BRICS Development Bank No Cause for Worry

July 17, 2014 2:02 pm Last Updated: April 24, 2016 6:33 am

So Brazil, Russia, China, India, and South Africa set up their own developing bank. Does this mean the end of the dollar, the International Monetary Fund (IMF) or the World Bank? Hardly.

It’s not that the above named institutions shouldn’t be replaced or reformed. Their track records are hardly impressive and some competition might even do them some good. But everything is relative and we should keep things in perspective.

IMF

First of all, the IMF’s main role is lending money to countries that can’t pay their debts, like Argentina and Greece. It usually does this working with interested parties, such as other European countries in the case of Greece.

This is not the case for the New Development Bank (NDB), however: “The Agreement is a framework for the provision of liquidity through currency swaps in response to actual or potential short-term balance of payments pressures,” the BRICS representatives said in a statement.

This has nothing to do with countries on the brink of default like Greece but rather suggests the NDB will supply foreign currency reserves to countries experiencing capital flight, as happened in East Asia in 1997.

Of course, outright lending programs similar to the IMF cannot be excluded in the future, but the initial capital subscription of $100 billion is rather small for this purpose—Greece would have eaten that up with a single bite. 

Also, it is unclear whether any country could access the currency swaps, or future loans, or whether this is just available to members of the BRICS.

In case of the latter, the whole exercise will be rather pointless as only South Africa could be in need of help anytime soon. The BRICS don’t depend on either the IMF or the World Bank so this institution would only serve a purpose if it can influence other developing countries. 

World Bank

However, the NDB has the explicit mandate to provide loans for infrastructure investments in other developing countries as well, thereby providing competition to the World Bank, which traditionally has assumed this function.

So the World Bank will get some competition, which is not a bad thing. More money for infrastructure projects in Africa and other developing countries doesn’t sound too bad. Of course, the five countries will pursue their own hidden agendas with the loans, but they have been doing that anyway through other projects and bilateral cooperation.

If the West is serious in competing for resources and political clout, the World Bank should just provide better value to those in need and the NDB won’t have a big impact.

The Dollar

So is the NDB another nail in the coffin for the dollar as a world reserve currency? Yes, but it’s one of the first and the coffin is big.

Here is the proof: The initial paid in capital of 100 billion is denominated in—guess what—U.S. dollars. Yes, that’s right, the currency this whole operation is supposedly replacing: “The initial total committed resources of the [arrangement] shall be one hundred billion dollars of the United States of America [sic],” continued the members statement.

Why is this the case? Because no other country has the capital markets where other countries can bank their money. So they’ll have to continue doing so in dollars, even the NDB. Until another country has the same capital market infrastructure as the United States, this is not going to change.

Yes, they can set up currency swaps and bilateral trade settlement deals but any surplus has to be primarily invested in U.S. dollars. Not even the euro, which has far bigger and far more developed capital markets than any of the BRICS, could supplant the dollar as the piggy bank of the world. Until now Europe could not set up a unified capital market surpassing U.S. Treasurys and neither can the BRICS.

This is not to say that U.S. policymakers should be complacent and that reserve status will last forever. The NDB is a small stepping stone on the road to replacing the dollar and gaining independence from Western hegemony, but the road is long—and can take a different turn altogether.