Emerging Markets want off the Washington Development Grid. Can they tear down the wall?

The World Bank is considering a project proposal by which Kyrgyzstan would export hydroelectric energy to Pakistan. So let’s consult a map. The power lines would have to first pass through Tajikistan.

Fine.

As long as the right pockets are lined, this is entirely feasible. Next, however, the infrastructure would cut through eastern Afghanistan, before entering the sunny pastures and rolling hills of Waziristan. The lines would then have to pass through hundreds of miles of essentially ungoverned territory before reaching any densely populated destination. Any adventurous Bank employee enlisted to monitor the project better brush up on his Farsi—a bulk of the American armed force is expected to abdicate the region by 2014.

Beyond being a sitting-duck for regional extremists, this project is logistical nightmare in the making. Yet it is precisely the style of project World Bank President Jim Yong Kim seems inclined to support.

At his April 2^nd speech at Georgetown University, World Bank President Jim Yong Kim addressed his objective to “transform history”. Perhaps only slightly less ambitious, he expressed a concrete goal to eliminate global poverty by 2030. He spoke of a “bold agenda” that would address climate change, pro-poor growth, and the elimination of death by preventable disease. Since assuming the presidency of the World Bank in July, 2012, Dr. Kim has demonstrated a preference for big picture projects. He wants regions reconfigured and the boundaries of possibility reimagined. The approach appears at odds with an industry that has recently found success at a more focused, micro level.

In the wake the 5^th BRICS summit held March 26-27 in South Africa, the address, and some feel, the strategy, appear aimed to reaffirm the World Bank’s relevance. In a speech where countries were mentioned sparsely and strategically, President Kim referenced China, South Africa, Brazil and India within the first half hour.

Perhaps the World Bank hears the footsteps.

Out of focus? President Kim on April 2nd.

Emerging Competition

At the summit, the BRICS (Brazil, Russia, India, China, and South Africa) affirmed their intention to establish a BRIC Development Bank. Media have reported the dialogues as a “flop”, with the sides unable to agree on how much each country should invest in such a bank. Participants approved an objective of a US$50 billion endowment, but China argued that each country should be responsible for US$10 billion, while Brazil sought to have shares divided proportionally by economy size.

In part, this disagreement reflects an emerging struggle between China and Brazil over leadership of the emerging markets, with the South American nation reluctant to accept China as the de facto star of the program. In truth, far greater obstacles to a BRIC Development Bank remain beyond funding allotments. China has no interest in Brazil sticking its nose in East Asian issues, and while Brazil welcomes Chinese trade, it would just as well prefer not to facilitate China’s rapidly growing influence in Latin America.

To the extent that a BRIC Development Bank would pave the way for one giant to trample in another’s backyard, all five participants approach the idea with trepidation. Yet, while concrete agreements may have remained elusive, the implication of the BRIC summit was clear:

Major Emerging Countries Want Off of the Bretton-Woods “Grid”

The BRICS Development Bank was not the only topic on the agenda. Brazil and China successfully sealed a three-year currency swap covering up to US$30 billion annually. While the move will eliminate a degree of dollar volatility in bilateral trade, it also indicates efforts to dethrone the dollar as the world’s reserve currency, and can be read as a challenge to the World Bank’s friendly neighbor, the International Monetary Fund.

The hegemony of the Washington international financial complex (the IMF, World Bank, and Inter-American Development Bank) in global development finance has quietly come under mounting threat. Simply put, these “official sources” of capital are no longer the only game in town. The Banco Nacional de Desenvolvimento Econômico e Social (BNDES), a Brazilian development bank, already maintains a larger lending portfolio than the World Bank. The Andean Development Corporation (CAF), a South American development bank headquartered in Caracas, is on pace to significantly out-lend the Inter-American Development Bank.  Beijing has the capacity to outspend anyone anywhere in the world, and it lends without fear of getting beat by a bad loan. These emerging market institutions have the potential to lend more capital at cheaper rates with less conditionality than traditional Bretton-Woods facilities.

Even in the Sahara, China makes it rain

The affects are already evident, especially in the developing world. In Latin America, IMF funding has plummeted from US$49 billion in 2003 to just under US$2 billion in 2010 (See Weisbrot, “Venezuela in the Chávez years”). Now most of its loans are executed in Europe as opposed to the developing world. Countries such as Ecuador and Venezuela have accepted billions of dollars in loans from China. These loans may have development written on the tin, but they can easily become off-budget slush funds for foreign governments. In Africa, leaders view hard currency reserves stockpiling in BRIC treasuries as the answer to the continent’s habitual infrastructure deficit. Upwards of 15 African heads-of-state attended the Durban summit, hoping to arrest the attention of the BRICS.

In his April 2^nd speech, World Bank President Kim routinely interrupted his address to acknowledge the influence and importance of the United States Agency for International Development (USAID) and its president, Rajiv Shah (who sat front row, center)—an obvious example of obsequience that BRICS countries find cloying. Before underscoring the “urgency” with which the World Bank would address its goals, President Kim suggested that he and Dr. Shah were ready to “shake things up”. With emerging economies flexing their financial muscles, much is being shaken up in global development. If the World Bank cannot shake its reputation as a Washington lackey, it may find itself increasingly marginalized.

Shaken, not Stirred

An underground tunnel connects the International Monetary Fund to the World Bank. The walls are painted white and are lit with florescent lights. Dapper professionals hurry past you in tailored suits, speaking exotic languages. You emerge from the tunnel into the awe-inspiring atrium of the World Bank, with elegantly curved architecture, blue water reflecting pools, and mirror glass windows extending to the heavens.

Bretton-Woods still has swag.

But it hears the footsteps.

The World Bank may face mounting competition, but it still offers the best product on the market. While not contingent upon free-market reform, Chinese loans are often contingent upon importing Chinese labor for project execution. As a result, such projects often do not return either the expected levels of local employment or the desired knowledge spill over, as both manual and mid-level positions go to migrant laborers. In contrast, the World Bank model that stresses local inclusion and participation can once again seem very appealing.

Moreover, elements of Dr. Kim’s approach suggest a winning strategy. His commitment to infrastructure underscores an important shift as the Bank had previously underinvested in this sector of critical importance to emerging markets. His unflinching determination to reduce poverty offers a humanistic contrast to existing BRIC investments. The Word Bank must leverage these advantages, while finding ways to actively incorporate BRIC voices into the fold. Yes, the World Bank faces increased competition. But, as Bretton-Woods institutions would be first to point out, increased competition yields the best results.

Shaq knows a thing or two about BRICS