Tag Archives: BRICs

Beijing’s $43B Big Stick

Beijing is making a fat down payment on taking a larger role on the international stage. The $43 billion China has pledged towards the replenishment of the International Monetary Fund’s coffers is conditional on implementing outline reforms of the Fund’s voting structure agreed in 2010. More room for China, and the four other Brics, who have spearheaded this latest replenishment as the Fund gathers the wherewithal to bail-out the eurozone if necessary, is being made by the U.S. and Canada not participating.

Voting power at the IMF is largely a function of capital contributions. The required size of a country’s contribution, its quota, is determined by a formula that comes down to economic clout. The 2010 reforms propose a 6% shift of quota from developed to emerging economies. The effect will be to give China the third most votes at the Fund. All the Brics will move into the top 10. The Fund aims to ratify the changes, which require the approval of its member nations, at is 2014 annual meeting. It is not for nothing that the Beijing and its fellow Brics are holding back their latest money until the Fund’s existing bail-out supplies are exhausted, in case a reminder of who holds the big stick is required.

Beijing and the other Brics have also agreed to study further currency swaps and pooling their foreign exchange reserves. This is being billed as a means to create pools of liquidity available to help stabilize the international financial system should it be required, but it will also advance Beijing’s agenda of gradually internationalizing the yuan. Finance ministers and central bank governors from the Brics will report back on this at next year’s Brics summit in South Africa. As always, follow the money.

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Fear Of China Holds Back Brics

    Brazil's President Dilma Rousseff, Russian President Dmitry Medvedev, India's Prime Minister Manmohan Singh, Chinese President Hu Jintao and South Africa's President Jacob Zuma (L to R) pose for group photos in New Delhi, capital of India, on March 29, 2012.

Five Apart

All that the Brics nations — Brazil, Russia, India, China and South Africa — really have in common is that they aren’t quite yet developed economies while calling them developing nations no longer does them justice. They have repeatedly found it difficult to make common cause. Witness their inability to come up with an agreed candidate for the presidency of the World Bank, or the managing directorship of the International Monetary Fund last year, come to that. On big issues like climate change, where the quintet could assert global leadership, they have been even more divided.

All the old divisions were on view at their summit in New Delhi this week, as was one of the main underlying causes of them. While the five nations agreed to study the feasibility of creating a Brics multilateral agency to fund infrastructure and core sector projects — a sort of mash-up of the World Bank, the regional development banks and the IMF, but their own — and to make it a tad easier to settle bilateral trade between Brics nations in local currencies, both decisions fell short of the progress in institution building that had been hoped for ahead of the meeting.

The reason is that Brazil, Russia, India and South Africa are all rivals of China in various ways. Each has their economic and geopolitical interests that don’t necessarily align with those of the others. All are competing for investment and trade, not just with each other but with developed and developing countries. All are seeking a sphere of influence and a place at the global high table. China’s is the common shadow they see falling over their efforts. Hence the wary progress in Delhi, beyond the easy sweeping joint statements of concern at global imbalances and criticisms of loose monetary policy in developed economics. Brazil, Russia, India and South Africa fear the clout that China would have in a Brics Bank and a growing trading block, however informal, in which the yuan would be trending towards being its single currency to the exclusion of the dollar. So none is rushing to bring any of that any closer. As long as those sorts of fears persist, the Brics, as a group, will have little influence on world affairs, regardless of the members’ individual economic clout.

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Opening More Top IMF Jobs To China And Other Brics

Though the emerging economies represented on the IMF board don’t appear to have been able to get behind a common candidate of their own to succeed the lately resigned Dominique Strauss-Kahn as the Fund’s managing director, the five that constitute the Brics have put out a common statement reiterating that the selection should be based on merit not nationality and repeating that the institution should better reflect the growing role of developing countries in the world economy. As the executive director from China, Jianxiong He is one of the quintet that signed it.

All pretty pro-forma stuff. Yet even though the Fund has been gradually reforming its governance to be more encompassing of emerging economies, this Bystander’s eye was still caught by a couple of sentences in points five and six of the statement:

…adequate representation of emerging market and developing members in the Fund’s management is critical to its legitimacy and effectiveness.

The next Managing Director…[should be] a person that is committed to continuing the process of change and reform of the institution so as to adapt it to the new realities of the world economy.

That is likely to mean a promotion for among others, Zhu Min, who, as special assistant to the managing director, is currently the most senior Chinese official at the Fund. He is likely to be bumped up to be a deputy managing director. The three the Fund now has are Naoyuki Shinohara, a Japanese, Nemat Shafik, an Egyptian, and John Lipsky, the American who is acting managing director but who has said he will be leaving the Fund later this year. We also expect the ranks of the senior counsellors and departmental directors to look a little more diverse after the inevitable rejigging once a new managing director is in place.

It also means that any Brics’s backing for the candidacy of France’s finance minister Christine Lagarde, now the front runner since Turkish economist Kermal Derviş has declined to throw his hat in the ring, will be dependent on an explicit promise that “the obsolete unwritten convention that requires that the head of the IMF be necessarily from Europe” will be abandoned for next time round.

A how-it-works footnote:  The IMF has 187 member countries, but five exert the most influence over how it is run–the U.S. and the other big, developed economies — Japan, Germany, France and the U.K. That quintet has permanent seats on the executive board. The remaining 182 member countries are assigned to 19 groups, each represented by an executive director. The votes they cast are weighted by their group’s member countries’ subscription to the IMF, its quota. (List of executive directors and their voting power here.) It is a model that leaves the Brics (Brazil, Russia, India, China and South Africa) in particular underrepresented now the center of economic and financial power is tilting eastwards and southwards. The big five command 37.5% of the votes against the Brics 11%. During Strauss-Kahn’s tenure, a start was made on reforming the quota system, with China, for example, seeing its voting share being increased over time to 6% from 2.9%; it has reached 3.82% to date. Longer term, the Fund’s staff of 2,400 also needs to reflect the changes taking place in the world economy and not only in senior management positions.

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China And The Next Head Of The IMF

Late last year the International Monetary Fund shook up its membership quotas to better reflect the growing tilt of global economic power to developing economies. China became the third largest member behind the U.S. and Japan, and ahead of Germany, France and the U.K. Its fellow Brics–Brazil, India and Russia–moved into the top ten. With that greater stake in the ownership of the IMF has come growing demands from the Brics for a commensurately bigger stake in the running the place. In particular, they want an end to the convention that the IMF’s top job, that of managing director, goes to a European, just as the top job at the World Bank goes to an American.

With the incumbent, Dominque Strauss-Kahn, now facing charges of sexual assault in New York, (and this Bystander assumes innocence until otherwise shown; DSK, as he is known, denies the charges and any wrongdoing) attention is turning to his successor. Could that be for the first time not just not a European, but someone from China, in keeping with the country’s new status within the institution?

Not to spoil the ending, but this Bystander doesn’t think it will happen this time. It is a generation of IMF leadership too soon. The name most mentioned as a possible Chinese candidate, People’s Bank of China governor Zhou Xiaochuan, now in his early 60s, may be a tad too old (IMF retirement age is 65, though that could be easily circumvented if necessary). Zhu Min, a deputy central bank governor now in his late 50s and who is a special assistant to Strauss-Kahn, the first Chinese to hold a senior position at the IMF, though U.S.-educated and a highly polished individual, may be seen as too much of a technocrat for what is also a highly political job, especially now bailing out Europe’s indebted nations is the IMFs first order of business.

There are other forces at work against a Chinese being the first non-European head of the IMF: Japan and India. Both neighbors would like the honor to be theirs, or at least not one of the other’s. India has the most credible candidate in Montek Singh Ahluwlia, one of the architects of the country’s economic reform, but at 67, age weighs even more heavily against him than Zhou. Japan has enough internationally seasoned economic diplomats to field a candidate but no name has emerged as a strong contender.

Even if China, Japan and India all agree that the job should go to someone from an emerging economy, getting the three to line up behind a single candidate will be tough. So there will be horse trading in support of a compromise candidate–and the geopolitical arm wrestling with the U.S. will get an additional dimension because the job won’t go to an American so Washington will have to play through a proxy. (There is a fuller discussion of possible candidates here.) That could swing the choice back towards a European–and Brussels will claim the eurozone crisis demands a European. While several Asian finance ministers have already come out in support of France’s finance minister, Christine Lagarde, none of Beijing, Delhi and Tokyo has endorsed her (and she has been quietly canvassing support in the region, having been expecting Strauss-Kahn to step down next year when it was thought he would have been running for the French presidency, an event that now seems unlikely and the top IMF job to open up sooner than expected).

Kemal Dervis, Turkey’s former economy minister now at the Brookings Institution in Washington, Trevor Manuel, a former South Africa finance minister and Agustin Carstens, governor of Mexico’s central bank, along with Lagarde, would probably comprise the bookmakers’ favorites. Stanley Fischer, the African-born American economist who is now a governor of Israel’s central bank, and a favorite in Washington, as an outside bet, though he, too, at 67, has an age handicap. So is former U.K. prime minister Gordon Brown as his successor, David Cameron, won’t back him saying the job should go to China or India.

What is certain is that none of the candidates can get the job with Beijing’s tacit agreement, and that will surely come at an as yet unspecified price in terms of even greater influence over the institution.

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BRICSHouse Five

The BRICS summit being held in Sanya on Hainan Island on Thursday will probably be presented as a united front of the leading emerging economies. The clarion call will be for strengthened cooperation and coordination between the quintet (South Africa makes five) over global issues such as trade, financial regulation and microeconomic policy, and the environment and climate change.

Yet there are plenty of underlying tensions between the members. China’s relations with Brazil are a case in point. Brazil’s new president, Dilma Rousseff, is making a concomitant state visit. Behind the headline trade deals (China is Brazil’s leading trade partner, with a small surplus in Brazil’s favor), she will be expressing concerns heard increasingly at home that Chinese manufacturing exports to Brazil are de-industrializing the Brazilian economy, while Brazilian exports to China are over concentrated in commodities. (State media are making a big counterpoint of the fact that China is buying Brazilian aircraft as part of the trade deals.)

Certainly the strength of the real, exacerbated by Brazil’s commodity exports to China, makes Chinese exports even cheaper in competition with domestic products. Rousseff will have been pressing Beijing to press ahead more vigorously with letting the yuan appreciate. People who live in bricshouses can still throw stones.

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Oiling The Dollar’s Decline As The World’s Reserve Currency

More on the dollar and its growing role as the fault line of the China-U.S. relationship: China, Russia, Brazil, France and the Gulf States are plotting to switch global oil trading out of dollars, according to Robert Fisk writing in The Independent. Instead they would price oil against a basket of currencies and gold. Secret meetings of finance ministers and central bankers to this end have been held, Fisk says.

What is no secret is that less of the world’s oil trade is priced in dollars than was once the case as buyers and sellers have sought to dampen the volatility that the dollar has exhibited in recent years. The mechanics of pricing oil against a basket of currencies and commodities would be a nightmare, unless the IMF’s special drawing rights (SDRs) or some close facsimile become a widely accepted currency, which this Bytander doubts will happen anytime soon. And what constitutes a secret meeting when it comes to finance ministers and central bankers getting together is another thing of definitional fuzziness.

Saudi central bank governor Muhammad al-Jasser has flatly denied The Indie’s report, saying there have been no such discussions secret or otherwise. Japan’s finance minister Hirohisa Fujii said much the same. But it is certainly no secret that China, along with some other leading developing economies, is steadily chipping away at the notion that the dollar should be the world’s sole reserve currency, and with it the U.S. sway over the world economy.

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BRICs and Brickbats Over The Dollar’s Reserve Currency Role

Brazil, Russia, India and China meet on Tuesday in Yekaterinburg for the first summit of the so-called BRICs, the four leading emerging economies.

They see themselves as a leading voice for the developing world and as a counterweight to the developed world’s dominance in international economic matters as represented by the G-7. As such they want to want to boost their role as global players and increase their collective weight in international organizations.

So far, they share too little in common beyond large, fast growing developing economies to have acted as a bloc. One arena in which they might have been expected to exert collective clout and to speak as one for the developing world was the seemingly interminable Doha round of world trade talks. Yet the interests of China’s low-tech farmers were different from those of their Indian counterparts and far too different from those of Brazil’s high-tech farmers for there to be any unity.

There is one issue that is emerging, however, on which they could speak with a common voice, and it is one on which Beijing has already been a herald: the challenge to the role of the dollar  as the world’s sole reserve currency. Beyond the statistics commonly trotted out to describe the BRICs — they cover a quarter of the world’s land surface, are home to 40% of the world’s people and account for 15% of world GDP– is one highly relevant to this issue: they hold 42% of global foreign exchange reserves.

As well as giving repeated airings to its concerns about the falling value of the dollar on all the U.S. debt it owns, Beijing has switched $50 billion of its admittedly more than $1 trillion of reserves into multi-currency based bonds issued by the International Monetary Fund. Russia has moved $10 billion and Brazil’s central bank has just announced it is doing the same with a similar amount of its reserves. The BRICs want more say over the IMF and are putting a bit of the money at least where their mouths are, and Beijing in particular would be most pleased for the IMF emerge as more of a counterweight in the global financial system to the U.S. The issue will figure prominently at the meeting in Yekaterinburg, a town historically redolent of executing the old order.

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