Bricsbank: The new kid on the block that sadly ignores Mena

In case you had not noticed, there is a new kid on the block of the global financial order. Just about the time the country’s football team was surrendering embarrassingly in the Fifa World Cup, a meeting in the Brazilian city of Fortaleza announced the creation of a development bank aimed at transforming the world economic system, sweeping away all that awful American and European domination and putting the emerging countries firmly in the financial driving seat.

The leaders of Brazil, Russia, India, China and South Africa (the Brics) announced the creation of the bank, which is to control a US$100 billion reserve fund aimed at furthering economic cooperation between these giants of the global economy, strengthening the global financial system and generally making the world a better place.

The unwritten subtext was that the Bricsbank (as it was immediately named) would gradually replace the existing global financial order, dominated by the US dollar and administered by the US and European institutions – IMF, World Bank, European Central Bank and others – that were perceived as having been lacking during the global financial crisis.

It was termed a “momentous” event by some commentators. Certainly anything that shakes up the complacency of the old western financial technocrats is a good thing; anything that reflects the shift in economic power from west to east is also to be applauded; and anything that has the ambition of preventing another global financial catastrophe is to be welcomed.

But I can’t help feeling that the Bricsbank is none of those things. At best, I fear, it will be a distraction from serious attempts to reform the current creaking institutional financial framework. At worst, it will erect a whole new hierarchy of accident prone administrators with all the temptations presented by handling vast amounts of other people’s money.

It also risks marginalising some parts of the world – such as the Middle East – that should have a vital role to play in the development of the new order.

A little bit of history is required. The term “Bric” was coined by a Goldman Sachs economist in 2002 as a shorthand to describe what he identified as the four leading global economies of the coming decade and beyond.

As an investment category, and as a piece of Goldman marketing, it was inspired, and returns over the decade ahead mainly justified the hype. The Bric growth rates post-crisis were largely responsible for getting the world out of the mess that US and European bankers had got themselves into.

South Africa (the “s” in Brics) was added as a political afterthought, though entirely unjustified on the fundamental economic criteria for Bric inclusion. The other four saw such great business opportunities in Africa that they felt it would be appropriate to have an initial representative there.

Actually, Nigeria fitted the bill better on all counts, except that it would have not have made such a snappy acronym.

And that tells you a lot about what is wrong with the new bank. It is the creation of an artificially concocted grouping – countries that have very little in common with each other apart from big populations and growth rates (though these too, with the exception of China, have slipped back to western levels recently.)

On several levels, the aims of the new bank look hugely ambitious. If the job is really to force the old powers into better levels of global financial corporate governance, you would think there are better teachers around than the controlling regimes of any of the Brics countries, all of which rank badly on the indices of transparency and corruption.

If, as one commentator has said, the Bricsbank is a “forerunner of a new multi-currency world that breaks US dollar hegemony”, it has a tough task ahead. Only the Chinese yuan has a real claim to be a truly global reserve currency, and it will not be easy to break the greenback, though in the long run desirable to reduce its power.

But the big defect in the new set-up is that it appears to ignore one of the biggest financial and economic groupings in the non-western world: the region often described as Mena, the Middle East and North Africa.

To try to build a new world order without taking into account such a key building block seems wilfully short-sighted and could just about guarantee its failure.

fkane@thenational.ae

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