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New Development Bank – Brics Bank

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updated on September 4th, 2019

Brics Bank

  • The Idea of BRICS bank was put Forward by India in the 4th Brics Summit in 2012, New Delhi.
  • Together with the process of globalization world regional forces have also been asserting their power through different short of alignments— the Fortaleza Declaration of heads of state (late July 2014) from Brazil, Russia, India, China, and South Africa (the BRICS countries) is another such attempt—the creation of a BRICS Bank i.e., New Development Bank (NDB).

Major highlights about the bank are as given below:

  • (i) The bank will have an initial subscribed capital of $50 billion—equally shared by the five nations.
  • (ii) The capital base is to be used for funding infrastructure and ‘sustainable development’ projects in the BRICS countries initially.
  • (iii) Other low and middle-income countries will be able to get funding as time progresses.
  • (iv) A Contingent Reserve Arrangement (CRA) of $100 billion is to be also created to provide additional liquidity protection to member-nations during the balance of payments problems.
  • (v) The CRA is being funded 41 percent by China, 18 percent each from Brazil, India, and Russia, and 5 percent from South Africa.
  • (vi) CRA, according to the Declaration, is ‘a framework for the provision of currency swaps in response to actual or a potential short-term balance of payments pressures.’

More than the establishment of the NDB, the Fortaleza Declaration is remarkable for the adoption of a one-nation one-vote prescription for the proposed bank. The Bretton Woods institutions (the World Bank and the International Monetary Fund) have structures that are not equitable.

As per the experts, two factors have triggered the birth of the NDB:

(a) BRICS has emerged as a big economic power and solidified their ties in terms of commerce with the emerging market economies and developing countries (EMDCs) and they are a force to reckon within the global economy.
(b) Their disenchantment with the Bretton Woods institutions has been growing over the years.

Fortaleza Declaration

Two statements of the Fortaleza Declaration make the situation more clear—

(i) “We are confronted with persistent political instability and conflict in various global hotspots and non-conventional emerging threats. On the other hand, international governance structures designed within a different power configuration show increasingly evident signs of losing legitimacy and effectiveness, as transitional and ad hoc arrangements become increasingly prevalent, often at the expense of multilateralism.”
(ii) “We believe the BRICS are an important force for incremental change and reform of current institutions towards more representative and equitable governance, capable of generating more inclusive global growth and fostering a stable, peaceful and prosperous world.”

The BRICS bank development comes at a time when reforms at the Bretton Woods institutions fail to fructify for one reason or the other and with the US and European nations still not reconciled to concede BRICS nations a greater voice in the governance structure of the Bretton-Woods institutions.

Whether the BRICS-sponsored NDB will be a fitting alternative to the Bretton Woods twin depends on a host of factors. Major ones of these factors, among others, are its ability—

(i) to put in place a conflict resolution mechanism,
(ii) to devise a robust credit appraisal mechanism, and
(iii) to put in place an effective supervisory regime.

The BRICS-sponsored development bank is not an isolated and unique initiative. Similar initiatives had sprung up in the past to blunt the might of Bretton-Woods twin. Development Bank of Latin America (created by Andean nations) in the 1960s, the Chiang Mai Initiative in early 2000s (of 10 ASEAN nations plus China, South Korea and Japan) to establish a network of bilateral currency swap pacts in the wake of Asian currency crisis, and the establishment of the Bank of South by Latin American countries in 2009 were the result of escalating dissatisfaction with the US-dominated IMF and World Bank.

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