LATIN AMERICA. A new world order with China’s growing influence has emerged in Fortaleza, where Brazil, Russia, India, China, and South Africa (BRICS) met for a two-day summit on July 15th.
The BRICS agreed to launch a Development Bank to fund infrastructure projects in developing countries. They will lend money at lower rates and with fewer preconditions than the International Monetary Fund (IMF).
The five nations also approved the creation of a Contingent Reserve Arrangement with US$100 billion initially. China will contribute the most with US$41 billion. Brazil, Russia and India will put up US$18 billion each. South Africa will give US$5 billion.
A new international financial system
The creation of the BRICS Development Bank is a concrete step towards a new international financial system, in which emerging markets clamor for a bigger say. It could be hailed as the birth of a structure comparable to what was created at Bretton Woods in 1944.
The BRICS gather 43% of the world population and 21% of the planet’s gross domestic product. They have combined foreign reserves of about US$4.4 trillion. The total trade within the bloc stands at US$6.14 trillion—nearly 17% of the world’s total.
The emergence of this version of the IMF and the World Bank is a counterweight to the United States’ tightly-held grip of the global financial system. At one point, each BRICS member was compelled to make budget cuts so as to meet the strict conditions to qualify for IMF loans.
China’s president Xi Jinping thus contented that the BRICS are improving global economic governance and promoting the democratization of international relations.
Under China’s helm?
Despite the fact Brazil’s president said that: “I don’t believe the format of the new BRICS bank will promote a new hegemony,” the Development Bank is emblematic of Beijing’s increasing clout in the world and especially in Latin America.
The Fortaleza Declaration set out that Shanghai will be the headquarters of the Development Bank. This move is expected to bolster the city’s bid to become an international financial center by 2020.
Notwithstanding that China’s economy has slowed in recent years, it remains the world’s second economy and the main engine of growth. In fact, China’s economy is larger than that of all the other BRICS combined.
The timing of the BRICS summit is significant too. Xi has embarked on a Latin American tour until July 23rd to consolidate its relations with key allies like Venezuela, Cuba and Argentina – all have shunned international financial organizations.
The United Nations’ Economic Commission for Latin America and the Caribbean expects China to become the region’s second largest trade partner by 2015. The report also forecasts that China will buy more than 19% of the region’s total exports in 2020, up from about 8% in 2009.
Bonding with “pariah” states
Chinese banks offer an interesting alternative to Latin American states deemed pariah by international financial organisms because they refuse to bow to creditors. The establishment of the BRICS Development Bank will thus strengthen China’s role as a strategic source of financing for less creditworthy nations in the region.
For instance, since the 1980s, Argentina has shifted its foreign policy from dependence to the United States to a progressive rapprochement with China and Russia.
Today, international financial markets have shunned Buenos Aires for defaulting on about $100bn of debt. This left the South American country starved of foreign capital, allowing China to step in.
“South America, in general, and Argentina, in particular are examples – faced to a developed world affected by the worst crisis of capitalism – that it is possible, with policies opposite to those of the neo-liberal block, to advance development processes with economic growth and social inclusion,” explains Fernanda Vallejos, Advisor to Argentina’s Ministry of Economy and Finance.
“The BRICS Development Bank will allow the financing of major infrastructure projects that will consolidate these development processes underway, detached from the functioning of traditional organisms,” she says.
China has also contributed to diversifying Venezuela’s international economic relations. Whilst the United States has considered Venezuela a significant challenge to its interests in the Americas, Beijing has become Caracas’ second commercial partner. In March 2014, China has agreed to lend Venezuela US$5 billion, the third tranche of the China-Venezuela Fund.
Figures from the 2013 China-Latin America Finance Database set out that China lent almost US$100 billion to Latin America between 2005 and 2013. More than half of it was directed to Venezuela.
Similarly, the United States remains deeply distrustful of Cuba since after Fidel Castro marched victoriously into Havana in 1959. The island has been absent from leading international financial institutions, like the IMF and the World Bank, regarded as agents of “capitalist imperialism”.
Yet, China agreed in 2004 to give Cuba US$400 million in long-term loans. Since the 1990s, China invested US$1.3 billion in the island.
A matter of time
If China is likely to keep strengthening its influence in Latin America and revive national economies, the launch of the BRICS Development Bank is a matter of time. It is currently pending legislative approval in each member country. This process could take several years.
“The influence of the BRICs will be long term, not short term,” says David Thomas, a BRIC expert based in Australia.
“It will take time for the BRICS leaders to make an impact as they work through the complexities of creating a new world order, and the leaders of Latin American countries will have to convince investors that they are open to foreign investment and will respect and protect their interests,” he explains.