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The development of a BRICS development bank, touted as the developing world's answer to the World Bank and the International Monetary Fund (IMF) might have already run into trouble.
India and Russia want to go much slower on the concept than China does. Brazil and South Africa, whose economies shrank last year, seem even more nervous about the idea, given some formal shape at the fifth BRICS summit last week in Durban, South Africa. The politico-economic acronym, developed by Jim O'Neill of Goldman Sachs in 2001 (South Africa was invited to join on China's proposal, two years ago, has metamorphosed into a group of considerable stature, anchored mostly by China's runaway economic success in even a time of considerable financial recession.
However, it is precisely China's economic heft that is making the other parties nervous. When China proposed in Durban that the proposed BRICS development bank be seeded with a capital of $100 billion, the others balked. India and Russia thought a seed capital of $50 billion was enough, with each country contributing $10 billion each. China offered to mop up whatever the other nations weren't able to cough up, scaring both India and Russia into persuading the entire group into postponing the euphoria.
The rationale
Clearly, the idea of an alternative bank that is a funder to the Third World's infrastructure projects and proposes to control currency volatility by creating a $100-billion credit reserve arrangement is one whose time has come. Especially as Bretton Woods institutions like the IMF and the World Bank continue to insist on an archaic US-European solidarity.
Between themselves, BRICS countries hold $4.4 trillion worth of combined foreign currency reserves and account for 43 per cent of the world's population. Last year, Nigeria and Colombia proposed candidates for president of the World Bank but the US more or less dismissed these to instead pick an American, Jim Young Kim. In 2010, it failed to ratify an agreement that gave greater voter rights to emerging markets.
"We need to change the way business is conducted in the international financial institutions," South African International Relations Minister Maite Nkoana-Mashabane said in a March 15 speech in Johannesburg. "They need to be reformed."
According to the UN Conference on Trade and Development, foreign direct investment (FDI) within BRICS nations touched $263 billion last year, accounting for 20 per cent of global FDI flows and up from six per cent in 2001. Mutual trade increased from $27 billion in 2002 to $282 billion last year; projections are that it will touch $500 billion by 2015.
Much of both the trade and investment is led by China. In fact, with China continuing to power itself to becoming the largest economy in the world, still number two but well on its way to number one, it seems as if India, Brazil and Russia are having some second thoughts on the kind of group BRICS hopes to evolve into. South Africa, poorest of the BRICS countries, clearly wants greater Chinese economic engagement, so as to reduce the disparities that make it the most unequal county in the world.
Consider China's meteoric rise, says Graham Allison, head of the Belfer Center at Harvard's Kennedy School of International Relations. In 2001, when BRIC was spawned, China's GDP was equivalent to the GDP of the remaining three countries. In the last five years since the global financial crisis, 40 per cent of all growth in the world belonged to China; just the increment of growth in the Chinese economy was bigger than the combined economies of India and Russia.
The statistics even at last week's Durban summit give the game away as to the group's relative financial clout. Finance minister P Chidambaram admitted that China had agreed to contribute $41 billion for the credit reserve arrangement, while India, Russia and Brazil had agreed to provide $18 billion each. South Africa would cut a cheque for $5 billion, he said.
India's concerns
In fact, India's dilemma about BRICS is becoming all too apparent. It joined up enthusiastically five years ago, cheered on by an anti-Western undercurrent that is a leftover from its colonial experience. However, in recent years, it has benefited considerably from opening its economy to the richer West.
Interestingly, America's ambiguity about China's rise has fed into India's own mixed feelings about a country which defeated it militarily in 1962. But just as the US moves to engage China (allowing it, for example, to buy its treasury bonds worth a trillion dollars), India knows it has to hedge its own bets. Being part of a geo-economic grouping in which there are no Western players is one thing but being part of such a grouping that is overwhelmingly dominated by China is another altogether. Beijing's proposal to locate the BRICS bank in Shanghai (South Africa also wants to host the bank) has made Delhi even more nervous.
In addition, there is China's intention to establish an Asian bank to rival the Asian Development Bank (ADB), based in Manila and mostly funded by Japan. India believes it must enhance its economic engagement with China but not at the cost of handing over the BRICS leadership role to Beijing.
Only, it might not have much option. Despite O'Neill's enthusiastic backing ("India has the biggest potential for growth among BRICS countries this decade"), China's economy last year grew by $1 trillion, compared with the $100 billion each of India and Russia.
On the sidelines of the G-20 meeting in September, the BRICS finance ministers will meet to chalk out the next steps. Clearly, the last word on the BRICS bank hasn't been spoken yet.
