The BRICS Bank and World Dominance: How Real Is This?

By Saliem Fakir · 2 Apr 2013

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Picture: BRICS heads of states with leaders of African countries courtesy Blog do Planalto/Flickr.
Picture: BRICS heads of states with leaders of African countries courtesy Blog do Planalto/Flickr.

The 5th BRICS Summit recently hosted in Durban has come to an end with great fanfare and celebrations that progress has been made with the announcement that a BRICS development bank will be established.

The concept of the bank is sketchy and it is hard to tell what it will look like given that the partners are still mulling its final form. However, its primary focus is mooted to be in infrastructure development. Beyond that South Africa will chair the BRICS process until Brazil hosts the next summit.

The BRICS Summit also made announcements about the establishment of a BRICS business council and a think tank. Several bilateral deals were also announced by China and Russia respectively, reinforcing investment and trade ties with South Africa.

However, it is the BRICS bank that has attracted the most attention and much has been said about it - some of it quite hostile commentary. However, this fear mongering doesn’t tally well with existing and evolving realities.

The creation of a new institution does not necessarily imply that it is being established to compete with existing multi-lateral institutions like the World Bank and the International Monetary Fund (IMF). There is little substance to wild assertions by critics that the BRICS bank will compete with the World Bank in particular.

It is simply too early to tell and a lot also depends on what happens with the World Bank and the IMF in the future, as their strength and stability largely depend on whether former creditor nations that bankrolled them, and are now debtor countries themselves, are able to get out of their own debt and financial crises.

These institutions were created after World War II under the Bretton Woods agreement, primarily to promote US interests and ensure that the American dollar becomes the global reserve currency. Their principal aim was to keep the world solvent and protect the investment interests of developed nations in those countries that had unstable macro-economic conditions.

It would be easy to impute that the BRICS want to create a competing institution to the World Bank. But all the BRICS countries have a relationship with the bank and this line of thought, of a competing institution, is hard to accept at face value.

Chinese companies also compete for World Bank projects and at times co-finance projects with it. Additionally, while the US has the largest vote on the World Bank’s board, it needed China’s and other BRICS countries’ consent for the appointment of the most recent World Bank President, who, as it turns out is a US national of Korean origin.

The World Bank is also not the same institution that was created 60 years ago, mainly to assist with the reconstruction of Europe. The bank’s budget is insufficient to finance all the development and infrastructure needs of the world, while the processes involved in the release of its funds are complex and often quite burdensome.

Meanwhile, the US recognises that its ability to hold sway over the World Bank will wane over time, as emerging economies demand a greater say over its future direction. America’s ability to replenish World Bank funds annually could also be restrained due to domestic bi-partisan politics, the growth of its own debt and budget deficits.

If Chinese influence is feared to be dominant within the BRICS bank, China seemingly doesn’t really need a five-party negotiated structure, which may turn out to be convoluted, to assert its influence and interests. It does so very well without the help of a BRICS bank. China is not a novice as far as development finance and assistance goes. It has a number of finance institutions. For instance, China’s Development Bank and the China-Africa Development Fund are well established and active on the African continent.

China’s development assistance has enabled it, over time, to gain experience in the disbursement of development finance, linking it to its own strategic needs within the African continent.

Nevertheless, while Chinese foreign direct investment (FDI) and aid to low income countries, especially in sub-Saharan Africa (SSA), increased twentyfold from 2003 to 2009, it is still smaller than FDI and aid given by the US and France to SSA countries.

Looking at FDI in SSA countries, Chinese FDI is close to 5%. Most of China’s FDI in the region is in natural resources and infrastructure. Of the 800 Chinese companies known to operate in Africa, 85% are privately owned (primarily small and medium enterprises) with little support from the Chinese state.

All indications are that Chinese financial power is not as rampant as people believe. Although in the future its trade flows and investments will grow significantly.

Even if a wild thought was ventured of the BRICS taking over the world, this would perhaps only be true if the BRICS economies and political institutions were decoupled from the existing international system.

But this is not the case as BRICS members are also part of the G20 as well as other international and regional institutions that are dominated by the West.

The world is still a shared space and a multi-polar world paradoxically needs enhanced co-ordination, co-operation and the inclusion of new interests and power. While traditional Western power is weaker and less influential, it still holds sway.

More than 60% of the world’s GDP is still generated by the OECD countries with the BRICS countries contributing about 25% to global GDP.

There is no doubt that the BRICS countries, in the future, together with Mexico, Indonesia and Turkey will be responsible for most of the global GDP growth and share. However, economic muscle is only one part of the equation in international influence.

So while the BRICS group is perceived as having aspirations to disentangle itself from the existing Western dominated international system, the opposite is true.

The formation of BRICS can also be viewed as a way to reduce rivalry within the group. Where China previously fought wars with both India and Russia, currently it may just be mutual suspicion between these three BRICS nations that is still alive.

Advancement through conflict – they all recognise – is neither beneficial to their future nor productive because the world is simply in too much flux at the moment.

An unstable international system is not good for any of the BRICS countries. It is not conducive for the international flow of trade and capital, which is the primary objective of the BRICS rather any apparent political imperative. China will want to assert its influence but would not do so irresponsibly. It may cause irritation for existing powers but it will not rail against the prevailing international structure and system.

Coming back to the BRICS bank and its modus operandi, China will most likely carry the bulk of the financial burden of the bank, as it has the largest reserves compared to other BRICS countries. It may, as a result, place its own imprint on the way the bank works.

Meanwhile South Africa’s lobbying to host the bank has more to do with status than anything else.

It is clear BRICS Summits and on-going dialogues will mean nothing without the creation of some institutional pillar. The BRICS bank is the first experiment in that direction, as is the creation of a reserve fund.

Both instruments are aimed at enhancing intra-BRICS trade, investment flows and protection against a volatile and fragile international financial system.

Thus, the creation of the BRICS bank is more of a response to an internal need as opposed to an externally focused agenda of world dominance.  Far too much is read into its creation. The BRICS bank is not a radical departure from the norm nor will it bring about the demise of the World Bank.

Fakir is an independent writer based in Cape Town.

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