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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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BRICS Summit 2015 – A New Era for Developmental Banks

By: Moutusi Sau
July 31, 2015
   
   

Earlier this month, leaders of Brazil, Russia, India, China and South Africa met in Ufa, Russia for the seventh BRICS Summit. Despite the generally dark mood – the meeting was overshadowed by the sudden drop in Chinese stock markets that same day – the BRICS still managed to come together to establish the New Development Bank (NDB) and the Currency Contingency Arrangement (CCA).

Ever since the first BRIC Summit, in Yekaterinburg, Russia in 2009, the bloc has come a long way. The groundwork to form a development bank was laid down in fourth BRICS Summit in 2012 in New Delhi. The NDB was formally inaugurated just last week, on July 21, and will start accepting project proposals next year. The bank will be based in Shanghai. The NDB has been publicized as a rival to the World Bank, and the CCA has been mentioned in the press as a competitor to the IMF. However, Jim Yong Kim, president of the World Bank, has suggested that he intends to work together with the NDB to share knowledge and co-finance infrastructure projects. This development is interesting because the formation of the NDB was spurred by the discontent of the developing nations over the delay in implementation of proposed 2010 reforms in the Bretton Woods agreement. The proposed changes would reform the quota structure as per the GDP of the nation, helping equalize opportunities for smaller economies. Emerging countries, including the BRICS, have long felt they lacked a voice in the decisions made by the IMF and the World Bank.

Interestingly, the inauguration of the NDB was made less newsworthy by the opening, a few months ago, of Asian Infrastructure Investment Bank (AIIB). The AIIB, which is primarily a Chinese-run bank (China has a subscribed capital of $29.8 billion[i] in a total capital base of $100 billion) and has already garnered support from 57 member countries, including the UK and Germany. The AIIB has also pledged to work together with the NDB, although they will be lending mostly in the same space. The biggest news is that the NDB and AIIB have announced that they will be issuing their first loan in yuan. This will be a significant shift away from the dollar – a big first step for the BRICS toward fulfilling their goal to promote their intra-trade in local currencies.

Click to see the interactive chart

Despite the increase in clout and increasing collaboration between the BRICS countries, several analysts have questioned the countries’ ability to act collectively as a group. The foremost question is the oversized role of China in the bloc. China’s GDP is 61 percent of the GDP of the BRICS overall. China has 77 percent of foreign exchange reserves amongst all the BRICS nations. Bilateral trade agreements between China and other four BRICS nations account for 85 percent of total intra-BRICS trade. Overall, The BRICS nations have not had a great year, with the exception of India. The remaining BRICS are freighted with a lackluster GDP growth trajectory this year. Russia has been facing increasing pressure from the West due to sanctions imposed since last year. At the moment, South Africa is probably more of a benefactor than a real contributor in this bloc. Another often mentioned pillar of intra-BRICS trade agreement also looks lopsided. Of the total $376 billion invested in Africa last year, $222 billion came from China, while Russia contributed only $12.5 billion.[ii]

However, even as skeptics are quick to point out shortcomings, there is no denying that the BRICS were the fastest growing bloc, and their combined GDP exceeded the United States’ GDP last year. Goldman Sachs has estimated that by 2030, 85 percent of the world’s middle class will be living in BRICS. However, with the recent events, such as the huge declines in China’s stock market, questions remain. Those markets continue to fall, despite state intervention. It will be interesting to watch the BRICS’ collective growth alongside the increasing footprint of China in the world market as it hosts both the AIIB and the NDB, two of the newest banks in the developmental space.

[i] How China Plans to Run AIIB: Leaner, With Veto

[ii] Insight and Strategy - Africa’s re-pivoting trade portrait: 2014