In 1944, a group of world leaders gathered in a small New Hampshire town to figure out how to create a strong, interconnected global economy. Their goal: ensure we’d never see another Great Depression. Out of this conference came the International Monetary Fund (IMF), a global financial regulatory body. Since then, a growing chorus of critics has claimed that IMF has become a tool of western countries, particularly the United States, to ensure their economic hegemony over developing nations. As a response to these concerns, on July 15, BRICS countries (Brazil, Russia, India, China, and South Africa) formed a new bank as an alternative to the IMF. We asked four experts:
Will the new BRICS Bank challenge the IMF, and what will it mean for the United States?
Amadou Sy– Senior fellow in the Africa Growth Initiative and member of the Editorial Board of the Global Credit Review:
The establishment of the BRICS bank reflects the founding members’ dissatisfaction with the current governance of multilateral financial institutions such as the IMF and the World Bank. The five BRICS countries have been asking for a larger share of voting power in these institutions, a share that would be more commensurate with their expanding economies. The BRICS bank sends a strong signal to the United States and other G7 countries that there can be alternatives to existing institutions when BRICS countries cannot rebalance governance structures in their favor. The BRICS bank is also a response to the large financing gap associated with infrastructure projects.
However, beyond the muscle flexing and the legitimate need to finance large and complex infrastructure projects, it will take a while before the BRICS bank can reach its cruising altitude. Member countries will need to answer these tough questions. For instance, how will the smaller South Africa manage the influence of a much larger China? How low can conditionalities be for commercial viability to be preserved?
I do not see the BRICS bank being a rival to the IMF as the IMF is not in the business of financing infrastructure and development projects. Instead, the IMF is more akin to a global firefighter that lends to countries in difficulty. The BRICS countries would need to create another institution with a similar mandate if they plan to rival the IMF. The BRICS bank is more comparable to the World Bank, which in its early years was heavily involved in infrastructure projects. In its early years, the BRICS bank may see benefits in collaborating with the World Bank which is set to become a “Knowledge Bank.”
It’s hard to see how the new BRICS Development Bank will rival the IMF, since the older institution has more capital. The BRICS Bank starts with $50 billion contributed by its members for development funding, along with a contingency reserve fund of $100 billion primarily from China, with smaller contributions from the other four. (This latter $100 billion is most akin to the IMF). The IMF’s New Arrangement to Borrow credit line alone can provide the equivalent of more than U.S. $500 billion, plus other credit lines for low-income countries. The IMF also has significant expertise about what works, accrued over many years.
The BRICS Bank offers member states a larger role in governance than they have in the IMF. IMF reform to allow greater voice and a larger governance role for emerging markets has been in the works, and is something the Obama Administration has supported—but unfortunately the U.S. Congress has not done its part. Partners like India conclude that the United States does not back up its words with action, which makes alternative forums more appealing.
But the BRICS Bank will have its own internal dynamics, especially with China’s capital as the dominant part. And India appears to want a new development bank specifically focused on South Asia: Last week, India’s prime minister, Narendra Modi, called for the creation of a new SAARC (South Asian Area of Regional Cooperation) Bank. It’s more likely that a variety of regional development forums will emerge, just as emerging donors have. The impact for the United States will be like everything else: more players at the table with their own views—and own resources.
Charles Kenny – Senior fellow at the Center for Global Development:
In pure financial terms, there isn’t much competition (yet). IMF lending capacity is somewhere over $750 billion, the World Bank can lend up to around $300 billion. The BRICS bank and the currency fund between them are supposed to be financed to the tune of about $150 billion (although they may be able to leverage more loans than that).
But that’s a partial view. The BRICS Bank and currency fund are a warning as much as a rival. The United States and Europe are stalling reforms to make the IMF more representative of global economic power. Despite their falling share of global output and trade, the U.S. wants to retain veto power over IMF decisions and Europe wants to keep the right to appoint the Fund’s Managing Director.
The BRICS currency fund is a sign that if the West doesn’t face up to the fact of a rising Rest, developing countries will go their own way. The IMF as a global institution has more credibility and clout than any regional monetary fund could muster. And the U.S. and Europe need the IMF more than ever – think of the Euro crisis and the key role played by the Fund in avoiding a deeper recession in Europe.
If the BRICS decide to abandon the Fund in favor of their own institution, critically weakening the Washington-based body, many of the biggest losers will be in the West. The BRICS Bank and currency fund are a signal to the U.S. and Europe alike: help reform the institutions you created for the new world, or see the multilateralism you need more than ever fall apart.
C.Z. Nnaemeka – Former banker at Goldman Sachs and foreign affairs contributor to Paris-based Le Figaro and author of The Unexotic Underclass:
I am not convinced, although I wish I were, that the newly-formed BRICS New Development Bank can pose a proper challenge to over half a century of Western-centric IMF dominance. The new BRICS bank faces a number of obstacles, chiefly, its lack of a qualified, outspoken leader.
It won’t be Brazil. Domestic discontent has threatened President Rousseff’s viability, leaving her little political capital (or energy) for international issues. South Africa’s lost its premier statesman and its position as Africa’s top economy. India, due to tradition, temperament, and turmoil has never forcefully asserted itself on the world stage. China, though vocal regionally, is strangely silent globally, preferring to let its (once) explosive growth do the talking.
Which leaves Russia… Say what you will about President Putin, he’s a born leader. But he’s also a destabiliser, quietly sowing instability behind an unmoving face, unlikely to be the commander the BRICS nations can confidently rally behind. In the decade since Goldman economist Jim O’Neill coined the term, the BRICS have been fast-growing, true, but also globally disengaged and bogged down by internal messiness.
You can’t embezzle political leadership just from GDP: economic growth alone does not make a great leader. The world’s current leader, the U.S., will not remain so forever. All empires eventually fall. But the new BRICS Bank will not be what fells U.S.-IMF hegemony.