Launched to great fanfare in Fortaleza, opinion is mixed on whether the emerging economy fund will be a force for good
By Ed King
Does the new development bank launched by Brazil, Russia, India, China and South Africa last week herald a new age in low carbon financing?
It is a question leading economists and civil society observers have been asking for some time, with few answers emerging from the five “BRICS” members.
And it’s critical given the way this coalition, representing 20% of the world economy and 3 billion people, will shape the planet over the coming century.
Based in Shanghai, the bank’s governing body has been neatly divided between Brazil, Russia and India, with a regional centre in South Africa.
Unlike the UN’s flagship climate fund, this bank already has a secured stream of income, with US$50 billion of guaranteed capital, and a $100 billion emergency swap fund for financial crises.
The official agreement text released on 15 July outlines the body’s fundamental principles, leaves the door open to other members, and underlines the thinking behind its creation.
Members, it says, are “mindful of a context where emerging market economies and developing countries continue to face significant financing constraints.”
In a subsequent statement released last week, the BRICS leaders directed finance ministers to “work out the modalities” for the bank, which will include environmental and ethical safeguards.
On the surface, these should be fairly green, given the bank’s mandate to mobilise “resources for infrastructure and sustainable development projects” in emerging and developing economies.
But some close observers are not convinced.
Sameer Dossani, a Delhi-based finance expert for ActionAid International who has interviewed officials working on the bank, tells RTCC his conversations leave him concerned about its true purpose.
“There’s certainly a need for a different kind of investment, but this conversation doesn’t seem to be a different kind of investment,” he says.
“This is very much a political symbol in a lot of ways. It has a lot to do with the G7 or G8 not living up to their promises that they made in 2008 and 2009.”
He is talking about assurances of future help western economies gave developing countries at the height of the financial crisis. Some major developing countries injected cash to bail rich nations out of their financial difficulties and perceive the G8 to have let down their end of the bargain.
Russian foreign minister Sergei Lavrov last week talked of the fund forming the basis of a new political alliance to counter the US, lending weight to the idea it is primarily a power play.
For Dossani, in its current form the bank is less about driving green growth than taking on the World Bank, traditionally a symbol of US hegemony and power over the global South.
He says BRICS financial officials need to define what pro-poor and environmentally sustainable development looks like – and ensure that is written into the bank’s constitution.
What is clear is the need for huge investments in the developing world, which is set to see huge increases in population growth over the next 50 years.
According to consultancy PwC, emerging market economies could be 25-75% larger than the current G7 by 2050, with China and India projected to top global GDP charts.
The UN’s World Health Organisation says by 2050, 7 out of 10 people will live in a city, with the highest increases expected in southeast Asia, South America and parts of Africa.
Leading climate economist Lord Stern says “trillions” will be needed to develop infrastructure in these countries, including new energy systems, roads, railways and broadband networks.
In the absence of low carbon stipulations, observers fear funds from the BRICS bank could flow into polluting coal power stations and other fossil fuels. These can be seen by developing countries as a cheaper way to stimulate economic growth in the short term than greener energy sources.
Mattia Romani, chief economist of the Korea-based Global Green Growth Institute says such fears are misplaced, however.
A long-term advocate of a fund run by major emerging economies, he describes its launch as “exceptional”, praising the verbal commitment to “sustainable infrastructure”.
“Countries understand that a new development bank cannot do anything else but put sustainability at the heart of what it does – particularly in infrastructure,” he tells RTCC.
“While no details on safeguards are allowed – my understanding with the conversations I’ve had with these countries is that they’re very serious about it.”
Romani argues it will create a “level playing field”, allowing developing countries an easier way to access to finance than they have traditionally enjoyed.
The World Bank has dominated lending since the 1940s, and often asks for tough fiscal policies, divestment of state owned companies and cuts to public sector spending when agreeing to back projects.
Perhaps wary of stoking rumours of conflict, it has welcomed the arrival of a BRICS finance mechanism.
Rachel Kyte, the World Bank’s head of climate, said it was another example of the drive towards green growth in emerging economies, reaffirming its commitment to support infrastructure projects.
For its part, the DC-based organisation has just gone through what many regard as a stunning shift from heavily backing fossil fuels to calling for a clean energy revolution.
That took time – and NGOs warn that the same mindset may not exist in the team pulling together the BRICS bank, which will have to find ways of supplying fast and cheap electricity to millions.
And until the safeguards are released – which isn’t likely to be soon – it will be hard to assess exactly what trajectory the bank will take.
A recent report from Oxfam highlights the lack of transparency in BRICS countries, particularly around the activities of large corporations.
It warns: “Currently, information around the extent and impact of BRICS related corporate activities in other regions is severely limited and a strong apparatus to ensure transparency around the activities and investments of the private sector in this regard is critical.”
The national development banks of China, Brazil and Russia have poor records when it comes to protecting the environment, Dossani points out.
Moscow and Beijing in particular are involved in a series of intense negotiations over oil and gas pipelines, which offer Russia an alternative to the increasingly hostile European market.
Dossani wants more stakeholders, specifically from farmers’ organizations, trade unions and other civil society organizations to be involved in creating new investment guidelines.
It’s a sentiment echoed by Lysa John, author of the Oxfam study, who says the level of engagement with civil society on the formation of the bank has so far been “abysmally low”.
She adds: “I have never seen any other global summit that had such low delivery in terms of communicating what policymakers are thinking… it seems like this is a dream we have grown up with, to have a global south bank, but the dream doesn’t belong to the people any more.”
It will also be intriguing to see how the BRICS bank gets on with the UN’s Green Climate Fund, a mechanism set up to deliver a clean energy “paradigm shift” in developing countries.
It has adopted ethical and environmental safeguards based on the World Bank’s private arm, the International Finance Corporation, and also has a strict accreditation system governing who it can partner with.
Based in Songdo, South Korea, the GCF is now hunting for government partners to help fill a multi-billion dollar hole in its wallet.
While the GCF has a headstart, it’s lacking the heavy political support the BRICS fund enjoys, relying predominantly on developed countries with tight budgets to provide an initial $10-15bn this year.
China, Brazil and India are known to have stayed away from a recent meeting on capitalising the fund, waiting to see if richer countries can deliver the cash.
For now Romani sees no conflict between the two funds, with one relying on emerging economy cash and the other on cash-strapped western countries.
“The key word is blending,” he says. “The role that this [BRICS] bank can have is blending infrastructure finance from the traditionally large institutions with some money and climate-related finance.”
“The bank can blend some public money from its own fund to lower political risk, put in some GCF money to take on the risks of a new technology, and then draw on infrastructure funds to build a new wind farm – that’s the kind of thing we want to see come out of this.”
All this is some way down the line.
Even the GCF is not expected to start backing big projects until mid-2015, but it does present a new and challenging financial landscape for low carbon policymakers.
Some analysts say all the BRICS bank has to do is “be better than the IMF and World Bank” and allow emerging economies the seat around the table they lack in Washington.
Others, such as the FT’s International Economy Editor Alan Beattie in his blog, suggest it’s a little too early to start worrying about a bank that is still in the making.
“The BRICS bank could end up being a big player, but the uncertainties around its eventual size and governance suggests that it will be a long time before it can rival the World Bank, and – ironically enough – even more before it can match the massive development finance firepower of China acting alone,” he writes.
“China in any case may well prefer to concentrate on the Asian Infrastructure Investment Bank, which it will very likely be able to dominate and use for security purposes in its region far more than the BRICS bank.”