Banking with a Difference, Part I

C. P. Chandrasekhar

This is the first in a two-part series on the New Development Bank (NDB) founded by the BRICS counties (Brazil, Russia, India, China and South Africa). This post discusses the NDB’s potential to “shift power relations in the multilateral development-banking infrastructure.” The second part considers some of the likely limitations on the changes the NDB will spur. The full article was first published as the H T Parekh Finance column in the Economic and Political Weekly.

The world has one more multilateral development bank, the New Development Bank (NDB), established on July 15, 2014. With authorised capital of $100 billion, and initial subscribed capital of $50 billion, the bank’s founding partners are the countries in the BRICS grouping (Brazil, Russia, India, China and South Africa). These five countries, which share equally the paid-up capital in the form of actual equity ($10 billion) and guarantees ($40 billion), will remain dominant in perpetuity with their aggregate shareholding never falling below 55 per cent. Organisationally too the BRICS bank seeks to be even-handed: India gets the first chance for a rotating Presidentship, China gets to host the bank’s headquarters in Shanghai, South Africa gets to host the first regional office, the first chair of the board of governors is from Russia and the first chair of the board of directors from Brazil.

In itself, the creation of a new multilateral development bank should not be considered out of the ordinary. A 2009 study from the Association of Development Financing Institutions in Asia and the Pacific estimated that there were over 550 development banks worldwide, of which 32 were in the nature of international, regional or sub-regional (as opposed to national) development banks. The news that one more has been added to the list should not elicit much excitement.

Yet the news that the NDB had been created was received in some circles with much enthusiasm, in others with disappointment and in yet others with a degree of discomfort.

The reason is that it is owned and controlled by the BRICS, an unusual grouping of “emerging” countries that started life as a mental construct of an investment banking analyst, Jim O’Neill, and then became a reality as the countries concerned bought into the idea. Four of their leaders first met in New York in 2006 and then constituted a formal group at a summit of four of the current five members in Yekaterinburg in 2009. South Africa joined the group in 2010.

Consisting of large countries, considered by some to be characterised by substantial potential for rapid growth, they are seen to be among the possible future giants that would challenge the currently dominant economies in the OECD. With two fifths of the world’s population and a fifth of the world’s GDP, the BRICS are indeed a formidable grouping. That makes the New Development Bank different because most existing development banks are in terms of shareholding, voting rights and management dominated by one or the other developed country, especially from among a set defined by the US, Germany, France and Japan. Other countries have been long arguing for a reshaping of these shareholding and control structures to account for the changes in the relative economic and political importance of individual countries in the global order, but progress with such restructuring has been slow and marginal. The creation of the NDB is seen as being a response to the intransigence of countries that dominate the existing multilateral development banking infrastructure, especially the US, and a declaration of the exasperation of emerging nations with the current global financial architecture. Its founding membership also gives it a much greater chance of success than past attempts like that with the Banco del Sur (Bank of the South) in establishing a successful competitor to the currently dominant multilateral development banks.

While these factors make the creation of the NDB a matter of significance, would it make a difference? There are development banks from the South such as the China Development Bank and Brazil’s BNDES that are large and have been expanding their international lending operations, especially in other developing countries, in recent years. But this is an instance of multilateral cooperation among a set of so-called “Southern countries” in the governance of a development bank, which infuses checks and balances into its operations. Moreover, along with the creation of the NDB, the summit at Fortaleza in July also established a BRICS-controlled Contingent Reserve Arrangement (CRA) with committed resources of $100 billion, defined as “a framework for the provision of support through liquidity and precautionary instruments in response to actual or potential short-term balance of payments pressures”. Since that involves entering an area now dominated by the IMF, controlled again by the developed countries led by the US, the perception that the NDB would shift power relations in the multilateral development-banking infrastructure seems corroborated.

It could for three reasons. First, in a world characterised by substantially enhanced possibilities of mobilising private resources in debt and equity markets, poorer developing countries are discriminated against and kept out of such markets. Since the NDB is owned and backed by governments in a set of “emerging economies”, it is likely to be able to mobilise substantial resources at reasonable cost from private markets and channel them to needy countries. Second, inasmuch as the allocation of these resources would be determined by the representatives of governments from the five BRICS countries, it could direct resources to projects that are more in keeping with the requirements of the Southern countries. Third, with control in the hands of the BRICS governments that are subject to the influence of local democratic forces, the terms on which the institution lends could in time reflect “Southern” requirements and sensitivities. For example, there has been developing country recognition that the kind of policy conditionalities attached to lending by the North-dominated Bretton Woods institutions limits national policy space in ways that favour the dominant nations and discriminates against the development interests of poorer countries and that of the disadvantaged sections of the populations in them. If, therefore, NDB lending occurs on terms that are more sensitive to the requirements of developing countries the impact can only be positive. In fact, conditionalities could be so set as to distribute a part of the benefits to the poor among developing country populations.

This is particularly important because of the role that development banks play. Unlike conventional banks, they focus on long term financing, and provide credit to more capital-intensive projects, especially of an infrastructural kind. Since such lending involves higher than normal debt to equity ratios, development banks to safeguard their resources closely monitor the activities of the firms they lend to, resulting in a special form of “relationship banking”, with far greater lending influence on the technology and on operations. The expectation is that such influence would be more Southern-oriented in the case of the NDB than, say, the World Bank.

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