The New Development Bank: What’s in it for small economies?

It is news that should awaken the World Bank and the International Monetary Fund (IMF) from their complacent attitude toward developing countries. It is also news that should confirm to the G20 that what used to be the G7 – a group of the seven industrialised nations – no longer controls the world’s financial affairs.

On July 16, Brazil, Russia, India, China and South Africa (BRICS) established the New Development Bank and alongside it a Contingent Reserve Arrangement (CRA). The two institutions will serve the needs of the five countries for financing infrastructure and industrialisation, and to provide support in the event of a balance of payments crisis.

The New Bank will be headquartered in Shanghai, with India as its President for the first term of six years. It will be capitalised initially with US$50 billion. Each BRICS member state will subscribe an equal share. The CRA will be funded with US$100 billion. China is contributing the largest share of about US$41 billion while Russia, Brazil and India will put in US$18 billion each and South Africa US$5 billion.

The creation of the New Bank and the CRA is motivated by frustration with the pace of reform of the IMF and the World Bank to give a greater voice to the BRICS. In the Fortaleza Declaration after their meeting in Brazil, the five BRICS leaders – Brazilian President Dilma Rousseff, Russian President Vladimir Putin, Indian Prime Minister Narendra Modi, China’s President Xi Jinping and South Africa’s President Jacob Zuma – stated that international governance under its current structure and power configuration show increasing signs of losing legitimacy and effectiveness.  They said: “The BRICS are an important force for incremental change and reform of current institutions toward more representative and equitable governance capable of generating more inclusive global growth”.

The BRICS are also concerned that the new vision for global economic governance, articulated by the G20 in 2009, has not materialized. And, while Brazil’s President Rousseff was careful to say that the world should not see the Bank and the CRA as a desire by the BRICS to dominate, she made it clear: “We want justice and equal rights. The IMF should urgently revise distribution of voting rights to reflect the importance of emerging economies globally”.

Whether the New Bank and the CRA remain open only to the BRICS or they widen their lending to all other developing countries, their establishment signals that it cannot be business as usual for the World Bank and the IMF, and that decision-making in the G20 will have to change.

BRICS represent 42 per cent of the world’s population and roughly 20 per cent of the world’s economy based on GDP. Total trade between them is US$6.14 trillion, or nearly 17 per cent of the world’s total. Importantly, together they are the world’s largest market and their combined GDP grew by more than 300 per cent in the last 10 years. Those are not figures to be scoffed at, and the BRICS have now shown that they are serious about demanding change.

Other developing countries, including those in CARICOM, should applaud the BRICS for creating their two new institutions. They have all endured the harsh terms, rigid conditionalities and unyielding dictates of the IMF and the World Bank. They would welcome any move that rattles the Washington-based institutions, which are controlled by the US and Europe, and encourages them to reform and to be more flexible in the treatment of developing countries that are confronted with crises.

At the same time, the BRICS would make a serious error if they kept the Bank and the CRA as a closed shop for their subscribing members only, or for other large developing countries such as Mexico and Indonesia that might be encouraged to join. For the two new institutions to command support from the wider community of developing countries, they should not repeat the mistakes of the IMF and World Bank.

The New Bank could be a much needed source of financing to developing countries for infrastructure, industrialization and productive development that many nations, such as those in the Caribbean Community (CARICOM), are now denied. Except for Haiti, CARICOM countries (13 of them) have been ‘graduated’ from access to concessional financing by the World Bank. The CRA could also allow developing economies to draw on pooled reserves in the event of balance of payments crises on terms that are more appropriate and more sympathetic than those now applied by the IMF.

Risk management, a high-quality loan portfolio that improves development but keeps default to a minimum, surveillance and profits are all crucial to any bank’s successes, and they will be vital to the New Bank’s survival – so standards will have to be high. But within those important parameters the BRICS should devise ways in which they could allow other developing countries, particularly small and medium-sized ones, to buy into the New Bank and the CRA on terms they can afford.

Arrangements should also be made for borrowings by developing countries on less onerous and more sympathetic conditions than the requirements of the IMF and World Bank.

In other words, the BRICS institutions should create competitive conditions for lending that would cause the Washington-based financial institutions to soften their criteria for lending and their terms and conditions, thus giving developing countries particularly small and vulnerable economies, more acceptable access to financing and a better chance to survive and prosper.

While the IMF and the World Bank may be aroused by the BRICS creation of the New Bank and the CRA, they will continue to be influential players in the wider world economy. It is significant that the BRICS remain members of the IMF and World Bank where, undoubtedly, they will use the alternative of their new institutions to try to leverage larger voting shares for themselves.

Small economies, in particular, should not be left as mere spectators to the competition between the Washington-based financial institutions and the newly created BRICS Bank and CRA.

(The writer is a Consultant, Senior Fellow at London University and former Caribbean diplomat. Responses and previous commentaries: www.sirronaldsanders.com)