By Nicholas Hager, Transatlantic Community Analyst
In mid-July, the leaders of Brazil, Russia, India, China, and South Africa — a loosely affiliated coalition of emerging economies known as the BRICS — met in Fortaleza, Brazil to finalize their efforts to develop a new development bank and currency exchange reserve. This is widely perceived as a direct challenge to the World Bank and the International Monetary Fund (IMF) —Bretton Woods institutions that are crucial components of the liberal international economic order — and their primarily Western majority stakeholders, but is this actually the case and does the initiative truly pose a threat to the survival of the World Bank and the IMF? The answer, it would appear, is yes, but not in the way one might expect.
The BRICS’ new endeavor is two-fold: in addition to founding a $50 billion development bank it also establishes a $100 billion currency exchange reserve that, according to the BRICS, would provide them with another source of development financing and remedy any future balance of payment crises. Former World Bank chief economist Joseph Stiglitz is sanguine about the BRICS’ new endeavor, claiming that it marks “a fundamental change in global economic and political power,” and contends that it may even offer a new reservoir of funding that compensates for the resources that the Bretton Woods institutions “just don’t have.” Similarly, Jeremy Stevens, of South Africa’s Standard Bank, argues that “the initiative would help South Africa and Brazil [boost] regional trade, [and it] would aid China [by] broadening the market for its currency[; moreover] India…could use the bank [to fund its] sizable infrastructure needs [and] Russia’s participation [ties it] to the next generation of economic heavyweights.”
There are, however, reasons to doubt that the BRICS initiative will fulfill these and other expectations. Daniel Runde, in Foreign Policy Magazine, poses a question to the reader: “Do we think India would really be willing to foot the bill if there was a Russian or Chinese mega-financial crisis?” This is dubious, he believes, because “[t]he bottom line is that the BRICS have political and economic aims that are at best disparate, and often, directly at odds with each other.” The Economist elaborates upon this argument, noting that, despite superficial economic similarities, the BRICS are actually quite different. The Chinese economy vastly outperforms those of its BRICS peers — it is “28 times the size of South Africa’s” — and authoritarian Chinese and Russian leaders are unlikely to find much in common with their more democratic Indian, Brazilian and South African colleagues. “It took the Bretton Woods institutions decades to sort…out [“basic principles, like whom…to lend money [and] on what terms”],” the author observes, and these countries are far more normatively and economically cohesive.
Institutionally, China’s economic and political strength may prove to be the coalition’s undoing because it can, in no way, be thought of as a legitimate peer of the other BRICS. This may breed contempt as the BRICS move beyond the honeymoon and into quotidian operations. The New Development Bank’s headquarters will be located in Shanghai and China’s contribution to the currency exchange reserve will far exceed the contributions of other members; this, in addition to the global position that China occupies, means that it will possess immense organizational clout that may allow it to shift the operation of these institutions almost at will. Exacerbating this dearth of parity is the fact that – despite vociferous denunciations of the West’s dominance over Bretton Woods institutions – the BRICS bank is actually organized in such a way that it prevents the BRICS founders from ever having less than a 55% voting share, as compared to the 49.7% currently shared by the World Bank’s 37 founding members, “no matter what the bank’s future membership looks like.” This is highly problematic for an institution that was billed by Brazilian Finance Minister Guido Mantega as a “democratic” alternative to Bretton Woods.
Beyond the actual merits and shortcomings of the project itself, some analysts feel that the new BRICS venture may be more of a gesture to “demonstrate that…[these] nations are not hostage to…[the] constructions of [the] previous world order” rather than an attempt to challenge it. In this view, the BRICS do not seek to upend the liberal international economic order because they “have been among the biggest beneficiaries of [its brand of] economic globalisation [sic], absorbing unprecedented amounts of foreign direct investments (FDIs) in recent decades.” Instead, they are attempting to challenge the leadership composition of the current order. Recent comments by Brazilian President Dilma Rousseff regarding the BRICS’ desire for “justice and equal rights [in the]…IMF,” as well as the positions of other leaders of the group, appear to bear this out.
Even so, the venture could still pose a risk to the World Bank and IMF. The BRICS’ bank may ultimately fail to transform itself beyond a bargaining chip for increased influence in Bretton Woods, but it could destabilize the Western brand of globalization upon which they rest. This is because these institutions are not merely lenders; they are international norm enforcement instruments that, despite mixed results, attempt to reign in human rights abuses around the world because the “[individual] freedoms [these institutions support] are…an intrinsic aspect of development.” If states hope to receive, or to continue to receive, funds, they must typically accept and act in accordance with at least some Western ideals, including the adoption of liberal social and economic policies.
China has done its part to subvert international norms and institutions, providing enormous amounts of no-strings-attached investments in Africa. But if the new BRICS bank is capable of providing so-called “outlaw states” with an alternative to the Bretton Woods institutions, it may help insulate countries such as North Korea, Iran, and Syria from economic sanctions, undermining one of the international community’s primary tools to preserve order. A timely example is Russia’s current quest to partition and destabilize neighboring Ukraine. Just as new sanctions impose costs on its actions, the New Development Bank would allow it to ignore the international community’s rebuke and continue its aggression unabated.
This may also obviate the deterrent effect of sanctions, rendering this non-violent policy option impotent. Should that happen, the world is likely to become a much less free, much more vicious place as structural violence and military-based deterrence are bound to become more common in the absence of any viable recourse for norm enforcement. In short, what the BRICS bank may actually be able to accomplish, rather than compromising Bretton Woods or challenging the West’s supposed hegemony over it, is the erosion of the normative foundations upon which the entire international order rests.
What can be done to prevent this from occurring? One potential step would be for the U.S. Congress to approve the IMF quota reform that it has, so far, refused to pass. Some argue that the U.S. must preserve its voting share in the IMF at all costs, but a Congressional Research Service report acknowledges that “the U.S. voting share would [only] fall from 17.69% to 17.40%,” a decline which would “not have a meaningful impact…[on] the United States’ unique veto power…at the IMF.” However, the report raises a more prescient concern, specifically that these “emerging economies [may not] support the existing norms and values of the international financial institutions” and that “increasing [their] voice and participation…at the IMF could result in the support of economic policies that are less aligned with the…policies of advanced economies.”
Because Congress appears to perceive the risk inherent in laxer normative responsibilities for member states, consenting to the quota change may not seem to be a likely (or palatable) solution, but it may be instrumental in stalling the BRICS bank at the starting line. The new quota would create a dilemma within the BRICS, forcing them to choose between accepting their new status in Bretton Woods or forging ahead with their new project. They cannot have both because their commitment to one delimits the utility of their commitment to the other, so these states would face hard choices and not likely to come to the same conclusions. From that point, the West may find it useful to accentuate divisions among the BRICS by selectively engaging the more normatively congruent of them while working to constrain the excesses of the others via initiatives like the Transatlantic Trade and Investment Partnership and the Trans-Pacific Partnership. The former could undercut Russia’s dominance over Europe’s energy supply and the possible benefits of inclusion in the latter would incentivize Chinese compliance.
The economic weight of the BRICS is increasing relative to advanced economies, and this must be acknowledged, and reflected, in the international institutions of which they are a part. That said, this must not come at the cost of an international order that has been developing over the last seventy years. The West – specifically the U.S. – must be willing to bend slightly now so the international order does not break catastrophically later.