Can BRICS rebuild collapsing global financial architecture?
Are BRICS any use for rebuilding the collapsing global financial architecture? By Patrick Bond
Durban, 18 September - In its most recent world public opinion survey, the Pew Research Centre found that only a third of South Africans identified ‘international financial instability’ as a major threat (third highest, after climate change and Chinese economic competition) compared to 52 percent of those polled globally (for whom it was a close second, after climate change at 54 percent).
Our relative ignorance is a shame, for since freedom was won in 1994, the SA currency (the Rand) has collapsed seven times by more than 15 percent within a few weeks, a miserable record bested only by the late Zimbabwe dollar. I think our society’s rather blasé attitude reflects soothing messages coming from the financial industry and its government allies.
For example, in late August as the rand started to tank, the formerly Marxist urban activist and now decisively neoliberal finance minister Pravin Gordhan intoned, ‘We have a floating exchange rate, which will be able to absorb some of the shocks emerging from events that we have little control over at this time.’
The ‘float’ will get far more turbulent once the vast balance of payments deficit – caused by flight of profits and dividends to former SA companies now mainly listed on overseas stock markets – pushes the SA foreign debt above $150 billion. That point will arrive in 2014, leaving us the same ratio of debt to GDP that PW Botha encountered thirty years earlier (after which nothing could stay the same).
But Gordhan sometimes shows a panicky side. In a Financial Times interview during a US monetary policy conference last month, he complained of his peers’ ‘inability to find coherent and cohesive responses across the globe to ensure that we reduce the volatility in currencies in particular, but also in sentiment.’
BRICS backslapping The following week, on the sidelines of the St Petersburg G20 Summit, Gordhan joined others in the Brazil-Russia-India-China-South Africa (BRICS) network to congratulate themselves about a forthcoming BRICS ‘New Development Bank’ and Contingent Reserve Arrangement (CRA).
But could these two infants challenge the Bretton Woods Institutions in the coming years’ chaotic world financial environment? Nearly seven decades after the World Bank and International Monetary Fund (IMF) were established to restore Western interstate banking following the Depression and World War II, the BRICS stand at the verge of replacing Washington and its neoliberal ideology with South-centred, state-aided capital accumulation.
That is the rhetoric, at any rate. But especially in the last few weeks, the question of whether BRICS strategies are profoundly different from – or instead reinforcing of –the global financial architecture’s self-destruction remains to be answered. After all, one of the CRA’s objectives, according to South African Treasury officials, is to ‘complement existing international arrangements.’
The BRICS economies face upheaval in mid-2013 Financial Times, 5 September 2013
As for the BRICS bank, critical details regarding institutional leadership and location were promised initially at the Durban Summit in March and then in Russia prior to the G20 finance ministers and heads of state summit. The details did not materialise at either meeting, but there are sufficient indications available of what might be expected.
A $50 billion BRICS bank capitalization wouldn’t initially challenge the World Bank (which lends almost that much every year). And a $100 billion CRA would quickly be exhausted in the event of a more serious financial meltdown.
Perhaps those sums can be increased in coming years, since they are pitiable amounts to face off against emerging-market financial melting of the sort witnessed since the mid-1990s, where numerous countries have needed a $50 billion package overnight so as to halt financial looting.
Financial backlash against BRICS To illustrate, in recent weeks trillions of dollars worth of paper assets have shifted around, driving quite intense currency crashes in most BRICS. As a result of an announced change in US Federal Reserve policy in which a bit less artificial stimulation (‘Quantitative Easing’) will be provided to banks thanks to Fed ‘tapering’, interest rates more than doubled over a few weeks, leading to dramatic outflows from emerging markets and the crash of the South African rand, Brazilian real, Russian rouble and especially the Indian rupee.
Swedish economist Anders Aslund of the Peterson Institute for International Economics was scathing in a Financial Times article in late August: ‘The BRICS party is over. Their ability to get going again rests on their ability to carry through reforms in grim times for which they lacked the courage in a boom.’
Added former South African opposition party leader Tony Leon in Business Day, ‘The investor community’s love affair with developing-market economies has soured. The romance has been replaced by recrimination.’ And Goldman Sachs banker Jim O’Neill was asked by the Wall Street Journal last month about the acronym he had created a dozen years earlier: ‘If I were to change it, I would just leave the “C”.’ The Economist opined, ‘The Great Deceleration means that booming emerging economies will no longer make up for weakness in rich countries.’
As reported last week in the China Daily (reflecting official sentiments), local experts predict that the BRICS bloc is already breaking up in material ways, leaving only China to push ahead through the storm. Remarked Tsinghua University economist Li Dokui, the end of the US Fed’s Quantitative Easing is ‘good news for the renminbi’ because it need no longer rise in value – but meantime, ‘the concept of the BRICS may vanish, leaving just China versus other emerging economies.’
According to Merrill Lynch economist Lu Ting, ‘China will be largely immune to the impact due to its sustained current-account surplus, low foreign debt, huge exchange reserves, high savings and capital controls.’ Offering official multilateral acknowledgment of severe danger, deputy IMF managing director Zhu Min warned that if China opens its capital account by liberalizing the currency, it would ‘exacerbate’ the global crisis – which is typically an observation an IMF man would repress.
BRICS behave There are still some who believe the BRICS can help fix global-scale problems caused by persistent capitalist crisis, the end of the commodity cycle, fiscal austerity, durable financial deregulation and recent credit constraint combined with new bubbles. Yet strategies advocated by BRICS leaders have so far had no discernible effect on financial volatility.
Within the IMF, for example, Chinese voting power has risen substantially but left no genuine change in the institution’s agenda. As University of Delhi professor emeritus Achin Vanaik argued at a Fudan University ‘Rising Powers’ workshop last week, ‘The Asian Monetary Fund and Chiang Mai Initiative, originally seen as countervailing financial power, ended up not opposing but complementing the IMF.’
As for the World Bank, its presidency was grabbed by Barack Obama’s nominee Jim Yong Kim in 2012, without a united response from the BRICS. The Brazilians nominated a progressive economist, Jose Antonio Campo; the South Africans nominated neoliberal Nigerian finance minister Ngozi Okonjo-Iweala; and the Russians supported Kim. As for China, the reward for not putting up a fight was getting leadership of the Bank’s International Finance Corporation for Jin-Yong Cai, while an Indian, Kaushik Basu, was made World Bank chief economist. And also reflecting assimilation not antagonism, in 2012 the BRICS contributed $75 billion to the recapitalization of the IMF, which meant that while China’s voting share increased, Africa’s decreased.
Thus it was reasonable to ask, with skepticism, whether the BRICS leaders were really serious about challenging Bretton Woods. After all, there was an alternative already in place that they could have supported: the Bank of the South. Founded by the late Venezuelan president Hugo Chavez in 2007 and supported by Argentina, Bolivia, Brazil, Ecuador, Paraguay and Uruguay, Banco del Sur already has $7 billion in capital. It offers a more profound development finance challenge to the Washington Consensus, especially after Ecuadoran radical economists improved the design.
Instead, a much more durable reflection of the commitment to stabilizing world finance – rather than radically changing the most unfair and intrinsically destabilizing components – is China’s ongoing financing of Washington’s massive trade deficit, by continuing to hold more than $1.3 trillion of Treasury Bills. The Chinese refuse to sell sufficient T-Bills in order to genuinely weaken Washington’s power, and to set up a new currency that the world could more democratically manage, instead of the Fed with its bias to the interests of the world’s largest banks.
Notwithstanding rhetoric about increasing use of BRICS currencies, not much more is being done to end the destructive system in which the US dollar has world ‘seignorage’: i.e., it is the world’s reserve currency, no matter how badly Washington officials abuse that power. If China really wants the renmimbi to one day take its place, the pace at which this is happening is agonizingly slow.
Worse still, in close alignment with Washington, South Africa explicitly supports financial liberalization. SA Reserve Bank deputy governor Daniel Mminele acknowledged last November that Pretoria opposed global regulation such as the ‘Robin Hood tax’ on financial transactions that was supported by more enlightened countries, including those from Europe being roiled by global financiers.
BRICS development banking? Meanwhile South Africa’s own precursor to the BRICS bank – the Development Bank of Southern Africa (DBSA) – has been run in a ‘shoddy’ way, according to the new chief executive Patrick Dlamini last December; he implied that corruption had been tolerated. Dlamini then announced both a 40 percent cut of his 750-strong staff, starting with environmentalists and social specialists, and a massive increase in privatisation financing.
‘Are the right people leaving the DBSA?’, asked Business Day’s development reporter Carol Paton: ‘The reason why the bank got itself into a financial mess in the first place was bad investments from which it hoped to make some money. It still has not come clean about what the bad investments were.’ The DBSA’s subsequent record was just as messy, with Dlamini admitting this week that the Bank suffered a net loss of $83 million in 2012-13 due to ‘impairment losses on development loans of $160 million and revaluation losses on financial instruments of $40 million.’ Its lending volume last year was only $1.8 billion, after reaching $3.4 billion two years earlier.
The man tasked with ensuring the DBSA’s revitalization in the region is Mo Shaik, who trained as an optometrist but became the leading spy in the Zuma government. But because of his gossiping of political secrets to US embassy officials (later published by WikiLeaks), because of notorious political squabbling which he often lost (e.g. a decade ago when accusing the national public prosecutor of being an apartheid-era spy), and because he had no development finance experience, Shaik’s appointment to a top DBSA job last year was generally considered bizarre.
The BRICS’ largest development finance institution, the Brazilian National Economic and Social Development Bank (BNDES) has also been exceptionally destructive in its massive lending portfolio, now in the range of $80 billion annually, more than twice the World Bank’s. Warns Carlos Tautz from Instituto Mais Democracia, ‘If the Brics Bank is mirrored on BNDES, this reveals a probable lack of transparency and omissions in governance, given the examples of the mega-projects run by Brazil´s multinationals which BNDES funds in Latin America and Africa, particularly in the extractive industries.’
Also larger than annual World Bank disbursements, the combined funding flows from the China Development Bank and the Export-Import Bank of China have some positive impacts especially in expanding solar technology and avoiding the imposition of Washington Consensus policies. But as Boston University scholar Kevin Gallagher shows, they can be severely destructive in sites as diverse as Burma, Honduras and Gabon.
In other words, when more announcements about a BRICS New Development Bank and CRA are made at the Fortaleza, Brazil summit next year, don’t expect much that would either stabilise or destabilise world finance; the BRICS appear now merely as a legitimating device.
Legitimation and localisation of global financial chaos In contrast, the G20 has in past years been a much more substantive site for elite worry over world finance, having been resurrected in November 2008 to deal with the global meltdown just after Lehman Brothers collapsed and world payment systems nearly froze. A few months later, in April 2009, the G20 was central to the push for re-empowering the IMF, first through increased Special Drawing Rights allocations and other grants of $750 billion to stimulate the world economy, and later, in a full recapitalisation in 2012, to generate more bailout financing options for European bankers, at the expense of structural adjustment for poor and working people.
Gordhan was implicated in the latter, after publicly advocating in September 2011 that the IMF should be more ‘nasty’ to Europe, while in the former, his predecessor Manuel authored the March 2009 ‘Dear Dominique’ letter proposing the IMF’s massive recapitalization. Although its then leader, Dominique Strauss-Kahn, postured about a Keynesian fiscal-expansionary policy during the 2008-09 crisis, the IMF imposed neoliberal, contractionary measures on three quarters of its borrowers.
The squeeze of poorer countries with South Africa’s financing blessing has been a long-standing problem, once Johannesburg became the continent’s premier financial ‘hot money centre’ around fifteen years ago. By 2004, Manuel’s director-general, Lesetja Kganyago, announced the ‘Financial Centre for Africa’ project to amplify the parasitical power of the exclusive Sandton central business district: ‘Over the five years to 2002, the financial sector grew at a real rate of 7.7 percent per year, more than twice as fast as the economy as a whole.’
Kganyago’s specific aims included ‘opening South Africa’s markets to African and global issuers; global lowest trading costs and trading risk; global leadership in investor protection; and a global hub for financial business process outsourcing’. He concluded, ‘Africa’s economies cannot wait the slow maturing of national financial markets to provide the necessary channel for large-scale foreign capital flows for development. Only a regional financial centre will be in a position to provide these services in the foreseeable future.’
(Ironically, by 2012 former South African president Thabo Mbeki – who expressed enthusiasm for this sort of neoliberalism – was reinventing himself as a leading critic of illicit capital flight from Africa. Sandton’s hub was one of the most destructive sites.)
In its 2012 National Development Plan, the National Planning Commission suggested strategies similar to Kganyago’s, namely that SA ‘can play a leading role in BRICS by helping to facilitate deeper integration of relations between African states and other BRICS member countries and by focusing on other niche advantages, including highly developed banking, financial, communications and transportation networks.’ That’s simply not healthy, given how destructive SA’s banks are these days.
Of course, the BRICS experiment won’t stand or fall on narrow grounds of development finance, or South African-style underdevelopment finance. But if we are seeking an alternative, it doesn’t appear to be here.
G20/BRICS and counter-power Meanwhile, the St Petersburg G20 did make some minor progress on rationalizing corporate taxation and reducing one of the greenhouse gases (HCFs) that should have been covered by the 1987 Montreal Protocol. Still, more durable critiques of both G20 power and BRICS supplication are needed. Some of these were developed at the St Petersburg Counter-Summit by the Post-Globalisation Initiative and its international guests. A rousing declaration emerged and alternative strategies were debated at our meetings, but the overarching fear was of inadequate civil society response to the bubbling economic and military crises, not to mention worsening climate-related destruction.
There are critical geopolitical factors to consider too, for while the world economy is now working against BRICS, turbulent relations between the BRICS and the G7 actually left Russia far stronger after the G20 summit. In St Petersburg, the BRICS unanimously backed Vladimir Putin’s attempt to peacefully revolve the Syrian crisis once chemical weapons were apparently used by the Assad regime against rebels, leading to Barack Obama’s threat to bomb Damascus. Brazil also took a tough stance against the US National Security Agency; president Dilma Roussef was so furious about Obama’s snooping on her (and parastatal oil giant Petrobras) that she canceled a Washington trip scheduled for next month.
But the ‘talk-left’ that is so common in the BRICS foreign policy milieu is invariably negated in the ‘walk-right’ by Treasury and central bank officials. So the dangers grow greater, not because of a South-North political confrontation, but because of the lack of an economic one.
BRICS Countries Beset By Economic Problems (Part 1)
JAISAL NOOR, TRNN PRODUCER: Welcome to The Real News Network. I'm Jaisal Noor in Baltimore. And welcome to this latest edition of The Bond Report.
There's been much talk in recent months, and years, even, of the economic surge of the so-called BRICS countries. That's Brazil, Russia, India, China, and South Africa. But in recent weeks, many of the former rapidly developing countries are experiencing a range of economic problems, including crashing currencies, slowing growth, and extreme distortions in inequality.
Now joining us to discuss this is Patrick Bond. He's the director of the Centre for Civil Society and professor at the University of KwaZulu-Natal in South Africa. Patrick Bond's books include Looting Africa and Against Global Apartheid.
Thank you so much for joining us, Patrick.
PATRICK BOND, DIRECTOR, CENTRE FOR CIVIL SOCIETY: Thanks. It's great to be back, Jaisal.
NOOR: So, Patrick, you were just at the G20, which is a global gathering of world leaders. Was any decisive action taken there to address these growing economic crises across the world?
BOND: Well, no. The attempt by the BRICS countries meeting separately on the sidelines was to steal the economic thunder with the announcements of the BRICS new Development Bank at about $50 billion capitalization and the $100 billion contingency reserve arrangement. That's sort of an IMF type arrangement so that the BRICS countries can lend each other money in the event of an emergency, a financial meltdown. And that would prevent the IMF from having the kind of leverage.
And this is part of what the rhetoric is, BRICS representing an alternative to the Washington consensus, the institutions of the Bretton Woods system, the IMF and World Bank. And the rhetoric sounds very good. And it is perhaps most desperately needed now in the wake of big, big collapses of some of these currencies, the Indian rupee perhaps worst, with maybe a 30 percent crash in recent weeks, the rand also crashing about 15 percent here in South Africa. And these are countries now that are under a great deal of stress, where the illusory growth, particularly in India, is now unveiled for having extreme contradictions.
NOOR: So, Patrick, I wanted to ask you about the severity of this ongoing global crisis, and specifically the U.S. Fed's decision to slow the money printing tactic known as quantitative easing.
BOND: Well, that's right. Throwing money at the problem, something that first Alan Greenspan taught back in 1987, the first big of the recent crashes of the stock market, and then practiced very effectively by Ben Bernanke on behalf of the U.S. and European banks, meant that on three occasions, trillions of dollars were printed and just pushed in [incompr.] into the world financial system. And it meant that the U.S. dollar, which has the world's sovereign currency status--it's basically a fiat money, a currency that can be used all over the world--was therefore being abused, and the potential for great inflation is there.
So as a result, tapering off that quantitative easing, to use the technical terms, is required. And the question is how quickly. And that means there will be less Federal Reserve creation of money. And as a result, the interest rates in the U.S. soared, and as a result in August a huge outflow of money from the emerging markets, where there had been quite a bit, especially here in South Africa, of financial liberalization--the exchange controls had been dropped and hot money flows in and out very quickly. So we've had, as a result, terrible instability.
The hope by many of the elites going to the G20 was that there might be some way to organize a more stable system. With Syria on everybody's mind as the first priority, however, that wasn't possible, so we're really looking at the U.S. Fed once again, as on so many other occasions, with the prerogatives really of the U.S. banking system foremost in mind, making life quite miserable for people elsewhere in the world.
NOOR: Patrick Bond, thank you so much for joining us for part one of this discussion.
BOND: Thank you.
NOOR: We're going to continue this discussion and post it online at TheRealNews.com. Thank you so much for joining us.
What Needs To Be Done To Fix The Global Economy (Part 2)
JAISAL NOOR, TRNN PRODUCER: Welcome to The Real News Network. I'm Jaisal Noor in Baltimore.
We're continuing our discussion with Patrick Bond. He is the director of the Centre for Civil Society and a professor at the University of KwaZulu-Natal in South Africa. His books include Looting Africa and Against Global Apartheid.
Thank you so much for being with us again, Patrick.
PATRICK BOND, DIRECTOR, CENTRE FOR CIVIL SOCIETY: Thanks. Great to be with you.
NOOR: So, Patrick, we've been discussing the economic crises in the BRICS countries, including currency inflation and growing inequities and inequalities in those countries. But China seems to be the one country that continues to prosper. What are the lessons of China? And what else can be done to help address these growing economic problems across the world?
BOND: Yes. Well, the Chinese economy is anticipated to hit about seven and a half percent. And the secret there is to not write down dead loans, to keep the game in play and the fiction of a lot of the credit system intact by printing money and having strong exchange controls to prevent the Chinese currency, the renminbi, from being speculated upon at a time when, with real estate problems in very uneven ways bedeviling the country, the government is still pouring quite a lot of money into infrastructure to keep things going. So it's partly a more inward-oriented focus.
But at the same time, as Jim O'Neill, the Goldman Sachs chair who said 12 years ago that Brazil, Russia, India, China will be the building bricks of the 21st-century capitalism, he has just said last month in a Wall Street Journal interview that he really only would anticipate the C of those four still maintaining the momentum to become a genuine power basis for world capitalism this century.
And that's very interesting, because the G20 certainly hasn't yet come to grips with the fact that China does deserve a great deal more power. And in our G20 countersummit, the post-globalization initiative in Moscow and in St. Petersburg held during the G20, and in my talks also last week when I was in Shanghai with academics, I really got a sense that the strategy of BRICS to gang together might not hold up. There may be too many contradictions.
What then could be done is probably some of the Keynesian strategies to protect economies from this financial turbulence and those [incompr.] first and foremost reimposition of exchange controls. Now, that sounds drastic for capitalist economies to begin to prevent people from moving big sums of money, especially corporations and banks, but in fact some countries have begun to do that. And the ones that explored it, say, Malaysia in 1998 or the Ecuadorians, the Venezuelans more recently, they've had good success in encouraging local growth and becoming less volatile in world economic terms.
And I think the delinking of finance is going to be the big campaign. Many of these campaigns at the moment are, for example, for a financial transactions tax and hot-money prohibitions. But I think it's really going to be when strong national governments reassert their financial sovereignty, put on exchange controls, and at that point control their interest rates, their inflows and outflows of currencies, as well as goods, that we can begin to see a recovery from the sort of maniacal globalization run by bankers that's doing so much damage.
NOOR: And talk more about the challenges that remain for that to happen, because you're talking about governments taking power back from corporations and banks, as you just mentioned. And they're increasingly becoming increasingly, obviously, more politically powerful and have--they're only increasing their influence around the world.
BOND: Well, that's right. And occasionally there's a breakthrough in which a smallish country--let's take Argentina. Two thousand one, '02 they defaulted on their debt and found ways to repay only part of it, or Ecuador defaulting on its foreign debt. A large part of it they had declared as illegitimate, as odious debt. And those would be the kinds of inspiring examples where individual countries can band together.
What the Venezuelan president, the late Hugo Chávez, realized then was that you had to do that in collaboration. He had a network, ALBA, but also the idea of a Bank of the South, which in July did formally launch. They have about $9 billion in capital, so that's a good start. And hopefully, if the Brazilians are cooperative (they haven't been entirely), a different kind of development finance can get off the ground that's much more ecologically and socially sensitive, rather than the kind of megaprojects that we can anticipate the new BRICS Development Bank, as well as the old Bretton Woods institutions, the World Bank and its allies across the Third World, to continue.
And I think that would be where very active civil society, particularly the environmentalists, indigenous people, community groups, to some extent trade unionists and feminists, have been watch-dogging and often protesting to prevent some of the worst projects from happening. On the environmental front, for example, even the very coal-addicted World Bank has had to make some recent concessions, with their president Jim Yong Kim announcing that they would try to have fewer coal-fired power plants in their portfolio.
So this is very slow progress when huge environmental problems like climate change and huge social inequalities and terrible financial turbulence continue. And that means if the BRICS have been a failure, if indeed current trends continue, they'll have to redouble efforts in civil society to try to find national governments that can break with the system, and then link those up and give them this North-South and South-South solidarity that'll be required to sustain this.
NOOR: Patrick Bond, thank you so much for joining us.
BOND: Great to be with you again, Jaisal. Thanks.
NOOR: That wraps up part two of our conversation. Go to TheRealNews.com for the full extended interview. Thank you so much for joining us.