WASHINGTON -- Fed up with U.S. dominance of the global financial system, five emerging market powers this week will start their own versions of the World Bank and the International Monetary Fund.
Brazil, Russia, India, China and South Africa --the so-called BRICS countries -- are seeking "alternatives to the existing world order," said Harold Trinkunas, director of the Latin America Initiative at the Brookings Institution.
At a summit today through Thursday in Brazil, the five countries will unveil their version of the IMF: a $100 billion fund to fight financial crises, called the Contingent Reserve Arrangement. They will also launch a World Bank alternative, a new bank that will make loans for infrastructure projects across the developing world. The IMF has assets of more than $300 billion; the World Bank, $490 billion.
The five countries each will invest $10 billion in the lender, tentatively called the New Development Bank. Another $50 billion is expected to come as other countries sign up.
The powers are still jousting over the location of the bank's headquarters -- Shanghai, Moscow, New Delhi or Johannesburg. The headquarters skirmish is 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, which is based in Washington.
The bloc comprises countries with vastly different economies, foreign policy aims and political systems -- from India's raucous democracy to China's communist state.
Whatever their differences, the five countries have a shared desire for a bigger voice in global economic policy. After decades of rapid growth, they account for nearly one-fifth of world economic activity. Each has had experiences with Western financial dominance: They've contended with economic sanctions imposed by Western powers, or they've been forced to make budget cuts and meet other strict conditions to qualify for emergency IMF loans.
Russia was burdened with multibillion-dollar debt in the 1990s but paid it down in the early 2000s. It has since been reluctant to borrow or to seek assistance from the IMF or other Western financial institutions, which are widely seen in Russia as predators.
As for China, it "actively supports the establishment of the BRICS Development Bank and the contingency reserve as soon as possible to give the BRICS countries their own safety net," Li Baodong, a deputy foreign minister from China, said last week.
Developing countries have been frustrated also because the U.S. Congress has refused to approve legislation providing extra money to help the IMF make more loans to countries in trouble. The money is part of a broader overhaul program that would give China and other developing countries more voting power at the IMF.
The new financial institutions arrive as developing countries contend with slower economic growth. They also are vulnerable to financial shocks as the U.S. Federal Reserve scales back bond purchases meant to stimulate the U.S. economy. As the Fed's easy money policies diminish, U.S. interest rates are likely to rise and draw money away from emerging markets and back to the United States. That could rattle financial markets in the developing world, driving stock prices and currencies down.
"We agreed that it's important in the current conditions of the capital flight to have this reserve, a kind of mini-IMF," Russian Finance Minister Anton Siluanov said before he went to Latin America with President Vladimir Putin. "The fund will be in a position to react promptly to capital outflows, providing liquidity in hard currency, in dollars, in this case."
Business on 07/15/2014