Shadow Government

The BRICS Bank, Bretton Woods, and U.S. Disengagement

American disengagement in the world is not consequence free. The new BRICS bank announced in Fortaleza by Brazil, Russia, India, China, and South Africa is largely a political exercise, which has been given a big boost by American indecision on IMF quota reform. U.S. detachment and inaction have given the BRICS the political cover to start something that would likely die with a whimper if Congress could muster the political will to pass IMF quota reform. The United States suffers from a lack of presidential leadership in the Bretton Woods arena; as we withdraw others fill the vacuum, and we cannot choose our replacements. American leadership always starts at the Presidential level, but Republicans share blame for the rise of the BRICS bank based on their inability to get IMF quota reform done in Congress.

The BRICS have complained about "vote" and "voice" in the Bretton Woods institutions. If we address the ostensible political grievances of countries like China and others at the IMF by passing quota reform their arguments for a BRICS bank largely collapse.

As long as the United States maintains implicit veto and influence over the selection the Bretton Woods institutions' leaders, we should accept marginal adjustments in shareholdings -- this has already happened at the World Bank, and the rest of the G20 has signed off on reform at the IMF. The IMF Quota reform is a good arrangement for the United States until a time when we can trade the U.S. held presidency at the World Bank for the managing director role at the IMF with the Europeans.

The international system still operates under the same essential structures and assumptions that were laid out in "the world America made" at the Bretton Woods Conference and elsewhere following WWII, and that international system works best under vigorous U.S. leadership. The BRICS bank is one of a growing number of efforts to "defect" (I think we should bring that verb back in its Cold War form) from an American led system, which serves both U.S. and world interests.

The BRICS have used U.S. failures on IMF governance reform to push these new institutions. For all their faults, the IMF and World Bank remain effective force multipliers of an American form of globalization, as I've written here, here, and here. It is in the best interest of the United States, and the western world, to keep the BRICS engaged in these forums rather than allowing them to start new ones.

Unsurprisingly, there are limited details available regarding the bank and its operation. We do know that the New Development Bank will have initial authorized capital of $100 billion (with $50 billion in initial subscribed capital) and that the Contingent Reserve Agreement will have an initial size of $100 billion. The bank will be headquartered in Shanghai, the first CEO will be Indian, the first chairman of the Board of Governors will be Russian, and Brazil will appoint the first chairman of the Board of Directors. After failing to land the headquarters, South Africa will host an African regional center.

There are very few cases of successful non-Organization for Economic Cooperation and Development led multilateral development banks. Latin America's Corporación Andina de Fomento (CAF) is one example, but its operations are tightly bound both regionally and sectorally. The New Development Bank is being envisioned along a much more ambitious premise. This will certainly effect its viability. The bottom line is that the BRICS have political and economic aims that are at best disparate, and often, directly at odds with each other. Do we think India would really be willing to foot the bill if there was a Russian or Chinese mega-financial crisis? The Greek bailout cost over $300 billion, and it's safe to assume that a fiscal crisis in any of the BRICS nations would be on a larger order of magnitude.

Here are the questions that I consider central to the success of this political enterprise:

  • In what currency will the deals be denominated? These countries are not big on using the U.S. Dollar so what currency will they use? Certainly not the Yen and certainly not the Euro. There have been suggestions of an alternative currency approach. I'll believe it when I see it.
  • Under which legal system will the bank operate? Most multilateral development banks adopt the U.S. or British legal system, but those both seem inconvenient and unlikely choices for the New Development Bank.
  • How will procurement award decisions, especially for infrastructure, work? For example, a "low-bid" system will favor China, whereas a "life-cycle" approach will favor other countries.
  • The Fortaleza Declaration repeatedly notes the BRICS recognition and commitment to "human rights." Ukrainians and Tibetans might dispute that commitment. The big projects that the World Bank and other multilateral development banks enter into are often socially and environmentally complex -- let's see how this issue is handled.

For my day job, I spend a lot of time analyzing middle-income countries. My take is that the BRICS like to wear the Rolexes and "bling" afforded by their economic rise, but they don't want to pay the condo fees of collective action and global leadership. With the exception of the lowest common denominator issues these challenges will still fall to an American-led West. Incongruent interests and operational challenges will likely cause the BRICS proposed bank and reserve agreement to fall under their own weight, but the U.S. shouldn't wait for this to happen. By passing IMF quota reform, Republicans could expose this as the political exercise that it is. On the other side of the aisle, the administration needs to cut a deal on this issue, and must be prepared to offer real concessions to make it happen -- the XL Keystone pipeline or Bush-43-era missile defense in Eastern Europe would be a good trade for Republicans. Time to call Joe Biden.


Shadow Government

As Ukraine Heats Up, America Needs to Take the Lead

At the beginning of the last century, President Theodore Roosevelt launched the United States onto the world stage with the call to "speak softly and carry a big stick." President George W. Bush perhaps forgot the part about speaking softly. President Barack Obama appears to have misplaced the stick.

In an overreaction to what many viewed as an excessively aggressive stance, we are clearly seeing the costs of believing that America can step back and have someone else pick up the slack. As Winston Churchill observed, "When the eagles are silent, the parrots begin to jabber."

As the world heats up, it is time for America to step up.

Active leadership by the United States in world affairs is essential to preserve the free flow of commerce -- including air travel. It adds to our leverage in economic negotiations, preserves the dollar as a world currency, facilitates collaboration to address global threats, and keeps rivals in check.

For those who think "darn it, let someone else lead for a while," I cannot help but recall the story of the Boy Scout who showed up at camp without his rain poncho. When chastised for not living up to the Scout motto to "be prepared," he replied, "I am prepared -- prepared to get wet."

The world is getting drenched.

A commercial jet is shot from the sky in the Ukraine, Crimea is seized, Israel launches a ground war, the death toll in Syria exceeds that of the Iraq War, Islamic extremism spreads across Africa, Iraq splinters along sectarian lines, China agitates over territorial claims in the Pacific provoking a determined response by Japan, and North Korean belligerence continues.

On the economic front, the Doha Round of trade talks linger as efforts to complete trade agreements in Europe and the Pacific drift past deadlines, with little prospect of the Congress providing negotiating authority anytime soon.

Are we wet enough yet?

What nation do we expect to fill the void?

A global economic landscape populated by multiple, more evenly balanced economic powers is on the horizon. Many nations jostling for power has historically led to conflict.

"We in this country," John F. Kennedy observed, "are -- by destiny rather than choice -- the watchmen on the walls of world freedom." Are we going to relinquish that post to China?

Assimilating China and other rising powers into world leadership without the conflagration that erupted with the rise of Germany and Japan will be facilitated by a strong and active America, not by ceding our place on the world stage.

There is no doubt that America no longer has, if it ever had, the capacity to act alone. Yet it should also be clear that the world needs a catalyst to address common concerns and that no other nation is lurking in the wings ready to assume that responsibility.

America is at its best when it acts as a catalyst for global action on the common problems we face as a planet. A catalyst by definition accelerates action by others. This implies both that it presses for action when needed and that it gathers as many allies as possible in that effort. That requires keeping our current alliances strong and seeking closer ties with emerging powers in key regions, especially India, Turkey, and the continent of Africa.

To be an effective catalyst for action, America must make its dual nature clear to the world. It can be your best friend by gathering the support of others to help you fulfill your aspirations and advance win-win policies. It also has the ability to be your worst enemy if you pursue objectives that conflict with the United States and its allies.

President Bush gave people confidence that America could be their worst enemy. President Obama has given people little confidence that America would take the actions necessary to be their best friend.

To lead, America must have both the soft power ability to persuade and the hard power ability to dissuade. Leadership is not soft power or hard power. It is soft power and hard power.

The path for Obama is clear: speak softly (including about when you will not use force), find the stick, and actively engage as a catalyst so that we never have to swing it.