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FORTALEZA: The BRICS Bank Cometh!

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The 6th annual BRICS (Brazil, Russia, India, China, and South Africa) summit held July 14-16 this year in Fortaleza, Brazil, marked a crucial milestone for this historic grouping. It marked beginning of the institutionalization process of its core objective, global economic reform, with the unveiling of the 'New Development Bank' (NDB) and Contingency Reserve Arrangement (CRA). Mainstream financial media may be wary of the Fortaleza Declaration, with its tendency to question revisionist non-Western initiatives that appear against the status-quo of a Western-dominated global economy. But this is shortsighted. Rome was not built in a day.

A New Generation of Development Finance Institutions

It is unsurprising that it took the BRICS, launched in 2009, this long to arrive at the development of the NDB. It will take a while longer still for the bank to become fully operational, nor will its capacity or that of the CRA match that of the Bretton Woods Institutions anytime soon. However, the latter, long-established institutions run the risk of diminishing influence in the long-term, especially if political stalemate in Washington continues delaying ratification of World Bank and IMF reforms.

This forecast is underpinned by the fact that the NDB-CRA launch is part of a larger trend: a new generation of development finance institutions (DFIs) emerging on the scene. These include the prospective Asian Infrastructure Investment Bank (AIIB) and the Nairobi-based China-Africa Development Fund partnering with the African Development Bank to create the Africa Growth Prosperity Fund. These dovetail with the first regional presence of the BRICS bank being headquartered in South Africa as the New Development Bank Africa Regional Centre.

This center could become the focal point of what should have emerged out of the 5th BRICS summit: a BRICS-Africa forum as a means of setting in place an ongoing dialogue in how Africa relates to the BRICS and other emerging powers as well as  the different self-interested strategies of these external powers on the continent. The absence of such a 'legacy idea' emerging from South Africa's hosting BRICS may reflect a still unresolved African 'outreach partnership process.' Otherwise, the regional center could conceivably become a means of fleshing out what Zuma started with his BRICS Leaders-Africa Retreat given the stated commitment enunciated at Fortaleza, "to foster BRICS-Africa cooperation in support of the socioeconomic development of Africa, particularly with regard to infrastructure development and industrialization."

The broader point underlined by the NDB is the urgency of financing Africa's initiatives under the New Partnership for Africa's Development (NEPAD). The same urgency applies to other developing regions as well, such as the Union of South American Nations (UNASUR). The Bretton Woods institutions simply cannot meet the burgeoning demand of emerging market and developing countries (EMDCs). Neither, moreover, is filling this development financing gap a zero-sum proposition. The cooperative agreement between the World Bank and the Russian-dominated Eurasian Development Bank attests to this.

Potential Partnerships and Power-Sharing among the BRICS

The room for cooperative developmental financing partnerships is probably set to expand with the NDB and other new generation DFIs . Further, what starts out as a BRICS bank will, over time, become a BRICS-led bank as non-BRICS emerging economic powers are allowed to buy into it. Thus, with a starting capital of US$50 billion, to expand over time to US$100 billion, the BRICS capital share is to never fall below 55%. Control of the new bank will reside amongst the BRICS with each having an equal share in the bank's governance. Neither will each member be able to increase their share without all other BRICS members agreeing.

Here, India's influence, having unveiled the proposal for such a bank at its hosting of the 4th summit, proved decisive. Beijing had to accommodate a more democratic power-sharing arrangement from that which is prevailing at the World Bank and the IMF. As such, the NDB should be seen as signaling expanding possibilities for a new era of cooperative development financing. This could apply just as well to Beijing's AIIB partnering with the Japan-dominated Asian Development Bank, similar to partnerships China has forged with the AfDB.

Where a BRICS bank fits in a new international finance institutional puzzle

Individual BRICS members, however, will need to sort out their particular niche within this fledgling financial architecture and what they expect to gain from it. The fact that the NDB will be headquartered in Shanghai reflects the new realities of the Asia-centric gravitational pull of the global economy, with China emerging at the head of what amounts to a new economic sub-order within the G20. China's influence will be modulated by the rotational formula for choosing the NDB's president, which will initially go to India.

The NDB will come on stream none too soon. This is due to projections that the anticipated convergence between the EMDCs and OECD economies will fail to be realized by 2050 resulting from  the marked slowdown in BRICS and other EMDC economies. Thus, in a recent Beyond BRICS analysis for the Financial Times, Mario Pezzini of OECD observed that,

"At their average growth rates during 2000-2012, several lower middle-income countries such as India, Indonesia and Vietnam, but also countries in the upper middle-income bracket such as Brazil, Colombia, Hungary, Mexico and South Africa, will fail to converge with the average OECD income level by 2050. Their challenge is deepened by the slowdown in China, whose rapid growth in the past has benefited its overseas suppliers, especially natural-resource exporters. The free-ride towards convergence for many developing countries, based on China's growth, is over."  

These challenges are reflected in difficult political transitions underway within the IBSA (India, Brazil, South Africa) members of BRICS and the economic slowdown all five are experiencing. Possibilities of a renewed cold war threaten additional baggage that could also distort the public diplomacy of the BRICS. The fact that Moscow will host the 7th BRICS summit in 2015 will reinforce such a polarizing east-west dimension in how the BRICS are perceived.

Strengthening South-South cooperation

There is, however, an eminently compelling Sino-Russian agenda to be pursued in conjunction with India which would strengthen BRICS. This would be the upgrading of the trilateral Russia-India-China (RIC) ministerial into a summit level heads-of-state mechanism for pursuing the interregional integration of Central, South and Northeast Asia along lines advocated by faculty members of the Observer Research Foundation in a February 2014 policy brief. From India's vantage point, this would dovetail with Prime Minister Nahendra Modi's overtures for Chinese investment in India's massive infrastructural development interacting with NDB financing. Whereas the RIC could constitute the northern focal point of a BRICS global agenda, developing a relationship between BRICS and IBSA, possibly revolving around a more robust role for the IBSA development fund, could strengthen a global South-South cooperation agenda. This would round out a BRICS sub-order within a G20 navigating the regionalizing multipolarity of an evolving global economic federalism, revealing the long-term vision BRICS is intending to give impetus to.

 

Francis Kornegay is a Wilson Center Global Fellow, and co-editor of Laying The BRICS of a New Global Order: From Yekaterinburg 2009 to eThekwini 2013, Africa Institute of South Africa.         

Photo Credit: Government ZA via flickr

About the Author

Francis A. Kornegay, Jr.


Africa Program

The Africa Program works to address the most critical issues facing Africa and US-Africa relations, build mutually beneficial US-Africa relations, and enhance knowledge and understanding about Africa in the United States. The Program achieves its mission through in-depth research and analyses, public discussion, working groups, and briefings that bring together policymakers, practitioners, and subject matter experts to analyze and offer practical options for tackling key challenges in Africa and in US-Africa relations.    Read more