Leaders of the BRICS countries, namely Brazil, Russia, India, China and South Africa, wrapped up their latest summit on March 27 in the South African city of Durban and issued the Fifth BRICS Summit Declaration. Among the 47-item declaration, the most substantially significant and of most concern to the world are undoubtedly the two statements regarding financial cooperation – the creation of a development bank and a Contingent Reserve Arrangement (CRA) amongst BRICS countries. A day earlier, China and Brazil signed a bilateral currency swap agreement.

In the current situation, these three decisions are expected to play an important role in stabilizing and reviving the economy of the BRICS countries. They are complementary and form a substitution for functional deficiencies of the International Monetary Fund (IMF) and the World Bank.

As the developing countries whose national currency hasn't become an international currency, BRICS members are faced with the potential pressure of international currency or financial crises. Different from the rapid economic growth during the first decade of the new century, the background of the fifth BRICS summit is the rapid accumulation of developing market economic risks.

Since the second half of 2011, severe economic shocks have occurred in main developing economies including BRICS countries, with a sharp decline in economic growth. The growth rate of Brazil surprisingly slipped down to less than one percent last year. The exchange rate of the Brazilian Real and Indian Rupee to the U.S. dollar drastically depreciated by about 30 percent within a year, ringing the alarm bells for the BRICS countries. Although the situation has taken a turn for the better since the end of last year, with capitals flowing in again and currency exchange rates rebounding, the risk is yet to be completely removed.

The increasingly stabilization of the U.S. economy, particularly the improvement of the job market, suggests its economy has left the severe situation of the so-called "jobless recovery" which occurred a few years ago. With a comparatively solid foundation for economic recovery, withdrawal from the quantitative easing monetary policy is no longer unattainable for the U.S., but may occur within this year. Once the U.S. withdraws from the quantitative easing monetary policy, it is possible to trigger a large-scale reversal of capital flow, causing developing countries and regions to suffer a heavy blow.

From the debt crisis in the 1980s, to which numerous developing countries fell victim, to the Mexico financial crisis in 1994, we witnessed again and again how developed countries, especially the U.S., had triggered capital backflow, consequently igniting crises in developing countries. Although China has no need to worry about the impact of the reversal of capital flow due to its unparalleled huge foreign exchange reserves, other newly developing market economies may not remain so calm. From the second half of 2011 to 2012, the awkward foreign exchange management policy situation in India and several other countries fully demonstrated this point.

The risk of currency or financial crises is accumulating. The existing financing rescue system of the IMF has many defects. Resources are limited, and its rules and actions mostly reflect the interests and wills of developed countries, especially those of the United States. It is often reduced to a battering ram to help Western countries open the doors of non-Western and developing countries. It is therefore imperative to build a fairer, substitutive financing and rescue arrangement. In this circumstance, the 190 billion yuan/60 billion Real of China-Brazil currency swap, in addition to the initial US$100 billion in contingent reserve arrangement, is expected to build a comparatively strong financial safety network outside the IMF system to help BRICS countries deal with any possible future currency crisis.

Since the East Asian financial crisis in 1997, China has conducted active financial cooperation with many countries to prevent the reoccurrence of such a crisis. The most prominent achievements include the setting up of the Association of Southeast Asian Nations (ASEAN) and the China-Japan-South Korea "10+3" currency swap network. Additionally, China signed currency swap agreements with Belarus, Argentina, Mongolia, Iceland, New Zealand and Kazakhstan, involving more than 2 trillion yuan.

Meanwhile, East Asia's foreign exchange reserve funds have exceeded US$240 billion, which is developing into an actual Asian Monetary Fund by breaking through obstacles from IMF and regional political confusions. All these arrangements have greatly strengthened East Asia's economic power.

The Contingent Reserve Arrangement amongst BRICS countries will be the second fund in which China can play a leading role. We hope Russia, India, South African will sign currency swap agreements with China too, in order to further expand the BRICS countries' financial safety network.

While CRA and the China-Brazil currency swap agreement are aimed at stabilizing the economy, the BRICS development bank is targeted at reviving these countries' economy. The sluggish infrastructure has held back the development of many developing countries and regions. Financial cooperation is absolutely necessary for the BRICS countries to break any financing bottlenecks in their economic development.

An unprecedented, continuous blackout in India from July 30 to August 1 last year, highlighted the graveness of the country's poor infrastructure industry. According to the World Bank 2012 Competitiveness Ranking, Brazil ranked 104 in infrastructure among the 142 surveyed countries. About 90 percent of its national railways were built between the end of 19th century and the early 20th century, with maximum speed per hour standing at less than 40 km.

According to the World Bank statistics, blackouts caused 6.6 percent sales losses in India in 2006 and 1.3 percent in China in 2003. Brazilian ports are "well-known" for their delay in international trade. The cost of a container exported from Brazil is twice as much as that from China, and over 1.5 times that from India.

The economic growth rate in Brazil reached 7.5 percent in 2010, the highest in the past 20 years, but the figure sharply declined to 2.7 percent in 2011 and less than 1 percent in 2012. Fluctuation of outside markets and the unstable macro indexes of exchange rates and public finance are the main causes though, its sluggish infrastructure played a role of pouring oil onto the flames.

Breaking infrastructure bottlenecks is the fervent wish of many newly developing market communities. A large scale of investment in infrastructure has been regarded as a powerful tool to start effective demands. However, with the exception of China, they are commonly faced with severe financing difficulties to develop their infrastructure industry. The existing IMF and the World Bank may not be advisable to meet their requirements due to limited resources. The creation of a development Bank is expected to mobilize more resources for BRICS countries and other newly developing market economies and to meet their long-term interests and wills as well.

The author is a researcher with the Chinese Academy of International Trade and Economic Cooperation directly under the Ministry of Commerce.

This article was first published in Chinese and translated by Li Jingrong.

Opinion articles reflect the views of their authors, not necessarily those of China.org.cn.

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