BRICS - The End of Western Dominance of the Global Financial and Economic
Order
By <
http://www.ipsnews.net/author/shyam-saran/> Shyam Saran
In this column, Shyam Saran, former Indian Foreign Secretary and currently
Chairman of India's National Security Advisory Board, argues that the new
financial institutions put in place by the BRICS countries at their recent
summit in Brazil will alter the global financial landscape irreversibly.
NEW DELHI, Jul 23 2014 (IPS) - The sixth BRICS Summit which has just ended
in Brazil marks the transition of a grouping based hitherto on shared
concerns to one based on shared interests.
Since the inception of BRICS (bringing together Brazil, Russia, India, China
and South Africa) in 2009, it has been seen as a mainly flag waving exercise
by a group of influential emerging economies, with little in terms of
convergent interest other than signalling their strong dissatisfaction over
persistent Western dominance of the world economic, financial as well as
security order, but unable to fashion credible alternative governance
structures themselves.
However, with the Fortaleza Summit finally announcing the much awaited
establishment of the New Development Bank (NDB) with a 50 billion dollar
subscribed capital and a Contingency Reserve Arrangement (CRA) of 100
billion dollars, the monopoly status and role of the Bretton Woods
institutions - the World Bank and the International Monetary Fund (IMF) -
stand broken.
True, it may take the NDB and the CRA considerable time and experience to
evolve into credible international financial institutions but that clearly
is the intent.
BRICS leaders have kept the door open for other stakeholders, but will
retain at least a 55 percent equity share. They have also been careful to
declare that these new institutions will supplement the activities of the
World Bank and the IMF, and this has also been the initial response from the
latter.
Nevertheless, the emergence of an alternative source of financing with norms
different from those followed by the established institutions will alter the
global financial landscape irreversibly.
It may be noted for the future that the one component of the global
financial infrastructure where Western companies still remain supreme is the
insurance and reinsurance sector. Global trade flows, in particular energy
flows are almost invariably insured by a handful of Western companies which
also determine risk factors and premiums.
In Brazil, the BRICS countries have given notice that they will examine the
prospect of pooling their capacities in this sector. A more competitive
situation in this sector can only be a positive development for developing
countries.
The BRICS initiatives were born out of mounting frustration among emerging
countries that even a modest restructuring of the governing structures of
the Bretton Woods institutions, to reflect their growing economic profile,
was being resisted. The commitment made in 2010 at the G20 to enlarge their
stake in the IMF remains unfulfilled while the restructuring of the World
Bank is yet to be taken up.
The longer the delay in such restructuring, the more rapid the consolidation
of the new BRICS institutions is likely to be. It is this factor which
played a role in helping resolve some of the differences among the BRICS
countries over the structure and governance of these proposed institutions.
The setting up of the BRICS institutions owed a great deal to the energy and
push displayed by China. It is doubtful that the proposals would have been
actualised had China not put its full weight behind them and showed a
readiness to accommodate other member countries, in particular India. Russia
became more enthusiastic after being drummed out of the G8 and subjected to
Western sanctions.
Chinese activism on this score must be seen in the context of other parallel
developments in which China has also been the prime mover and sometimes the
initiator. These are:
1. The proposal for setting up an Asian Infrastructure Investment Bank
(AIIB) to fund infrastructure and connectivity projects in Asia, in
particular, those which would help revive the maritime and land "Silk
Routes" linking China with both its eastern and western flanks. The parallel
with the NDB is hard to miss.
2. The consolidation of the Chiang Mai Initiative Multilateralisation (CMIM)
and the associated Asian Multilateral Research Organisation (AMRO) among the
Association of Southeast Asian Nations (ASEAN) + 3 (China, Japan and the
Republic of Korea). The CMIM is now a 240 billion dollar financing facility
to help member countries deal with balance of payments difficulties. This is
similar to the 100 billion dollar CRA set up by BRICS.
AMRO has evolved into a mechanism for macro-economic surveillance of member
countries and provides a benchmark for their economic health and
performance. This would enable sound lending policies and may very well be
linked in future to the AIIB. The CMIM and the AMRO thus provide building
blocks which could serve as the template for the NDB, the CRA and the AIIB.
3. In addition to the CMIM and the AMRO, there are ongoing initiatives
within ASEAN + 3 to develop a truly Asian Bond Market which could mobilise
regional savings into regional investments through local currency bonds. To
support this initiative, a regional Credit Guarantee and Investment Facility
has been established. A Regional Settlement Intermediary is proposed to
facilitate cross-border multi-currency transfers.
These developments are taking place just when there is a rapidly growing
Chinese yuan-denominated bond market, the so-called dim-sum bonds, which
have become an important source of corporate financing. This reduces the
dependence on euro and U.S. dollar-denominated bonds. The NDB could tap into
this market to build up its own finances.
It is important to keep in mind this broader picture in assessing the
significance of the decisions taken at the Fortaleza Summit. In
systematically pursuing a number of parallel initiatives, China is
attempting to create an alternative financial infrastructure which would
have it in the lead role. The dilemma for other emerging countries is that
there appear to be no credible alternatives, especially since the Western
countries are unwilling to cede any enhanced role to them.
The Fortaleza Summit marks the beginning of the end of the post-Second World
War Western dominance of the global economic and financial order. The
existing institutions will now have to share space with the new entrants and
may be compelled to adjust their norms to compete with the latter.
The prime mover behind the establishment of a rival network of financial
institutions is China, whose global profile and influence is likely to
increase as the various building blocks it has put in place come together to
shape a new global financial architecture. This is still in the future but
the trend is unmistakable. (END/IPS COLUMNIST SERVICE)
Received on Wed Jul 23 2014 - 18:07:08 EDT