The BRICS Development Bank: A Game-Changer?

07 Jul, 2014    ·   4599

Sonia Hukil writes why the BRICS bank, although a seemingly promising initiative, isn't entirely flawless

Sonia Hukil
Sonia Hukil
Research Intern
At the 2014 BRICS summit held in Brazil from 14-16 July, the five member countries agreed to the creation of a New Development Bank (NDB) and Contingent Reserve Arrangement (CRA). Will this move enhance the BRICS’ economic clout by countering the hegemony of Western-run financial systems? Will it be a game-changer? 

Significance of the BRICS Bank
The NDB will have an initial subscribed capital of $50 billion, which premises on an equity principle wherein the five signatories will contribute $10 billion each towards the $100 billion bank corpus. The capital base will fund infrastructure and sustainable development projects in the BRICS countries and eventually in the rest of the developing countries. The CRA is a fund pool to aide countries in hedging against short-term liquidity pressures. In contrast to the NDB, the CRA will be unequally funded by the BRICS – with China, contributing 41 per cent, at the helm. These arrangements are expected to have massive economic and political impacts.  

The formation of the NDB is proclaimed to be just, inclusive and forward-looking. It provides an equal voting status to the founding members and offers loans for assistance without attached conditions. This is envisioned in order to deepen present and long-term cooperation amongst the BRICS nations and further strengthen South-South economic cooperation. 

Clearly, the BRICS’ main motive behind these initiatives is to press for a larger role in the international economic order that is otherwise centered on the International Monetary Fund (IMF) and the World Bank (WB). The NDB intends to supplement, and, perhaps later, supplant these multilateral institutions for a new financial architecture. The BRICS nations are craving for more control over their own resources as well as for greater representation in order to democratise the framework of multilateral funding systems. 

A Game-Changer? 
Will the BRICS bank succeed in challenging the Western hold on global finance? Or will it have a mere symbolic and rhetorical impact? 

In proposition at least, the BRICS hold the financial capacity to counter the hegemony of the WB and IMF given how four of the BRICS founding members – China, India, Brazil and Russia – are the among the world’s top 10 economies. Yet, the reality is riddled with complexities. The NDB’s subscribed capital base and authorised lending is miniscule in comparison to the WB – which is estimated to lend approximately $60 billion this year. Clearly, lending by the NDB will not be sufficient to make a substantial impact on the development process of emerging nations. It will be difficult for the NDB to challenge the reach and expanse of existing development institutions. 

Meanwhile, through the NDB, the BRICS will continue to conduct their business using the dollar, thereby making their economies function in accordance with policies and procedures designed by the US. There is no other alternative to the dollar as it is the primary choice for financial transactions, globally. Thus, instead of controlling the global economic order, the BRICS nations likely to remain stuck in it for the near future. 

Furthermore, structural disparities are likely to be a tipping point for differences amongst the BRICS. This remains the core issue for de-stabilisation of the BRICS institutions. China is not only the second largest economy in the world but also substantially larger than all the BRICS nations’ economies combined. China’s contributions to the CRA will be significantly more than the rest of the member-nations’. Analysts state that China will bring countries from its own sphere of influence for membership. Thus, with greater political and economic clout, Beijing will overwhelm the institution. Fears linger that more than being a jointly-held banking system, the NDB will demonstrate China’s individual supremacy. 

Moreover, the economies of the BRICS member-nations are projected to a downturn in the foreseeable future. Their future growth will be less remarkable as compared to the past due to consistent economic troubles like inflation. Some even speculate that the next financial meltdown will come from the BRICS. Failure to sustain high growth rates will thwart the lending capacity of the BRICS and in turn augment their dependency on the WB and the IMF.

The BRICS’ divergent interests, priorities, and governance systems further raise doubts on its ability to challenge the Western-dominated financial systems. Intra-BRICS dynamics too seem delicate. India-China ties have deteriorated over territorial disputes; Russia seems worried about China’s growing economic influence,  and South Africa’s ties with China have been staggering in light of rising Chinese demands for its vital resources. The BRICS bloc therefore appears to be a fragile partnership of convenience that may possibly encounter demise in the future given China’s hold on power. The initiative taken during the summit is ground-breaking. However it is doubtful to envision the BRICS bank’s success in replacing the existing development banks and re-balancing the global economic order. 

India has high expectations from the BRICS bank. However, policymakers in New Delhi should not be complacent with its standing within the bank. India must tread cautiously and decisively along the BRICS road, and, if needed, must not shy away from taking a different turn altogether.