China’s clout on show with BRICS bank formation

KAY JOHNSON
AP Business Writer

MUMBAI, India (AP) — A developing nation version of the World Bank was formally agreed this week two years after India proposed the idea to Brazil, Russia, China and South Africa. Yet even as the five governments hailed its formation, there were questions about whether four of them might simply be paying to move from U.S. financial hegemony to dominance by another economic superpower: China.

India ensured a sense of parity with its insistence that each of the countries behind the New Development Bank contribute equal shares of $10 billion to its initial $50 billion capital. Like the World Bank, the new institution plans to fund development projects in poor countries.

But India failed in its bid to host the new bank’s headquarters in New Delhi. It will be located in Shanghai instead.

The headquarters skirmish was 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 and International Monetary Fund. Losing out to Shanghai set off a flurry of concern in Indian media that instead of the consensual approach that India originally envisioned, the new institution could be used to promote China’s priorities.

“At worst, India has been conned by China into giving Shanghai $10 billion, to start off with, to pursue Chinese interests in the developing world,” columnist Mihir S. Sharma wrote in the Business Standard newspaper.

India has long been suspicious of its giant neighbor to the north and border disputes still fester. Plus, for about a decade, India hoped to match or even outpace the Chinese economic juggernaut when its own economy was growing at 8-9 percent. That dream has crumbled in recent years. India’s economy slowed to less than 5 percent growth in the last two years and China, while also slowing, continued to outpace it.

In another concession to parity, the New Development Bank will have a rotating presidency shared among the member nations. But there is no doubting that China’s priorities will carry significant weight.

The Chinese economy is four times the size of India’s and larger than the combined economies of India, Russia, Brazil and South Africa. Take the C out of BRICS as the five are known and it becomes a much less muscular grouping.

Still, some economists argue that the significance of the development bank and the Contingent Reserve Arrangement, a $100 billion financial safety net similar to the International Monetary Fund, also agreed at the summit in Brazil, is useful as an alternative to the U.S.-dominated global economic system.

“It really is a historic development,” said Biswajit Dhar, an economist and professor at Jawaharlal Nehru University in New Delhi.

Some even compared the significance of the BRICS bank to the Bretton Woods summit in 1944, which provided by the basis for the modern system of central banking and foreign exchange as well as the creation of the World Bank, then called the International Bank for Reconstruction and Development, and the IMF.

China’s official Xinhua news agency said in an editorial that the agreement ushers in a long-awaited alternative to the “Western-dominated institutes in global finance.”

For decades, the World Bank and the IMF, along with the Asian Development Bank that is led by Japan, have been the only games in town for developing countries in financial trouble or seeking outside funds for big projects. The World Bank and especially the IMF have used that pre-eminence to advance a philosophy of free markets and limited government intervention in the economy.

The BRICS countries have long a shared desire for a bigger voice in global economic policy. Many developing nations 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.

Economist Shreeram Chaulia said that simply by offering an alternative, the new bank and emergency fund will be significant.

“In any market, competition is a good thing,” said Chaulia, a professor at New Delhi’s Jindal School of International Affairs.

The market in the case of global development, he said, is one of ideas on how best to promote economic growth.

China’s ruling Communist Party allows free enterprise but most industries, including oil and gas, banking and telecoms, are dominated by state-owned companies. The ruling party still issues Soviet-style five-year development plans and gives favored enterprises subsidies, monopolies and other support. Most bank lending goes to state companies.

Leaders of India, Russia, Brazil and South Africa also to varying extents favor a substantial state role in the economy, and Chaulia said he expected those values to be reflected when the new institutions open for business in two years.

“It will be more state-ist, to be blunt,” he said of a future BRICS financial and economic system.

Dhar, the Indian economist, said the new institutions could serve Chinese interests by improving its relationships with poorer countries that view its growing economic clout with suspicion.

China is embroiled in disputes with Southeast Asian nations because of its vast territorial claims in the South China Sea and state-backed Chinese companies in Africa have accumulated a track record of labor and environmental abuses.

But Dhar doesn’t see the New Development Bank as a vehicle for enforcing a Chinese hegemony.

“If China wants to dominate, it doesn’t need this development bank,” Dhar said.

Copyright 2014 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

Federal News Network Logo
Log in to your WTOP account for notifications and alerts customized for you.

Sign up