The announcement of the launching of a development bank by the BRICS (Brazil, Russia, India, China and South Africa) countries last month has generated mixed reactions, centring mostly around the query whether this initiative jointly struck by the five potentially powerful nations is going to institute a new world order by way of challenging, if not thwarting, the influence of the World Bank (WB) and the International Monetary Fund (IMF).
Leaders of the five BRICS countries launched the long-promised development bank and a reserve currency pool, marking their foray into global financial system, independent of the one that is dominated by the IMF and WB. The decision to establish the bank was agreed to by BRICS leaders more than a year ago at the fifth BRICS summit held in Durban, South Africa. Lately, on July 15, 2014 the leaders inked the document at the BRICS Summit held in Fortaleza, Brazil. The document envisages creation of US$100 billion BRICS Development Bank and a reserve currency pool worth over another $100 billion. The bank will have the initial capital of $50 billion, to be increased to $100 billion over time. Brazil, Russia, India, China and South Africa will contribute at this stage $10 billion each to bring the total to $50 billion. Each member cannot increase its share of capital without all other members agreeing. The bank's primary focus of lending will be infrastructure projects with authorised lending of up to $34 billion annually. The reserve currency pool is for providing support through liquidity and precautionary instruments in response to actual or potential short-term balance of payments (BoP) pressures. Shanghai was selected as the bank's headquarters. The first president will be from India, the inaugural Chairman of the Board of directors will be from Brazil and the inaugural chairman of the Board of Governors will be from Russia.
The establishment of the bank is the first major achievement of the BRICS countries since they got together in 2009. That the formation of the bank is an important landmark in the international financial system is amply clear from the fact that BRICS account for almost half the world's population and about one-fifth of global economic output (20 per cent of world gross domestic product or GDP) and 17 per cent of international trade.
There is no denying that the establishment of the BRICS bank reflects dissatisfaction with the current governance of multilateral financial institutions such as the IMF and the World Bank. The five BRICS countries have been asking for a larger share of voting power in these institutions, a share that they consider would be more commensurate with their expanding economies.
No doubt, the BRICS bank sends a strong signal to the United States and other Group of Seven (G7) developed economies that there can be alternatives to existing institutions. However, experts are of the view that to materialise the signal into a challenge, it will take a while before the bank can reach its cruising altitude. The member countries will need to answer many tough questions. For instance, how will the smaller South Africa manage the influence of a much larger China? Amadou Sy -- Senior Fellow in the Africa Growth Initiative and member of the Editorial Board of the Global Credit Review -- rules out the challenge theory, saying, "I do not see the BRICS bank being a rival to the IMF as the IMF is not in the business of financing infrastructure and development projects. Instead, the IMF is more akin to a global firefighter that lends to countries in difficulty."
There are economists and financial experts who find it hard to see how the new BRICS bank will rival the IMF, since the older institution has more capital. The BRICS Bank starts with $50 billion, contributed by its members for development funding, along with a contingency reserve fund of $100 billion primarily from China, with smaller contributions from the other four. The IMF's new arrangement to borrow credit line alone can provide the equivalent of more than US $500 billion, beside other credit lines for low-income countries.
The crux of the issue, as one would sensibly like to see, is not the muscle-flexing - a gesture that the media, especially in the developing world, have taken a fancy to stress upon since the announcement of the bank. What is important, more than the perceived challenge to the WB or the IMF, is that in the age of globalisation these five nations have opted out of the existing institutional set-ups in their future dealings in important matters as money and finance, and in that they have chosen a platform of their own that might in course of time usher in a new world order on the global financial front.
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