The new BRICS Bank - force for progress or cause for concern?

For many years various officials of governments in African, Asian and Latin American have urged the creation of a "development" bank that they would control.  On Tuesday 15 July hopes became reality in Forteleza, Brazil, with the formal creation of the New Development Bank by the leaders of the so-called BRICS group of countries (Brazil, Russia, India, China and South Africa.

This event raises several political questions for progressives:  1) what is a type of "bank" do the BRICS leaders propose, 2) why is it needed, 3) are these the appropriate leaders to organize and control the new institution, and 4) is it something progressives should view favourably?

The BRICS proposal has two parts, a "development" bank and a US$ 100 billion reserve of international currencies.  The former has similarities to the operations of the World Bank, while the latter would have some functional kinship with the International Monetary Fund.  At this point the plans for the second -- short term support for balance of payments problems -- remain a work in progress.  Those for the first are quite clearly specified. So what are the main issues?

Background

A little tedious background is necessary.  An international "development" bank is a non-profit, cross-country, public sector institution that makes loans to governments for long term projects, either directly productive ones (e.g., a hydro-electric dam) or supportive of productive activities (e.g., roads and highways).  A development bank's sine qua non lies in offering loans at more favourable terms than private banks.

The Bretton Woods conference of 1946 created the World Bank to provide loans of this type.  In addition, Africa, Asia and Latin America each has a regional development bank (the African Development Bank, the Asian Development Bank, and the Inter-American Development Bank).  Why is another one needed?

Shifting power

The answer is simply stated -- global power and its changing distribution over the last fifty years.  The proposals for the IMF and the World Bank at the end of WWII assigned voting power to the contribution of each member government to the capital base of the institution.  In contrast, each country would have had one vote in the International Trade Organization (ITO), proposed at the Havana conference of 1947-1948 to regulate world trade.  Readers will not be startled to learn that opposition from US government resulted in the early death of the ITO.

In practice the IMF and World Bank voting shares conformed to the demand of the US government to have control of both institutions.  The governments of the countries that emerged as the victors in WWII held the overwhelming majority of votes in both the IMF and the World Bank with the US government grabbing the largest share.

Imbalances perpetuated

The institutional power held by the United States, Great Britain, France and Canada became increasingly disproportional to their economic power as the Federal Republic of Germany ("West Germany") and Japan emerged to be major economic actors (this anomaly would be even greater in the UN Security Council with no permanent seat for either).  Bitter complaints about this imbalance resulted in marginal adjustments to voting shares among the developed countries, but peanuts for the economically blossoming BRICS.

The first complaint by the BRICS governments that prompts creation of the new bank is lack of power.  They want a financial institution in which they hold the controlling shares.    Closely related to this aspect of institutional power is the long-standing opposition -- even outrage -- among governments in the developing world at the policy conditions attached to IMF and World Bank loans (and grants for the latter).

World Bank and structural adjustment

In the World Bank the use of these well-known and notoriously anti-development conditions substantially increased with the institution's shift from "project lending" -- most of it for infrastructure -- to "budget support".  In the 1970s almost all World Bank lending went to projects.  In the 1980s came the Latin American debt crisis and with it a massive shift in the World Bank to loans directly to governments with their use not specified.

For example, in place of a requirement that US$ 200 million to Zambia be used to build a hydro-electric damn, conditions would require the government to privatize public enterprises, savagely cut government employment, and drastically slash public sending.  The implicit and frequently explicit purpose of these conditions was to convert the recipient governments to extreme neoliberal economic policies.  Brazil (in the 1980s) and Russia (in the 1990s) especially suffered from this ideological driven "structural adjustment".  All the regional development banks joined into the neoliberal conditionality game with varying degrees of enthusiasm.

BRICS Bank - less ideological lending?

In summary, the BRICS bank would provide a less ideological source of lending for infrastructure, and in doing so shift some power in global governance away from the governments of the G7 countries.  It would appear that any government in the developing world could qualify to join and apply to borrow.  However, it is a bit geographically challenged to describe it as the development bank of the "South" given that Russia is one of the founding members, the largest founding member is entirely north of the Tropic of Cancer except for a tiny sliver (China), and a third was entirely north of the equator the last time I checked a world map (India).

Setting aside pedantries about location, is this Gang of Five likely to shift international lending in a humane and flexible direction as Oxfam hopes?  We should note that the voting proposal for the BRICS bank follows the IMF/World Bank model -- money votes with shares reflecting each government's financial contribution.  The largest voting share goes to China, whose record on investments in Africa is nothing short of appalling (see my discussion of Chinese capital in Zambia).

Given the BRICS’ objection to US domination of the IMF and World Bank, I would have expected them to take the obvious lesson that they should not locate the institution in the territory of the largest member (see "BRICS bank to be headquartered in Shanghai").  The warm endorsement of the New Development Bank by the president of the World Bank suggests complementarily rather than tension between it and the Bretton Woods "Twins".

Is the BRICS Bank a positive development?

How should progressives react to the BRICS bank?  Many predict or at least hope that the new lending institution will improve the access of middle and low income countries to financing for infrastructure.  This is likely to be realized, because World Bank project loans not only carry neoliberal conditions, the procedures to obtain them are extremely bureaucratic.  If the BRICS bank can operate less bureaucratically than the World Bank, that would be a substantial gain in itself.

However, it is worth asking what to me is the obvious question -- why is it necessary for countries to borrow to build a new airport (for example)?  The problem is never "money".  Any government of a country that has its own currency can borrow from the central bank (this would not apply to the 14 members of the West and Central African currency zones).  Only one reason to borrow abroad comes to mind, that the project may require substantial imports of materials.  Thus, the purpose of the borrowing is to obtain US dollars, yen, renminbi, etc.

Since the purpose of the loan is to obtain foreign currency, the process by which the BRICS bank reviews and assesses specific projects involves the same unnecessary bureaucracy that we find in the World Bank.  The suspicion uppermost in my mind is that the purpose of the BRICS bank, as a project funding bank, is to link the finance to construction firms and materials suppliers in the BRICS themselves.  Certainly, the Chinese government is notorious for doing this (see "China insists on 'tied aid' in Africa").

What is really needed

Much better than a project bank for the "South" would be an institution providing long term loans in foreign currencies.  This would have several major advantages over the BRICS bank.  First, the loans could be made on the basis of a judgement about the ability of the government to repay, not a narrow assessment of specific project.  This rather difficult judgement is the de facto basis of all loan repayment -- can the country's export sectors generate the foreign exchange to service the debt?

Second, the borrowing country's external debt would increase by the foreign currency component of the project.  The rest would be financed domestically.  This arrangement would be in line with the famous advice of John Maynard Keynes in 1933, "let goods be homespun whenever it is reasonably and conveniently possible, and, above all, let finance be primarily national" (emphasis added).

This article is cross posted from Open Democracy (15th July).

John Weeks is Professor Emeritus, School of Oriental & African Studies, University of London, and author of 'Economics of the 1%: How mainstream economics serves the rich, obscures reality and distorts policy', Anthem Press, published earlier this year.