After five years of summits, the only tangible step [by the BRICS] towards alternative institution-building was the March 2013 announcement that a BRICS Development Bank would be created. Even this bank, however, was originally projected to have a total capitalization of approximately $50 billion – less than what the World Bank loans out in a single year.
So we’re not talking about a giant pot of money. The bank is ostensibly targeted towards infrastructure loans — but as Robert Kahn points out, “there are good reasons why private investment is wary to make strategic investments in this area, and many reasons (including environmental, social, and governance related) why the official community is careful to act.” Indeed, China’s bilateral development loans have not always panned out as expected. Furthermore, this bank will also have to compete with China’s other new international lending institution, the Asia Infrastructure Investment Bank, in making loans. And that bank is likely to have more capital than the NDB.
Looking at the actual arrangements:
The Bank shall have an initial authorized capital of US$ 100 billion. The initial subscribed capital shall be of US$ 50 billion, equally shared among founding members. The first chair of the Board of Governors shall be from Russia. The first chair of the Board of Directors shall be from Brazil. The first President of the Bank shall be from India. The headquarters of the Bank shall be located in Shanghai. The New Development Bank Africa Regional Center shall be established in South Africa concurrently with the headquarters.
This setup demonstrates consensus among the BRICS, but also put a serious constraint on how big the NDB can grow. Because if the shares are to be ponied up equally by the five BRICS partners, then the bank will grow only as fast as South Africa’s willingness to fund it.
Now, all that said, there are two things worth noting. The first was the creation of a $100 billion BRICS Contingent Reserve Arrangement of unclear funding. What, exactly, will that be used for? Simon Romero reports an interesting answer:
Pointing to concerns that the United States Federal Reserve was stepping back in its aggressive efforts to stimulate the American economy, possibly opening the way for interest rate increases in the United States, Brazil’s president, Dilma Rousseff, said the fund could mitigate the volatility that could emerge from such shifts.“This provides security, a kind of safety net for BRICS countries and others,” Ms. Rousseff said.
This is genuinely interesting. Such an arrangement could have made a difference to, say, India during last year’s taper announcement. If this goes forward and can demonstrate quick action, it could potentially mitigate some of the negative side-effects of the Federal Reserve’s hegemonic role in international money. That’s a big “if,” however.
The second thing worth noting is what the NDB could turn into over time. Because there were two paragraphs buried in the declaration that do hint at what the NDB could turn into if the status quo persists:
We remain disappointed and seriously concerned with the current non-implementation of the 2010 International Monetary Fund (IMF) reforms, which negatively impacts on the IMF’s legitimacy, credibility and effectiveness. The IMF reform process is based on high-level commitments, which already strengthened the Fund’s resources and must also lead to the modernization of its governance structure so as to better reflect the increasing weight of EMDCs in the world economy. The Fund must remain a quota-based institution. We call on the membership of the IMF to find ways to implement the 14th General Review of Quotas without further delay. We reiterate our call on the IMF to develop options to move ahead with its reform process, with a view to ensuring increased voice and representation of [emerging market economies and developing countries] in case the 2010 reforms are not entered into force by the end of the year. We also call on the membership of the IMF to reach a final agreement on a new quota formula together with the 15th General Review of Quotas so as not to further jeopardize the postponed deadline of January 2015.We welcome the goals set by the World Bank Group to help countries end extreme poverty and to promote shared prosperity. We recognize the potential of this new strategy in support of the fulfillment of these ambitious goals by the international community. This potential will only be realized, however, if the institution and its membership effectively move towards more democratic governance structures, strengthen the Bank’s financial capacity and explore innovative ways to enhance development financing and knowledge sharing while pursuing a strong client orientation that recognizes each country’s development needs. We look forward to initiating the work on the next shareholding review at the World Bank as soon as possible in order to meet the agreed deadline of October 2015. In this sense, we call for an international financial architecture that is more conducive to overcoming development challenges.
Decoded, that translates into the following very simple message, and the only one that truly unifies the BRICS:
Hey, United States, why don’t you pass the [EXPLETIVE DELETED] quota reform plan that gives us a greater voice in the international financial institutions while still retaining your veto power? I mean, seriously, you brokered the damn thing but it won’t go into effect without congressional approval. So get on it, or otherwise, we’ll start putting our resources into other institutions…
So think of the NDB as a marker that could grow if each of the BRICS members are willing and if the United States failed to ratify agreed-upon reforms to the IMF and the World Bank. The really interesting question is whether this kind of nascent forum-shopping creates any sense of urgency in either Congress or the Obama administration to take care of business. Unfortunately, I suspect that they will react like I did.