Built with BRICS: The New Development Bank and the Global Future of Finance

by / 0 Comments / 206 View / July 28, 2014

The collaborative future of global finance and diplomacy was unveiled on July 15th, when leaders from Brazil, Russia, India, China, and South Africa (collectively known as the “BRICS” group of nations) gathered for the 6th BRICS Summit in Fortaleza, Brazil. Speaking on behalf of their nations, which comprise about 45% of the world’s population and 20% of global GDP, heads of state Dilma Roussef, Vladimir Putin, Narendra Modi, Xi Jinping, and Jacob Zuma came together at the gathering to announce the official creation of the New Development Bank (NDB), which is a $100 billion dollar bank focused on lending to developing countries. The organization will be capitalized in various sums by all five countries and is the result of a push by emerging economies for increased influence in the Western-dominated international governance system. The NDB demonstrates the growing clout of the five biggest emerging economies in matters of financial and diplomatic governance and simultaneously showcases a new level of rising-nation cooperation. As Western societies age and decline in relative dominance, these five giants, along with other emerging nations, will have to shoulder increased responsibility not only for generating global growth but also for managing the gains and losses that come with economic and diplomatic cycles. The NDB’s creation is a powerful and encouraging indication of developing nations cooperating and preparing to assume a leading role in a multipolar world.

The NDB was first discussed and generally agreed to in March 2013 at the 5th BRICS Summit in Durban, South Africa. Recently faced with daunting estimates for infrastructure spending in modernizing economies, the BRICS countries sought to create an institution that would not only showcase their bloc unity but also help address this tremendous issue of infrastructure development and financing. South Africa alone, according to its estimates, will need more than $235 billion over the next ten years to meet infrastructure development needs. In order to help address such requirements, the countries signed into existence the NDB. With $10 billion coming from each of the partners, the bank is endowed with $50 billion in initial capital, which will grow to $100 billion over time. The bank will seek to fund grants for infrastructure projects across the globe, and in the statement released by the countries, there will be a wide range of factors considered in the decision making process. In addition to the bank’s lending function, the nations also agreed to create a type of rainy day fund called the Contingency Reserve Arrangement (CRA). The CRA will serve as a last resort foreign exchange pool, a proto-IMF, in the event of a balance of payments crisis for the five economies currently invested in it. The nations endured protracted negotiations to arrive at this plan; issues these countries faced in the negotiating process ranged from the location of the headquarters to the respective sums each country contributed to the financing arm and to the CRA. In the end, the result was a multifaceted organization headquartered in Shanghai with an Indian chief executive, a Brazilian chairman of the board of directors, a Russian chairman of the board of governors, and a regional facility in South Africa.

The founders generally propose the NDB, in its first iteration, as a developing world alternative to the International Monetary Fund and the World Bank. Upon close examination of the institution, it is hard to imagine how it could mount such a challenge. Key concerns dog the near and far future, and chief among these is how the diverse interests of the BRICS nations will be reconciled in the operation of the bank. The five nations have radically different political systems: Brazil and India are thriving multi-party democracies; Russia and China are single-party autocracies; South Africa runs a largely stagnant single-party democracy. In terms of growth profiles and economics, the countries again share little. Brazil and Russia are heavily dependent on natural resources exports, and both have suffered strong economic headwinds in recent quarters. India, by contrast, operates an unusual services-oriented economy, one that punches far below its weight for its population size. Of all five, China is far and away the largest and has cemented its status as the world’s second-largest economy on the strength of its manufacturing exports. It too, however, has shown weakness, with a housing bubble ready to pop and local governments weighed down with enormous debt loads. Lastly (and most certainly least), South Africa, which represents Africa in this endeavor, is projected to slip into a recession this year. Judging from their backgrounds, it is clear to see that each nation would naturally be oriented to different decision making styles, investment habits, and lending preferences. Thus, a major challenge for the NDB is developing a way of balancing the interests of the five founders while maintaining an influential and competitive portfolio. Despite having close-knit, like-minded liberal democracies, it took more than 50 years for the founders of the World Bank and the IMF to somewhat perfect the respective institutions; the NDB faces a much larger problem when placed in this context.

Further questions beyond the reconciliation in interests include the kind of currency the NDB will use and the ideological nature of the bank. Both of these questions hinge on the dominance of the dollar and Western nations’ economic principles in the running of the global economy. The dollar’s status as the world’s reserve currency allows the United States to engage in powerful and possibly punitive actions towards other nations, like restricting access to currency. The influence of the dollar also grants the U.S. major sway over the World Bank and the IMF. The U.S.’s voting power pushes these organizations to implement policies that are decidedly neo-liberal, such as privatization of government entities. Such policies and their frequent attachment as conditions of IMF and World Bank loans are detested in the developing world and amongst the BRICS nations. In order to effectively advance an alternate ideology through the NDB, the BRICS nations would have to break free of the hold of the dollar. So far, the founders have managed to create an especially complex currency exchange system that would avoid direct dollar usage. Despite this workaround, the NDB is still reliant upon the dollar underpinning the financial system, effectively changing little in the system.

Despite these clear obstacles, the NDB can be successful in a number of key areas. Critically, the NDB demonstrates the BRICS nations’ commitment to participating in international governance. Agreeing to participate in the NDB is no small feat — negotiations were tense and centered on a wide range of issues. In the end, that the BRICS five were able to develop a solution that respected all parties’ prestige is quite impressive. As one Brazilian diplomat said to Reuters, “we pulled it off ten minutes before the end of the game [and] reached a balanced package that is satisfactory to all.” The structure of the bank, headquartered in Shanghai, presided over by an Indian, with a Brazilian chair of the board of directors, a Russian chair of the board of governors, and a key regional facility in South Africa, emerges as a fair and proportional system directly based on the amounts each country contributed to the NDB’s capital base. The NDB also has a unique provision that allows other nations to buy into the lending half of the bank, broadening the possibility for further cooperation between growing nations. The ability to compromise in governance and develop such fair and broad representation could actually lead to accomplishing a more important goal for the BRICS nations: quota reform in the current international governance system. Should the NDB, with its relatively weighted voting shares, succeed, pressure will mount on the IMF, World Bank, and the United Nations to reform their voting systems. Western dominance of such institutions, especially the Security Council of the United Nations, effectively shuts out developing nations from key international policy making. Jim O’Neill, the legendary Goldman Sachs economist who coined the term “BRICS,” went so far as to tell CNBC that the creation of the bank was “a permanent sign that global governance is a mess. Global governance has not kept up with the pace of global economic change.” O’Neill directly charged the U.S. with failing to modernize the system. Especially at fault is the U.S. Congress, which has held up a bill to allow quota reform for more than four years. With the NDB’s development, the U.S. and Western nations could begin to cooperate more with emerging nations, who have now shown themselves to be more than willing to strike out on their own in the process of creating global institutions.

 

References:

Clinch, Matt. “Jim O’Neill: BRICS Bank Highlights US Failings.” CNBC.com. CNBC, 17 July 2014. Web. 25 July 2014.

Soto, Alonso, and Anthony Boadle. “BRICS Set up Bank to Counter Western Hold on Global Finances.” Reuters. Thomson Reuters, 16 July 2014. Web. 24 July 2014.

Weeks, John. “The New BRICS Bank – Force for Progress or Cause for Concern?” PRIME ECONOMICS. N.p., 18 July 2014. Web. 24 July 2014.

Image Credit:

De Oliveira, Ana. “Reunião BRICS – América do Sul.” Flickr: Creative CommonsFlickr, n.d. Web. 28 July 2014. <https://flic.kr/p/oogtkg>.