APRIL 4, 2013
BRIC BY BRIC: BUILDING AN ALTERNATIVE TO BRETTON WOODS DEVELOPMENT by Samuel George At his April 2 speech at Georgetown University, World Bank President Jim Yong Kim outlined his objective to “transform history”. Perhaps only slightly less ambitious, he expressed a concrete goal to eradicate extreme poverty by 2030. He outlined a bold agenda that would address climate change and inclusive growth while eliminating death by preventable disease. Since assuming the Bank’s presidency in July 2012, Dr. Kim has demonstrated a preference for big-picture projects. He wants regions reconfigured and the boundaries of possibility reimagined. In the wake of the 5th BRICS summit held March 26-27 in South Africa, the address and, some feel, the strategy aim to reaffirm the World Bank's relevance. In a speech that mentioned countries sparsely and strategically, Dr. Kim referenced China, South Africa, Brazil and India within the first half hour. Perhaps the World Bank feels the heat. Emerging Competition At the summit, the BRICS (Brazil, Russia, India, China and South Africa) declared their intention to establish their own development bank. Media have reported the dialogue as a “flop”, with no agreement on the amount each country should invest in such a bank. Participants approved a US$50 billion endowment goal, but China argued that each country should be responsible for US$10 billion, while Brazil sought to have shares divided proportionally by economic size.
This disagreement reflects in part an emerging struggle between Brazil and China over leadership of the emerging markets, with the former reluctant to accept the latter as the de facto star of the program. In truth, far greater obstacles to a BRICS development bank remain beyond funding allotments. China has no interest in Brazil’s sticking its nose in East Asian issues, and Brazil, while welcoming Chinese trade, would prefer not to facilitate China’s rapidly growing influence in Latin America. To the extent that a BRICS development bank would pave the way for one giant to tread into another’s backyard, all five participants approach the idea with trepidation. Yet, while concrete agreements may remain elusive, the implication of the BRICS summit was clear: Out of the Bretton Woods A BRICS development bank was not the only topic on the agenda. Brazil and China successfully sealed a three-year currency swap covering up to US$30 billion annually. While the move will eliminate a degree of dollar volatility in bilateral trade, it also indicates efforts to dethrone the greenback as the world’s reserve currency and can be read as a challenge to the World Bank’s neighbor, the International Monetary Fund (IMF). The hegemony of the Bretton Woods international financial complex (the IMF and World Bank) and Inter-American Development Bank (IADB) in global development has quietly come under mounting threat. Simply put, these “official sources” of capital are no longer the only game in town. The Banco Nacional de Desenvolvimento Econômico e Social (BNDES), a Brazilian development bank, already maintains a larger lending portfolio than the World Bank. The Andean Development Corporation (CAF), a South American development bank headquartered in Caracas, is on pace to significantly out-lend the IADB in coming years. Beijing has the capacity to outspend anyone anywhere, and it lends without fear of a non-performing loan. These emerging-market institutions have the potential to lend more capital at cheaper rates with less conditionality than traditional Washington facilities. The effects are already evident, especially in the developing world. In Latin America, IMF funding has plummeted from US$49 billion in 2003 to just under US$2 billion in 2010.1 Most IMF loans are now executed in Europe as opposed to the developing world. Countries such as Ecuador and Venezuela have accepted billions of dollars in loans from China. These funds may have purportedly developmental purposes, but they can easily become off-budget slush funds for foreign governments, an unlikely scenario in more carefully scrutinized World Bank loans. In Africa, leaders view hard-currency reserves stockpiling in BRICS treasuries as the answer to the continent’s habitual infrastructure deficit. Upwards of 15 African heads of state attended the Durban summit, hoping to arrest the attention of the BRICS. Shaken not Stirred The World Bank may face mounting competition, but it still offers the best product on the market. Chinese loans may not be contingent upon free-market reform, but they can be contingent upon importing Chinese labor for project execution. As a result, such projects often do not return the expected levels of local employment or the desired knowledge spillover since
manual and mid-level positions regularly go to migrant laborers. This makes the World Bank model that stresses local participation appealing. Moreover, elements of Dr. Kim’s approach suggest a winning strategy. His commitment to infrastructure underscores an important shift as the Bank had previously underinvested in this important sector. His unflinching determination to reduce poverty offers a humanistic contrast to existing BRICS investments. The World Bank must leverage these advantages while finding ways to incorporate BRICS voices into the fold. The World Bank certainly faces increased competition. But, as Bretton Woods institutions would be first to point out, increased competition yields the best results. 1
Mark Weisbrot. “Venezuela in the Chávez Years: Its Economy and Influence in the Region.” In Thomas Ponniah and Jonathan Eastwood ed. The Revolution in Venezuela: Social and Political Change under Chávez (Cambridge: Harvard University Press, 2011), p. 216.
Samuel George is a project manager at the Bertelsmann Foundation. samuel.george@bfna.org
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