BRICS finance for development
initiatives - global capital flows with a
south-south perspective
Piergiuseppe Fortunato
ECIDC UNCTAD
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Outline
1. The Global Context
2. The way forward – the role of BRICS
3. Several dimensions of action
 Development Assistance
 Investment Flows
 Financial Sector Development
 Financial and Monetary Integration
 A new Development Bank (BDB)
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The Global Context
 The Global Financial Crisis caused by excess global
liquidity and excessive risk taking, has led to:
 Collapse of Growth rates
 Increase volatility on various markets
 Reduction of Capital flows to DEEs
3
Financial crisis and Growth
4
Financial Crisis and Commodity Prices
Financial Crisis and Food Prices
Financial crisis and Capital Flows
7
 These poor global conditions, and the further fragility the
current European crisis has created, are very negative for
developing countries.
 What is the way forward? How developing countries can
obtain:
• Additional financial resources needed for development (long run)
• Support to reduce vulnerability to shocks (short run)
• At the same time: maintain policy space
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The Rise of the BRICS
20
15
10
Brazil
5
China
India
0
South Africa
Russia
-5
OECD
-10
-15
-20
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BRICS - Financial Markets Development
 Financial sector in the BRICS community rose
significantly in the last two decades
 Growth spread across various segments of the
financial system
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BRICS - Financial Markets Development
Share of BRICS in Global Total (in percent)
Market Capitalization
Value of Share Trading
Newly Issued capital
Banks in Global Top 1000 (No)
2002
3
1
9
43
2011
13
9
21
168
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BRICS - Financial Markets Development
NUMBER OF BRICS BANKS IN TOP 1000
90
80
70
60
50
2000
2010
40
30
20
10
0
Brazil
Russia
India
China
South Africa
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BRICS - Financial Markets Development
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What the BRICS can do?
 Can BRICS initiatives have a different
developmental impact on developing economies as
compared to EU and US?
 What can they do differently (aid, investment flows,
financial cooperation and integration)?
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Developmental Solidarity
 The close economic proximity of economies within
the South, and the direct familiarity of donors with
the development challenges facing other developing
countries would imply more equal relationships
between donors and recipient countries in SSC as
compared to NSC
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I) Development Assistance
 BRICS engagement is founded on a model of mutual
benefits and noninterference with internal affairs
Focus on infrastructure: most of the financing has been
concentrated in the infrastructure sector to support
productive activities as opposed to the social spending
(MDG) which characterize traditional donors
Project versus Policy orientation: BRICS tend to
provide non-cash financing for projects without
attachment of policy conditionality
Finance: BRICS tending to focus on microsustainability of individual projects while traditional
donors pay greater attention to long-run debt
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sustainability
Financial assistance from non-DAC countries
to Africa
Arab
countries
Aid to Africa Main Country Destinations
(% of group)
10.5
Egypt, Sudan, Morocco,
Senegal, Mauritania,
Djibouti, Cameroon
Brazil
3.5
China
83.0
India
0.4
Korea
1.7
Turkey
0.9
Targets
Productive sectors
(transportation,
telecommunication, energy,
agriculture)
Angola, Cape Verde, Guinea- Agriculture, education, health,
Bissau, Mozambique, Sao
fisheries, reconstruction.
Tome and Principe
Angola, Nigeria, Sudan,
Infrastructure (roads, railways,
Zambia
energy), education, health,
science.
Nigeria, Sudan, Burkina
Faso, Ghana, Senegal
Angola, Liberia, Senegal,
Egypt, Tanzania
Sudan, Somalia, Mauritania,
Ethiopia
Infrastructure, health, ICT,
manufacturing, humanitarian.
Health, ICT, education,
agriculture
Education, health, water,
infrastructure, agriculture,
culture.
Form of Finance
Grants, concessional loans
Co-financing
Grants (in kind); free
interest and concessional
loans, from development
and EXIM banks and
ministries.
Credit, concessional loans,
grants
Grants, concessional loans
Grants, export credit, loans
Sources: Authors’ elaboration, based on UNCTAD (2010), OECD database and Krugelund (2008).
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II) Investment Flows
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Southern FDI
 Southern TNCs tend to be more willing to invest in
DEs:
 less risk adverse (especially banks)
 they have greater knowledge of markets and business
practices (product adaptation)
 They use more labor-intensive technologies
 Trends in SS are not correlated with NS allowing to
reduce investment volatility
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Differences in governance: Southern TNCs are more
controlled by the State
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Financial Sector – The role of the
Government
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III) Financial Sector Development
• The BRICS have banking systems that are fairly complex and
diverse. They have public and private banks, foreign and
domestic, commercial and development banks. These are banks
that:
– Finance commercial activities but also development projects
– Play an important counter-cyclical role in times of crisis.
• Other countries could learn from these banking systems, and
adopt what is working well, and what meets their particular
needs.
• Example: Angola has created a development bank, using as a
model a successful Brazilian development bank.
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IV) Financial Integration
• BRICS cross-listing of equities and securities (BRICS
Exchange Alliance)
• Cooperation of commodity derivatives exchanges
• SME Financing Instruments
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IV) Financial Integration
• Many developing countries have made progress by:
– Creating their own stock exchanges and allowing for cross-border
listing and cross-border trading;
– Francophone West African countries have created a regional stock
exchange.
• The leading developing countries could support further
capital markets’ development
• BRICS to become anchor countries for regional financial
market development and integration
India : South Asia; China : East and Southeast Asia
Russia : CIS/CEE; Brazil : LatAm; South Africa : Africa
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V) Sub-regional monetary arrangements
• Help promote intra-regional trade.
• Enable trade to happen even when a country is facing
foreign exchange constraint.
• Help reduce foreign exchange uncertainty.
– Example 1: the ALBA (The Bolivarian Alliance for the
Americas), which in 2009 created the SUCRE (sistema monetario
de compensacion de pagos), a virtual currency. The participating
countries are: Bolivia, Cuba, Ecuador, Nicaragua and Venezuela.
– Example 2: Argentina-Brazil bilateral ‘Payments System on Local
Currency’. In this system, exporters can set prices in their own
currencies.
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VI) Regional pooling of international reserves
• Work as first line of defense against sudden outflows of capital
• Provide easier and quicker access to financial funds – and
without conditionality attached (though CMI requires IMF
surveillance)
• Put pressure off the country to accumulate foreign reserves as a
self-insurance mechanism, which can be quite costly.
– Examples: Some regional initiatives already exist to help countries
prevent and manage currency and financial crises – the ASEAN +
Three Chiang Mai initiative (CMI) and the FLAR (Fondo
Latinoamericano de Reservas; seven member countries).
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VII) A new Development Bank
 Huge amount of reserves and assets accumulated by
DEEs (SWF)
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International Reserves Dynamics
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Developing Countries Now Hold Most Foreign
Exchange Reserves
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BRICS and the International Financial
Institutions
• BRICS focused on efforts to facilitate reform of IMF and
World Bank
• Some success in shift of voting power but also important
drawbacks:
– Change of leadership of IMF saw BRICS fail to take common
position
• A BRICS Development Bank!
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BRICS Bank: the Facts
 Its establishment was agreed to by BRICS leaders at the 2013
BRICS summit held in Durban, South Africa on 27 March
2013
 Goals:
• Provide funding for infrastructure projects in developing economies
(long term, WB)
• Create a Contingent Reserve Arrangement worth $100 billion to help
countries counteract future financial shocks (short term, IMF)
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BRICS Bank: what it will do
 Raise resources in the international capital markets at lower
costs (compared to the recipient country governments) due to
better credit ratings
 Have lending directed primarily towards development-related
projects
 Play a counter-cyclical role in times multilaterals are
reluctant or attach stringent conditionality to do so
 Intermediate resources from multilateral and bilateral
agencies, and do so with greater effectiveness due to their
better knowledge on developing economies
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BRICS Bank: the Benefits
 For the borrowers:
Solve market failures: underinvestment in LDCs and
SMEs
Finance infrastructure and long run development
projects
 For the lenders:
Portfolio diversification
Higher yields
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The challenges ahead
 More resources needed
 In the years before the crisis, policy in AEs and global
conditions were highly favorable in providing markets,
financing and technology to major EEs
• Subprime expansion (surge in exports), low interest rates (surge
in capital flows), financialization (boom in commodity prices)
• Can major EEs (BRICS) sustain reasonably rapid growth
despite sluggish growth or a second dip in AEs and help lift rest
of the South? (Arthur Lewis)
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