The agreement that was just signed at the BRICS (Brazil, Russia, India, China and South Africa) Summit in Fortaleza, Brazil, on Tuesday, to formally establish a new international financial institution - The New Development Bank - has caught the world's a
There has been a fundamental change in the international economy in the last decade. Emerging and developing countries have increased their weight in global GDP and growth. Some of them, especially China, have accumulated very large long-term foreign exchange assets and foreign exchange reserves. These resources are normally invested in developed countries with fairly low yields.
Meanwhile, there are massive unmet needs in the emerging and developing nations for infrastructure investment and sustainable development. Hence, the professed key objective of the NDB.
According to a recent paper of the United Nations Conference on Trade and Development (UNCTAD), the need for infrastructure spending in emerging and developing countries will increase from the current US$800 billion to $900 billion per year to $1.8 trillion to $2.3 trillion annually by 2020. About 85 per cent of
these total needs are from lower-middle income countries. They are for electricity (generation, transmission and distribution), transport, telecommunications and fresh water supplies.
Equally important is the greater need for provision of short-term liquidity (short-term balance of payments financing) by Southern economies in light of the US tapering off its $85-billion monthly Quantitative Easing (QE) that resulted in large capital outflows from emerging economies. Currently, the International Monetary Fund (IMF) is providing such financing, but the assistance comes with harsh conditionality that has caused public uproar and political unrests in many recipient countries. The BRICS bank is intended to address a broad-based Southern-led monetary fund. As such, in addition to the bank, BRICS countries also planned to create Contingency Reserve Arrangements (CRA) among themselves to provide official liquidity in times of need.
Furthermore, there has been a consensus among the emerging economies on the broader need for a South-South financial architecture. Clearly, their financial needs are varied, depending on the stage of development and the level of governance, and therefore some “trade-offs” such as loan-to-value ratios i.e. quality of loans, operation mechanisms, transparency and sophistication of the instruments, etc. are needed. Such trade-offs are not possible under the World Bank’s or the IMF’s financial regimes.
While, many Western developed countries may look at the BRICS bank with considerable trepidation, the NDB, in its straightforward role as a development bank, could generate both competition and complementarities to existing multilateral financial institutions such as the World Bank, the IMF and the ADB, that constitute valuable externalities such as BRICS advancing reform in the international financial and development architecture that favour developing and emerging economies in general. Already, the World Bank has begun its work on creating a special financing vehicle for the Sub-Saharan region.
For the “questionable” part, there are still plenty of challenges for BRICS’ NDB. The devil is always in the details.
There are considerable differences among the BRICS members in economics and politics. All combined, the group accounts for 25 per cent of global GDP and 40 per cent of the world’s population. However, among the five, China’s GDP alone is larger than the other four combined. Such lopsided financial strength i.e. the ability to capitalise the new bank vis-a-vis its relative equitable lending policy and structure has been one of the stumbling blocks for the BRICS bank, which led to the postponement of the NDB’s formal establishment from last year’s BRICS Summit in South Africa to this year. Horse-trading was conducted until the very last minutes before the announcement. Brazil withdrew its request to assume the first presidency of the bank, which will now go to India. South Africa withdrew its proposal to have the BRICS headquarters located there. Instead, Shanghai will be the bank’s new home.
While, the NDB will be based on equal shares, the US$100-billion contingency reserve fund, or the so-called “mini-IMF” will factor in China’s extra weight. China will contribute US$41 billion to the fund, Brazil, Russia and India $18 billion each, and South Africa $5 billion. But a system of multipliers will be used to compensate for the unequal contribution. China will be able to use half of what it puts in, South Africa double, and Russia, Brazil and India receive the same amount that they have committed. Nonetheless, the fear of Chinese domination continues to loom large among BRICS countries.
More cautionary issues are facing the NDB such as the quality of loans, the degree of financial sophistication of the instruments, transparency and profits of the bank that will increase the total stock of funding that will in turn enable it to provide more funding as it goes along.
Another fundamental issue of BRICS NDB is none of the currencies of the group members are global currencies. The Chinese renminbi is still under capital control that represents another kind of risk and thereby subjected itself to discount. The prediction of looming China’s financial crisis, similar to that of the Japanese in the 1980s, represents another risk to NDB’s continued viability. India’s inflation is a runaway beast, and the Russian rouble and the Brazilian real are in tatters. All of these issues have ramifications on the feasibility of the NDB that prompted some analysts to describe its future as “stillborn”.
BRICS’ NDB was described by the Moscow Times as a “coup for Russia” in the face of the Western “freeze-out” because of the Ukrainian conflicts. Some called it a major breakthrough for China to assert its greater global influence in the new-world political and economic paradigms. Some described it as the reflection of the waning US global domination.
Regardless of the positions of the critics, one fact remains – BRICS’ creation of its own development bank is not going to be strewn with roses, despite the happy picture of its five leaders on Tuesday. It may also prove true the old Thai adage that one can try to run away from the tiger, only to succumb to the crocodile.