6th BRICS Summit: the seeds of a new financial architecture

Ariel Noyola Rodríguez

30/06/2014

Opinión

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On the day following the end of the World Cup in Brazil, the Sixth Summit of BRICS (Brazil, Russia, India, China and South Africa) will be held in Fortaleza and Brasilia, on the 14^th, 15^th and 16^th of July, to establish a financial architecture under the slogan: “Inclusive growth and sustainable solutions”. In contrast to the initiatives of financial regionalization in Asia and South America, the BRICS countries, since they do not have a common geographical space, at a time when they are less exposed to simultaneous financial turbulence, can increase the effectiveness of their defensive instruments.

A monetary stabilization fund called Contingent Reserve Arrangement (CRA) and a development bank called BRICS Bank will operate as a multilateral mechanism in support of balance of payments and investment financing. De facto, the BRICS will distance themselves from the International Monetary Fund (IMF) and the World Bank, institutions created some seven decades ago under the orbit of the US Treasury Department. In the midst of the crisis, both of these initiatives open space for financial cooperation in the face of the volatility of the dollar, and financial alternatives for countries in critical situations without subjecting themselves to structural adjustment programmes or economic reconversion.

As a consequence of the growing economic slowdown on a world level, it has become more complicated for BRICS countries to reach growth rates above five per cent. The sustained fall in prices of commodities for industrial use, due to a lower demand from the Asian continent and the return of short-term capital flows to Wall Street have had a negative impact on foreign trade and exchange rates. With the exception of the yuan, BRICS currencies have lost from 8.80 % (rupee) to 16% (South African rand) between May of 2013 and June of this year. In this sense the BRICS CRA, with 100 billion dollars as of March 2013, with contributions from China of 41 billion dollars; Brazil, India and Russia, with 18 billion each; and South Africa with 5 billion dollars – once under way will substantially reduce the exchange volatility in trade relations and investment between members of the bloc. Sceptics claim that the CRA will have only secondary importance and will only exercise functions complementary to the IMF. They leave aside the fact that in contrast to the Chiang Mai Initiative, for example (with China, Japan, South Korea and ten economies of the Association of Southeast Asian Nations), the BRICS CRA will not need the support of the IMF to make loans, and thus will have greater political autonomy with respect to Washington. The currency war of the central economies against economies of the capitalist periphery demands the implementation of the CRA as soon as possible.

Meanwhile, the BRICS Bank has awakened great expectations. It will begin operations with a capital of 50 billion dollars (with contributions of 10 billion and guarantees of 40 billion from each of its members), and will be able to expand to 100 billion dollars within two years, and to 200 billion in five years; it will enjoy a capacity of financing up to 350 billion for projects of infrastructure, education, health, science and technology, environment, etc. However, for South America, its impact in the medium term presents a dual picture. Not everything is honey in every corner of credit markets. On the one hand, the BRICS Bank could contribute to reduce the costs of financing and strengthen the counter cyclical function of the Development Bank of Latin America (CAF) through increased credits in moments of crisis, and thus rule out loans from the World Bank and the Inter-American Development Bank (IADB). On the other hand, as a source of credit, the BRICS Bank will face competition from financial institutions of considerable weight in the region, such as the BNDES (Banco Nacional de Desarrollo Económico y Social, of Brazil), the CAF and the Chinese banks with a greater number of credits (China Development Bank and Exim Bank of China). It is unlikely that these financial institutions could manage their offers of credit in a complementary way without affecting their loan portfolios.

There are also some frictions within BRICS. The Chinese elites look to provide a majority contribution (contrary to the Russian proposal to establish proportional contributions) and to make Shanghai the seat of the organization (in place of New Delhi, Moscow or Johannesburg). If the loans of the BRICS Bank are denominated in yuans, the Chinese currency will advance in its internationalization and gradually establish its position as a multipolar means of payment and a reserve currency, to the detriment of others. Beyond the consolidation of a multipolar world, the CRA and the BRICS Bank represent the seeds of a financial architecture emerging in a period of crisis that is full of contradictions and characterized by cooperation and financial rivalry.

- Ariel Noyola Rodríguez is a member of the Observatorio Económico de América Latina of the Instituto de Investigaciones Económicas of the Universidad Nacional Autónoma de México.

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