The eyes of the world has focused recently on Brazil,which hosted an event that may prove in time to be the beginning of a grand project in global affairs. It wasn’t the World Cup, though. On July 15, Brazil organized the sixth meeting of leaders of the BRICS nations – Brazil, Russia, India, China and South Africa – and, following that, a meeting among the BRICS and the leaders of South America.
Since 2009, BRICS leaders have been gathering in what has primarily been a symbolic exercise, highlighting and promoting the idea that a strategic shift is underway in the global economy from the developed to the largest and fastest growing developing economies, which will require recalibrating global governance and political leadership. However, as developed economies have slowly recovered from the financial crisis and the BRICS nations have slowed, the utility of largely symbolic meetings has been questioned to the point where the importance of the BRICS itself is unclear to many but the most dedicated advocates.
This changed recently in Fortaleza, Brazil, as the BRICS leaders advanced an agenda of concrete actions, including the establishment of a $50 billion BRICS “New Development Bank” and a $100 billion contingent reserve arrangement designed initially to address global balance of payments pressures within the bloc. Operations are planned to begin in 2016. Given China’s overwhelming economic size vis-à-vis its BRICS partners (some 70 percent of overall GDP), Beijing’s voice will carry greater weight on issues of highest importance. For example, after much debate, the location of the new BRICS bank will be Shanghai; compromise was reached on the leadership, which will rotate among the founding five members.
At the same time, the implications of an international financial institution underwritten by the BRICS are uncertain but potentially significant. It is unclear whether the bank will directly compete with the World Bank or IMF, which are much larger, or regional development banks, or even existing national development banks. But it’s worth noting that China’s initial contribution to the new bank will be only a little less than its paid in capital at the World Bank, and the other BRICS nations will actually contribute more to the new entity than they do to the World Bank.
A key question is the value added for potential borrowers of using the BRICS bank rather than existing global financial institutions. Until the charter of the bank and the procedures are finalized, there is no clear answer. But from a borrowing perspective, one of the most onerous aspects of going to international financial institutions for assistance is the conditionality that goes with lending programs. Over the years, the World Bank, IMF and others have added numerous additional layers of obligations that go well beyond straight financial obligations for repayment and, often, economic restructuring. Now, conditionality often includes social development requirements including poverty alleviation, environmental protection, human rights and gender equality, anti-corruption and other topics in addition to the traditional financial and economic requirements. This is on top of politically sensitive steps which may be required as part of any economic restructuring such as the reduction or elimination of certain subsidies, improved competition policy, central bank independence and the like.
These obligations can be highly intrusive and are often resented by borrowers. At the same time, they are a primary means by which the Westernized international community has promoted the broader dissemination of a vision consistent with its values. To the extent borrowing nations have the option to approach the BRICS bank for assistance that is not conditioned with non-financial obligations, they may find it to be a more attractive proposition. That will both enhance the importance of the BRICS, while also potentially undercutting one of the most important and effective tools that the international community has relied upon in the post-war era to promote policies designed for good governance and economic development. This could become most readily apparent in sectors that the BRICS nations deem strategic, such as the energy and extractive sectors, which are among the sectors worldwide most fraught with environmental, social and local community complications. Established international financial institutions normally consider these matters; the BRICS bank might not.
Even if this scenario is overblown, the existence of new lending options may nonetheless encourage existing development banks, including the World Bank, to soften or reduce their conditionality requirements in order to promote their own lending in certain instances. Such “conditionality arbitrage” might suit the leaders of borrowing nations but it will ultimately blunt the development prospects of their people.
From the lenders’ perspective, they will have to determine whether the political advantages of engagement with nations that may have been shut out of the international financial system or may otherwise be unreliable borrowers outweighs the risks of non-performance of loaned capital.
As the outlines of the BRICS financial facilities are being established, the project architects will have to keep these difficult but relevant issues very much in mind.
This blog discusses some of the obstacles that the BRICS must undergo in order to establish and promote this idea of a new development bank. I believe its quite possible for them to be able to achieve this if the World Bank as well as other existing development reduce the requirements they have in place for BRICS in order to promote them. With more added obligations, it makes it tough for borrowers to become trustworthy of them, and it creates difficulty in the establishment. Therefore, the development bank will only be achievable if the relevant issues brought up are reduced, and the requirements decreased.
ReplyDeleteI worry that the creation of a BRICS New Development Bank will come with, as this post hinted, more lax non-financial requirements. While some may view the conditionality of the World Bank as being excessive, people respond to incentives, and borrowers are people, even though may they be in the form of corporations, businesses, etc. In order to move towards improvements in areas such as "...poverty alleviation, environmental protection, human rights and gender equality, anti-corruption.." it must be incentivized. If there are no incentives for big businesses to address these issues, it would significantly slow down current improvement speeds while also discouraging the "keeping up with the Jones'" effect the increasing amount of business who do incorporate (by choice or by conditionality) social / environmental obligations into their business plans have on other business. IE: having a social / environmental aspects to the business plan is becoming a "norm," and BRICS' unaggressive conditionality could work against that. As the article says, having lax requirements may attract more borrowers "...while also potentially undercutting one of the most important and effective tools that the international community has relied upon in the post-war era to promote policies designed for good governance and economic development." This could then have a domino effect wherein not only are businesses less likely to obtain a loan with lots of conditionality elements, but in order to keep up with the new aspect of competition, the World Bank may scale back on its own conditionality requirements. As the post says, "Even if this scenario is overblown, the existence of new lending options may nonetheless encourage existing development banks, including the World Bank, to soften or reduce their conditionality requirements in order to promote their own lending in certain instances. Such 'conditionality arbitrage' might suit the leaders of borrowing nations but it will ultimately blunt the development prospects of their people."
ReplyDeleteThe BRICS nations are attempting to create a new development bank that may rival the existing World Bank and any other international lender. Based on the reading, it is fair to say that the BRICS bank would be much easier on borrowers, in terms of their obligations that come with repayment. It seems that the World Bank, and the like, have conditions that go along with borrowing that are anything but financial. Why is it necessary to have borrowers perform philanthropic work? Does that extra condition lessen the amount of interest borrowers have to pay? Or, is this just an additional hurdle? I believe that philanthropy and community outreach are extremely important, but forcing borrowers to participate and use their capital and resources to abide by the set terms, seems wrong.
ReplyDeleteThe BRICS bank, if the report is true, should take a good chunk of business away from the other international banks. If that is the case, those like the World Bank will likely conform to the new standard set by the BRICS.
The formation of the BRICS bank is an opportunity for leaders to borrow from a fund that promotes economic development in world regions that need it most. As others have mentioned, if the obligations to get a loan are lax, it would certainly attract more borrowers and establish relationships between the borrowing nation and the BRICS bank. The World Bank has these additional requirements because they want to ensure that basic needs for a functioning society are met such as human rights and anti-corruption legislation, and that the lending of money from the BRICS banks will support human development. I think that the BRICS Bank can adopt similar lending requirements and obligations to nations, and have particular requirements exempted, based on the state of affairs in a given nation. The foundational requirements should be those of human rights issues. The amount of economic development that can stem from BRICS bank borrowing can be significant, only if coupled with human development. A nation should never allow their economy to grow without this because it can have the potential to stifle economic growth in the long run.
ReplyDeleteIn contrary to my rather definite comment in the previous blog post, this time I tend to be a little bit unsure.
ReplyDeleteIn general, what is the benefit and purpose of these banks? What would be the connection between World Bank, the new BRICS bank and FED?
As far as I understand it, the first two differ in nature from FED - or any other central park, as they facilitate countries with different currencies. Thus the new BRICS bank would resemble the classic notion of "bank" more than a central bank, dealing with borrowing and lending funds to countries, correct? However, how would that necessarily differ from other large international banks? Perhaps this bank would not seek profits, but if not, what would it be seeking?
Even though the answers are hinted in the blog post and other sources, mostly the descriptions sound rather vague.
I believe that the creation of a BRICS development bank was created a backlash to the way the IMF and World Bank function. Both the IMF and World Bank, as it states in the article, "have added numerous additional layers of obligations that go well beyond straight financial obligations for repayment and, often, economic restructuring." For instance, they have set up social development requirements including poverty alleviation and anti-corruption among others. Since the IMF and World Bank are run by the developed countries, the borrowers, mainly smaller poverty stricken countries believe that these extra requirements are just another way for these countries to monitor what is going on within the specified country. They resent these required polices but have no choice but to borrow from the World Bank or IMF. In addition, most of the developing countries do not have a prominent voice in influenceing decisions made by the World Bank or IMF. Having a BRICS bank would be beneficial because the obligations to get a loan are very lax. I believe that the main reason BRICS bank has been created is due to the fact that the IMF and World Bank have been inefficient in their lending procedures. Ultimately, the World Bank among others, will need to compete against the BRICS bank by changing the way it operates or the BRICS bank could potentially reduce the amount of loans other international banks are able to create. However, I am not so sure that its a bad thing.
ReplyDeleteI have looked into this a little bit more and looked at a lot of articles. I did not understand completely what will be an exact issue because I did not see what they would be doing wrong. From what I read a lot of people are worried that they are going to have a laid back system with not strong policies. People think that it could be problematic if the bank starts to give out loans easily. I would like to see how this develops a little bit more and see what they policies they have are going to be.
ReplyDeleteI am a bit skeptical about this because I do support the establishment of this bank but I feel that it will take a numerous amount effort and time before the BRICS are "accepted" as countries who can compete with the United States and Europe.
ReplyDeleteThe creation of a BRICS development bank will be essential toward the growth and reputation of these developing economies. The bank can improve the financial sector of these countries, allowing them to be more independent from the World Bank and IMF. This can lead to a reduction in corruption, poverty, and more funds for education. The bank will address the infrastructure needs of these countries - creating new jobs, boosting tourism, and improving transportation among many others. There's no doubt that the bank will have positive outcomes for these countries, but these outcomes will not emerge unless methods are exercised effectively and efficiently.
Relative to the IMF and World Bank, the New Development Bank lacks the credibility (financial and expertise) of competing with these multilateral financial giants; though the possibility of accumulated wealth and development should not be ignored. Presently, the United States and Europe are largely represented and mandated to control the economic aspects of the developing world through the IMF and World Bank. This a privilege that these countries will keep a strong hold on (and who wouldn't, given the high status?).
I am wondering whether the strategic relationship between these nations will falter, considering that China's large economy and greater contribution towards the bank, has overshadowed the other four countries. Will the bank allow for a more equalized representation of these countries and create a structural union? How will a small economy like South Africa enforce its status in this alliance while simultaneously compete with a larger economy like Russia?
Mandy,
DeleteI also defend the establishment of this new development bank for the sake of BRICS countries. However, it will take too much time and effort for them. I defend this establishment no matter what happens. I think the country leaders should dedicate their time for establishing this bank.
I think that the creation of BRICS Bank may bring non-financial requirements at this point. There are some requirements but BRICS needs this bank to help meet the developing world’s huge infrastructure needs. It also frees up other global financial institutions to better serve lesser developed nations. Leaders of five emerging economics that we know as BRICS try to increase their role in global financial system through the agreement of establish a bank in Shanghai. This new bank will provide some ways of providing alternative ways for financing new roads and bridges. I can view that NBD has been given $50 billion in initial capital with the contribution of each of five counties. The idea of this new bank can be even bigger than the World Bank or IMF. Critics have different ideas on this issue as well and they mostly favor this. The world is in flux again and this was underscored at the time the officials announced the creation of New Development Bank. For their growing share in the global economic BRICS countries and other emerging economies search for new financial institutions and trade relationships and they do this in order not to be dominated by the West. Though there are harsh requirements, BRICS countries should do this.
ReplyDeleteI am very skeptical of the BRICS Bank because we have not seen something like this in a very long time. From their perspective, I think that this is a very strategic yet risky move. BRICS need to do something to help them continue to move forward. These countries have begun to develop at a much higher speed but they also have seem some setbacks. In order to make themselves grow, they need to do something drastic. On the other hand, if this bank fails it could set them back to where they started. This would hurt a lot of economies. I think that if they take the time to think out their strategies and plans, that this bank could be an overall success. There is no certainty in markets, so it is a coin toss most of the times. I also think that because it is five countries working together that they may have a better chance of success. Each country has had their own experiences and knowledge in the markets. If this bank is a success, we may see these countries in more powerful roles sooner than later.
ReplyDeleteThe creation of a BRICS developmental bank can increase the status and reputation of the BRICS countries. Having their own bank is a sign that the developing nations are ready to act as major leaders and lenders in a global setting. I think the BRICS bank was created to compete with the IMF and World Bank which both seem to have a westernized approach to development and lending. Hopefully, the BRICS bank will be able to aid less developed nations which need the most help and offer a new perspective on the most effective ways to increase economic development within these countries. The article raises concerns that the BRICS bank will lend without the conditionality of the lending programs seen in the IMF and World Bank. The article mentions that the conditions attached with the IMF and World Bank lending are the “primary means by which the Westernized international community has promoted the broader dissemination of a vision consistent with its values”. The growing concern throughout this article is that now that there is the opportunity to have another international bank to borrow from countries will not focus on the social, political, and economic improvements that were once attached to borrowing. It is also feared that competition from the BRICS bank will cause the IMF and World Bank to lower their standards for borrowing. I believe that the BRICS bank may not push the same westernized values as the World Bank or IMF, but still will have some conditions attached to their lending. I think the smaller size and means of the BRICS bank will force developing nations to still have to borrow from the IMF and World Bank and therefore the social improvements will continue. Having a BRICS bank should take some of the pressure off of the other banks so more developing countries can get the aid they need and increase overall development. I believe that other nations will pressure the BRICS bank to improve social conditions as well as economic conditions.
ReplyDeleteI believe that the BRICS development bank being established is pretty significant for the future international order. Since the BRICS members are largely still developing countries, this development bank will focus on how they will improve the living standards of their citizens. Also, many other developing countries are in desperate need of funding for infrastructure projects, which they will be able to receive. Next, the BRICS bank would be able to demonstrate China’s global leadership. Since China is large and able to quickly development itself, they can really be of use to the world, as long as they do not give the impression that they dominate the BRICS bank. China should not try to impose its own will and rules on other members and developing countries seeking funding from the bank, but instead promote equality with the bank as a common platform for all developing countries to realize their development dreams. Lastly, it can be said that the BRICS bank is important because it would be a direct challenge to the global order, being led by the West. While many feel that the BRICS bank is responding for the many failed reforms of the IMF and World Bank, as developing countries like China will not be able to increase their influence within that institution. Ultimately, the competition that is between the BRICS bank and the World Bank should be about being efficient instead of the struggle between liberal vs. alternative economic philosophies. The West and the World Bank should not view the BRICS bank as being a threat to their domination of the global economics order. I do not think that the BRICS development bank will replace the World Bank or IMF in the future but it will still compete with it.
ReplyDeleteThe BRICS' new development institutions bring the promise of becoming major sources of capital for the developing world, which is in dire need of infrastructural development. However much the need is, this new development may challenge the World Bank. Also, China's dominance within the grouping could complicate their so-called goals for establishing a democratic global construction of governance. Quite ironically, an internally imbalanced BRICS has sought to create a more balanced global order. Being the fact that the capital for the bank will be divided among the five participating countries, although the economies of the countries are clearly not identical in size, and some may be more vulnerable than others at times, China takes role as a the dominant in the group. In my opinion, I think it is very far-fetched for the BRICS development to have try and take over the World Bank and IMF. The development seems to carry out a different message to the world that is empowering.
ReplyDeleteThe beginning of BRICS was based on a very crucial mission of encouraging the new era industrialized countries of financial imbalance. As time has passed people may think that BRICs is not needed or not successful but this is not true. As time has changed, the mission of BRICS and its structure also has to change to suit the needs of economies today, BRICS is a good international competition to the global banks because it has less restrictions this is very appealing to borrowers. However, I do not believe it can overpower the World Bank but only remain strict competition to it. There are a lot of aspects to consider especially the NDB (New Development Bank) which will give more economic power and status to the participating countries which will be a positive aspect. The reaction of the IMF and World bank will determine the future and influence of the NDB.
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