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Mar 27, 2013 | 02:10 GMT

5 mins read

Challenging the International Economic System

It can be difficult to separate the important from unimportant on any given day. Reflections mean to do exactly that — by thinking about what happened today, we can consider what might happen tomorrow.

A deal up for discussion at the BRICS summit in Durban, South Africa, this week could yield a concrete move away from U.S.- and European-dominated international financial management. Leaders from Brazil, Russia, India, China and South Africa — the BRICS countries — will meet Wednesday after two days of technical meetings. Early statements indicate that the countries may have reached a deal on establishing a joint financial institution that would serve the dual functions of the World Bank and the International Monetary Fund. In addition to discussions about a possible multilateral bank, Brazil and China signed a currency swap deal for $30 billion worth of trade. 

While there are plenty of reasons to dismiss the BRICS countries as an economic grouping, each member is a regional power in its own right, a fact that even economic slowdowns are unlikely to change. A multilateral financial institution with money available to help finance investment and stabilize balance-of-payments crises could help boost the BRICS countries' influence and long-term stability, at the expense of traditional economic powers. The idea of a currency stabilization mechanism built outside the auspices of U.S. or European management is not new. The Association of Southeast Asian Nations plus Japan, China and South Korea maintain a regional currency swap mechanism through the Chiang Mai Initiative. 

What the BRICS countries are considering would have very different geopolitical implications. First, it would be a vehicle to facilitate financing for major investment projects in the member countries. It would probably also serve as a stabilization tool for countries with currency problems that have been cut out of the U.S. system.

What is a Geopolitical Diary? George Friedman explains.

For a country like Argentina, which can almost certainly expect serious currency instability in coming years, a stabilization bank partly managed by neighbor and economic partner Brazil could provide a much needed safety net. For Brazil, it would be another way to shape relations with its southern neighbor. For Russia and China, a multilateral institution in which they play a pivotal role would give them a tool to increase influence over their strategic neighbors — who have in the past relied on aid from the West — while relying on the legitimacy of a multilateral institution to reduce Moscow and Beijing's image of imperialism. None of this is to say that these countries don't already wield significant economic and political weight. But a multilateral banking tool under the direction of BRICS countries would create an alternative option to relying on the International Monetary Fund in times of need, diversifying the tools available to BRICS governments. 

Whereas the Chiang Mai Initiative was a reaction to the economic turmoil of the 1997 Asian economic crisis, a BRICS bank would represent a political economic union of geographically disparate nations demonstrating a willingness and capacity to break away from the U.S.-dominated system that has for six decades been dominated by Atlantic institutions. The challenges are myriad and already apparent, with some reports indicating that there may be difficulties getting all five countries to agree to an initial investment in the bank. With China holding the majority of liquid reserves, it would be difficult for a BRICS bank to not be dominated by China, and the solution may be to weaken the bank's institutions to prevent power imbalances. But the fact that the discussion has come this far demonstrates that mid-level geopolitical powers have begun to explore alternative ways to handle the world's shifting economic balance. 

The current global economic system is defined by the 1944 Bretton Woods agreement. Though aspects of the agreement — like the gold standard — have been abandoned, its principles of low barriers to trade, rapid industrialization and predictable currency regimes have remained unchanged. The agreement itself was a way for the United States to bind countries into an alliance that came to characterize the capitalist bloc of the Cold War. The World Bank and the International Monetary Fund were among the many institutions created to service this system, but with the end of the Cold War, the International Monetary Fund in particular has suffered a series of missteps in its approach to aiding unstable countries that have undermined its reputation internationally. Most important, from the perspective of the BRICS countries, the International Monetary Fund remains dominated by Atlantic powers. The United States has the largest bloc of votes on the International Monetary Fund board, whose head is traditionally European.

Ultimately, the International Monetary Fund finds itself at odds with an enormous number of countries whose primary goal is social and political stability, not economic perfection. This is not an alien concept to the United States, which has historically been willing to allow partners to bypass democratic and economic ideals to ensure stability in a strategic ally. But the current economic system and its associated institutions were built around the United States when it was the only major industrial power with the resources to stabilize allies. The rising economic powers of the world are regional powers in their own right, with idiosyncratic economic management models. 

Simply put, today's international economic system is still dominated by an order that was designed to prevent a second Great Depression after World War II. It has not yet adjusted to the rise of countries like the BRICS, not to mention other major emerged and emerging economies, including Mexico and Indonesia. The impact of this rise is exacerbated by the ongoing instability in Europe that will only worsen as the political impacts of the economic crisis become clear.

The United States remains the dominant global power while the rest of the international system adjusts to the failure of the European experiment. Whereas Europe dominated global commerce for 500 years, demographic shifts, constant warring, the reassertion of regional independence from European control and the United States' rise to global dominance have put the world in a state of flux. While dominant, the United States is in no position to micromanage global affairs. For middle and regional powers, this period presents a time of great strategic opportunity. Whether it succeeds or not, the BRICS bank is exactly the kind of proposed change that we would expect in a globalized system that has outgrown the European age.

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