Banking on the BRICS

BERKELEY – For the leaders of the BRICS countries (Brazil, Russia, India, China, and South Africa), the announcement in July of their agreement to establish a “New Development Bank” (NDB) and a “Contingent Reserve Arrangement” (CRA) was a public-relations coup. The opportunity for a triumphal group photo was especially welcome for Brazilian President Dilma Rousseff, in light of her country’s ignominious World Cup defeat and slack economy, and for Russia’s President Vladimir Putin, given the international reaction against his government’s support of the rebels in Ukraine.

The agreement was also an opportunity for the five countries to reiterate their dissatisfaction with the World Bank, the International Monetary Fund, and the role of the dollar in the global monetary system. The BRICS possess just 11% of the votes in the IMF, despite accounting for more than 20% of global economic activity. The US Congress refuses to ratify the agreement reached in 2010 to correct this skewed state of affairs. And the United States has displayed no willingness to renounce its anachronistic privilege of nominating the World Bank’s president.

Meanwhile, the share of the dollar in global foreign-exchange reserves remains more than 60%, while 85% of global foreign-exchange transactions involve dollars. Given the reluctance of underrepresented countries to sign up for the IMF’s precautionary credit lines, central banks desperate for dollars can obtain them only from the Federal Reserve. The Fed was reasonably forthcoming in providing dollar swaps in the last crisis in 2008; but there is no guarantee that it will behave similarly in the future.

Thus, the BRICS’ dissatisfaction with the status quo is understandable. The question is whether their NDB and CRA will make a difference.