From the 3rd until the 5th of September 2017 the 9th BRICS summit took place in Xiamen, China, bringing together the leaders of Brazil, Russia, India, China, and South Africa. On the concluding evening of the summit country leaders from Egypt, Kenya, Tajikistan, Mexico, and Thailand joined the BRICS country leaders, discussing important topics on the global agenda.

The BRICS countries account for 40 percent of the world’s population, and have accounted for a large share of world economic growth, mainly due to China’s and India’s high growth rates. It is also largely thanks to the economic rise of these two countries that absolute poverty has decreased globally. Today, BRICS accounts for around 23 percent of the world’s domestic product

Priority Topics

This year’s summit title is “Stronger Partnership for a Brighter Future” — and aims to promote economic collaboration (e.g., the development of the OBOR initiative), political and security cooperation, people-to-people exchanges, and the enhancement of BRICS cooperation in global institutions like the International Monetary Fund (IMF), World Bank, and World Trade Organisation (WTO). This is meant to give more voice to developing countries and emerging economies, and to create BRICS institutions like the New Development Bank (NBD) and Contingent Reserve Arrangement (CRA) (as complements to both the World Bank and IMF).

This year’s cooperation priorities include the “Enhanced cultural and people-to-people exchanges and cooperation among BRICS countries and will go a long way in deepening the traditional friendships and mutual understanding between BRICS peoples and promoting the exchanges and development of all civilisations.” This central principle of BRICS-cooperation is perfectly in line with the Dialogue of Civilizations Research Institute’s mission, that is to foster inter-civilisational dialogue based on the appreciation and understanding of each other’s cultures and a common interest in fair economic development.

Several days before the summit a stand-off over border disputes between armed forces at the Sino-Indian demarcation line took place – risking India’s participation – which was fortunately resolved shortly before the summit. This topic will probably also be an issue for bilateral meetings between presidents Modi and Xi, and it shows that there are some serious issues that could endanger a deeper integration of BRICS countries.

Long-standing Western Domination

The BRICS are often criticised for having less in common with each other, as opposed to what sets them apart. Disparate foreign policies, diverging economies, and different models of governments to name a few diverging features. This is largely true and reminds one of the fact that the acronym BRIC (without South Africa) was created by an investment banker at Goldman Sachs in 2001 who wanted to find a catchy name for these fast growing emerging market. Nevertheless, it is also true that all BRICS countries do feel a certain discomfort about the domination of Western countries in world financial institutions like the World Bank and the IMF, and to different degrees they all reject the idea of the neoliberal economic policies that are still promoted by many Western countries and institutions.

For a clear example of how Western institutions are biased in favour of certain Western countries, one could look at the equity in power sharing in the IMF and World Bank.

With regard to the World Bank, some reshuffling of voting power to the advantage of China and India (and to the disadvantage of UK, Germany, and France) has taken place. However, the US holding 15.85 percent of voting power still has the ability to unilaterally veto all decisions, because 85 percent is needed to take a decision to issue loans.

Moreover, the World Bank is – due to a gentlemen’s agreement struck during the formation of Bretton Woods system – regularly headed by a US citizen. Although the US is still the biggest economy measured in nominal GDP, China is leading when GDP is measured in Purchasing Power Parity (PPP). Generally, the growing economic weight of the Global South is not adequately reflected in the decision-making process at the World Bank.

The IMF is equally biased towards the interests of some Western countries. According to the same gentlemen’s agreement, the head of the IMF is as a rule supposed to be a European. This tradition is increasingly criticised and therefore the IMF decided that the next president –  for the first time in history –  will not be a European (or North American). Traditionally, Western countries have had a strong influence in the IMF.

Only in the year 2015 – with a delay of five years due to a delay caused by the US Congress – a voting right[1] reform that was already agreed on in 2010 was implemented, shifting some six percent of voting rights to BRICS countries and doubling the funding available for loans. China, India, Brazil, and Russia will now be under the top 10 members, with China’s voting rights growing by the largest amount from 3.8 percent to six percent. In fact, about six percent of the quota shares will shift from European countries and the US to emerging and developing countries. Despite the fact that the BRICS quota was raised to 14.7 percent, the actual economic power of the BRICS amounts to 23 percent of global GDP at market price and 30 percent of global GDP at PPP. Looking at these figures it becomes obvious that voting rights in the IMF are not aligned with the current distribution of economic power.

Another criticism of IMF and World Bank loans is that a substantial number of conditions (the so-called ‘conditionality’) are attached to the reception loans. While some of the conditions are adequate, others are aimed at more controversial areas, like trade liberalisation, austerity, and privatisation that have partially caused ‘collateral damage’ in some receiving countries.

Frequently, the significant leverage of lending countries – mainly the countries of the Global North – have over the distribution and conditions of loans to individual borrowing countries (typically poor countries) has been criticised by developing countries and emerging economies.

Another point of concern is the leverage that the US government possesses on individual loan decisions. After the 2010 reforms the US quota decreased from 17.8 to 17.4 percent, still providing the US with the opportunity to veto every decision (15.1 percent of the quote is sufficient for vetoing).

An Alternative or a Complement?

One of the most tangible successes of the BRICS is the creation of the New Development Bank (sometimes simply called ‘BRICS bank’), which has the aim to fund infrastructure and development projects in BRICS-countries.

After many years of consultations, the bank was established in 2015 with headquarters in Shanghai and a regional branch recently opened in Johannesburg. Every BRICS country will contribute 10 billion USD to the bank. An additional amount 50 billion USD will be added by new members joining at a later stage.

One of the most important features of the NDB is that there is equity in power sharing, meaning that each member has the same say in the distribution of loans and that there is no veto right. Another important fact is that the NDB is – in contrast to the World Bank and IMF where rich countries (mostly Western countries) lend money to poor countries – a bank that potentially opens the doors for a new kind of South-South cooperation, due to the background of its member countries The NDB has the aim to gradually broaden its membership irrespective of geography and will closely work together with the Chinese-led Asian Infrastructure Investment Bank (AIIB) in areas of mutual interest, such as infrastructure and sustainable development projects. In April 2016, the NDB successfully issued its first financial assistance worth 811 million USD to renewable energy projects (producing an overall capacity of 2,370 megawatts) in Brazil, China, India, and South Africa.

In addition, the BRICS will establish a so-called ‘contingency reserve arrangement’ (CRA), to contain global liquidity pressures of each member’s currency through the creation of a 100-billion USD fund. In contrast to the NDB the contributions are not equally shared by the member countries. The lion share of 41 percent will be contributed by China, 18 percent each by Brazil, India, and Russia, and 5 percent by South Africa. The distribution of shares reflects the voting rights of the CRA members.

A Dawn of a New Era?

The mere fact that the BRICS have established their own institutions could possibly infuse the World Bank and IMF with a certain degree of competitiveness, which might could make these institutions step further away from their strict conditionality approach.

Clearly the establishment of the NDB and the CRA is an important step in the right direction as more funding e.g., for infrastructure projects, especially in poor countries, is desperately needed. Moreover, a better distribution of loans to developing and emerging countries that is not attached to such conditions as austerity, privatisation, and trade liberalisation is surely an improvement. It remains however to be seen if these new BRICS institutions are able to deliver on that expectation.

 

 

[1] The IMF defines quotas as follows: “A country’s quota at the IMF determines its voting power, the amount of financial resources it must provide to the IMF and its access to IMF financing. The larger a country’s quota, the more say that country has in the governance of the international financial institution.

Quotas are based on a weighted average of GDP, openness, economic variability and international reserves.” IMF-website: http://www.imf.org/en/About/Factsheets/Sheets/2016/07/14/12/21/IMF-Quotas (Accessed 3.9.2017)

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Klemens Witte, Research Associate at the DOC, is specifically interested in economic questions, international relations, and policy-making. He holds a Masters in Political Science and Intercultural Communication (Martin-Luther-University Halle-Wittenberg), a second Masters in Baltic Sea Studies (Södertörns University College/Stockholm), and a postgraduate LL.M. in International Economic Law (Southwest-University for Political Science and Law/Chongqing and Martin-Luther-University Halle-Wittenberg). Klemens Witte has gained international experience in universities in Kazan, Moscow, Kaliningrad, Minsk, and Beijing. He has further work experience within the fields of internationalization and education as a desk officer with Swedish government ministries and as a lecturer from the Moscow State Institute of International Relations. He speaks German, English, Swedish, Russian, and Chinese.