The New Development Bank

The BRICS leaders met in Brasilia on 15^th July 2014 and signed the long anticipated document to create the $100 billion BRICS Development Bank and a reserve currency pool worth over another $100 billion. Documents on cooperation between BRICS export credit agencies and an agreement of cooperation on innovation were also inked.

Why was it needed?

The US and the west have dominated and controlled the world finances for over half a century now. The voting rights in the IMF are greatly skewed in favor of US and Europe. For instance, Netherlands and Belgium have more votes than Brazil and the US has around 3 times the votes the second ranked country (Japan) has.

I did a few calculations and found out that the BRICS nations which represent almost one-fifth (19.8%) of the world’s economy have only about one-tenth (11%) of the votes in the IMF.

Nonetheless, a shift of power from the old to the rising ones is quite evident through long term growth prospects. Ever since the recession of 2007, the old powerful economies have dwindled while China, India and Brazil have managed to keep growing at a decent rate. Over the last decade the BRICS combined GDP has grown 5 times more than that of the developed nations.

For almost a decade now, the emerging economies have been trying to get the quotas changed in the IMF but to no avail. The European nations are too power hungry to make any such amendments.

This prompted the BRICS nations to find an alternative to the IMF monopoly where there economic weight would reflect in their rights and after a long conception period the BRICS Development Bank was finally born last week.

How big is it?

Not much. It has begun with a capital base of $50 billion and plans to add another $50 billion soon. On the other hand, the World Bank has $232 billion and the Asian Development Bank (Although Asian, it is controlled by the US) has $165 billion is capital. Still, for starters $100 billion seem good enough for NDB.

                            

Why wasn’t it made bigger?

Equality comes at a price. To give everyone equal rights, NDB had to compromise on its financial clout as China would have wanted higher voting rights had it contributed more.

What are the expectations?

• The basic aim of the NDB is to provide funds for the infrastructural development and sustainability of its member nations.
• To increase influence over the West.
• Force IMF to change the quotas and reallocate the votes.

Why is it better than IMF and World Bank?

• It is not influenced by the United States.
• The new bank will provide money for infrastructure and development projects in BRICS countries, and unlike the IMF or World Bank, each nation has equal say, regardless of GDP size.
• The founding nations will retain atleast 55% of the votes even when other nations join the bank.
•  It seems like a win-win for everybody. Russia got something that could challenge the IMF and the World Bank, China got the headquarters which prove its strength in the world economy, South Africa got regional headquarters, Brazil got the chairman post and India got the Presidency of the Bank.

Will it succeed?

The answer is it has already begun to. It has succeeded in sending a strong signal to the world about the economic power of the BRICS nations which is being reflected in the media across the world. However, what everyone is skeptical about is its ability to decrease the infrastructural funding gap with just initial $50 billion. Nonetheless, it seems like a good initiative on the part of emerging economies and we might soon see countries such as Argentina, Mexico and Indonesia join in.