Webinar Summary: Progress and Shortcomings – The BRICS and the Financing Mechanisms They Created

By Rebecca Ray

On Thursday, October 28, the Boston University Global Development Policy (GDP) Center hosted a webinar book launch with Brazilian economist, Paulo Nogueira Batista Jr, for his latest book, The BRICS and the Financing Mechanisms They Created: Progress and Shortcomings, available through Anthem Press. Nogueira Batista holds the Celso Furtado Chair of Macroeconomics and Development at the Federal University of Rio de Janeiro and is the former Vice-President of the New Development Bank and a former Executive Director for Brazil and other countries at the International Monetary Fund (IMF).

The presentation and ensuing discussion was moderated by the Magalie Masamba, Post-doctoral Global China Fellow at the GDP Center and at Post-doctoral Research Fellow at the Centre for Human Rights at the University of Pretoria, South Africa. Masamba began by introducing the importance of the topic at hand. The BRICS countries (Brazil, Russia, India, China and South Africa) collectively represent 3.2 billion people. As the world’s five major emerging economies, they bear significant influence on international affairs and on economic cooperation among emerging economies in general. In 2014, after several years of internal discussion, the BRICS countries established two major multilateral mechanisms of their own: the BRICS Contingent Reserve Arrangement (CRA) and the New Development Bank (NDB), of which Nogueira Batista co-founded. Nearly a decade later, Nogueira Batista’s book explores the effect these new financing mechanisms have had on global economic development, and which shortcomings have been most pronounced. His book details his insider’s account of the negotiations that led the BRICS to form their own cooperation mechanisms and explores the future of these institutions in the post-COVID-19 world.

Nogueira Batista began his presentation with context for the early negotiations that eventually led to the NDB and CRA. Before the financial crisis among North Atlantic economies in 2008-2009, few observers expected emerging market economies to collaborate on their own institutions. Fewer still would have expected these negotiations to have begun at the IMF, an institution that had been losing relevance in international cooperation prior to that crisis. But as the crisis unfolded, it became clear the needs of emerging markets were not sufficiently covered by existing multilateral efforts like the IMF and other Bretton Woods institutions.

It is for this reason that BRICS cooperation is here to stay. Large emerging markets are still not sufficiently taken into account in the design and performance of other multilateral mechanisms. However, the process of collaboration across the BRICS countries has not been straightforward, due to differences among them. The most obvious of these differences may be in language and culture, but another significant internal difference is the disproportionate size of the largest economy, China. However, compensating for the difficulties brought by these internal differences are their common external challenges: increasing tensions between several of their members and high-income Western countries. These tensions have intensified since 2008, reinforcing the necessity of cooperation among BRICS countries.

However, significant obstacles still hold these BRICS mechanisms back from their full potential. These include institutional factors as well as broader factors at the global scale. On the institutional level, the leadership of the individuals involved and the reticence of traditional institutions, such as central banks, to embrace innovation and new forms of cooperation slowed progress and prevented these mechanisms from reaching their full potential. For example, while China had ample experience working with the Chiang Mai Initiative, an Asian regional monetary arrangement, other BRICS members had no such experience, and none had worked on a trans-regional initiative, like the CRA. As a first-hand account of the negotiations involved, Nogueira Batista’s book gives a full portrait of the characters involved and their dynamics. On the international scale, difficulties in negotiation emerged from tensions between India and China, internal political crises in Brazil and tensions between Russia and the Western allies of some BRICS countries. These challenges all still exist.

Nevertheless, Nogueira Batista is hopeful for the BRICS and their continued cooperation. It is his goal for this book to explain how the BRICS can make their collaboration more effective and how the mechanisms they created can play a more important role for the BRICS, as well as the global economy. He also hopes that the book will show more broadly the importance of international cooperation. Increasingly, inter-connected economies mean that national economic concerns can quickly become global challenges that require global responses. He hopes the book will serve to further this awareness, both for BRICS nations and those that interact with them.

Next, Gregory Chin shared his reaction to the book. Chin is Associate Professor of Political Science at York University, Canada, as well as Senior Fellow of the Foreign Policy Institute at the Johns Hopkins University School of Advanced International Studies.

He began by emphasizing the important contribution made by this book for both academics and policymakers. As the first book with a true insider’s perspective on the founding of the BRICS financial mechanisms, the narratives it presents become the public record of the process. It is also an important portrait of the political economy context in which these mechanisms were founded. That context, and the policy space it fosters, has changed significantly; it is unclear whether similar efforts could have been successful if they were launched today. As such, this book serves an important purpose not only for students of the BRICS cooperative mechanisms, but also for historians more generally.

Even though Chin is a scholar of the BRICS, the book held new lessons for him. For example, it taught him about the important role played by former Brazilian President Dilma Rousseff and Brazilian Finance Minister Guido Mantega in forming the BRICS CRA. The book also shines a light on the importance of the example of the Chiang Mai Initiative for guiding the CRA. Finally, Chin says he learned the interesting story of how the IMF – based in Washington, DC and exemplary of the Bretton Woods institutions – became the seat for negotiations that would eventually create mechanisms that serve as alternatives to the IMF itself.

Chin ended with a question: what to make of the NDB’s three new members, Bangladesh, Uruguay and the United Arab Emirates? These were not the three countries most commonly discussed as possible additions to the NDB at its outset.

The next comments were provided by Leslie Elliott Armijo, Adjunct Professor at the School for International Studies at Simon Fraser University. She began by expressing appreciation for how entertaining she found the book. The author’s frankness and sense of humor stand out in this field. His anecdotes were reminiscent of other historical moments in which representatives of very different countries had to find common ground for shared goals, such as the negotiations among allies after World War Two.

In her reading, Armijo was interested to see the theme of global governance and representation throughout the negotiations, particularly regarding voting shares at the NDB and the CRA. In the end, the CRA emerged with weighted voting, with China representing the largest share. The consensus that the CRA will not expand beyond its five BRICS members makes this situation likely to continue. It stands in contrast to the NBD, which has equal voting and equal capital share. It is particularly interesting that even though the bank was expressly designed to expand, the founding members are guaranteed to always have a collective majority vote share, with 11 percent each, or 55 percent together.

She was also interested to learn the different stances of each BRICS country on potential NDB expansion. China has favored expansion, perhaps because newer countries would always be junior in standing to the founding members. Russia shows the greatest resistance to expansion, which this book attributes to a bureaucratic culture of resistance to change among the representatives of the Russian government. Deepening tensions between Russia and many countries with strong ties to the United States or the European Union also make Russia less open to incorporating new members. Finally, South Africa has shown an interest in expanding membership to include high-income non-borrowers to expand the bank’s capital base, but such potential members are likely to be experiencing tensions with Russia following the its annexation of Crimea in 2014.

She ended her comments with a challenge: what to make of the internal BRICS tension between China and India? She raised the question: to what extent will these tensions hamper progress, or diminish India’s willingness to collaborate with China?

Next, Chris Humphrey, a Senior Research Associate at the Overseas Development Institute, United Kingdom, and a Senior Scientist with the ETH Center for Development and Cooperation (NADEL), Switzerland, gave his remarks.

Humphrey began by praising the rare glimpse into the inner workings of multilateralism provided by this book. It is useful for historians as well as scholars who engage directly with public policy, as he does. From his role participating in strategy and planning discussions early in the history of the NDB, he sees several challenges to the institution as it currently stands. These challenges are not insurmountable, as NDB is fully capitalized and operational and poised to continue to grow and can meet these challenges with dedicated leadership.

The first challenge is transparency and engagement. According to Humphrey, although the NDB has a transparency policy, it does not have a history of living up to that policy. This is not a healthy model or precedent for future performance. It breeds suspicion and hinders the capacity for public engagement. Furthermore, the NDB does not participate in active public engagement to its fullest potential, as the Asian Infrastructure Investment Bank (AIIB) does, for example. That approach has benefited the AIIB and could benefit the NDB as well.

A second challenge is the NDB’s approach to environmental and social safeguards and their reliance on country systems for this aspect of project management. A strategy of using country systems can be a strong institutional advantage, and Humphrey was an early proponent of this approach. However, in practice, it may have become a pretext for overlooking environmental and social governance of projects entirely. The NDB states that it has evaluated the national systems of each member as sufficiently strict to rely on them but has not published any documentation of this process. This approach is likely to lead to scandals and poorly performing projects and should be revisited.

There is great opportunity for the NDB to create a niche for itself in financing sustainable infrastructure. The NDB has in fact financed a significant amount of projects in this sector, and in fact the NDB often states this as their goal, but they have not yet defined the types of projects that could qualify as such, nor the institutional processes necessary to oversee them in a sustainable way. This is an area in which the NDB has come a long way but could make further progress to take full advantage of the opportunities they have.

Finally, governance may be an obstacle for further growth. While the NDB was founded as egalitarian, it will not remain so, as new members will have less vote share than founding members. While the NDB is an important institution for BRICS countries, it could make a much larger impact for emerging economies more broadly if it also incorporated members, such as Mexico, Nigeria, Indonesia, Ethiopia and others. Those countries have not shown an interest in joining so far. They may be discouraged by the unequal opportunities presented to them. The Development Bank of Latin America (CAF) also dealt with this challenge, as it was initially founded for Andean countries, but under the leadership of Luis Garcia it expanded tremendously.

At this point, Nogueira Batista answered questions raised by the panelists. To Chin’s question on new members and Armijo’s question on internal differences among BRICS countries, he responded by pointing out that it is noteworthy that it took six years to incorporate the first group of new members. This inertia shows the lack of dynamism that has plagued various aspects of negotiations among BRICS countries throughout these processes. To Humphrey’s question on voting power and growth, he responded that the example of CAF is an apt one. The individual leadership of CAF President L. Enrique Garcia was instrumental in making necessary changes. NDB has not had that type of leadership, but he hopes they will in the future.

Kevin Gallagher of the GDP Center asked why BRICS countries’ use of the CRA has lagged behind use of the NDB. Nogueira Batista explained that when he helped design the CRA he wanted a more ambitious scope, but pared back those ambitious in order to win the approval of traditionally conservative central banks. He noted that the collaboration among those central banks, to put into place all the necessary arrangements for the CRA, has nevertheless been impressive. He reiterated that stronger, more visionary leadership, particularly by Brazil, can push both the CRA and NDB to fulfil their initial purpose, not only for the BRICS countries but beyond.

Ultimately, the BRICS countries have a significant role globally and with proper cooperation and leadership, Nogueira Batista hopes they can step into this role and contribute to global development.