A New Bank for the BRICS

As five leaders, representing nearly half of the world’s population, descended on the Brazilian city of Fortaleza to attend the sixth BRIC’s (Brazil, Russia, India, China and South Africa) Summit, scheduled for July 15-16, elaborate security measures were being put in place, street drains within proximity were meticulously inspected, local police had cordoned off the area to traffic and military jets prowled above the skies ensuring that the no fly zone within proximity of the Summit’s venue were observed. But it wasn’t the security activities around Fortaleza (Fortress) that grabbed the headline, but rather what was being discussed inside the Summit. 

As the leaders sat around a table, they were discussing the potential end of, what they perceived to be, the way mega business, aided and abetted by the US and its allies, had an unchallenged ability to exert a wielding influence over the world’s economy since the end of WWII. The International Monetary Fund (IMF) and the World Bank, both institutions established almost 60 years ago by the world’s most powerful nations in the aftermath of WWII, is increasingly being viewed by the group of BRICS nations as pretty much the facilitators for US and allied economic supremacy. While the World Banks and the IMF, both share the same aim of ending extreme poverty and boosting shared prosperity this seems less realistic today with rising inequality, even among developed nations. Moreover, these altruistic goals are perhaps a smokescreen for their true function, according to critics who believe that these financial institutions are merely tools of corporatocracy, a society or system governed by corporations. “When the IMF or World Bank lends money, strings are invariably attached, and those strings tend to reflect the values and interests of Washington and its allies,” said an analyst at the Institute for Development Studies in Sussex, UK.

So the BRICS plan, to resist a society ruled by big business and White House policies, is to launch its own development bank, called the BRICS bank and a monetary stabilization fund called the Contingent Reserve Arrangement (CRA). Indeed, adding flesh to the bones, BRICS nations were able to conclude at the Summit in Fortaleza the financing structure of the BRICS bank and CRA. Both BRICS financial institutions will rival the World Bank and the IMF and are scheduled to be launched at the conclusion of the Summit. The choice of city is expected to be made soon along with the leadership of the bank, which will be rotated every five years.

The CRA will have 100 billion, with China being the largest contributor of 41 billion USD; Brazil, India and Russia, with all contribute 18 billion USD each and South Africa will add 5 billion USD to the fund. The BRICS Development Bank will begin operation with a capital of 50 billion dollars with contributions of 10 billion and guarantees of 40 billion from each of its members. The BRICS Bank has ambitious expansionary plans. It intends to expand 100 billion dollars within two years, and up to 200 billion in five years. The Development Banks projected capacity for financing projects is anticipated to total 350 billion USD by 2019. This is certainly by no means small beer. 

Therefore, assuming the BRICS Development Bank and CRA are successful, it would be reasonable to assume that these newly formed financial institutions could then end the monopoly stranglehold that the IMF and the World Bank’s has over financing large scale international development projects. Additionally, for the economies involved in the architecture of BRICs financial institution, being able to circumvent the World Bank and the IMF for development aid and apply to their own group’s BRICS Development Bank may be a real boon. The BRICS economies might be able to benefit from the no strings attached financing of the group of countries new BRICS Development Bank. Previously, much World Bank development aid concerning hefty infrastructure projects in developing countries tended to be tied down to the approval of finance, which was subject to contracts being awarded to US and western corporations. Moreover, interest payments on the loans made also resulted in payment outflows from the BRICS economies. In view of this, it then becomes fairly apparent that the creation of BRICS Development Bank, in theory is likely to be a boost to BRICS companies, their bank and its economies. 

On the other hand, the implications for US and allied corporate titans may not be so favourable in so much as it could also extinguish an era of plum public contracts being awarded on a silver plate to these corporations. There might also be the added risk that the BRICS Development Bank could deliberately or by chance promote policies within BRICS nations and beyond that are at odds with those of the White House. So it’s reasonable to assume that the BRICS bank could act as a facilitator in the shifting of economic and political power from the West to the East.

However, the extent to which this power and political shift plays out depends on the BRICS Development Bank’s effectiveness as a means of financing infrastructure projects within the group’s countries and beyond. If the BRICS bank is just another replica based on the IMF and World Bank model, with its criticized shortcomings, then its influence may not be as significant as anticipated by its architects. Like any institution, it is run by human beings who often have self-serving interests, combine this with little transparency and practically no press freedom in a number of BRICS countries and it might just be the perfect cocktail for a few oligarchs becoming even more powerful at the cost of many. That would be worse than corporatocracy.

But that’s maybe just a cynical view, on the upside the BRICS Development Bank has maybe got the world’s financial architects thinking about the need for change. If that is the case, then let’s hope that what emerges is for the greater good.

International Economic Statistics

Europe chose to resolve the financial crisis in 2008 with a programme of austerity for the peripheral and weakest economies while the US and UK chose to recharge their economies with quantitative easing.  Both also increased controls over the banks and brought interest rates down to an historically low level.

So how has the different approaches affected the current economic performances of the countries involved? 

In Europe the result has been to improve the performance of the peripheral economies and to regain investor confidence in the robustness of the European monetary system.  This approach has been successful but has resulted in lower anticipated growth in the next couple of years from the two main northern countries with German and French GDP growth forecast by the IMF to be 1.7% and 1.0% respectively in 2014 with 1.6% and 1.5% forecast for 2015.  Italian GDP on the other hand is forecast as 0.6% in 2014 and 1.1% in 2015 following the austerity measures forced upon it in order for it to qualify for financial support.  

In the UK comparable figures from the IMF are for GDP growth of 2.9% and 2.5% for 2014 and 2015 respectively.  In the US they are forecasting 2.7% and 3.0%.

In Japan forecasts for GDP growth in 2014 and 2015 are for 1.3% and 1.0%.

Japan went through a similar financial crisis in the early nineties and has suffered stagnation since then with falling prices and increasing government borrowing.  They have responded recently under Mr Abe with a quantitative easing programme of their own which, coupled with an austerity programme of fiscal reform and talk of fundamental reform was to develop their own recovery from this period of stagnation.  It is early days to judge the result but some growth is forecast in GDP which is a positive sign and a determination to extricate themselves is clear.  Although the fundamental reforms are proving hard to achieve, inflation is forecast to be 2.8% this year as it has been given a boost by the introduction of a sales tax last month of 15%.  An inflation figure of 1.3% forecast for 2015 is progress.

The fear is that, in the absence of a monetary stimulus programme on the lines of that followed in the US, Europe will go down the same route as that followed by Japan in the nineties and experience low growth and deflation.  The forecast for inflation in 2014 is 0.8% followed by 1.2% in 2015 which, if achieved, will avoid deflation, but is regarded by many independent economists as too optimistic. Talk of a stimulus programme by Mario Draghi to combat this risk is thought to be his attempt to talk down the currency (a high currency leads to lower import prices and lower inflation) without actually introducing the stimulus.  The Germans remain very opposed to any such action as it is regarded as a way to avoid the reforms needed in the Southern economies and, perhaps, France and that it could lead to unacceptably high inflation in the future.

The UK and US have followed very similar paths from an early date with major programmes of quantitative easing, low interest rates and a programme of cutting government expenditure.  The result has been faster economic growth but without any adverse reaction detectable in the inflation figures which are forecast to be 1.9% in 2014 and 2015 in the UK and 1.4% and 1.6% in the US.

The result of these responses to the financial crisis can be seen in recent statistics with demand for housing and retail products rising sharply in the UK and US while consumer confidence in Europe remains low.  

In the UK house prices rose 8.9% on average across the country according to Rightmove.  Inflation was marginally higher than anticipated at 1.8% aided by the strength of Sterling over the last year which was up nearly 10%. This strength has dampened hopes for strong UK export growth as seen in the latest figures which revealed a fall of 1.0% over the last quarter.  On the other hand imports fell by 1.1% with the dampening effect of higher Sterling on import prices contributing to the slowdown. An increase in consumer confidence is reflected in higher house prices as is the strong retail sales figures which rose 6.9% on the year aided by improving weather and wages which rose in line with inflation. The Bank of England revealed the minutes of the MPC which reflected unanimity for retaining low interest rates.  The Governor reiterated their determination to retain interest rates at a low level until well into next year and to tackle any threat from rapidly rising house prices by using ‘other tools’ such as a reduction in the ‘Help to buy’ programme and tighter criteria for lending. The CBI’s survey on industrial trends revealed a disappointingly flat trend, however, the UK seems to be growing faster than forecast, as GDP came in at 3.1% aided by a continued strong performance from the services sector up 0.9% in the March quarter and a recovering trend for capital investment which was up 8.7% over the year. Government borrowing came in lower for the year ended April 2014 and in line with plans.

There was a similar story from the US where the minutes of the FOMC meeting were published and followed by speeches from various Federal Reserve officials including Janet Yellen who reiterated their continued dedication to low interest rates and to ‘tapering’ the rate at which they pump money into the US economy.  Their fear is that the recovery in the housing market will stall should interest rates rise as a result of them ‘tapering’.  Existing home sales, however, remained at healthy levels with a rise of 1.3% in April over the previous month and new home sales rose 6.4% over the same period.

In Europe manufacturing in Germany maintained some growth with a figure of 52.9 (above 50 is growth) but this was lower than the previous month’s 54.9. In France, on the other hand, they continue to be in the doldrums with a figure of 49.2 after a higher figure in the previous month of 51.2.  European consumer confidence remains low with a fall of 7.2 in May but was a slight improvement on the fall of 8.6 in April.  In Italy industrial orders returned to growth with an increase of 2.8% over the last year.

Short term the Anglo Saxon countries are performing best but without much more success improving the fiscal balances as a percentage of GDP the long term result may be totally different.

Darren Winters