Who's afraid of BRICS bank?

Seema Guha
Seema GuhaJul 22, 2015 | 11:16

Who's afraid of BRICS bank?

Can the BRICS bank give the traditional Western lending agencies such as the World Bank and the International Monetary Fund a run for their money? It is a fine first step for an alternative lending agency which is attuned to the needs of the developing world. All eyes will be on the new institution to see if it can actually deliver as competing with the well-established IMF and World Bank would not be a cakewalk.

When the BRICS nations (Brazil, Russia, India, China and South Africa) announced in 2012, during a summit in New Delhi that the emerging nations would be setting up a new bank for developing nations, few took it seriously.

Most, especially those in Western capitals said that in a group when both arch rivals China and India were equal members, they would squabble over everything. Everyone however acknowledged that China, flushed as it was with excess funds was in a position to finance a BRICS bank and call the shots. True to these predictions there was much wrangling, mainly between Asian rivals India and China. Both wanted the bank to be set up in their respective capitals. There was also debate about the rotating presidency of the bank. Who would be the first president? Every nation wanted its nominee. Western analysts wrote it off as a non-starter.

But the stepmotherly treatment meted out to the developing nations, the hectoring about financial discipline, the need for prudent financial management, economic austerity and hours of talking-to whenever funds were borrowed from either the IMF or the World Bank, irked the leaders of emerging countries enough to overcome their traditional rivalry.

But the leaders of the emerging economies stubbornly persisted and were able to overcome the initial hurdle. In three years since the announcement, the bank has become a reality. All members will have equal voting rights in the new institution. China which wanted to call the shots by contributing the most, was prevented by India and Brazil from doing so. All members will not give equal shares. The lingering differences which remained was finally sorted out between the leaders in the Russian city of Ufa, where the last summit as held two weeks ago.

The New Development Bank was launched on Tuesday in the Chinese city of Shanghai, and India's Kundapur Vaman Kamath is the first president of the new bank. The post of the president will be rotated among the five countries. The emerging economies had long resented the fact that the Western world had divided the leadership of the two international lending agencies among themselves. An American always heads the World Bank while Europe gets to have the IMF boss.

The bank is to start out with a capital of $50bn and the aim is to double the amount in the coming years, depending on how it works out. India has contributed one billion dollars to the fund. China, and India will preside over its operations for the first six years, followed by five-year terms for Brazil and then Russia, leaders of the five-country group announced at the sixth BRICS - Brazil, Russia, India, China and South Africa - Summit. The Development Bank will lend money for infrastructure projects in nations across Asia and Africa. The first loan of the Development Bank is expected to roll out early next year. The bank will also have a $100 bn-currency reserve.

There is some confusion here about the focus areas of the Development Bank and the Beijing-based Asian Infrastructure Development Bank, which as its name suggests is devoted solely to infrastructure projects. Here again China will call the shots, though many other nations including India and Western nations like UK, France and Germany are all members. So the legitimate question will be what is the difference between the Shanghai-based BRICS and the Beijing bank.

As of now there appears to be none. So why two banks? Some serious discussion has to be done among BRICS leaders over the issue of focus. The Beijing bank is obviously concentrating on countries and projects within China's one road one belt, or the new Silk Road concept. The BRICS meanwhile will focus on projects which dove tail the mandate of emerging economies. The BRICS bank will also be the first line of defence during a financial crisis faced by developing nations. Generally at such times a government usually has to rely on the Western lending agencies, now there will be the alternative institution to bail out a government in urgent need of funds.

The first step has been taken with the setting up of the BRICS bank. It is still work in progress and will have to be fine-tuned as the bank evolves. The clear message is the world has changed since 1945, and the emerging economies want to chart their own course in 2015.

If this experiment succeeds, it will be a boon to developing countries. It will also send out a strong signal that the world has an alternative to the Western-backed financial institutions. This will also be the first major success of BRICS as a grouping which started in 2009.

Last updated: July 22, 2015 | 11:16
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