The BRICS bite back with a new development bank

August 7, 2014 by Cameron Frecklington

Some have called it “a new dawn” while others remain sceptical, yet it cannot be denied that the recently-formed New Development Bank (NDB, known in the past as the BRICS Development Bank) has shaken things up, offering an alternative to the world’s current hegemonic global financial structure.

On 15th July at the 6th BRICS summit held in the north-eastern Brazilian city of Fortaleza, an agreement to form the bank was signed by all of the BRICS nations – Brazil, Russia, India, China, and South Africa – “to address challenges to humankind posed by the need to simultaneously achieve growth, inclusiveness, protection and preservation.”

The bank – to be headquartered in Shanghai with an Indian president, a Brazilian chairman of the board, and a Russian chairman of the board of governors – will have an initial capital base of $50bn to be used primarily for infrastructure projects, with each of the five member states putting in an equal $10bn share. In time, it is hoped that the bank’s capital will eventually climb to $100bn. In addition, the bank will also establish a $100bn contingent reserve arrangement for protection against global liquidity pressures on BRICS currencies. Into this fund, China will contribute $41bn, the BRI nations $18bn, and South Africa $5bn.

The BRICS nations have long been frustrated by the uneven balance of power among financial institutions such as the World Bank and the International Monetary Fund (IMF), created post-World War II as part of the Bretton Woods system of monetary management.

Despite the progress made by many developing nations over the past three decades, leadership of the World Bank and the IMF throughout history has been reserved for an American and a European respectively. Voting rights is another area of contention for many of the BRICS nations – China’s GDP is ranked second in the world at $9.24trn, more than 3.5 times the GDP of the United Kingdom, yet receives only 3.81% of total votes in the IMF compared to the UK’s 4.29%.

As the BRICS nations’ economies have grown, so too has their global influence and desire to be heard. The NDB is a manifestation of that desire.

“The fact the BRICS are setting up a separate, independent financial institution does reflect in a major way a certain frustration at their under-representation in western institutions; it’s an indication of the failure and inability of the Bretton Woods institutions to assimilate and institutionalize the Rising Powers’ demands for a greater voice,” says Yunnan Chen, research officer at the UK-based Institute of Development Studies.

“Beyond the political project, there are also strong economic motivations for the BRICS bank,” says Chen. “As countries gaining significant reserves and financial resources, the Bank serves as another channel for the BRICS to diversify their investments away from Western markets towards developing countries to which they are increasingly involved and investing in.”

The IMF and the World Bank are often criticized for the conditions asked of borrowing countries, conditions that some have argued actually deepen the chasm of global inequality. The conditions have been derided for forcing borrowing countries to adopt economic measures poorly suited to their current situation, higher taxes, a reduction in government spending, and the privatization of state-owned enterprises among the conditions commonly asked.

An April 2014 report from the European Network on Debt and Development, also known as Eurodad, noted that despite these criticisms and promises of reform, the average number of conditions per IMF loan has risen from 14 conditions per programme in 2003-04 to 19.5 today. The organization has also compared dealing with the IMF to negotiations at gunpoint, the most recent example being cash-strapped Ukraine forced to take action under threat of default.

Loans free from such conditions would be of great interest to nations looking for assistance. “One of the advantages [of a BRICS-helmed bank] might be a perception of decision-making without any political agenda as there are five equal stakeholders and they have no interests in linking lending decisions to various extraneous issues such as human rights, environment, labour, etc,” says Dr. Harsh Pant, professor of international relations at King’s College, London.

“The BRICS bloc makes a great deal about non-intervention in the internal affairs of other states. And that would make it attractive to a whole range of states, Pant adds.

Chen agrees, saying that “a BRICS loan could possibly be a more politically palatable product for leaders in developing countries for whom historical aversion to IMF and WB conditionality and historical dominance is strong.”

“Social and environmental conditions from World Bank/IMF loans have also been constricting in some cases – one example is restrictions on coal power, despite its abundance as a resource and its potential benefits for many developing countries sorely lacking in energy-access,” Chen says.

Some have asked what China stands to gain from a BRICS bank, given that the country’s 2014 GDP of $9.24trn dollars is greater than that of all the other BRICS nations combined ($6.57trn), and that the world’s second-largest economy also has $3.9trn in foreign exchange reserves. India was recently applauded for its refusal to back down to China’s proposal to contribute uneven amounts to the bank’s capital, with Indian Prime Minister Narendra Modi perhaps realizing what dissimilar contributions would mean for the bank’s balance of power and influence.

“The cruel reality is that China is so far ahead of the other states that it could very well finance such an initiative on its own. It is because of this that India insisted on equal contributions. China wanted to make a larger contribution but others, in particular Russia and India, were not in favour of that, recognizing its implications,” Dr. Pant says.

“The $10bn development capital put in by China is small-fry compared to what the China Development Bank is supplying in Africa and elsewhere, and China’s plans for the creation of an Asian Infrastructure Investment Bank (AIIB) show it has the capacity – and the willingness – to create a development finance body through its own heft. But the legitimacy of the BRICS bank depends on its multilateralism, and despite the fears of Chinese dominance, the set-up of the Bank has been remarkably and consciously egalitarian,” Chen adds.

While many scholars and global finance observers remain divided over the potential of the NDB, most agree that the bank is necessary and a boon for the developing world. As the World Bank writes on its website: “The infrastructure gap [the disparity between demand for infrastructure investment and the actual funding] is estimated at $1trn in low- and middle-income countries, and the demand for infrastructure continues to grow as countries develop.”

Trying to determine where this funding will come from is a difficult question to answer, and another international bank would help relieve such pressures.

“The developing world has a huge need for infrastructural investment in the next twenty years, and so the rationale for the NDB is a positive step towards this. To go any way towards addressing that deficit, the Bank will need to significantly scale up its capacity, but in the short term it can still potentially fill a niche in lending towards the projects not being financed by Western IFIs [international finance institutions],” Chen says.

“But simply having the presence of another actor in the market, albeit a small one, is undeniably a boon for developing countries. It’s a challenge to the incumbent banks, who will have to up their game, as it were, and raises the level of competition. For developing countries, having this alternative and broader range of choice expands their bargaining power and leverage in setting out the terms and conditions of the products they’re being sold.”

More competition and choice for countries that need a leg up? That can only be a good thing.

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