By Piyush Jain, Rajiv Gandhi National University of Law, Punjab.
The New Development Bank (NDB), formerly referred to as the BRICS Development Bank, is a multilateral development bank operated by the BRICS states (Brazil, Russia, India, China and South Africa) as an alternative to the existing US-dominated World Bank and International Monetary Fund. The bank is set up to foster greater financial and development cooperation among the five emerging markets. The New Development Bank was agreed to by BRICS leaders at the 5th BRICS summit held in Durban, South Africa on 27 March 2013.
As the division of voting power at the IMF has been a political subject based on a quota system, each member country is assigned a quota, or the monetary contribution, that is supposed to reflect the country’s relative size in the global economy as measured by GDP. This quota also determines each member country’s voting power. However, these quotas have not been revised for many years while the contribution to global GDP from the emerging BRIC economies has grown dramatically (China’s voting power currently sits at 5% while it now makes up roughly 10% of the global GDP). As a result, the BRICS countries carry a disproportionately low amount of voting power in the IMF. In 2010, the G20 agreed to reforms to give more voting power to emerging economies like BRICS; however Congress has yet to approve these reforms. Approval from the U.S. (which holds 17% of the IMF’s voting power) is required to fulfill an 85% supermajority needed for such IMF reforms. Interestingly, the proposed reforms would only dilute the U.S. voting power to roughly 16.5%, still enough voting power to veto any future IMF proposals that require a supermajority.
Thus on 15 July 2014, the first day of the 6th BRICS summit held in Fortaleza, Brazil, the group of emerging economies signed the long-anticipated document to create the $100 billion BRICS Development Bank and a reserve currency pool worth over another $100 billion. Both will counter the influence of Western-based lending institutions and the dollar.
Each member country is going to provide shares of capital stock and these shares of capital stock in the NDB not only represent equity of the contributing member but represent a country’s direct representation in decision-making.
Documents on cooperation between BRICS export credit agencies and an agreement of cooperation on innovation were also signed. Shanghai was selected as the headquarters after competition from New Delhi and Johannesburg. The first president was supposed to be from India and on 11 May 2015, K. V. Kamath was appointed as President of the Bank.
On July 15, the leaders of BRICS signed the articles of agreement for the NDB, and a treaty for the establishment of a contingency reserve arrangement (CRA) in their first effort to balance the world financial order. While the CRA is intended to relieve liquidity pressures in times of crisis, the bank will be used to facilitate infrastructure investment and promote sustainable development in nations facing financial constraints—something the BRICS nations believe needs more international capital than it is receiving.
Article 2, Chapter 1 of the agreement provides the purpose of the establishment of the bank. It states:
The purpose of the Bank shall be to mobilize resources for infrastructure and sustainable development projects in BRICS and other emerging market economies and developing countries to complement the existing efforts of multilateral and regional financial institutions for global growth and development.
And Article 3 states the functions which the bank is authorized to do to fulfill its purpose. These are:
- To utilize resources at its disposal to support infrastructure and sustainable development projects, public or private, in the BRICS and other emerging market economies and developing countries, through the provision of loans, guarantees, equity participation and other financial instruments;
- To cooperate as the Bank may deem appropriate, within its mandate, with international organizations, as well as national entities whether public or private, in particular with international financial institutions and national development banks;
- To provide technical assistance for the preparation and implementation of infrastructure and sustainable development projects to be supported by the Bank;
- To support infrastructure and sustainable development projects involving more than one country;
- To establish, or be entrusted with the administration, of Special Funds which are designed to serve its purpose.
It’s a permanent instrument which will be in the heart of BRICS cooperation. The idea is that the funds would be accessible to individual members as an emergency fund if they experience balance of payment problems. The Bank with quite a large capital will be in the position to provide finance for important projects and in case of Russia it is going to play a more important role, as the World Bank is not lending money to Russia and Russia isn’t borrowing from it because of the issue over Ukraine. The BRICS Development Bank has been positioned as a bank that will provide developing countries with alternative funding.
In addition, the BRICS Development Bank also promises to make lending processes faster, simpler and cheaper, as opposed to the current protracted, complicated and expensive processes undertaken by the World Bank.
However, it should be noted, their balance-of-power initiative is not present in governance in either financial instrument. Because eventually, all the United Nations will be eligible for membership and borrowing, the agreements specifically outline the terms of future earning of stock. The articles explain that a country’s increase in capital share must be agreed upon by all founding countries, the BRICS capital share must never fall below 55 percent, and a non-founding member may never increase above 7 percent.
Muhammad Yunus, who is a Nobel Peace Prize-winning economist and a banker, says, “The New Development Bank should not become a World Bank clone but focus instead on eradicating poverty, unemployment, and net carbon emissions.”
He also gives four strategic points which should be taken into consideration by the New Development Bank.
- The first strategy would be to unleash the creative power and commitment of the new generation of youth. If BRICS can mobilize the power of the youth, it will become easier to achieve the goals.
- The second strategy would be to focus on technological innovations to solve human problems. Technology today is under the command of money-makers and war-makers. Socially committed drivers must take charge of technology. They are invisible today. Combining the power of the youth with that of technology will create an unshakeable force.
- This brings us to the third strategy: building social businesses to mobilize their creative power to solve long-standing and complex social, economic, and environmental problems.
- Social business is a new variety of business which delinks itself from a profit motive. This business is mission-driven, with non-dividend companies being exclusively devoted to solving human problems. After the company makes a profit, the investor recoups his or her investment money but does not take any profit after that. Additional profits made are ploughed back into the business to expand and improve it.
With these objectives, functions and strategies, creation of this institution becomes important as it is the first step towards the institutionalization of BRICS and important to develop a relationship between member countries.