New BRICS Institutions Highlight the Changing Global Financial Order

Guild Investment Management  |

Leaders of the BRICS nations -- Brazil, Russia, India, China, and South Africa -- have taken a decisive step to increase their clout in global finance and reduce their dependence on financial institutions dominated by Europe and the United States. For now, this is primarily a political gesture -- but it could be the seed of significant changes in the power-balance of the world’s financial system.

Last month, after the conclusion of soccer’s World Cup, the BRICS leaders sat down for their annual summit in Fortaleza, Brazil. The biggest news to come out of the event was the announcement that they had succeeded in hammering out the basic structure of two new financial institutions to compete with the World Bank and the International Monetary Fund (IMF). This marks a new level of assertiveness and organization from these giants of the emerging-market world.

To compete with the World Bank, the BRICS have now created the “New Development Bank” (NDB); and to compete with the IMF, the “Contingent Reserve Arrangement” (CRA).

The Status Quo Chafes the BRICS

As their share of global population and global GDP has grown, the BRICS are increasingly dissatisfied with the governance of global finance, which they view as dominated by the United States and Europe.

The World Bank primarily provides loans for development projects, and the IMF assists countries whose financial systems have come under stress. Both have their roots in the “Bretton Woods” financial system created after the Second World War. The U.S. typically appoints the head of the World Bank, and the IMF has always been headed by a European. Voting rights in the IMF are allocated according to a quota system that no longer reflects economic reality:

Changes to IMF voting rights which would correct some of the imbalance were agreed on in 2010 -- but they’ve been in limbo since the United States Congress has yet to ratify them.

World Bank and IMF -- Policy Tools for the West?

The BRICS have more complaints, however. The World Bank and the IMF have, throughout their existence, been used as policy tools, with aid to emerging-market countries tied to their implementation of pro-growth, free-market reforms -- which often meant austerity, as in the aftermath of the Asian financial crisis of the 1990s. In fact, many Argentinians blame IMF-imposed austerity for their late-90s economic collapse and 2001 default.

(We disagree; we believe that Argentina sealed its own fate with irresponsible spending, chronic corruption and tax evasion, and other policy mistakes. But a large part of the electorate in the BRICS and other emerging markets view the World Bank and IMF as oppressive powers. Their leaders are quite happy to exploit this sentiment for their own political ends.)

The BRICS noted that the same demands for austerity were not placed on developed-market countries during the 2008 financial crisis and the slow recovery that has followed it. Indeed, they viewed cavalier western central banks’ loose credit as hypocritical compared to the bitter medicine the emerging markets had been asked to take in the past. They also felt the impact of these easy money policies on their own economies’ stability, and criticized western policy-makers for ignoring their needs.

All these perceptions and frustrations led up to the creation of the new BRICS bank and monetary fund -- although the new institutions are tiny compared to the ones they are being set up to challenge.

BRICS’ Political Ambitions

There are other political forces at work making members of the BRICS eager to assert more power over the world’s financial institutions. The very notion of a set of countries called the “BRICS” was dreamed up by an economist at Goldman Sachs in 2002. That economist, Jim O’Neill, now doubts whether the grouping is even relevant any more.

The BRICS’ economies are wildly different. Among them you have strong growing economies, like China and India, and you have those whose growth has stalled, like Brazil, to those who are near economic basket-cases, such as Russia and South Africa. They run the gamut from industrial powerhouses to resource kleptocracies. Some, like India, are raucous democracies, while others have quasi-totalitarian political systems.

The leaders of the BRICS could barely agree on some of the ground rules for their new institutions, with a quarrel between China and India over the bank’s headquarters nearly scuppering the deal before a last-minute compromise. Many of the administrative details have yet to be worked out, and may prove troublesome. The important issue is that they do have one major commonality: they all want to dethrone the U.S. and Europe from their position as rulers of the global financial order, and the U.S. dollar from its dominance in international trade. Each is probably viewing these new institutions as a springboard for its own ambitions.

Of course, ambitions among the members run deeper than finance. China and Russia, the bloc’s most powerful members, seem bent on exploiting U.S. uncertainty in foreign affairs, and carving out new spheres of influence for themselves (or reasserting old spheres of influence) in Africa, Asia, and Eastern Europe.

A Reprimand to Western Failures

It remains to be seen whether the BRICS -- and any other countries that may seek to join the NDB and CRA as members -- can overcome their mutual differences and their own internal problems and become a significant force in global finance. We have many reasons to believe that they will have great difficulties in doing so. Barring a radical change in political leadership, Russia seems doomed to remain a ‘Third World country with a First World military’ -- dependent on its resources, and growing ever weaker in growth and innovation. China faces tremendous obstacles to its ambitions to make the Yuan a global currency. Such a shift is decades away, we believe, even if China can transform its own financial system deeply enough to really integrate it into the global order. Brazil has been challenged to maintain the dynamism it showed under President Lula. India is making huge strides under Narendra Modi, but has a deep legacy of corruption and statism to overcome. And South Africa seems to be drifting perilously close to the zero-sum game of group conflict that has mired so much of Africa in underdevelopment.

To us, the main lesson from the announcement of the new BRICS development bank and monetary fund is simply the failure of western institutions to step up to the challenge of changing global economic and geopolitical realities. That failure will eventually mean western weakness and, most likely, burgeoning conflicts, both economic and military. We do not view these changes as imminent, but they remain a backdrop in our thought about the global investment environment.

Investment implications: Investors should be attentive to these events as indicators of the possible emergence of a global order in which the influence of the developed countries on policy, foreign affairs, and trade is less decisive. Investors should also remain alert to the geopolitical implications of reduced U.S., European, and Japanese power, whether economic, financial, political, or military.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to:


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