This week, the Financial Times confirmed that BRICS countries — Brazil Russia India, China, and South Africa — have set up their own international bank called the New Development Banks or the BRICS Development Bank. It’s an emergency bank for the emerging markets.
Except, as I mentioned last week, you can’t call them that any more.
Either way, the BRICS are branching out on their own.
This move fits in with Kris’ Megatrend idea. He says that the power is shifting from the US economy to the Eastern economies.
I’ll explain more on this in a minute. But first…
Why would the BRICS establish their own bank when there’s the World Bank and the International Monetary Fund?
It comes down to two reasons: unfair allocation and ‘strings attached’ loans.
Basically, the BRICS feel they are unfairly represented with voting rights in both the World Bank and the IMF.
You see, the head of the World Bank always selects a leader from a European country. And the American President at the time selects the person for the top job at the IMF.
Both Brazil and China have stated this method of selection is unfair to them. And with every new leadership choice, the voting rights remain the same for these ‘frontier’ countries.
To see what I mean, have a look at the picture below.
Percentage of Global GDP Compared to IMF Voting Rights
Source: Financial Times
Click to enlarge
As you can see, America has the lion’s share.
Yet China’s tipped to overtake America as the world’s leading economy this year.
Also, the BRICS make up one quarter of the world’s economy.
In spite of these five countries contributing more GDP combined than America’s they don’t even come close to the same amount of voting power. In fact, these growing markets only have a total 11.0% voting rights to America’s 16.8%.
It hardly seems fair.
There’s a new player in the Global Financial System
The unjustness of it all is what prompted the BRICS to establish their development world bank. And because the biggest complaint amongst them is fairness, they have laid out some fair leadership rules.
Firstly, the BRICS Development Bank will have a five year rotating presidency. That is, each country will have a chance at presidency. Also, there will be four vice presidents. One from each country. And finally, they will answer to a board of directors selected from senior bureaucrats from each of the countries.
From a funding point of view, each member has seven years to contribute US$2 billion to the fund with a further US$50 billion in guarantees.
However, the bureaucrats are already squabbling. The distribution of voting rights is already an issue. Furthermore, they struggled to agree on where to locate the bank. China reckoned they should host the bank. India thought, given the clout of Chinese financial institutions, that’s a bad idea.
South Africa claimed it’d be the perfect ‘neutral’ spot and could better serve the rest of Africa as an infrastructure bank (many African countries felt the current international bank lending requirements are too tough).
The countries finally settled on Shanghai.
But let’s put the nuts and bolts aside.
What this really demonstrates is that there is shift in power happening right now.
The Financial Times argued the BRICS have gone down this path because they could no longer knock on the door of the IMF for emergency cash.
However, they fail to realise the long term implications of this.
This is a once in a lifetime economic power shift.
It’s tempting to question the long term financial stability of this new ‘slush fund’. You have to remember that America still controls the IMF in spite of accumulating USD$60 trillion dollars of perhaps unrepayable debt.
These frontier markets are taking control of their own economies.
While the intimate details of the bank aren’t available, don’t let the cloudy data fool you. In decades to come, we may reflect on this creation as we do the signing of the Bretton Woods agreement. That was an historical financial shift where the world left the gold standard behind.
Simply put, this creation shows the BRICS — for now — will work together. This marks the destruction of economic governance as we know it. And the emergence of a new frontier power.
Editor, Money Weekend