BRICS group to set up new bank

Crescent International

Rabi' al-Thani 19, 1434 2013-03-01

Daily News Analysis

by Crescent International

Welcome to the new global economic order free from the chains of US imperialism.

Durban,

March 26, 2013, 20:05 EST

The BRICS group of countries unveiled a new bank during their summit in Durban, South Africa over the weekend. The five member states said its aim was to break the monopoly of Western-backed institutions that have often worked to undermine developing economies. The BRICS group comprises Brazil, Russia, India, China and South Africa and together they represent more than 40 percent of the global population.

“It’s done,” said Pravin Gordhan, South African Finance Minister, on Tuesday, adding that “we made very good progress” on the formation of a World Bank-analogue development agency. Finance ministers of the BRICS countries met in Durban, South Africa for the opening of the fifth BRICS summit this week to put final touches to the plan. The leaders of BRICS members are expected to make an official announcement on Wednesday. “Not long ago we discussed the formation of a developmental bank...Today we are ready to launch it," said South African President Jacob Zuma on Monday (March 25).

So far the Bretton Woods institutions—the World Bank and the International Monetary Fund (IMF)—have dominated the global financial system. The BRICS bank will present an alternative to western monopoly on finance. In any case, the western financial and banking sectors are on the verge of collapse. The turmoil in Cyprus is but the latest manifestation of this phenomenon. In the US, the Lehmann Brothers, a financial institution, was allowed to sink in 2008 but Goldman Sacs was saved, primarily because then US Treasury Secretary Henry Poulson had been a former chief executive of Goldman Sacs. The rot however has spread to many western financial institutions and it appears increasingly unlikely that they can hold the tide.

The function of the new BRICS bank will be to provide a collective foreign exchange reserve and a fund for financing developmental projects in order to address the needs of emerging and poor economies. During the BRICS summit, considerable progress was made. The two largest economies of the emerging power groups, China and Brazil, agreed to remove nearly half of their trade exchanges out of the US dollar zone. This will add to pressure on the dollar, sinking it further. The US dollar has already lost much of its appeal. Currently 53% of the world’s central banks hold their reserves in US dollars. This is down from 64% only a decade ago. Financial experts believe that once the dollar reserves fall below 50%, that would signal the end of the US dollar as a global reserve currency.

At the Durban summit, it was also agreed that each of the five BRICS members would contribute up to $10 billion in the launching of the development bank with a total start up capital of $50 billion. While the bank will take several years to be up and running, the BRICS decision signals a serious move in the global financial order. The BRICS bank will operate on using national currencies, rather than a single currency such as the dollar or the currency of any of the member states and will be used in bilateral and multilateral trade deals. This appears to be a major concession by China whose currency, the yuan, is clearly the dominant currency among BRICS members and will soon become a major global currency as well. China’s GDP is expected to surpass that of the US by 2017 making it the biggest economic power in the world. Currently, BRICS members account for 25% of the global GDP. This will certainly increase in coming years as the US and Europe decline while the emerging BRICS countries take center stage.

BRICS members say the current global balance of power is unworkable, with institutions such as the WB, the IMF and the United Nations Security Council irrelevant in addressing matters concerning global economics.

Welcome to the new global economic order free from the chains of US imperialism.

END