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The Brics have a $100bn bank. Can the West start taking them seriously now?
A boy reads the plaque in front of the Charging Bull statue at the financial square in Shanghai
Earlier this month, the political leaders of the so-called Brics countries, who were meeting in the city of Fortaleza in northern Brazil, announced plans to set up a joint development bank. The new institution will be headquartered in Shanghai, run by an Indian president, and backed by $100bn (£59bn) of capital.
It is two years since this idea was first mooted. If nothing else the plans demonstrate that these extremely diverse countries can agree on something quite specific if they put their minds to it. It is a development that I have more than a passing interest in, having coined the BRIC acronym – for Brazil, Russia, India and China – back in 2001. So how significant is the launch of this new institution?
Some have suggested that it will start vying for influence with the World Bank and could mark the beginning of the demise of the global order that has existed since the end of the Second World War. Well, maybe. Much will depend on the remit of the Brics bank and how the World Bank and the International Monetary Fund respond. It is worth noting that the IMF issued a statement welcoming the new organisation. I suspect that neither it nor the World Bank will see the Brics bank as direct competition. After all, there are already the Asian and African development banks, and many countries have their own versions – the BRICS countries included.
The first article I wrote that included the Bric acronym (South Africa has since been added to make it Brics but the country was never part of my economic vision) was called “The World Needs Better Economic Brics”. In it, I partly explained the then already rising economic might of Brazil, Russia, India and China, and set forth some alternative forecasts for the rest of the last decade.
As it turned out, their absolute and relative rise was much stronger than even the most optimistic scenario I laid out. And despite disappointments in the past couple of years, those four economies are still much bigger today than I thought possible back in 2001.
I also suggested that global governance wasn’t representative of the changing world order and argued that the G7 either needed to be expanded or revamped. The global economic crisis in 2008 resulted in the sleepy G20, which includes all the Brics countries, being revived. This was a positive step.
But the G20 is not a club of equals. It consists of two factions: the G7 group of developed countries and their friends, and the Brics countries and their emerging market allies. Though this split might suit historic alliances and accepted norms, it is increasingly inappropriate, not least as the relative size of countries, and thus their importance to the global economy, change.
China, for example, now has a bigger economy than France, Germany and Italy combined. Before this decade is over, there is a reasonable chance that India (and possibly Brazil) will be larger than the UK. They will certainly both be larger than Italy and they are already larger than Canada, another G7 member.
Although it still makes sense for the G7 countries to meet regularly, as they all share democratic values, surely they need to recognise that this is hardly representative of modern global requirements.
It is definitely true that the Brics countries and other large emerging economies are under-represented within the IMF and World Bank, both for voting rights and their collective bargaining power. Shortly after the credit crisis, an agreement was reached at the 2009 London G20 meeting to allocate new capital to the IMF through the creation of more Special Drawing Rights and extra power to the Brics countries, China in particular.
But one of the key criteria for this re-balancing was the size of a country’s economy in 2008. That information is now nearly six years out of date. The Chinese economy is twice the size it was at the end 2008 in terms of nominal gross domestic product in dollar terms. But even that issue is moot: the US Congress has failed to ratify the 2009 G20 agreement.
Not surprisingly, politicians in Brics countries don’t think that global governance is working. The creation of the Brics Development Bank could be seen as a manifestation of their frustration. It will be an institution in which they hold equal power and will enact their shared priorities. It may well make them a little more reluctant to respond to additional funding from the IMF and World Bank.
Ahead of the meeting in Fortaleza, there were some doubts about whether the politicians would be able to agree on the capital contributions and where the headquarters would be located. The fact that these things were agreed (and presumably including a deal for the headquarters to be located in Shanghai in return for its first head being an Indian) is a good indication that these countries can make collective decisions. It also suggests that next time the nominations for a new head of the IMF and World Bank come up, the Brics countries will be more likely to have an agreed candidate to propose.
The new Brics bank is also being formed at a time when it is fashionably popular to dismiss the Brics economic story. It is true that the growth of the first four countries has been disappointing recently. But China and India are starting to show signs of acceleration; their growth rates will remain the envy of the Western world. The average Brics growth rate is likely to remain at least 5pc through the rest of the decade and India, under new prime minister Narendra Modi, might even beat China in the second half of the decade.
What will the Brics bank do? There are likely to be infrastructure goals, lending for energy efficiency projects, alternative energies and efforts to improve water quality and availability. Something I am going to be personally speaking to them about when I start chairing a review into the economics of anti-microbial resistance is the urgent need for new antibiotics.
Without this, those who remain pessimistic about Brics economies might turn out to be right.
Jim O’Neill is chairman of the City Growth Commission and visiting research fellow at the Brussels-based think tank Bruegel
The Brics have a $100bn bank. Can the West start taking them seriously now? - Telegraph
