BRICS: Banding Together for Funding

04/18/2013 5:15 am EST

Focus: GLOBAL

Benjamin Shepherd

Analyst, Breakthrough Tech Profits, Global Income Edge and Personal Finance

Tired of playing backseat to developing countries, the BRICS are combining forces to create their own funding behemoth, says Benjamin Shepherd of Personal Finance.

When then Goldmanite James O’Neil coined the term BRIC to describe the growing power block of Brazil, Russia, India, and China—the ‘S’ for South Africa was appended in 2010—he predicted it would take decades for them to overtake the G7 countries in economic influence.

The global financial crisis of 2007-2009 accelerated that timeline, as the BRICS held their own economically while the developed world suffered a severe recession. It was during this troubled period that these emerging nations began to decouple from the developed world, largely thanks to growing, youthful populations that were gaining in wealth and education.

Already accounting for 40% of the world’s population, more than half of economic growth since 2009, and a quarter of global gross domestic product, the BRICS have become an economic force to be reckoned with. These rising nations now want to consolidate that power and further reduce their dependence on the developed world.

After their recent summit meeting in Durban, South Africa, the BRICS announced that they would create their own lending institutions to rival the World Bank and the International Monetary Fund (IMF), with the goal of reducing Western influence in the developing world.

The World Bank and IMF have long been criticized by emerging market countries as tools of the developed world, used to push their own agendas without regard for the best interests of the countries they’re supposedly helping. The suspicion is that these Western-centric organizations are designed to funnel wealth from the emerging markets into the developed world, in a modern version of colonialism.

The five BRICS nations hope to counter that influence, by keeping emerging-market money in the emerging markets, as well as reducing currency volatility and encouraging trade. The BRICS will seed their new bank with $50 billion in capital shared equally among the partners.

China and Brazil, the two largest economies in the group, also signed a three-year currency swap agreement, covering up to $30 billion a year in bilateral trade.

The most compelling argument for the BRICS bank is that it will deepen trade ties among emerging-market nations, while encouraging economic growth through funding infrastructure projects such as roads, ports, power, and rail systems.

The reserves pool mechanism would serve much the same purpose as the IMF, funding balance of payment problems and stabilizing economies in crisis, through excess reserves provided by stable member nations.

Neither the BRICS bank nor the reserves pool mechanism is actually up and functioning yet. The rudimentary structures probably won’t be in place until the back half of the year. Nonetheless, this bold initiative already is coming under criticism. Some skeptics say the institutions are being created primarily to help fund China’s need for raw materials, while others argue that they will complement the existing efforts of the World Bank and IMF.

Regardless of whether those criticisms prove true, the simple fact is that the new institutions will enable emerging-market nations to secure financing on more favorable terms than currently available to them.

They will also deepen the pool of credit available to emerging-market nations. India is currently seeking to have its credit limit with the World Bank and its subsidiary, the International Development Association, increased for the second time in three years. The creation of a new development bank would keep the loans necessary to fund infrastructure projects flowing if other credit isn’t available.

Over the past few years, the more stable BRICS countries have also been generous contributors to the IMF emergency fund, which has been used to bail out struggling European nations. However, those contributions weren’t being made altruistically. The aim was essentially to buy greater influence in the IMF, so far to little effect.

That’s left the BRICS wondering if they could get such generous funding in the event of another 1990s-style Asian crisis, or if their voices actually count for much in the process.

By creating their own BRICS bank and IMF-style funding mechanism, these up-and-coming countries are essentially signaling that they’re almost ready to go it alone if necessary. The organizations would also allow the BRICS to ultimately expand their club, enhancing their influence with other developing nations and creating new commercial opportunities.

Regardless of their true aims or ultimate outcomes, the new development bank and funding mechanisms are clear signs that the BRICS are consolidating their clout on a global scale.

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