By Anjan Roy
The BRICS summit in New Delhi may be said to have set a milestone in its ambition. It has called for setting up a south-south development bank; it called for making the BRICS nations currencies more effective mediums of exchange for international trade; and, the group defied the United States bid to impose unilateral sanctions on those who maintain links with Iran.
Of these targets, the establishment of a south- south bank can be a critical game changer in the future if it takes off. The core proposal has reportedly been presented in a paper by noted economist Joseph Stiglitz. The idea was enthusiastically embraced by prime minister, Manmohan Singh, and now officially included in the BRICS agenda. If successfully implemented, the new bank could be an emerging nations’ counterpart of the World Bank.
If backed by China, which has huge surplus resources locked up in its foreign exchange reserves, the new bank can have large resources at its command. However, it will also mean that among all the BRICS countries, China would like to call the tunes of the new bank, just as the United States dominated the World Bank ever since it was established. It can be an all-win option for China in that the country is actively looking for alternative investment avenues than placing the major share of the large reserves back into US treasuries. At the same time, placing resources with the Bank, China can gain political leverage that it does not enjoy now. To become an effective player in the bank, India will have to commit adequate resources to the new bank to get significant voting shares.
But is a new development bank really needed? Already, there are any number of multilateral development banks. Apart from the World Bank, you have the Asian Development Bank, the Latin American Development Bank as well as the African Development Bank. These institutions are playing their role in funding projects in their respective regions in addition to the funding from the World Bank. No doubt, large amounts of money are required for funding, say, infrastructure projects in the developing countries some of, which can come from the new bank.
Chinais already funding numerous projects in Africa and Latin American countries bilaterally, promoting mainly resources companies to capture raw materials its ever increasing demand. These funding activities have given China access to the least developed and strategically important resources-rich countries. At the same time, Chinese policies and practices pursued in these countries have often resulted in deep resentment of China. For example, Chinese projects have invariably employed workers from home and not local people. Thus, while extracting natural resources –like iron ore, coal or oil—the projects did not largely benefit the local population.
Dominated by China, the new bank might become a multilateral vehicle for pushing China’s bilateral interests. Such via media should help China in diverting some of the local ire against it. Alternatively, the other members and backers of the institution will have to work doubly to keep the new bank strictly multilateral in its operation. It will be a difficult task, because he who pays will always seek to have the dominant say.
Secondly, what the emerging countries now need is not another development finance institution. But they need a parallel multilateral bank and financing architecture for carrying on trade. It is only when such an independent banking structure is available, the emerging countries will be able to independently stand to their decisions affecting global trade. This has been demonstrated recently in course of the issue of Iran sanctions by the United States and EU.
Although not backed by UN, the sanctions had real punch as the US and EU had instruments available for those countries doing oil trade with Iran to feel the hurt. Since trade is conducted by and large in dollars, the US sanctions and ability to stall payments in dollars created real problems in carrying on trade with Iran. India had to work out alternative banking transactions routes with Turkish banks for some time. Thereafter, India tried to conclude rupee trade which was virtually a barter system for exchange of goods between the two countries through settlement of the outstanding amounts. This was almost a replica of India’s earlier experience of rupee-rouble trade. For a while, it might work, not in the long run unless these are carefully planned in advance.
Admittedly, the BRICS summit in Delhi examined this issue, without coming to any conclusion. A working group will be set up by the five finance ministers to be constituted which will examine these issues, according to the declaration of the BRICS at the end of the Summit. The use of the currencies of the five participating countries can become a tricky subject. As will be readily noticed, the currencies of the emerging countries have fluctuated at varying rates against the US dollar. These changes will reflect on their competitiveness and any one country manipulating its exchange rate can gain against the rest.
Once again, the Chinese have already taken some steps to internationalize its currency by opening renminbi credit lines with select central banks in its neighbouring regions. Besides, it has started a renminbi bonds arrangements through Hong Kong. There were reports about setting up similar centre in London. However, despite these moves, renminbi remains strictly controlled by the Chinese authorities and its convertibility is limited. Unless these disabilities are withdrawn and the currency become free with unlimited convertibility, it can hardly become a medium of greater exchange.
Nevertheless, as the BRICS countries become more financially strong global players, many of these issues would have to be sorted out in the future. The BRICS summit appears to have flagged off some of these. Effective solutions and experiments would evolve out of the compulsions of future development. (IPA Service)