Saturday, 12 July 2014

VI BRICS Summit: Will the BRICS Bank Help Reform Global Financial Architecture?

The VI BRICS Summit, which Brazil will host in Fortaleza and Brasilia from 14th July, will unveil a new multilateral development bank not led by the West. Let´s call it the BRICS bank (it may be called the New Development Bank[1]). I want to reflect on the normative power that would be unleashed in changing global financial governance by the creation of the BRICS bank. What will be the prospects for hastened changes in the global governance structure? Will it be rebalanced away from advanced-country dependence toward the BRICS? The answer comes in three steps:

  • First, the starting point is the current imbalance of emerging powers´ capital shares and voting rights in the existing multilateral banking system; the more imbalanced it is, the higher the pressure to rebalance toward fairer representation.
  • Second, the extent of excess demand (financing gap) for multilateral soft loans will define the demand for concessional flows from the new BRICS bank; joint with relative lending capacity, this will guide how much business – hence political influence- the existing Bretton Woods institutions and Western-led regional development banks might lose in favor of the new competitor bank.
  • Third, how much time it will take for a new BRICS bank to generate the knowledge and ´certification value´ that the existing IFIs have acquired already.

@First: The recalibration of the world economy toward the BRICS is still not reflected in the global financial architecture. The BRICS represent 46% of world population and almost 20% of world GDP in current dollars[2]. At the World Bank the five BRICS together have just 13-14% of shares and votes, according to the IBRD Statement of Subscriptions to Capital Stock and Voting Power (Table 1). By contrast, the G7 group of advanced countries represents only 15% of world population; its share of world GDP corresponds roughly now to its voting shares at the IBRD.

Table 1: IBRD Statement of Subscriptions to Capital Stock and Voting Power, October 2013

Country Group
Capital Stock Shares, %
Voting Power, %

Europe has been a stumbling block toward reform, staying overrepresented in the executive boards of World Bank, IMF and regional development banks. Although overrepresented, Europe´s voice is not united and hence weaker than necessary. Meanwhile, the US retains a blocking minority at the IMF (and informally, joint with allies, at the other international financial institutions). Early 2014, international financial reform and the G20 have suffered a serious blow after the US Congress refused to ratify a capital increase for the International Monetary Fund agreed four years ago. Advanced economies have reneged on their promise to support greater voice and representation for the BRICS and other emerging economies in global governance arrangements. BRICS have thus little incentive to take more responsibility as important stakeholders of the global economy and as financiers of global public goods.

The Asian Development Bank, firmly ruled by Japan and the US, provides an especially stark case of distorted representation. ADB members who are also members of OECD hold 64.6% of total subscribed capital and 58.5% of total voting rights. By contrast, China and India (the other three BRICS are not ADB members…) combine a mere 10.9% of voting rights (Table 2). Japan and the US are by far the biggest shareholders in the ADB with 15.7 per cent and 15.6 per cent, respectively. China, whose economy in dollar terms surpassed Japan’s in 2010, has just 5.5 per cent of voting rights; India, soon to be Asia´s and the world´s most populous country, has 5.4%.

Table 2: ADB Subscribed Capital and Voting Power, end 2013

Country Group
Subscribed Capital Shares, %
Voting Power, %
BRICS (China + India)

Source: Author´s calculation;


An immediate negative consequence of uneven representation is the negative impact on capital resources (to which China could amply provide) and hence lending capacity. Financial constraints on both the concessional window ADF and ordinary capital resources (OCR) are stretching ADB’s capacity to the limit. If ADB is to maintain meaningful levels of involvement in poor ADF countries, it has to find creative ways to enhance its financial capacity[3] – or it has to change representation as Japan´s fiscal resources are limited by rapid ageing, with the risk to turn Japan into a ´middling donor´ (Sawada, 2014)[4]. Although Japan is the largest financial contributor to the ADB, its policy positions are usually framed within the parameters set by the US-Japan relationship, which has effectively limited higher representation of and core funding by China and India in particular.

@ Second: Potential demand for concessional flows from the new BRICS-Bank and its relative lending capacity will determine what share of the business – hence political influence- the existing Bretton-Woods institutions and Western-led regional development banks might lose in favour of the new competitor bank. In a recent UNCTAD paper, Stephany Griffith-Jones has assembled the evidence for the shortage of long-term finance, especially to finance infrastructure, in the developing and emerging countries[5]. Current annual spending on infrastructure in developing and emerging countries has been estimated at $0.8-0.9 trn; existing multilateral development banks contribute merely $40-60bn to that sum while the bulk is being financed from national government budgets ($500-600bn). The annual spending on developing-country infrastructure to finance access to water, electricity, transport and other infrastructure needed to combat poverty, deprivation and climate change have been estimated by various sources (MacQuarie; Estache; MDB working group on infrastructure) at $1.8-2.3trn. The resulting financing gap would be around $1.0-1.4trn.

Figure 1: The Annual Infrastructure Financing Gap

Source: Bhattacharia & Romani (2013)

China – not the other BRICS - has the financial fire power to close a large part of that gap – given the wright incentives and institutions. The politically correct way is to write BRICS and to mean China. The fact that the financing power between China and the other BRICS is very asymmetric, however, is central to future financial governance developments. The new BRICS bank will initially have 50bn subscribed capital, to which each of the five BRICS will contribute $10bn. This sum is negligible by China´s standards, but corresponds to 2.5% of South Africa´s current GDP and almost 9% of her annual tax revenues. Note, however, that just $10bn of capital has to be paid-in ($40bn in guarantees) and that up to 45% of the BRICS bank capital will be allowed to be held by non-BRICS[6]. Nonetheless, the political prior to have equal say at the BRICS bank joint with the limited firepower notably of South Africa provides a certain constraint on the BRICS bank capacity to divert an important part of the multilateral lending business away from the traditional development banks. This may also explain why China has been pursuing recently the creation of yet another multilateral development bank (China-led), the Asian Infrastructure Investment Bank (AIIB), with registered capital planned at $100bn initially double the size of the BRICS bank[7].

@ Third: Stephany Griffith-Jones (op.cit.) provides some estimates on the BRICS bank lending capacity based on the assumption of an eventual total capital endowment of $100 bn. According to her estimates, the level of annual lending could reach, after 20 years, a stock of loans of up to US$350 billion, equivalent to about US$34 billion annually. The latter amount could be used for investment projects worth at least US$68 billion annually, given that there would be co-financing by private and public lenders and investors. Similar to the Latin American CAF development bank, a loan-capital leverage ratio of 2.4 underlies these estimates, among others (profits, rating level). The prospective annual BRICS bank lending sum would be roughly half of the annual flows provided by the major multilateral Western-led IFIs, worth $63bn in 2011, according to latest OECD data. Without taking account of the AIIB and the smaller multilaterals, the BRICS bank might be able to capture roughly a third of mainstream development bank business. Not negligible at all, enough I think to hasten global governance changes. The BRICS bank will be wise to focus on infrastructure finance not merely for the present excess demand but also to deploy China´s knowledge and comparative advantage in that area. A focus on well-defined project finance will help the viability of return to lending for the new BRICS bank.


[1] Christopher Wood (2014), The BRICS New Development Bank and Currency Reserve Arrangement at a glance,, The South African Institute of International Affairs, Pretoria, July 8
[2] VI BRICS Summit (2014),
[3] ADB has recently presented a new proposal to enhance ADB’s financial capacity through a modified management of its capital resources. The proposal entails terminating ADF loan operations and combining ADF loans (and part of ADF liquid assets, projected to be USD 35.3bn in total) with the OCR balance sheet in January 2017. This would increase OCR equity from a projected USD 17.9bn to USD 53.2bn. ADF would henceforth provide only grant assistance, while ADB would continue concessional lending through its OCR window
[4] Yasuyuki Sawada (2014), Japan’s Strategy for Economic Cooperation with Asian Countries, Policy Research Institute, Ministry of Finance, Japan, Public Policy Review, Vol.10, No.1, March 2014.
[5] Stephany Griffith-Jones (2014), „A Brics Development Bank: A Dream Coming True?”, UNCTAD Discussion Papers #215. Her estimates are based on a presentation by Amar Bhattacharya and Mattia Romani (2013), “Meeting the infrastructure challenge; the case for a new development bank”. 

Sunday, 29 June 2014

BRICS under the Second Cold War

“We are slowly but surely moving toward a second Cold War, which no one needs,” Russian Prime Minister Dmitry Medvedev said in a recent Bloomberg interview. He blamed U.S. President Barack Obama, his one-time partner in a reset of relations, for a lack of “political tact.” Upon closer inspection, especially China and Russia may indeed feel being increasingly circled by the US and US allies. Despite Russia´s occupation of the Crimea and China´s territorial disputes with its neighbors in the South China Sea and the Senkaku Islands, it is not obvious at all that they only have to blame themselves. Worried about its relative economic and political decline, the former hegemon – the United States of America – has been turning increasingly ´nasty´ during the Obama years.

From a Russian perspective, the occupation of the Crimea in Spring 2014 aimed at blocking a scheme by the North Atlantic Treaty Organization (NATO) to roll right up to the Russia’s western border. If the Ukraine crisis has indeed set up a Second World War, it is linked to the chaos in which the First Cold War ended: Moscow has long asserted that the Soviet Union allowed Germany to unify only in return for a pledge from Washington never to expand the Atlantic alliance. While refuted by the West, papers and files released by various leaders (Kohl, Gorbachev, Bush Sr, Baker), providing first-hand evidence on the February 1990 talks leading to German reunification, provide some substance to Russian grievances that there had been deals that NATO would not extend to the East[1].

Hillary Clinton, then US Secretary of State, had explicitly formulated a new Russia Containment strategy in 2012 as a reaction to Russia´s attempts to deepen economic integration with her neighbors. Clinton told a news conference in Dublin that the US was trying to prevent Russia from recreating a new version of the Soviet Union under the ruse of economic integration. “Clinton vows to thwart new Soviet Union” appearing on the Financial Times website on 6 December 2011 had caught much attention.

From a Chinese perspective, the US containment of Russia is not driven by impulse but has to be read in the context of China´s rise: “To keep a potential strategic competitor at bay and preserve a uni-polar world order under Pax Americana, Washington must prevent Moscow from building a Eurasian Union that includes Ukraine – and thus thwart any chance of a revived Soviet Union. America’s strategic interests demand that it does this, even at the risk of further straining relations with the Kremlin.”[2] (Note that this view was chosen as editor´s pick.)

Meanwhile, many Chinese officials have come to think that the US and its closest regional allies Japan and Australia have embarked on a China Containment Policy[3], despite official US declarations to the contrary. Building military, economic, and diplomatic ties with countries adjacent to China's borders, the US have been frustrating China's own attempts at alliance-building and economic partnership. The presence of American military in Central Asia, recently strengthened ties with South Korea and Japan, efforts to improve relations with India and Vietnam and the Pivot to Asia Strategy for increased American involvement in the Pacific have been pointed to as evidence of a containment policy.

Sir Alan Winters has recently argued, convincingly in my view, that the Trans-Atlantic Trade and Investment Partnership (TTIP) and the Trans-Pacific Partnership (TPP) can´t naively be discussed in a purely economic context (as many economists have done) but has to be viewed primarily in the context of a particular US foreign and economic policy package[4]. TPP, according to Sir Alan, is the most visible and advanced element of this US package. The problem with TTP[5], to quote him:

The TPP is a deep international integration arrangement between the US and 11 other Pacific states, which would cover 40% of world GDP and over 30% of world trade. It seeks to address as series of issues that 21st century commerce, but arguably its most obvious feature is that it excludes China – the world’s largest international trader and before long the world’s largest economy. There are, of course, the ritual genuflections towards ‘open regionalism’ – China can join if only it will agree to the necessary policy requirements – but this is about as much use as saying the Chief Rabbi can dine with you while insisting that the menu contains pork.

Putting the Ukraine crisis, China´s territorial disputes, TPP and TIPP into broader historical context then (rather than to portray them as Russian or Chinese aggression in isolation), points to the imprudence (to put it mildly) and enormous cost of a ´defensive´ US diplomacy in a recalibrated world where the economic gravity has been shifting East. University of Yale historian Paul Kennedy has provided the historical antecedents and textbook explanation for imperial overstretch in his 1987 classic The Rise and Fall of the Great Powers. Kennedy highlighted the precedence of the "four modernizations" in Deng Xiaoping's plans for China—agriculture, industry, science and military—deemphasizing military while the United States (and the Soviet Union) was emphasizing it. He predicted that continued deficit spending, especially on military build-up, would be the single most important reason for decline of any Great Power. Table 1, relating military spending to GDP for some ´Great Powers´ in 1989 (end of First Cold War) and latest (start of Second Cold War) shows that Russia and the US still spend more than double of their resources (as a fraction of their GDP) on the military than the other ´powers´.


Table 1: Military Spending as % of GDP, 1989 v 2012

United States

* EU = average France/UK


 Under the Second Cold War, both multilateralism and the provision of global public goods are going to suffer. The United States have ceased to be a benevolent leader (if they ever were). In a thought provoking blog post, Danny Quah[6] has just referred to Hegemonic Stability Theory (HST), initially inspired by the late economic historian Charles Kindleberger´s study of the 1930s recovery from the Great Depression. Just as it was the US that led the way to global prosperity after WW II, HST assumes that the interest of the US and of the rest of the world will coincide. In the HST perspective (shared and promoted by ´Atlanticism´)

“as global hegemon the US cannot help but be benevolent. The US provides global public goods on which the rest of the world either shirks responsibility or cannot afford. Under HST, the world looks with respect and admiration at its hegemon. The US’s soft power is complete: what the US wants is automatically what the rest of the world wants.” (Quah, 2014)

Quah doubts that the HST proponents can still reconcile their view with recent events and attitudes. He points to selfish action and rethoric by US Federal reserve officials in early 2014 and the reaction by Raguhram Rajan, the highly-respected Governor of the Reserve Bank of India, who had complained that international monetary cooperation had broken down when the emerging countries needed it while the latter had helped the West to recover from their self-bred crisis in 2008-09. (ShiftingWealth had analyzed the issue on February 1st in “Stop Preaching Emerging Countries, Blame Ben and VIX®”). To be sure, there a couple of further examples of US selfishness: The long failure to reign in its CO2 emission (accounting for 40% of world total); the traditional macroeconomic blame games on China, Germany and other performers; the use of US banking laws to enhance US strategic positioning (witness the BNP case): On the latter, Felix Salmon has just written a superb piece[7] that concludes (sic!):

 “No other country can get away with this: what we are seeing is unapologetic American exceptionalism, manifesting as extraterritorial powermongering. Using financial regulation as a vehicle for international power politics is extremely effective. It is also very cheap, compared with, say, declaring war. US officials never apologise for the fact that their own domestic law always trumps everybody else’s; rather, they positively revel in it. The consequence is entirely predictable: a very high degree of resentment at the way in which the US throws its weight around. The result is that genuine international co-operation is difficult to obtain, and generally shortlived.”

 But the end of American exceptionalism must be near. Quah stresses rightly that with the center of gravity having shifted 5000km east, drawn by the rise of China and the rest of east Asia, what is good for the BRICS is directly good for 40% of the world population and indirectly for the rest that trades with new economic center: “Soon perhaps even more than what is good for the US economy, it will actually be what is good for the East that is good for the global economy.

What the end of US hegemony and the Second Cold War mean for the multilateral system will be analyzed on these pages shortly. Think Bretton Woods institutions, OECD, WTO, multilateral development banks…

[1] Mary Elise Sarotte (2009), „Enlarging NATO, Expanding Confusion“, New York Times, November 29.
[3] Joseph S. Nye jr (2013), „Work With China, Don´t Contain IT!”, New York Times, January 25.
[4][4] L Alan Winters (2014), „The Problem with TTIP“,, May 22.
[5] Winters makes a second point, very important to the EU: “By signing TTIP Europe would be tying itself to a static rather than a dynamic part of the world economy and substantially reinforcing the US’s exclusionary policies.”
[6] Danny Quah (2014), „It is not easy to be the leader of the world“, June 27.
[7] Felix Salmon (2014), “America prosecutes its interests and persecutes BNP”, FT, June 5.