The five countries in the BRICS group have set up a development bank and a reserve fund to increase their influence in world affairs. Their desires are justified. Their combined economies are equal to America's in gross domestic product and far bigger in trade. And, yet, they have little influence in international financial institutions like the World Bank, the International Monetary Fund or the Asian Development Bank.
So could the BRICS project work in their favour and advance the interests of emerging economies in general?
At first glance, it seems the project will struggle to be effective. The World Bank and the IMF are UN-affiliated organisations, and virtually all UN members are shareholders. The BRICS bank and fund have five members and can't establish regular, official dialogue with other emerging economies. Hence, it may function like another commercial bank. That would be a pity.
Meanwhile, the influence and relevance of international financial institutions have been dwindling. Emerging economies have trillions of dollars in foreign reserves, thanks to the US Federal Reserve's easy monetary policy. The odds are that they will be called on to bail out developed economies, rather than the other way around. Indeed, the IMF has been bailing out European economies partly with funds from emerging economies.
The World Bank has been a significant source of long-term capital for emerging economies for many decades. But global capital markets have developed so much that its funds are tiny compared to what emerging economies can get from issuing stocks and bonds.
Both institutions have been struggling to justify their existence. Instead of being major sources of financing, they try to sell the "Washington Consensus" to their member countries or the public, that is, an open economy, deregulation and fiscal discipline.
In the past decade, major events have shaken people's faith in what they say. The 2008 global financial crisis, for one, can be partly attributed to financial deregulation. The successes of China and Russia in growing their economies have also generated enthusiasm among emerging markets for the state capitalism model as an alternative to the Washington Consensus.
Filling the intellectual vacuum on the optimal development model is the key opportunity for the BRICS bank and fund to gain influence. Rather than be another source of financing, which is small compared to what capital markets can provide, the development bank and fund should live or die on intellectual competition. Unless it can offer a credible alternative vision to that of the World Bank/IMF, it will languish as just another politically motivated and wasteful international body.
Debate on what is the best development model is sorely needed. The Washington Consensus is wobbling, yet alternative visions are not being discussed vigorously. This is largely because the latest financial crises have not led to serious reforms. Instead, the bankrupt systems and institutions have been resurrected with bailouts through excessively easy monetary policy and/or taxpayers' money. There has been no revision of old ideas or the creation of new ones.
The experiences of the past two decades have exposed serious flaws in the Washington Consensus. First, while economic institutions, such as a central bank, can function well in a mature economy, they often do not in societies rooted in centuries-old traditions.
Second, big businesses tend to dominate all economies. While small and medium-sized ones may employ most people, big businesses use most resources. They must be regulated or controlled.
The ultimate goal of economic development is capital formation. A modern economy needs roads, bridges, power plants and the like. Robber barons made it happen in the US. State-directed business groups did it in Germany and Japan. State-owned enterprises have done so in China. Yet, there seems to be no significant example where the formation of the most important capital has occurred under Washington Consensus-like conditions.
Under that consensus, emerging economies export labour-intensive goods to, and import capital goods from, developed economies. This is a recipe for disaster. When roads, ports and power plants are built at Western costs, no matter how low the local wages are, the country won't be competitive.
If the 21st century belongs to emerging economies, they must produce capital goods at their prices. This is the case for South-South trade. The old model of North-South trade no longer contains enough punch to fuel economic development.
This is why the BRICS bank and fund should have an open-door policy. All developing economies should be able to join. By forming a BRICS Consensus on South-South trade, the development bank and fund could usher in a new era of global prosperity.
Andy Xie is an independent economist