BRICS Seek to Cement Position in Global Economic Landscape
Leaders from Brazil, Russia, India, China, and South Africa - collectively known as the BRICS - formally announced today their plans to launch a new development bank, in what analysts say is a move to reduce the group’s dependence on the Bretton Woods institutions. The two-day meet, held in Durban, South Africa, also raised issues such as the impact of developed country monetary policy on trade, and the importance of the next WTO chief being from a developing country.
The 26-27 March gathering - the fifth in as many years - led to the eThekwini Declaration, named after the municipality that includes Durban and its surrounding towns. The event marked the first time that the summit was held in Africa.
The final document outlines the importance of cementing the BRICS alliance further: aside from sharing an acronym, the five emerging economies have often found it difficult to reach common ground on various topics, and have varying political and economic characteristics. For instance, the inclusion of South Africa into the group just two years ago had been greeted with scepticism by some observers, as some noted that its size as an economy does not match up with its counterparts in the group.
“We aim at progressively developing BRICS into a full-fledged mechanism of current and long-term coordination on a wide range of key issues of the world economy and politics,” the final statement said, adding that today’s global governance architecture is run by institutions that were established during a different era.
“We meet during a critical time where stronger South-South trade is more compelling, with the most dynamic emerging economies leading a structural shift in the global economy,” South African President Jacob Zuma said during the event.
The BRICS together account for approximately a quarter of global GDP and 40 percent of the world’s population.
BRICS agree to establish development bank, disagree on details
The highlight of the two-day proceedings was the long-awaited announcement of whether the BRICS would be establishing their own development bank, after the group’s finance ministers were tasked last year with evaluating the idea’s feasibility.
The goal, leaders said at the time, would be for the bank to “[mobilise] resources for infrastructure and sustainable development projects in BRICS and other emerging economies and developing countries.” (See Bridges Weekly, 4 April 2012)
The planned development bank “is feasible and viable,” leaders confirmed in a statement on Wednesday. Such a bank would “supplement the existing efforts of multilateral and regional financial institutions for global growth and development.”
However, officials speaking earlier during the summit admitted that various key details remain to be worked out before the proposed bank can become fully operational - a process that is expected to take years. For instance, disagreements have already surfaced among the BRICS on the specifics of the bank’s mandate, and how exactly the institution would be financed.
While members ahead of the gathering had said that the five countries would together contribute a total of US$50 billion of capital into the proposed institution, that number has reportedly been scaled back, and how much each individual member would give was also left unclear. Where the bank will be located was similarly left undecided during this week’s meeting.
The proposed development bank is widely being seen as an effort by the BRICS to limit their reliance on the World Bank and International Monetary Fund (IMF). The five-country group has long argued that the two international finance institutions need a substantial overhaul with regards to their governance structure - a stance that BRICS leaders reiterated in Wednesday’s communiqué.
Some analysts suggest that establishing their own bank could also allow the BRICS to place added pressure on existing international organisations - such as the IMF and World Bank - to give them more weight in decision-making processes.
The plans for a BRICS development bank have so far been welcomed by the World Bank. “Establishing a development bank is a significant undertaking,” the Washington-based institution said in a statement. “The World Bank will stand steady and work closely to partner with regional development banks in a bid to enhance the effectiveness of our collective work.”
With regards to trade, the final statement focused largely on the ongoing preparations for the WTO’s upcoming ministerial conference, which is scheduled for 3-6 December in the Indonesian island of Bali. The global trade body’s 159 members are currently trying to negotiate a small package of deliverables from the broader Doha Round of trade talks in time for the high-level event, after the overall discussions were formally declared at an impasse in late 2011. (For more on the Bali preparations, see related article, this issue)
“We are committed to [ensuring] that new proposals and approaches to the Doha Round negotiations will reinforce the core principles and the developmental mandate of the Doha Round,” BRICS leaders said. “We look forward to significant and meaningful deliverables that are balanced and address key development concerns of the poorest and most vulnerable WTO members.”
The ongoing race to replace WTO Director-General Pascal Lamy, who steps down from his post at the global trade body in August, was also referred to in the final communiqué. BRICS leaders stressed that his successor will need to show a “commitment to multilateralism and to enhancing the effectiveness of the WTO, including through a commitment to support efforts that will lead to an expeditious conclusion of the [Doha Round].”
In addition, the new global trade chief should be from a developing country, the five leaders said, though they stopped short of jointly backing a particular nominee. Of the nine candidates currently lobbying for the WTO role, eight of them are from members that are self-designated as developing countries, and one of them - Brazilian WTO Ambassador Roberto Carvalho de Azevêdo - is from a BRICS country.
A separate statement by BRICS trade ministers released on Tuesday gave additional details on the group’s concerns for the multilateral trading system. For one, it reiterated the group’s worry over “initiatives that might undermine the coherence of the Doha Development Agenda and that deviate from the principles of multilateralism,” in an apparent reference to some efforts - such as the discussions among 21 WTO members over a possible plurilateral deal on services- that are being pursued among subsets of the global trade body’s membership.
In addition, the WTO’s “single undertaking” principle, and the development mandate of the negotiations, must be respected, trade ministers said, as the global trade body continues its efforts to move the Doha talks forward.
Rich country monetary policy draws fire
Developed country monetary policy also came under scrutiny during the Durban gathering. Central banks in the US, EU, and Japan have faced criticism from some trading partners in recent months over their decisions to undertake additional rounds of monetary easing, which have sparked fears of a “global currency war.”
Many have argued that the moves by these central banks can create exchange rate misalignments that can effectively make developed countries’ exports more competitive than those of their trading partners. Advanced economies, meanwhile, have noted that these efforts are aimed not toward bettering their terms of trade, but at advancing domestic policy objectives such as reducing unemployment or fighting deflation.
“Central banks in advanced economies have responded with unconventional monetary policy actions which have increased global liquidity,” the BRICS leaders said.
“While this may be consistent with domestic monetary policy mandates, major central banks should avoid the unintended consequences of these actions in the form of increased volatility of capital flows, currencies, and commodity prices, which may have negative growth effects on other economies, in particular developing countries.”
Foreign reserves, currency swaps
In another move ostensibly aimed at reducing dependency on the IMF in a crisis, the five-member group agreed to establish a “BRICS contingent reserve arrangement” - essentially an exchange pool of foreign reserves aimed at ensuring financial stability and dealing with short-term liquidity problems that might arise. The idea was first tabled in April 2011. (See Bridges Weekly, 20 April 2011)
Earlier this week, Brazil and China inked a deal that would allow them to conduct up to US$30 billion of trade in their local currencies, rather than having to use the dollar or the euro as they have done in the past. The deal would be valid for the next three years.
ICTSD reporting; “Group of Emerging Nations Plans to Form Development Bank,” THE NEW YORK TIMES, 26 March 2013; “Deal on development bank eludes BRICS nations at summit, REUTERS, 26 March 2013.
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