Brics talks seek to sideline World Bank, IMF

Published Mar 27, 2013

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Mike Cohen and Ilya Arkhipov

The biggest emerging markets are uniting to tackle currency volatility and under-development with plans to set up institutions that encroach on the roles of the World Bank and International Monetary Fund (IMF).

The leaders of the Brics nations – Brazil, Russia, India, China and South Africa – were set to approve the establishment of a new development bank during an annual summit that was due to start yesterday in Durban, officials from all five nations said.

They would also discuss pooling foreign currency reserves to ward off balance of payments or currency crises.

“The deepest rationale for the Brics is almost certainly the creation of new Bretton Woods-type institutions that are inclined toward the developing world,” said Martyn Davies, the chief executive of Johannesburg-based Frontier Advisory, which provides research on emerging markets.

“There’s a shift in power from the traditional to the emerging world. There is a lot of geopolitical concern about this shift in the western world.”

The Brics nations, which have combined foreign currency reserves of $4.4 trillion (R40.8 trillion) and account for 43 percent of the world’s population, are seeking greater sway in global finance to match their rising economic power.

They have called for an overhaul of the management of the World Bank and IMF, which were created in Bretton Woods, New Hampshire, in 1944, and oppose the practice of their respective presidents being drawn from the US and Europe.

“We need to change the way business is conducted in the international financial institutions,” International Relations and Co-operation Minister Maite Nkoana-Mashabane said earlier this month. “They need to be reformed.”

The US has failed to ratify a 2010 agreement to give more sway to emerging markets at the IMF, while it secured Jim Yong Kim, an American, as the head of the World Bank last year over candidates from Nigeria and Colombia.

Finance ministers and central bank governors from the Brics nations were meeting in Durban yesterday to discuss the bank and currency fund, with leaders expected to arrive later yesterday.

Goldman Sachs Asset Management chairman Jim O’Neill coined the Bric term in 2001 to describe the four emerging powers he estimated would equal the US in joint economic output by 2020.

Brazil, Russia, India and China held their first summit four years ago and invited South Africa to join their ranks in December 2010.

Trade within the group surged to $282 billion last year from $27bn in 2002 and may reach $500bn by 2015, according to data from Brazil’s government.

“If they announce a Brics bank it will be quite something,” O’Neill said in an e-mailed reply to questions on March 15.

“At a minimum it symbolises they can achieve something as [a] political group and means lots of other things could follow in the future.

“It also means that they will have their own kind of special World Bank, which may aid infrastructure and trade projects.”

While Brics leaders may approve the creation of a development bank in principle at the summit, there is still disagreement on how it should be funded and operated.

The meeting might fail to reach a detailed agreement this week on how to fund the bank, said Mikhail Margelov, President Vladimir Putin’s envoy to Africa.

Russia favoured capping each side’s initial contribution at $10bn, he said in a March 15 interview in Moscow.

“It will be some time before it will be feasible for this bank to start financing say, a railway project,” Simon Freemantle, an analyst at Standard Bank, Africa’s biggest lender, told reporters in Durban on Monday.

“That is some way out.”

Agreement on pooling foreign currency reserves to fend against crises was also “some way off”, South African Trade Minister Rob Davies said last Friday.

In October, Brazilian Finance Minister Guido Mantega said the pool would be modelled on the Chiang Mai Initiative, which gives Japan, China, South Korea and 10 southeast Asian nations access to $240bn of emergency liquidity to shield the region from global financial shocks.

Interest rates near zero in the US, Japan and Europe have fuelled foreign investors’ appetite for higher-yielding assets, driving up currencies from Brazil to Turkey.

Brazil has warned of a global currency war as nations take reciprocal action to weaken their currencies and protect export industries.

Brazil’s real has gained 2 percent against the dollar since the beginning of the year, while the rand has dropped 8.8 percent during that period.

For South Africa, which makes up just 2.5 percent of the combined gross domestic product of the Brics, the summit is a way to showcase its role as an investment gateway to Africa.

President Jacob Zuma has invited 15 African heads of state, including Egypt’s Mohamed Mursi and Ethiopia’s Hailemariam Desalegn, for talks with the Brics leaders at the summit.

For most of the Brics leaders, it’s also the first opportunity to meet Chinese President Xi Jinping after his appointment on March 17.

“We will discuss ways to revive global growth and ensure macroeconomic stability, as well as mechanisms and measures to promote investment in infrastructure and sustainable development,” Indian Prime Minister Manmohan Singh said in a statement on Monday. – Bloomberg

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