The Brics (Brazil, Russia, India, China and Sou-th Africa) Sum-mit has annou-nced the setting up of the New Development Bank, on the lines of existing multilateral institutions like the World Bank and Asian Development Bank (ADB), headquartered at Shanghai. The Brics development bank envisages an equity base of $50 billion shared equally by the five founders. It also envisages a further $100 billion initially as advances by member countries. These advances will be in the shape of subscribed bonds with countries subscribing them according to their capabilities. Thus, if China even subscribes to the most of the bond issues, it will not make a difference to how the funds are administered, as a management reflecting the equity shares will control them.
This is unlike the World Bank, where some are more equal than others.
The announcement of the formation of the Brics development bank will have as much an impact about how the non-G7 countries manage their economies and their foreign reserves, as it does on the intellectual discourse. The development priorities and agenda — which was hitherto set by Western experts responding mostly to Western priorities and notions — will now have to compete with an intellectual tradition that is and can be very different. For instance, Western theorists have for long rejected state-owned companies as wasteful and inefficient, but China has proved that SOEs (state-owned enterprises) can be economic drivers and major exporters, and also very profitable.
Economists are as prone to herd behaviour like other animals. They veer towards the money and by the generally prevalent economic policy consensus, right now the Washington Consensus. This has as its main priority the maintenance of the status quo now tilted wholly in favour of North America and Western European interests. The Brics bank is the first step towards reforming the world system. It has also to be read against the decision of the Brics nations to do more trade with each other on the basis of currency swaps.
The world barely escaped a melt down when bank after bank either failed or were on the verge of failing in the US. The US administration of President Barack Obama fashioned out a rescue by pumping in almost a trillion dollars to shore up the banks and save the giant US automobile industry, which is still that country’s major industrial driver. This money was made available by putting the printing presses of the various US Federal Reserve Banks on overdrive. Little wonder then that the US dollar is devaluing against most world currencies. But the problem is that the US dollar is the world’s preferred currency.
Now lets turn to see how the system actually works. Countries like China and India produce goods and services at low cost for consumption in the US, which pays them in dollars, which they in turn deposit in US banks. Since money cannot sit still, this money in US banks is then lent to Americans, who today have the highest per capita indebtedness in the world, to splurge on houses, cars, Plasma TV’s, computers and playstations which they can often ill-afford. Thus, in effect the rest of the world was plying the US with cheap credit, encouraging it to splurge even more.
The Bretton Woods Conference of July 1944 took place under the fast receding shadow of World War II and when the US was literally the last man standing. Lord Keynes had in mind a more elaborate scheme that called for the establishment of an international reserve currency administered by a world central bank, but this had to be shelved in the face of American obduracy. This central bank would have been vested with the possibility of creating money and with the authority to take actions on a much larger scale. But the US blocked Keynes’ plan.
This international system was unilaterally abrogated when in 1971 US President Richard Nixon delinked the dollar from the gold standard. Consequently, the US and its even more profligate citizens have an apparently endless access to easy credit to satiate their sundry appetites. In this way the ever-growing annual US trade deficit becomes the de facto engine of growth for very many economies, such as China and the Asean countries. Unfortunately, the International Monetary Fund controlled by the G7 cannot bring itself to even caution the US’ profligacy, let alone force it to mend its ways.
In the past few decades, the gross world product has been growing at a much faster rate. In 1985, it was growing at 2.76 per cent. In 2005, it grew by 3.56 per cent. Much of this is due to the changing of gear in countries like China and India that began their great leaps forward. It seems that in 2050, it will indeed be a very different world economic order. Then four of the Brics will be among the top five. By 2035, the Brics gross domestic products will be more than the G7 GDPs. The economic balance of power is shifting.
Like communism, the ideology of the Washington Consensus rammed down the world’s throat has been proved to be a failure. It is time we begin to think differently.
With the IMF failing to play its role, it devolves upon these five growth engines to bring more order into the world system. Casino capitalism can no longer be the guiding ideology. It must be swiftly discarded and a more responsive and intelligent system best suited to all and not just the US is the need of the day. It is time we revisited Lord Keynes’ proposal for a global reserve currency and consider establishing a system to regulate and manage it.
The US and the Europeans will not want to relinquish the duopoly they have established whereby 91.4 per cent of the world foreign reserves are held in their currencies. While the dollar alone accounts for 61 per cent of global reserves of $11,864 billion, the US’ own foreign reserves stand at a measly $148 billion. China’s reserves alone stand at $4,009 billion while Russia’s is $467 billion. India is way behind here with only $315 billion, but even this is still 50 per cent more than that of Germany, twice as much as those of France and Britain.
Clearly, the time has come when we must put our money work for ourselves and not be vulnerable any more to the gambling and speculative predilections of the overpaid professionals in Wall Street. The Brics’ New Development Bank is indeed a new and long overdue development.
The writer held senior
positions in government and industry, and is a policy
analyst studying economic and security issues. He also specialises in the Chinese economy.
