According to its own articles, the Contingency Reserve Arrangement will barely be able to function without IMF backing, writes Peter Fabricius.
Johannesburg - Brics has largely been a source of rhetoric about the need for a counterweight to the global dominance of the West.
Soon we should see if and how that rhetoric can be put into practice.
President Jacob Zuma and the leaders of the other Brics nations – Brazil, Russia, India and China – formally launched the $50-billion (R622bn) Brics bank, officially the New Development Bank, and the Contingency Reserve Arrangement at the seventh Brics summit in Ufa, Russia, this week.
These two entities are the most concrete expressions of the Brics, so their formal launch in a sense puts Brics on the ground.
Some time this year the New Development Bank will open its doors in the heart of Shanghai’s financial district.
Later it will establish its African branch in South Africa, probably in Midrand.
In keeping with the overall Brics mission, the New Development Bank has been characterised as an alternative to the World Bank and the Contingency Reserve Arrangement to the International Monetary Fund (IMF), both perceived by the Brics governments as doing the work of Western governments to the detriment of the interests of other regions.
Certainly, their governing structures are tilted towards the West.
Whether they are also politically skewed in their funding, by imposing pro-Western conditionalities, is less clear.
If they are, it’s also unclear yet whether the New Development Bank and the Contingency Reserve Arrangement will be able to make much of a difference.
Take the Contingency Reserve Arrangement. This is to be a mechanism whereby Brics countries come to the rescue of any member that faces a balance of payments emergency.
The irony is that, according to its own articles, the Contingency Reserve Arrangement will barely be able to function without IMF backing.
Peter Draper, of Tutwala Consulting, has pointed out in a paper this week that the promoters of the Contingency Reserve Arrangement have argued that it would provide “insurance” to South Africa in the event of investment status downgrades by the ratings agencies, and an ensuing capital flight – “an increasingly likely proposition”.
South Africa could tap these resources during balance of payments crises, enabling the government to cover calls on forex reserves.
But according to the Contingency Reserve Arrangement’s rules, South Africa could call only $10bn from it, of which only $3bn could be called without recourse to the IMF.
A lot more money would be required to prevent a run on the rand, Draper said.
The idea of the Contingency Reserve Arrangement as an alternative to IMF conditionalities “therefore holds no water”.
It appears that Brics has anticipated this problem by proposing a credit rating network to balance the apparently baleful influence of the Western credit rating agencies such as Standard & Poor and Moody’s.
In an interview with the Russian TV network RT this week, Zuma fully endorsed this idea.
He said the Western credit rating agencies did not always understand the South African economy.
They were too influenced by the media, he said, for example by giving too much importance to strikes or protests, and ignoring the government’s remedies.
Whether markets would heed a credit rating agency designed to protect Brics economies is doubtful.
The New Development Bank is the Brics financial institution that is most likely to make a difference. At the start, at least, it will be small in comparison with global financial institutions, such as the World Bank.
There is no shortage of development capital in the world, so development economists say, just a shortage of good, bankable projects to invest in.
What constitutes a good bankable project is a matter of definition.
In the RT interview, Zuma complained that the Western development banks treated developing countries like “former (colonial) subjects” by imposing their wills through their loan conditions.
“The Brics’ development bank says whenever people in the Third World… need to do something and they need funds, they are going to be provided, they are going to achieve their objectives without being put under more difficult conditions.”
Pressed by the interviewer to explain the precise problem with the Western development banks, Zuma said: “Nobody says ‘You’ve got people who are unemployed, let us create factories here, and let us have joint ventures to create factories that will beneficiate’ – nobody’s talking about that.”
It seems the government is counting on the bank to finance its industrialisation strategy.
It seems a bit unfair to suggest the Bretton Woods institutions are opposed to doing this, considering, for example, that in 2010 the World Bank gave South Africa a loan of $3.75bn to help build the Medupi power station at a time when funding coal-burning power plants was environmentally incorrect.
The other question is whether the New Development Bank will be prepared to fund the sort of projects South Africa wants it to.
Draper wrote that South African officials were concerned that it was not clear how the Brics economic strategy “will promote more value-added exports and attract investment in minerals beneficiation or processing at source”.
The jury is still out, it seems, on whether the Brics bank will be the remedy South Africa seeks for its economic ills.
The Sunday Independent