Brics development bank an important alernative to IMF

2014-07-24 00:00

“The Brics members will also set up a $100 billion contingency reserves pool (called the Contingent Reserve Arrangement – CRA), in U.S. dollar currency, to help members who face sudden foreign-capital flights. The new Brics contingency reserve fund is also seen as an alternative to the IMF’s much-criticised failure to deal with global monetary crises, which have often left developing countries worse off.”

William Gumede

AFRICA desperately needs cheaper, more easily accessible and rapidly available finance for development that does not come with crippling strings attached, which often accompany World Bank and International Monetary Fund finance to developing countries.

Joyce Banda, the Malawian leader, lost the elections in May in her country partially because she was forced to introduce ruinous reforms by the IMF, which included devaluation of the currency, abolishing subsidies for the vulnerable and help to farmers, in return for development aid, unleashing widespread popular anger.

Leaders of Brazil, Russia, India, China and South Africa (Brics) have signed a treaty to launch a new Brics development bank, called the New Development Bank (NDB), which they promise will lend to developing countries such as Malawi, without World Bank and IMF-like conditions, at a Brics summit in the northern Brazilian city of Fortaleza.

The Brics members will also set up a $100 billion contingency reserve pool (called the Contingent Reserve Arrangement — CRA), to help members who face sudden foreign-capital flights.

The new Brics contingency reserve fund is also seen as an alternative to the IMF’s much-criticised failure to deal with global monetary crises, which have often left developing countries worse off.

In January, a mini-financial crisis among many emerging markets saw many of them experiencing capital flight, partially following the sudden easing by the United States of its monetary stimulus — without consulting emerging markets that were likely to be affected because of the global dominance of the U.S. dollar.

With a start-up capital of $50 billion, which will be built over time to $100 billion, the new Brics development bank is dwarfed by the war chest of the World Bank.

However, the Brics development bank and the contingency reserve fund are the first real and practical attempts by developing countries to create an alternative monetary, development finance and trade system to the IMF, World Bank and the dominance of the U.S. dollar — which have been skewed against Africa and developing countries.

Brics, African and developing countries have failed to get industrial nations to give them a bigger say in decision-making at the World Bank and IMF, and for these institutions to ease on the punishing and inappropriate structural adjustment programmes for developing countries (which dominant industrial countries would not implement in their own economies) in turn for funding.

Africa has struggled to secure finance for infrastructure and to develop indigenous manufacturing sectors.

With the financial difficulties in the aftermath of the global financial crisis that many industrial economies in Western Europe and North America find themselves in, traditional sources of funding may also dry up for Africa.

The Brics development bank could be a source of finance for not only member states, but also for Africa as a whole.

The mere presence of a Brics bank that does not adhere to the World Bank and IMF’s structural adjustment philosophy, may strengthen the hand of African governments with more independent and relevant national development policies, rather than the “one-size-fits-all” policies enforced by traditional lenders.

But the establishment of a Brics development bank may also finally bring accountability, responsiveness and inclusivity to the World Bank and IMF, which has been lacking.

The Brics development could also help Africans to secure better investment deals in their negotiations with traditional multilateral banks and the private sector.

Off course, the very difficult issues of deciding on the investment rules, management and leadership of the new Brics development bank will only be negotiated after the ratification of the treaty ­establishing the entity.

There is no guarantee that a Brics bank would not attach as onerous conditions as the World Bank or other development banks, or would prioritise the development and infrastructure policies important to African economies, rather than Brics economies.

Also, there is absolutely no guarantee that the envisaged Brics-inspired development bank would be more development-orientated than the World Bank, IMF or Western or Eastern developmental banks.

Most individual current Brics development banks, such as BNDES, the Brazilian development bank, and the China Development Bank, lend at market rates to African countries, and aggressively pursue commercial interests abroad.

Africans will have to learn the lessons from their lopsided engagement, which they have had since independence, with the World Bank, IMF and industrial countries’ financial institutions, and strike smarter partnerships through African development banks, SOEs and the private sector, with the Brics development bank.

The big question is whether China will dominate the new bank, and its future practices.

India in particular, has pushed for ­equitable shareholding, with equal voting rights for all members, no matter their economic weight.

Linked to that is whether the Brics development bank will allow African and other developing countries shares, or whether it will be another club, not unlike the World Bank, of the rich, this time of large emerging powers.

• William Gumede is chairperson of the Democracy Works Foundation in Johannesburg. He is the author of South Africa in BRICS: Salvation or Ruination, Tafelberg.

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