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Moutusi Sau
Senior Associate, Program Research Analyst, Center for Financial Markets
Moutusi Sau is a senior associate at the Milken Institute's Center for Financial Markets in Washington, D.C. She conducts research and helps execute programmatic activities on Milken Institute projects involving new tools for access to capital, strengthening capital markets in developing countries, and housing finance reform.
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The BRICS bank: Rise of a new bloc

By: Moutusi Sau
August 07, 2014
   
   

The World Cup was not the only important event that wrapped up a few weeks ago in Brazil. Around the same time, the BRICS nations (Brazil, Russia, India, China, and South Africa) got together in Fortaleza and signed a contract that creates the New Development Bank (NDB). Popularly known as the BRICS Bank, it may come to rival the World Bank and International Monetary Fund. This important development, however, was overshadowed in the headlines by the Ukraine political crisis and the ongoing Israel-Palestinian conflict.   

The foundation for the bank was set up last year during the fifth annual BRICS summit held in Durban, South Africa. The plans were brought to fruition during this year’s BRICS Summit in Brazil. According to its initial mandate, the total capital base for NDB will be $50 billion and each member nation will contribute $10 billion to the core capital.[1] There is also a contingent reserve arrangement of $100 billion to help members during financial difficulties. According to the current proposal, $41 billion will be contributed by China, $5 billion by South Africa and $18 billion by the rest of the members.

The need to create a new development bank has been brewing for a long time. China is the second-largest economy in the world, yet has less voting power in the IMF and World Bank than smaller European nations like Belgium, the Netherlands, and Luxembourg. According to the World Bank, there is a $1 trillion gap in infrastructure investment in developing nations, a need unmet by the multilateral lending organizations.[2] Currently, only 40 percent of that gap is being filled through existing development banks, indicating the need for a bank that will exclusively cater to the infrastructure finance needs of BRICS nations.

Moreover, the development should not come as a surprise. The BRICS nations currently possess considerable clout and economic weight in the economic landscape. Outside of the Organization for Economic Co-operation and Development, they are the largest economic bloc in the world.  Their share of world GDP and total reserves has increased almost three times and six times, respectively, since 1993. Their cross-regional trade has expanded considerably. According to a study by India’s Chamber of Commerce, China is currently the largest trading partner of India, and their commerce reached $48.5 billion during the first nine months of the current fiscal year.[3]

The most astounding figure that exemplifies the BRICS’ contribution to the global ecosystem is their share of foreign exchange reserves. Together, these nations account for 43 percent of the world’s total. If the BRICS were to set aside one-fifth of their forex reserves (almost $5 trillion as of 2013), they can create a fund equivalent to the IMF ($1 trillion).[4] With these gargantuan assets, it is worthwhile to use their financial might to create a bank to address their greatest needs.

https://public.tableausoftware.com/views/BRICS/BRICSanotherview?:embed=y&:display_count=no

However, whether the new bank will succeed has yet to be seen. Indeed, many regional trade partnerships created to solve local financing gaps have failed. In Southeast Asia, the Chiang Mai Initiative—set up by 10 ASEAN nations as a network of bilateral currency swap agreements—has been underutilized. On the other hand, Corporacion Andina de Fomento (CAF), created by South American nations, has been a visible success. CAF was created to bypass the strict infrastructure loan requirements enforced by the World Bank. As of April 2012, it had provided more loans to its member nations than the World Bank and the Inter-American Development Bank combined.

There is no denying that the BRICS have a powerful emerging role in the global economy. Their political and geographical environments vary, but their financial collaboration is sure to strengthen them as a bloc.