Can the BRICS Be the Catalyst for a New International Monetary System Based on Global Infrastructure Development? / Paul Gallagher and Richard A. Black
Can the BRICS Be the Catalyst for a New International Monetary System Based on Global Infrastructure Development?
It is often mentioned that the Chinese term for crisis – “Weiji” – is made up of two characters: the first can mean “dangerous,” and the second, “opportunity.” We may hope that the currently unfolding monetary crisis – potentially far worse than that of 2008 – will be the sharp prod for major nations to take the opportunity for bold action to form a new monetary arrangement. This arrangement must dry out the global speculative bubble and focus on investment in great projects of trans-national infrastructure, especially in the developing sector.
The former chief economist at the European Central Bank (ECB), Otmar Issing, recently stated that ECB’s extreme low-interest rate policy is encouraging investors to get into things whose risks they do not understand. And since this approach is moving into the most remote corners of the financial market, “that can lead to a crisis of new dimensions,” Issing says, adding, that the situation is as fragile as before the outbreak of the crisis in 2008. While in the US, on December 13th, the New York Federal Reserve announced an expansion of its past 3 months of overnight “repo market” lending to the top New York trading houses -- which is already at the level of $50-100 billion each night-- to try to forestall a new, major Wall St. liquidity crisis.
Two members of the BRICS, China and Russia, are already involved in new initiatives which are breaking with the old patterns of non-investment in infrastructure: China’s Belt and Road Initiative (BRI) and the Russian Federation’s plan to “light up Africa” with nuclear-power vectored electricity generation. The American physical economist, Lyndon LaRouche, had shown in research papers published over many years, that major infrastructure – high-speed railroads, third and fourth generation nuclear power, major water management systems - are the central and irreplaceable producer of added value in a national economy. LaRouche had shown that “the actual role of infrastructure in a viable form of economy… amplifies the productive powers of labor, a science-driven increase of physical productivity at the point of production.” Let us examine how the New Development Bank (NDB) of the BRICS could be expanded in size and in conception to become a seed-crystal for a new monetary system for development.
For Example, the New Development Bank
Although the New Development Bank of the BRICS nations comes with a top label of “$100 billion capital”, it has, in its first 3.5 years, operated at an order of magnitude below that. That is to say, that while stating “The NDB intends to operate at scale”, the Bank has not, as it admits, operated on the scale at which lie the urgent new infrastructure needs of the member countries. This is to say nothing of developing nations to which it could be reaching out, as in the needed and thus far neglected reconstruction needs of Syria.
For example, if one looks at the large-scale need and demand for nuclear power plants in all the member countries, and the potential of Russia and China to supply those needs given a sufficient volume of credit for new infrastructure projects, it is clear that much more capacity for hard infrastructure credit needs to be created. The New Development Bank emphasizes its preference for “green” and “renewable” energy and other projects. But it is evident from the latest available operating data of power plants around the world, that added solar or wind power capacity adds far less actual electricity generation per capita per year – and far, far less per land area used per year -- than the same added capacity in nuclear plants. Actual electricity generation per capita per year, and per hectare per year, are the factors which increase economic productivity. Those many bankers who advertise their devotion to “green” investments only, and decorate their annual reports with pictures of rows of wind turbines, are making a spectacle of themselves for the giant sovereign wealth and pension funds of Europe, not fostering power density and productivity.
Let us return to the issue of levels of credit necessary to build nuclear facilities, railroad corridors, modernize ports and land-side infrastructure in Russia; and to bring the Belt and Road into connection with the Syrian government’s “Five Seas” development plan for reconstruction, as expanded by the Schiller Institute. Let us use Russia as an example of what can be done across the BRICS. What is necessary is to build the much more extensive “great projects” which the New Development Bank could undertake, more on the base of national credit institutions in the BRICS member states. Specifically that aspect of the NDB which is stated in its General Strategy 2017-2021 – “The Bank will fund its operations through regular bond issues in member countries … including in local currencies” – has not been significantly exploited.
Leave aside for the moment China’s extensive investments in hard-infrastructure “great projects” in third countries, which have not gone through or involved the NDB. Let us take Russia as an example of how such a national credit institution can be built up, which can also serve as a basis for the NDB, as well as for other multilateral infrastructure lending institutions.
A Lesson From Alexander Hamilton
Any government which has been able to borrow from its own citizens at a reasonable rate of interest, is able to use that debt to issue national government credit (new currency) into its economy for purposes of raising productivity,and increasing production and living standards. The statement of the first U.S. Treasury Secretary, Alexander Hamilton, that “A national debt is a national blessing if the means of its ultimate extinguishment have been provided for,” refers to this. Hamilton’s handling of the new American government’s problem of assuming colonial debts – many, then non-performing – while issuing new credits, and establishing the sound basis of all the country’s debts, launched what came to be called “the American System of economy”. Most importantly, it launched the transformation of an overwhelmingly farm-based society into a great industrial power, by providing national credit to realize technological innovations in manufacturing and infrastructure.
The means of ultimate extinguishment of newly issued national debt are, essentially, higher labor productivity and technological productivity (total factor productivity) of future generations, resulting from the use of the credit for, particularly, technological advances expressed in new basic economic infrastructure. Assigning government tax revenues to service the new debt in the short term is needed simply to maintain or increase the national currency’s value while launching great infrastructure projects. The basis for this currency issuance among nations should not be the dollar as reserve currency, but a gold-reserve system as under the post-World War II Bretton Woods Agreements.
The nations which are best situated to launch a new Bretton Woods arrangement, with stable currency exchange rates on a gold-reserve basis, are China, Russia, India and the United States; they also have the scientific and technological prowess, including as spacefaring nations, to export capital goods to developing countries in development projects. Within that system the national credit institutions of these nations can cooperate in joint credits for great projects.
A Russian Bank for Infrastructure
Let the Russian parliament enact a law creating a Russian Bank for Infrastructure and Industry, with the stated purpose of concentrating investments for the national purposes of Russia focused on new economic infrastructure. Let that Bank be capitalized by issuing preferred shares, up to a maximum equity of $100 billion equivalent, with an annual dividend return of 8%, to be subscribed solely by Russian citizens, companies, banks and Russian institutions, paid in solely in rubles, the warrants to be called only at the discretion of the Bank for a period of 20 years. Let the national government issue $10 billion equivalent in 20-year general government bonds as its share of equity capital in the Bank, and be on call for an additional $10 billion. Let the national government through its account at the Central Bank, and/or through the National Welfare Fund, guarantee payment of dividends over that term, and the eventual redemption of equity shares.
To the greatest extent possible, encourage Russian holders of Russian long-term general government bonds (apparently totaling about $130 billion currently outstanding) to trade these for equity in the Bank, both for patriotic reasons and rewarded by a rate of return approximately 1.5% higher. To the extent such already outstanding government debt is traded for equity in the Bank, the government’s interest expense is much less under its dividend guarantee. And alternatively, the government may from time to time purchase back some of its own bonds which have been subscribed to the Bank, by issues of rubles to the Bank, thus providing the Bank with liquid operating capital.
Let the Bank for Infrastructure and Industry, as necessary, raise borrowed capital in addition, up to a maximum total of $100 billion equivalent (leveraging itself up to 2:1), by issuing 20-year bonds on essentially the same terms and guarantees, denominated in rubles and again purchased by Russian citizens, companies, banks or other institutions. These bonds are to be callable only by the Bank during the period of 20 years.
Let the Bank issue credits for construction of nuclear power installations and development of more advanced modular nuclear designs; for the building of railroad corridors such as Moscow-Beijing and modernization of others (double tracking, electrification, communications, etc.); for urgent modernization of Russia’s Pacific ports, and similar national purposes.
The Bank’s commercial revenue will come from payments on these credits; from participation in loans made by private banks to contractors; from purchasing bonds issued by municipal or regional governments in order take necessary parts in these projects, and from other commercial banking activities. The national government, through one or both of the means stated above, will in this structure have a guarantee expense of up to $160 billion equivalent over 20 years’ time, and will guarantee the Bank’s ultimate redemption of its capital as necessary after that time. As government revenue increases from rising economic activity in building these great projects and rising economic wealth when they are in use, the government may assign a portion of these additional revenues to the Bank from time to time, even using it as a bank of deposit for these revenues.
As was noted in the 2015 case of Egypt’s raising approximately $2 billion equivalent for the second channel of the Suez Canal (exclusively from Egyptians and in Egyptian pounds), successful capitalization of a Russian Bank for Infrastructure and Industry in this manner is likely to be accompanied by a rise in the ruble’s value.
It is evident that such a credit institution could be created directly by the Russian government’s making a special issue of government bonds for the purpose of capitalizing it, although its scale would then be limited by its having no private investors in its equity or in its debt. Such an institution was the United States’ Reconstruction Finance Corporation (RFC) in operation for post-Depression revival and reconstruction from 1931 to 1957. All its funds were raised by specially earmarked bond issues of the U.S. Treasury; though it operated like a large commercial bank in some ways, it was unable to borrow or to take deposits as a bank.
Such a National Bank in Russia can cooperate with other multilateral lending institutions; for example, in organizing ruble bonds for the New Development Bank, or in backing an NDB bond issues in the currencies of other member countries. It and the NDB could make the construction loans to break the log-jam on construction of nuclear power plants in South Africa, for example.
The most powerful partnership of national credit institutions for development will be among China, Russia, India and the United States. These nations can facilitate long-term productive investments by agreeing on new, stable currency exchange rates between themselves, kept stable by exchange controls; and they can use bank separation to protect their commercial banking sectors to participate in such investments. This is the path to a new Bretton Woods credit and monetary system, again, on a gold-reserve rather than a dollar-reserve basis.
Paul Gallagher is co-editor of the international newsweekly, Executive Intelligence Review, and its Co-Director for Economic Intelligence.
Richard A. Black is The Schiller Institute’s representative at the United Nations in New York.
Статья является субъективным мнением авторов.