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International Law

The BRICS bank: Future of Finances

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Few disputed the unfair weightings in the IMF and World Bank of the BRICS companies. But Rajat Nag, a former Managing Director of the Asian Development Bank, warns of the pitfalls that await their Shangai-based New Development Bank

Arguing the case for the BRICS Bank was the easier part; China, though soon to be the world’s largest economy, has a shareholding at the IMF smaller than the Benelux countries. Brazil, with an economy almost three times the size of Belgium’s and a population about 18 times bigger, also has a smaller IMF shareholding.

As a group, the BRICS countries account for about 42% of the world’s population and about a fifth of the global GDP, yet just over a tenth of the shareholdings in the IMF. It is true that reforms are under way to give developing countries a slightly greater voice, particularly the BRICS countries, but the pace has been  slow and rather hesitant.

No wonder then that the BRICS countries keenly desire a new international financial institution where they will have a strong say in keeping with their growing economic weight. There is also the issue of huge and largely unmet needs for the financing of infrastructure projects in the developing world, to the tune of almost a trillion dollars a year in Asia alone. The new BRICS institution could help to supplement the resources already being provided by international financing institutions like the World Bank and the regional development banks.

It wasn’t an easy or straightforward road that led to the clasping of hands of the five BRICS leaders at the Fortaleza Summit in Brazil in mid-2014, when they announced the creation of two institutions, first, the BRICS Bank itself, formerly named the New Development Bank, or NDB, with an initial capital base of $50bn, and second, the $100bn Contingency Reserve Arrangement (CRA).

A number of potentially very disruptive issues had first to be dealt with. China had initially suggested an ownership structure in proportion to each of the five countries’ economic size but  this would have created a very lop-sided institution as China’s GDP is greater than the combines economies of the other four countries. After a drawn-out and difficult bargaining process, an equal shareholding arrangement was agreed on. In return, China would host the institution in Shanghai. The others were not left empty-handed as it was agreed that an Indian would head the institution for the first six years, a Brazilian would chair the Board of Directors, a Russian the Board of Governors and South Africa would host a Regional Office of the NDB.

Now comes the hard part: implementation. As well as the usual challenges that any newly-created institution faces, there are some critical issues the NDB still has to contend with. First, diversity. There is no denying that the five BRICS countries have more that differentiates them than they have in common. China’s economy is about 16 times that of South Africa; per capita GDP in Russia is about six times that of India. Two of the BRICS are permanent members of the UN Security Council, and have been every bit as reluctant as the U.S., the UK and France to admit others to permanent membership. Three BRICS countries are vibrant and often chaotic democracies, and have to contend with very different and demanding processes of consensus building.

In light of their diversity, it’s still far from clear how the NDB will formulate operational policies. Nor is it clear who the NDB will lend to and what its priorities will be. Will it be only to the BRICS countries themselves or will other developing nations be eligible to borrow? If the latter, how will those countries be selected? And within the BRICS, what will be the banks’ criteria for lending?

On top of that, there’s the thorny question of the cost of borrowing from the NDB. International financial institutions like the World Bank or the Asian Development Bank (ADB) operate on a very simple financial model; backed by the collective economic strength of their members, which include most of the advanced economies, these institutions enjoy AAA prime credit ratings – often better than the terms enjoyed by individual member countries. They therefore borrow on international capital markets at highly competitive terms, add a small margin and on lend those funds at rates lower and for longer maturities than national borrowers could have  mustered on their own. With the NDB currently owned by only five countries, it is not clear what credit rating it will enjoy and thus both the volume and price of the debt funds it will be able to raise in the international capital markets remain uncertain.

There is also the matter of credibility. An important factor influencing the cost of borrowing is the NDB’s credibility. Its track record as a lender that upholds the highest standards in its lending operations has yet to be established; so nothing is still known of its governance methods or its respect for social and environmental safeguards. The new bank also has to establish its credibility as a borrower that repays its debt and enjoys sound financial health.

The demand for funds, particularly to finance infrastructure projects, is enormous in all five BRICS countries and throughout the developing world. The NDB will need to lend at a meaningful level each year, but its relatively limited initial equity base of only $50bn means its lending volume will be determined by the level of debt funds it is able to mobilize. That in turn will depend on the credit rating it can command.

The need will be for great attention by the NDB for its due diligence processes regarding projects, including on social and environmental safeguards. The long-term viability of NDB as an institution will depend on the viability of the projects it finances; so these will need to be technically and economically viable while upholding best practices in social and environmental safeguards. The financial viability of projects will need to be assured either by the direct beneficiaries or by the borrowing government. Any compromises on the project quality at entry and during implementation would over time compromise the NDB’s own integrity and its financial health.

How well the BRICS’ new institution builds a pipeline of bankable projects will determine the credibility of the NDB, and there should be no illusions that doing so will need painstaking efforts and time-consuming development of staff skills and operational policies. The new institution will need to guard against any relaxation of its the standards of due diligence, or in the design and preparation of projects out of a desire to respond to borrowing countries’ needs.

The rationale for the NDB is strong, and it should start to take shape in the coming months so as to be ready for business in 2016. But the rationale for the Contingency Reserve Arrangement is not so strong and still needs careful review. The idea is that the $100bn CRA’s pooling of the five countries’ foreign exchange reserves will be available for BRICS members to draw on in a crisis. The two major challenges are that, first, in a genuine crisis a fund as small as $100bn will be insignificant even for the smallest of the giant BRICS countries. Second, any doubts about the repayment capacity of a borrower would mean that the other BRICS countries might well be unwilling to lend without imposing tough conditions. This would be politically very difficult between sovereign states of a club whose members are deemed to be equal partners. Conditionalities and the monitoring of compliance would exacerbate the tensions of a partnership whose diverse interests risk making their working harmoniously together difficult under the best of circumstances.

An instructive footnote could be that the similar Asian arrangement of swap lines and credit was established with the Chiang Mai Initiative following the 1997 Asian financial crisis, but was never used, even during the 2008 global financial crisis. There is no reason to believe that the CRA will be any more successful. The architects of the arrangement themselves recognised the CRA’s potential pitfalls by including in its design a provision that any country drawing more than 30% of their swaps will also need to negotiate an IMF programme. In short, it may be better for the BRICS to focus their attention on the NDB rather than pursue the CRA too.

 

First published by the Europe’s World under title ‘The BRICS bank: Now for the hard part’. Reposted per author’s permission.

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International Law

Human Rights Council election: 5 things you need to know about it

MD Staff

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The United Nations General Assembly held secret-ballot elections for the Human Rights Council (HRC) on Friday.  As of 1 January next year, the 18 newly-elected States will serve for three years on the UN’s highest inter-governmental body, mandated to protect and promote human rights worldwide.

While the institution has been the subject of controversy since its creation in 2006 – culminating in the withdrawal of the USA this past June – UN Secretary-General António Guterres reiterated that it plays “a very important role” in the UN’s human rights architecture.

1. First of all… how does it all work?

Elections to the Council happen annually, with countries serving for three years on a rotational basis, as some of the seats expire on 31 December every year. There are 47 seats, equitably distributed according to five regional divisions.

Countries need a minimum of 97 votes to get elected, and everything happens by secret ballot. This year, 18 seats were up for election:  five for Africa, five for Asia-Pacific, two for Eastern Europe, three for Latin America and the Caribbean, and three for Western Europe and other States.

2. So… who’s in and who’s out?

After Friday’s election, here’s how the Council will look from 1 January:

IN, elected this year: Argentina, Austria, Bahamas, Bahrain, Bangladesh, Bulgaria, Burkina Faso, Cameroon, Czech Republic, Denmark, Eritrea, Fiji, India, Italy, Philippines, Somalia, Togo and Uruguay.

IN, continuing their terms: Angola, DRC, Egypt, Nigeria, Rwanda, Senegal, South Africa, Tunisia, Afghanistan, China, Iraq, Japan, Nepal, Pakistan, Qatar, Saudi Arabia, Croatia, Hungary, Slovakia, Ukraine, Brazil, Chile, Cuba, Mexico, Peru, Australia, Iceland, Spain, and United Kingdom of Great Britain and Northern Ireland.

OUT, because they didn’t apply for a second consecutive term: Belgium, Burundi, Ecuador, Georgia, Kyrgyzstan, Mongolia, Panama, Slovenia and Switzerland.

OUT, because after two consecutive terms, they’re not eligible for re-election: Côte d’Ivoire, Ethiopia, Kenya, the Republic of Korea, the United Arab Emirates, Venezuela and Germany.

3. What does the Council actually do?

In a nutshell, the HRC is a multilateral forum to discuss anything relating to human rights issues around the world.

In addition to launching fact-finding missions and establishing commissions of inquiry into specific situations, it meets three times a year to review the human rights records of all UN Member States, in a special process designed to give countries the chance to present the actions they have taken, and what they’ve done, to advance human rights. This is known as the Universal Periodic Review.

This video explains it all in a simple way:

4. How come some countries accused of human rights violations still serve?

The HRC was created in 2006, following a proposal by former Secretary-General Kofi Annan. In a report titled “In Larger Freedom”, he noted that the Commission on Human Rights, created in 1946, was suffering from “declining credibility and professionalism” and was “in need of major reform”. Subsequently, based on his recommendations, the Human Rights Council was established by the General Assembly to replace the Commission and several measures were put in place to try and avoid the same problems that eventually arose with the Commission.

For example, as it is understood that the Council can only be as effective as its Member States, the election process was placed directly in the hands of the General Assembly, the only UN organ where every one of the 193 countries has equal voting weight.

In addition, the geographical group divisions and seat allocations are meant to prevent disproportionate focus on just a handful of regions and countries, and ensure that every country has a chance of fair consideration.

Finally, during the elections for each regional group, the General Assembly allows extra blank slates: this should theoretically ensure there are more candidates than available seats, enabling a competitive process. However, if – as was the case this year with 18 candidacies for 18 available seats – no extra countries apply, then no competition occurs, and whichever Member State applies, is likely to get elected.

5. So does the HRC make a difference for human rights worldwide?

Although human rights have always been a very sensitive matter for Member States, the Human Rights Council remains an essential part of the UN’s human rights architecture.

The Council has the power to adopt resolutions, launch fact-finding missions and investigations, and establish commissions of inquiry. In particular, the HRC can appoint independent experts on specific issues. At the moment, there are 44 thematic experts and 11 country ones appointed to monitor and report on human rights issues as requested.

All these mechanisms allow for grave violations to be highlighted and brought up on the global stage for examination, discussion and, whenever feasible, action.

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International Law

Unilateralism Vs Multilateralism

David Ceasar Wani

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During the 73rd sessions of the general assembly at the UN, the crunch of unilateralism and multilateralism between US and China kicked off, in which Trump’s unilateral visualization of the world likely to hurt the US, but it might undermine his presidency. As the competitions between unilateralism and multilateralism are viewed inversely. According to the international relations scholars, unilateralism has defined an approach in international relations in which states act without regard to the interests of other states or without their support. Unilateralism is usually contrasted with its opposite approach, yet multilateralism is acting cooperatively with other states. Though unilateralism is often used in a negative way, experts agree that there are positive aspects to occasionally acting unilaterally, such as in issues of national self-defense.

Some politicians and international experts support unilateralism, at least for certain issues. An example of a unilateral action is the U.S. President Donald Trump’s decision to withdraw from the Paris Climate Accord in 2017. The Paris Climate Accord was actually negotiated and approved by nearly 200 nations around the world, and the issue of climate change is impossible to be handled significantly without united efforts of all the countries, particular the major ones. Trump withdrew from the Paris Climate Accord, saying that it hurt American jobs and American interests as well. Trump’s decision was opposed by many experts and average people around the world including the United States.

Nevertheless, it is believed that unilateralism is a policy of dealing with affairs that may be violent, regardless of the will of other countries or nationals. Given this, the most prominent feature of multilateralism is the negotiation since it can pay close attention to the shared interests of the majority and take practical and reasonable measures to deal with affairs in international affairs. The U.S. adopts unilateralism as a kind of closed rather than open behavior. Self-interest is the American priority mentality that Trump previously reiterated, and this approach seems to be a good way to safeguard the interests of the United States, but in fact, it is inconvenient for American nationals, and for the United States.  Conversely, politics, diplomacy, and trade all have disadvantages and this disadvantage can be a hindrance to domestic investment, risk from political changes negative influence on exchange rates, higher costs, economic non-viability, expropriation, negative impact on the country’s investment, modern-day economic colonialism and etc.

From this point of view, it can be said unfavorable to Americans. The reason why the United States has become strong from a dispersed federation compared with the confederation is mainly between states. Improvement of politics and other status has enabled the United States to develop and be strong because of a strong government. If the United States 1787 Constitution was originally formulated by the founding fathers’ generation, and then adopted unilateralism and did not negotiate, it is unimaginable that there would be a powerful United States today. So now Trump adopts unilateralism, which is contrary to the spirit and method adopted by the U.S. Constitution. The threat to his presidency is great because unilateralism is difficult to promote the cooperation and development of national economies. The interests generated by the United States are very short-lived, but they pose great threats to their long-term development and the long-term interests of their citizens. Therefore, when dealing with state affairs or international affairs, multilateralism should be adopted and negotiated. The problem is that we can better safeguard the interests of all parties, maximize the benefits, and promote the development of countries and their own economies.

In conclusion, it is important to understand the evolution of China’s concept of multilateralism, because one has to begin with China’s particularly humble experience with multilateral institutions e.g. it’s being kept out of the United Nations (UN) and its institutions during its preliminary decades as also for it is being the target of UN criticism and sanctions (for Korean War) during those years. The things were to begin to change following the Sino-US rapprochement and China’s entry into the UN and other multilateral institutions from the 1970s. Another crunch change to overlap with the late 1970s was the rise of Deng Xiaoping to power in China. Deng’s economic reforms and openness become the driving force behind China’s conclusive shift toward multilateral institutions.

According to Zhang Baijia, expert at the Chinese Communist Party’s (CCP) Central School, numerous internal and external developments during the first half of the 1980s were to expressively influence Deng’s strategic thinking in three major ways: (a) Deng aborted the long-held view that world war is inevitable’ and instead stresses on ‘peace and development’ as central theme for China; (b) Deng acknowledged that the contemporary world is heterogeneous in nature and that conflicts coexist with cooperation and competition with interdependence; and (c) Deng maintained that independence does not equal isolation and self-reliance does not mean rejecting all foreign things as had been the case during Mao’s times. Change in Deng’s worldview was to result in the change in China’s approach towards international institution and towards the whole idea about multilateralism.

As a result, the whole of the 1980s witnessed extraordinary qualitative and quantitative changes as China gradually involved itself in not only international organizations in the political domain but also expanded its participation in economic and security types of multilateral forums. As regards China’s future vision on multilateralism, it has been motivated primarily by China’s felt need (a) for undermining the basis of United States’ unilateralism and its global power profile and (b) for making efforts to become acceptable as the benign rising power amongst its immediate neighbors and amongst the world at large. By far these two remain China’s most important foreign policy challenges through its rise as a major power has already been accepted as a given reality in general. The conditions have also been facilitated by external dynamics, especially following the collapse of former Soviet Union which has shifted the focus of international relations and led to the widening of the whole understanding of security and strategic calculations amongst major players therefore moving the dynamic of international power politics beyond two superpowers to include new actors like China.

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International Law

Strengthen UN, Implement UN Charterer in true spirit

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Humanity is suffering everywhere whether it is Syria or Yemen, Afghanistan or Libya, Iraq or Myanmar, Palestine or Kashmir. The one who are being killed are human beings, irrespective of his or her race, color, religion, nationality, its human lives which are being lost. Last couple of decade, around 2 million people have been killed, 6 million have been made refugees in their own country or forced to migrate to other countries. Threats and tension is felt in Iran, Turkey and North Korea, Ukraine, and many other parts of the world.  If one switches on TV or read or listen to News, it is all about War, Killings, Blasts, hate and suppressions. People are fed-up of bad news all the time. Everyone is suffering with mental torture. Geo-political situation is deteriorating rapidly. The world is less safe than few decades ago. Insecurity feelings are rising exponentially. What is new world order? On the name of World new order, we have made this world more hostile and fragile. Who is suffering, humanity! Who is the beneficiary, end of the day, no one will be winner.

United Nation General Assembly is busy in its 73rd session. Leaders from all over the world are meeting each other and making speeches one after another, but what will be the out-come or result?

United Nation was founded on 24 October 1945, just after the World War II, in replacement of League of Nations. Its head quarter is at New York, USA. The United Nations is an intergovernmental organization tasked to promote international co-operation and to create and maintain international order. The charter of UN was very well drafted and very comprehensive. Its charter was formulated on justice and equality. It was hard work of genius people.

But with the passage of time, it is losing its effectiveness and failed to maintain world order. Some nations became so strong that, they put aside the UN and act unilaterally. Some nations are so stubborn, that they violate UN charter openly and feel no guilt. Some countries are so feeling-less that the whole world condemned them but they keep criminal silence.

Should we stay calm and just became spectators and watch what so-ever will happen? Should we leave all the issues to our next generations to suffer? Should we close our eyes and do not acknowledge the issues? Can we escape? Can we be ignorant? Can be we so cruel to our kids and leave them to be humiliated?

I believe, it is time to think and raise our voice, and struggle for a better tomorrow, better tomorrow for everyone, better tomorrow for my kids, better tomorrow for your kids, better tomorrow for our next generation, better tomorrow for everyone. We should struggle to make our tomorrow better than our yesterday. Think positively, act smartly and be optimistic.

We demand, respect of the UN , we demand for implementation of UN charter, We demand for justice, We demand for equality, We demand for fair-practices, We demand respect for human kind, We demand for a stoppage of killing, we demand stoppage of violence, We demand for protection of weak, We demand for uniformity etc.

It is natural, when we live together, the differences may rise among us. It can be among individuals or nations. It is very much normal and was happening since ages. We quarrel with our kids, brothers and sisters, parents, spouse or friends, boss or subordinates or colleagues. It is understandable. But we live in a civilized world. There are mechanisms to resolve the differences. In our day to day life we are over-coming on many issues and resolve with each other. The same approach may be followed to resolve the differences or misunderstanding among nations. UN is the right platform, UN charter is the proper guidelines for resolving the issues. Diplomacy is the weapon of civilized world. We all must respect UN, and its charter and resolve all issue through peaceful manner and dialogue. No one should have the right to by-pass UN or impose its decisions unilaterally.

I suggest, the International Community may join hands and strengthen UN and implement its charter in true later and spirit. UN may investigate the history of almost 7 decades and point out all the violators and let them declare responsible for their wrong doings. Force them to rectify their mistakes, compensate their wrong doings. UN should strengthen to the extent that any country how strong it might be, should not dare to violate UN charter. Any sanctions without UN approval may be declared null and void. Any military action without UN approval may not be recognized and declared criminal acts. They must be punished for their heinous crimes and war like crimes.

Let us struggle to make this world a place of “Peace, Harmony, Justice, Equality and Prosper” place for our generations to come. We may sacrifice but our next generation may enjoy Peace, Harmony and Prosperity.

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