Economy

The BRICS Bank isn’t Challenging the System, Only Western Leadership of It

The launch of the New Development Bank is excellent news from a development perspective

A HIGH TABLE OF OUR OWN: Presidents Vladimir Putin, Dilma Roussef, Jacob Zuma and Xi Jinping with Prime Minister Narendra Modi during the BRICS Leaders Meeting in Ufa, Russia, in July 2015. Credit: Elmond Jiyane, GCIS, CC 2.0

A HIGH TABLE OF OUR OWN: Presidents Vladimir Putin, Dilma Roussef, Jacob Zuma and Xi Jinping with Prime Minister Narendra Modi during the BRICS Leaders Meeting in Ufa, Russia, in July 2015. Credit: Elmond Jiyane, GCIS, CC 2.0

Less than a month after the signing ceremony of the China-led Asian Infrastructure Investment Bank (AIIB) in Beijing, another global financial institution was launched 1200 kilometres further south. Based in Shanghai, China’s financial hub, the New Development Bank’s creation marks an important step in the history of the BRICS grouping. After being a mere investment category between 2001 and 2007 and an informal platform between 2008 and 2014, the launch of the NDB marks the beginning of a new era for an unlikely grouping that has been confronted with broad skepticism and rejection in the Western media since the very beginning. While the Asian Infrastructure Investment Bank has received far more media attention – largely due to the United States’s ill-conceived attempt to keep others from joining it – the NDB will begin with initial capital of $100 billion, the same as the AIIB. The five BRICS countries all have equal voting shares.

Three questions matter: First, how will the NDB influence ties between member countries? Second, how will it affect development and lending practices (conditionalities)? And finally, and most importantly, is the BRICS-led bank proof that the BRICS have a revisionist agenda as far as the international system is concerned?

With regard to ties between member countries, the creation of the bank – along with the Contingency Reserve Agreement (CRA) – is set to strengthen the relationship between central banks, national development banks and finance ministries. Yet, the existence of the bank should be used to generate additional ties not only between governments, but between societies, which know very little about each other. There are many ways in which the bank could serve as a platform. For example, the NDB should encourage doctoral students in economics from BRICS countries to spend time at headquarters in Shanghai to conduct research. Whenever the bank’s decision-makers travel to member countries, they should engage with civil society to explain the bank’s activities. Most Brazilians, Russians or Chinese have never heard of the bank, yet a broad public discussion can only benefit the new institution. The bank’s leading policy makers should regularly participate in discussions at research institutes and universities around the world. In addition, the Bank’s website should provide detailed information about lending practices, project information and – similar to the World Bank – global economic data. All that could help turn the NDB into far more than a bank: a platform to generate and promote cutting-edge knowledge about development.

The NDB’s impact on lending practices will only become evident in the coming years. As Green and Kalomeris point out,

on the one hand, the bank can be seen as an alternative to the Western-based conditionality of existing institutions. MDB loan conditions are often called excessive or even hypocritical when requirements exceed the actions of the lender at a similar point of development. On the other hand, if it supports projects with controversial environmental, social, or corruption concerns, the NDB is left open to criticism.

Irrespective of the NDB’s lending strategy, the new bank is welcome news from a development perspective. The developing world badly needs greater investment in infrastructure, and none of the existing banks have been able to satisfy such a massive demand. In India alone, the expenditure needs for infrastructure amount to an estimated $2 trillion in the coming decade. Over the past years, Nicholas Stern, Joseph Stiglitz, Amar Bhattacharya, and Mattia Romani have campaigned globally for the creation of a new BRICS-led bank. As the four economists point out in a 2013 op-ed,

The infrastructure requirements in emerging-market economies and low-income countries are huge – 1.4-billion people still have no reliable electricity, 900-million lack access to clean water and 2.6-billion do not have adequate sanitation. About 2-billion people will move to cities in the next 25 years. Policy makers must ensure the investments are environmentally sustainable. To meet these and the other challenges, infrastructure spending will have to rise from about $800bn to at least $ 2-trillion a year in the coming decades or it will be impossible to achieve long-term poverty reduction and inclusive growth.

The NDB’s impact on global governance remains perhaps the most interesting question, even though it will take years before we gain a clearer understanding of whether and how it will affect existing structures.

Many observers see the bank as proof that the BRICS have a revisionist agenda. Varun Sahni, for example, argues that the establishment of the NDB is “a strong example of revisionist power aggregation, insofar as it challenges the structures and legitimacy of the World Bank and the International Monetary Fund.” Yet calling the BRICS countries revisionist would be misguided. Quite to the contrary, the NDB’s launch underlines the BRICS’ willingness to help fix a system that no longer satisfies existing demands. Only those who regard US leadership – rather than the system’s rules and functionality – as the decisive element of today’s order will call the BRICS revisionist.

As Daniel Chardell correctly writes,

(…) the NDB and CRA mark the BRICS’s response to the widely acknowledged shortcomings of the existing global financial system. A common desire to reform global economic governance was the issue that drove the BRICS together and gave them legitimacy in the aftermath of the global financial crisis. For years, the BRICS have demanded an overhaul of the Bretton Woods institutions, where Western powers remain overrepresented at the expense of emerging economies. China, the world’s second-largest economy, has just 3.81% of total votes in the International Monetary Fund (IMF). To put that in perspective, France and the United Kingdom each have 4.29%, yet their economies are three times smaller than China’s, according to the latest IMF data. Clearly, some reshuffling is long overdue.

The launch of the NDB is a huge success for the BRICS grouping, but the grouping’s greatest challenges lie ahead. Creating a globally active development bank is fiendishly difficult, and the BRICS will be wise to draw from existing institutions’ experiences. In a sign of welcome pragmatism by member countries, the bank’s key decision-makers, such as K.V. Kamath, who comes from the world of private banking, and Nogueira Batista, an IMF man, possess expertise from established bodies.

While the new institutions must first show that they can make a tangible contribution to addressing international development challenges, the NDB – along with the AIIB – may serve as symbols of a very different global institutional landscape: more complex, less Western-centric, but ultimately more adequate for a multipolar world.

Oliver Stuenkel is a Brazilian scholar and Assistant Professor of International Relations at the Getúlio Vargas Foundation in São Paulo. He is the author of IBSA: The Rise of the Global South? (Routledge, 2014), BRICS and the Future of Global Order (Lexington, 2015) and the forthcoming Parallel Worlds (Polity, 2016).

  • DON

    I wish the BRICS Bank, NDB, CRA, and the AIIB, all the very best!
    They are ALL needed, in order to balance out the current (American-Controlled) lenders’ attrocious demands and restrictions for the allocation of funding.
    The Troika, that has strangled Greece, AND MANY OTHER EMERGING COUNTRIES’, deserves some REAL competition.
    Keep up the good work, Brazil, Russia, India, China and South Africa. The world is watching with bated breath, to see you succeed!

  • Eugene Salov

    The System may be perfectly new,all depends from the behaviour of the United States of America on the International Arena! The nonlaw of the quantity of Money in the sphere of Circulation are making this already old System as already obsolete excessive speculative System,becoming the origin of mass unemployment,hyperinflation,misery and wars!