New Brics bank needs to be more than simply anti-West

THE Brics grouping started out as a political construct. But for it to gain relevance and enhance its global impact, it has to include commerce and industry.

The Brics development bank, which will now be headquartered in Shanghai, is a crucial step in shifting the group from mere political theatre to one with punch in world affairs.

The rise of the major emerging markets — in particular China, India and Brazil — over the past few decades has shifted the global power balances. The Russian recovery from its disastrous sojourn with communism has also seen its resurgence on the global stage. The South African link now brings the increasingly important African constituency into the conversation.

It also marks a shift in geopolitical power. In 1945, when World War 2 ended, the US and Western nations dominated the global economy and also the world’s decision-making bodies. The Group of Seven’s formation in the 1970s, in which the largest economies of the free world at the time promoted their own interests, epitomised this. But over the past three decades, progress in emerging markets led to a number of economies surpassing those of the G7. The Brics nations now boast economies that have surpassed a number of G7 countries. China now has the second-biggest economy in the world after the US and ahead of Japan. Brazil’s economy has surpassed that of the UK.

And yet global decision-making is still dominated by the US and Western hegemony. It is true that there are already a number of development finance institutions in existence. For example, the IMF and World Bank are at the apex of these institutions, but are dominated by the US. They set the rules. And, when emerging market countries run into trouble, they have to turn to the World Bank and the IMF for funding. This comes with strings attached that include demands for reforms in accordance with the socalled Washington Consensus.

This, of course, generated resentment, especially when politically unpopular austerity is imposed.

At the very least, the new Brics development bank will enable emerging markets to bypass the World Bank and the IMF. This would signify an important shift in the global power balance between emerging markets and the developed world.

Another risk to the established world order is the overwhelming dominance of the US dollar in global trade and commerce. This, again, is a relic of the aftermath of World War 2. But now it is quite possible — some would say even probable — that, over time, the Brics development bank will shift to another currency in competition with the US dollar. This would also represent a major shift in the global power balance.

Still, the Brics construct would have to develop a better reason for existence than just being anti-West. Being anti-something fails to pro-

Instead of it being a development finance institution, it could become a sovereign slush fund for unsavoury regimes

vide a reason for existence. The higher purpose of the organisation is still lacking, especially considering that cohesion even inside the Brics remains fragile, because the countries do not appear to have that much in common.

The danger for the Brics development bank is that it could be used merely as a vehicle to gain global influence. After all, what will the bank do differently to the myriad other development finance institutions?

Merely bypassing the IMF and World Bank is insufficient. If anything, the loan conditionality of the IMF and World Bank are part of their risk-control measures. The reforms that they insist on are meant to improve the circumstances that brought the distressed countries into trouble in the first place.

If the Brics development bank simply wants to gain favour with less savoury regimes by advancing finance without putting in place risk-mitigation measures, it may well be doomed to failure. Instead of it being a development finance institution, it will merely be a sovereign slush fund. South Africa can ill-afford to be funding such misadventures.

Hart is chief strategist for Investment Solutions