Building a new development bank, brick by BRICS

After much debate, Brazil, Russia, India, China and South Africa — often referred to as BRICS — finally announced last week the establishment of a “new development bank” that hopes to rival the strength and influence of the World Bank. Meeting in its sixth summit in Fortaleza, Brazil, the bloc’s decision to give birth to the new financial institution not only signals a shake up in the international development scene, but also underlines the growing prominence of new and emerging donors. There’s already a lot of buzz in India about the creation of a South Asian Development Bank. More details are coming out on China’s planned Asian Infrastructure Investment Bank as well, which is reportedly causing quite a stir at the Asian Development Bank, currently the region’s sole multilateral development institution. The New Development Bank, experts consulted by Devex argue, could be an additional source of financing as well as knowledge. It will have a $50 billion initial subscribed capital — $10 billion from each BRICS nation — with an authorized capital of up to $100 billion. It will be based in Shanghai, China, despite Johannesburg’s offer to host the bank to compensate for a part of their share. The inaugural five-year leadership will be given to India, followed by Russia and Brazil. South Africa, meanwhile, will set up the bank’s first regional office. The basic structure of the bank will be centered on the five members of the bloc, with equal voting rights, at least initially. It was agreed that no one member can increase share holdings without the approval of the other four and, to prevent unequal operations, the cap for additional shares will be $7 billion. While the creation of the BRICS bank has been generally viewed with anticipation given its potential to add much-needed financial clout in an otherwise resource-strapped development community, some have expressed concern. One of the biggest issues is the bank’s own impartiality and objectivity beyond the interests of the five founding members. The second issue is whether the bank will comply with international standards once it starts implementing large-scale development projects. “Potential and reality often come into conflict at development institutions … as vested interests focus more on personnel picks, prerogatives and preserving the status quo than on instituting critical reforms,” Curtis Chin, former U.S. ambassador to ADB, told Devex. These issues are not isolated, as they also confront the inevitable establishment of AIIB given China’s reputation of doing things its “own way” — which most of the time is not particularly agreeable to international safeguards and policies. Even the more established development institutions are no exceptions. The World Bank itself is currently battling rough waters for more than a year over President Jim Kim’s reforms that came into effect July 1. Variety and choice Given these challenges, why still push for a separate bank? Why not just focus on making the existing ones better? For one development expert, the creation of the BRICS bank offers several advantages. “More institutions mean more resources, but I believe the big thing on offer is choice,” Christopher Wood, researcher at the South African Institute of International Affairs, told Devex. “The ability for developing countries to choose between different sources of funding gives them scope to find the funder that best meets their needs, and puts pressure on the development institutions to remain responsive to the needs of beneficiaries.” Chin added that such competition (and collaboration) “may well drive new ideas and innovations” on top of additional financing and the possibility of pushing these institutions to be more responsive — something that could only benefit developing countries in the long-run, particularly in cofinancing large development projects that existing MDBs and their donors are not too keen on implementing these days. Although details on country membership are not yet clear for the New Development Bank, it is expected to eventually give out loans at favorable rates to compete with other MDBs. This is something that China is doing in Africa, where it has been offering interest-free loans over the past few years. But whether this is something that will be beneficial or not to developing nations is still up for debate. The BRICS bank, though, should watch out for potential pitfalls once it starts operations, including possible overlap of efforts and falling for the more negative version of BRICS — bureaucracy, regulation, interventionism, corruption and sectarianism, Chin said. An overlap in efforts, in particular, would be a waste of time and money, although the former U.S. envoy to ADB added that condemning the bank in its infancy will be shortsighted. The focus, he said, should be on building a “strong and ideally complementary [and] competitive institution.” How to stand out What could — or should — the BRICS bank do to blaze its own trail in an already populated community of international financial institutions? Chin and Wood shared their insights: 1. Stamp its brand as a development bank by the developing world for the developing world. Since the founders are emerging nations, it is a “symbolic statement on the growth of the developing world,” Wood shared. 2. Continue to keep institutions, like ADB and the World Bank, on its toes so they come up with innovative development institutions. 3. Assure the rest of the international development community that sustainable development — and not vested interests — will be the bank’s main goal, and that the bank will have a “fair and democratic decision-making structure.” 4. Despite the huge risk and money required, prioritize long-term funding — with a strong focus on infrastructure — through cofinancing, guided by safety and environmental policies. “The key is to ensure through transparent systems and strong accountability that no one is made worse off by these emerging institution’s efforts to speed necessary development,” Chin said. “It is never easy for today’s multilateral development banks to balance some developing nations’ calls for development ‘above all else’ with the calls of some of the more developed nations for equal emphasis on environmental protections and respect for human rights.” The creation of the BRICS bank is complemented with the establishment of the Contingent Reserve Arrangement, a $10 billion reserve fund shared equally by the five nations, to provide against global liquidity pressures in case a financial crisis, like in 1998 and 2008, happen again. It is seen as the bloc’s answer to rising frustrations at the International Monetary Fund. Other issues The train has been built, but the tracks are yet to be finished and polished. What are the requirements for countries to join and avail of the loans and grants of the bank? Is everyone welcome, or will there be restrictions, unequal rights and privileges? Will the operations be felt only in the BRICS nations or will the rest of the developing world, particularly the most impoverished nations, benefit from the new institution? And if and when the bank opens itself up to other countries, what will be the process for choosing its leadership? In terms of conditionality, will the new bank operate as China does, with little conditionality, or with a different kind of “strings attached”? These are some of the gnawing concerns the bloc has yet to address. “What … will the BRICS bank commit to in terms of a transparent personnel and then project selection process?” Chin asked. “Those are critical questions that need to be thought through in the establishment of any new multilateral development bank.” Personnel may also be a dangling issue for the BRICS bank given its clear need for experience and skill, but that may put established international institutions at risk of losing their experts, as seen by the impending establishment of AIIB on ADB. Wood noted, however, that experts for the new bank may more likely come from members of the bloc themselves, like those from the Brazilian Development Bank and the South African Development Bank. This may actually be a good thing for these institutions, Wood added, saying this could be a brain gain instead of a brain drain. “These banks will probably provide some of the initial staffing, but I wouldn’t see this as a loss to their home institutions, but rather as an opportunity to gain influence in the NDB and to learn from their BRICS partners,” he concluded. Check out more insights and analysis provided to hundreds of Executive Members worldwide, and subscribe to the Development Insider to receive the latest news, trends and policies that influence your organization.