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A major political move: the BRICS launch the New Development Bank and a reserve arrangement

Added 18 Jul 2014
By María José Romero (Eurodad) & Sargon Nissan (Bretton Woods Project)

The city of Fortaleza on the north-east coast of Brazil was the selected place for a major political move by Brazil, Russia, India, China and South Africa – the so called BRICS nations - in mid July. After the 2013 fifth BRICS’s summit held in Durban, South Africa, expectations were raised for the launch of a new development bank and a reserve arrangement as alternatives to challenge the power of traditional international financial institutions dominated by northern rich countries, primarily the World Bank and the International Monetary Fund (IMF). 

How new is the New Development Bank?

The bank created by the five members of the BRICS is called the New Development Bank (NDB). It is set to finance “infrastructure and sustainable development projects in BRICS and other emerging economies and developing countries” and will be based on “sound banking principles.” The bank will provide loans, equity investments, guarantees and technical assistance in support of public or private projects, including public-private partnerships. The financing instruments and the business model – mobilizing finance from international capital markets – are not so distinct from the institutions that already exist. However, officials have stressed repeatedly that the NDB will be a ‘bank of projects’ and not a ‘bank of policies.’ This in itself represents a move away from the traditional practice of the World Bank – which has been heavily involved in influencing developing country governments’ policies through the conditions attached to its lending and its major advisory role. The NDB’s approach is more similar to the project focussed efforts of BRICS countries’ own national development banks.  

Who runs the NDB?

The governance and shareholding structure of the NDB should be held under close scrutiny and is liable to change over time. It will begin with a ‘subscribed capital’ – paid in by the owning governments - of $50 billion, divided equally between the five countries, and an initial authorized capital – representing the maximum additional shares that can be sold -  of $100 billion. The membership will be open to other countries as either borrowing or non-borrowing members. The voting power of each member will be equal to the number of its subscribed shares in the capital stock of the bank. The articles of agreement states that BRICS countries will always retain at least 55% of the total voting power, while the voting power of non-borrowing member countries can’t be above 20% of the total voting power (none of them with more than 7%). In practice one of the implications of this is that borrowing members, i.e. other developing countries, interested in buying NDB shares can only collectively own a maximum of 25% of the total and that all countries, including low-income countries will have to contribute if they want to have voting representation and a (small) say in decision making. This leaves open the possibility that the NDB will finance operations in developing countries that can’t afford, or don’t want to buy shares, and have no say in the governance of the NDB. 

BRICS countries carefully divided their influence over the bank. Each country was given a concession: the headquarters will be in Shanghai, the first president will be from India, the first chair of the Board of Governors will be from Russia, the first chair of the Board of Directors will be from Brazil, and the bank will have a regional office in South Africa. However, nothing was explicitly said about civil society participation, criteria for project selection, transparency or complaint mechanisms. A clear demand from side events organized by CSOs in Fortaleza is that the BRICS should avoid the mistakes of northern-dominated development finance institutions, which have overwhelmingly prioritised profit oriented projects, often at the expense of promoting sustainable and equitable development.  

New reserve arrangement: a challenge to the IMF?

A revealing dimension of the BRICS’ communiqué is the ‘alternative’ to the IMF, the $ 100 billion Contingent Reserve Arrangement (CRA). Some commentators have seen the CRA as a historic blow to the IMF’s relevance and centrality, even perhaps to the primacy of the dollar. But scratch the surface of the agreement, and Madame Lagarde, the IMF’s Managing Director, can rest easy. The agreement is not a true fund whereby each member is putting actual money aside to be pooled together. It is a commitment to provide money if a crisis emerges – in the meantime the cash stays at home. 

The differences in BRICS countries’ economic resources mean that the commitment from each country is not equal from the outset. China will promise $41 billion, Brazil, Russia and India $18 billion each and South Africa just $5 billion. When you know that India alone has a likely budget deficit in 2013/14 in the order of four fifths of total CRA’s resources, it becomes clear that the CRA does not yet have the firepower provide critical bailout financing in the case of a crisis. 

The maximum access, or borrowing limit, for each member is set as a multiple of each member’s CRA commitment, for China the multiplier is half of what it has committed, for Russia, India and Brazil it is equal to the total commitment. Only South Africa could, in case of crisis, receive double its $5 billion maximum commitment. But even that access will come with strings attached. The CRA will only provide up to 30 per cent of the maximum each member could access without turning to the IMF to implement a programme to monitor the borrowing country’s economic performance. 

The CRA’s true nature calls into question the extent to which the BRICS are really breaking from the existing international development architecture. It also suggests that the CRA is heavily symbolic. Though the 30 percent ‘no-strings’ access will be valuable to deter financial attacks from speculators, it is far from being a true bailout fund. Despite all its tribulations in Europe – where as part of the ‘troika’ with the European Commission and European Central Bank it is under fire for failing austerity policies and lingering debt crises -  the IMF’s scale (with access to almost $900 billion), its army of economists and its global presence dwarf the CRA’s ambition. 

A challenge to the old order

Regardless of similarities and differences with existing institutions, the NDB will represent an alternative source of finance for developing countries and a political response to institutions that have failed to adapt to the new economic order. In the communiqué the BRICS pointed out the lack of democratic governance of the World Bank. While there was an acknowledgment of the “potential of [the World Bank’s] new strategy” they mentioned that “this potential will only be realized, if the institution and its membership effectively move towards more democratic governance structures,” something that these countries have been calling for in each and every international fora in which they participate.  

Similarly, the CRA seems more of a political gesture to articulate the frustration BRICS and other developing countries feel about the failure to make the IMF’s governance provide more voice to developing countries. The CRA agreement holds open the possibility that new members could also join. All but exceptional decisions will only require a simple majority of vote shares, which under the announced voting system, means that no member (not even China) has a veto – in stark contrast to the United States’ position within the IMF. 

So did the outcomes of the BRICS summit meet expectations? The political and deliberately symbolic nature of the announcements has stirred the waters, and begins to put substance behind the BRICS’ challenge to the old world order and the Bretton Woods institutions. It also places the role of industrial policy and active state at the centre of this discussion – a shift which was already occurring in the multilateral development finance context. However, in many ways the new institutions replicate the old, and an awful lot remains to be worked out in terms of practical implementation. The NDB and the CRA are therefore better seen as a demand from the BRICS to have a bigger space at the table – mirroring the yielding of the G8 to the G20 – than genuine progress for all developing countries.