Role and Importance of BRICS Bank
Sudhakar Singh
PGPSM 2015
National Institute of Securities Market
The ‘BRICs’ acronym, in its most common usage, derives from a report to investors by Goldman Sachs’ analyst Jim O’Neill, signaling the new dynamic that four large countries; Brazil, Russia, India and China, were bringing to the global economy at the beginning of the new millennium.
A conclusion advanced in the Goldman Sachs report was that the BRICs should be included in the G7 as their macroeconomic significance increased in the decade to come. From a global investment angle, the world has moved on from there to a wider set of dynamic emerging countries, including a number of fast-growing African nations, as more developing countries find their own way to catch up on growth, resisting world recessionary tendencies (O’Neill 2001 2011). The investor’s world of emerging markets has thus expanded beyond the BRICs, even as questions are raised about the sustainability of growth in the BRICs themselves, with their structural and political challenges and their vulnerability to the uncertainties of global monetary developments.
(http://mobile.opendocs.ids.ac.uk/opendocs/handle/123456789/3599#.VemUOn2MgQ0)
The grouping was originally known as "BRIC" before the inclusion of South Africa in 2010. The BRICS members are all developing or newly industrialised countries, but they are distinguished by their large, fast-growing economies and significant influence on regional and global affairs; all five are G-20 members. Since 2010, the BRICS nations have met annually at formal summits. Russia currently holds the chair of the
BRICS group, and hosted the group's seventh summit in July 2015.
(https://en.wikipedia.org/wiki/BRIC)
Summary
The BRICS New Development Bank (NDB) was created in mid-2014 by the governments of Brazil, Russia, India, China and South Africa. It will have a fairly large capital contribution – initially of US $ 50 billion – from BRICS countries and can grow up to $100 billion with contributions from other countries.
It will fund investment in infrastructure and sustainable development on a significant scale. The NDB will provide valuable resources to help fill the massive gap in investment in infrastructure and sustainable development resources in emerging and developing economies , which has been estimated to reach at least US $ 1 trillion annually. It will also give emerging and developing countries a greater voice in the development finance architecture. Other emerging economies are also creating institutions. Thus, BRICS leaders have also created new institutions, such as the Contingency Reserve Arrangements (CRA), in
BRICS countries to provide official liquidity in times when balance of payments adjustments are needed . Further- more, with China’s initiative, the Asian
Infrastructure Investment Bank (AIIB) is being created. It will have 57 potential member countries, including all major European economies (such as Germany, the United Kingdom and France), with the largest share of the capital being contributed by China. China also announced the creation of the New
Silk Road Bank to fund investment in infrastructure connections within Asia as well as those linking to Europe and Africa. The creation of these new institutions contributes in a valuable way to the aims of financing sustainable development, as will be discussed in the Financing for Development conference in Addis Ababa on 12 – 16 July 2015.
1. Introduction
The idea for setting up the bank was proposed by India at the 4th BRICS summit in 2012 held in Delhi. The creation of a new development bank was the main theme on the agenda for the summit.[6] BRICS leaders agreed to set up a Development bank at the 5th BRICS summit held in Durban, South Africa on 27 March 2013.
On 15 July 2014, the first day of the 6th BRICS summit held in Fortaleza, Brazil, the BRICS states signed the Agreement on the New Development Bank, which is after its entry into force to form the legal basis for the bank.[3] The Agreement contains the Articles of Agreement of the Bank, and stipulates the total capital of $100 billion BRICS Development Bank, 12.5% of which is to be paid in by the members in the first 7 years. In a separate agreement, a reserve currency pool worth over another $100 billion was setup. Both are partly motivated by the desire to counter the influence of Western-based lending institutions. Documents on cooperation between BRICS export credit agencies and an agreement of cooperation on innovation were also signed.
Shanghai was selected as the headquarters after competition from New Delhi and Johannesburg. An African regional center will be set up in Johannesburg.
The first president will be from India, the inaugural Chairman of the Board of directors will come from Brazil and the inaugural chairman of the Board of Governors will be Russian.
The 7th BRICS summit in July 2015 marked the entry into force of the Agreement. On 11 May 2015, K. V. Kamath was appointed as President of the Bank.
2. Structure and objectives
Composition and power
According to the Articles of Agreement, the main organs of the bank are
Board of (ministers)
Board of Directors
President, Vice-Presidents
Development capital
The bank's primary focus of lending will be infrastructure projects with authorized lending of up to $34 billion annually. South Africa will be the African
Headquarters of the Bank named the "New Development Bank Africa Regional Centre". The bank will have starting capital of $50 billion, with capital increased to
$100 billion over time. Brazil, Russia, India, China and South Africa will initially contribute $10 billion each to bring the total to $50 billion. Each member cannot increase its share of capital without all other 4 members agreeing. This was a primary requirement of India. The bank will allow new members to join but the BRICS capital share cannot fall below 55%.
Members
The agreement entered into force in July 2015, with the ratification of all 5 states that have signed the Agreement on the New Development Bank.
Founding Members
Brazil
Russia
India
China
South Africa
3. Shareholding Structure
The following table are amounts for 5 countries by shareholding at the New Development Bank.
Countries by Shareholding at the New Development Bank
Country
Number of
Shareholding
Voting Rights
Authorised Capital
Shares
(% of Total)
(% of Total)
(billion USD)
Brazil
100,000
20
20
10
China
100,000
20
20
10
India
100,000
20
20
10
Russia
100,000
20
20
10
South Africa
100,000
20
20
10
Unallocated Shares
500,000
-
-
50
1,000,000
100
100
100
Grand Total
4. Why BRICKS Bank
The rising economic strength of the BRICS countries has outpaced increases in their voice at the World Bank and the International Monetary
Fund (IMF). South-South economic cooperation has expanded dramatically in recent years. Brazil now has more embassies in Africa than does the United Kingdom. China has become Africa’s most important trading partner. The value of South-South trade now exceeds North-South trade by some $2.2 trillion—over one-quarter of global trade. Low-income countries have also seen unprecedented growth in “South–South” foreign aid—with China, Brazil, and India all becoming larger donors. So, these BRICS institutions are partly just the result of a two-decade long process of greater economic engagement by and among developing nations.
In the meantime, long-standing dissatisfaction with Bretton-Woods institutions has also pushed BRICS towards a developing-country alternative to global development finance. In the late 1960s, Andean nations created the Corporación Andina de Fomento (CAF), also known as the
“Development Bank of Latin America,” as a way of bypassing the stringent rules imposed by the World Bank on infrastructure loans. In the early
2000s, partly as a reaction to a widely perceived failure of the IMF to stop currency speculation during the Asian Crisis, 10 ASEAN nations plus
China, South Korea, Japan established a network of bilateral currency swap agreements that would become the Chiang Mai Initiative. In 2009 seven Latin American countries signed an agreement to establish the “Bank of the South” or BancoSur to fund regional development and social protection, and in which each member nation would have one vote. Both of these latter efforts were launched, in part, as a response to the
Bretton-Woods enforcement of conditions on countries seeking emergency loans. So it is with the NDB and the CRA; said the official statement,
“International governance structures designed within a different power configuration show increasingly evident signs of losing legitimacy and effectiveness.” Although the BRICS comprise over one-fifth of the global economy, together they wield about 11 percent of the votes at the IMF. But reform to the governance of the Bretton-Woods institutions has encountered a number of roadblocks. In 2008 and again in 2010, quota reform at the IMF was intended to double total financial commitments from all member countries, while at the same time giving BRICS countries larger voting shares. Because this required additional contributions by member governments of richer countries, several balked for different reasons.
Smaller European countries, whose quota shares would be reduced by the changes, opposed quota reform on the grounds that their contributions to total official development assistance would be undermined if their voting strength were diminished at the IMF. In the United
States—whose shares would not be reduced by quota reform—the Congress failed to approve increased capital contributions to the IMF. In the one recent effort to pass quota reform, Democrats in the House of Representatives tried to sneak an amendment into a loan guarantee for
Ukraine that would have authorized the increased quota, but then withdrew the amendment, bowing to Republican opposition. Thus, the one time the Congress has considered IMF quota reform has been as a rider in an unrelated bill.
These developments show the political tightrope on which countries must walk when it comes to global development finance: while low- and middle-income countries have legitimate claims about their exclusion from the governance of the Bretton-Woods institutions, richer countries cannot cede too much influence over these institutions to developing nations and still justify large contributions—in particular, to the World
Bank’s International Development Association every three years, and to the IMF as part of quota reforms—to their restless voters, especially during difficult economic times.
What are the implications of the BRICS institutions for international development finance? Developing nations hope that BRICS bank/CRA(Contingency Reserve Arrangements) may eventually challenge World Bank-IMF hegemony over matters such as: funding for basic services, emergency assistance, policy lending, and funding to conflict-affected states. The World Bank’s own estimates point to a $1 trillion infrastructure investment “gap” in developing countries. Existing multilateral development banks are able to fill approximately 40 percent of that gap. So, the fact that a BRICS bank aims to make electricity, transport, telecommunications, and water/sewage a priority is important; the demand for infrastructure is expected to grow sharply as more countries transition out of low-income status. In terms of scale, it has been suggested that—after a couple of decades, should membership be expanded, and should co-financing by governments and private investors be mobilized—that BRICS Bank loans could dwarf World Bank loans. This type of success has been seen with the CAF, which now funds more infrastructure in Latin America than the World Bank and the Inter-American Development Bank combined.
Whether the BRICS institutions go the way of the more successful CAF on the one hand, or the way of the as yet unutilized Chiang-Mai Initiative or BancoSur on the other, will ultimately depend on two other factors: risk management and coordination.
Presumably a BRICS bank and reserve fund will need to ensure a high-quality loan portfolio that maximizes developmental impact, but keeps defaults to a minimum (for expanding the scale of lending operations, it would also be important to make profits on its loans). And so the problem of surveillance will have to be tackled. Unfortunately, the track record of regional initiatives on surveillance does not bode well. The
Chiang Mai Initiative, for example, was simply unable to devise and implement a system of monitoring and surveillance, and eventually resigned itself to requiring countries using its credit lines to undergo surveillance by the IMF! The result: not a single Asian nation has used credit through the initiative.
Meanwhile, given the abundance of evidence that multilateral economic initiatives work best when their principal stakeholders are able to resolve coordination problems, the possibility of serious intra-BRICS disagreements could prevent these new institutions from operating at capacity. Hugo Chavez’s dream of BancoSur supplanting both the World Bank and IMF in Latin America foundered on a series of disagreements on issues such as: the bank’s tax-free status, the role of concessional finance, relationships with the private sector, transparency rules, and the need for environmental safeguards.
The structural disparity between China and the rest of the BRICS members (the Chinese economy being larger than the economies of all other
BRICS combined) is at the heart of the matter for any BRICS institution. China’s dominant position makes coordination—in terms of operations and funding priorities—difficult to imagine. At one point, all other BRICS countries have expressed concern with Beijing’s economic policies and currency regime. Brazilian and Indian central bankers spoke out against the undervalued Yuan in 2009 and 2010, but to little effect. Ongoing trade disputes among developing countries also threaten unity. Last year WTO member states reached a deal on trade facilitation in Bali but
India, among a group of developing nations, has threatened to withdraw support for the protocol over the issue of food security. A joint communiqué of BRICS trade ministers remains vague about whether BRICS countries commonly support the Bali agreement. These, along with a host of other intra-BRICS disputes, could limit the effectiveness of the NDB/CRA. For now, they seem to have been papered over amid the excitement surrounding the Fortaleza agreements. But they will, ultimately, determine whether the developing world has finally found a viable alternative to Bretton Woods.
(http://www.washingtonpost.com/blogs/monkey-cage/wp/2014/07/17/what-the-new-bank-of-brics-is-all-about/)
Brazil’s Interests
Sergei Vasiliev, Vice Chairman at VEB Bank for Development, member of the Advisory Council at the Carnegie Moscow Center, Chairman of the
Russian-Brazil Business Council
First of all, by participating in BRICS, Brazil derives several economic benefits.One of Brazil’s largest trade partners is China, and Brazil is also
Russia’s largest trade partner in South America. Brazil also has very large economic interests in South Africa. In addition, India, South Africa, and
Brazil have been partners within the IBSA framework since before BRICS was created.
On the other hand, its political benefits are even more critical to Brazil. Brazil has always had geopolitical ambitions but could never develop them because of its weak economy and disorganized internal politics. Domestic, political, and economic stability over the last 20 years, however, has allowed Brazil to dramatically elevate its international profile. Let’s also recall the active role Brazil played in the WTO negotiations. The Brazilian elite has found BRICS’ format quite suitable for attaining its long-term goals – particularly, in terms of moving out of
America’s shadow. At the same time, this format prevents direct confrontation with the U.S.
Russia’s Interests
Andrey Movchan, director of the Carnegie Moscow Center’s Economic Policy Program
The BRICS countries are trying to create an institution that will serve as a potential alternative to the IMF – WB (IBRD) system and that will not directly depend on the US (of course, indirect dependence will continue to persist). Despite Russia’s active participation in this project, it’s hard to imagine that Russia will emerge as one of themost important sponsors of such a system; after all, Russia is far behind other member states in terms of the scale and dynamics of its own economy.
Nevertheless, it is possible that Russia might be able to use BRICS Bank and reserve currency pool in the future in order to alleviate its economic problems and even to possibly launch Perestroika-2 – this time without any political demands associated with financial assistance provided by
IMF, IFC, or IBRD. Thus, while being mindful of the BRICS members’ economic realities, Russia is effectively trying to create a system that will be controlled by China, the country that, unlike the scrupulous US, doesn’t scrutinize its partners’ domestics policies.
It’s still too early to tell whether this system can become successful enough to induce serious World Bank sponsors to make a switch. Its success appears unlikely for a number of reasons. The US and US-controlled World Bank are familiar and rule-oriented partners, while China has so far presented itself as a more active and self-interested creditor.
At any event, Russia has nothing to lose.. The regime considers self-preservation as the country’s priority and sees any possibility of external influence on its domestic policies as the main danger. In this light, plans to create BRICS financial institutions are quite reasonable despite their low chances for success.
India’s Interests
Petr Topychkanov, an India scholar and an associate in the Carnegie Moscow Center’s Nonproliferation Program
What India appreciates in BRICS is the association’s informal character that allows the country to further its agenda on the international stage with little political and so far little economic costs. The political component of India’s agenda has to do with New Delhi’s effort to play a global role. Indian politicians understand that the UN reform will take a long time. They also understand that India is unlikely to become a member of the UN Security Council any time soon, despite Moscow’s and Washington’s assurances of the contrary. It’s also clear that the SCO is more of a regional organization than a global one. Moreover, India has yet to be granted full-fledged membership to that organization.
India is also interested in BRICS because it would give Indians an opportunity to continue their maneuvering between alliances and associations, enabling them to further develop relations with states that are in conflict with one another. While improving its relations with the US, India continues to develop ties with both Russia and China. It’s easier for India to shield its joint initiatives with Russia and China from Western criticism if these initiatives were to be conducted under BRICS’ umbrella.
India’s participation in BRICS is also important for its domestic politics. This is due to the fact that anti-colonial and anti-Western sentiments are still strong in the country and are being exploited by all political parties. Were it not for BRICS, India’s rapprochement with the US would encounter greater resistance inside the country. Yet as of now, the Indian authorities can always cite BRICS as proof of the country’s balanced foreign-policy course.
On the economic front, India is in dire need of investments. The country will hardly be able to sustain its current industrial and agricultural growth. Without reforms in these areas, India will be unable to lay the economic foundation for the global role it wants to play in the 21st
century. Indeed, in orderto conduct reforms, it requires investments that no single country can provide. In this case, Indians see BRICS and the
Asian Infrastructure Investment Bank, which was created under its umbrella, as a source for new opportunities.
China’s Interests
Alexander Gabuev, the chair of the Russia in the Asia-Pacific Program at the Carnegie Moscow Center
Originally, China didn’t start the process of turning BRIC into a semblance international organization (incidentally, the acronym was coined by then-chairman of Goldman Sachs Asset Management, Jim O’Neill, as a marketing move). It was actually Russia who came up with the idea first.
Nevertheless, Beijing had and still has at least three reasons to sponsor BRICS’ format.
First of all, it is quite appropriate for the largest developing countries to demand that the West revamp the global financial architecture. Indeed, the IMF vote structure no longer reflects modern realities. Furthermore, as theworld’s second largest economy (first in terms of purchasing power parity), China is quite justified in its quest for greater privileges.
However, Beijing has hesitated to voice its demands until just recently and was always on the lookout for good company – preferably highprofile and authoritative partners. Thus, the format that emerged in 2009 as a result of the financial crisis allowed China to make a more assertive claim for its rights while speaking on behalf of developing countries and while avoiding a direct clash with the West.
Secondly, Beijing lacks its own original ideas on how to organize global financial architecture (apart from replacing the U.S. with China as its center). Therefore, intellectual cooperation with other large powers that think alike will help generate some creative ideas. Besides, by participating in BRICS Banks and the currency reserve pool, China will gain invaluable practical experience in the implementation of development projects – this time by playing a leadership rather than an auxiliary role.
Thirdly, the BRICS format gradually conditions the world to allow for the possibility of parallel centers in the global financial architecture. It also creates an infrastructure for promoting yuan as one of reserve currencies.
The emergence of the Asian Infrastructure Investment Bank is the first practical outcome of China’s participation in BRICS. In addition to the US
Congress’ obstinacy and China’s wide-open wallet, the project owes its current success to the feeling that it’s quite normal and in fact good to have another institution in the ever-more-complicated global financial architecture. Furthermore, the ideas formulated and absorbed by
Chinese diplomats and financiers in the course of their work on BRICS Bank have also contributed to the project’s success. http://carnegie.ru/eurasiaoutlook/?fa=60636 BRICS bank to close infrastructure gap
In Fortaleza in July 2014, the heads of state of Brazil, the Russian Federation, India, China and South Africa agreed to set up the New
Development Bank. It was agreed by these governments that the NDB would be based in Shanghai, with a regional centre in South Africa, and that the first president to serve for an initial period of five years would be an Indian citizen. The plan is to have a rotating presidency, which would imply a Brazilian president after the Indian one.
Mr KV Kamath was appointed as the first president of the bank in May 2015.
Emerging and developing countries have significantly increased their weight in terms of global GDP and global economic growth. Perhaps most importantly, some emerging and developing economies have accumulated very large, long-term foreign exchange assets, which they have typically placed in sovereign wealth funds. Many of these resources are invested in developed countries with relatively low yields.
At the same time, there are significant unmet needs in the emerging and developing countries in the field of infrastructure as well as in more environmentally sustainable forms of development. A shortfall of investment of approximately US$ 1 trillion annually has been identified by
Bhattacharya, Romani, and Stern (2012) and by others, beyond what is likely to be financed by current institutions. The persistence of such a major deficit would constrain future growth of developing and emerging economies, as well as imply that a large proportion of the world’s population will continue to lack access to electricity and clean water. Furthermore, much crucial investment in sustainable development, such as in renewable energy, would not take place. Thus, there is a strong case for a major increase in investment in infrastructure and more sustainable development, based on the need for growth, structural change, (e.g. the massive movement of people from rural to urban areas), inclusion as well as sustainability and resilience.
New emerging architecture of international development banks
A clear case for new institutions such as the NDB could be made due to the fact that emerging and developing countries have the necessary savings and foreign exchange reserves to finance a new development bank that can contribute towards financing such crucial investment.
Furthermore, its existence together with other development finance institutions financed mainly or completely by emerging and developing
economies clearly strengthens the voice of these countries in the development finance architecture and provides much needed additional finance. It is very welcome that the leaders of the BRICS nations have created the NDB for infrastructure and sustainable development. This institution will be a complement to not a substitute for existing financial institutions, both in the public and private sectors. Furthermore, it is a positive development to have healthy competition between established development finance institutions and the new ones being created.
It is encouraging that BRICS leaders have also created other institutions, such as the CRA, amongst BRICS countries, which can provide official liquidity in times of need.
The AIIB is being created due to the initiative of China and other Asian countries (excluding Japan). It will have 57 potential member countries, including all major European economies, but the largest share of capital is being contributed by China reportedly 75 per cent of the capital will be contributed by Asian economies. China has also announced the creation of the New Silk Road Bank to fund investment in land and maritime
Asia infrastructure connections within Asia as well as those linking to Europe and Africa.
There are important similarities between the NDB and other development banks, such as the World Bank, which also started with a focus on infrastructure. The scale of lending of the BRICS bank needs to be large enough to make a meaningful impact, given the significant level of needs identified.
The impact of a BRICS bank must also be measured in terms of its capacity to enact leverage through its co-financing of projects in the private and public sectors.
National and regional development banks, as well as the World Bank, will be natural partners. Indeed, the creation of the NDB and the AIIB also reflects a shift towards a greater emphasis on public development banks, regionally as well as nationally. There is a growing consensus that well-run public development banks can play a positive role in funding the real economy, especially in light of the limitations of the private financial system in doing so. This is the case in particular in certain sectors, such as infrastructure, where long-term finance is required before investments become profitable, often beyond the maturity dates that the private banks are willing to lend for, especially in poorer countries.
Investment in sustainable development for example renewable energy, where important environmental externalities exist is also a case in which investment is being insufficiently funded by private finance and can be successfully funded by public development banks.
Appropriate design of financial instruments
An important issue is the quality of the loans being made by the new development banks. There is a potential trade-off between the pace of growth of a portfolio of loans and the quality of the loans. Though the scale of operations is clearly important, loans of high quality are a priority, as they maximise the likely development impact of the projects and minimise the risk of default the latter is key for improving the credit rating of the NDB. It is also important that the NDB and the other new development banks, such as the AIIB, make profits on their loans, as those can be reinvested, allowing for an expansion of capital, which will facilitate increased lending. As regards the point on maximising development impact, it is key that these banks contribute to the structural transformation needed to achieve sustainable and inclusive growth.
In this context, it is also important that these new banks meet good social and environmental standards as well as standard conditions of transparency, and that they encourage the private banks through whom they channel funds to be equally transparent. This last point is also necessary for multilateral development banks such as the World Bank.
A second issue is the degree of financial “sophistication” of the instruments used. Firstly, the more complex the products are, the longer they take to be designed and implemented. So-called plain vanilla loans can be made much faster than loans with more complicated structures.
Transactions involving equity take even longer (though they have desirable features, such as capturing part of the “upside” if projects are very profitable). Secondly, the experience of the North Atlantic crisis (normally called global financial crisis) indicates that complexity often breeds opaqueness and leads to greater risk and future losses. Indeed, though a BRICS bank may wish to assume greater project risks (e.g. investing in very poor countries) when these projects have potentially large developmental or other benefits, it should avoid taking financial risks that could lead to substantial losses.
Capital and potential lending volume
The New Development Bank was created by the BRICS governments with a total capital contribution of US$ 50 billion, of which 20 per cent, or
US$ 10 billion, is being paid-in. Non-BRICS countries (emerging and developing, as well as developed ones) were also able to contribute capital either right at the beginning or after the bank was established of an additional $50 billion of capital. However, BRICS countries would always have a minimum of 55 per cent of the total capital. Assuming a total capital endowment of US$ 100 billion, of which 20 per cent has been paid in, the level of annual lending could according to preliminary estimates made in Griffith-Jones (2014) reach, after 20 years, a stock of loans with a value of up to US$ 350 billion, equivalent to about $34 billion of annual loans. The latter amount could be used for investment projects worth at least US$ 68 billion annually, given that there would be co-financing by private and public lenders and investors. The capital will be paid-in on a set schedule over seven years following final ratification of the agreement by all BRICS countries, which will slow down this growth of lending somewhat. This implies that, after a period of 20 years, the level of lending of the BRICS bank would become comparable to the current total level of annual European Investment Bank (EIB) lending, which in 2012 reached US $32 billion in lending for infrastructure. The EIB is the largest
regional development bank and is far larger than the World Bank regarding its level of lending total World Bank lending for infrastructure reportedly reached US$ 22 billion in 2012.Therefore, under this scenario, after 20 years the NDB would be lending significantly more for infrastructure than the World Bank currently does.
It seems to be a positive development that the BRICS created the bank on their own, as negotiations may have been less complex and therefore quicker. However, it is also positive that there is a future option for broadening membership.
A BRICS development bank would lend to both the BRICS countries themselves and to other developing countries.
Furthermore, it would be desirable for it to have a balanced portfolio of loans that include middle- and low-income countries from different regions, as this would make the bank more creditworthy, both because middle-income countries may be more creditworthy than low-income ones, and because it would ensure the benefits of geographical diversification. However, given that the AIIB will be focusing on Asia, there may be a case for the NDB to put a somewhat greater focus on Africa and Latin America.
The role of the BRICS bank in the development finance architecture
A BRICS bank would provide a valuable addition to the existing network of multilateral, regional and national development banks, which seem to perform far better including their support for productive development through infrastructure investment if they work closely with national development banks, which have far greater local knowledge. Similarly, national development banks can operate better if they have the financial and technical support of banks the kind of support that the NDB will offer.
A BRICS bank can and will initially benefit from the experiences and expertise of existing successful development banks, such as the World Bank at the multilateral level; CAF and EIB at the regional level; and Brazil’sBNDES, the German Development Bank (KfW), the South African Industrial
Development Corporation, the China Development Bank as well as others at the national level.
The development of large and effective BRICS institutions, such as the NDB and the Contingent Reserve Arrangement, can provide a valuable platform for the BRICS to advance reforms in the international financial and development architecture that favor developing and emerging countries in general. The scale of the new institutions, as well as the speed in establishing them, will significantly enhance the potential bargaining power for encouraging meaningful reform.
In this sense, as mentioned, it is very positive that other important initiatives were launched after the New Development Bank was created in particular, the creation of the Asian Infrastructure Investment Bank in early 2015. The focus of future lending will also be on infrastructure, but it will have a more regional (Asian) character. The Chinese contribution to the AIIB’s total capital of US$ 100 billion is far larger than the contribution to the NDB, as China will have the largest share in the bank. Furthermore, the AIIB seems to have sought the participation of other countries more actively, both emerging (especially in Asia) and developed ones. As a result, there are 57 member countries that have applied to join, including 16 of the 20 largest economies. All major Asian countries (except Japan) and all major West European countries (including
Germany, the United Kingdom, France and Italy) will join, as will the BRICS countries. Three features of the new development finance institutions being created are worth highlighting. Firstly, their creation implies an important shift in the international development finance architecture towards “Southern” or “Southern dominated” institutions. This implies a reflection in the financial sphere of the changes that have been happening in manufacturing and other sectors. “Southern“ or developing and emerging economies have assumed much larger roles; their status regarding macro-economic variables has also changed regarding, for example, their growing proportion of global savings and the foreign exchange reserves generated.
Secondly, some of these new institutions particularly the AIIB and Silk Road Bank imply a large role for China, a country that is also concentrating strongly on production in sectors such as world manufacturing and infrastructure capacity. It also holds a very high proportion of the savings and foreign exchange reserves of emerging and developing economies. In this sense the NDB is different, in that the capital of the bank will be comprised of equal shares of the BRICS countries.
Thirdly, it is interesting that the BRICS countries have actually chosen to create public development banks, in much the way that developed economies created such institutions in the post Second World War period. Though clearly funded in the private capital markets with cofinancing from private and public lenders as well as private investors the new development banks are owned and capitalized by national governments. They therefore provide a valuable instrument for helping implement and fund national, regional and global strategies. They can also help achieve policy aims, such as helping to achieve the Sustainable Development Goals. https://www.die-gdi.de/uploads/media/BP_13.2015.pdf Professor Stephany Griffith-Jones is Financial Markets Director, Initiative for Policy Dialogue, Columbia University; Research Associate, ODI and
Emeritus Fellow, Institute of Development Studies, Sussex University. She has been a Visiting Fellow at DIE, Bonn.
She has published widely, including over 20 books and many academic and other articles on international capital flows, international financial architecture and development finance.
Literature
Bhattacharya A, Romani M, & Stern, M. (2012).Infrastructure financing: Meeting the challenges. London: Grantham Research Institute.
Griffith-Jones, S. (2014).A BRICS development bank: A dream coming true? (Discussion Paper 215). Geneva: United Nations Conference on
Trade and Development.
Importance:
Until now it had been widely assumed that globalisation was driven by the West and imposed on the rest. Bosses in New York, London and Paris would control the process from their glass towers, and Western consumers would reap most of the benefits. This is changing fast. Muscular emerging‐market champions such as India's ArcelorMittal in steel and Mexico's Cemex in cement are gobbling up Western companies. Brainy ones such as Infosys and Wipro are taking over office work. And consumers in developing countries are getting richer faster than their equivalents in the West. In some cases the traditional global supply chain is even being reversed:
Embraer buys many of its component parts from the West and does the assembly work in Brazil.
All things considered, the size and enduring growth of economies of the emerging world, the associated global shifts in trade, investment and savings, and the advent of new institutions and manifest politics around puts it:
What is already a fact is that the clear delineation between developed and ‘backward’ countries is a thing of the past. Western multinational companies are seeking to expand in the BRICS as growth in their home markets has dried up.
Chinese and Indian corporations are building their brands in other emerging markets and the West. More than ever, developed countries' economic fates are tied to those of emerging markets.
The rise of the BRICs over the last decade and a half is a story of regional economic powers becoming increasingly important global political actors. With the promise of new global financial institutions to rival the post-World War 2 western constructs of Bretton Woods, we stand on the cusp of a new era of multilateral international economic and development politics. Furthermore, this global political ascendancy has generally reinforced the standing of BRICS countries as both economic and political leaders in the region – indeed it was precisely on the political grounds of regional leadership that South Africa was included in the BRICS in the first place.
However, the BRICS are an interesting case of political life imitating economic art, as they were coined as an investment meme by a Goldman
Sachs bank to help western capitalists make money. While the construct worked in the sense that foreign investment flowed into the BRICS, it also revealed deeper processes of global economic integration reflected by emerging market growth such that traditional patters of manufacturing, consumption, wealth and financing are beginning to undercut simple north-south divides.
Hence the debate about whether it is really the BRICS, or MINT or the EAGLES or just India and China that come to dominate the world economy, must be set against the re-spatialisation of wealth and poverty in ways that coincide less and less with national boundaries. Perhaps one day all billionaires will live in Singapore with the cities of the globe fragmented into sub-cities framed along socio-economic and identity lines. Thus the north–south divide may not so much disappear as be decentralised to sub-national and sub-city level.
The theme of the re-spatialisation of economic well-being brings us to the question of the relationship of regions to the globe, and in this regard is seems pretty clear that global recognition has reinforced the regional standing of most of the BRICS, if not all. Notably, the mutually reinforcing logic of global recognition and regional leadership for BRICS does not necessarily mean that the rise of the BRICS is good for the wider regions themselves. Much seems to hang on the nature of economic and political architecture within regions, such that (arguably) the ascent of Brazil may harm Argentina while the ascent of China helps South Korea. Notably, South Africa’s ascent seems mostly limited to southern Africa with other BRICS more influential to the north.
A closely related debate is whether the BRICS are effective serving as sub-imperialists by better integrating the regions into global neo-liberal capitalism, or empowering emerging economies by offering a wider range of economic choice. For example, the BRICS bank and Contingent
Reserve Arrangement may introduce greater choice for emerging countries in terms of loans and their conditionalities that will allow for countries to choose policies that are not rigidly neo-liberal and more statist. It also implies that we can expect greater variation in macroeconomic policy across the capitalist system, with different states and regions making these choices in different ways. What constitutes a significant difference from the neo-liberal norm is a matter of vigorous debate.
In line with the latter view, the rise of the BRICS can also be read as symbolising the rise of global capitalism, but not necessarily the neo-liberal version embedded in the Washington consensus, as at both home and abroad the models of business and development embraced by the BRICs have strong statistelements, and are also informed by an anti-western identity politics that is important for global political dynamics. Notably, this politics does not necessarily lead to democratic political outcomes such as greater democracy at home, given Taylor’s observations about the elite bias of most policies, but is better understood in terms of greater pluralism in elite forums of international politics and economics.
References
http://www.researchgate.net/profile/Laurence_Piper/publication/275830654_The_BRICS_phenomenon_from_regional_economic_leaders_to
_global_political_players/links/5547a8c60cf2e2031b383809.pdf 