It was 70 years ago this week that 44 nations signed a historic agreement to create a new international monetary framework at Bretton Woods in New Hampshire. The deal, which created the World Bank and International Monetary Fund, was superficially borne out of a desire to avoid the kind of economic nationalism that had led to the Second World War. But the newspaper headlines – which portrayed a new world order based on enlightened financial cooperation – obscured a very different reality on the ground. As the Bretton Woods participants knew only too well, negotiations were fraught as war-ravaged Britain was forced to hand over leadership of the global economy to a new hegemon: the United States.
British negotiator John Maynard Keynes knew his country was facing a “financial Dunkirk” after the ruinous costs of fighting two world wars. So he had to cede practically every negotiating point to his US counterpart, Henry Dexter White, who turned out to be a lot more than he seemed – a Russian spy who thought that Soviet-style planning would one day trump Western capitalism.
“Now the advantage is ours and I personally think we should take it,” then US Treasury Secretary, Henry Morgenthau Jr told White during the conference. And so it has been ever since. At least that is the view of the BRICS countries, which finally decided to set up a development bank of their own last week.
The pithily titled New Development Bank (NDB), founded by Brazil, Russia, India, China and South Africa, has been established as an emerging markets counterpoint to Western multilateral institutions like the IMF and the World Bank. Just as Britain was forced to cede its global status to the US, the BRICS believe the US should now recognise their growing economic clout.
And the geopolitical point has not been lost on most of the Western media, which reckon the new institution is a consequence of the US Congress repeatedly failing to ratify a 2010 deal to reform the IMF and increase the voting power of emerging market nations from 39.5% to 42.3%. Jim O’Neill, the man who initially coined the term BRIC (before the addition of South Africa), tells CNBC: “It’s a sign that global governance is a mess. It has not kept pace with global economic change.”
Former World Bank Chief Economist Joseph Stiglitz articulates similar thoughts in comments made to Democracy Now. “It’s hard for an institution where the global governance is so out of tune with current economic and political realities to be as effective as it could be,” he says.
Newspapers in the BRICS countries, by contrast, reiterate that the NDB has been founded on the principle of equality between nations. Each of the five countries is contributing $10 billion in start-up capital and will have an equal vote on how the money is lent out.
The five have also established an emergency reserve fund, which will total $100 billion. Here, China has the right to draw on half of the $41 billion it has pledged, while Russia, India and Brazil can each draw $18 billion – equal to their individual contributions – and South Africa can draw $10 billion, double its $5 billion commitment.
“Equality and democracy are the biggest features of the BRICS bank,” says Wallstreetcn.com. “It gets rid of the hierarchical order dominated by America and European countries and provides a new aid mechanism created by emerging market countries.”
The Global Times is more forthright and takes issue with certain Western publications, which it accuses of “fomenting trouble”. The newspaper singles out an editorial by Reuters entitled, “The Biggest Challenge for BRICS success? Big brother China”. In it, the UK-based news agency claims the main stumbling block to getting the bank off the ground was China’s ambitions to secure a bigger share of the bank. It further argues that the other four nations could struggle to contain China should it try to use the bank as a springboard to increase its authority.
Indeed, a number of domestic media outlets hope that the NDB will help promote the use of the renminbi overseas. Xinhua quotes a local financial analyst who says the bank will “play a catalytic role in the internationalisation of the RMB”. In doing so, Xinhua also expects the NDB will help Chinese firms to go global and expand the scope of their investments.
In Russia the new bank has been viewed by domestic media outlets like the Moscow Times as a way for the country to embrace “the next generation of economic heavyweights” after being frozen out of the Western economic system “as punishment for its politics in Ukraine”. The Voice of Russia also expressed its hope for an end to a dollar-dominated world order. “Washington’s bullying will make even former American allies choose the anti-dollar alliance rather than the existing dollar-based monetary system,” it argues.
Brazil’s respected economic newspaper Valor Economico has published an editorial highlighting the kind of contradictions within the existing system. It points out how quickly a record-breaking package has been put together for Ukraine, while World Bank bureaucrats shelved a strategy to help Argentina. It believes the NDB will also “allow a contrasting evaluation of how pure the ‘Western’ politics (with Japan included in the West) really are in the procedures and decisions of multilateral banks masked as management reasoning.”
The most ambivalent response has come from India, where a number of newspapers have highlighted India’s close ties to both the BRICS and to leading countries in the West. In an editorial in Asian Age, KC Singh, a former Secretary of the External Affairs Ministry voices his warning that “India has to seek a balance outside China-led or likely dominated structures, while remaining a valid voice in them,” while Zee News wonders whether India’s money would have been better spent within the country rather than via a Shanghai-based bank.
In fact the arguments over where the NDB should be located were only resolved at the last minute after Brazil agreed to give away the presidency to India if the Indians agreed to let China get the headquarters.
Chinese netizens originally thought the presidency would go to Chen Yuan, the man who originally proposed the BRICS bank idea and who was responsible for building China Development Bank (CDB) into a Rmb1 trillion ($160 billion) powerhouse. Chen left CDB after 15 years at the helm in April (see WiC189 for our profile of the man and his time at this influential bank). Even if Chen was ever in the running for the role – some think that his departure from CDB signalled his waning political influence at home – he has now been pipped by an Indian candidate.
Indeed, debates closer to home about policy banking, have seen CDB make headlines recently too. New Century Weekly reported this week that the central bank is now debating whether CDB should become a pure policy bank (again) seven years after Chen led it on an expansionist path abroad (even buying a small stake in Barclays), and attempted to commercialise its operations. Now reformers want to rein in the powerful fiefdom that Chen created, blaming it for promoting cronyism and state-led capitalism at the expense of market-driven lending.
Other analysts have been contrasting CDB’s enormous financial firepower with that of the NDB, concluding that the new bank’s potential might not be as great as some think.
And in another report delivered to the UN back in March, Colombia University’s Professor Stephany Griffith-Jones said it will take about 20 years before the NDB is hitting its lending limits of $34 billion a year, compared to the World Bank’s $52.6 billion of financing in 2013.
However, the World Bank also estimates that low and middle income countries require about $1 trillion in infrastructure funding, which is finance that the NDB can help to bridge. In this context a new lender is very welcome, Griffith-Jones says. “We talk about competition in the private sector, we encourage that and we should have competition in the public sector too,” she told the South China Morning Post.
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