The BRICS New Development Bank and the Contingent Reserve Agreement (CRA) are scheduled to start lending to member countries in 2016. If you don’t know what those are, you are not alone; few articles about these agreements have been widely circulated on the web. They are out there, to be sure, but in general, coverage of these agreements has not been ‘popular’ news. So what do they mean? If you live in South America, Africa, the Middle East or Asia, they might mean a brighter future for your kids and grandkids. If you live in North America, Europe or Japan, those two names may be ones that the people around you come to hate. If you belong to the latter group, you will hear negative things. You will hear that the CRA and the New Development bank are locked in constant battle with the IMF and the World Bank. You will hear that the IMF and World Bank are a force for democracy and all that is good, and that the New Development Bank and CRA are a tool for all the backwards crazy demagogues who want nothing more than to get in the way of progress. If you belong to the former group, you will probably hear that there’s hope. You will be told that the IMF and World Bank have consistently held back your country’s economy for the benefit of the world’s wealthiest nations, who’ve all joined forces in an epic cronyist conspiracy dating back to the end of WWII. You will be told that the BRICS Nations – Brazil, Russia, India, China and South Africa – are at the forefront of a revolution, and if your country has any shot at wealth and power, it’s through the wise counsel of these five. But in neither case will you ever really be as informed as you should be. So, before the inevitable media onslaught of this issue begins in your home country, protect yourself. You’ve probably heard of the IMF and World Bank in the news. But what do these institutions even do? Let’s start with the IMF. IMF stands for the International Monetary Fund. The UN conceived it after WWII as a preventative measure against another Great Depression. The idea is that every country in the world would pool a set amount of funds together, and the funds could then be given out to a member country experiencing some kind of immediate crisis or otherwise in need of a short-term financial bandaid. After the funds are given out, the IMF board of directors (featuring two representatives from 188 countries) will then supervise while the recipient country implements a specified type of economic reform. For example: in a small country named Narnia, agriculture is the economy’s backbone. Farmers produce rice and wheat in excess, and Narnia sells this excess to buy other things it needs from other countries. Narnia’s economy is not very strong, but Narnia’s government pegs their currency, the Aslan, to the value of the US Dollar at a one-to-one ratio. This means that one Aslan is worth one Dollar – even if one Aslan shouldn’t really be worth that much. Now, the Aslan is overvalued. This is good for Narnia’s government when they want to buy imports: their money is worth more, and they can buy more for less. But, because their money is worth more, that means the prices of their own exports are also higher, making it harder to sell their rice and wheat abroad. Ultimately, Narnia finds itself spending too much on imports (because “everything’s so much cheaper!”) and with not enough export sales to balance its spending. Finding itself in debt, Narnia’s government decides to cut into social spending, including stopping subsidies to farmers. But without subsidies, many farmers find themselves unable to maintain the costs of running their farms. Suddenly, on top of being unable to sell the rice that it had before, Narnia now has even less rice left to sell. The problem begins to perpetuate itself. When a country has fallen into debt in this way, it’s not as easy as just un-pegging the currency and watching the nation’s checkbook balance itself out. Any changes made to the Narnian economy would take time to have an effect, and in the mean time the situation would continue to deteriorate. Without a quick infusion of cash – an adrenaline boost, as it were – Narnia may be stuck in a low point for a long time. And in a globalized economy, this hurts other countries, too. This is the principle on which the IMF was founded: a quick shot of cash to help out a nation who’s had a minor misstep while they get back on track. The World Bank works in a similar fashion, but on a long-term scale. It seeks to expedite development projects, like roads, schools, and industries. It borrows money from lender countries (primarily the US, European nations, and Japan) and lends them out to developing countries in South America, Africa, Southeast Asia and the Middle East. These loans come with conditions attached: a hundred million dollars to Narnia, for instance, on the condition that they put all of it into improving their schools, so that the next generation of students can pursue lines of work other than farming. Rarely, however, does the World bank charge any interest, meaning that the client country (usually) has all the time in the world to pay it back, and doesn’t need to worry if things don’t improve for them right away. All in all, the IMF and the World Bank constitute, in theory, the closest thing we have to global economic cooperation, bringing the world together with the purpose of making everyone in every country happier. So why are they contentious? The IMF/World Bank, although ostensibly about putting the world’s nations on equal footing, are indisputably run by the elite few wealthiest nations of the world. The IMF’s voting system gives each member nation a percentage of the vote based on that nation’s share of money in the IMF pot. So, because the US has about $62 billion in the pot (about 16% of the total reserve of the IMF), she gets about 16% of the votes. In fact, the top three contributors together – the U. S., Japan, and Germany – have more voting power (25%) than the bottom 158 countries combined (23%). In theory this shouldn’t be a problem: if the IMF/World Bank are truly made up of objective, rational people who only seek to improve the lives of everyone on Earth, then it shouldn’t matter where the money comes from. If the wealthiest nations on Earth have indeed each put in tens of billions of dollars from their own treasury purely out of the wish for a brighter economic future, then we can be sure that when they make their decisions to give or withhold funds from member nations, it’s because they’ve done the research and know exactly what needs to be done to improve the situation. But, if there’s reason to believe that the people putting in the money have ulterior motives for doing so, then the whole setup starts to look less like a partnership of nations and more like schoolyard bullying. The IMF’s Chairman has traditionally always hailed from a European nation, while the World Bank’s President has never not been American. Developing nations of the world might understandably feel under-represented by these supposed egalitarian institutions. Even if every member of the IMF and World Bank was a perfectly objective, rational, saintlike creature incapable of greed, it’s hard to blame most of the world for feeling powerless when they no longer hold singular command over their own economy. If the World Bank/IMF wanted to prey upon a corrupt government for the benefit of Western powers, they could do so very easily. For example: the World Bank could offer a loan to Ghana in exchange for, say, privatizing their water industry – an act with no conceivable outcome other than to allow foreign bottling companies to take control of their drinking water, drive up water prices and make living harder for Ghanaian citizens. However, unlike the hypothetical problem of Narnia, this problem of Ghana’s was for decades very real, and makes for a perfect exhibit as to why the World Bank may not be able to solve all the world’s problems alone, after all. In the 1990’s, Ghana’s water quality was a crippling problem. The country’s water utility, Ghana Water Company, Ltd., was doing their job terribly. After extensive studies and one consultation “workshop” in 1995 (in which every participant was from a foreign institution and no Ghanaian NGO’s were present), the World Bank and Ghana’s government decided to lease out the water supply of "half the cities and towns of Ghana" to private companies. In 2000, they moved forward in doing just that: a 30-year contract for half the country, including Accra, was to be given to the US corporation Enron. After massive public outcry and allegations of corruption, the move ultimately failed. This case is by no means unique. Many suspicious dealings have taken place between the World Bank/IMF and countries without the economic stability to refuse them, like Ghana – or countries whose leaders just like to receive loans so they can spend them on Sports Cars, like Argentinian Carlos Menem. In fact, trust in the IMF/World Bank’s moral authority has been shaken many, many times in the past. Naomi Klein, reporter for the Guardian and a strong voice against the two institutions, says her faith in the World Bank was broken “when it made telecom privatisation a condition of aid for Hurricane Mitch; when it demanded labour ‘flexibility’ in Sri Lanka in the aftermath of the Asian tsunami; when it pushed for eliminating food subsidies in post-invasion Iraq.” And again in Ecuador, when it “withheld a promised $100m after the country dared to spend a portion of its oil revenues on health and education.” This is why the New Development Bank/CRA were proposed: To give a new faction of countries, led by the five founding nations of BRICS, a chance to defend themselves if need be. They are nearly identical to the World Bank/IMF in structure, with the difference that they represent production-based countries, as opposed to the consumerist economies of Europe/USA/Japan. But, while the directive of healing the world economy has carried over, so has the danger of cronyism. To be sure, leaders of the World Bank/IMF could make a solid case that each one of Klein’s accusations was a result of very specific circumstances; that their ultimate goals have always been noble, and with the right context everyone would agree. And, by the same token, the BRICS Nations can claim that the New Development Bank and CRA (virtually carbon copies of the World Bank and IMF, respectively) will be just as noble. Whether we believe the IMF/World Bank to have been positive or negative influences on the world economy, make no mistake that the New Development Bank/CRA will mark a new paradigm. Each of the five members of BRICS hail from areas of the world that have become disillusioned with the current Euro/American/Japanese hegemony of the world market, and each holds tremendous influence over the politics, economics, and even culture of the countries around them. The New Development Bank/CRA are set to become the second party of an inevitable two-party system, with the old, consumer-based economies attempting to steer the world economy in one direction, and the rising, production-based economies exerting a pull in another. Even if all four institutions in question were to be run by wise, selfless Jedi-economists, there will inevitably be cases where one side diametrically opposes the other. Some will say this is a step in the direction of progress, as it gives countries more freedom as to where to get their support from, and forces the lending institutions to be more reasonable in their demands; others will say it is a tragedy for any future vision of global cooperation, because existing political tensions now have yet another outlet through which to divide the world. In the end, it doesn’t matter how corrupt the IMF/World Bank have been in recent decades; reasonable people would only expect more of the same from the BRICS institutions when they are up and running. Maybe having two factions in the world lending will make them both compete to be the one that makes the most reasonable and beneficial changes to the world economy. Or maybe, in their wrestling, the two Titans will stumble and smash around indiscriminately, scrambling to get rich and making poor countries violently poorer. The only way to handle this shift in the world stage is with pragmatism: weigh both sides in the larger context of their political goals, and decide for yourself who has a better interest in keeping you on your feet. If you live in Pakistan, would you rather owe money to America or to India? If you live in Africa, would you rather be indebted to Europe, or to China? Maybe one day no nation will need to ask themselves these questions. Maybe there’s a way to make every country both self sufficient, and a vital contributor to the world economy. Maybe having two opposing forces balancing one another on the international stage is an important step in that direction. Or maybe, like some say the IMF and World Bank ultimately did, they’ll wind up doing more harm than good.

Sources:

https://www.imf.org/external/pubs/ft/exrp/differ/differ.htm

http://en.wikipedia.org/wiki/International_Monetary_Fund

http://en.wikipedia.org/wiki/World_Bank

http://www.theguardian.com/commentisfree/2007/apr/27/comment.business

http://www.wdm.org.uk/sites/default/files/treacherousconditions07052003.pdf

http://en.wikipedia.org/wiki/Water_privatisation_in_Ghana

This article was written by Michael Margaritoff. Send an email to [email protected] to get in touch. Photo Credit: Marjorie Wang