What Brazil’s ‘multipolar’ foreign policy means for the Bretton Woods institutions

This Econographic is part of our Next generation scholarship which aims to train a new generation of young economists to rethink the pillars of global economic governance. These undergraduate fellows studied the governance of the international financial system as part of the Bretton Woods 2.0 project in the summer of 2023.

As he approaches the first year of his final term, Brazilian President Lula da Silva has consolidated an eyebrow-raising foreign policy aimed at restoring Brazil’s position on the world stage. Whether it is his refusal to arm Ukraine against Russia, the efforts to normalize relations with Venezuela’s Nicolás Maduro or the decision to authorize the docking of Iranian warships, Lula signaled his willingness to break conventions in pursuit of “the creation of a multipolar world» – a far cry from the isolationist approach of his predecessor, Jair Bolsonaro. However, despite all the friction generated by these one-off meetings, the core of Brazil’s current strategy lies in its strengthened relationship with China and its economic initiatives across Latin America. Combined, these factors have the potential to not only consolidate Brazil as a power player in the region, but also upend the role of the Bretton Woods Institutions (BWI) as international polarization reaches an unprecedented level. If IBWs fail to adapt to this changing landscape, they risk losing relevance and influence, paving the way for alternative financial institutions to dominate the global economy.

Since overtaking the United States as Brazil’s largest trading partner in 2009, China has invested more than $36 billion in projects related to the country’s infrastructure, utilities and natural resources. These investments have transformed Brazil into a cornerstone of China’s engagement in Latin America, while the dynamics surrounding BRICS have affirmed the country’s influence on the global economy. Although Bolsonaro’s presidency has cooled Brazil’s diplomatic relations, Chinese investments totaled $20 billion during his term. Although the United States has maintained a dominant financial presence in Brazil, with annual investment flows exceeding $60 billion over the past decade, the acceleration of Chinese investment signifies a strategic shift in a once bilateral relationship. defined by commerce alone.

Lula made this development clear during his long-awaited trip to Beijing last April, signing agreements with President Xi Jinping to strengthen bilateral efforts in trade, innovation and social development. Specifically, the state visit resulted in commitments to promote mutual investments in infrastructure, energy and agriculture, facilitate science and technology exchanges, and deepen collaboration in the digital economy. On the heels of resumption of negotiations on a free trade agreement Between the Brazilian-backed Mercosur, the South American trade bloc and the European Union, Xi has expressed interest in engaging with the bloc to deepen China’s ties with the rest of Latin America.

The most notable moment of the visit came when Lula shared the spotlight with protégé-turned-successor Dilma Rousseff during her inauguration as president of the New Development Bank (NDB). Describing the multilateral bank as a tool to “finance infrastructure, sustainable development as well as social and digital inclusion,” Rousseff presented the NDB as an alternative to BWIs for emerging economies that “respects and reaffirms the sovereignty of each country “. Less inclined to analyze his remarks, Lula praised the bank for its potential to free countries from “submission to traditional financial institutions,” comments that echo the $822 million he has obtained from the NDB since its entry in function.

As Brazil moves onto the international stage with its “multipolar” approach, the rest of Latin America is also witnessing the rise of left-wing administrations, a phenomenon known as Second pink tide. For IBWs, the implications are twofold. First, these governments have expressed more interest in diversifying their trade and financial options, including across current geopolitical fault lines. Second, while remaining interested in multilateralism, many Latin American leaders have expressed frustration with BWIs due to their governance structure and lack of country-specific policy flexibility. For IBWs to remain relevant and effective in this changing scenario, they must do three things:

Flexible lending protocols: The appeal gained by institutions like the NDB highlights the appeal of financial organizations that offer terms recognizing the unique challenges of each member country. Recognizing the economic dynamism of countries like Brazil, BWIs should introduce countercyclical lending. Such a system would link loan repayments to a country’s GDP performance or export earnings, thereby serving as a buffer against economic volatility. This would not only make loan portfolios more resilient, but also strengthen the role of IBWs as stabilizers of the global economy.

Collaborative financing: Brazil’s burgeoning relationship with China and its participation in the NDB signal its move toward diversified financial sources. BWIs should respond in kind by creating instruments that pool their resources. For example, the World Bank and NDB could jointly finance sustainable infrastructure projects in the region, combining their expertise and financial resources. Likewise, financial packages combining grants, equity, concessional loans and non-concessional financing would allow BWIs to meet the specific needs of countries. Beyond direct funding, sharing data and analytical tools would foster a deeper understanding of market trends, risks and opportunities, thereby improving the predictive power and response time of these institutions.

Revision of governance structures: The power dynamics of BWIs, mainly determined by economic contributions, have historically favored high-income countries. To account for the rise of emerging economies like Brazil, China and India, BWIs should recalibrate voting rights to allow these countries to exert more significant influence over decisions. Likewise, leadership roles within IBWs traditionally come from internal deliberations of their respective Boards of Directors. To foster trust and global collaboration, leadership positions should be open to candidates from a wider range of member countries, ensuring representation from different regions and economies.

As Brazil embraces multipolarity and deepens its alliances with global powers, the international financial landscape is poised for a seismic shift. The start of the second pink tide across Latin America highlights the region’s shift toward diversified economic partnerships and the abandonment of IBW conventions. For these institutions to maintain their impact, they must adapt, prioritizing flexible lending protocols, promoting collaborative financing, and ensuring more inclusive governance. Only by recognizing and addressing the changing attitudes of countries like Brazil can BWIs hope to maintain their relevance in an ever-changing world order.

Jack Tapay-Cueva is a former Next Gen fellow at the GeoEconomics Center’s Bretton Woods 2.0 project.

David Dong is a former Next Gen fellow at the GeoEconomics Center’s Bretton Woods 2.0 project.

At the intersection of economics, finance and foreign policy, the Center for Geoeconomics is a translation center whose goal is to help shape a better global economic future.

Image: Brazilian President Luiz Inacio Lula da Silva delivers his opening speech at the BRICS summit in Johannesburg, South Africa. August 22, 2023 REUTERS/James Oatway