BRICS Development Bank

When the BRICS Development Bank is taking shape, please read this May 2013 article published in The Global ANALYST:

The Global Analyst, May 2013

BRICS Development Bank:

Prospects and Challenges

Success of BRICS Development Bank will pave the way for improving relationship among BRICS nations, creating more opportunities for absorption of surplus capital within the group and channeling resources within the region to needy developing countries.

-M G Warrier

The adage ‘Necessity is the mother of invention’ is true not only in the context of things and ideas  generally included in the broad category of inventions, but also in respect of evolution of institutional structure which takes care of governance, administration of law and regulations and management of organisations in various fields including financial sector. If this position is acceptable, one need not be too much on the defensive, when stake-holders in the existing international finance management architecture criticize the proposal for a BRICS Development Bank with a mandate to supplement the long-term financing and foreign direct investment support needed to help developing countries face the challenges of infrastructure development. There is enough space for new development institutions, provided they get the resources and skill support from those who manage material resources and workforce.

Having said this, one has to reckon the existence of three institutions having professed objectives, almost identical to those which BRICS Development Bank may pursue. A brief mention of the emergence of these three organisations is considered necessary for clarity in the observations that follow.

World Bank

Conceived at the Bretton Wood Conference in 1944, World Bank came into being in June 1946. The World Bank, comprising two development institutions, namely IBRD and International Development Association (IDA) supports developing countries by providing technical and financial assistance. The large membership (about 185 member countries) and dominance of developed nations like US in policy and guidance have made this institution somewhat unwieldy and to some extent, unpopular among developing countries. India and China, the two major member nations in the BRICS Group, are amongst the first 10 largest shareholders in World Bank with almost 3% and 5% voting rights.

Asian Development Bank

ADB, a regional development bank established in 1966 and operating from Manila, Philippines pursues initiatives aimed at economic development of countries in Asia. It has about 70 member-countries of which more than two-thirds are from the Asian region.

In 1974, ADB launched the Asian Development Fund for providing concessional credit to the needy members.

BRICS

BRICS comprising Brazil, Russia, India, China and South Africa(South Africa joined the group in 2010) is an accidental assortment of five nations which have come together not because of their geographical proximity or similarities in approach to common issues or even any proximity on the growth path.

What all of them have in common is the feeling of neglect by the developed world, occasionally trespassing the borders of acceptable levels of ill-treatment and insult in international forums. Some of them, including India, have experienced such neglect even in meetings of bodies of which they are members or were attending on invitation. The irony is, even Durban meeting of BRICS saw the head of a member country being treated shabbily, may be due to the lack of experience of South Africa’s ‘Event Managers’. The reference here is to the reported stay arrangements for Prime Minister Dr Manmohan Singh, some 40 km away from the city, while his counterparts stayed in posh hotels in Durban close to the venue of the meeting. Being a mature and experienced statesman, he took it in his stride.

The Durban Proposal

The March 27, 2013 announcement from Durban talked about the BRICS decision to establish a new development bank to finance infrastructure and to create a $100 billion Contingency Reserve Arrangement to tackle any financial crisis in emerging economies. The amount may look meager, as the bailout of Cyprus financial sector during the week that followed had talked about the same amount ($100 billion) and the size of that country in terms of population was 0ne-fiftieth of the smallest country in the BRICS group. Still, to make a beginning, $100 billion is not a small amount. In an extended session of the BRICS summit, leaders of the inter-continental grouping considered the proposal for BRICS Development Bank with inputs from their respective finance ministers and declared that they were satisfied about the feasibility and viability of the proposed new international finance institution.

It may be recalled that the idea to set up a new development bank was mooted by India at last year’s BRICS summit in Delhi. Here, a word of appreciation for Dr Manmohan Singh would be appropriate. Whatever view one may have about his capabilities in politics and diplomacy, he is the one person who has successfully guided the management of both monetary and fiscal policy in India during trying times. A strong BRICS Development Bank will change not only the fate of economic development in the so called third world, but bring about a change in attitude and the way in which developed countries treat the geographical areas, which, now they believe will perennially remain poor and beg for their mercy for all time to come. The World Bank took note of the proposal for ‘BRICS Development Bank’ without loss of time, and described it as a significant development, making a promise to work closely with the new bank to end poverty throughout the developing world.

Enough ‘Space’ for the New Development Bank

Let us first remove the misconception that this development bank is an alternative which will take over the role of the Bretton Woods twins, the IMF and the World Bank in the geographical area covered by BRICS nations. At least initially, the declared objective of the new development bank is to support members of BRICS group and other developing countries in meeting long term investment needs in infrastructure and providing emergency assistance to developing countries in removing poverty. Viewed from this perspective, the new institution’s initiatives will only supplement the role being played by IMF and World Bank and there is enough unattended space for the new bank.

In his book ‘The end of poverty’ (Penguin, 2005), Jeffrey D Sachs made the following observation on capital needed to alleviate extreme poverty:

“At the most basic level, the key to ending extreme poverty is to enable the poorest of the poor to get their foot on the ladder of development. The development ladder hovers overhead, and the poorest of the poor are stuck beneath it. They lack the minimum amount of capital necessary to get a foothold, and therefore need a boost up to the first rung. The extreme poor lack six major kinds of capital:

• Human capital: health, nutrition, and skills needed for each person to be economically productive
• Business capital: the machinery, facilities, motorized transport used in agriculture, industry, and services
• Infrastructure: roads, power, water and sanitation, airports and seaports, and telecommunication systems, that are critical inputs into business productivity
• Natural capital: arable land, healthy soils, biodiversity, and well-functioning ecosystems that provide the environmental services needed by human society
• Public institutional capital: the commercial law, judicial systems, government services and policing that underpin the peaceful and prosperous division of labour
• Knowledge capital: the scientific and technological know-how that raises productivity in business output and the promotion of physical and natural capital”

The twin objectives of supporting infrastructure development and creating a Contingency Reserve Fund to assist needy developing countries accepted by the BRICS leadership while mooting the idea of a new development bank in themselves carry the theme which can be developed into a transparent vision statement which could be supportive of financing and pursuing the above needs. 

It may be recalled that the idea to set up a new development bank was mooted by India at last year’s BRICS summit in Delhi. Dr Manmohan Singh could sell the ‘idea’ which may change the way the rich look at the poor. Whatever view one may have about Dr Singh’s capabilities in politics and diplomacy, he is the one person who has successfully guided the management of both monetary and fiscal policy in India during trying times. It was not the critics who are once again active these days, who guided India on the correct trajectory during early 1990’s.  A strong BRICS Development Bank will change not only the fate of economic development in the so called third world, but bring about a change in attitude and the way in which developed countries treat the geographical areas, which, now they believe will perennially remain poor and beg for their mercy for all time to come. The World Bank took note of the proposal for ‘BRICS Development Bank’ without loss of time, and described it as a significant development, making a promise to work closely with the new bank to end poverty throughout the developing world. It is ‘we’ who are apathetic to right initiatives.

Business Model for BRICS Development Bank

The BRICS leadership has before it the models of IMF, World Bank and Asian Development Bank which have been doing substantial work in mobilization of resources and providing technical and financial support for economic development in different geographical areas for a variety of purposes. BRICS can also count on the experience of India’s central bank (Reserve bank of India) which has acquired professional expertise and experience in handling issues like financial inclusion, priority sector lending, institution-building for meeting diverse needs of financial sector, forex reserves management and public debt management, besides the core central banking functions which the Reserve Bank of India has managed well during the last 78 years of its existence.

The bank could consider a share-holding and contribution (to contingency reserve fund etc) pattern based on the proportion of member nation’s GDP. There should be appropriate upper ceiling for voting rights of individual nations, to ensure that the mighty does not dictate terms, just because they have contributed more. Learning from the failures of the institutions dominated by the rich developed nations will save the new bank from repeating same mistakes. If developing countries outside BRICS Group who may become the beneficiaries of services provided by the bank are allowed share-holding in the bank, BRICS should retain the right to ensure that the BRICS Group’s share-holding does not fall below a certain level. Reasonable institutional autonomy to ensure adequate resources mobilization, evolving a pragmatic lending policy which factors in reasonable return on investment and covers risk-related matters and management of HR-related issues should be given to the bank’s management.

Briefly…..

 Why another bank is needed?

The outreach of IMF and World Bank is insignificant in regions covered by BRICS countries and generally in geographical areas covered by developing countries where they do not find ‘cheap resources’ which they are interested in ‘exploiting’. Just as moving towards ‘full literacy is not on India’s agenda, poverty alleviation (ending poverty globally) is not on the agenda of international bodies dominated by developed countries. Just as the controlling forces (rich and the powerful) in India has a vested interest in keeping the feeder sources for cheap labour illiterate, developed countries are interested in a large chunk of humanity poor for obvious reasons.

Has IMF, WB, failed to deliver?

They do not have a system in place to monitor sources and uses of resources globally and ensuring equitable distribution at least to ensure a decent lifestyle for all. Diplomacy and politics today are dominated by money power.

What are the key challenges the bank could face?

Main challenge will come from developed countries in the form of manipulation of economic policies to suffocate and stifle the new entity making its survival difficult. But, if the people in developing countries look forward to ‘ending poverty’ they should make a number of institutions like BRICS Development Bank succeed. Resources will not be a problem. To mention one, the potential for exploitation of ‘surface gold stock’ in India is immense 

What could be the modalities of the bank?

Democratic functioning and resource participation in proportion to GDP should be ensured. See paragraphs under Business model in the article.

Role and dominance of China, and any possible conflict with other member countries? 

Each country will have country-specific interests to protect. We need not be too much skeptic about China. China’s views are pragmatic and practical when it comes to economic development. Conflicts will be there. But they are surmountable.

How India could benefit?

Playing a major role in institution-building at international level will definitely benefit India. The partnership could help in further pursuing cooperation in economic development in this region. I foresee the possibility of improving our (India’s) relationships with all neighbors including China.

M G Warrier, Former General Manager, Reserve Bank of India, Mumbai

Future

The diversity in the systems of governance in the countries that constitute BRICS should not be seen as a disadvantage. It should take us back to the principles of peaceful coexistence preached by Jawaharlal Nehru and make us think about channeling our efforts to make the world a better place to live, not only for the people in developed countries and those belonging to the upper strata of ‘economic divide’ in other countries.

Success of BRICS Development Bank will pave the way for improving relationship among BRICS nations, creating more opportunities for absorption of surplus capital within the group and channeling resources within the region to needy developing countries. Nations which have ‘tasted’ poverty and problems related to poverty in the recent past will be able to appreciate the problems of the survivors of  an estimated eight million human beings who die across the world each year, because they are too poor to stay alive.

As Jeffrey D Sachs has argued in his book referred to earlier in this article, our generation can choose to end poverty in a couple of decades, if we make appropriate realignment of priorities. The idea to establish BRICS Development Bank should be seen as one small step in the right direction towards achieving this goal.

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