As the three day meeting for the 6th annual “BRICS” conference of Brazil, Russia, India, China and South Africa comes to a close, the most important accomplishment is the founding of the BRICS Development Bank and a currency stabilization pool known as the Contingency Reserve Arrangement.
At a puny $50 billion, the BRICS Development Bank does not undermine the U.S. dollar as the world’s reserve currency. But it does recognize that most of the world’s coming growth will be from emerging economies and seeks to undermine Western nations in investment decisions regarding that growth.
McKinsey and Company consultants estimate that from a 2010 base of 6.8 billion people in the world and about 2.4 billion people with enough disposable income to be consumers, by 2025 there will be 7.9 billion people and 4.2 billion consumers. About 56% of the world’s GDP comes from 600 cities and the top 160 developed cities control 2/3. But as urbanization creates another billion consumers by 2025, the emerging 440 cities will control twice the GDP of the developed cities. About $23 trillion, or 47%, of the world’s consumer growth will come from these emerging cities as one billion of their residents gain enough disposable income to meet McKinsey’s definition of a consumer.
The BRICS believe that the world’s international financial institutions are all Western dominated and the West has increasingly used their control over investment decisions to undermine emerging nations’ sovereignty. Actions these nations cite as proof of this sanctions against Russia, steel import restrictions against China, and travel restrictions against India’s new Prime Minister.
The World Bank started out as a development bank designed to help rebuild Europe after World War II, before growing into the global institution it is today. The BRICS Development Bank will start out at $50 billion of initial capitalization in 2016 and is proposed to grow to $100 billion by 2021. Even this would still be fairly small institution. But if the dozens of other potentially fast growing countries– like Vietnam, where I am currently teaching “Capitalist Business Strategy” to 50 young and very ambitious entrepreneurs– were to join both new BRICS’ institutions relative quickly, the BDB and CRA could become powerhouses.
More importantly to the developing world, such a bank would eliminate the political and business conditions regularly imposed on emerging nations by Western institutions, replacing them with political and business conditions imposed by BRICS nations. It would also represent an effort to insulate the developing world from continuing financial crisis in the debt-laden Western economies. The BRICS have suffered short-term capital flight as investors responded to U.S. Federal Reserve and European Central Bank stimulus, quantitative easing and tapering announcements. Developing country governments that traditionally held assets in Western financial markets fear being the victim of a Western liquidity crisis.
The BDB will also promote infrastructure and sustainable development in emerging countries via loans. Some estimates suggest the developing world lacks about $1 trillion annually in financing for economically justified infrastructure. With many traditional Western donors and investors into other development banks now experiencing debt crises at home, the emerging world is being squeezed out.
The BRICS Development Bank initially will be relatively small for a multilateral development bank. Even though China can anchor the BDB with its economy and financial power that dwarf the other BRICS members, the Contingency Reserve Arrangement’s $50 or $100 billion capitalization would be quickly exhausted in a global financial crisis. The BRICS would still have to rely on the existing financial institution’s capitalizations: European Investment Bank at $331 billion; World Bank at $223 billion; Asian Development Bank at $163; Inter-American Development Bank at $129; and African Development Bank at 103 billion.
China wanted the initial contributions to be based on each country’s size and offered to put up all of an initial start-up capitalization for both the BRICS Development Bank and Contingency Reserve Arrangement to be $100 billion, but the other BRICS members rejected the risk of moving from one master to another. It was negotiated that the BDB will start lending in 2016 with an initial capital base of $50 billion. Ten billion dollars will be contributed by each member, with plans to increase the capitalization to $100 billion over the next five years. The $100 billion Contingency Reserve Arrangement will be based on the size of each country’s economy, with China contributing $41 billion.
The interests within the BRICS have often diverged and there is no discussion about moving to a common currency to challenge the dominance of the U.S. dollar. It will also take decades to determine whether the BRICS Development Bank and Contingency Reserve Arrangement can rival Western-led institutions. But with the emerging markets expected to dominate economic growth, the BRICS believe that should increasingly control their own investment decisions.
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From July 15th to July 29th, Chriss Street is teaching “Entrepreneurship and Capitalist Business Strategy” at Ho Chi Minh University in Vietnam