BRICS and mortar of development financing
Print Edition
Hopes are running high that the New Development Bank launched last week will set a precedent for development banks in the 21st century and help bolster flagging growth in emerging markets.
Also known as the BRICS bank, the new lender is headquartered in Shanghai and has initial capital of US$100 billion. Its founding members are the so-called BRICS nations: Brazil, Russia, India, China and South Africa. Its aim is to help emerging economies, which have been doing it tough amid a general global slowdown.
On paper, the bank certainly has clout. Its five founders accounted for more than half of the world’s economic growth in the past decade. They are home to almost 43 percent of the world’s population and roughly a third of its land area. Their combined gross domestic product is about a fifth of the global total.
Chinese Finance Minister Lou Jiwei said the new bank will be “professional, efficient, transparent and green.”
Joseph Stiglitz, an economics Nobel laureate and professor at Columbia University, said the bank is expected to bring emerging economy governance in line with new global realities, helping to tap an enormous pool of savings in developing countries.
“One important role for the bank is to recycle capital to those best-needed places,” Stiglitz said during a video message screened at the bank’s opening ceremony. “It should avoid a short-term focus and recognize projects that are in the best interests of its members — those with enriching returns and minimized risks.”
At the same time, Stiglitz added, the new bank should seize the opportunity to create growth that addresses “central problems” in modern society, such as climate change, quality of life and environmental protection.
Evandro Menezes de Carvalho, a professor at Fundacao Getulio Vargas in Brazil and a visiting scholar at the Center for BRICS Studies at Fudan University, said the new institution should become a “knowledge bank” that offers vision and solutions to meet the challenges in world development.
Such lofty ideals have tended to obscure a political function. Many analysts have said the BRICS bank, along with the newly created Asian Infrastructure Investment Bank spearheaded by China, are attempts to set up institutions to rival the World Bank and International Monetary Fund, which are regarded as US-dominated and often not accommodating enough to the desires of emerging countries.
That view has been roundly denied.
Kundapur Vaman Kamath, president of the new BRICS bank and a former executive with India’s largest private lender ICICI Bank, made it clear in Shanghai remarks that the bank was not created as a rival but rather as a partner to existing multilateral institutions.
“Our objective is not to challenge the existing system but to improve and complement the system in our own way,” Kamath said.
Last year, the five founding members of the bank signed an agreement that clarified the purpose of the bank is to “mobilize resources for infrastructure and sustainable development projects in BRICS and other emerging economies, complementing the existing efforts of multilateral and regional financial institutions.”
At the opening ceremony in Shanghai last week, the management team of New Development Bank expressed gratitude for the achievements of the World Bank, the IMF and regional development banks in helping poorer countries.
But they have finite funds to address rapidly expanding need.
According to the World Bank, the annual capital gap for infrastructure in developing and low-income countries is between US$1 trillion and US$1.5 trillion, with only about 5 percent of that available from the existing system.
“There will be no ‘jam’ as a result of the creation of the two new banks,” said Jin Liqun, who was nominated by China to become the first president of the Asian Infrastructure Investment Bank. “The world is far from being crowded by development banks.”
Jin said one advantage of the New Development Bank is that its members know precisely what they need, making it a cost-effective way to mobilize funds.
Kamath confirmed that view. He said the management team of the new bank will “listen carefully to the members and try to offer tailor-made services, instead of following a one-size-fits-all approach.”
The World Bank and the Asian Development Bank have welcomed the newcomers.
They pledged their cooperation if joint projects can be created.
“We treat the New Development Bank as a partner,” said Karin M Finkelston, vice president of the World Bank and chief operating officer for the Multilateral Investment Guarantee Agency.
Sun Lijian, a finance professor at Fudan University said innovation should be a centerpiece of the New Development Bank.
“That’s why it has the ‘new’ in its name,” he said. “The unity of all five BRICS countries is already an innovation, and that can help the bank cope with the differences and difficulties ahead to sustain the growth of the bank.”
It took almost three years for the five countries to reach agreement on the bank’s financing, management and headquarters.
Complementing its Indian president, New Development Bank will have four vice presidents, from China, Russia, Brazil and South Africa. Each of the top executives comes with experience in multilateral financing.
Kamath, who made his first trip to China one month ago, said he is extremely confident about the bank’s future.
“We will deliver people’s expectations,” he said in Shanghai.
However, euphoria needs to be kept in perspective, said Leslie Maasdorp, the New Development Bank vice president representing South Africa.
“The bank is two days old,” he said in Shanghai last week. “But a lot of people are already pressing me about details of our first loan, which we don’t expect to be released until the first quarter of next year.”
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