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BRICS finance for development initiatives - global capital flows with a

south-south perspective

Piergiuseppe FortunatoECIDC 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 marketsReduction of Capital flows to DEEs

Financial crisis and Growth

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Financial Crisis and Commodity Prices

Financial Crisis and Food Prices

Financial crisis and Capital Flows

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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

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)

2002 2011Market Capitalization 3 13Value of Share Trading 1 9Newly Issued capital 9 21Banks in Global Top 1000 (No) 43 168

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BRICS - Financial Markets Development

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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 micro-sustainability of individual projects while traditional donors pay greater attention to long-run debt sustainability

Financial assistance from non-DAC countries to Africa

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Aid to Africa (% of group)

Main Country Destinations Targets Form of Finance

Arab countries

10.5 Egypt, Sudan, Morocco, Senegal, Mauritania, Djibouti, Cameroon

Productive sectors (transportation, telecommunication, energy, agriculture)

Grants, concessional loans

Brazil 3.5 Angola, Cape Verde, Guinea-Bissau, Mozambique, Sao Tome and Principe

Agriculture, education, health, fisheries, reconstruction.

Co-financing

China 83.0 Angola, Nigeria, Sudan, Zambia

Infrastructure (roads, railways, energy), education, health, science.

Grants (in kind); free interest and concessional loans, from development and EXIM banks and ministries.

India 0.4 Nigeria, Sudan, Burkina Faso, Ghana, Senegal

Infrastructure, health, ICT, manufacturing, humanitarian.

Credit, concessional loans, grants

Korea 1.7 Angola, Liberia, Senegal, Egypt, Tanzania

Health, ICT, education, agriculture

Grants, concessional loans

Turkey 0.9 Sudan, Somalia, Mauritania, Ethiopia

Education, health, water, infrastructure, agriculture, culture.

Grants, export credit, loans

Sources: Authors’ elaboration, based on UNCTAD (2010), OECD database and Krugelund (2008).

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

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

integrationIndia : South Asia; China : East and Southeast AsiaRussia : 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

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

SMEsFinance infrastructure and long run development

projects

For the lenders:Portfolio diversificationHigher 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)