Should we celebrate the creation of the New Development Bank?

Co-authored by Alice de Moraes Amorim Vogas, an associate at GIP – Public Interest Management in Rio de Janeiro, Brazil  

The New Development Bank established at the BRICS Summit in Fortaleza on 14–16 July could play a key role in supporting sustainable development and ending poverty. But to make this happen, we need a clear definition of its role, to understand how it will link with the existing development cooperation agenda, and clarity on its accountability mechanisms.

The New Development Bank is the first institution established by the BRICS (Brazil, Russia, India, China and South Africa). It will be based in Shangai, China; presidency will rotate, starting with India. The first chairs of the Board of Governors and Directors will be from Russia and Brazil respectively, though we don’t yet know how the governance structure will operate. The start-up capital will be US$50 billion and will grow to US$100 billion, with each BRICS country contributing equally.

The BRICS countries have also agreed to set up the BRICS Contingent Reserve Arrangement with an initial size of US$100 billion. This aims to help countries forestall short-term liquidity pressures and strengthen the global financial safety net.

Capitalisation is only a partial indicator of a bank’s size. The New Development Bank is set to be relatively small, at least in its first few years. Capital contributions to the International Development Association were US$304 billion between 1944 and 2014 in total. The International Bank for Reconstruction and Development operates with a capital of US$15 billion, but gathers other resources on the market. The World Bank has a subscribed capital of US$223.2 billion and the Asian Development Bank US$162.8 billion.

Formalising BRICS alliances- and bidding for more representation

BRICS countries now make up about 20% of global gross domestic product (GDP) and over 40% of the world’s population. They are also home to almost half the world’s population living in poverty (on less than PPP$1.25 a day). Together they command US$5 trillion in international monetary reserves. But their weight in the global economy is not reflected in how they’re represented in development finance institutions such as the World Bank and the International Monetary Fund, where voting rights shares for countries like China, India and Brazil are well below their share of global GDP.

BRICS countries leaders have declared that the New Development Bank is a complement to the Bretton Woods institutions and not an alternative. At the same time, its launch is a response to the unsatisfactory progress towards more equal representation in these existing institutions, and a move towards a more multi-polar world where emerging countries have a stronger voice. The bank also addresses some criticism of the low institutionalisation of the BRICS.

Institutionalisation has been progressing with the inauguration of the Business Council and the Think Tanks Council. During the summit, more than 15 bilateral treaties were signed between China and Brazil, and by India and Brazil, to advance cooperation in the fields of technology development, education, environment protection and security among others.

The BRICS Bank’s agenda: infrastructure and sustainable development

The New Development Bank will invest in BRICS countries and other developing economies. It will invest in infrastructure, aligning with BRICS countries’ private sector interests and filling a market gap, as the sector has struggled to attract investments considered by some countries in the South essential to their development. The Bank will also invest in sustainable development projects, but the scope of this is still unclear, leading to some concerns about the outcomes of these financed operations.

These new resources should help reduce poverty and inequality, and increase sustainability. They are among the aims of the BRICS cooperation and should inform decision-making on projects the bank will finance. We need transparency and accountability to make sure it uses its resources in line with these objectives. Yet so far, we have little information about what mechanisms it will adopt to address this issue.

Clarity needed on Bank’s plans for tackling poverty, equality and sustainability

It’s not yet clear how these resources will be used together with the development cooperation strategy of each of the BRICS countries and their private sector investments. BRICS countries are all involved in some form of development cooperation but do not have a shared vision of the purpose of this. Links between BRICS-based actors in the private sector are increasing, and fostering the internationalisation of their companies is among the BRICS goals. The bank is likely to have a role in this. In both cases, we have limited information on decision-making, implementation and impact.

The New Development Bank represents an opportunity to make progress towards a more equal and sustainable world. We welcome its establishment but – to make a real difference – the bank must put poverty reduction, equality, sustainability and transparency at its core.