Eyes are currently focused on South Africa, as it will soon host the fifth BRICS Summit from 26-27 March 2013 at its coastal city of Durban. The big expectation is the launch of the ‘BRICS bank,’ an important global political and economic development that also has bilateral and multilateral implications for the United States, which recently expanded its economic engagement in Africa.
The Weigh In
The BRICS concept, developed by Jim O’Neill of Goldman Sachs, is now over a decade old. It was a predication that Brazil, Russia, India and China would soon be amongst the top five dominant economies in the world. This idea eventually gave birth to a political organization with the First BRIC Summit being held in Russia in June 2009. The BRIC countries discussed United Nations reform, as well as how their group could lead to a “greater voice and representation in international financial institutions.” South Africa was officially added in December 2010 making the BRICS combined weight even more formidable.
According to the CIA World Factbook, the five countries have a combined estimated GDP (PPP) of US$22.5 trillion dollars compared to America’s US$15.7 trillion. The BRICS have over three billion people compared to 314 million for the US. Politically, they hold two of the five permanent member seats at the UN Security Council. However, the key issue for the BRICS in 2013 is global economics, with the BRICS Bank quickly fast tracking the BRICS 2009 vision of a greater voice and representation in international financial institutions.
The BRICS Development Bank, as it will formally be known, will have an initial capital of US$50 billion, compared to the combined World Bank 2011 aid portfolio of US$57 billion and the International Monterey Fund (IMF)’s control over hundreds of billions of dollars. Nevertheless, symbolically this development is huge. The BRICS bank shows Washington and its Western allies that their ‘creditor cartel’ control of the World Bank and the IMF, as well as its pressure for neoliberal policies placed on other countries is slowly weakening. The BRICS will now be able to dictate new ways of funding and underwriting development in emerging economies in Africa and elsewhere. The BRICS can, and most likely will, extend credit via local currencies, which will decrease the reliance on the US dollar. And the BRICS development bank is only the beginning; as there are discussions taking place around the formation of a US$240 billion emerging market funds similar to the IMF.
The development of the BRICS bank was only a matter of time, as older statistics like the numbers Jim O’Neill analyzed clearly showed emerging economies soon catching up to the most developed nations like America. Speeches over the years also made it obvious that leaders around the world were not going to stand back and let the Western powers control international finance forever. In March 2012, the BRICS Leaders urged the World Bank and IMF to urgently review their quota systems to help poorer nations, and blamed the West for lax monetary policy that could fuel instability in emerging economies.
Despite this international finance swing, for now the US still controls the World Bank via its chief Jim Yoon Kim. The Europeans still control the IMF via Christine Lagarade, as per the decades old gentleman’s agreement. These leadership roles help ensure that loans are sensitive to issues important to Americans and other Western powers, and have other important qualities such as information and intelligence gathering with Bank Presidents frequently meeting finance ministers and a whole host of other important individuals from around the world. But will this new BRICS bank lead to World Bank/IMF versus BRICS showdown?
The World Bank says it wants a ‘strong working relationship’ with the BRICS development bank, but there is some bad history and suspicion between the African countries and the IMF in particular. Nevertheless, it is probably safe to say that some partnership will take place due to overlapping priorities within the organizations. Indian Prime Minister, Manmohan Singh set the tone during the 4th BRICS Summit in New Delhi last year when he identified ten priority areas the BRICS could focus on including: job creation, skills upgrading, energy, food and water security, sustainable growth through expanded trade opportunities, clean energy, income inequality, urbanization, and the impact of the external geo-political environment.
This is similar to many of World Bank’s programs in Africa, with the Bank’s financial commitments to Africa, increasing by US$2.8 billion to $12.2 billion in 2012. According to their website: “This included US$7.4 billion in the International Development Association (IDA) credits, grants, and guarantees (up from US$7 billion from the previous year); US$4 billion from the International Finance Corporation (IFC) for private sector development projects; US$147 million in the International Bank for Reconstruction and Development (IBRD) lending; and US$637 million in the Multilateral Investment Guarantee Agency (MIGA) guarantees for projects. US$7.06 billion in development financing to Africa, representing a US$400 million increase over the US$6.6 billion delivered the previous fiscal year.”
The theme for this years BRICS Summit is ‘BRICS and Africa – partnerships for integration and industrialization,’ and South Africa is promoting much needed regional integration. Pretoria has invited the African regional economies via a first dialogue between BRICS Leaders and African Heads of State and Government from the eight Regional Economic Communities (RECs) and the NEPAD Presidential Infrastructure Champion Initiative (PICIs). The BRICS are also looking to collaborate with the captains of industry and academics in the hope of developing a BRICS think tank and a BRICS business council. This will undoubtedly lead to increased trade between the BRICS countries and the dozens of African countries. All of these plans have implications for Washington, which is making a substantial push into Africa.
In November 2012, the US launched its ‘Doing Business in Africa’ campaign. The US Department of Commerce is spearheading the initiative, but involves other agencies like the Overseas Private Investment Agency Corporation who will assist with the establishment of the US-Africa Clean Energy Development and Finance Center in Johannesburg, amongst others. Like the BRICS, America is focusing on clean energy and development with the above centre providing a coordinated approach to clean energy project development on the continent while coordinating its resources with the US private sector, local development banks and private banks. Washington, again like the BRICS, is also engaging heavily on the job creation front. For example, the US Agency for International Development recently established a credit guarantee facility for South African-based asset management firm Cadiz Life Limited, which will make up to US$150 million in funding available to more than 300 small and medium enterprises that could create over 20,000 jobs in South Africa.
Africa welcomes these developments, especially African entrepreneurs. However, the main concern to many is still the extension America’s African Growth and Opportunity Act (AGOA) that is set to expire in 2015. Acting US Secretary of Commerce, Rebecca Blank recently commented on the future of AGOA and said: “There’s no question that Congress will look to see whether American business appear to be operating on a level playing field, whether they have access to procurement and to investment opportunities the same as other businesses, and if they feel the answer to that is no, there might well be hesitations in Congress.”
This ‘level playing field’ is important because the competition on the continent is stiff. American companies now benefit from at least some government backing, but it will prove difficult for some companies to compete for projects throughout Africa that continuously become available as their infrastructure grows and economies continue to prosper if they don’t have assistance from experts and contacts on the ground. At the same time, Chinese money is investing in new platinum mines being built in South Africa such as Wesizwe Platinum’s Bakubung mine China’s first direct investment in the sector.
There is room for partnership in several developmental realms between the BRICS, World Bank, IMF, the US, Africa and others. However, no one has more to gain than the African countries themselves who are finally well positioned to pull themselves out of poverty and empower their citizens. From the business perspective, despite risks, there is plenty of opportunity in Africa. However, given the increasing competition as shown by the upcoming BRICS Summit and America’s new campaign, investors and businesses need to act as these opportunities will not be available forever.