BRICS form new development bank

Updated: 2014-07-16 11:27

By Chen Weihua in Washington, Amy He in New York and Zheng Yangpeng in Beijing (China Daily USA)

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The world's five key emerging economies, known as BRICS, reached an agreement on Tuesday to set up a development bank headquartered in Shanghai.

The announcement was made as part of the Sixth BRICS Summit Fortaleza Declaration on Tuesday afternoon after the leaders of the five nations - Brazil, Russia, India, China and South Africa - met for a two-day summit in Brazil.

The declaration said the agreement to establish the New Development Bank (NDB) was signed at a time when the BRICS nations and other emerging markets and developing countries continue to face significant financing constraints to address infrastructure gaps and sustainable development needs.

The NDB was founded "with the purpose of mobilizing resources for infrastructure and sustainable development projects in BRICS and other emerging and developing economies", the declaration said.

"Based on sound banking principles, the NDB will strengthen the cooperation among our countries and will supplement the efforts of multilateral and regional financial institutions for global development, thus contributing to our collective commitments for achieving the goal of strong, sustainable and balanced growth," the statement said.

The NDB will have an initial authorized capital of $100 billion and an initial subscribed capital of $50 billion, shared equally among the founding members.

The first chair of the Board of Governors will be from Russia, the first chair of the Board of Directors will be from Brazil, the first president of the bank from India and its Africa regional center will be established in South Africa.

The bank's headquarters will be in Shanghai, ending a long debate over the location. The Chinese metropolis has a population more than 20 million and aspires to being a global financial hub.

BRICS form new development bank

Besides the bank, the BRICS nations also announced the signing of a treaty for the establishment of the BRICS Contingent Reserve Arrangement (CRA) with an initial size of $100 billion.

The BRICS countries have expressed their disappointment at the slow pace of reforms at the International Monetary Fund (IMF), which they say has a "negative impact on the IMF's legitimacy, credibility and effectiveness".

The BRICS nations applaud the goals set by the World Bank Group to help countries end extreme poverty and to promote shared prosperity.

But the group also calls for an international financial architecture that is more conducive to overcoming development challenges.

Eswar Prasad, a senior fellow at the Brookings Institution, described the new bank as "an important symbol of the rising stature of the major emerging market economies, which now have the clout and the resources to play a significant role in international finance".

"Setting up the BRICS bank would be an important signal that the major emerging market economies are willing to cooperate and follow through in making progress towards their common goals," said Prasad, a former senior official at IMF. "This substantive action would be a key step that turns statements and rhetoric about cooperation among these countries into a reality."

Nicholas Lardy, a senior fellow at the Peterson Institute for International Economics, said it's a good sign that the BRICS nations reached an agreement to base the bank in Shanghai.

"It can make a positive contribution to global growth," Lardy said. "It also sends a message that China and some other countries are not happy at the pace at which governance is changing at long-standing multilateral international institutions."

Lardy said the most important thing was not where the bank is located, but its governance, the principles it's going to operate on and the level of transparency and the international practices it adopts.

"In a sense, the new development bank is another version of the World Bank, but without some of the political conditionality issues that have traditionally been attached to World Bank loans," said Harold Trinkunas, director of the Latin America Initiative at the Brookings Institution.

"In a lot of ways, the BRICS countries are all concerned with the level of influence that the west exercises in the current set of the institutions that govern the international financial economic system, and they're looking to create some alternatives that diversify and give them some options," Trinkunas said.

Yukon Huang, senior associate at the Carnegie Endowment for International Peace, said that though the bank is launching on the premise of equal contributions by the five countries, China will stand out.

"This is a multi-polar world, which China favors, being that there are many poles of power or interest," Huang said. "China would be willing to compromise in terms of equal shares just to support a general principle. But in exchange, China would want some evidence of something that would reflect the fact that it's by far the largest economic power within this BRICS grouping."

"These institutions - seen as counterparts of the Bretton Woods Institutions, the World Bank and the International Monetary Fund - are articulations of the growing assertion of the BRICS nations in the management of the global economy," said Biswajit Dhara, an economics professor at Jawaharlal Nehru University. "But the most important aspect of this development would be that it is the first time such institutions are being established by the emerging economies."

Chen Fengying, director of the Institute of World Economic Studies at the China Institutes of Contemporary International Relations, said: "There are many suspicions. There will surely be problems. But what is important is to start the operation of the two institutions. No matter who says what, we have to do what we believe is right."

Huang Wei, a researcher at the Institute of World Economics and Politics at the Chinese Academy of Social Sciences, said the BRICS bank would be different from the World Bank and Asian Development Bank. While those two focus on aid to alleviate poverty in the least developed nations, the BRICS bank will focus on development and infrastructure funding.

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(China Daily USA 07/16/2014 page1)