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The BRICS (Brazil, Russia, India, China and South Africa) economies have long been boasting about their importance to the global economy and their hard-earned credentials as players with clout and influence.
They are not short of reasons to claim a bigger role in the world. Combined, they account for 43 percent of the world's population and about 30 percent of its GDP. In the wake of the crisis, these economies accounted for most of the global economic growth.
Most importantly, they are a source of savings and current account surpluses, especially China, which help finance deficits in Europe and the United States. Combined, they own over $4.4 trillion in foreign exchange reserves, nearly 70 percent of the worldtotal. Thus, they have enough cash on hand not just to absorb any possible shocks to their economies, but to behave as respectable global investors.
Their recent summit in Durban, South Africa, has led to some significant developments. In addition to establishing a joint pool of international reserves, the five powerhouses have agreed to create a joint development bank.
This new institution has the potential of overshadowing the two multilateral organizations that became the pillars of the post World War II economy, namely, the IMF and the World Bank.
While this is not the first time that the BRICS members have made such a proposal, it seems that this time they are serious about it. Moreover, they have domestic experience with this type of institution. China has both a large development bank and several sovereign wealth funds, and Brazil has a large development bank, though less experience running large amounts of foreign reserves.
Few details are known about the key characteristics of this new bank, beyond the proposed initial capital of $50 billion and an intended focus on infrastructure. The implicit message, however, is quite clear.
The BRICS members are not satisfied with the functioning of the old Bretton Woods institutions, created in 1944, and they certainly believe that their new size and prominence is not reflected in their presence on their governance bodies. They believe that the dominance of European and Americans is not consistent with the new economic and financial realities. There is no doubt that the world has changed much over the last seven decades.
The proposal of a new bank also expresses the discomfort that the BRICS economies have toward how the IMF has managed the current crisis, especially in Europe, where it has not applied the same harsh medicine that it inflicted on Latin American and Asian economies in past crises.
The IMF has worked with the European Union instead of imposing conditionality clauses unilaterally on countries in financial trouble.
We see these developments are worrisome. In a fully integrated global economy, we need one set of institutions to handle global financial and economic issues, not two. Fragmentation of global governance at this critical moment is not the right recipe.
Having said that, the IMF and World Bank need to change and recognize in their decision-making bodies the new global realities of the 21st century.
In our book "Global Turning Points" we argue that this rebalancing of governance needs to take place as soon as possible.
We need institutions as ecumenical and democratic as possible, precisely the idea that John Maynard Keynes espoused at the Bretton Woods conference.
We must eliminate the frustration in the emerging world and make their success work for the entire global economy.
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