BRICS Bank versus the IMF: a zero-sum-game?

By Elsa Buchanan


After a decade of anti-Western discourses, the world’s emerging economies have finally launched a pair of financial institutions they hope will challenge their pet hates, the World Bank and International Monetary Fund (IMF).

Built on shared complaints and challenges, the new ‘mini IMF and World Bank’ has been billed as a historic challenge to the global financial order that has been dominated by the US and Western Europe since the 1944 inception of the IMF.

But are these developments a zero-sum-game for the BRICS? Do the big five have enough scope to sustain funding?

Launched at the sixth BRICS summit in Fortaleza, Brazil, the New Development Bank (NDB) and so-called Contingent Reserve Arrangement (CRA) will fund infrastructure projects in the founding members’ countries, as well as in developing nations and provide a security net in case of a currency crisis.

In contrast to the World Bank, the NDB will begin as an egalitarian venture among the BRICS, with each founding nation contributing $10 billion and equal share holding for all the five members. The bank is then expected to see it total capital double to $100 billion.

Alternatively, the currency emergency fund will amount to $100billion, with China contributing $41 billion, followed by Brazil, Russia, and India putting in $18billion each, while South Africa will provide $5billion. According to Brazil’s President, Dilma Rousseff, this lending capacity could grow substantially as non-BRICS countries are allowed to contribute to the NDB.

“The bank could leverage its $50 billion of capital to initially issue $24 billion in loans, which could grow to $34 billion in ten years. If the bank leveraged more aggressively, it could initially lend up to $48 billion,” explained Christopher Wood, a researcher in the Economic Diplomacy programme at the South African Institute of International Affairs (SAIIA).

“It is substantial, but smaller than the major multinational development banks,” he added, pointing to the World Bank’s $223.2 billion in capital. “The CRA is not meant to replace the IMF [which] is about 8.5 times larger.”

Further, Wood holds the view the NDB will most likely work with the World Bank and other multinational organisations to co-finance major development projects, rather than run into it.

A need for credibility

While the BRICS leaders are hoping the CRA will defy the IMF’s $850 billion total resources, Dr Mina Toksoz, emerging markets and country risk consultant and an associate fellow of the Chatham House International Economics Programme, warned they could face funding hurdles if the Cooperation Council for the Arab States of the Gulf (GCC) decided not to join them.

Indeed, she outlined the fact the Gulf countries have had their own Sovereign Wealth funds, which have existed for several decades now. These include the behemoth Arab Monetary Fund (AMF) which extends to 22 member countries, and the $773 billion Abu Dhabi Investment Authority (ADIA), of which half the assets are already invested in the developed world and the rest of emerging markets.

“The new bank could only grow if the GCC countries too joined in and pooled resources, but they have their own regional funds. Otherwise, besides China and perhaps south Korea, other emerging market contributions are not likely to be that significant,” Toksoz said. “However, the important point is that the savings surplus economies such as China and Russia are trying to direct their funds for development finance for emerging markets.”

In a forward looking view, the Chatham House doctor also anticipated the new institutions could pose the risk of a fragmentation of the global economy, which would undermine the rules based multilateral system.

“Depending on how the developed react to these initiatives, the new institutions have the potential to generate wide geostrategic conflicts like in the 19th century when the world was carved up into colonial empires and spheres of influence,” Toksoz said.

Notwithstanding financial and geopolitical potential issues, many have applauded the prospect of an ‘easy win’ for the BRICS coalition, which has been “increasingly accused of being a talk show”, Woods explained.

This move, he said, could act as a counterpoint to the IMF’s, which has been roundly criticised by all BRICS members on various issues including its undemocratic internal structure, and failures to reform its voting rights structure under which US and Japan have a strangle hold.

Toksoz, who welcomed the launch, anticipates much of the BRICS fund could be used amongst themselves.

“I don’t think the BRICS are a particularly coherent political group, [but] there is some logic and complementarities in their economies. Hence it is normal for them to develop increasing ties. More, Brazil, India and Russia have major demand for infrastructure finance.”

She said: “The fact that emerging markets are presenting their own options to other emerging markets does mean that there are now other sources and other options, and it is a positive in that sense.”

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