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Cementing the BRICS of a New Development Bank

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Cementing the BRICS of a New Development Bank

Gavin van der Nest, tralac Researcher, comments on the foundations of the BRICS Development Bank

At the Sixth BRICS (Brazil, Russia, India, China, South Africa) Summit recently held in Fortaleza, Brazil a New Development Bank (NDB) and Contingency Reserve Arrangement (CRA) were launched in a drive towards committing to a new financial architecture for emerging powers. The hope is that the Bank will foster closer relations between member states of BRICS as well as with other developing countries. It is also anticipated that the Bank will allow for greater economic cooperation amongst member states as well as to deliver upon sustainable development needs.

Brazilian President and Summit host, Dilma Rouseff explained that the NDB and CRA were created as a ‘response to our needs’ and not as a result of opposition to any institution or state. The BRICS leaders have also rejected commentary that these institutions were deliberately created to oppose and provide alternatives to the World Bank and International Monetary Fund (IMF).

However, Vladimir Putin, Russian President, has said that the BRICS countries wish to challenge the international financial system’s dependency on US policies as well as to strengthen the rule of international law. He was quick to point out that amongst the BRICS there is no plan for a military or political alliance. Another point he raised was the international monetary systems reliance on the US dollar as well as the monetary and financial policy of the US authorities. It is therefore interesting that the Bank will raise capital in US dollar-denominated shares and not in one of the currencies of the founding members (Brazil, Russia, India, China, South Africa). This then perpetuates the Bank’s reliance on US monetary and financial policy as the movements of the US dollar will mostly be beyond the control of the founding members.

The NDB is designed to address the lack of resources for financing infrastructure programmes in developing countries by complementing existing multilateral and regional financial institutions.

The headquarters of the Bank will be in Shanghai, China with the first regional office of the Bank to be established in Johannesburg, South Africa. Although South Africa attempted to have the headquarters based in the country, having the first regional office based in South Africa is a significant achievement. It could be argued that this shows the importance with which the BRICS view African regional development and indeed development of other emerging markets.

The establishment of a regional office in South Africa presents another avenue to secure financing for infrastructure development projects within the continent, especially within the ambit of regional integration and sustainable development, and can only bode well for potential economic growth in the region. This is especially so as access to credit would be cheaper as the Bank’s size and expected authority would theoretically allow for it to secure better rates of lending in comparison to regional banks.

However, it should be noted that the establishment of such a regional office requires additional capital outlay. Stuart Theobald (Business Day, 28 July 2014, p. 11) asks whether it would it not be more cost effective to merge such an office with the Development Bank of Southern Africa (DBSA) or indeed the African Development Bank (AfDB) where the infrastructure is already in place and thus will require minimal investment? Failing which, a synchronisation and coordination of the Bank’s investment plans with the DBSA and AfDB should be considered. In 2014 the South African Treasury injected approximately R7 billion into the DBSA as capital to support the expansion of major pan-African development funds as well as committing to several local initiatives. If one were to re-form the DBSA as an African branch of the BRICS bank this would assist South Africa in part to meet its funding commitment to the new Bank as well as avoiding the duplication of infrastructure.

Additionally, the question remains whether the location of the Bank’s headquarters in China will result in greater decision-making power for China due to its clear economic and monetary dominance. As of 2012, foreign exchange reserves amount to US$ 373 billion for Brazil, US$ 473 billion for Russia, US$ 292 billion for India, US$ 3 312 billion for China and US$ 51 billion for South Africa. Gross Domestic Product (GDP) in current prices for 2013 amounted to US$ 2 246 billion for Brazil, US$ 2 096 billion for Russia, US$ 1 726 for India, US$ 9 185 billion for China and US$ 382 billion for South Africa. China is the dominant player by a long stretch with South Africa being the small player in a big league.

With regards to subscription of shares, as per Chapter II Article 8 of the Agreement on the New Development Bank, there shall be no increase in the subscription of any member to the capital stock and any right pertaining to the subscription of shares shall be waived if any of the following conditions occur:

  • The voting power of the founding members is reduced below 55 % of the total voting power

  • Non-borrowing member countries’ voting power increases above 20 % of the total voting power

  • A single non-founding member country’s voting power increases above 7 %

The Agreement is therefore designed to be largely in favour of the founding members.

The CRA is designed to allow the five countries to make available US$ 100 billion from their own reserves and is designed to offer financial security to its members without the need to depart from the IMF. It is designed to offer support through liquidity and precautionary instruments to mitigate actual or potential short-term balance of payments pressures. Individual BRICS commitments are as follows:

  • China US$ 41 billion
  • Brazil US$ 18 billion
  • Russia US$ 18 billion
  • India US$ 18 billion
  • South Africa US$ 5 billion

In cases of balance of payment pressures China is entitled to withdraw half of its commitment; Brazil, India and Russia may withdraw their full commitment of US$ 18 billion and South Africa is entitled to withdraw double its commitment at US$ 10 billion. If a member state wishes to withdraw more than 30% of the amount it is entitled to they would need to present their case in front of the IMF in regards to conditions of payment.

The NDB and CRA have been designed in such a way as to limit aspirations of dominance. At the outset there will be an initial outlay of US$ 50 billion of subscribed capital and US$ 100 billion authorised capital. Each of the five founding members will contribute an equal share of US$ 10 billion of subscribed capital and the voting power of each member is equal to its subscribed shares in the capital stock.

In particular, when considering the voting rights of the founding members , each will have voting power equal to the number of its subscribed shares in the capital stock of the Bank. As the Founding Members will all contribute equally to subscribed capital (US$ 10 billion each) their voting power shall also be equal. If any member fails to pay any part of the amount due in terms of paid-in shares the member shall not be able to exercise its voting power, for the duration of the shortfall, according to the percentage outstanding of its total commitment.

The important positions of Bank President and Governing Councils will be rotated amongst member states. Bank membership is also open to members of the United Nations as well as to borrowing and non-borrowing members.

However, according to Carlos Langoni, former President of the Brazilian Central Bank, at the outset the NDB may be composed so as to avoid inequalities but that ‘equal participation is only a formality since in practice the future trend will be towards greater Chinese influence.’ However, all decisions taken by the Bank shall be decided by a simple majority of votes (Chapter II Article 6) unless otherwise provided for in the Agreement. It could be then be debated that since China is the largest economic player in this grouping it should be able to leverage its dominant position in theory to lobby for additional, favourable loans and capital in order to drive development and infrastructure according to its own internal policies.

All that remains now for the NDB to Enter into Force (Chapter IX Article 49) is for each signatory country to deposit an instrument setting forth that it has accepted, ratified or approved the Agreement in accordance with its own laws. This then needs to be deposited with the government of the Federative Republic of Brazil.

It will be interesting to see how the introduction of such a Bank will challenge contemporary monetary and financial institutions and whether there will be a shift away from the Bretton Woods financial system dominance. It may have been said that the NDB is only fulfilling a need but the shift of emerging markets away from Washington dominated monetary and financial policies is clear.

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References

‘Agreement on the New Development Bank – Fortaleza, July 15’. Available: http://www.tralac.org/images/Resources/BRICS/Agreement%20on%20the%20New%20development%20Bank.pdf

BRICS: joint statistical publication: 2014 ; Brazil, Russia, India, China, South Africa /IBGE. - Rio de Janeiro : IBGE, 2014. Available: http://www.brics.ibge.gov.br/downloads/BRICS_Joint_Statistical_Publication_2014.pdf

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