The Implications of the BRICS New Development Bank

In 2016, the world’s fastest growing economies, Brazil, Russia, India, China, and South Africa, commonly abbreviated as the ‘BRICS’ countries, with South Africa being the latest addition to the group, will set up their own Development Bank. The Development Bank will focus on BRICS infrastructure projects and will serve to support the blocs’ economies. The BRICS Development Bank authorised capital (the maximum amount of shared capital that the company is authorised to allocate to shareholders) will be situated at $100 Billion, of which $50 Billion will be pledged. This figure will be achieved with contributions coming from each country into a common pool, with China contributing the most (US$41 billion), Brazil, Russia and India contributing US$18 billion each, and South Africa contributing US$5 billion. The BRICS are also rumoured to be considering the implementation of an emergency coffer for BRICS nations in the scenario of which one of the member states face an economic collapse.

The new bank will be located in Shanghai, China, with an African regional centre located in South Africa, Johannesburg. Both the regional centre and the headquarters of the bank will be opened before the first loan in 2016. To further equally distribute power amongst all BRICS states, the first president shall be Indian, the first chairman of the board of governors will be Russian, and the first chairman of the board of directors will be Brazilian.

Pravin Gordhan, South Africa’s finance minister highlights the need for BRICS to push away from the World Bank and IMF, stating that the two westernised international banks still live in a post-World War Two environment and thus the emerging power of the BRCS feel that their new found economic prowess is not accurately reflected in their decision making power at the World Bank and the International Monetary Fund. There have been accusations of the IMF and The World Bank perpetuating Western powers. This is evident in the voting power which disproportionately favours the US with 16.75% of the voting power, Japan with 6.23%, and Germany, France and the UK votes amounting to 14.39% compared to a total of 11% for BRICS, of which China controls a 3.8% share of the vote. This is hardly reflective of China’s and India’s new economic force and the emerging financial capacity of the rest of the BRICS nations. Today, BRICS account for 35% of global GDP, 35% of total international reserves, and 42% of the world population.

That is not to say that action hasn’t been taken to reform the IMF to more equally distribute power amongst its stakeholders. In 2010 the G20 summit agreed to redistribute 6% of voting powers towards the faster growing economies, however to date, the U.S congress has failed to ratify these reforms leaving them in a state of twilight. It would appear the U.S. congress feels that its capacity as hegemon is under threat and so is reluctant to shed some of its privileged powers in the IMF.

Another motivation driving the creation of the Development Bank is that emerging nations have borne the brunt of protectionism since the 2008 financial collapse. According to the World Bank, 6.4% of China’s exports were subject to anti-dumping measures and other trade barriers introduced by G20 countries at the end of 2013, more than 5 times the per cent of U.S. implication. This follows a historical trend in which new entrants to the institution are targeted, such as the focus on South Korean and Japanese products in the 1980s.

Some may ask as to why China has decided to invest in such a bank, especially considering the fact that the gap between itself and the smallest economy of the group is at a ratio of 24 to 1. The fact remains China could finance a larger bank than the new Development Bank with its own funds, but for China, the pursuit isn’t a financial one per se, but rather, a political statement. China has accepted a minority holding in the bank to garner greater credibility for international cooperation. The degree to which it will be happy to finance members’ development projects for greater credibility remains to be seen.

The new Development Bank could see a shift in soft power from western states to emerging economies. The global financial centre has slowly and steadily been shifting east, a move accelerated by the 2008 financial collapse, with East Asia in particular serving as the world’s main growth engine since the financial collapse. This soft power shift will be augmented with the construction of a ‘Yuan Zone’. Whilst international financial transactions predominantly shift with the use of USD as a standardised currency (or the Euro), the new Development Bank will further China’s ambition of making the Yuan a key currency for international settlements, and will proliferate the Yuan’s status as a global financial currency.  It will also mitigate China from politically motivated financial sanctions stemming from its participation is the USD based payment system, thus loosening the grasp the U.S. can exert over China.

However others dispute this theory of a new rise in the east, claiming that the anointment of a new ‘Asian Century’ is premature as global structures continue to prolong and perpetuate western dominance notwithstanding a BRICS financially dominated world. The article by Cox (2012) linked above declares that both hard power and soft power still very much remains with the U.S. with its capacity to project military force across the globe, as well as the fact that the U.S. and EU combined still account for well over 50% of World GDP.

Currently, given the relative size of the BRICS new Development Bank, we would be getting ahead of ourselves to declare it a contender to the IMF or World Bank considering the planned capital of the new Development Bank will be situated at $100 billion when at full flow, compared to the $232 billion in capital the World Bank holds. For now, the new Development Bank will predominantly service the interests of a bloc, rather than having a more global scope, however, this may change as the BRICS consolidate themselves on the international arena.

The importance of this new development is evident more so for Russia than arguably anyone else at this moment. At a time when it continues to face sanctions from the West, the new Development Bank could prevent financial turmoil in Russia, preventing isolation in Moscow, as well as affording it new allies on the international stage. However, what remains to be seen is how cooperative stakeholders in the new development Bank will be, considering how diverse and loosely associated the member states are, some of whom are devoid of any connection other than the fact they are an emerging economy.

Whilst the BRICS Development Bank marks a new chapter in global affairs, the extent to which it will influence international affairs remains to be seen. What it will do is enhance the development of emerging economies and safeguard them from Western financial implications, such implications which seen investors pull out of developing economies as a result of the U.S. scaling back its economic stimulus programme. It will afford China greater recognition as a leader on the world stage whilst simultaneously internationalising the Renminbi. While this Development Bank will not destroy western hegemony just yet, it could very well be planting the seeds that will eventually lead to the decay of western power.

By Stephen Mirkovic

Tags: , , , , , , , ,

Categories: Asia, Europe, Latin America

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