How BRICS’ new bank will challenge the West

How BRICS’ new bank will challenge the West
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BRICS countries have launched the New Development Bank with the aim of boosting infrastructure investment. The new bank may not become a key lender in the world economy but could challenge Western development policy.

At the BRICS summit on July 15, the leaders of Brazil, Russia, India, China and South Africa formally announced the creation of the New Development Bank (NDB) with an initial capital of $50 billion plus a $100 billion contingent reserve arrangement (CRA) to be operational by 2015.

The NDB will provide long-term funding for infrastructure projects in emerging economies, an investment area that BRICS countries have recurrently claimed that the World Bank and other multilateral development banks have failed to serve adequately. In addition, the CRA will be used to to offer currency support to emerging markets, with a view to supplanting the widely criticized International Monetary Fund in currency crises.

No enough firepower to make a difference

Despite all the fanfare surrounding its presentation, the NDB will start to operate with a relatively modest capacity to influence on international capital markets and global credit. Still, with its initial capital endowment and if it eventually manages to raise funding four or five times its equity, the NDB could eventually match the financial muscle of the leading multilateral institutions, which it looks to compete with.

To put this in context, the two main lending arms of the World Bank Group, the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA), reported a balance sheet of $490 million and a loan portfolio of $268 billion in June 2013. Other multilateral development lenders, the Asian Development Bank and European Bank for Reconstruction and Development, have even far smaller asset portfolios of just $21 billion and $65 billion, respectively.

Even if the NDB maximizes its lending capacity over a few years, however, it may not ever have the firepower to make any difference, via direct lending or guarantees. This should not come as a surprise: multilateral banks do not actually play a significant role in the global financial system or really affect the economic course of medium- or large-sized countries. Their impact is only visible when they operate in small countries with relatively large-scale projects.

This rather modest role is particularly evident in infrastructure financing. A report by the two former World Bank chief economists Nick Stern and Joseph Stiglitz recently showed that the $40-60 billion of loans by multilateral banks earmarked for infrastructure over the next two years would only cover 2-3% of the $2 trillion of annual need in developing countries.

This does not mean that these financial needs are not met. It is a well-known fact that the true and effective instruments of investment for infrastructure in BRICS countries have always been their local state-run development banks, such as Brazil’s BNDES or China Development Bank, with assets amounting to $330 billion and $1.33 trillion, respectively, as of the end of 2013.

Challenge to Western development policy

Nevertheless, the limited financial capacity of NDB to influence on the global economy should not minimize its potential future role in the far more important battle of economic policy in the 21st century. Its long-awaited creation is undoubtedly a political statement by the BRICS countries: not just a demonstration of their own financial independence but also a signal of disagreements with the policy-based lending of the dominating multilateral banks.

Precisely in the field of policy design, the NDB could find its real mission and role as a developer of alternative ideas in competition with the World Bank Group’s economic doctrine, which has long been viewed as influenced by a Western bias.

After all, the World Bank is a much more effective, valuable and influential institution as a think tank than as a pure financial lender: it maintains benchmark indexes, offers advice for governments, identifies best practices, designs development projects, produces reviews and monitoring reports, and so on. It is the ‘sentinel’ of Western orthodoxy for development policies based on the principle of conditionality for lending decisions.

The NDB will probably aim to perform an equivalent role promoting a different ideological approach to economic development aligned with the views of the BRICS countries on economic policy and political governance.

As this new bank begins to implement projects, deploying capabilities in third-world countries under different conditional rules, the potential successes, even if they are modest in size, will likely be exploited by the BRICS to exhibit the possibilities of a method that can contend with mainstream development economics (Western-centric and Washington-based).

The bank, in this sense, could become a vehicle for showcasing the economic policies of the founding members and a key instrument for their foreign policy in developing regions in the future.

Categories: Economics, International

About Author

Antonio Timoner

Antonio works as a senior economist at IHS Banking Risk Service in London. Prior to joining IHS, Antonio worked as an associate analyst at Taylor-DeJongh, an investment banking firm based in Washington ,DC, and as senior engineer at ACS, an infrastructure group in Spain. Antonio holds an MA in International Economics from the Paul H. Nitze School of Advanced International Studies and a BSc in Civil Engineering from the Technical University of Catalonia in Barcelona.