BRICS na­tions plan new bank to by­pass World Bank, IMF

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The big­gest emerg­ing mar­kets are unit­ing to tackle un­der-devel­op­ment and cur­rency volatil­ity with plans to set up in­sti­tu­tions that en­croach on the roles of the World Bank and In­ter­na­tional Mon­e­tary Fund.

The lead­ers of the so-called BRICS na­tions — Brazil, Rus­sia, In­dia, China and South Africa — are set to ap­prove the es­tab­lish­ment of a new devel­op­ment bank dur­ing an an­nual sum­mit that starts to­day in the east­ern South African city of Dur­ban, of­fi­cials from all five na­tions say.

They will also dis­cuss pool­ing for­eign-cur­rency re­serves to ward off bal­ance of pay­ments or cur­rency crises. “The deep­est ra­tio­nale for the BRICS is al­most cer­tainly the cre­ation of new Bret­ton Woods-type in­sti­tu­tions that are in­clined to­ward the de­vel­op­ing world,” Mar­tyn Davies, chief ex­ec­u­tive of­fi­cer of Jo­han­nes­burg-based Fron­tier Ad­vi­sory, which pro­vides re­search on emerg­ing mar­kets, said in a phone in­ter­view. “There’s a shift in power from the tra­di­tional to the emerg­ing world. There is a lot of geo-po­lit­i­cal con­cern about this shift in the west­ern world.” The BRICS na­tions, which have com­bined for­eign-cur­rency re­serves of $4.4 tril­lion and ac­count for 43 per­cent of the world’s pop­u­la­tion, are seek­ing greater sway in global fi­nance to match their ris­ing eco­nomic power. They have called for an over­haul of man­age­ment of the World Bank and IMF, which were cre­ated in Bret­ton Woods, New Hamp­shire, in 1944, and op­pose the prac­tice of their re­spec­tive pres­i­dents be­ing drawn from the U.S. and Europe.

“We need to change the way busi­ness is con­ducted in the in­ter­na­tional fi­nan­cial in­sti­tu­tions,” South African In­ter­na­tional Re­la­tions Min­is­ter Maite NkoanaMasha­bane said in a March 15 speech in Jo­han­nes­burg. “They need to be re­formed.”

The U.S. has failed to rat­ify a 2010 agree­ment to give more sway to emerg­ing mar­kets at the IMF, while it se­cured Jim Yong Kim, an Amer­i­can, as head of the World Bank last year over can­di­dates from Nigeria and Colom­bia.

Brazil, Rus­sia, In­dia and China held their first sum­mit four years ago and in­vited South Africa to join their ranks in De­cem­ber 2010. Trade within the group surged to $282 bil­lion last year from $27 bil­lion in 2002 and may reach $500 bil­lion by 2015, ac­cord­ing to data from Brazil’s government.

“If they an­nounce a BRICS bank it will be quite some­thing,” O’Neill said in an e-mailed re­ply to ques­tions on March 15. “At a min­i­mum it sym­bol­izes they can achieve some­thing as po­lit­i­cal group and means lots of other things could fol­low in the fu­ture. It also means that they will have their own kind of spe­cial World Bank, which may aid in­fra­struc­ture and trade projects.” While BRICS lead­ers may ap­prove the cre­ation of a devel­op­ment bank in prin­ci­ple at the sum­mit, there’s still dis­agree­ment on how it should be funded and op­er­ated.

The meet­ing may fail to reach a de­tailed agree­ment this week on how to fund the bank, said Mikhail Margelov, Pres­i­dent Vladimir Putin’s en­voy to Africa. Rus­sia fa­vors cap­ping each side’s ini­tial con­tri­bu­tion at $10 bil­lion, he said in a March 15 in­ter­view in Moscow.

“It will be some time be­fore it will be fea­si­ble for this bank to start fi­nanc­ing say, a rail­way project,” Simon Free­man­tle, an an­a­lyst at Stan­dard Bank Group Ltd., Africa’s big­gest lender, told re­porters in Dur­ban yes­ter­day. “That is some way out.” Agree­ment on pool­ing for­eign-cur­rency re­serves to fend against crises is also “some way off,” South African Trade Min­is­ter Rob Davies said on March 22.

In Oc­to­ber, Brazil­ian Fi­nance Min­is­ter Guido Man­tega said the pool will be mod­eled on the Chi­ang Mai Ini­tia­tive, which gives Ja­pan, China, South Korea and 10 south­east Asian na­tions ac­cess to $240 bil­lion of emer­gency liq­uid­ity to shield the re­gion from global fi­nan­cial shocks.

In­ter­est rates near zero in the U.S., Ja­pan and Europe have fu­eled for­eign in­vestors’ ap­petite for higher-yield­ing as­sets, driv­ing up cur­ren­cies from Brazil to Turkey. Brazil has warned of a global cur­rency war as na­tions take re­cip­ro­cal ac­tion to weaken their cur­ren­cies and pro­tect ex­port in­dus­tries.

Brazil’s real has gained 2 per­cent against the dol­lar since the be­gin­ning of the year, while South Africa’s rand has dropped 8.8 per­cent in the pe­riod. For South Africa, which makes up just 2.5 per­cent of to­tal gross domestic prod­uct in BRICS, the sum­mit is a way to show­case its role as an in­vest­ment gate­way to Africa. Pres­i­dent Ja­cob Zuma has in­vited 15 African heads of state, in­clud­ing Egypt’s Mo­hamed Mursi and Ethiopia’s Haile­mariam De­salegn, for talks with the BRICS lead­ers at the sum­mit. For most of the BRICS lead­ers, it’s also the first op­por­tu­nity to meet Chi­nese Pres­i­dent Xi Jin­ping af­ter his ap­point­ment on March 17. “We will dis­cuss ways to re­vive global growth and en­sure macroe­co­nomic sta­bil­ity, as well as mech­a­nisms and mea­sures to pro­mote in­vest­ment in in­fra­struc­ture and sus­tain­able devel­op­ment,” In­dian Prime Min­is­ter Man­mo­han Singh said in a state­ment yes­ter­day.

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