Will the New Development Bank (NDB) of the BRICS (Brazil, Russia, India, South Africa) reshape the world's financial system? We hope, it will. For long, the BRICS countries and other underdeveloped countries have been saying that the Bretton Woods system that created and shaped the present financial system was uneven and tilted towards the interests of the western advanced economies, especially to those of the USA. There had been no change in the system which was founded immediately after the Second World War by the victors of the war. The two institutions that came into being in 1946 following negotiation among the then big economies and a meeting in the Bretton Woods of the USA were the International Bank for Reconstruction and Development (IBRD) which later became known as the World Bank and the International Monetary Fund (IMF). These two institutions were headquartered side by side in Washington DC of the USA.
Initially, the IBRD was created to bring the war-ravaged Europe out of mess but when European reconstruction was through, the institution engaged itself for development of the poor countries of the world which became its members after attaining independence from the European colonial powers. Unfortunately though, the poor underdeveloped countries became the main clients of the World Bank's funds, but they had little say in its management. Similarly, the monetary system that was created and shaped by the IMF basically served the interests of the USA. The IMF system replaced almost all other currencies as the global reserve money by the US currency dollar and one kind of dollar standard was set by the Fund for payment among the trading countries of the world.
The world saw a dollarisation process and at the same time, dollar-holding countries remained susceptible to the interest of the US Federal Reserve System, the central bank of the USA which issues the currency 'dollar'. Many countries of the world hold a huge amount of greenback, another name for the US currency, from their trade surplus, but with that they were to buy the US treasury bonds or put them in foreign central banks with zero interest rate. In fact, dollar-holding by the member-countries in the reserve accounts benefited disproportionately only one country in the world, that is the USA. The World Bank and the IMF were headed by US and European citizens respectively since their founding.
Many developing countries, including China and India, tried to bring a change in the voting system of these two Bretton Woods organisations but failed. The US and Europe were not ready to give up any percentage of voting powers they held in these institutions in favour of the emerging economies. The voting power was designed in such a way that the USA alone was enough to block any proposal for bringing any change in the institutions' policymaking bodies. Even successive IMF Managing Directors fervently campaigned for bringing change in the management affairs of the Fund, but the US law- making body - the Congress blocked every attempt to change. China, which became the second largest economy in the world in a period shorter than many expected, holds voting powers in the IMF less than many small European countries.
India, China, Russia, Brazil and South Africa time and again expressed their discontentment about the present global financial system but that did not bear any result in the face of opposition from the US policymakers. Meanwhile, China after failing to include its currency Yuan in the IMF's basket of currency SDR turned to bilateral arrangements with its willing trading partners to have its currencies used in bilateral payments. A number of countries now also hold Chinese currency Yuan as one of their reserve currencies.
Brazil, Russia, India, China and South Africa which in acronym became known as BRICS took an initiative to set up their own global development bank named the New Development Bank (NDB) with $100 billion as paid-up capital of which China's subscription is about one-third. The Bank is headquartered in Shanghai and headed by an Indian professional. The funding members pledged to make the Bank inclusive. There were a few other regional development banks operating for almost the same purpose around the world, but the BRICS' New Development Bank (NDB) will be a global bank in the real sense. The world's emerging economies will no longer depend on the US-controlled World Bank for concessionary loan. The New Development Bank will open up another window for fund for the emerging economies.
With the operation of NDB which will be operation from 2016, there will be no shortage of concessionary loans for the emerging economies like that of Bangladesh. In the meantime, BRICS leaders also decided to set up Contingency Reserve Arrangement - CRA of $100 billion which will be used for balance of payment support of the member-countries. It is expected that the proposed CRA will function to an extent like the IMF and will include Chinese and other important currencies in its reserve account. BRICS' NDB will become operational by 2016 and in the meantime, BRICS member-countries shall have to subscribe the allotted capital as well as ratify the charter and regulations of the proposed NDB.
The writer is Professor of Economics University of Dhaka.
email: abuahmedecon@yahoo.com
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