Friday, December 15, 2017

New bank of BRICS: 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 15 Brazil, Russia, India, China and South Africa (BRICS) established the New Development Bank (NDB) 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 NDB 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 NDB 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 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 materialised.  It will also be at least two years before the NDB becomes fully operational, and the parliaments of the five countries are still to ratify the bank and the CRA—certainly in India, this will be a contentious process.  

Whether the NDB 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 rapidly.

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 ten 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 15-nation 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.

 The NDB 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 NDB’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 NDB 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.