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BRICS to launch own version of IMF, W. Bank

Russia’s President Vladimir Putin, left, sits with Brazil’s President Dilma Rousseff during an agreement signing ceremony at the Planalto Presidential Palace in Brasilia, Brazil, yesterday.

Creation of ‘alternative’ financial institutions tops agenda at summit but critics question worth

WASHINGTON — Fed up with US dominance of the global financial system, five emerging market powers this week will launch their own versions of the World Bank and the International Monetary Fund.

Brazil, Russia, India, China and South Africa —the so-called BRICS countries — are seeking “alternatives to the existing world (banking) order,” said Harold Trinkunas, director of the Latin America Initiative at the Brookings Institution.

At a summit that starts today and finishes on Thursday in Fortaleza, Brazil, the five countries will unveil their version of the IMF: a US$100 billion fund to fight financial crises, called the Contingent Reserve Arrangement (CRA). They will also launch a World Bank alternative, a new bank that will make loans for infrastructure projects across the developing world.

The five BRICS countries will each invest US$10 billion in the lender, tentatively called the New Development Bank. Another US$50 billion is expected to come as other countries sign up.

Comparatively, the IMF has assets of more than US$300 billion; the World Bank, US$490 billion.

The BRICS powers are still jousting over the location of the bank’s headquarters, but Brazilian Finance Minister Guido Mantega told Folha de Sao Paulo yesterday that Shangai looks like the most probable location. He also said that the first president would likely be Brazilian.

The headquarters skirmish is part of a larger struggle to keep China, the world’s second-biggest economy, from dominating the new bank the way the United States has dominated the World Bank, which is based in Washington.

The bloc comprises countries with vastly different economies, foreign policy aims and political systems — from India’s raucous democracy to China’s one-party state.

A bigger voice

Whatever their differences, the BRICS countries have a shared desire for a bigger voice in global economic policy. After decades of rapid growth, the five countries account for nearly one-fifth of world economic activity.

Each has had painful experiences with Western financial dominance: they’ve contended with economic sanctions imposed by Western powers or they’ve been forced to make painful budget cuts and meet other strict conditions to qualify for emergency IMF loans.

Critics, however, are sceptical of the impact that the two new institutions will have on the world banking order, noting that the CRA — like the Chiang Mai initiative before it — requires the borrowing country to rely initially on the IMF.

Brazil’s Mantega confirmed that the IMF will have an important role. “We will be advised by the IMF, which will be asked to assess the countries’ solidity,” he told Folha in an interview yesterday.

The new financial institutions arrive as developing countries contend with slower economic growth. They also are vulnerable to financial shocks as the US Federal Reserve scales back massive bond purchases meant to stimulate the US economy.

As the Fed’s easy money policies diminish, US interest rates are likely to rise and draw money away from emerging markets and back to the United States. That could rattle financial markets in the developing world, driving stock prices and currencies down.

No ‘dependency’

In a bilateral meeting yesterday, Brazilian President Dilma Rousseff and Russian leader Vladimir Putin expressed support for the creation of the two financial institutions.

Rousseff received Putin in the presidential palace in Brasilia a day before the start of the BRICS summit in Fortaleza.

Speaking to reporters following the meeting, Rousseff said the proposed bank would top the summit’s agenda and she hoped the proposed institution would be approved there.

The five countries “are among the largest in the world and cannot content themselves in the middle of the 21st century with any kind of dependency,” Rousseff said.

Both leaders steered clear of thorny international issues like the Ukraine crisis, with Putin stating simply that “we are united in our analysis of the key international problems.”

“The focus of our attentions has been the economic ties,” Putin added.

Cohesion

Economic growth in the five countries is projected to average 5.37 percent this year, half the pace seen seven years ago, according to the median estimate of economists surveyed by Bloomberg. Brazil and Russia will grow 1.3 percent and 0.5 percent, respectively.

Yuri Ushakov, Russian presidential aide on foreign policy, said in an interview that the group’s growth rate is still above that of the global average and that its economic and political weight is increasing.

The BRICS have evolved from the original term coined in 2001 by then-Goldman Sachs economist Jim O'Neill to describe the growing weight of the largest emerging markets in the global economy. In 2011, South Africa joined to give the BRICS a broader geographic representation.

The group’s track record in pursuing a common agenda on the world stage has been mixed.

The five countries failed to agree on a candidate to head the World Bank in 2012 and the International Monetary Fund in 2011, two posts at the heart of their demands for more say in global economic matters.

Herald with AP, Reuters, Bloomberg, online media

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