BRICS Bank

Amit Guin
The BRICS Bank may change the form of development financing and reduce dependence on the Breton Woods institutions, World Bank and International Monetary Fund (IMF).
The Durban summit of BRICS – Brazil, Russia, India, China, South Africa – on March 26, 27 has taken a modest but concrete step in gluing its members together. Until now it has been a loose group for yielding pressure for formulation of world policies. The stated goal of the new bank is to provide its members with a way to pool money for investment in targeted infrastructure projects among themselves.
It is a modest beginning with seed capital of $ 50 billion, contributed equally by the five members. China wants it to be $ 100 billion. Except for China all others are facing foreign exchange crunch. China’s central bank has $ 1.2 trillion foreign reserves and more than $60 billion arrives annually in direct investment by investment bankers flush with cash.
The other countries are not in a position to contribute more. Apart they want that all of them should have equal control over the new bank. The Durban summit has so far given the conceptual clearance.
It has yet to decide on where the bank would be located and when it might start. The meetings during the next over a year would try to solve these issues.
It also intends to create an emergency reserve of $ 100 billion. China proposes to contribute $ 41 billion, India, Russia and Brazil $ 18 billion each and South Africa $ 5 billion.
It is a major international development. The ASEAN group despite having formed long before even BRICS was mooted has yet to come up with a development bank. Other development banks like the Asian Development Bank and African Development Bank are offshoots of the WB.
The world is watching the move. The US expects it to function in cooperation with the international financial institutions. International rating agency Goldman Sachs Asset Management chairman Jim O’Neil says, “This could become a World Bank in future due to the increasing influence of emerging countries”.
The BRICS, is being viewed, as the world’s biggest market and economies of the future.
Together, the five members of BRICS account for 25 percent of global GDP and 45 percent of the world’s population. They control a quarter of the world’s land mass and quarter of its economy at $ 13.5 trillion.
If it sails well, as most expect it to be, in the coming decades it may shift the pivot of the world economy from western countries. The WB and IMF had come up to help the World War II ravaged countries. It has served them well. The two institutions’ goal of reducing poverty the world over has been more cosmetic.
Currently, countries gain access to international capital — including Chinese — through loans from the WB and IMF. They leverage it through imposing policies that are often not suited for these economies.
Since the European crisis, the institutions are preoccupied with giving aid to Euro zone for stabilising economies that are in trouble.
The World Bank’s net lending has plummeted over the past few years, even as it keeps shopping loans to the likes of Brazil, Turkey, Russia and China, sometimes on hugely generous terms.
Now, the creation of a BRICS development bank could offer countries a way to negotiate for infrastructure loans much more directly. For countries like India, this is expected to hedge currency volatility as also may help in managing forex crisis, resulting from severe current account deficit, or simply put rising imports and falling exports.
India expects, prime minister Manmohan Singh hinted, to create a political and business clout.
Whether it would be able to counter or match Chinese influence needs to be observed.
The bank could be helpful in promoting trade within BRICS countries.
The economic achievements are much bigger than political. With respect to economics, BRICS countries – except South Africa – have become much bigger much more quickly than he expected, even if they have lost some momentum in the past 12 months.
Their achievements are remarkable as their collective GDP in 2011 increased by around $ 2.3 trillion, equivalent to the size of Italy’s GDP. By 2015, the combined size of BRICS seems highly likely to become as big as the US and they are set to become as big as the G7 by 2027, assess international estimates.
The IMF says it is watching. It needs to. As the bank is set up and expands it would have to include provisions for extending assistance to other economies in Asia, Africa and Latin America. That is where it would be in conflict with WB and IMF.
India passing through a severe economic and financial crisis, current account deficit touching a record, the move to set up the bank is an expensive proposition. It is being seen more as a hedge against future developments than trying to solve the present crisis.
The BRICS bank is not without its conflict within. The growing influence of China concerns all not only Russia and India. Even the African countries are apprehensive. They do not want China to gobble up their emerging economies through cheap exports and ruin them.
India is viewed as a moderate. The initiative taken by it is being seen as a move for changing the world order. Despite some murmurs in South Africa, where the opposition finds funding the venture not so useful for its stagnating economy, the bank is being given a wide support. Brazil, which has developed important trade links with China, sees in this a platform for diversification.
The opportunities are wide for India but the path is not easy. China would like to use it to counter every gain that India may perceived to be having.
The US and other big powers are watching every move of the BRICS and each individual nation.
The BRICS has the capacity to transform the world economy, including patterns of world trade and finance. It has potential. If it functions as perceived, the five nations, with their expanse across the globe, may not only emerge as the largest economic bloc but also address unfulfilled Millennium Development Goal (MDG) objective of poverty alleviation in a more inclusive and meaningful manner through distribution of wealth and creation of the largest number of jobs.

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