrangements”.
The creation of the Brics bank will almost surely create competition for both the World Bank and other similar regional funds. Brics nations have criticised the World Bank and the International Monetary Fund for not giving developing nations enough voting rights.One of the goals for the bank – whose creation has been discussed for some time – would be to increase the amount of money loaned to developing countries to help with infrastructure projects.
The Fortaleza Declaration of heads of state from Brazil, Russia, India, China, and South Africa (the so-called BRICS countries) is the latest evidence in the rise of regional assertion in the global field.
Objectives of the bank
The leaders of the BRICS nations have pulled off a coup of sort in announcing the establishment of a New Development Bank (NDB) with an initial subscribed capital of $50 billion. Significantly, they have chosen to share the capital equally among them. The capital base is to be used for funding infrastructure and “sustainable development” projects in the BRICS countries initially. Other low and middle-income countries will be able buy in and apply for funding subsequent as time progresses. They have also created a $100 billion Contingent Reserve Arrangement (CRA). This is to provide additional liquidity protection to member-nations during balance of payments problems. The CRA, however, is being funded 41 per cent by China, 18 per cent each from Brazil, India, and Russia, and 5 per cent from South Africa. CRA, according to the Declaration, is “a framework for the provision of currency swaps in response to actual or potential short-term balance of payments pressures.”
More than the establishment of the NDB, the Fortaleza Declaration is remarkable for adoption of ‘one-nation one-vote’ prescription for the proposed bank. The Bretton-Woods institutions – the World Bank and the International Monetary Fund – have structures that aren’t equitable, to say the least. BRICS nations have also amicably settled other issues related to the formation, running and structure of the NDB. The high-five meet also saw the signing of a memorandum of understanding of co-operation among BRICS export credit and guarantee agencies “to improve the support environment for increasing trade opportunities” among them.
“We recognise that there is potential for BRICS in insurance and re-insurance markets to pool capacities. We directo our relevant authorities to explore avenue of co-operation in this regard,” the Declaration said.
The triggering factors
Two factors have clearly triggered the birth of NDB.
For one, BRICS have emerged as big economic power, and solidified their ties in terms of commerce with the emerging market economies and developing countries (EMDCs). Together, they are a force to reckon with in the global economy. For another, their disenchantment with the Bretton-Woods institutions has been growing over the years for assorted reasons. The BRICS-sponsored development bank is not an isolated and unique initiative. Similar initiatives had sprung up in the past to blunt the might of Bretton-Woods twin. Development Bank of Latin America (created by Andean nations) in the 60s, the Chiang Mai Initiative in early 2000 (of 10 ASEAN nations plus China, South Korea and Japan) to establish a network of bilateral currency swap pacts in the wake of Asian currency crisis, and the establishment of the Bank of South by Latin American countries in 2009 were the result of escalating dissatisfaction with the U.S.-dominated IMF and World Bank. “We are confronted with persistent political instability and conflict in various global hotspots and non-conventional emerging threats.
On the other hand, international governance structures designed within a different power configuration show increasingly evident signs of losing legitimacy and effectiveness, as transitional and ad hoc arrangements become increasingly prevalent, often at the expense of multilateralism,” the Declaration said. “We believe the BRICS are an important force for incremental change and reform of current institutions towards more representative and equitable governance, capable of generating more inclusive global growth and fostering a stable, peaceful and prosperous world,” it went on to add.
The BRICS bank development comes at a time when reforms at the Bretton-Woods institutions fail to fructify for one reason or the other and with the U.S. and European nations still not reconciled to concede BRICS nations a greater voice in the governance structure of the Bretton-Woods twin. Can the BRICS-sponsored NDB be a fitting alternative to the Bretton-Woods twin? It is easier said than done, however. It all depends on a host of factors. Its ability to put in place a conflict resolution mechanism, devise a robust credit appraisal mechanism, and put in place an effective supervisory regime will all, among others, be under test.
In a way, the BRICS-sponsored bank is akin to a native concept, which has been practiced in Tamil Nadu, the southern part of India. Area-specific Nidhi companies have existed successfully in Tamil Nadu, helping the members (who live in that area) to tide over their financial needs at affordable rate. The lenders, in these instances, have greater understanding of their clients. In the global arena, blocks of nation-states seem to tweak this concept, and tailor it to their larger needs.
For the first time since its creation in the aftermath of World War II, the structure of global economic governance established and dominated by the United States has some serious competition. At their summit in Brazil on July 15, 2014, the five BRICS countries (Brazil, Russia, India, China and South Africa) agreed to set up the New Development Bank with a capitalisation of U.S. $100 billion) and a contingency fund to deal with financial crises.
It is too early to say whether these mechanisms will challenge the role of the International Bank for Reconstruction and Development (IBRD) or the World Bank and the International Monetary Fund (IMF), which have been the bedrock of the Bretton Woods system under U.S. hegemony. But they at least serve as a reminder that the era of Western and American dominance of the world is ending, giving way to a more complex and diversified world order: the multiplex world. The move by BRICS, though outwardly economic in nature, has serious geopolitical undertones.
It comes after a speech last May to the U.S. Military Academy in West Point by U.S. President Barack Obama in which he declared: “America must always lead on the world stage. If we don’t, no one else will.” Such remarks would seem arrogant and dismissive of the ambitions of the emerging powers. The BRICS nations do not accept the view that the world is for America’s alone to lead or manage. The BRICS summit in Brazil also showed that the emerging powers do not buy the Obama administration’s move to punish Russia for its actions in Ukraine by isolating it internationally.
Domination from the West
To compound matters, recent developments, including the deterioration of U.S.-Russian relations over Ukraine and U.S.-China relations over East Asian maritime disputes casts a shadow over cooperation among the major powers in advancing global governance. One potential victim could be the G-20. Created in 1999 in response to the Asian financial crisis, G-20 was upgraded to a summit-level conclave of established and emerging nations in 2008, to manage the unfolding global financial crisis. Representing 80 per cent of the world’s population, 90 per cent of the world’s GDP, 90 per cent of the world’s finance, and 80 per cent of the world’s trade, this institution describes itself (at its Pittsburg Summit in September 2009) as the “world’s premier forum for international economic cooperation.” There is little doubt that it is vital to the future of global governance. Javier Solana, the former NATO and EU foreign policy chief, has called the G20, “the only forum in which world powers and emerging countries sit as equals at the same table.”
In the meantime, the U.S. attitude towards the emerging powers seems to have hardened. In 2010, the U.S. Secretary of State, Hillary Clinton, expressed the determination of the U.S. “to deepen engagement with these emerging centres of influence.” As she put it, “American leadership does not mean we do everything ourselves. We contribute our share, often the largest share, but we also have high expectations of the governments and peoples we work with.”
But in a speech delivered on June 11, 2014, closely following Mr. Obama’s “America must always lead” doctrine at West Point, U.S. National Security Adviser Susan Rice declared: “With emerging powers we must be able to collaborate where our interests converge but define our differences and defend our interests where they diverge.”
With relations with two of the BRICS countries – Russia and China – under serious strain over Ukraine and maritime disputes in East and Southeast Asia respectively, Washington’s commitment and ability to develop a shared leadership structure that Ms. Clinton had envisaged looks increasingly doubtful, if not altogether impossible. In this context, the mainstream western media has been too dismissive of the latest move by BRICS to set up a bank and contingency fund. But such cynicism misses the larger picture, which is the end of western hegemony and the rise of the multiplex world. A better response from the U.S. and the West would be to speed up the reform of the IMF and the World Bank so that they accommodate the rising clout of the emerging powers.
Historical background of brics..
BRICS is the acronym for an association of five major emerging national economies: Brazil, Russia, India, China, and South Africa. The grouping was originally known as “BRIC” before the inclusion of South Africa in 2010. The BRICS members are alldeveloping or newly industrialised countries, but they are distinguished by their large, fast-growing economies and significant influence on regional and global affairs; all five are G-20.
As of 2013, the five BRICS countries represent almost 3 billion people with a combined nominal GDP of US$16.039 trillion and an estimated US$4 trillion in combined foreign reserves. As of 2014, the BRICS nations represented 18 percent of the world economy.
Brazil held the chair of the BRICS group in 2014, having hosted the group’s sixth summit in 2014.
The BRICS have received both praise and criticism from numerous quarters. Argentina participated in the Fortaleza Summit held in July 2014 in response to an invitation by Russia. In that meeting, the BRICS countries will discuss the possible admission of Argentina as the sixth member country.
The term, “BRICS”, was coined by economist Jim O’Neill in his publication, Building Better Global Economic BRICs