Despite the Rhetoric, a BRICS Bank Won’t Affect the Dominance of the West

by Andrew Alexander
The views represented in this article are solely those of the author and may not be construed as in any way representative of the views or policies of Oxford Royale Summer Schools.
Image shows a renminbi alongside lots of dollars.Most of us will have come across the ‘butterfly effect’ at some point – the idea that an insect flapping its wings on one side of the world will, if it happens at a particular moment in space and time, set off a chain reaction which leads to a hurricane elsewhere.

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It’s the theory that comes most to mind when one thinks of the BRICS – Brazil, Russia, India, China and from December 2010 South Africa – the emerging economic superpowers lumped together by Goldman Sachs economist Jim O’Neil in a research note in November 2001. From an analyst’s pen, a global challenger for hegemony has been born.
The nations concerned have taken the sobriquet rather seriously. The BRICS have formed their own association, have regular summits, have pushed for a new reserve currency and, most interestingly, have collaborated on the Global Development Bank and a fund called the Contingent Reserve Arrangement, which will provide emergency capital to members. These last two institutions, announced in July this year, are potentially far more disruptive to global international finance than is readily appreciated and have a deep significance in terms of the emerging global picture.

Image shows skyscrapers and illuminated roads in Shanghai.
Shanghai is the planned location for the BRICS bank.

The Global Development Bank will be a multi-lateral development bank, which is bankrolled by the BRICS economies and will start life with an initial capitalisation of $50bn. Headquartered in Shanghai, this is an institution making on obvious pitch for the ground covered by the World Bank at present. The Contingent Reserve Arrangement, which will be capitalised with $100bn, will offer a buffer against shortages in liquidity amongst member states – in other words, the ability to lend capital to countries whose government issued debt or currency is coming under severe pressure from the markets. Again, this has an obvious forerunner in the IMF. Both components of the so-called ‘BRICS Bank’ therefore consciously model themselves on existing Western multilateral mechanisms but seek to shift the power base to the East. Whilst imitation is the sincerest form of flattery, I would argue that we should not yet worry that the world’s financial order is about to be turned on its head.

Image is a button that reads, "Browse all Economics articles."Looking behind the rhetoric

How seriously should we take the new BRICS bank? I think we should analyse this on three levels – crisis management, globalisation, messaging.

Image shows the Moscow State University and a Russian flag.
Russia has borrowed heavily from the IMF.

The primary purpose of the IMF is to prevent catastrophic failures in the global financial system – in effect it steps in when countries go through the equivalent of a ‘bank run’. If the BRICS bank is to be a meaningful substitute then it needs the same capacity to act effectively at a moment of crisis. It does not have this. As set out in this brief but punchy analysis by the Council on Foreign Relations, the arrangement between the BRICS allows China to borrow up to $6.2bn, Brazil, Russia and India $5.4bn and South Africa $3bn without recourse to the IMF. Yet recent IMF loans to BRICS nations have been way in excess of these figures – Russia borrowed $38bn in the 1990s, Brazil took $30bn in 2002. Given the boom in emerging market trade, the amount needed to balance currency flows in the event of an emergency will have increased exponentially since then. China has $3,993bn in foreign reserves; Russia has $419 and so on. In each case, the BRICS Bank is very unlikely to have the firepower to make a meaningful intervention if domestic containment initiatives fail. The true fall-back remains the IMF. In this sense, the best that can be said is that the new bank offers a platform from which something with greater power to act in the event of a crisis can be built.
More interesting is the New Development Bank. Globalisation as a concept has always been championed largely by the West. In doing so, Western policymakers have primarily benefitted the East. The West has destroyed its internal manufacturing and heavy industry by removing barriers that prevented the cheap labour economies of the East competing on cost. In a country like Britain, this effect has been pronounced, and even in nations like the USA where this impact has been less severe, this is down to the bounty of the earth in the form of cheap local energy rather than the ability to learn policy lessons. British politicians in particular are fascinated by globalisation, but very few have the intellectual honesty to admit that in its first phase it has not benefitted the country in the round.

Image shows mineral extraction in Bolivia.
Different attitudes have been taken to the extraction of minerals from third-world countries.

The second phase of globalisation will be even more contentious. It will consist in the race to extract raw materials from the third world and sees the first and second worlds take very different approaches. The first world is terrified of the shadows of colonialism. Its efforts in this space consist firstly in large aid programmes designed to make third world governance more responsible with the hope that resources will then be sold on the open market and competed for commercially. These efforts also consist in having corporations chase global resources but handicapping these same corporations with legislation which makes it very difficult for them to compete in a landscape with less than perfect governance both in public office and local corporations.
The second world approach is very different. Here the goal is not to reform the market and secure the resource as a result, but to secure the resource by working within the limitations of the existing market. The classic example is the road-for-minerals contract the Chinese have signed across Africa. The Chinese agree to build a road that is apparently self-serving, running from the location of the minerals to an airstrip. They employ a small amount of local labour and sign a contract to take the minerals at a preferential rate. The payoff for the local politicians comes in the procurement contracts around the deal – so the construction firm will take a fleet of diggers at 1000% of their true price from a local consortium, for instance. In this way the right wheels are greased while the public is shown a new road and the Chinese get their minerals. This is a widespread method of business in Africa and by no means limited to the Chinese. It does leave open the possibility of a highly impactful role for the New Development Bank – with a cash roll of $50bn, it will have the ability to prise open very significant opportunities for third and second world cooperation and presents a serious challenge to existing donor models as put forward by the West in the developing world.
Finally, there is the messaging aspect. As with the 2008 declaration on wanting a new global currency, this re-modelling of existing Western institutions in such a way that the West is excluded from them indicates not that the Western model is somehow incompatible with the approaches of the emerging powers –they all accept the model in practice if not in theory – but that American hegemony is upsetting to them. It is not Western financial institutions which upset the BRICS but rather Westerners themselves, a problem at once simpler and also more dangerous than is commonly supposed.

The next episode: moving away from the drawing board?

Image shows an empty year planner.
The BRICS have made little in the way of concrete plans.

Every analysis on the BRICS points out the enormous cultural, economic and demographic gulf between them. In this sense it is somewhat surprising that they have attempted, let alone managed, the transition from analyst’s note concept to real world institutions. The fact that they have tells us a lot about the dynamism of their leaderships as well as the extent to which they disagree with their place in the current global order. All the same, this year’s was the sixth global BRICS summit and the first to offer anything other than words as a plan for joint movement. As much as the BRICS like meeting they have not yet demonstrated an ability to act in harmony in practice, and high stakes organisations with complicated loyalties where there is a premium both on trust and fairness are harder to pull together in fact than they are to plan on paper.
Even assuming that the BRICS Bank gets off the drawing board and into a Shanghai skyscraper, there are dark clouds on the horizon likely to keep each focussed on the domestic agenda for some time to come. Firstly, there is global economic slowdown in emerging markets. Every one of the BRICS is growing substantially more slowly than in the first decade of this millennium. Brazil is in recession with inflation over 6%, stagflation in other words. In South Africa the rand has dropped by 25% against the dollar in the last year, the country’s main export partner China is not buying at the same volume anymore and the trade deficit is out of control. Russia’s stock market has been pounded into the ground by events in the Ukraine and it must now find a way to make ends meet in a world where oil trades under $100 a barrel in the long-term.

Image shows the Indian and Chinese premiers shaking hands.
India and China have disputed their shared border.

As for China, the cost-competitiveness is still there but eroding fast – the US now has cheaper energy on tap through the shale boom with the prospect of glut to come when the next President signs off the oil pipeline from Canada, China cannot compete on that and nor for social reasons can it hold down wages with any great success. While it’s impossible to make definitive statements given the chronic unreliability of local data, BCG argues that it now just holds a slight advantage over the USA on a cost basis. As if that wasn’t enough, the country’s shadow banking system is always on the brink and its housing overvalued by just about any measure you care to name. If ever the Fed, the ECB and the BoE turn off the free money taps and end the global hunt for yield, it is the BRICS who will feel the pain the most.
Then there is the political situation. Do the BRICS hate US hegemony more than they hate each other? It seems a strange question to ask, but given ongoing tensions between Russia and China and China and India, the idea that they would be able to act in indivisible concert expect on narrow and occasional diplomatic questions is a highly optimistic one. Ultimately each country resents the American position as hegemon not because the values of America appal it, but because it would itself like to enjoy that position – world domination is not an easy thing to build an alliance around. We are a long way from seeing meaningful and concerted disruptive action on the world stage from the BRICS economies, and the world is probably a more secure place as a result.

Image shows a cartoon of Uncle Sam lecturing to countries under US control.
US hegemony is likely to remain unchallenged.

The economic and political strides made by the BRICS in the last 20 years have been highly admirable. They are of the sort which happen very rarely in the life of a nation and it is right and proper that they have been acclaimed for doing so. Now, though, is the hard part. With the cost advantages either going or gone in labour and in energy, the BRICS will need to compete with the West on the innovative edge. Given the incredible preponderance of government interference and bureaucracy in their corporations, they are very badly positioned to do this – it is not for nothing that no great invention has ever been devised in a committee room. The gloablisation which the leaders of the West exposed their economies to provided a domestic shock, made old industries redundant and threatened others. Now the challenge which was set down by the new economies is being met by the private sectors of the old – the new Western companies coming back to market benefit from the longstanding Western advantages in education and in a tradition of risk acceptance and intellectual freedom. America and Britain have continued to invent the modern world – from the internet to Apple – and for as long as the BRICS remain reactive, trying to copy and exclude rather than innovate, they will continue to be at the vanguard of global progress for many years to come.


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Image credits: banner; Shanghai; Russia; mineral extraction; planning; India and China; US hegemony.