World Bank watch out, the BRICS Bank is a game-changer

Ali Burak GuvenThis post was written by Dr Ali Burak Güven, Lecturer in International Relations & International Political Economy in Birkbeck’s Department of Politics. It was originally published on The Conversation.

The top news from this year’s BRICS summit was the announcement of a New Development Bank. Headquartered in Shanghai, the bank will become operational in 2016 with an initial capital of US$50 billion. Its core mandate is to finance infrastructure projects in the developing world.

The bank, announced at the summit in Fortaleza, Brazil, will also have a monetary twin to provide short-term emergency loans, the Contingency Reserve Arrangement. While the bank will be open to all UN members, the reserve will lend only to the contributing BRICS countries in times of crisis.

This combination of timing, actors, and institutions is noteworthy. It was in July 1944 that the Allied nations gathered at Bretton Woods to form two of the most vital institutions of the post-war era: the International Monetary Fund and what would become the World Bank. Now, 70 years later and only a few years on from the global financial crisis, the leading developing nations of our time have joined forces to forge new institutions of international economic cooperation with mandates identical to the World Bank and the IMF.

This move is born out of a belief that the Bretton Woods twins, despite numerous governance reform initiatives over the past decade, remain set to reflect the policy preferences of their original creators. In creating complementary institutions, the BRICS will be hoping to use these alternative platforms of international economic governance and as leverage to accelerate the reform of existing arrangements.

Game-changing potential

The New Development Bank is currently the more interesting of the “Fortaleza twins”, for it is designed as a freestanding organisation that’s open to all. Yet it has not received a warm welcome in business columns. While the political symbolism of the new institution is widely acknowledged, its immediate economic utility has been challenged – why do the BRICS need a development bank of their own when infrastructure projects are already easily financed through private as well as official channels, especially through the World Bank?

This is a narrow criticism. In the long run, the New Development Bank has the potential to become a game-changer in development financing. In fact, if its evolution even remotely parallels that of the World Bank, it might end up having a formative impact on economic policy-making and overall development strategy in the Global South.

To begin, while there is no shortage of national and regional development banks as well as private financiers of infrastructure projects, there is still a massive gap in development finance, estimated to be as high as US$1 trillion per year. Many developing countries encountered significant financing problems during the global crisis of the late 2000s. This shortfall necessitated a surge in World Bank commitments, from an annual US$25 billion in 2007 to about US$60 billion in 2010.

But commitments declined just as swiftly over the past few years, and as of 2013 stood at about $30 billion. Given these figures, the New Development Bank’s readily available $10 billion in paid-up capital and the extra $40 billion available upon request are not exactly pocket money for development financing.

Yet just as the World Bank was never simply a money lender, so too will the new bank represent far more than a mere pool of funds. The existing geostrategic and policy inclinations of its founding stakeholders imply a bigger role to play for the institution. In the process, it is bound to offer a formidable challenge to the World Bank’s financial prominence and so influence policy in the developing world.

Client-side

The new bank has been long in the making. It is the culmination of nearly two decades of intense South-South cooperation and engagement. In recent years especially, the BRICS and other emerging nations have become donors and investors in both their immediate regions and in less developed areas of the world – with Chinese and Brazilian involvement in sub-Saharan Africa and parts of Latin America representing the prime examples.

They have made an effort to establish more equal relationships with their lower-income developing peers and emphasised an attractive narrative of partnership, non-intervention and knowledge transfer, instead of smug, superior Western notions of top-down aid and restrictive conditionality. To the extent that it could keep its rates competitive, the New Development Bank is unlikely to suffer from a dearth of clients from among its fellow developing nations.

Paradoxically, BRICS and other large middle-income countries still remain the most valuable clients of the World Bank. Since the financial crisis, India has been the largest borrower of the World Bank, and has been closely followed by Brazil, China and a few other near-BRICS such as Indonesia, Turkey and Mexico. But, once the new bank fully kicks off, it is possible the World Bank will lose a lot more business from this traditionally lucrative market of large middle-income borrowers who now have a serious alternative.

Political implications

A reduced loan portfolio will ultimately translate into declining policy influence for the World Bank, which has held near-monopoly of development wisdom over the past 70 years. Perhaps in recognition of their waning power, there has already been a slight but steady decline in World Bank loans that emphasise policy and institutional reforms.

Also, a larger portion of the Bank’s resources have been allocated to conventional development projects, such as environment and natural resource management, private sector development, human development, and social protection. These are precisely the types of projects the Bank will encounter fierce competition from the new BRICS-led bank.

Knowledge and power

Consider also that the World Bank has labelled itself as a “knowledge bank” in recent years. Employing thousands of policy specialists, it doubles as one of the biggest think tanks in the world. Yet if it loses considerable financial ground to initiatives such as the New Development Bank, this threatens a decline in the power it has through knowledge.

Crucially, none of the BRICS adhere to the Bank’s standard policy prescriptions, nor do they advocate a different common strategy either. Brazil’s social democratic neo-developmentalism is quite different from China’s state neoliberalism, which in turn differs from established policy paths in others in the group. The only common denominator is a substantially broader role given to the state. But beyond this there is much flexibility and experimentation and little in the way of templates and blueprints like there is with the Western institutions. This policy diversity itself dismisses any idea of superiority of knowledge and expertise.

None of this suggests that the World Bank, as the dominant, Northern-led development agency, is now on an ineluctable path of decline. Cumbersome as they may appear, large organisations often accumulate considerable resilience and adaptive capacity over generations. Yet the World Bank does have a serious contender in the New Development Bank.

While it may not overtake the World Bank in financial prowess and policy influence any time soon, at a minimum it should be able to exert significant pressure over the World Bank to respond more sincerely and effectively to the new balance of power in the global economy.

The Conversation

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Commonwealth hamstrung to fight abuse in Sri Lanka

This post was contributed by Frederick Cowell, a lecturer and researcher in international law in Birkbeck’s School of Law. This article first appeared on The Conversation.

The list of crimes alleged to have been perpetrated by brothers Mahinda and Gotabhaya Rajapaksa – respectively the president and defence minister of Sri Lanka – are truly horrifying. During the last few months of the civil war in 2009, the Sri Lankan army was alleged to have deliberately shelled civilian areas and since the ceasefire, as the Sri Lanka justice campaign has detailed, there have been numerous extrajudicial killings and incidents of torture.

Rather than being treated as international pariahs, though, the Rajapaskas are hosting the Commonwealth Heads of Government Meeting this week, attended by representatives of more than 40 governments from around the world.

Since 1965 the Commonwealth has been an independent intergovernmental organisation, with its own headquarters and secretariat. From 1971 it took a leading role in facilitating negotiations over ending white minority rule in Southern Africa.

Sincere commitments at the organisational level, however, did little to affect the Commonwealth’s membership. Military regimes and dictatorships were prominent members of the Commonwealth throughout the 1980s. When the Commonwealth broadened its focus to the protection of human rights with the passage of the 1991 Harare Declaration, committing Commonwealth member states to the protection of “fundamental human rights” and democracy, it was clear a more robust enforcement mechanism was needed if the declaration was to have any meaningful effect.

Suspension is easy

Article 3 of the 1995 Millbrook Action Programme allows states to be suspended from the organisation when they were clearly “in violation” of the Harare Principles, “particularly in the event of an unconstitutional overthrow of a democratically elected government”. This was the first instrument of its kind and was a radical move. At the time the UN Human Rights Commission didn’t even have an instrument for suspending serial human rights abusers or illegal governments.

In 1995 Nigeria became the first country to be suspended from the Commonwealth after General Abache’s regime rejected the results of the 1993 elections and went onto commit series of human rights abuses including the execution of activist Ken Saro Wiwa. This was followed by the suspension of Pakistan in 1999 and Fiji in 2000, both following military coups.

The Millbrook action programme also allowed the appointment of ad-hoc groups of high level officials. Zimbabwe was suspended from the Commonwealth in 2002 after a troika of officials, including then Australian prime minister John Howard, concluded Robert Mugabe’s re-election that year had been “marred by a high level of politically motivated violence”. This led to Zimbabwe withdrawing from the organisation a year later. The most recent suspension was Fiji in 2009 after the government refused to accept a domestic court ruling that a 2006 coup was illegal.

Human rights play second fiddle

The focus of the Commonwealth Ministerial Action Group (CMAG), the decision making body of the Commonwealth, has been largely on the overthrow of democratically elected governments. This has led to the relative relegation of the protection of human rights, effectively turning Article 3 into an anti-coup instrument. And even as an anti-coup instrument, it has been applied inconsistently. When Maumoon Abdul Gayoom took power unconstitutionally in the Maldives in February 2012, CMAG issued a statement urging the government to hold fresh elections, but little action has been taken since.

It is also increasingly unclear what suspension is actually for. Fiji has been suspended for nearly four years, during which time it has made scant progress towards returning to constitutional government. Fiji’s government has covered the shortfall in development aid it suffered by receiving aid from China.

Anti-coup instruments have been adopted in several other international and regional organisations including the African Union. The problem is that they can easily become mechanisms that protect governments rather than human rights.

An anti-coup mechanism is also a barrier to gaining international recognition for a new government that comes to power through a coup. This can help deter future coups, which benefits exiting governments. This is why the Millbrook Action plan has received so much support from Commonwealth members. Commonwealth states have resisted attempts to create an independent Commonwealth Human Rights Commissioner, meaning that the decision to suspend states still rests with diplomats from member states.

The situation in Sri Lanka has split opinion among Commonwealth governments about the best way to respond to the human rights abuses taking place in Sri Lanka. Until a strong independent mechanism is brought in to assess suspension, Sri Lanka will remain a Commonwealth member, despite the atrocities that occur on its soil.

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Free China?

On the anniversary of the Tiananmen Square massacre, Dr Andreas Liefooghe of Birkbeck’s Department of Organizational Psychology explores the powerful message of the award-winning documentary Free China, and asks why the West lacks the courage to believe.

For the first time, the service industry accounts for more than half of China’s economy, with manufacturing now accounting for less than 40%. Reports state that this is because of a burgeoning, and wealthy, middle-class doing what they do best: consume. Yet this is only part of a story.  For every Vuitton bag sold (fake or otherwise), someone else labours not for a minimum wage, but for nothing at all. Beyond the glossy facades of Shanghai and Beijing lies the ugly underbelly of repressive China. The laogai system provides labour from ‘criminals’ and prisoners incarcerated for ‘crimes against the regime’ who need ‘re-education’. Those Homer Simpson slippers you are wearing may just be made by one of these prisoners, and perhaps it’s time to listen to some alternative account of China’s might.

On the 24th anniversary of the Tiananmen Square Massacre, the documentary Free China: The Courage To Believe does just that. Following the lives of two protagonists, Free China tells the story of Jennifer, a mother and former Communist Party member, who along with more than 70 million Chinese people, was practicing a belief that combined Buddhism and Daoism, until the Chinese Government outlawed it. The Internet police intercepted an email and Jennifer was imprisoned for her faith. As she endured physical and mental torture, she had to decide: does she stand her ground and languish in jail, or does she recant her belief so she can tell her story to the world and be reunited with her family? A world away, Dr. Charles Lee, a Chinese American businessman, wanted to do his part to stop the persecution by attempting to broadcast uncensored information on state controlled television. He was arrested in China and sentenced to three years of re-education in a prison camp where he endured forced labor, making amongst other things, aforementioned slippers sold at stores throughout the US.

As political scandals surface and tensions rise, along with more than one hundred and fifty thousand protests occurring each year inside China, this timely documentary highlights the issue of unfair trade practices with the West, organ harvesting of prisoners of conscience and widespread forced/slave labor. The film also highlights how new Internet technologies are helping to bring freedom to 1.3 billion people in China, and other repressive regimes throughout the world. Free China also has another aim. It has partnered with an internet technology team, who have developed new peer-to-peer software, which allows users inside China to safely and securely breakthrough the Great Internet Firewall, and access uncensored information. This is hoped to allow Chinese people with alternative sources of information, to be able to make more informed decisions about their own future, and to help transform ‘China-net’ from a tool of control and oppression into one of freedom of expression on the world stage.

This week from the 4 June people can buy DVDs of the film, plus there will be theatrical releases in New York and Los Angeles, as well as a series of international screenings. Despite high-profile endorsement, very little is heard of this story. As we continue to court China for its economic power, perhaps we also need to check our courage to believe some alternative accounts.

Free China was screened at Birkbeck on 18 March 2013 as part of the Vulnerable Selves, Disciplining Others ESRC Seminar Series, examining the relationship between vulnerable individuals and oppressive regimes. We were joined by the producer Kean Wong, protagonist Jennifer Zeng, and interviewee Ethan Gutmann, and became part of a list of screenings alongside US Congress and EU Parliament.

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