Leaders of the BRICS group of emerging economies – Brazil, Russia, India, China and South Africa – have announced the formation of a multilateral development bank to finance infrastructure projects and drive economic growth.
Assessing the feasibility of a BRICS bank topped the agenda of this year’s BRICS summit, held last week in Durban, South Africa. After a year-long viability study by BRICS Finance Ministers, the bank has received an official stamp of approval and a presidential go-ahead.
Collectively producing 25% of global gross domestic product (GDP), accounting for 43% of the world’s population, and conducting 17% of global trade, the BRICS nations have signaled their intent to rebuild the world’s financial architecture in line with new geo-economic realities and the interests of emerging markets.
The bank’s ownership structure, governance, operational currency and location have yet to be agreed upon. These are highly political decisions that will continue to be negotiated in Ministerial meetings for months – or years – to come. Its financing is a source of widespread speculation. BRICS leaders aim to inject an initial $50 billion of seed capital, but there is disagreement over whether each country should contribute an equal amount of $10 billion or if contributions should vary by the size of their economies.
The bank’s financing model is a contentious issue, as the group is determined to set up an equitable system that does not allow a country to dominate decision-making on the basis of economic clout. The reality, however, is that the BRICS’ economic balance of power indisputably favors China. Its $3.2 trillion in foreign reserves are three times bigger than those of the four other BRICS countries combined. And with a GDP topping $7.4 trillion in 2011, China’s economy eclipses South Africa’s, whose GDP amounted to $408 billion in the same year.
The BRICS’ economic disparities highlight a key challenge that bank detractors have been quick to point out. These countries are struggling to form a common identity. Despite collectively presenting a potential economic counterweight to industrialized Western countries, individually the BRICS countries are very different. Russian President, Vladimir Putin, has likened them to Africa’s “Big Five” – the lion, elephant, buffalo, leopard and rhinoceros – and some commentators have questioned whether they can run as a herd or hunt as a pack on the global stage. They do not share similar ideological foundations and frequently operate as competitors in different arenas.
However, since their informal grouping in 2009, the BRICS countries have projected a single frustrated voice in their call for reform of Western dominated international financial institutions. First as the BRIC group and then as the BRICS, with South Africa’s entry in 2011, they have relentlessly urged the World Bank and the International Monetary Fund (IMF) to review institutional voting structures and quota systems to better safeguard the interests of developing countries, and have blamed the West for lax monetary policies that they believe could fuel instability in emerging countries.
The resolve of the BRICS to reduce dependence on these institutions and to ensure a policy mandate that is responsive to the development needs of the BRICS countries has been the driving motivation behind the formation of the bank. According to South African President Jacob Zuma, the infrastructure needs of the BRICS countries amount to $4.5 trillion over the next five years, and directly negotiating loans amongst each other, rather than having to access international capital through institutions whose governance and structure they distrust, has decided benefits for the BRICS’ future development cooperation.
The bank also raises the prospect of massive road, rail and construction projects across Africa, a continent currently in the BRICS investment spotlight. Resource-rich African states hold the promise of fulfilling the fast-growing energy and mineral needs of the BRICS populations, whose consumption patterns are set to skyrocket. Improving infrastructure for the extractive industries on the continent will likely be a priority for the new bank. However, whether African emerging economies and other non-BRICS developing countries will be able to join – and under what conditions – are unresolved questions.
It is essential that BRICS leaders take their time to set up a credible institution that is built on strong foundations and does not fall victim to the same pitfalls that have plagued other development banks. Their efforts may well unify a dynamic bloc of nations determined to introduce a new development financing model and an economic paradigm that works for emerging economies.