At first it appeared as nothing more than a lot of hot air, limited to loud thinking among the proponents. An inter-continental bank requires cohesion, spirit of co-operation in concrete terms, a good deal of determination and planning which were found wanting. Bluster and not hardnosed calculation of assets and liabilities lay behind the occasional declaration, it was pointed out by sceptics. Rhetoric and not reality played supreme, it seemed. The announcement about the establishment of a new multi-national bank under the aegis of Brazil, India, China, Russia and South Africa (BRICS) gave the lie to all misgivings and speculations. At Fortaleza in Brazil, the sixth summit meeting of heads of states of BRICS member countries declared the birth of a bank and a reserve fund, just like the Bretton Woods twins of the World Bank and the IMF. The parallel is more than symbolic; the twin institutions will replicate the role and functions of the Bretton Woods sisters free from western dominance.
The overarching control of the World Bank and the IMF by Europe and America triggered the process that led to the emergence of the two new international institutions. The emerging countries tried hard to bring about reform in the two existing financial institutions to make the decision making more broad-based and flexible. Their efforts came to naught because of the stubborn opposition of American legislators against any amendment of the existing laws. To the emerging countries the World Bank appeared somewhat obsolete and dowdy, failing to reflect the growing contributions that they were making to the global economy.
Broader global governance reforms remained stalled despite the many commitments made by the advanced economies to allow a more prominent role for emerging countries in international financial institutions. Apart from the lack of democratic governance the two institutions were also criticised for functioning within a conservative, almost reactionary mould. The World Bank's ambivalent attitude to the important sector of infrastructure left the emerging and developing economies almost dismayed and even perplexed. The deficit in this vital sector piled up to the growing frustration of borrowing member countries. Inaction or inadequate response to urgent needs was exacerbated by myriads of conditionalities attached by the World Bank and the IMF to their loans. This not only circumscribed the freedom of borrowers but made use of loans difficult also. Unutilised fund littered the bank balance of many borrowing countries. Untrammelled de-regulation and privatisation dictated by the Bretton Woods duo wreaked havoc in the market which ran amok in many countries. All these past experiences and the present reality of global economy have led to the emergence of the New Development Bank (NDB) and the Contingent Reserve Fund (CRF).
The announcement about the NDB and the CRF marks a new phase in the evolution of BRICS. Until the five member countries of BRICS agreed on this new architecture of development financing the association was little more than abstract, indulging in occasional rhetorical statements. They showed no common programme and developed almost no concrete policy to pursue development agenda and to promote cooperation. The establishment of the NDB and the CRF is equivalent to Big Bang in their short history. These are likely to bring them closer together making them major players in the global economy both as producers of goods and services and as arbiters of international financial architecture, side by side with America and Europe. The stranglehold of the West on the world financial landscape seems to be on the verge of erosion.
There is no doubt that the NDB has made a relatively modest financial undertaking to begin with. According to the agreement reached the NDB will have only US$ 10 billion in paid-in capital with each of the five countries contributing US$ 2.0 billion. In addition, the NDB will have US$ 40 billion that will be paid upon request. Thus the initial funding pool of the NDB will consist of US$ 50 billion only. Another $ 50 billion will be made available to the NDB by BRICS in future. Of the $ 100 billion capital fund of CRF, China will provide $ 41 billion, India, Russia and Brazil will contribute $ 18 billion each. The remaining $ 5.0 billion will come from South Africa.
In the short term, co-operation among the BRICS countries will be measured almost solely on the performance of the NDB. The operation of the Contingent Reserve Fund (CRF), amounting to $ 100 billion, will take time to start, given the complexity of lending for financial stabilisation. The expertise required for lending by the CRF will take time to develop. Even the NDB will find it a slow process to approve loans for infrastructural financing. In the event, it is unlikely to quickly deliver spectacular results in fulfilling its mandate.
In the long run, the challenges to the success of the NDB and the CRF will be chiefly geo-politic, rather than economic. The BRICS may aspire to be the developing world's answer to the G-7. The fundamental differences between the BRICS and the G-7 will greatly influence how BRICS works with each other in managing the NDB and the CRF. The G-7 countries are all democratic and have the same level of development. Geo-politically they are allies in international affairs. In contrast, some of the BRICS countries have geo-political rivalry (India, China) and distrust (China, Russia). Both Russia and China may want to use the BRICS as a counter-balancing forum to the threat from the West. On the other hand, if the bilateral relation between China and India grows antagonistic, institution-building under the BRICS may become difficult. Lack of homogeneity is the greatest challenge to the smooth functioning of the NDB and the CRF.
For now, only BRICS countries will be able to draw from the $ 50 billion in the NDB and $ 100 billion in the CRF. Proof of the new institutions' effectiveness will come when other countries knock on their door for money. The BRICS's bank is scheduled to start lending from 2016 and will be open to membership to other countries. The terms and conditions of new membership will show how far democratic will be the two new institutions.
A promising start has been made by the BRICS to change international financial architecture. It has many challenges to meet and its success cannot be taken for granted.
hasnat.hye5@gmail.com
A bank is born: Promising start to change international financial architecture
Hasnat Abdul Hye | Published: July 25, 2014 00:00:00 | Updated: November 30, 2024 06:01:00
BRICS bank is launched.
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