Banking on the BRICS

Barry Eichengreen

AUG 13, 2014
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BRICS leaders 2014



BERKELEY For the leaders of the BRICS countries (Brazil, Russia, India, China, and South Africa), the announcement in July of their agreement to establish a “New Development Bank” (NDB) and a “Contingent Reserve Arrangement” (CRA) was a public-relations coup. The opportunity for a triumphal group photo was especially welcome for Brazilian President Dilma Rousseff, in light of her country’s ignominious World Cup defeat and slack economy, and for Russia’s President Vladimir Putin, given the international reaction against his government’s support of the rebels in Ukraine.

The agreement was also an opportunity for the five countries to reiterate their dissatisfaction with the World Bank, the International Monetary Fund, and the role of the dollar in the global monetary system. The BRICS possess just 11% of the votes in the IMF, despite accounting for more than 20% of global economic activity. The US Congress refuses to ratify the agreement reached in 2010 to correct this skewed state of affairs. And the United States has displayed no willingness to renounce its anachronistic privilege of nominating the World Bank’s president.

Meanwhile, the share of the dollar in global foreign-exchange reserves remains more than 60%, while 85% of global foreign-exchange transactions involve dollars. Given the reluctance of underrepresented countries to sign up for the IMF’s precautionary credit lines, central banks desperate for dollars can obtain them only from the Federal Reserve. The Fed was reasonably forthcoming in providing dollar swaps in the last crisis in 2008; but there is no guarantee that it will behave similarly in the future.

Thus, the BRICS’ dissatisfaction with the status quo is understandable. The question is whether their NDB and CRA will make a difference.

The logic for the NDB is compelling. The BRICS, and developing countries generally, have immense infrastructure needs. 

China may not have an infrastructure deficit, but it has something else: large construction companies that welcome the opportunity to undertake additional projects abroad. Hence the incentives of the NDB’s prospective creditors and borrowers are happily aligned.

Moreover, there already is a proliferation of regional development banks, from the Inter-American Development Bank and the Asian Development Bank to the more modestly capitalized African Development Bank. These institutions cooperate with the World Bank. Their existence creates no major problems for the Bretton Woods institutions.

There is no reason why the NDB should create problems, either. With initial capital of just $100 billion, it is too small to make a major contribution to global infrastructure needs. But inadequate capitalization can be corrected over time.

The CRAintended to lessen the BRICS’ dependence on the Fed and the dollar – is another story. The five participants agreed to earmark $100 billion of their foreign-exchange reserves for swap lines on which all members are entitled to draw.

But here the interests of prospective borrowers and lenders are not obviously compatible. The next BRICS country experiencing a crisis will want to draw on the CRA. But the other members will hesitate to lend more than token amounts, especially if there are repayment doubts. In contrast to development finance, the incentives of potential lenders and borrowers are not aligned.

Permitting the lenders to impose policy conditions on borrowers, and to monitor their compliance, can redress this problem. But imposing conditionality on sovereign states is a delicate matter especially when the countries involved are as large, proud, and diverse as the BRICS. It is difficult to imagine Brazil, for example, accepting policy conditions laid down by China.

Other attempts to establish networks of swap lines and credits, such as the Chiang Mai Initiative, which was negotiated in the wake of the Asian crisis, have been bedeviled by the same problem. The Chiang Mai network is even larger than the CRA. But, given the divergent interests of lenders and borrowers, it has never been usednot even in 2008, at the height of the global financial crisis.

The architects of the Chiang Mai Initiative attempted to finesse the problem by requiring countries that draw more than 30% of their swaps to negotiate a program with the IMF. Ironically, the Treaty for the Establishment of a BRICS Contingent Reserve Arrangement contains exactly the same provision. So much, then, for the CRA as an alternative to the IMF. And, if inclusion of that provision was not revealing enough, then there is the fact that the BRICS’ commitments to the CRA are expressed in US dollars.

The NDB makes sense for the BRICS, and it has a future. But the CRA is empty symbolism, and that is how it will be remembered.


Barry Eichengreen is Professor of Economics and Political Science at the University of California, Berkeley, and a former senior policy adviser at the International Monetary Fund. His most recent book is Exorbitant Privilege: The Rise and Fall of the Dollar and the Future of the International Monetary System.


August 13, 2014 5:12 pm

America’s view of China is fogged by liberal ideas

The spiral of animosity is largely a creation of American policy, writes Christopher Layne

A man reads a newspaper on a bench outside a McDonald's restaurant in Beijing, China in August 23, 2001. Faced with a saturated market in the U.S., McDonald's is accelerating expansion in emerging markets such as China, where urban incomes rose 40 percent between 1999 and 2003 and the economy grew 9.7 percent in the first half. Source: ImagineChina via Bloomberg News©Bloomberg


Do the events that led to the outbreak of the first world war carry lessons for the Sino-American relationship? A century ago it was the ascent of Germany under Kaiser Wilhelm II that unsettled the world; today a rising China is roiling east Asia. Then, as now, domestic politics on both sides played a role; one that is too easily neglected.

Why did Britain and Germanylinked by trade, dynastic ties, culture and religionfind themselves at war in August 1914? In part, as historian Paul Kennedy has argued, it was because London’s liberal ideology contributed to its perception of a growing German threat.

Filtered through liberalism’s lens, Germany looked militarist, autocratic, mercantilist and statist – and contempt for the country’s political culture added to London’s disquiet. When the war began, it quickly came to be seen as a liberal crusade against “Prussianism”.

In this respect, today’s Sino-American rivalry resembles the pre-1914 Anglo-German antagonism. The speed of China’s growth worries US policy makers, as do the geopolitical implications of its economic transformation.

Across the American political spectrum, China’s success is attributed to its failure to play by the rules of free trade – for instance, its habit of manipulating the value of its currency and engaging in industrial espionage. Market-oriented liberalism is the dominant ideology in the US and, as in pre-1914 Britain, it shapes policy makers’ image of their supposed adversary.

American leaders view China as a nation whose undemocratic political system raises doubts about both the scope of its foreign policy ambitions and its trustworthiness as a diplomatic partner. Moreover, China’s combination of political authoritarianism and state-directed capitalism causes unease because it challenges the supposed universality of the American model of liberal democracy and free-market capitalism.

Aaron Friedberg, a Princeton University professor, says that for Americans, “the success of a mainland [Chinese] regime that blends authoritarian rule with market-driven economics is an affront.” For members of the US foreign-policy elite, the Chinese threat is not so much geopolitical as ideological.

Powerful external and domestic forces are putting the US and China on the road to confrontation. China aspires to be the regional hegemon in east (and southeast) Asia. The US – the incumbent hegemon, having dominated the region since 1945 – is blocking its path.

Yet America’s predominance in east Asia contributes little to the security of a nation whose geography and unsurpassed military capabilities would anyway make it close to invulnerable. The US is the most secure great power in historyeven more so if you factor in the deterrent effect of nuclear weapons. The true cause of American insecurity is not an imminent encroachment on its territory but the risk that US alliances especially with Japan – will draw it into a regional conflict.

The US wants to maintain its east Asian dominance to keep the region’s markets open to American goods and its people open to liberal ideas. China threatens this openness, on which America’s security is wrongly believed to depend.

The liberal assumptions embedded in American foreign policy put the US at odds with China, and also heighten Beijing’s mistrust of Washington’s intentions and ambitions. The spiral of animosity that threatens to culminate in a confrontation between the two countries is in large part a creation of American policy.

As China’s rises, Washington has a last clear chance to avoid the looming Sino-American conflict. This would entail making real concessions on Taiwan and on China’s territorial claims in the East and South China Seas. It would also involve a commitment that Washington would not interfere in China’s internal affairs.

America’s political culturebased on exceptionalism, liberal ideology, and openness – is a big obstacle to coming to terms with a resurgent China. So is the fact that the foreign-policy elite remains wedded to American primacy, and refuses to accept that this will inevitably slip away because of the relative decline of US power.

History is also a problem. US policy makers are quick to invoke what they take to be the lessons of the 1930s while overlooking the causes of the first world war. David Calleo, a professor at Johns Hopkins, has observed that what we should learn from the earlier conflict “is not so much the need for vigilance against aggressors, but the ruinous consequences of refusing reasonable accommodation to upstarts”.

If the US wants to avoid a future conflict with China, it cannot allow liberal ideology to obstruct a reconciliation with an ever more powerful China. That is the real lesson of 1914.


The writer is a professor at Texas A&M University and author of the forthcoming ‘After the Fall’ 


Copyright The Financial Times Limited 2014.


When Fewer Is Better

Adair Turner

AUG 13, 2014
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Crossing Street New York City



LONDON – Is a shrinking population always a bad thing? Judging by the lamentations of some economists and policymakers in the advanced economies, where people are living longer and birth rates have fallen below replacement levels, one certainly might think so. In fact, the benefits of demographic stability – or even slight declineoutweigh any adverse effects.

To be sure, an aging population poses obvious challenges for pension systems. And, as economists like Paul Krugman have suggested, it could also mean that advanced economies face not only a slow recovery, but also the danger of “secular stagnation.”

With slower population growth, the need to invest in capital stock diminishes. Meanwhile, people planning for longer retirements may save more to ensure adequate pensions. If these savings exceed investment needs, they could lead to inadequate aggregate demand, depressing economic growth.

But the policy challenges associated with these demographic shifts are manageable. And, perhaps more important, the benefits of increased longevity and reduced fertility are considerable.

Rising life expectancy is the welcome product of medical and economic progress, and additional increases are almost certain. Indeed, the average life expectancy for children born in prosperous countries could soon exceed 100.

That implies an ever-rising ratio of those over 65 to younger cohorts. But as long as average retirement ages rise to keep stable the proportions of life spent in work and in retirement, the fact that working and retirement years are growing at equal rates has no adverse economic effect. There is, moreover, strong evidence that rising longevity can mean more years of healthy active life, not unhealthy dependency. Only bad policies, such as the recent German commitment to reduce retirement ages, can turn longer lives into an economic problem.

Declining fertility, including in some lower- and middle-income countries, such as Iran and Brazil, also reflects hugely positive social developments – particularly the empowerment of women. Wherever women have the right to an education and to choose how many children to have, fertility rates fall to or slightly below replacement levels.

Falling birth rates challenge pension systems more than rising longevity, because they imply a rising old-age dependency ratio even if retirement ages increase in line with life expectancy. But as long as birth rates are only slightly below replacement level, pension systems’ sustainability can be ensured by means of affordable increases in contribution rates. And lower birth rates deliver the offsetting benefit of lower child dependency ratios, reducing education costs or enabling increased investment in education per child.

Slower population growth might also reduce the increase in wealth-to-income ratios, and the resulting increase in inequality that Thomas Piketty recently highlighted. In many countries, the increase results primarily from the rise in real-estate prices relative to income, as more prosperous people devote a growing share of their income to purchasing property in desirable locations.

Continued population growth would intensify competition for such positional goods,” which are not easily supplied in greater volume. A stable population, or actual decline, would reduce their importance somewhat. It would also make it easier to reduce carbon-dioxide emissions at an acceptable cost, and to preserve and enhance local environmental quality, which people increasingly value as their incomes rise.

For today’s advanced economies, a stable or slightly declining population would likely be optimal for human welfare. For the world as a whole, it is a desirable goal.

But it is also a distant goal. Indeed, population decline in the advanced countries remains far less of a problem than rapid population growth in many developing countries. The United Nations’ medium fertility scenario projects that the world’s population will rise from seven billion today to ten billion by 2050. Nigeria’s population could rise from 123 million in 2000 to 440 million by 2050, while Yemen’s could grow from 18 million to 42 million.

High fertility rates in many countries are partly a consequence of low income. But causation also runs the other way. High fertility rates stymie prospects for economic growth, because excessively rapid population growth makes it impossible to accumulate per capita stocks of physical and human capital at the pace required to drive rapid income gains.

That said, efforts to control population growth through measures like China’s compulsory one-child policy are both morally abhorrent and unnecessary. As examples like Iran show, even low-income countries can achieve dramatic fertility reductions simply by providing choice and education. But that does not change the fact that China’s rapid fertility decline played a major role in its extraordinary economic breakthrough.

Facile commentary often suggests the opposite: countries with high fertility rates supposedly enjoy the demographic dividend of a rapidly rising and youthful population. But, beyond some rate of population growth, jobs cannot be created fast enough to absorb the growing workforce.

Almost all countries with fertility rates well above replacement levels face economically and socially harmful youth-unemployment rates. Political instability in the Middle East has many causes, but among them is the lack of jobs for young people, especially young men.

Yes, demographic slowdown may, as Krugman and others have argued, increase the risk of deficient demand and below-potential growth. But if the problem is inadequate demand, the danger can be averted

Governments and central banks can always create additional nominal demand if they are willing to use all of the policy tools available to them, such as debt- or money-financed public investment. And if there are underused resources, additional real growth will result.

If aging populations lead to secular stagnation, the cause will be deficient policies. By contrast, the problems created by excessively rapid population growth are rooted in real and unavoidable constraints. The manageable challenges created by rising life expectancy and lower birth rates should not be allowed to obscure the huge benefits of greater longevity and population stabilization. And it certainly should not blind us to the adverse economic and social consequences of rapid population growth.


Adair Turner, former Chairman of the United Kingdom’s Financial Services Authority, is a member of the UK’s Financial Policy Committee and the House of Lords.