The other event happening this week in Brazil was the summit of leaders from Brazil, Russia, India, China and South Africa: the BRICS. It was held in the coastal city of Fortaleza and, unlike her demeanour at the World Cup, President Dilma Rousseff was smiling when she released the Fontalez Declaration at the conclusion of the summit.
The main headline was the agreement over the capital base and headquarters for a new development bank with a US$100 billion reserve fund. The idea of a BRICS development bank was first announced at the Fourth BRICS summit in New Delhi in 2012. The proposal has been edging forward since then, with robust discussions on where the headquarters would be located.
The 'big' announcement from Fortaleza was that the headquarters will be in Shanghai. But everyone received a prize: Russia will be the initial chair of the board of governors, the first president will be from India, the first chair of the board of directors will be from Brazil and a 'development bank regional centre' will be established in South Africa. The bank will have an initial authorised capital of US$100bn and an initial subscribed capital of US$50bn, equally shared between the founding members. The reserve currency pool -- a crisis safety net -- will be US$100bn, with China contributing the lion's share of US$41bn.
Is this another step in the solidification of the BRIC countries as a powerful bloc in global governance? Yes and no.
The BRICS have been an enigma, in that they started as no more than an acronym coined by economist Jim O'Neil in 2001 to describe the fast growing economies of Brazil, Russia, India and China. South Africa joined later when the BRIC summits began. Ironically, as the pace of economic growth among the BRICS has eased, there has been more progress at a political level, with the latest summit in Fortaleza being the sixth.
A common view was that the BRICS were unlikely to become a powerful international grouping because it was difficult to identify their common interests, and their track record of pursuing common international issues was mixed. However, one thing that united them was a desire to 'reshape the Western-dominated international financial system'. The ongoing failure of the US Congress to pass legislation that would increase the quota share of emerging markets in the IMF has only galvanised the BRICS.
The significance of the latest BRICS summit, and the steps taken towards establishing a new development bank, has received a mixed response.
The Indian press declared the summit a victory for India, although China is the clear winner with the headquarters for the bank permanently based in Shanghai. The Moscow Times responded to the perennial question of whether Russia should be included in a grouping of potentially rapidly growing economies by saying that Russia had earned its place in the new bank given that it was the world's biggest energy and minerals exporter. It also speculated that the BRICS grouping could rival the G7.
On the negative side, the Bloomberg editorial led with the headline 'The BRICS don't need their own bank', suggesting that given cross-border private capital is so readily available for good emerging-market borrowers, it is not clear there is still a need for multilateral lenders like the World Bank. Robert Kahn from the US Council of Foreign Relations was sceptical of whether the new bank would be an effective development institution and saw serious risks that the bank could be undermined by poor investments, bad policies and even corruption.
Is this criticism a reaction from a West that fears the new institution could be a threat to the World Bank and the reserve currency pool a threat to the IMF? Perhaps. But it will be a long time before this happens. Moreover, the currency pool may well have the same conditions as the Asian Chiang Mai agreement, where drawings above a certain amount can only take place if the country has an IMF program. And, as Robert Kahan notes, it will take a long time for the new bank to build institutional capacity. There are some estimates that the new bank could lend US$3.4bn per year in a decade, which compares with the US$61bn the World Bank will lend this year.
The motivation to form a new development bank was a political one, and the main significance of Fortaleza is also political. Notwithstanding all their differences, the establishment of the development bank will continue to provide a core for the BRICS to rally around. Furthermore, it could be a grouping that not only unites against what it perceives as Western domination of international institutions, but also a force countering Western sanctions against one of its members -- Russia being a case in point.
In short, while the new development bank may at this stage be more symbolic than significant, the BRICS continue to deepen as a political grouping and will be around for some time to come.