A shot in the arm for African finance

Countries across the continent set to embrace arrival of $100 billion BRICS bank

The recent unveiling of the planned BRICS Development Bank is being hailed as a huge leap forward for the developing world, and a significant milestone in cooperation between the five major emerging economies.

The Brazil summit, which agreed on the bank's creation earlier this month, convened under the overall theme "Sustainable Solutions for Inclusive Growth".

But just what are the implications for Africa of setting up this $100 billion Shanghai-based development bank?

Amidst an ongoing international clamor for reform of the global geopolitical system, establishing a financial institution to focus on providing developing nations with an alternative source of funding to Western-dominated financial institutions has been applauded politically as a solid first step in the creation of a potentially more symmetrical global polity.

When the idea of the new development bank was first mooted in Durban, South Africa last year, the wording of its draft constitutional document was unequivocal.

It stated clearly that the five country members - Brazil, Russia, India, China, and South Africa - had directed their finance ministries "to examine the feasibility and viability of setting up a New Development Bank for mobilizing resources for infrastructure and sustainable development projects in BRICS, and other emerging economies and developing countries".

The creation of such a development-organization-for-all was certainly not lost on observers.

No lesser a commentator than Jim O'Neill - the former chairman of investments at Goldman Sachs, who is credited with coining the acronym "BRIC" in the first place - has disputed the worthiness of South Africa as a BRICS member, pointing out that its economy falls well short of the other four on all fronts.

However, he does accept that the invitation and retention of South Africa is a worthy illustration of solidarity, and that Africa must have a seat at this important geopolitical organization.

It is no coincidence that the rollout of the new BRICS bank came barely a month after the African Union endorsed a plan for the establishment of the African Monetary Fund.

However, some have concluded that even with the creation of the bank and the AMU, economic representation of developing countries still falls well short, compared with that of developed nations, within the International Monetary Fund and the World Bank.

The Bretton Woods system of monetary management first established the rules for commercial and financial relations among the world's major industrial states in the mid-20th century - the first example of a fully negotiated monetary order intended to govern monetary relations among independent states.

After the Bretton Woods Conference of 1944 established the IMF and International Bank for Reconstruction and Development, which today is part of the World Bank, it was agreed that countries adopt a monetary policy that maintained exchange rates by tying currencies to the US dollar with the ability of the IMF to bridge temporary imbalances of payments.

The United States unilaterally terminated convertibility of the US dollar to gold in the early 1970s, effectively bringing the Bretton Woods system to an end and rendering the dollar a fiat currency.

The action, referred to as "the Nixon shock", created the situation in which the US dollar became the reserve currency for many states, and at the same time, many fixed currencies (such as the British pound sterling) also became free-floating.

Critics of these two original Bretton Woods institutions, however, claim the rules are still far more Western than they are truly global, and that as a consequence, they have been used too often as tools for the West to simply foist its developmental models on Africa.

African nations are utterly disenchanted by this so-called Western consensus model and variants of it, claiming that development finance is still often wrapped in too much red tape, or other "strings attached".

For many, the BRICS bank represents a credible new alternative relationship between Africa and the emerging economic powers, and affords the continent far greater leverage in the world of global finance.

It has been suggested that its arrival will, if nothing else, bolster the voice of the developing world and the ripple effect might see the IMF and the World Bank undertake reforms to stay relevant.

It is even possible to begin to entertain the thought that the BRICS bank will spark a much-needed shakeup of the very architecture of international development finance, an issue that has vexed African governments since the 1960s.

But at the very least, the BRICS bank will serve to complement any shortfalls in resources from the Bretton Woods institutions, and other international financiers.

Obviously, its biggest beneficiaries are expected to be the member nations., but given the growing effect of those nations on economies right across Africa over the past 15 years, its influence is sure to be felt for the better.

A 2013 United Nations Economic Commission for Africa report indicated that Africa's trade with the BRICS nations has grown faster than the continent's trade with any other region in the world, doubling since 2007 to $340 billion in 2012, and projected to reach $500 billion by 2015.

It makes sense, therefore, to assume that the launch of a truly global development bank will naturally have a momentous impact on Africa.

It is understood that most of its resources will be drawn from the large foreign exchange reserves of those five, particularly China.

These reserves have traditionally been invested in the sovereign wealth funds of developed nations - so it would be something of a game changer even if only a fraction of these reserves were directed instead to a new institution, and then made available to African nations badly in need of financing for infrastructure projects.

But beyond the bank's use as a source of finance for African infrastructure is the issue of its role in global financial stability.

At its launch in Brazil, it was revealed there would be a contingency reserve arrangement worth an initial $100 billion to hedge against volatility in the global financial markets.

One strong note of caution might be that as Africa has been so reliant in the past on finance from developed nations, any future instability in the BRICS nations could well have a big negative effect on the continent's fragile economies.

It's still too early to predict how the bank will fare over its two-year formative period - but what can be stated with a measure of certainty is that African nations are likely to embrace the new institution.

The author is a PhD candidate at the Communication University of China in Beijing and research associate at the University of Witwatersrand, Johannesburg, South Africa. The views do not necessairly reflect those of China Daily.

(China Daily Africa Weekly 07/25/2014 page10)