Rethinking Bretton Woods | Fri, Jul 18, 2014
This article analyzes the outcomes of the BRICS Summit held on July 14-15 2014 in Fortaleza, Brazil.
At the just-concluded 6th Summit of Brazil, Russia, India, China and South Africa (the BRICS), Leaders of the five nations took another step towards what is becoming a redefinition of the post-Cold War international geopolitical economic landscape.
Held in Fortaleza, Brazil, last July 14 -15, the meeting concluded with a statement (hereinafter “the Statement”) where the Leaders of the five nations issued or reinforced positions on a number of issues that set them in stark difference to the Western powers that until not long ago used to be the ones setting the tone for the international economic agenda:
Global economic trends—After the global economic crisis of 2008-09, attempts by some Northern countries to lecture the rest of the world on policy prescriptions for recovery, e.g. pushing austerity and structural reform, became apparent, especially in the G20. The BRICS claimed the high ground in this debate by recalling that in the last 6 years, collectively, their economies consolidated their position as “the main engines for sustaining the pace of the international economy as it recovers from the recent economic and financial global crisis.” The language can be interpreted as a reminder to the G7 that it is due to the diverse macroeconomic and structural models implemented by the BRICS that the world economy had resources to bounce back from the crisis. At the same time, they used the opportunity to restate concerns they expressed before in regards to monetary easing and their withdrawal in the context of an unreformed monetary system. “Monetary policy settings in some advanced economies may bring renewed stress and volatility to financial markets and changes in monetary stance need to be carefully calibrated and clearly communicated in order to minimize negative spillovers,” they said.
Tax cooperation—Commissioned by the G20, the OECD continues to develop an Action Plan on “Base Erosion and Profit Shifting.” The exercise aims at stopping tax arbitrage by transnational companies that deprives countries of tax revenue. But there is a risk that the limited-club nature of the OECD itself will preclude an analysis of the alternatives most favourable to developing countries. Many of these depart from OECD long-held principles, such as the residence principle for taxing revenue. In a clear challenge to this principle BRICS said in their statement that “sustainable development and economic growth will be facilitated by taxation of revenue generated in jurisdictions where economic activity takes place.” They also expressed concern over the harmful impact of tax evasion, transnational fraud and aggressive tax planning on the world economy and the challenges brought by aggressive tax avoidance and non-compliance practices.
UNCTAD – The United Nations Conference on Trade and Development, an agency of the United Nations created 50 years ago, has traditionally offered a counterbalance to economic policy views of the Bretton Woods Institutions and WTO. In fact, one of its greatest successes lies in it having called the global financial crisis at a time when the IMF and other institutions continued to suggest rosy future scenarios. The institution has come under attack from several of its developed country members which seek to reduce its mandate and financing. The BRICS “reaffirmed the United Nations Conference on Trade and Development’s (UNCTAD) mandate” which they considered “unique and necessary to deal with the challenges of development and growth in the increasingly interdependent global economy.”
State-Owned Companies – In stark contrast with Western powers push for greater reliance on market-based and private sector approaches to development, as well as Public –Private Partnerships, the Statement vindicated public sector companies, acknowledging “the important role that State Owned Companies (SOCs) play in the economy” and encouraging their State Owned Companies to “continue to explore ways of cooperation, exchange of information and best practices.”
Human rights – As recently put by a civil society expert, there is need for southern democracies such as India, Brazil and South Africa, each with proud histories of people’s movements overcoming colonialism, military dictatorship and racial oppression against great odds, “to come forward and free the human-rights narrative from the strategic goals of traditionally powerful western governments.” The BRICS Leaders vowed to “continue to treat all human rights, including the right to development, in a fair and equal manner, on the same footing and with the same emphasis,” and to “foster dialogue and cooperation . . . both within BRICS and in multilateral fora . . . taking into account the necessity to promote, protect and fulfil human rights in a non-selective, non-politicized and constructive manner, and without double standards.” This stands in contrast to the developed world’s increasing reluctance to take even-handed approaches to human rights, for instance through refusal to examine economic policy dimensions of human rights, or even accepting the very existence of economic and social rights, as well as the right to development. This clash was most recently seen at the Human Rights Council where Western countries voted against attempts to establish a treaty to regulate, in international human rights law, the activities of Transnational Corporations.
Post-2015 agenda – Last September the General Assembly formally launched the intergovernmental process towards the adoption of a development framework to replace the Millennium Development Goals in 2015. In such deliberations, two notable trends have emerged in the positions of developed countries. First, developed countries seek to reduce or eliminate altogether references to the principle of common but differentiated responsibilities, one of the cornerstone principles to emerge from the 1992 Rio Conference on Sustainable Development. Second, facing in several cases budget crises at home, developed countries are trying to dilute their financing commitments by emphasizing the responsibilities of other actors, namely (in addition to developing countries themselves), the private sector. According to officials close to the discussions, some donors have blatantly said in closed sessions that the world should be ready for “the end of ODA.” Speaking of the post-2015 Development Agenda, the statement said it must fully respect “all Rio principles on sustainable development, including the principle of common but differentiated responsibilities” and emphasized “the need for an effective sustainable development financing strategy . . . with ODA as a major source of financing.”
New economic institutions
Perhaps the clearest challenge to the Northern countries’ established way of doing things came in the form of two concrete financial instruments: the creation of a New Development Bank and a Contingent Reserve Arrangement. The former will be a development finance institution, whose Articles of Agreement were adopted in a separate document. The latter will be a multilateral arrangement for the provision of liquidity through currency swaps in response to actual or potential short-term balance of payments pressures.
Speaking at the sidelines of the Summit, BRICS government officials were careful to frame the creation of these institutions as an action intended to complement and not “substitute” for the World Bank and the IMF. In all fairness, this was an unnecessary clarification. The Bank of the BRICS will have an initial subscribed capital of USD 50 billion (authorized capital goes up to USD 100 billion), but will be devoted to infrastructure finance. With estimated financing needs of USD 1 trillion a year, the infrastructure sector needs will continue to be unmet, even applying both World Bank and BRICS Bank best case scenarios of lending. Same can be said for the Contingent Reserve Arrangement, a system of swaps among the members whose total amount, given the size of the economy of the BRICS, will hardly be enough to make a difference in balance of payments crisis any of them may suffer. Access limits (which vary by member) and conditionality (IMF conditions apply if countries need to draw above a 30 per cent of their authorized access) further reinforce this situation.
However, the launch of these instruments in the same statement where BRICS expressed their displeasure with the current functioning and limitations of the Northern-dominated Bretton Woods Institutions leaves little space for an ambiguous reading. According to the statement, the BRICS “remain disappointed and seriously concerned with the current non-implementation of the 2010 International Monetary Fund (IMF) reforms, which negatively impacts on the IMF’s legitimacy, credibility and effectiveness.” Further down they called on the IMF’s membership to “develop options to move ahead with its reform process, with a view to ensuring increased voice and representation of emerging markets and developing countries, in case the 2010 reforms are not entered into force by the end of the year.” These “options” effectively mean something that was discussed by the G20 during the last Spring meetings. Facing frustration with the US Congress refusal to approve the last package of reforms, several G20 members reportedly backed the idea of setting up governance and resource structures that would allow the Fund to act without being subject to the veto power of the United States. This could mean, for instance, making permanent existing bilateral credit arrangements that complement the capital of the institution and, thus, would be subject to approval by the respective providers of such credit lines, bypassing the voting structure of the Fund.
As for the World Bank, the BRICS statement welcomed its new strategic goals of helping countries end extreme poverty and promote shared prosperity. But it said the potential of this strategy would “if the institution and its membership effectively move towards more democratic governance structures, strengthen the Bank's financial capacity and explore innovative ways to enhance development financing and knowledge sharing while pursuing a strong client orientation that recognizes each country's development needs.”
The innovative governance arrangements agreed for the new institutions also feature a departure from those of the Bretton Woods Institutions. The New Development Bank adheres to a principle of one country-one vote, though voting is still tied to capital, so the one-country one-vote system is only an accidental function of all members contributing initially a similar amount of capital. The Contingent Reserve Arrangement features very unequal commitments by members: China is the largest contributor (USD 41 billion) and South Africa the smallest (USD 5 billion), while the remaining three members contribute USD 18 billion each. But decisions will still be made by majority of contributed amounts funding. This means that in its initial configuration no country will have veto power, unlike the long-criticized situation at the IMF. However, it is worth noting this is easier to do in an arrangement of this type, that is, swap commitments, rather than the capital contributions IMF members make to that institution.
There are still plenty of policy directions to be defined in the new institutions. To what extent they will apply lessons learned, not only from the seven decades of experience of the Bretton Woods system but also from the BRICS’ experience with their own development banks, remains unclear. Moreover, the Bretton Woods Institutions were also initiated with great-sounding constitutive agreements. It was their definition in policy and practice, however, that grew increasingly problematic over the years.
So the newly-created BRICS institutions can be seen as more of an opportunity to alter the international economic order for good than an actual attempt at doing it.
They should be seen, however, in the context of the rest of the Fortaleza BRICS statements. They evidence the BRICS’ determination to create a counternarrative to a Western-dominated debate on international economic and development policy that left too many things out for too long. As such, they are undoubtedly a welcome and refreshing sight to see.