BRICS Economies Launch the New Development Bank

Leaders from Brazil, China, India, Russia and South Africa – the so-called ‘BRICS’ emerging economies (EMs) – will today announce the launch of a development bank, to be called the New Development Bank (NDB), coupled with an emergency reserves fund. The announcement comes as BRICS leaders attend a summit meeting in Brazil.

The project was originally agreed to at
an earlier summit in Durban, South Africa
in March 2013. The new bank will seek to establish an international presence by offering developing nations alternative financing to the World Bank and its private lending arm the International Finance Corporation (IFC) as well as the International Monetary Fund (IMF), long dominated by the US and Europe.

However, the competition is unlikely to greatly trouble the World Bank, which has acknowledged that more funding sources are required for major infrastructure projects. As the Bank notes on its website: “The gap is estimated at US$1 trillion in low and middle-income countries, and the demand for infrastructure continues to grow as countries develop.”

The concept of a ‘BRICS’ bank has also been supported by major economists, including Nobel Prize winner Joseph Stiglitz, who described it as “an idea whose time has come”. However, the chosen title of New Development Bank acknowledges that other EMs such as Turkey, Mexico, Indonesia and Nigeria may join as partners at some future date.

“Such a bank could play a strong role in rebalancing the world economy by channelling hard-earned savings in emerging markets and developing countries to more productive uses than funding bubbles in rich-country housing markets,” the economists said.

The BRICS will initially pool US$50bn or just under £30bn in the NDB, with each country contributing an equal amount. Its main function will be to mobilise “resources for infrastructure and sustainable development projects in BRICS and other emerging economies and developing countries”.

Additionally, a US$100bn joint US dollar currency reserve pool called the Contingent Reserve Arrangement (CRA), will offer emergency cash to BRICS countries faced with short-term currency crises or a balance of payments problem.

Many of the NDB’s rules of operations, such as future investment in private projects, will be decided after its formal creation at this week’s summit in the Brazilian city of Fortaleza. The bank is expected to make its first loan in 2016.

BRICS leaders will also decide which country will hold the first five-year presidency of the bank and whether it will be headquartered in Shanghai or New Delhi, with reports suggesting that Shanghai is the more likely choice. Since the project was first unveiled there have been concerns – not entirely dispelled – that China could take a commanding position as its economy exceeds those of the other four BRICS nations combined in size.

The term ‘BRICS’ was the invention of former Goldman Sachs economist Jim O’Neill, who first coined it in 2001 – although at the time South Africa was not included as the fifth member. By 2009, the term had caught on with leaders of the five countries, who began holding annual summits with a view to enhancing their collective influence globally.

 

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