The BRICS Summit has announced the setting up of a BRICS development bank, on the lines of existing multilateral institutions like the World Bank and ADB, headquartered at Shanghai. The BRICS development bank envisages an equity base of $50 billion shared equally by the five founders. It also envisages a further $100 billion initially as advances by member countries. These advances will be in the shape of subscribed bonds with countries subscribing them according to their capabilities. Thus, if China even subscribes to the most of the bond issues, it will not make a difference to how the funds are administered, as that will be managed by the banks management vested according to their equity. This is unlike the World Bank, where some are more equal than others. For instance the Indian nominated director has absolutely no say on critical policies that are set by the US appointed President and Western European directors.
The announcement of the formation of the BRICS development bank will have as much an impact about how the non-G7 countries manage their economies and their foreign reserves, as it does on the intellectual discourse. The development priorities and agenda which was hitherto set by western experts responding mostly to western priorities and notions will now have to compete with an intellectual tradition that is and can be very different. For instance western theorists have for long rejected state owned companies as wasteful and inefficient, but China has proved that SOE’s can be economic drivers and major exporters, and also very profitable. Similarly the co-operative sector, largely rejected as Marxist idealism, might now find a new relevance. Again industrial investment, now entirely left to the western dominated private sector, might find support.
Economists are as prone to herd behavior as any other animals. They veer towards the money and by the generally prevalent economic policy consensus, right now the Washington Consensus. This has as its main priority the maintenance of the status quo now tilted wholly in favor of North America and Western European interests. By encouraging a different way of thinking and exploring different intellectual possibilities, we might see the beginning of a global intellectual churn that will expose the prevalent casino capitalism for what it is and how vulnerable it has made global economic and financial order to the predations of western merchant banking. Clearly the impact of the BRICS bank is going to be more than economic and financial.
The BRICS bank is the first step towards reforming the world system. It has to be read against the decision of the BRICS nations to do trade more with each other on the basis of currency swaps. To understand the importance of this, it would be necessary to understand the flaws and inherent weaknesses in the existing international system, which is in a shambles.
The world barely escaped a melt down when bank after bank either failed or were on the verge of failing in the USA. The US Administration of President Barack Obama fashioned out a rescue by pumping in almost a trillion dollars to shore up the banks and save the giant US automobile industry, which is still that country’s major industrial driver. This money was made available by putting the printing presses of the various US Federal Reserve Bank’s on overdrive. Little wonder then that the UD dollar is devaluing against most world currencies. But the problem is that the US dollar is the world’s preferred currency. Today almost 61% of the world’s reserves are held in US currency. Another 24.5% is held in Euros. This clearly indicates that the USA is the world’s preferred banker. On the other hand if the USA continues with its profligate ways and keeps adding to the supply of dollars, they value of dollar reserves will keep dwindling.
Now lets turn to see the system actually works. Countries like China and India produce goods and services at low cost for consumption in the USA, which in turn pays them in dollars, which they in turn deposit in US banks. Give or take a little. Since money cannot sit still, this money in US banks is then lent to Americans, who today have the highest per capita indebtedness in the world, to splurge on houses, cars, plasma TV’s, computers and play stations which they can often ill-afford. This was well understood, but like the people who kept investing with Bernard Madoff, countries like China, Russia, Japan, Kuwait, India and others keep investing in US securities at interest rates mostly between 0.5-2%. Thus, in effect the rest of the world was plying the USA with cheap credit, encouraging it to splurge even more. Unfortunately there was and is no global regulator to caution the US on its profligacy or force it to mend its ways.
The Breton Woods Conference of July 1944 took place under the fast receding shadow of the WWII and when the US was literally the last man standing. Lord Keynes had in mind a more elaborate scheme that called for the establishment of an international reserve currency but this had to be shelved in the face of American obduracy. Keynes’ proposals would have established a world reserve currency (he proposed it be called “bancor”) to be administered by a World Central Bank. This Central Bank would have been vested with the possibility of creating money and with the authority to take actions on a much larger scale.
But the United States, as a likely creditor nation, and eager to take on the role of the world’s economic powerhouse, baulked at Keynes’ plan and did not pay serious attention to it. As a result, the IMF was born with an economic approach and political ideology that stressed controlling inflation and introducing austerity plans over fighting poverty. But the fact that the US has been the world’s biggest deficit country for several decades and seemingly least concerned about it seems to have eluded the IMF. This and the fact that the US dollar is the world’s preferred reserve currency is now the root of the world’s economic problem.
This international system was unilaterally abrogated when in 1971 US President Richard Nixon US delinked the dollar from the gold standard. Consequently the US and its even more profligate citizens have an apparently endless access to easy credit to satiate their sundry appetites. In this way the ever growing annual US trade deficit becomes the de facto engine of growth for very many economies, such as China and the ASEAN countries.
In the past few decades the GWP has been growing at a much faster rate. In 1985 it was growing at 2.76%. In 2005 it grew by 3.56%. Much of this is due to the changing of gear in countries like China and India that began their great leaps forward. China’s growth in particular has been truly astounding. The growth trajectory of these countries has made people to review long held notions about how this century is going to shape up. It seems that in 2050 it will indeed be a very different world economic order.
The economic balance of power is shifting towards Asia. Like Communism the ideology of the Washington Consensus rammed down the world’ throat has been proved to be a failure. It is time we begin to think differently. Many think that the world’s four fastest growing economies Brazil, Russia, India, China and South Africa (BRICS) must now become the basic building bricks of the new order.
With the IMF failing to play its role, it devolves upon these five growth engines to bring more order into the world system. Casino capitalism can no longer be the guiding ideology. It must be swiftly discarded and a more responsive and intelligent system best suited to all and not just the USA is the need of the day. It is time we revisited Lord Keynes’ proposal for a global reserve currency and consider establishing a system to regulate and manage it.
The USA and even the Euro zone will not want to relinquish the duopoly they have established whereby 91.4% of the world foreign reserves are held in their currencies. While the dollar alone accounts for 61% of global reserves of $11864 billions, the USA’s own foreign reserves stand at a measly $ 148 billions. China’s reserves alone stand at $4009 billion while Russia’s is $467 billion. India is way behind here with only $315 billion, but this is still 50% more than that of Germany, twice as much as those of and France and Britain. Clearly the time has come when we must put to work our money for ourselves and not be vulnerable any more to the gambling and speculative predilections of the so-called and over paid professionals in Wall Street. The BRICS bank, now tentatively called the New Development Bank is indeed a new and long overdue development.
July 17, 2014