Signup for our free newsletter:

BRIC Investing

Written By Briton Ryle

Posted July 8, 2014

bricimageThe underdogs of global economies are teaming up to form an new banking authority that will challenge the financial superiority of western economies. The BRICS group of nations (Brazil, Russia, India, China and South Africa) will be meeting in Brazil next week to finalize a new development bank tailored to the unique needs of developing countries.

The new $100 billion development bank could some day rival the financial clout of the long-standing International Monetary Fund and World Bank. While both of these banking structures are mandated with providing financial assistance and emergency loans to all member nations regardless of their level of development, certain developing nations have always felt a little short-changed and marginalized by the developed western members of the consortiums. So they are forming a financial club of their own.

Just what is the purpose and intent of such a financial structure? Membership invitations are already being extended beyond the original five amigos. How much of a challenge will this new banking structure present to the financial dominance of developed western economies?

A Bank Focussed on Banking

The purpose of the new BRICS development bank is quite obviously to assist in the financing of development projects and programs adopted by its member countries. While such assistance has long been offered by the IMF and World Bank, many developing nations have resented the two institutions’ meddling in their internal affairs.
For instance, as a component of the United Nations Development Group, the World Bank has several objectives besides simply handing out emergency loans. It will base the approval of loans on other considerations besides the borrowing nation’s ability to repay the money.

Some of the World Bank’s latched-on goals include eradicating extreme poverty and hunger, achieving universal primary education, promoting gender equality, reducing child mortality, improving maternal health, combating AIDS, Malaria, and other diseases, ensuring environmental sustainability, and developing greater political integration and cooperation.

While these goals are admirable and greatly needed, many developing nations find it extremely difficult committing themselves to such add-on objectives in the face of a crippling financial crisis. It would be like loosing your home in a fire, going to your bank for an emergency loan, and being asked to change a number of your personal affairs first before qualifying for the loan.

When nations are desperate for financial relief, they need financing before their countries fall completely apart. The last things on their minds are pollution controls and other social changes, admirable though they may be.
“The new development bank would help cover growing demand for project financing that has not been entirely met by global multilaterals, which, for years, have been heavily criticized for meddling in the domestic policies of sovereign borrowers,” Reuters summarises the founding nations’ intent for establishing the new institution.

Insulation from Global Crises

Another important benefit the new development bank would offer its members of developing nations is some needed protection from the economic flu bugs of western economies. The virus of the latest global financial crisis which surfaced in 2008-09 actually started to grow several years before in the early 2000’s in the largest economy in the world – the U.S.

As western banks became more and more aggressive in locating new home owners to whom they could issue new loans, they would periodically package their riskiest mortgages into stocks for sale on the open market. These “toxic” mortgage-backed securities were then dumped onto an unsuspecting global marketplace, ending up in the portfolios of banks and funds all over the world, including in developing nations.

When the housing market in America finally grew too ill to continue and collapsed to the ground, the whole world caught its financial flu. But because their economies were already weaker then western economies, developing nations fell harder, many of which have yet to even begin their road to recovery. Financial assistance was now harder to come by, and the costs of any assistance that was available became too burdensome for such ailing developing economies to shoulder.

A new development bank catering to the specific needs of developing nations would tailor loans and other financial assistance and investments to the situations of each member country, taking its fragile state of development into account. It would provide a source of funding that would not readily dry up when western economies routinely stumble due to their happy-go-lucky carelessness with their markets.

Expansion Already on the Agenda

The BRICS development bank is not even up and running yet and already its members are extending invitations to other developing nations to join their financial club. After attending the summit to finalize the arrangement in Brazil next week, China’s president Xi Jinping will be swinging through other nearby countries including Argentina, Venezuela and Cuba.

Russia has also been courting closer ties with Argentina, with the two countries recently signing a non-proliferation of arms into space treaty. Argentina’s Foreign Minister Héctor Timerman supported the closer ties as a “strategic association” that is “based on a common vision about the essence of international relations, values and objectives of common well-being that both nations are building”.

Given Argentina’s recent close brush with credit default as western governments press it to honor its loan payments to them, the invitation to join the BRICS financial club of developing nations will likely be eagerly embraced.

We mustn’t be surprised, then, to see the soon-to-be instituted BRICS development bank add a great many more letters to its name, as the incentive for developing nations to flock to its personalized and less complicated structure entices them away from its western-dominated banking alternatives.

And then there were three. The IMF and World Bank aught to pay close attention to its new competitor. Western governments as well should seriously reconsider their positions if they wish to compete against it. There’s a new bank in town, and it plans on playing the financial game differently. This one has an independent head on its shoulders, and it will not be so easily controlled.

Joseph Cafariello