The next developing country to face insurmountable debt and angry creditors may be able to shop around, like a consumer would, for the best bailout package.
Since the end of World War II, under the Bretton Woods financial system created by its victors, the World Bank and the International Monetary Fund have had a near monopoly on development and emergency financing. But at a summit on Tuesday in Fortaleza, Brazil, the five “BRICS” countries — Brazil, Russia, India, China, and South Africa — signed a declaration establishing a bank that will compete with those bodies, and offered up the cash to support it.
'Developing countries have begun to self-organize and set up their own programs. Now they have a bank.'
The BRICS Development Bank, which is meant to occupy a similar role to the World Bank, will be funded by an initial $50 billion injection split evenly among the five countries, with the bank’s capital eventually amounting to $100 billion.
The group will also establish a Contingent Reserve Allocation for emergency lending in the mode of the IMF, which will have $100 billion as well. China will provide $41 billion for the emergency fund, while Brazil, Russia, and India will each contribute $18 billion. South Africa will give $5 billion.
“This is a long time coming,” Manuel Montes, senior advisor on finance and development at the South Centre, an intergovernmental think tank based in Geneva, told VICE News. “Developing countries have begun to self-organize and set up their own programs. Now they have a bank.”
Reports about negotiations between the five countries suggested that India was particularly wary of China’s outsized influence among the group and hesitant to agree that the bank be headquartered in Shanghai. A balanced agreement was struck that situates the bank in Shanghai, although the first bank president will be Indian. A Russian will be the first chair of the bank’s board of governors, and the first chair of the board of directors will be from Brazil.
The BRICS group makes up 42 percent of the global population and accounts for about a fifth of the world’s GDP. As the bank begins to operate, membership is expected to rapidly expand to developing countries in Latin America, Asia, and Africa.
Nations in those regions have complained for decades of a lack of voting rights at both the World Bank and IMF, and of the strict austerity measures imposed on governments in order to receive emergency bailouts. The “Washington Consensus” that guided both international lenders throughout the 1990s suggested that market solutions were the only remedies for a country’s woes, but they have ultimately proved inflexible.
From the destruction of Jamaica’s dairy industry to Argentina’s $100 billion default in 2001, the eventual effects of IMF policies have long been seen as detrimental by borrowers.
Starting in the 1980s, the IMF demanded in exchange for assistance that Jamaica open up its domestic agricultural market to competition from abroad. Practically overnight, subsidized American milk powder and vegetables supplanted local produce, decimating Jamaican industry.
In Argentina, the IMF told the government to implement severe budget cuts during an already significant economic downturn in the late 1990s. It also supported an unsustainable fixed exchange rate that emptied government coffers and brought the country closer to its inevitable default.
In both cases, the countries did what they were supposed to and suffered for it in the long-term.
'The IMF urgently needs to review its distribution of voting power in order to reflect the unquestionable weight of emerging countries.'
During the recent unrest in Ukraine, the country’s government — first under President Viktor Yanukovych, then under an interim administration — was faced with a choice between a Russian bailout or an IMF loan to help manage its crippling debt. Though the interim government eventually chose the IMF and the austerity that accompanies its money, the outcome might have been different if the BRICS bank offered another alternative.
IMF voting power is proportionate to the financing provided by its members. An extraordinary 85 percent majority of votes is required to make changes to this allotment of financing and voting power. With 16.75 percent of the votes, the US effectively wields veto power over any changes to the ownership structure.
When the IMF was created, the BRICS nations were impoverished and, with the exception of Russia, not world powers. Today they make up an immense, growing chunk of the world economy, but collectively hold a meager 11 percent of votes at the IMF.
“The BRICS already have an important voice and role in the IMF that is set to be enhanced further upon completion of the pending quota and governance reform of the fund, which we continue to work hard for and hope to be completed in the near future,” an IMF spokesperson told VICE News, referring to an agreement hatched years ago that would increase the voting power of BRICS at the IMF.
President Obama offered his support for the agreement in 2010, but the effort was blocked by the US Congress. Developing countries want to pay for a greater share in the IMF, but they are not allowed to.
“The IMF urgently needs to review its distribution of voting power in order to reflect the unquestionable weight of emerging countries,” Brazilian President Dilma Rousseff said at the summit in Fortaleza.
Some civil society groups are concerned that the BRICS Development Bank will not have the same environmental considerations about the sustainability and impact of development projects as the World Bank. But in the end, the story is the tardiness of the US and Europe in creating a more inclusive financial system.
“Both the IMF and World Bank have structures that are weighted very heavily in favor of the US and Europe, and emerging economies and low income countries have much lower shares in both institutions,” Gail Hurley, a researcher at the United Nations’ Development Program, told VICE News. “As the balance of wealth and power shift, the emerging economies are increasingly expressing their rights within these institutions. There is a consensus that the governing structures of these institutions have to change.”
But developing countries might care less now that they have a viable alternative to the World Bank and the IMF — albeit one that is for now in the hands of only a few countries.
Follow Samuel Oakford on Twitter: @samueloakford