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New Development Bank: An Initiative in the World of Emerging Economies

By Kashyap Arora

Edited by Sanchita Malhotra, Associate Editor, The Indian Economist

The formation of the BRICS nations, which have often been mocked by some as an impractical concept, have finally shown some strength and progress in the form of the commitment of its member nations towards formation of a “New Development Bank (NDB)”, formerly referred to as the BRICS Development Bank. The bank comes with an initial subscribe capital of $50 million, which will be shared equally among the BRICS nations.

The fund which will consist of $10 billion of “paid in capital” ($2 billion from each member to be provided over seven years) and an additional $40 billion to be “paid upon request”, has been set up primarily for funding infrastructure and sustainable development projects in the BRICS countries, and will also be subsequently open to other economies for membership and borrowing purposes, however, with the capital share of the BRICS nations always remaining at least 55% or above. Furthermore, the capital made by the bank would be shared evenly between the BRICS nations. The bank will also take advantage of the booming green bonds market, where Germany has just committed a further €750 million (£594m) to the fund.

In addition to the above, the BRICS nations have also created a $100 billion Contingent Reserve Arrangement (CRA), which will be funded 41% by China, 18% each by Brazil, India, and Russia, and 5% by South Africa. The CRA will be used for providing additional liquidity to the member nations during balance of payment problems. One fact worth noting is the planned initial contribution from China to the new bank being only a slightly less than its paid in capital at the World Bank, and the other BRICS nations planned contribution being more than what they do at the World bank.

Factors triggering the formation of New Development Bank (NDB):

The two major factors contributing towards the formation of the NDB comprise firstly of the emergence of the BRICS nations as a big economic power, with its solidified trade and commerce ties with the emerging market economies and developing countries (EMDCs), and secondly the growing dissatisfaction towards the Bretton-Woods institutions. Some crucial objections placed towards the Bretton-Woods institutions comprise of the lack of equitable structures, numerous layers of obligations for the borrowers going further beyond the financial obligations for repayment and economic restructuring, and its use by the Westernized international community to promote spreading of a vision consistent with its values.

Contrary to the Bretton-Woods institutions the BRICS nations have adopted an equitable structure of ‘one-nation one-vote’ for its “New Development Bank (NDB)”, and has also proposed to provide assistance to other economies suffering from volatility due to United States’ exit from its expansionary monetary policy through its bank. Furthermore, initiatives similar to BRICS-sponsored development bank have sprung up in the past mostly due to growing dissatisfaction with the might and influence of Bretton-Woods twin institutions, some of the prime examples of such institutions are the Development Bank of Latin America (created by Andean nations) in the 60s, the Chiang Mai Initiative in early 2000 (of 10 ASEAN nations plus China, South Korea and Japan, and the latest establishment of the Bank of South by Latin American countries in 2009.

Thus, the New Development Bank comes at a time when reforms at the Bretton-Woods institutions having proved to be largely ineffective and the U.S. and European nations have shown reluctance towards BRICS nations becoming more powerful in the governance structure of the Bretton-Woods twin. However, it is still early days for the BRICS sponsored Development Bank and it is imperative for its member nations to put in place a conflict resolution mechanism along with an effective supervisory regime and a proper credit appraisal mechanism. One thing which is for sure though is that the existence of a new lending option in form of the NDB, will definitely lead to softening or reduction of the conditionality requirements put forward by development banks including the World Bank, a changes which will also slow down the development prospects of people in emerging economies.

An economist from University of Warwick, Kashyap is an avid reader, writer, and tactician with a real zeal for economics and finance. He has also professionally represented and worked for some of the most prestigious organizations such as Standard and Poor, and HDFC. It is his passion which drew him towards “The Indian Economist”, where he aims to study aspects of Indian economic and polity scenario from a different perspective and derive more involvement from his readers, thus, laying down the  foundation for a highly aware future generation.