By Anubhav Gupta

Edited by Nandita Singh, Senior Editor, The Indian Economist

The BRICS Development Bank is a multilateral development bank set up by the BRICS countries (Brazil, Russia, India, China and South Africa). These countries contain more than 40% of the world’s population, cover more than 25% of the world’s land area and account for more than a quarter of the world’s GDP. Headquartered in Shanghai, the bank consists of two institutions. The New Development Bank, with $50bn in initial capital, will finance infrastructure and sustainable development projects (much like the World Bank), and the Contingent Reserve Arrangement, with $100bn in initial capital, will provide assistance to members in financial difficulty (much like the IMF).

A bank born out of politics

For several years the BRICS countries have tried in vain to carve out a larger role for themselves in the World Bank and the IMF, as the US and the EU dominate both the institutions. In its 70-year history, the World Bank has always had an American President. Similarly, the IMF has always had a European Managing Director. The US and the largest European countries hold the majority of the voting rights in both the institutions. In fact, the US is the only country to have a de facto right of veto at the World Bank.

The IMF’s quota system for assigning voting rights has been a major bone of contention between the developed and the developing countries. Each member country is assigned a quota that is supposed to reflect the country’s GDP and assigns proportional voting rights. However, the quotas have not been revised for a long time. Reforms to increase the voting rights of emerging economies like India and China have been blocked by the US Senate. It is against this backdrop that the BRICS Bank was born.

Membership Structure

Each of the 5 BRICS countries has contributed equally to the fund. To stop a single member from dominating, any new capital contribution by a member has to be approved by all the members. Also, each member will have one vote with no country possessing veto power. The key posts and locations have been divided among all the members.

A Challenger to the World Bank and the IMF

The US and the EU are cutting off significant portions of their funding to international institutions. The European Union is struggling to shrug off the effects of the sovereign debt crises of the southern European countries. Even relatively stable economies like Germany, the UK and France are showing minimal growth or stagnation and struggling with austerity measures. The US has its own financial crisis to recover from, with unemployment remaining high, and there is a growing belief among the Americans that the government should reduce foreign aid and funding and get its own house in order first.

The BRICS Bank hopes it can exploit this gap and emerge as a credible lender to other developing countries, many of who are disillusioned with the World Bank and IMF due to their stringent lending conditions (sometimes outright servicing Western interests). The austerity measures imposed by the IMF have destabilized governments and caused public outcry in Italy, Greece, Ireland, and Portugal.

Similarly, the World Bank has a long and checkered history of dealing with developing countries. Its demand for water privatization in Bolivia and its complicity in the land grab that destroyed large parts of the Brazilian rainforests in the 80s are only two incidents in a lengthy list of controversial lending policies. The BRICS Bank says that since its member countries face the same challenges as other developing countries, it is better equipped to take on infrastructure projects in these countries.

Also, at the time of their formation, both the World Bank and IMF were expected to contribute significantly to the promotion of free trade. Fast-forward 70 years and the IMF is only in the news for its bailouts acting as a lender of last resort, and the World Bank has lost its credibility in many African countries, as it has failed to discourage the EU from imposing high tariffs and regulatory burdens on African exports. With trade increasing exponentially between the BRICS countries (Russia and China’s gas deal, India’s increasing defense collaboration with Russia, Chinese investment in Indian infrastructure projects), there is immense potential for the BRICS Bank to take up the mantle for promoting trade and perhaps even form a powerful trade bloc.

Challenges

The biggest threat the Bank faces is from its own members. There is a fear that internal bickering and politics could hamper the Bank’s working: India and China have territorial disputes, Russia’s economy is much more developed than the others’, Brazil’s focus on social welfare programmes is in contrast to the infrastructure centric programmes of others, and South Africa is not really seen as a powerful emerging economy.

If the BRICS Bank can overcome the challenge of internal cooperation, it can emerge as a viable and credible alternative to the existing institutions and even lead to increased efficiency within the World Bank and the IMF as it competes with them. The BRICS countries have momentum with them, it only remains to be seen whether they are able to translate this momentum into a concrete institution that can make a lasting impact.

 Anubhav Gupta is a first-year student of Economics at St. Stephen’s College, University of Delhi. As a future investment banker, he strives to explore and learn about every nook and cranny of the financial markets. He is an avid reader with a particular interest in philosophical and historical fiction. He devotes the rest of his time to running and globetrotting.

Posted by The Indian Economist | For the Curious Mind