BRICS by Brick

Will the BRICS De­vel­op­ment Bank lead to the es­tab­lish­ment of more such in­sti­tu­tions like a SAARC bank to bol­ster re­gional eco­nomics?

Southasia - - CONTENTS - By M. Ali Ke­mal

The BRICS bloc, for­merly known as BRIC be­fore South Africa joined it in 2010, is a con­sor­tium of five newly in­dus­tri­al­ized ad­vanced economies which in­clude Brazil, Rus­sia, In­dia, China and South Africa. Th­ese five na­tions have 40 per­cent of the world’s pop­u­la­tion, ac­count for 20 per­cent of the global eco­nomic out­put and hold among them $4 tril­lion as for­eign ex­change re­serves.

Fac­tors such as the de­crease in the mon­e­tary pol­icy by the U.S. dur­ing the last re­ces­sion fol­lowed by the re­duc­tion in the World Bank’s fund­ing forced the BRICS coun­tries to think of an al­ter­na­tive bank­ing sys­tem which could fi­nance their de­vel­op­ment projects. In March 2013, it was de­cided in the 5th sum­mit of BRICS that the bloc would form a ‘BRICS De­vel­op­ment Bank’. In July 2014, at their 6th sum­mit at For­taleza, Brazil, the five coun­tries signed the agree­ment to es­tab­lish the new bank.

Ini­tially, ev­ery mem­ber coun­try will con­trib­ute $10 bil­lion to raise $50 bil­lion – the start­ing cap­i­tal of the bank – and will grad­u­ally in­crease their share to $100 bil­lion. The pri­mary fo­cus of the bank will be on pro­vid­ing funds for in­fra­struc­ture projects, such as roads, en­ergy, ed­u­ca­tion, health, etc. Lend­ing is ex­pected to start from 2016.

The New De­vel­op­ment Bank

(NDB) is seen as a com­peti­tor to the World Bank, the Asian De­vel­op­ment Bank and the IMF be­cause its main ob­jec­tive is to pro­vide funds to de­vel­op­ing coun­tries. On an in­ter­est­ing note, the NDB will not de­cide on the projects that come up for lend­ing. It will only choose from among the projects that ask for its lend­ing support. More­over, un­like the World Bank and the IMF, the NDB will not frame its own con­di­tions for loans. This will help coun­tries to follow their own poli­cies.

Apart from pro­vid­ing World Bank-type lend­ing, the bank also has the pro­vi­sion of lend­ing IMF-type loans. This type of lend­ing is called Con­tin­gent Re­serve Ar­range­ment. It is a self-man­aged sys­tem to avoid short­term bal­ance of pay­ment prob­lems. It will start with a cap­i­tal of $100 bil­lion; China has the largest share of $41 bil­lion and South Africa the small­est with $5 bil­lion, while the rest of the coun­tries will con­trib­ute $18 bil­lion each.

Un­like the World Bank and the IMF, where the U.S. dom­i­nates the poli­cies by virtue of hav­ing the power of veto, in the NDB ev­ery coun­try has equal num­ber of votes. Although China, be­ing the largest coun­try in the group, can ex­er­cise more con­trol, it wants to stay away from any kind of dom­i­nance in the group, mak­ing way for the other four coun­tries to work in a demo­cratic way in­stead of get­ting bogged down in po­lit­i­cal in­trigues.

Although cur­rently only the BRICS mem­bers have ac­cess to the funds avail­able with the NDB, they can al­low other coun­tries to join the NDB with or with­out hav­ing vot­ing rights. How­ever, BRICS’ cap­i­tal share can­not fall be­low 55 per­cent. This im­plies that if In­dia can ask other coun­tries to join and get their vot­ing shares in the NDB then whoso­ever has more coun­tries on its side can ma­nip­u­late the de­ci­sions of giv­ing loans by hav­ing more votes.

Con­sid­er­ing the fi­nan­cial uncer­tain­ties in the global mar­kets it is hoped that the NDB will sta­bilise fi­nan­cial flows to the de­vel­op­ing economies which were volatile dur­ing the re­ces­sion. Sta­bil­ity in fi­nan­cial flows will even­tu­ally sta­bilise the econ­omy of BRICS coun­tries. This will, in turn, put th­ese coun­tries on the path of sus­tain­able growth in the long run.

It is a fact that the dic­ta­to­rial strings at­tached to World Bank and IMF loans are so harsh that they don’t al­low the re­cip­i­ent coun­tries to for­mu­late their own poli­cies. Both in­sti­tu­tions put cer­tain con­di­tions to re­lease each in­stal­ment of loans. With the emer­gence of the NDB, the de­pen­dence of the world com­mu­nity on the WB and the IMF will de­crease over time.

With a higher sus­tain­able growth, In­dia’s sta­tus in the re­gion, es­pe­cially among the SAARC coun­tries, is likely to in­crease. While it will be in a po­si­tion to pro­vide funds on its own, other SAARC coun­tries can also ben­e­fit from the NDB by join­ing it, es­pe­cially to solve their short-term bal­ance of pay­ment prob­lems.

It is still un­clear what cur­rency will be used for the bank’s re­serves – U.S. dol­lar or Chi­nese yuan. Ap­par­ently, two ma­jor coun­tries, China and In­dia, have a good amount of for­eign ex­change re­serves in U.S. dol­lar. Nev­er­the­less, In­dia’s bal­ance of pay­ment is con­sis­tently neg­a­tive, while China has been en­joy­ing a cur­rent ac­count sur­plus for many years now. If Yuan is se­lected as the re­serve cur­rency then the coun­tries can eas­ily bor­row from China ir­re­spec­tive of the U.S.’ in­flu­ence to re­lease Chi­nese for­eign ex­change re­serves held at the U.S. trea­sury. More­over, In­dia can boost trade with China and fi­nance its in­fra­struc­ture projects us­ing Chi­nese tech­nolo­gies.

Even if the re­serve cur­rency is U.S. dol­lar, for not mak­ing China more pow­er­ful in the BRICS, the hy­poth­e­sis of sus­tain­able fi­nan­cial flows ir­re­spec­tive of global re­ces­sion be­comes even stronger given the ar­gu­ment that China holds a good amount of re­serves and can en­sure cash flows if any coun­try is in dire need. China is also the max­i­mum contributor in the CRA fund.

In­dia will get sev­eral ben­e­fits by ob­tain­ing loans for in­fras­truc­tural de­vel­op­ment. It could be en­er­gyre­lated projects, roads or ed­u­ca­tional de­vel­op­ment. Th­ese projects will not only boost In­dia’s GDP growth but will also at­tract peo­ple from all over the world as well as from SAARC coun­tries to In­dia – although Pak­istan may be an ex­cep­tion. More­over, it will also raise the stan­dard of liv­ing of the or­di­nary In­dian.

Ac­cord­ingly, In­dia will be in a good po­si­tion to set up a SAARC de­vel­op­ment bank which is also on the wish list of In­dian Prime Min­is­ter Naren­dra Modi. The coun­try can act as an ex­pe­ri­enced mem­ber and take the driver’s seat if such a bank is set up.

It is clear that In­dia’s sta­tus will con­sid­er­ably in­crease in the re­gion, es­pe­cially among the SAARC coun­tries, due to the NDB. Thus In­dia needs to be ex­tra care­ful in for­mu­lat­ing its for­eign as well as do­mes­tic and eco­nomic poli­cies as they can af­fect the smaller coun­tries in the re­gion. And if it wants to fur­ther bol­ster its sta­tus in South Asia, what other way to do it than form­ing a SAARC bank!

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