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Banking on the BRICS

By Rajitha Swaminathan

Frustrated and fatigued with the quest of finding better seats at the IMF and World Bank banquet table, the BRICS came together in July 2014 to set up their own multilateral development bank. Thus was born New Development Bank (NDB), the BRICS’ version of a mini-World Bank. For good measure, they also set up another BRICS-only monetary fund organization – the Contingent Reserve Arrangement (CRA).

The NDB will start off with a $50 billion capital base, made up by equal contributions from member countries. The capital will be used to fund infrastructure and sustainable development projects in the BRICS, and eventually in other middle and low income countries.

The CRA on the other hand, has a $100 billion capital base, with China contributing $41 billion, South Africa contributing $5 billion, and the rest contributing $18 billion each. Recovering from the recent hurt of global liquidity crunches, this reserve will be used as a response to liquidity or balance of payments crises in any of the countries.

The setting up of the NDB and CRA is the forerunner of the new world order. While there has always been dissatisfaction, this is a manifestation of denial in accepting the status quo of global governance. The BRICS together cover more than 25% of the world’s land area, contribute 25% of global GDP, and comprise of over 40% of world population. Yet, their say in the IMF and WB is often low and unheeded.

BRICS Bank_Infrographic

The IMF and World Bank were set up as post-World War II institutions, and their governance structures have remained static since then. Today, the BRICS possess some of the world’s fastest growth rates, burgeoning educated middle-class, and high volumes of trade. The BRICS bank is an initiative to underline their place in today’s global political economy, and carve out an alternative to the old world order.

So, the first big impact that the NDB and the CRA will have is in reflecting the new world order in global economic governance. The design of the NDB is different from older multilateral organizations. For one, nobody has the power of veto – something which the UN and IMF have never been able to shake off. Each of the countries has one vote each, thus ensuring fair treatment, equality in representation, and plurality in voice. The weak spot here is within the CRA. It is difficult to imagine a bailout for economies in trouble, where the lender (which may most probably end up being China) does not impose conditions on its borrowers. The responsibility of ensuring fairnesswill rest upon China’s shoulders. The fear of displaying power by imposing rules upon the smaller members may mean the end of the Bank.

The setting up of the NDB and CRA is the forerunner of the new world order.

Secondly, a collateral result of the BRICS Bank eventually, would be in undermining the hegemony of the US Dollar. Today, the US Dollar is the world’s ubiquitous reserve currency. The CRA and the NDB will not be required to maintain their reserve in USD. While reduced dependency on the USD is a good thing, there is an undercurrent of mistrust, even with the BRICS themselves, about China’s valuation of the Yuan. This may cause ruffles in the future, especially during liquidity crunches. While the world order may have changed very quickly, the US dollar still remains the most stable and safest of all currencies.

Lastly, this is what I believe may be the most impactful contribution of the BRICS Bank – competition to the World Bank and IMF. The latter are large and clunky giants, using the pretext of non-profit motives for lack of efficient functioning. The WB itself has recognized a $2.5 trillion infrastructure gap, only in South Asia. This translates to tremendous potential for new projects. The BRICS are seen as young and vibrant (at least most of them), experiencing high growth rates with educated talent. This may just be the injection of energy and efficiency that the development finance world needs. What may cause disruption in the efficient and smooth functioning of the NDB may be the inherent differences between each of the BRICS countries themselves. Apart from being “emerging”, they share little in common culturally and politically. Simple issues, like what may be termed a sustainable development project in each of the nations, or how infrastructure projects are green lit in bureaucratic democracies vs. more decisive but non-democratic regimes may become roadblocks to a smooth operating model of the NDB.

In conclusion, the coming together of any group of nations to set up development finance institutions is good news. A cloud of apprehension hovers over the long-term success of the CRA. But if the NDB can function complementarily and competitively to the World Bank, instead of conflicting with it, the BRICS may just have awakened the world to push for a change in global economic governance that dynamically and fairly reflects changing world orders.

Rajitha is a policy enthusiast and aspiring writer. She is passionate about the intersection of policy, business, innovation, and development. Her topics of interest include global economic governance, international affairs, economic policy, and emerging markets. Rajitha has a multidisciplinary educational background – an advanced degree in International Affairs from Columbia University, an MBA from the Indian Institute of Foreign Trade, and an undergraduate degree in Engineering.

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