Hamish McRae: The Brics are banking on a rather old-fashioned idea to challenge US and Western dominance

Economic View: Is the new bank likely to be of much use? The emerging countries have done pretty well without it

The Brics summit has produced, as expected, a rival world bank to be headquartered in Shanghai, with capital of $50bn (£29bn). It has also agreed to set up a currency reserve facility of $100bn that countries can draw on short term if they run into a balance of payments crisis. So the Brics are mirroring the twin institutions founded after the Bretton Woods Conference exactly 70 years ago, the World Bank and the International Monetary Fund. What should we make of this?

It is, for a start, an astounding tribute to the power of an idea: the coining by Jim O’Neill at Goldman Sachs of an acronym to encompass the four largest emerging economies, Brazil, Russia, India and China. South Africa became the S, though it does not really qualify on GDP grounds and may not even be the largest African economy now, as it looks as though Nigeria has passed it.

If the big idea was a Western one, forming two institutions that copy the existing institutions (of which the Bric countries are naturally already members) is a further compliment to Western intellectual leadership. Indeed, both the World Bank and the IMF have become rather old-fashioned concepts. If an African country wants to obtain development funds it goes direct to China, rather than the World Bank – or at least it does if it has any natural resources. Or it goes to the private sector, importing access to markets and commercial know-how as well as the cash. As for the currency reserve, in a world of floating rates, you don’t really need an IMF. It was intended to help lubricate the fixed exchange rate system, which died in 1973. While it has subsequently had a role in bailing out countries that have made a mess of their finances – the UK in 1976 and much more recently the eurozone periphery – were it not to exist I don’t think the world would really notice. It shows a certain lack of imagination to create two new institutions when the present ones are becoming less and less relevant. Why do it? 

Part of it is frustration with what is seen as a US-dominated system. Both the World Bank and the IMF are located in Washington and the US remains the largest shareholder. The head of the bank is, by tradition, an American; the head of the fund, a European. This anachronistic split holds true even when the appointee turns out to be incompetent, or misbehaves in other ways, as we recently found with Dominique Strauss-Kahn. (Dr Jim Yong Kim, current president of the World Bank, was born in South Korea, but moved to the US with his parents at the age of five.)

There is a precedent. When Europe wanted to direct more funds to Eastern Europe after the collapse of the Soviet Union, it formed the European Bank for Reconstruction and Development. That echoed the full title of the World Bank – the International Bank for Reconstruction and Development. Recently the largest recipient of EBRD funds has been Russia, and there is pressure by the EU now to cut these funds, following the Ukraine emergency. From the Russian perspective the new bank is a bit of poke in the eye for the West.

For different reasons, it also suits China, which wants a greater global financial role, but is hesitant to let its currency be used for international trading. It suits India, which provides the first head of the new bank. It suits Brazil, where growth has slowed dramatically and which needs to rebuild its self-confidence. And it suits South Africa to have a place on the financial world stage.

If, however, you ask whether the world needs yet more international bodies, it is hard to sustain much of a case. Having a short-term lending facility that gives an alternative to the IMF has political attractions, and given the IMF’s poor performance with regard to the eurozone fringe (not to mention its absurd attack on the UK), having some sort of rival may be no bad thing. A competitor to the World Bank may also be marginally useful. Competition in finance for global infrastructure cannot be bad.

So the “first do no harm” stricture holds. But if you have a look at the two graphs you can see both why the emerging world hardly needs any new institutions, but also why it wants to have them.

The top graph comes from the IMF and shows how the emerging world (black line) has outpaced the developed world (red line) for the past 15 years. True, the gap is narrower now than it was in the early 2000s, but looking ahead the emerging world seems likely to grow at roughly double the rate of the developed world. Is a new bank really likely to be of much use? The emerging countries have done pretty well without it.

The second graph shows the pecking order in 2030, as projected by the Goldman Sachs model. As you can see, the four Bric countries (shown in black) occupy four of the six top places, while the G7 countries (shown in red) slip down the pack. South Africa does not register, demonstrating that its inclusion is political rather than economic. Stronger candidates as members of the club would be Mexico, which is part of Nafta; Turkey, which has a trade agreement with the EU; and South Korea, shown in grey. It is hard, however, to argue with the basic point that the world will, in 15 years’ time, be dominated by the Brics and that they must have a much more explicit role in the choreography of this economy.

That really should be the aim of the West: to get closer cooperation between all these new players, so that fostering world growth – and the handling of related issues such as environmental concerns – becomes the responsibility of all. We need the new economic powers to take on the role that their status demands. It may seem a pity that they should feel the need to set up rival bodies to the World Bank and IMF, though it is easy to see why. But since it is hard to see these bodies doing any harm, they surely deserve a welcome. 

News
Susan Sarandon described David Bowie as
peopleSusan Sarandon reveals more on her David Bowie romance
Sport
Arsenal supporters gather for a recent ‘fan party’ in New Jersey
football
Sport
sportDidier Drogba returns to Chelsea on one-year deal
Arts and Entertainment
The Secret Cinema performance of Back to the Future has been cancelled again
film
PROMOTED VIDEO
Life and Style
Balmain's autumn/winter 2014 campaign, shot by Mario Sorrenti and featuring Binx Walton, Cara Delevingne, Jourdan Dunn, Ysaunny Brito, Issa Lish and Kayla Scott
fashionHow Olivier Rousteing is revitalising the house of Balmain
News
people
Arts and Entertainment
Christian Grey cradles Ana in the Fifty Shades of Grey film
filmFifty Shades of Grey trailer provokes moral outrage in US
News
BBC broadcaster and presenter Evan Davis, who will be taking over from Jeremy Paxman on Newsnight
peopleForget Paxman - what will Evan Davis be like on Newsnight?
Life and Style
fashionCustomer complained about the visibly protruding ribs
Voices
The new dawn heralded by George Osborne has yet to rise
voicesJames Moore: As the Tories rub their hands together, the average voter will be asking why they're not getting a piece of the action
Sport
Dejan Lovren celebrates scoring for Southampton although the goal was later credited to Adam Lallana
sport
News
newsComedy club forced to apologise as maggots eating a dead pigeon fall out of air-conditioning
Arts and Entertainment
Jo Brand says she's mellowed a lot
tvJo Brand says shows encourage people to laugh at the vulnerable
Life and Style
People may feel that they're procrastinating by watching TV in the evening
life
News
ebookA unique anthology of reporting and analysis of a crucial period of history
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Senior Risk Manager - Banking - London - £650

£600 - £650 per day: Orgtel: Conduct Risk Liaison Manager - Banking - London -...

The benefits of being in Recruitment at SThree...

£18000 - £23000 per annum + Comission: SThree: SThree, International Recruitme...

Test Analyst - UAT - Credit Risk

£280 - £300 per day + competitive: Orgtel: Test Analyst, Edinburgh, Credit Ris...

Trainee Recruitment Consultants - Banking & Finance

£20000 - £25000 per annum + OTE £40,000: SThree: SThree Group have been well e...

Day In a Page

Evan Davis: The BBC’s wolf in sheep’s clothing to take over at Newsnight

The BBC’s wolf in sheep’s clothing

What will Evan Davis be like on Newsnight?
Finding the names for America’s shame: What happens to the immigrants crossing the US-Mexico border without documents who never make it past the Arizona desert?

Finding the names for America’s shame

The immigrants crossing the US-Mexico border without documents who never make it past the Arizona desert
Inside a church for Born Again Christians: Speaking to God in a Manchester multiplex

Inside a church for Born Again Christians

As Britain's Anglican church struggles to establish its modern identity, one branch of Christianity is booming
Rihanna, Kim Kardashian and me: How Olivier Rousteing is revitalising the house of Balmain

Olivier Rousteing is revitalising the house of Balmain

Parisian couturier Pierre Balmain made his name dressing the mid-century jet set. Today, Olivier Rousteing – heir to the house Pierre built – is celebrating their 21st-century equivalents. The result? Nothing short of Balmania
Cancer, cardiac arrest, HIV and homelessness - and he's only 39

Incredible survival story of David Tovey

Tovey went from cooking for the Queen to rifling through bins for his supper. His is a startling story of endurance against the odds – and of a social safety net failing at every turn
Backhanders, bribery and abuses of power have soared in China as economy surges

Bribery and abuses of power soar in China

The bribery is fuelled by the surge in China's economy but the rules of corruption are subtle and unspoken, finds Evan Osnos, as he learns the dark arts from a master
Commonwealth Games 2014: Highland terriers stole the show at the opening ceremony

Highland terriers steal the show at opening ceremony

Gillian Orr explores why a dog loved by film stars and presidents is finally having its day
German art world rocked as artists use renowned fat sculpture to distil schnapps

Brewing the fat from artwork angers widow of sculptor

Part of Joseph Beuys' 1982 sculpture 'Fettecke' used to distil schnapps
BBC's The Secret History of Our Streets reveals a fascinating window into Britain's past

BBC takes viewers back down memory lane

The Secret History of Our Streets, which returns with three films looking at Scottish streets, is the inverse of Benefits Street - delivering warmth instead of cynicism
Joe, film review: Nicolas Cage delivers an astonishing performance in low budget drama

Nicolas Cage shines in low-budget drama Joe

Cage plays an ex-con in David Gordon Green's independent drama, which has been adapted from a novel by Larry Brown
How to make your own gourmet ice lollies, granitas, slushy cocktails and frozen yoghurt

Make your own ice lollies and frozen yoghurt

Think outside the cool box for this summer's tempting frozen treats
Ford Fiesta is UK's most popular car of all-time, with sales topping 4.1 million since 1976

Fiesta is UK's most popular car of all-time

Sales have topped 4.1 million since 1976. To celebrate this milestone, four Independent writers recall their Fiestas with pride
10 best reed diffusers

Heaven scent: 10 best reed diffusers

Keep your rooms smelling summery and fresh with one of these subtle but distinctive home fragrances that’ll last you months
Commonwealth Games 2014: Female boxers set to compete for first time

Female boxers set to compete at Commonwealth Games for first time

There’s no favourites and with no headguards anything could happen
Five things we’ve learned so far about Manchester United under Louis van Gaal

Five things we’ve learned so far about United under Van Gaal

It’s impossible to avoid the impression that the Dutch manager is playing to the gallery a little