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2019 | OriginalPaper | Chapter

6. Construction of Brics Financial Cooperation Platform

Authors : Yao Ouyang, Xianzhong Yi, Lingxiao Tang

Published in: Growth and Transformation of Emerging Powers

Publisher: Springer Singapore

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Abstract

In the new century, BRICS has evolved from an economic concept into a new platform for international cooperation. In 2011, the Sanya Declaration established the Brics cooperation mechanism focusing on economy, trade and finance. The mechanism is characterized by adhering to the principle of sharing interests and promoting multilateralism and south-south cooperation. It is really a new model of global economic cooperation. In 2010 and 2011, the Brics countries contributed more than 50% to the growth of the global economy.

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previous chapter Shared Growth of Foreign Trade of the Brics Countries
Footnotes
1
According to estimation by the International Monetary Fund.
 
2
Joseph Stiglitz and Nicholas Stern, believing that in order to meet the investment needs of emerging developing economies, a financial intermediary system should be established to recycle the savings of the emerging economies, and the south-south development bank is best suited to assume this financial intermediary function. Therefore, they proposed to establish a south-south development bank to promote south-south investment. At the G20 Summit held in Seoul of Korea in November 2010, Indian Prime Minister Manmohan Singh informally proposed this idea for discussion at the meeting. His basic idea was also to convert excess savings into investment in developing countries through recycling, and he also pointed out that this would not only help alleviate the direct demand imbalance, but also help solve the development imbalance. After that, the press and academic circle called it the Brics Development Bank.
 
3
As reported by Japan Economic News, Montek Singh Ahluwalia, Vice Chairman of the Planning Committee of the Indian government said on March 27, 2012 that the world needs more banks. The primary goal of setting up the Brics Development Bank is to increase the amount of loans for infrastructure investment in developing countries through transnational financial institutions.
 
4
The chief economist of Bank of America Merrill Lynch (India) Indranil Sen Gupta pointed out that, apart from the World Bank and the IMF, almost all the development banks are based on geographical scope. The close geographical locations enable the members of these multilateral organizations to realize the status, political and cultural identity. But the Brics countries are so diverse as they are located in four continents that a single unified development bank may not work smoothly.
 
5
When discussing the roles of currency and banks in economic development in Chapter II of the Wealth of Nations, Smith stated that, “Prudent banking activities can enhance a country’s industry, turn dead assets to active, make most of the originally useless capital useful, make most of the originally unprofitable capital accrue profit, thus greatly increasing the annual output of land and labor.” Smith realized that banks have the credit intermediary function as well as the importance of banks to industrial development.
 
6
Schumpeter put forward the “credit creation theory”, analyzed the reasons why banks can increase the total output of society, and pointed out that the essence of economic development is the new combination of production factors, and the important role of bank credit in economic development is to provide necessary purchasing power for the new combination of production factors. This purchasing power comes from the creation of bank credit, instead of the savings absorbed by banks, or the discount of real bills. It is this ability to create credit that makes it a driving force for economic development.
 
7
For the first time, they proposed that financial intermediaries have the function of asset transformation, and fund financing between surplus units and insufficient units is possible by issuing indirect financing securities, so as to improve the availability of funds. They demonstrated the promoting role of diversified financial assets and financial intermediaries in credit creation, asset conversion and economic growth.
 
8
From the perspective of information asymmetry, they explained that financial intermediaries have unique cost advantages in the process of information production based on moral hazard model. Under the condition of asymmetric information, moral hazard hinders information transmission. Entrepreneurs take the action of investing a certain proportion of their own capital, as a signal to convey the project quality confidence to the lenders. Entrepreneurs will greatly save the cost of information production in financing after forming an alliance. Introducing financial intermediary as the information producer of entrepreneur alliance can solve the problem of “defective cars”.
 
9
He built the entrusted monitoring model based on the principal–agent theory and asymmetric information theory of multiple clients. This model proves that there will be a two-layer agency relationship with the presence of financial intermediaries. Even if the agency cost of financial intermediaries is taken into account, financial intermediaries still have the advantages of information production and monitoring.
 
10
They put forward the “participation cost theory” based on risk management function. It was pointed out that due to the increasing complexity of financial instruments and the increase of people’s income per unit time, the opportunity cost for investors to learn financial investment and the time to participate in risk management and decision-making, namely the participation cost, have increased greatly, which offset the role of transaction cost and information cost reduction. They believe that financial intermediaries, as major trading subjects of innovative tools and important participants in innovative markets, have the advantage of risk management and can create value by reducing the participation cost of investors.
 
11
Starting from the internal factors of financial intermediaries, they believe that value appreciation is the main driving force for the development of financial intermediaries. As an independent market participant specializing in the production of financial products, financial intermediaries provide value-added services for savers and investors through technical transformation of financial products on the risks, term, scale and liquidity, and at the same time realize their own value.
 
12
In its 12th Five-Year Plan, China planned to invest 6.2 trillion USD, focusing on large-scale infrastructure, exports and clean energy as the key to economic growth, including energy, power, railways, highways and airports. In its 12th five-year plan, India proposed to invest 1 trillion USD in infrastructure construction, including 42 billion USD for highway-related infrastructure and 67 billion USD for railway-related infrastructure. Russia planned to invest 1 trillion used over 10 years starting in 2012. Brazil planned to invest 1 trillion USD from 2012 to 2016. South Africa has the most developed infrastructure, and will invest 100 billion USD invested by 2015. The above data comes from authoritative media websites such as China economic net and national online.
 
13
Under open economic conditions, a zero current account balance implies that domestic savings are equal to the financing needed for domestic investment; deficit in the current account means insufficient domestic savings to finance domestic investment, and the difference is made up by using foreign savings; surplus in the current account means that domestic savings exceed the financing needs of domestic investment, and the surplus domestic savings flow out of the country in the form of current account surplus. This view is in the article “China’s Double Surplus: Nature, Source and Solution” by Yu Yongding and Qin Donghai, World Economy, No. 3, 2006.
 
14
The theory of crisis contagion shows that crisis spreads from one country to another through “contact” approaches such as industrial linkage effect, trade spillover effect and capital flow effect. Modern crisis is more likely to occur with “non-contact” (or “pure”) infection, that is, crisis can spread between two or more countries without the need of any industrial, trade, financial links, and only via the psychological channels through investor expectation. The key to the formation of “non-contact” contagion is that investors believe that the infecting country and the infected country are similar in some aspects (such as economic fundamentals, development strategy or history, politics and culture, legal system, exchange rate system, etc.).
 
15
In this article, Glick and Ross proved through empirical tests that trade channels can well explain crisis contagion.
 
16
The data come from BRICS United Statistical Manual (2011).
 
17
It is co-movement in English, which was first introduced in China by Wei Zhong and Tan Donghai (2003). It refers to the process variables describing the mutual influence and interaction of time series fluctuations. Correlation coefficient method and filtering analysis method are mainly used to measure the co-movement.
 
18
The poor co-movement between South Africa and the other Brics countries may be due to the small size of South Africa’s economy and the fact that it has not established close and stable economic and trade relations with other Brics countries as it is a new member.
 
19
This co-movement is mainly attributed to the fact that the Brics countries face common external environment and impact, have close economic and trade ties with each other and adopt similar economic structures and policies.
 
20
The “Shared” Growth of Foreign Trade between China and Brics Countries by Yao Ouyang, Zhang Yabin and Yi Xianzhong is an example of these literatures.
 
21
The Self-managed Reserve Pooling Arrangement (SRPA) is a common foreign exchange reserve fund established on the basis of the Chiang Mai Initiative, with contributions from the foreign exchange reserves of ASEAN, China, Japan and Korea.
 
22
It has been announced that the total amount of infrastructure investment of the five Brics countries in 3–10 years will be 9.3 trillion USD. If 5% of the capital needed in infrastructure construction by the five countries is to be raised from the Brics Development Bank, and its capital adequacy ratio is set at 30% (the capital adequacy ratio of international development financial institutions is generally 30–40%), the rough estimate is that they need capital as much as 155 billion US dollars.
 
23
The reason why Shanghai is not recommended is that the capital account in China mainland is still under control and the financial system and capital market are not well developed, which will have a negative impact on the market financing and capital operation of the Brics Development Bank.
 
24
In 2010, bonds and note financing accounted for 97.5% of the funds of the Inter-American Development Bank, and this figure was 94.3% for the European Investment Bank, 87.4% for the European Bank for Reconstruction and Development, and 83.6% for the African Development Bank.
 
25
As of July 2011, the credit rating of Standard and Poor and Moody for the Brics countries was BBB for Russia, BBB+ for South Africa, AA− for China, and BBB− for Brazil and India.
 
26
From 1973 to 2011, the cumulative amount (that is, the withdrawal from IMF by member countries other than the national reserve positions) of IMF credit used by the Brics countries was 43.17 billion USD for China, 87.97 billion USD for India, 219.66 billion USD for Russia, 147.31 billion USD for Brazil and 15.41 billion USD for South Africa. The data come from the database of the World Bank.
 
27
Recipient countries may leave things to chance and relax their macroeconomic and financial risk management in anticipation of rescue by the international lender of last resort (ILOLR); Highly profitable international creditors chasing high profits, may deliberately neglect the credit risk of the countries in crisis in anticipation of ILOLR’s rescue. Member states are reluctant to commit to inject more money because of the presence of moral hazard.
 
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Metadata
Title
Construction of Brics Financial Cooperation Platform
Authors
Yao Ouyang
Xianzhong Yi
Lingxiao Tang
Copyright Year
2019
Publisher
Springer Singapore
Book
Growth and Transformation of Emerging Powers

Print ISBN: 978-981-329-743-2

Electronic ISBN: 978-981-329-744-9

Copyright Year: 2019

DOI
https://doi.org/10.1007/978-981-32-9744-9_6