BRICS New Development Bank in Changing World Economic Order

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by Manoj Kumar 10 February 2019

The New Development Bank (NDB) is a multinational bank established by member states namely Brazil, Russia, India, China and South Africa, specifically as per Agreement of the NDB, “the Bank shall support public or private projects through loans, guarantees, equity participation and other financial instruments.” Also, the NDB “shall cooperate with international organizations and other financial entities, and provide technical assistance for projects to be supported by the Bank.” In 2012 it was realized by the member States that lack of proper international intergovernmental institutions is averting the BRICS development. At the 4th summit held at New Delhi in 2012, the creation of new development bank was the main theme of the summit. More importantly in 2012 BRICS countries initiated an inquiry into the benefits of a New Development Bank “to mobilize resources for the infrastructure and sustainable development projects in BRICS and other developing countries.” Finance ministers and central bank authorities of the member countries were directed to explore, “the construction of a financial safety net for BRICS through the establishment of a currency reserve with the Contingency Reserve Arrangement (CRA).” The NDB started its operations in July 2015, and a Treaty for the establishment of BRICS CRA also entered into force in 2015 itself. The main purpose of CRA is to immunize the BRICS countries, “in the event of any liquidity pressures that might arise in the wake of persistent sovereign debt crisis and uncertainties in the financial sector of Western economies.” 

The Rationale of NDB

The rationale behind the NDB can be dissatisfaction of developing economies with the pace of reforms at the International Monetary Fund (IMF). At Ufa Summit during 2015 the BRICS leaders expressed dissatisfaction with the IMF, “We remain deeply disappointed with the prolonged failure by the United States to ratify the IMF 2010 reform package, which continues to undermine the credibility, legitimacy and effectiveness of the IMF.” It is an acknowledged fact that the IMF along with World Bank has been the key international financial institutions in the world and the main reason why BRICS countries are asking for their reformation is the overt influence of developed countries on the said institutions. In 2015 share of voting power of US was 16.5 percent whereas the share voting power of BRICS countries combined was 14.1 percent. It implies that as far as decision making is concerned the US along with developed nations have qualified majority and are able to assert their policy making decisions. In the words of Nobel Economist Joseph Stiglitz who hailed creation of NDB which will challenge US economic hegemony in IMF and World Bank,  “It’s very important in many ways, this is adding to the flow of money that will go to finance infrastructure, adaptation to climate change — all the needs that are so evident in the poorest countries. It [also] reflects a fundamental change in global economic and political power. The BRICS countries today are richer than the advanced countries were when the World Bank and the IMF were founded. We’re in a different world — but the old institutions haven’t kept up.” The New Development Bank therefore was created due to, “resentment over the World Bank and IMF’s main donors stubbornly clinging to their over-weighted voting shares. It also reflects a difference in philosophy over the need to prioritize physical infrastructure over other priorities (such as education, healthcare, women’s rights, etc.) towards which the World Bank has been drawn in recent decades. From a holistic point of view, all such investments are crucial for equitable national prosperity and wellbeing, but nothing creates jobs and literally drives ‘state-building’ like infrastructure.”

Democratic Structure of NDB

 In the NDB the decision making power is divided equally among all the five member countries, the decision making process and the voting rights are not dependent upon factors like economic size, size of population, or the amount of contribution by the member country. It is important to note here that China alone contributes half of the BRICS financial output but it does not have any special or numerically superior voting rights over other members, unlike with the Bretton Woods institutions. Further the membership is open to all UN members, with the consent to the conditions prescribed by Board of Governors with a qualified majority of four original members. Though there is a limit to new member so that the share of total voting power will not fall below 55 percent, with the maximum voting power of any new member is set at seven percent.

Financing Needs of Developing Economies

The main purpose of the NDB is for funding the development and infrastructure projects in developing economies. The lack of regular supply of finance for infrastructure such as power and transport infrastructure impedes the economic growth. In fact, the deficit in infrastructure financing is proving to be main impediment in growth of economies. Although even in the case of World Bank’s loans almost 80 percent have been directed towards development of infrastructure projects. But critics of Bretton Woods institutions like Joseph Stiglitz and Glinanvos, expresses strong opposition to ‘conditions’ attached with ‘investment loans’ like trade liberalization, cuts in public spending, privatization, and openness towards Foreign Direct Investment. In this way the conditionality still being practiced by these international financial institutions, “in the way that lending is focused on countries with a strong track record in successfully implementing the conditions tied to the previous loans.” There is also great need for financing the projects according to local needs; there was case in 2013 with World Bank when it declared that it will avoid funding towards coal sector, such kind of moves will adversely affect fulfillment of energy requirement of coal dependent energy production, for example in case of India coal-based thermal power plants alone makes up 60 percent of its total power generation.

Another important measure that has been adopted by NDB is provision of releasing loans to countries in their own currencies. Such move is aimed at allowing the NDB to use a larger pool of currencies for lending and borrowing, although the default operating currency of the bank will remain as US dollar only for raising funds from global markets as well in its lending to other countries.

BRICS through NDB strongly seems to be building an alternative international financial institution for member and developing countries comparatively more suited for local conditions. The creation of NDB may be viewed as changing the present world economic order to be replaced by new one and may end the continued dominance of West-led financial institutions. It is also felt that macroeconomic issues of BRICS countries will also be dealt effectively by dynamic and extensive quality assessment of loan requirements of the developmental projects supported by NDB.