5 Things to Know About the New BRICS Bank

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Meeting in the Brazilian city of Fortaleza last week, leaders of the five BRICS nations – Brazil, Russia, India, China and South Africa – finally put some flesh on the bones of a long-awaited plan to set up a new development bank to rival the World Bank.

The World Bank’s main role is to make loans at concessional rates for big infrastructure projects in developing countries, though recently it has strayed more and more into “technical assistance” and policy advice. The bank aims to cover its costs, but not to turn a profit.

Here are five observations to put the BRICS alternative in perspective.

#1: This reflects frustration with the existing institutions

The World Bank and the International Monetary Fund, which lends to countries facing fiscal crisis, were set up way back in 1944. The distribution of international economic might has shifted momentously since then, but the balance of power at the institutions has stayed basically the same. Leadership of the World Bank has by tradition been reserved for an American and leadership of the IMF for a European. When World Bank president Robert Zoellick stood down in 2012, strong candidates emerged from Nigeria and Colombia; but ultimately the job went to another American, albeit a Korean-American, Jim Yong Kim.

Developing countries are more or less fed up with this. Hence, the search for an alternative.


#2: The new bank is a minnow compared with some of its competitors

With a planned capital base of $50 billion, rising eventually to $100 billion, the New Development Bank will be a midget compared to the World Bank ($232 billion in capital) or even the Manila-based Asian Development Bank ($165 billion in capital), another institution where the U.S. has an outsize influence.

The World Bank says it is not fazed by the new competition. “Any estimate of the infrastructure needs in developing countries starts at about $1 trillion a year,” said Mr. Kim at a press conference earlier this month. “We welcome any new organizations, any countries.”


#3: It could still add to pressure for reform at the existing institutions

As long ago as 2010, IMF member nations agreed to redistribute voting rights to give more weight to developing nations, but the changes have never taken place thanks to the failure of the U.S. Congress to ratify the agreement. The new bank might nudge that process along. China would be the biggest winner from the planned reforms, but India and Brazil would gain voting rights too, mostly at the expense of European countries.

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#4: Every BRIC got something for itself

It seems safe to say there was no shortage of horse-trading in Fortaleza. Assuming it gets the green light from each country’s legislature, the aptly named New Development Bank will have its headquarters in Shanghai and will initially be led by an Indian, with other important posts reserved for Russia and Brazil and a regional office opening in South Africa.

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#5: This could be a big deal – but don’t hold your breath

The jealous divvying up of key posts between the five nations hints at the biggest question mark hanging over the new bank – how will they ever see eye-to-eye? Aside from being major developing countries, the BRICS have little in common.

There is a precedent for successful regional organizations that have shrugged off western dominance. The Corporación Andina de Fomento, a Latin American development bank founded in 1970, continues to lend, though on a modest scale (it  approved$12.1 billion of projects last year). Another Latin American initiative, the Bank of the South, never got off the drawing board: Launched to a fanfare of anti-capitalist rhetoric in 2009, it has yet to make a single loan.

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22 July 2014

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