In his 2001 paper
titled “Building Better Global Economic BRICs”, economist Jim O’Neill of
Goldman Sachs calculated that “if the 2001/2002 outlook were to be
extrapolated, over the next decade, China would be “as big as Germany” and
Brazil and India “not far behind Italy” on a current GDP basis. Cut to 2013;
Jim O’ Neill’s expectations seem modest. Last year, China was the world’s
second largest economy, Brazil ahead of Italy and India just one rank behind in
terms of current GDP. In purchasing power parity (PPP) terms, all the BRIC
countries were within the top 10, with China and India at second and third
position respectively. BRIC, in Wall Street lingo, is an “outperformer.”
Despite the
crippling financial crisis, BRIC has done better on pure economic terms than
most expectations. But the acronym is today representative of much more than an
investment narrative alone. With the inclusion of South Africa, BRIC became
BRICS, giving a pluralist and inclusive veneer to an economic idea. This group
now has a significant political dimension, as is evidenced by the increasing
number of converging positions on political issues.
In a follow-up paper
in 2003, titled, “Dreaming with BRICs: The Path to 2050,” Goldman Sachs claimed
that by 2050, the list of the world’s largest 10 economies would look very
different. It is remarkable then, that in 2014 the list already looks radically
different, and it is clear that it is time to “wake up” to the BRICS.
NDB versus existing
banks
In this context
there were at least two concrete arrangements inked at the sixth BRICS Summit
in July, which will have a large economic and political impact. These were the
Contingent Reserve Arrangement and the New Development Bank (NDB).
Conversations and reportage on these two were shrill, coloured and obtuse in
the run-up to the Summit. It continues to follow in the same vein. Indeed the
NDB is at once the most celebrated and critiqued outcome of the Fortaleza Summit.
Now that we are a few weeks away from its public conception, it is time for a
reality check on this widely discussed BRICS achievement.
The first reality is
the NDB can neither replace nor supplant the role of the existing development
banks. The NDB will not be able to compete with the reach and expanse of
existing institutions such as the World Bank, which has a subscribed capital of
over $223 billion. The bank borrows $30 billion annually by issuing Triple-A
rated debt in international bond markets. Such easy access to capital markets
on the back of high promoter creditworthiness allows the bank to have a lower
cost of funds. Other development finance institutions enjoy similar financial
backing. The Asian Development Bank (ADB) too has a large balance sheet, backed
by 67 member nations and a subscribed capital of $162 billion.
In contrast, the NDB
will require over half a decade before it can accumulate the stated capital
base of $50 billion from within BRICS and another $50 billion (approximately) from
other countries and institutions. Indeed, in the immediate term, only a modest
$150 million has been promised by each of the BRICS countries. A contribution
of $1,850 million thereafter, staggered over five to six years, will require
some doing as the BRICS countries are grappling with weak balance sheets,
fragile current accounts and other domestic imperatives.
Then, there are
other questions that will need to be answered in the days ahead. If China is
unable to dominate this institution, will it prefer to prioritise investments
through its (proposed) Asian Infrastructure Investment Bank? How soon can the
central banks of the member countries devise arrangements to act as depository
institutions for the NDB? And, how will the NDB raise funds in different
countries? What will be the currency or currencies of choice? All important
posers which can be addressed if the resolve is unerring.
Development finance
The second reality
is, in spite of its modest economic weight in the initial years, the NDB can change
the ethos of development finance irreversibly. Rather than replacing or
supplanting existing development finance institutions, the NDB will seek to
supplement existing resources. In fact, the World Bank President, Jim Yong Kim,
has welcomed the idea of the NDB and acknowledged its potential in
infrastructure development and the global fight against poverty.
An important
difference could be in the way conditions and restrictions are imposed on loan
recipients. Bretton Woods Institutions such as the World Bank have been known
to impose conditions for lending that create structural mismatches between
project funding, demand and supply. As recently as last year, the World Bank
Group decided to restrict funding for new coal plants in developing countries,
deciding instead to invest greater resources in “cleaner” fuels. Of course, the
World Bank would be well advised to reconsider this decision given lifeline
energy needs and the energy access realities in developing countries such as
India.
The NDB’s mission
must be to create a business structure where borrowing countries are given
greater agency in prioritising the kinds of projects they would want funded.
Over a decade, this could become the demonstrator project through which the
relationship between donors and recipients, lenders and borrowers, will be
rewritten. Hopefully this will be in favour of developing economies and will
enable the reimagining of economic pathways.
Location and
ownership
The third reality —
perhaps, the most debated — is that the location of the NDB is immaterial when
governance and ownership is equally shared. Location has frequently been
confused with ownership, skewed by our imagination of existing institutions
such as the World Bank. According to its Articles of Agreement, major policy
decisions at the World Bank are made through a Super Majority — 85 per cent of
votes. Vote shares in turn are determined by the level of a nation’s financial
contribution. With around 16 per cent voting share at the World Bank, the U.S.
has a de facto veto. Conversely, BRICS, with 40 per cent of the global
population and a combined GDP of $24 trillion (PPP), collectively accounts for
a mere 13 per cent of the votes at the World Bank.
As such, the
concentration of voting power and headquarter location in Washington DC in the
case of the World Bank is merely a coincidence. Japan dominates the functioning
of the ADB with a 15.7 per cent shareholding, despite the headquarters being
located in the Philippines.
It is also useful to
note that previous World Bank presidents have been U.S. citizens and the
International Monetary Fund’s (IMF) list of managing directors is composed
entirely of Europeans. Even the ADB’s presidents have been Japanese citizens,
with almost all of them having served in the Finance Ministry in Tokyo. In this
regard, the NDB, with its intention of rotating leadership, seeks to overhaul
the existing governance framework prevalent in the international development
finance institutions. Through equal shares of paid-in capital in the NDB, there
is a clear intention of creating an alternative model that focusses on
voting-power parity. The smallest country can negotiate at par with the biggest
country.
Will BRICS create a
framework that is as democratic in sharing governance space with other
investors and stakeholders? This will be something to watch for as the systems
and structures evolve. The notion that the NDB has been “Shanghai-ed” is
perhaps a shallow understanding of this exciting new initiative.
With an equal voting
share, all five countries have to be on board to move in a particular
direction. Admittedly, this can be hugely inefficient and troublesome.
Therefore, it is incumbent upon BRICS members to ensure that this initial
at-par equity in governance does not unexpectedly allow for a super majority
like gridlock, restricting decision making because of a lack of consensus. The
NDB must be dynamic and lithe, much like the BRICS grouping itself. It would be
useful for BRICS members to institute a professional management body for
steering everyday operations of the NDB as well as all non-policy related
decisions, including those dealing with project funding.
And most
importantly, as discussed earlier, BRICS members should democratise the bank’s
functioning if new stakeholders are included in the future. They must find ways
to engage the recipients and beneficiaries in its decision-making apparatus. If
anything, the NDB must be a template for change, not a mirror to the existing
hegemony of money.
(Samir Saran is
vice-president at the Observer Research Foundation)
