The Real Avengers?
If you were following monetary news last month, you may have come across a rattling announcement by Russia’s Deputy Finance Minister, Sergei Storchak. If the BRICS’s demands for more representation at the IMF remain unmet, then the BRICS will create their own anti-crisis fund, threatened Storchak as the BRICS tied $75 billion in contributions to the IMF to guarantees of reform. It may come as a surprise, but the fact is that this news has been brewing for a while in the hallways of the BRICS summits. As the BRICS are forecasted to dominate the international economy in a few decades, it is only logical for them to begin shaping the system according to their interests. Their monetary system would also have a new anti-crisis fund, their own lender of last resort.
Even a possibility of such a development is already a symptom of great power emerging, yet the BRICS are not ready for the much needed responsibility that comes along with an anti-crisis fund. On one hand, the BRICS appear to be eagerly waiting for the right moment to floor the financial leadership accelerator. On the other hand, creating an anti-crisis fund now will bring forth a premature institution with porous credibility and limited influence on the monetary system.
Striking the Iron while it’s Hot
The BRICS do have the material capabilities and the timing on their side for the establishment of their own anti-crisis fund. As recently as December 31st 2011, China had the first, Russia 4th, Brazil 6th, and India 7th world’s largest foreign exchange reserves, while Germany, France, Italy, USA, and UK ranked 12th, 15th, 16th, 19th, and 25th respectively, according to the CIA World Factbook. With more resources to lend out, a potential BRICS fund is a serious rival to existing monetary structures. Moreover, the BRICS, and in particular China and Russia, have a cozier state-private financial sector relationship, a domestic feature that would only facilitate the functioning of an anti-crisis fund.
No anti-crisis fund has the means to end financial crises on its own. In fact, these funds serve as signaling mechanisms which, by lending to actors that no one else has the confidence to lend to, initiate the catalytic effect in order to restore private investors’ confidence. A BRICS fund will not only have the benefit of the state-held reserves but also of private capital that can be summoned by a decree of a BRICS government. It is from this position of force at the G20 Summit in Los Cabos, held only a day after the fateful Greek elections, that the BRICS issued its own condition to the IMF, by linking much needed additional contributions to guarantees for reform. Mention of the new fund was that threatening postscriptum, an ultimatum.
No Systemic Centrality, At Least Not Yet
Beyond the superficial, the BRICS are actually not ready for the responsibility of running an anti-crisis fund as they lack the power to influence the system financially. The BRICS lack network centrality that would empower them to enforce regime norms and safeguard against moral hazard. As illustrated in Benjamin Cohen’s Currency and State Power, an actor’s relative network centrality depends, first, on the number of links that the actor has with other actors and second, on the number of times an actor serves as a third party intermediary between two other actors in the network. In monetary terms, a state’s financial centrality depends on the integration of its domestic capital market within international ones and the presence of financial centers on its soil.
The first component of centrality allows the state to have reach across the network, diversify its risks, and avoid depending on a single partner. This provides the state with passive power, autonomy. The second, however, gives the state proactive power and influence, since the more often the state serves as the intermediary between others, the more it is involved in other’s business, and the more it can intervene on issues to which it relates only indirectly.
Asset freezes, denial of entry into a securities market, or more aggressive actions, such as persuasion of others to cooperate in punitive action, are more effective, the more central are national financial centers to the world’s system. Without the centrality of the New York Stock Exchange, USA’s sanctions against U.K. and France would have not been as effective at ending the 1956 Suez Crisis. While the Suez Crisis was not a financial crisis, the power of financial centrality must not be discounted in dealing with moral hazard, enforcing the terms of the loan, or breaking legs in the process of collecting old debts.
It is on this key characteristic of financial network centrality that the BRICS still lag behind the developed countries. According to the latest Global Financial Centers Index 11, London tops the list, five American centers are in the top 20 (with New York coming in 2nd), and seven other European centers are in the world’s top 25 financial centers. Meanwhile, while Hong Kong came in third and Shanghai 8th, the next most central BRICS financial centers are Beijing in 26th, Shenzhen in 32nd, Sao Paolo in 50th, Rio de Janeiro in 53rd, Johannesburg in 55th, Mumbai in 64th, and Moscow in 65th.
Lacking financial centrality on the world’s markets, the BRICS cannot exert responsible influence that is required of an effective anti-crisis fund, at least not in the near future. Out of all the BRICS, Chinese financial centers are in the best position to rival the West’s, yet this Chinese preeminence within the BRICS only hints at another shortcoming of the BRICS’ ability at operating an anti-crisis fund through a responsible consensus.
Unaligned interests inside BRICS hint at the more rhetorical rather than substantive nature of Storchak’s announcement by directing attention to the lack of unity and hence credibility of a joint BRICS decision. Since its beginnings, the club was criticized for lacking a purpose other than to voice discontent at outdated international institutions, continuously study possibilities of more stable monetary systems, and push for the unfathomable developing world agenda. Its annual statements repeated themselves, and the five members seemed to be the most odd of bedfellows.
For instance, while all five call for UN Security Council reform, it remains unrealistic for Russia or China to give way to the inclusion of Brazil, India or South Africa into the permanent veto power club at the apex of international politics. Similarly, while Russia keeps denouncing the greenback’s destabilizing effects and calling for new international mediums of exchange, the other four hush, with China keeping its international Yuan ambitions in check. Such internal disunity would undermine the credibility of a BRICS-dominated anti-crisis fund.
Supporters of the BRICS would argue that it is moving forward by focusing on issues of common agreement, mainly in the domains of economics and finance, while putting aside the contentious. This may well be the case and may be applauded for demonstrating successful multipolar cooperation, yet the creation of an anti-crisis fund immediately draws the more contentious into the realm of the economic and the financial. Current currency swap agreements between the BRICS isolate the loans from broader international implications, but an institutionalized anti-crisis fund will be engulfed by complex independencies and issue linkages that may not always be solved.
Would China and India agree on a loan to a defaulting Pakistan, let alone on the conditionalities attached? Would democracies such as Brazil and India manage to convince Russia and China to lend to a successfully revolted Libya?
Not Just Yet
In short, the BRICS may be getting ahead of themselves by claiming that they can carry out the responsibilities associated to operating an anti-crisis fund. Unprecedented foreign exchange stockpiles and special state-private financial sector relations help the BRICS’ case, but these considerations cannot negate the deeper weaknesses associated to the BRICS’s premature centrality that limit its power to influence the system and internal disunity that undermine its credibility. Storchak may have forgotten that great power comes with great responsibility, but, then again, he might have been bluffing.