COMPARISON OF IMF AND BRICS NEW DEVELOPMENT BANK LENDING SYSTEMS AND THE POTENTIAL DOMINANCE OF THE INTERNATIONAL MONETARY SYSTEM

COMPARISON OF IMF AND BRICS NEW DEVELOPMENT BANK

LENDING SYSTEMS AND THE POTENTIAL DOMINANCE OF THE

INTERNATIONAL MONETARY SYSTEM

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Introduction

Hegemony is something that cannot be denied, both in politics and economics. Since

the end of the Second World War, the United States has become a bigger name. As one of the

As a country that suffered little war losses, the United States was very active in providing

economic assistance to other countries, especially to Western European countries that had

suffered a lot of losses. This assistance to Western Europe was called the Marshall Plan.

Through this program, the United States built its name as a country that helped Europe to live

again. In this program, the United States disbursed funds amounting to 13 billion dollars or

around Rp 179 trillion, which today is approximately equivalent to Rp 1,500 trillion

(Hardoko, 2018). The running of the Marshall Plan is also one of the backgrounds why the

United States Dollar currency is used as a benchmark for world currency. This also marks the

success of the United States in building its name and controlling the economy in the world.

Besides the Marshall Plan, there is also the GATT/WTO. The World Trade

Organization is the only international organization that specifically regulates trade between

countries. The WTO is currently the ruling regime of international trade, which has the right

to punish member countries that violate agreed agreements and regulations. One of the

originators of the establishment of the WTO is of course the United States, and until now, the

WTO has been the only international organization that regulates trade between countries. The

United States continues to have a very strong influence on the WTO. The statement that the

WTO is the ruling regime of international trade, in other words, states that the real ruler of

international trade is the United States.

Due to the strong hegemony of the United States over the world economy, several

industrialized countries formed an economic organization, aiming to break away from the

hegemonic influence. Some of the countries that joined are Brazil, Russia, India, China, and

South Africa or commonly called BRICS. The joining of these countries is due to injustice

and differences in principles with the World Bank and the International Monetary Fund, both

of which are controlled by the United States. The countries that are members of BRICS have

been very vocal in voicing their disagreement with the policies of the World Bank and/or

IMF. BRICS considers the dominance of the World Bank and IMF to be very favorable to

countries that have a lot of capital, resulting in inequality in the policy-making process, and

this is considered very detrimental to third world countries.

One of the actions taken BRICS in restoring balance of the world economy is the

establishment of the BRICS Development Bank or recently renamed the New Development

Bank. The NDB is a multilateral development bank that will be run by the BRICS member

countries of Brazil, Russia, India, China, and South Africa. The New Development Bank was

agreed upon at the fifth BRICS Summit meeting on March 27, 2013 in Durban, South Africa

(Powell, 2013). At the sixth BRICS Summit, the BRICS member countries signed a

document establishing a $100 Billion BRICS Development Bank and an additional $100

Billion currency reserve (Bbc, 2014). The first elected president was from India. Based on the

things that have been mentioned before, therefore in this study the author will examine how

the difference in policy making between the BRICS National Development Bank and the

IMF.

Methods

In order to explain the comparison between the IMF and BRICS New Development

Bank institutions, the author uses the international system level of analysis. System level of

analysis International is where countries in the world interact with each other to form a

system. The structure of the system and the changes it experiences will determine the

behavior of the International Relations actors involved in it. The system that applies in a

region will affect the behavior of countries in the system.

The method used is a comparative descriptive method. Descriptive research aims to

achieve facts by interpreting the data precisely. With descriptive methods researchers can

compare various phenomena so that they become comparative studies. (Mas'oed, 1995) By

using the comparative descriptive research method, the researcher will convey a thorough

explanation of the research results, in which it is explained in a narrative so that it is hoped

that the research findings are objective findings.

The data collection technique in this research is a literature study that uses secondary

data, namely data taken indirectly in the field. Data obtained by understanding and studying

from literature, magazines, articles, the internet, the results of previous research and scientific

papers related to problems raised by the author. The data collection is continued with data

processing and selecting and classifying data that is relevant to the object of research. The

data analysis technique used in this research is qualitative data analysis. In this case, the data

analysis technique is through the process of systematically searching and compiling data

obtained from the results of the literature study, so that it is easy to understand, and the

findings can be informed to others.

Theoretical Framework

In this study, the author uses structural power theory to explain the difference between

the IMF as a Brettonwoods institution that has dominated the international financial and

monetary system for a long time compared to the BRICS NDB (Culpepper, 2015). In the

same source, it is also mentioned that the relationship between the state and business is bound

up in the relationship mutual dependency, where this dependence can carry a risk (Culpepper,

2015). According to Susan Strange structural power in international political economy has

four dimensions, namely security, production, finance and knowledge (May, 2008).

Therefore, in this study, the theory is used to explain the structural power of the

Brettonwoods Institutions, namely the IMF and the BRICS New Development Bank, and

then compared between them.

In addition to using structural power theory in explaining the comparison between the

IMF and BRICS New Development Bank, the author also uses the concept of middle power.

Middle power is a country that is neither large nor small in terms of power, capacity and

international influence, but has a tendency to promote cohesion and stability in the world

system (Jordaan, 2003) to promote cohesion and stability in the world system (Jordaan,

2003). The Middle Power concept also says that countries that have middle power try to

create a system or a structure of their own to stem the influence of superpowers, countries

that have middle power or middle power are Australia, Canada, Norway and Sweden. Middle

power can be identified through a country's foreign policy which is determined by their

constitution or position in the world system (Jordaan, 2003). There are several characteristics

that can be used to identify a middle power, namely: consideration of the country's capacity,

position in the world order (Jordaan, 2003) world, the normative composition of state

societies, domestic class interests, and foreign influence in policy making (Jordaan, 2003).

These will be used to explain the position of BRICS in the international system. In this

journal, the author uses middle power to explain the BRICS National Development Bank as

an international financial institution, different from the general definition of middle power

that uses the state as the main actor.

RESULTS AND DISCUSSION

International Monetary Fund (IMF)

After the end of World War II, the economic policy makers of countries discussed how

to rebuild the post-war world economy at Bretton Woods. The meeting resulted in an

agreement on efforts to restore the world economy by reducing trade, payment and exchange

rate policies that hinder world trade. From this meeting, it was agreed to establish three

international institutions, one of which was the International Monetery Found (IMF).(Nim,

2011) The IMF is responsible for regulating the global financial system as well as the global

financial system provides loans to member countries to help with the country's financial

problems. The IMF finally through ratification in the Parliament or Congress of member

countries began to stand on March 1, 1947. (Nim, 2011) The IMF is one of the World's

International Organizations, having 187 member countries. The command line for the

implementation of the IMF comes from the government of the member countries. The highest

decision-making in the IMF is the IMF Board of Governors which comes from all members.

In day-to-day operations, decision-making is carried out by the Board of Directors and

consists of 24 Executive Directors representing all member countries. The Board of Directors

meets regularly, generally three times a week. However, meetings can also be held outside of

these three days whenever there is an agenda to be discussed or a problem.(Nim, 2011).

In accordance with article 1 of the Article of Agreement, the IMF has a role by

providing emergency funding assistance both from the IMF and from other international

financial institutions that use the IMF as a reference institution. There are three types of

assistance by the IMF, namely the IMF General Facility, the IMF Special Facility, and the

IMF Concession Facility.(Nim, 2011) The IMF in providing assistance is an international

institution that safeguarding loans made to applicant countries. This is done so that loan funds

can be returned in the event of unilateral withdrawal from the existing agreement. This

principle is stated in the IMF's Articles of Association, where adequate safeguards are

required for every loan. Withdrawal can be done if there is a failure or the applicant country

does not follow the agreed agreement.(Nim, 2011) If a country requests financial assistance

to the IMF, the country is required to fulfill certain conditions in accordance with IMF policy.

These conditions include adjustments to the domestic economic policies of the applicant

country. The purpose of this is so that the applicant country can immediately overcome

balance of payments difficulties and repay the loan that has been submitted. By doing this,

the IMF can embed its influence into the policies of the borrowing country and that influence

will continue to be embedded as long as the borrowing country needs financial assistance

from the IMF. We can see that this condition is used by the IMF in addition to making sure

that the funds they lend can be returned in accordance with the stipulated time period as well

as to exert influence on the borrowing country (Nim, 2011).

The IMF's offer of solutions to overcome the economic problems of countries is

increasingly experiencing shocks caused by the undemocratic nature of the IMF. The

decision-making mechanism is not based on the principle of one man one vote but rather

based on the contribution of funds deposited by members. Developed countries such as the

United States (19.1%), the United Kingdom (6.6%), Germany (5.7%), France (4.8%), Japan

(4.5%), and Canada (3.1%) has the dominant voice. (Nim, 2011) With this disparity of votes,

it is not surprising that the world economic recovery tends to carry the interests of developed

countries. In this case, it is clear that the role of the US is quite large in important decisions at

the IMF. The US vote of 19.1% will be able to determine any decision that according to the

rules must meet the provisions of at least 85% of the votes of its members. This means that

decisions at the IMF tend to carry US interests (Widarjono, 2016).

In order to achieve the country's goals when requesting assistance from the IMF, in the

Washington Consensus, the recipient country must do things such as: (1) reduce government

spending, deficits (2) reducing the growth rate of money to control inflation; (3) reducing the

government's monopoly role in the market or privatization; (4) deregulating the industrial and

banking sectors; (5) shifting lending from the public to the private sector; (6) reducing

government control over wages, prices interest rates and reducing subsidies; (7) raising

interest rates; (8) removing barriers to exports; (9) reducing tariffs, removing quotas and

stopping foreign exchange controls and exchange rate controls; (10) keeping foreign

exchange reserves in a safe amount; (11) devaluing. (IMF Site) It can be seen that the three

pillars of the Washington Consensus are a conspiracy between the IMF, the World Bank, and

the US Treasury Department that is used as a reference for the IMF as a condition for helping

developing countries (Nim, 2011). With so many conditions proposed, it leads to interference

with recipient countries who are forced to accept the advice of the IMF. This can be a

hindrance to borrowing countries in their efforts to have control over their own economies.

The IMF has become a tool to impose imperial financial discipline on countries the

world using technical assistance. Historically, the IMF has been able to position itself as an

economic advisor to its member countries, especially poor countries. By using the power that

comes from this source of funds, the IMF has the authority to interfere in the domestic affairs

of member countries.(Analysis, Causes, & Solutions, 2003) In addition, the IMF also has a

major power that lies in its role as a Credit Agency. This means that all major credit agencies

in the advanced capitalist world, whether private, government, or multilateral institutions

such as the World Bank will refuse to lend money to countries that do not accept the advice

of the IMF. The IMF is the keystone of a total system involving the governments and capital

markets of the entire capitalist world (Analysis et al., 2003). The IMF's system, as such, does

not support its role in helping developing countries. The IMF's orientation and policies tend

to lean towards the conditions of developed countries and do not think about the capacity of

developing countries.

BRICS New Development Bank

History BRICS New Development Bank started with the agreement of member

countries BRICS namely Brazil, Russian Federation, India, China, South Africa agreed to

establish a new bank namely BRICS New Development Bank or BRICS NDB (Griffith-

Jones, 2015). The discourse first took shape at the BRICS meeting in New Delhi, India in

2011 where there was a skeptical view about the ability of the members to establish a new

bank- BRICS members to fulfill the proposal, not only because of wide differences in

strategic interests but also because of the lack of institutional capacity to navigate these

differences (Cooper & Farooq, 2015). The second discourse was in March 2013 during the

BRICS member states' meeting held in Durban, South Africa (Griffith-Jones, 2014). The

meeting in Durban had led to an agreement called the Durban Summit Declaration and

Action Plan (Griffith-Jones, 2014). The content of the Durban Summit Declaration and

Action Plan is "In March 2012 we directed the Minister of Trade to examine the feasibility of

establishing a New Development Bank to mobilize existing resources for infrastructure and

Sustainable Development Projects within BRICS and other emerging economies, to

complement existing efforts of the BRICS and other developing economies regional and

multilateral financial institutions in global growth and development. We have agreed to

establish a New Development Bank. Contributions must also be large and sufficient for the

Bank to be an effective financial vehicle" (Griffith-Jones, 2014). It has also been agreed that

the government running the NDB or New Development Bank will be located in Shanghai,

China and the regional center will be located in South Africa and the first President who will

serve as the President of the New Development Bank for five years will be chosen from the

people of India, and Mr. KV Kamath was inaugurated in May 2015 (Griffith-Jones, 2015). In

addition, there is a discourse that the President of the New Development Bank will be elected

alternately where after the President from India, the next president will be elected with

Brazilian nationality (Griffith-Jones, 2015). The establishment of the BRICS New

Development Bank aims to improve institutional relations among BRICS members

themselves.

The committee in charge of BRICS New Development Bank is appointed by the Board

of Directors to ensure the work runs smoothly. BRICS New Development Bank provides

assistance to the main member countries of BRICS itself and also to developing countries

outside BRICS. In some cases the NDB or New Development Bank will provide assistance

that focuses on Latin America and also the African region because in Asia there are already

many banks that help with development in Asia. Africa and Latin America are the focus of

the BRICS NDB because of its mission. BRICS NDB's main objective is to eliminate

development gap between countries, where the two regions were lacking in infrastructure

development, so BRICS NDB came to the aid of Africa and Latin America. BRICS NDB

provides loans to multilateral, regional networks, as well as other national banks. BRICS

NDB also invests in infrastructure to aid development in developing countries. BRICS NDB

provides assistance which focuses on environmentally sustainable infrastructure, such as

water and sustainable transportation and in the future will start to enter the energy sector

(Bank, n.d.-b). The development of the BRICS NDB can provide strong support for the NDB

in providing infrastructure assistance to developing countries, which is dependent on from

speed of development of the BRICS NDB itself, if the development is fast it can increase the

bargaining power of the BRICS NDB and also cause the aid to be more impactful (Griffith-

Jones, 2015). The BRICS member countries that pioneered the BRICS NDB are now major

contributors to the international system (School, n.d.). Aid from the NDB is also channeled to

UN peacekeeping activities where while western countries are reducing their aid, the BRICS

NDB is lending more (School, n.d.).

The BRICS NDB has the main objective to mobilize resources for infrastructure and

sustainable development projects in the countries- BRICS member countries as well as other

emerging economies. A bank like BRICS NDB that is arguably unlike any other bank in the

world. Traditional development banks focus more on infrastructure investment than on

lending money. Borrowing countries do not need to implement policies related to changes in

their country such as economic policies, implementation of reforms, etc., which are often

stipulated by traditional development banks (IMF) (Larionova & Shelepov, 2016). It is this

difference that makes the NDB an important feature as an institution that ensures a fairer

international financial system based on the principle of respecting the interests of all member

countries. Another feature of the BRICS NDB is the desire to lend in national currency

instruments in developing countries and future plans for countries to repay loans in their local

currency even if it is not the same currency as the loan.

In general, the policies of the BRICS NDB are used to attract new borrowers and are

particularly targeted at developing countries in general that need loans. The main mission of

the BRICS NDB is to provide development investment sustainable infrastructure in BRICS

member countries that will reduce the existing infrastructure development gap. In addition,

infrastructure development also In addition, infrastructure development also considers

environmentally and climate sustainable development that requires new infrastructure.

Existing infrastructure should be creatively designed to promote green lifestyles and broader

development models. The BRICS NDB's investment in infrastructure that enables the use of

renewable energy is an important initiative to promote green development (Griffith-Jones,

2009) green development (Griffith-Jones, 2014).

Analysis of the IMF's Role in United States Economic Crisis

The economic crisis that occurred in United States in mid-1997 resulted in an increase

in government and private foreign debt. (Khadijah, 2014) Because the confidence of the

international economic community was drastically reduced, in October 1997 the government

officially requested assistance from the IMF. (Salamah, 2001) The crisis that occurred in

1997 had a direct and noticeable impact on United States with the change in the rupiah

exchange rate against the US dollar sharply. This drastic decline in the rupiah exchange rate

resulted in the United States government's foreign exchange reserves almost being depleted.

(Khadijah, 2014) Since the signing of the Letter of Intent (LOI) or Memorandum of

Agreement between the United States government and the IMF, United States began to rely

on foreign debt. The disbursement of funds obtained from the IMF was the mainstay to

overcome the economic crisis that had hit United States at that time. At that time the IMF was

believed to be a god of help that was expected to create financial stability in United States

(Khadijah, 2014).

United States request for assistance to the IMF went through a long negotiation process

and finally United States received multilateral assistance from the IMF totaling US$ 23

billion. In addition to the long process required, the negotiations on the request for assistance

to the IMF were also quite tough. This is due to the different visions of IMF policies that are

very likely not in line with what the United States government will do.(IMF, Problematik, &

Hamid, 1997) This again refers to the existence of rules if a country requests financial

assistance to the IMF, then the country is required to fulfill certain conditions in accordance

with the IMF's policies with IMF policies. It may be that the IMF's conditionality does not

match what the United States government wants. However, at the moment United States is

still able to soften the IMF's policy conditionalities because it still has better bargaining

power than Thailand, which is fully controlled and accepts quite harsh conditionalities from

the IMF (IMF et al., 1997).

Finally, on January 15, 1997, the Executive Director of the IMF came to Jakarta and

presented the LOI which was signed by President Soeharto and began the era of the United

States economy driven by the IMF. The IMF as a party that is expected to be able to

overcome the economic crisis in United States, of course, does not merely stand as a party

that only "disburses" money aid to United States without any consequences. The IMF through

its LOI has obliged United States to follow the stages of economic recovery as outlined in the

agreement. (Khadijah, 2014) Since then, all concepts proposed by the government have been

taken over by the IMF. In its implementation, the IMF will conduct evaluations and IMF

representatives will also enter into many relevant departments and institutions. Seeing this,

we can conclude that the IMF is the one who control and dictate the policy strategies of the

United States government.

The IMF has pressured and demanded the United States government to comply with the

conditions in the LOI so that funds will be provided if the conditions have been met.

(Khadijah, 2014) Of the various points offered by the IMF to the United States government,

there are three known moves in overcoming the economic crisis. The three moves are (1)

Trade Liberalization Move (2) State-Owned Enterprises Privatization Move (3) Foreign

Capital Investment Freedom Move. If you look at the prescription given by the IMF to United

States, it seems to be very good. However, if examined more deeply, there will be many

contradictions. With the IMF recommending trade liberalization for developing countries, it

means that the country must be very open to the flow of imports. The influx of imports will

actually harm the country. For points 2 and 3, the heavy inflow of foreign investment will

actually incur costs to serve foreign investment much higher than foreign debt. The greater

the flow of investment, the higher the import intensity in the country. Injections of financial

assistance from the IMF continue to be made in the hope of recovery economy, but it never

materialized.

The reason for the IMF's failure in United States since its involvement in the crisis in

1997 is that the IMF has always imposed fiscal and monetary tightening. The tightening is

forced so that there is a surplus to pay for the burden of increasing debt, even though each

country has a different economic structure and problems. (Khadijah, 2014) So far, the crisis

recovery program run by the IMF has drawn various criticisms. The efforts made by the IMF

still focus on efforts to increase the ability to pay debts. The IMF has also not played much of

a role in encouraging a more sustainable economic recovery but has created more sustainable

dependency. Prescriptions from the IMF are also considered too generic, tend to be oriented

towards western countries and are not adaptive to the conditions of the country requesting

assistance (Salamah, 2001).

Analysis of BRICS New Development Bank's Aid to India

The project that BRICS New Development Bank is funding in India is called Mumbai

Metro Rail Project. The purpose of the project is to develop transportation links in Mumbai

that are Mumbai is the second largest city in the world. This is because Mumbai's public

transit capacity is far from sufficient to meet the increasing demand (B. N. D. Bank, 2018). In

addition, to keep up with the expected continued trend of urbanization and the City's

population is expected to increase by 53% by 2050 (B. N. D. Bank, 2018). As such, the

project is designed to improve urban transportation infrastructure in Mumbai through the

financing of three metro lines, ultimately supporting the development of the city (B. N. D.

Bank, 2018). The project is in line with the NDB's mandate to support sustainable

infrastructure development. The total length of the lines to be constructed is 58 km by

building line 2A from Dahisar East to DN Nagar, Line 2B from DN Nagar to Mandale, and

line 7 from Andheri East to Dahisar East (B. N. D. Bank, 2018). In addition, the project also

provides mass transit facilities in the form of railways to remote areas.

The project cost reached USD 2,500, but the NDB only financed USD 260 million,

which is about 10% of the total project (B. N. D. Bank, 2018). While the remaining shortfall

will be financed by other banks and from Mumbai Metropolitan Region Development

Authority. It is estimated that the project will be completed by 2022 (B. N. D. Bank, 2018).

BRICS NDB provides infrastructure assistance to India to accelerate development or projects

in India. This development can affect other sectors such as the economy so that the economy

in India can increase rapidly and can improve other sectors as well.

Comparison of Aid Provided by IMF and BRICS New Development Bank

The IMF as an international bank has long provided assistance for the development of

countries in the world, especially in the economic field. The assistance provided by the IMF

is financial assistance to be used by borrowing countries to improve or restore the economy

of borrowing countries, which used to be focused on countries affected by World War II, but

now it is comprehensive. The loans provided by the IMF are not just - just, the IMF provides

several requirements before providing loans. The requirements given by the IMF must be

approved by the country that wants to borrow, otherwise it will not be given a loan by the

IMF. Requirements by the IMF are They are binding and coercive, and often influence

economic policies in borrowing countries. The conditions that are proposed often only benefit

the IMF because they carry the interests of the country with the largest contribution of funds

in the IMF, namely the US. The IMF also influences the policies of borrowing countries not

only with the terms proposed, but also the IMF is required to be an economic advisor to

borrowing countries, this shows the IMF's capitalist role is very strong.

BRICS NDB itself is different from the IMF, BRICS NDB provides loans not in the

financial sector, but rather infrastructure investment in a country. Lending in BRICS NDB is

also not complicated by the requirements, as long as the borrowing country can repay it, other

requirements are not a problem for BRICS NDB considering BRICS member countries

themselves have many differences in economic policies so that there is no strong domination

by a country. The absence of domination by a country means that the currency lent depends

on the national currency of the lending country. The loan can also be repaid according to the

national currency of the lending country so that there is no need for the borrower to pay back

the loan. The BRICS NDB is stuck to the same currency, unlike the IMF which uses the US

Dollar as the international currency. BRICS NDB simplifies lending requirements because it

wants to attract new borrowers so that they switch to BRICS NDB and do not depend on the

IMF anymore. The BRICS countries themselves are middle power countries with rapid

economic growth and the difference in the easier lending system by BRICS NDB makes them

ready to rival the dominance of the IMF so far.

Conclusions

The International Monetary Fund and the BRICS New Development Bank are the two

international organizations based on economics. The two organizations certainly have some

differences. One prominent difference is the countries involved. It can be seen that, as an

organization that has been in the international world longer, the IMF has more colleagues.

Among these colleagues, most are from countries that are already developed in the economic

field. It can be seen from the voting system, such as the principle of one country, one vote

man one vote) but rather based on the contribution of funds deposited by members.

Developed countries such as the United States (19.1%), the United Kingdom (6.6%),

Germany (5.7%), France (4.8%), Japan (4.5%), and Canada (3.1%) have a dominant voice.

The total is 57.6%, while developing countries are only 34.4%. On this basis, the IMF is

considered an organization controlled by the upper class. In addition, in terms of lending

money, the IMF also imposes several special conditions for countries that will borrow money

from the IMF. These conditions must be met by the country concerned in order to receive

financial assistance from the IMF. It is not uncommon for these conditions to benefit

developed countries that are members of the IMF.

Unlike the IMF, the BRICS NDB has the main objective of mobilizing resources in

infrastructure and sustainable development projects in the BRICS member countries as well

as other emerging economies. Since the founding countries of BRICS are developing

countries, BRICS NDB focuses more on the development of developing countries. BRICS

itself was established on the basis of the unwillingness of countries such as Brazil, Russia,

India, China, and South Africa to disengage over the monopoly of money by developed

countries through financial organizations such as the IMF. These countries are eager to

escape the shackles of superpowers that have harmed and hindered the progress of

developing countries. Therefore, the BRICS NDB is here to offer financial assistance, along

with terms that are not burdensome to the borrower. It is governed or managed by countries

that are still learning and not trying to hegemonize each other.

It can be concluded using structuralist theory that the dominance built by the IMF in the

international monetary system has created a structure in the international system. The use of

the Middle Power concept plays a role here, where the BRICS NDB creates a new system

that contains countries that are not part of the IMF countries that have less power than the

superpowers want to stem their influence. The BRICS NDB is a new system that is preferred

by countries in the world and has great potential to replace the IMF as an international

monetary institution.