Some thoughts on the Bank of the BRICS

The BRICS announced in their last summit a new development bank, with US$ 100 billions in capital, of which US$ 41 billions are from China. There is a certain excitement about the possibilities for South-South cooperation and alternatives to development that this new institution will bring about. First, let me explicitly say that I think in general development banks are a relevant tool for development, that the new bank is a welcome addition that increases South-South cooperation and that reduces the need for developed country dominated institutions.

And yes a lot of the investment that will come will likely (and I would say hopefully) be on infrastructure (I say this since in one of the meetings of the Bank of the South, in Quito years ago, an activist told me I was a neoliberal for supporting infrastructure rather than community based projects; by the way, not against those, but as I said back then, if you want schools or sanitation for local communities, you'll need roads, electricity, sewer facilities and so on, which is what I mean by infrastructure). Stephany Griffith-Jones provides here the sort of defense of development banks I would agree with.

The new arrangements include a Contingent Reserve Arrangement which is more interesting than the bank itself, since it purports to provide “a self-managed contingent reserve arrangement to forestall short-term balance of payments pressures, provide mutual support and further strengthen financial stability.” In other words, not simply provide funding for development projects, but more widely to provide finance for balance of payments problems, which are at the center of developing countries problems. So, all in all, this seems to be something to be celebrated.

My two concerns are not directly connected to the new institutions. The first issue would be implementation. The Bank of the South has been in the works for almost a decade, and has been established since 2009. As I had noted here, barriers to implementation have basically meant that it is an irrelevant institution, at least so far (what I said back in 2009 was that lack of implementation might come from political differences, in the case of the Bank of the South, given its role vis-à-vis the Brazilian National Development Bank, BNDES). Note that in the case of the Bank of South it duplicated to some extent the work done by the Corporación Andina de Fomento (CAF), another regional development bank, also headquartered in Caracas. Not only it has so far failed, but in addition it has precluded the further development of existing institutions.

The second concern is regarding the type of integration between Brazil (member of the BRICS) and other Latin American countries (the same is true with some caveats for India, specialized in services, and Russia and South Africa) with China. If the new development bank is one more instrument to pursue a strategy of development in which Latin American economies specialize in commodity exports, to an increasingly manufacturing based China, then rather than solve our long-term balance of payments problems we will end building a new dependent relation, now with the Asian periphery (for more here). Hope springs eternal.

A Call for Change in Europe by the Progressive Economy Foundation

The Scientific Board of the Progressive Economy Foundation of the European Parliament, chaired by Joe Stiglitz and Jean-Paul Fitoussi, and signed by Jamie Galbraith, Ilene Grabel, and Stephany Griffith-Jones among others, has just published a statement called "A Call for Change" that should have an effect on the terms of policy discourse in Europe.You may find the full statement here, in five languages here.

Kevin Gallagher on capital controls

Another interesting talk at the Central Bank of Argentina, this one by Kevin Gallagher from the University of Boston based to a great extent on his recent work with José Antonio Ocampo and Stephany Griffith-Jones on the regulation of capital flows (see here).

He has three main points to make. First, there is increasing and overwhelming evidence that there is no connection between capital account liberalization and economic growth. He cited the recent work by Arvind Subramanian, Olivier Jeanne and John Williamson (the latter of Washington Consensus fame) at the Peterson Institute, called "Who Needs to Open the Capital Account?," who argue (2012, p. 5) that "the international community should not seek to promote totally free trade in assets -- even over the long run-- because ... free capital mobility seems to have little benefit in terms of long run growth."

Second, it seems that the International Monetary Fund (IMF) has come to partially recognize the appropriateness of capital account regulations and has gone so far as to recommend (and officially endorse) a set of guidelines regarding the appropriate use of Capital Account Regulations (CARs), the new term for capital controls within the IMF. He warned, correctly I think, that changes within the IMF can be seen as a reform that tries to restrict the use of capital account regulations to emergencies, and situations approved by the IMF within article 4 consultations, when article 6 guarantees that countries can use them freely.

Finally, and more importantly, Kevin warned that Bilateral Investment Treaties (BITs) and Free Trade Agreements (FTAs) have regularly included very restrictive language on capital account regulations, and have a tendency to restrict the policy space in developing countries, exactly when a consensus that this restrictions do not provide any benefit in terms of growth.