THE leaders of five of the world’s largest emerging markets will showcase a new currency reserve fund and development bank this week. Critics say neither is enough to revive the group’s waning clout.
Brazil, Russia, India, China and SA (Brics), will approve the creation for the $100bn reserve fund and $50bn bank at a summit on Tuesday and Wednesday in Brazil’s coastal city of Fortaleza and the capital Brasilia.
The initiatives are born out of frustration with a lack of participation in global governance, particularly in the World Bank and International Monetary Fund (IMF), Peterson Institute for International Economics senior fellow Arvind Subramanian says.
The measures are not big enough to boost growth or cohesion in the group as foreign investor sentiment sours and member states focus on issues at home, such as Brazil’s elections, the conflict in Ukraine and new economic policy plans in India.
"It’s hard to see a lot of impetus at this stage for the Brics in general and for these initiatives in particular. There’s going to be a lot of attention on domestic issues," he says.
Growth in the five countries is projected to average 5.37% this year, half the pace seen seven years ago, according to the median estimate of economists surveyed by Bloomberg. Brazil and Russia will grow 1.3% and 0.5%, respectively.
Russian presidential aide on foreign policy Yuri Ushakov says that the group’s growth rate is still above that of the global average and that its economic and political weight is increasing.
The Brics have evolved from the original term coined in 2001 by then-Goldman Sachs Group economist Jim O’Neill to describe the growing weight of the largest emerging markets in the global economy. In 2011, SA joined to give the Brics a broader geographic representation. The group’s track record in pursuing a common agenda on the world stage has been mixed.
"It’s easier to say what the Brics aren’t than what they are," says Jose Alfredo Graca Lima, under-secretary for political affairs at the Brazilian Foreign Ministry. The five countries failed to agree on a candidate to head the World Bank in 2012 and IMF in 2011, two posts at the heart of their demands for more say in global economic matters.
The summit is unlikely to provide a common front to push ahead global trade talks either, even though the World Trade Organisation (WTO) is headed by Brazilian Roberto Azevedo.
Brazil itself has increased protectionist measures under President Dilma Rousseff.
"I wouldn’t say that there will be a common outcome in that sense, but certainly there will be discussion on WTO matters," says Sujata Mehta, secretary for economic relations at the Indian Foreign Ministry.
India and SA have signalled they may backtrack on a trade facilitation agreement reached at the WTO talks in Bali last December, wrote Carlos Braga and Jean-Pierre Lehmann, professors at Switzerland’s IMD business school.
Still, Indian Prime Minister Narendra Modi is unlikely to rock the boat at the Brazil summit, says NR Bhanumurthy, an economist at the National Institute of Public Finance and Policy, a research institute in New Delhi. "Domestic issues are dominating his agenda, especially growth and inflation."
Russia expects Brics leaders to discuss international issues, including the situation in Ukraine, and speak out against "sanction pressure," Mr Ushakov told reporters on July 10.
All Brics members except for Russia abstained from a United Nations (UN) vote that called on states not to recognise Crimea’s autonomy from Ukraine. Ms Rousseff on Sunday hosted a luncheon for leaders watching the World Cup final in Rio de Janeiro, including Russian President Vladimir Putin and German Chancellor Angela Merkel.
The new development bank, which will not impose policy requirements on borrowers, will help fill fast-growing infrastructure financing needs, Boston University professor of international relations Kevin Gallagher says. The Brics can also use it to pressure developed countries, particularly the US, to advance stalled measures to make global financial institutions more equitable, he says.
"They can say, ‘look, we have an alternative’," he says. "It gives you a lot of political leverage."
With an expected startup capital of $50bn financed equally by the five members, the bank could lend $3.4bn a year in a decade, according to a March study by the UN Conference on Trade and Development. That compares with the $61bn the World Bank expects to lend this year.
The bank will require legislative approval from member countries and at least one year to be implemented. It will eventually open membership to non-Brics countries and coincides with plans for an Asian infrastructure development bank spearheaded by Beijing, according to an official at the Brazilian Finance Ministry, who requested not to be named because he is not authorised to speak publicly on the matter.
The Brics bank, along with the separate $50bn Asian infrastructure bank, is another way for China to get higher returns on its $3.9-trillion reserves than it does from buying US Treasuries, says Oliver Rui, professor of finance and accounting at the China Europe International Business School in Shanghai, the favourite city to headquarter the bank.
Multilateral lending agencies are also a way for Beijing to legitimise investments abroad, after nationalistic backlashes in Africa against Chinese investment, says Mr Subramanian.
China will also fund $41bn of the currency reserve agreement, which member countries will be able to tap in case of balance of payment deficits.
SA will earmark $5bn of its reserves and the remaining countries will set aside $18bn each. Details on the functioning of the $100bn agreement, which amounts to 2% of the Brics’ pooled reserves, have yet to be worked out.
"There are many unanswered questions still," Waterloo, Ontario-based Centre for International Governance Innovation director of global economy Domenico Lombardi says. "The measures are more symbolic, designed to show they have alternative instruments to the IMF and World Bank."
Bloomberg
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(Front, left to right) Maite Nkoana-Mashabane, President Jacob Zuma and Nhlanhla Nene exhange a few words at a Brics (Brazil Russia, India, China and South Africa) summit in Brazil on Tuesday. Picture: GCIS
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Delegates from the Brazil, Russia, India, China and SA (Brics) group of countries engage in discussions at a summit in Brazil on Tuesday. Picture: GCIS
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President Jacob Zuma, left, and his Brazilian counterpart Dilma Rousseff during a Brics (Brazil, Russia, India, China and South Africa) summit in Brazil on Tuesday. Picture: GCIS
THE leaders of five of the world’s largest emerging markets will showcase a new currency reserve fund and development bank this week. Critics say neither is enough to revive the group’s waning clout.
Brazil, Russia, India, China and SA (Brics), will approve the creation for the $100bn reserve fund and $50bn bank at a summit on Tuesday and Wednesday in Brazil’s coastal city of Fortaleza and the capital Brasilia.
The initiatives are born out of frustration with a lack of participation in global governance, particularly in the World Bank and International Monetary Fund (IMF), Peterson Institute for International Economics senior fellow Arvind Subramanian says.
The measures are not big enough to boost growth or cohesion in the group as foreign investor sentiment sours and member states focus on issues at home, such as Brazil’s elections, the conflict in Ukraine and new economic policy plans in India.
"It’s hard to see a lot of impetus at this stage for the Brics in general and for these initiatives in particular. There’s going to be a lot of attention on domestic issues," he says.
Growth in the five countries is projected to average 5.37% this year, half the pace seen seven years ago, according to the median estimate of economists surveyed by Bloomberg. Brazil and Russia will grow 1.3% and 0.5%, respectively.
Russian presidential aide on foreign policy Yuri Ushakov says that the group’s growth rate is still above that of the global average and that its economic and political weight is increasing.
The Brics have evolved from the original term coined in 2001 by then-Goldman Sachs Group economist Jim O’Neill to describe the growing weight of the largest emerging markets in the global economy. In 2011, SA joined to give the Brics a broader geographic representation. The group’s track record in pursuing a common agenda on the world stage has been mixed.
"It’s easier to say what the Brics aren’t than what they are," says Jose Alfredo Graca Lima, under-secretary for political affairs at the Brazilian Foreign Ministry. The five countries failed to agree on a candidate to head the World Bank in 2012 and IMF in 2011, two posts at the heart of their demands for more say in global economic matters.
The summit is unlikely to provide a common front to push ahead global trade talks either, even though the World Trade Organisation (WTO) is headed by Brazilian Roberto Azevedo.
Brazil itself has increased protectionist measures under President Dilma Rousseff.
"I wouldn’t say that there will be a common outcome in that sense, but certainly there will be discussion on WTO matters," says Sujata Mehta, secretary for economic relations at the Indian Foreign Ministry.
India and SA have signalled they may backtrack on a trade facilitation agreement reached at the WTO talks in Bali last December, wrote Carlos Braga and Jean-Pierre Lehmann, professors at Switzerland’s IMD business school.
Still, Indian Prime Minister Narendra Modi is unlikely to rock the boat at the Brazil summit, says NR Bhanumurthy, an economist at the National Institute of Public Finance and Policy, a research institute in New Delhi. "Domestic issues are dominating his agenda, especially growth and inflation."
Russia expects Brics leaders to discuss international issues, including the situation in Ukraine, and speak out against "sanction pressure," Mr Ushakov told reporters on July 10.
All Brics members except for Russia abstained from a United Nations (UN) vote that called on states not to recognise Crimea’s autonomy from Ukraine. Ms Rousseff on Sunday hosted a luncheon for leaders watching the World Cup final in Rio de Janeiro, including Russian President Vladimir Putin and German Chancellor Angela Merkel.
The new development bank, which will not impose policy requirements on borrowers, will help fill fast-growing infrastructure financing needs, Boston University professor of international relations Kevin Gallagher says. The Brics can also use it to pressure developed countries, particularly the US, to advance stalled measures to make global financial institutions more equitable, he says.
"They can say, ‘look, we have an alternative’," he says. "It gives you a lot of political leverage."
With an expected startup capital of $50bn financed equally by the five members, the bank could lend $3.4bn a year in a decade, according to a March study by the UN Conference on Trade and Development. That compares with the $61bn the World Bank expects to lend this year.
The bank will require legislative approval from member countries and at least one year to be implemented. It will eventually open membership to non-Brics countries and coincides with plans for an Asian infrastructure development bank spearheaded by Beijing, according to an official at the Brazilian Finance Ministry, who requested not to be named because he is not authorised to speak publicly on the matter.
The Brics bank, along with the separate $50bn Asian infrastructure bank, is another way for China to get higher returns on its $3.9-trillion reserves than it does from buying US Treasuries, says Oliver Rui, professor of finance and accounting at the China Europe International Business School in Shanghai, the favourite city to headquarter the bank.
Multilateral lending agencies are also a way for Beijing to legitimise investments abroad, after nationalistic backlashes in Africa against Chinese investment, says Mr Subramanian.
China will also fund $41bn of the currency reserve agreement, which member countries will be able to tap in case of balance of payment deficits.
SA will earmark $5bn of its reserves and the remaining countries will set aside $18bn each. Details on the functioning of the $100bn agreement, which amounts to 2% of the Brics’ pooled reserves, have yet to be worked out.
"There are many unanswered questions still," Waterloo, Ontario-based Centre for International Governance Innovation director of global economy Domenico Lombardi says. "The measures are more symbolic, designed to show they have alternative instruments to the IMF and World Bank."
Bloomberg
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