BRICS Development Bank – An Alternative to the IMF and World Bank?

Namrata Janani

BRICS summit participants: President of Russia Vladmir Putin, Prime Minister of India Narendra Modi, President of Brazil Dilma Rousseff, President of China Xi Jinping, President of South Africa Jacob Zuma. Credit: via Wikimedia

BRICS summit participants: President of Russia Vladmir Putin, Prime Minister of India Narendra Modi, President of Brazil Dilma Rousseff, President of China Xi Jinping, President of South Africa Jacob Zuma. Credit: via Wikimedia Commons

In 2014 at a summit in Brazil it was announced that a BRICS development bank would be established. Scepticism is likely to arise when it is announced that a new bank (the New Development Bank) is going to be created to influence the current global financial order, especially after the reputation of the World Bank and IMF, which are primarily dominated by the West. Therefore, a ‘development’ bank led by the BRICS could be seen as a positive move to tackle major development issues such as sustainability and infrastructure. With a key issue of the gap widening between the value of developing countries GDP and their influence and voting privileges in the IMF and World Bank governing arrangements, the NDB would be sure to eliminate such governance issues.

The bank will be headquartered in Shanghai in China to fight financial crises, which will be an alternative to the IMF and will also provide loans for infrastructure projects across the Global South as an alternative to the World Bank. Initially, the BRICS will pool $50bn in the bank and each country will contribute an equal amount. Following the enervating impact of the 2007-2008 Great Recession, the BRICS have also established a joint foundation of $100bn Contingent Reserve Arrangement (CRA), which will allow member countries to access the necessary funds during a time of crisis. Furthermore, the CRA will also open up a path for emerging powers to pool their massive foreign exchange reserves together which paves the way for shaping their national monetary policies and jointly expanding their influence in global financial markets.

With concerns highlighted amid developing countries regarding the delay to IMF quota and governance reforms emphasised in the G20 Finance Ministers and Central Bank Governors Meeting held in Istanbul on the 9th and 10th of February 2015, it would seem necessary for a New Development Bank to arise and rectify the current problems these countries have with the IMF and World Bank and insure they have a transparent governance system and steer away from architectures of the Bretton Woods system since 1944. The NDB represents the change in the financial system with the BRICS countries, now with the Asian BRICS preceding to hold 25% of the world GDP by 2025 with China becoming the world’s largest economy.

One of the most questioned policies of the IMF or World Bank arises from the structural adjustment policies (SAPs) of the receiving countries. This is due to SAPs coming with harsh measures and unrealistic ties, which have been argued to favour the west and is a key ingredient in modern neo-colonialism .The NDB will instead provide funds without SAPs or other restraints, which will give countries the chance to freely decide how to overcome any socio-economic crises they face.

However, there have been many concerns of whether the current procedures and governing decisions of the NDB will make it an ‘alternative’ option to the IMF and World Bank. China holds a clear dominance within the BRICS group and it has also been chosen to host the NDB. This could be quite worrying if it parallels the outcome of the World Bank and IMF headquarters, with the US holding the highest shares and voting rights. However, the design of the NDB ensures that all BRICS member’s will be given a primary position within the bank; as of 11 May 2015, K. V. Kamath from India was appointed President of the Bank, the inaugural Chairman of the Board of Directors will be from Brazil and the inaugural chairman of the Board of Governors will be Russian. In other words, the bank is working towards ensuring all leading members have an equal say within the bank.

The success of the bank also faces some inherent risks, with the internal problems that some of the BRICS members face. Brazil face a slowing economy, having contracted by 0.2% in this quarter according to some analysts, and predictions are that Brazil’s GDP will drop by 1.2% for 2015. Combined with sluggish levels of global growth and low investment confidence as well as internal issues with overspending, high inflation rates and a weaker currency, much will have to be done to reverse Brazil’s economy to ensure stability. China too is trying to recover from a slowing economy having fallen to 7.0% from 7.3% in the last quarter of 2014. These internal issues will need to be resolved to ensure a successful running of the bank.

However, with the enormity of the issues that the bank intend to resolve, especially the infrastructure programs and its redistributive process in the governing of the bank, means that only time will be able to tell whether the New Development Bank will become a leading functional institution, balancing the IMF and World Bank in the future.

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