COMMENT: The BRICS bank and the Great Schism

By bne IntelliNews August 22, 2014

Mark Adomanis in Philadelphia -


The five BRICS nations agreed in August to set up a development bank. The project is the embodiment of what could now be dubbed "the Great Schism" developing between the emerging and developed world.

Brazil, Russia, India, China and South Africa will set up the BRICS bank with $100bn capitalization in a bid to break their dependence on the G7-dominated International Monetary Fund (IMF) and World Bank. The emerging market giants are uncomfortable with relying on the West for badly needed support during transition. 

When analyzing the BRICS bank it is important to keep in mind the distinction between its short-term political significance and long-term economic impact. The first is unambiguous and widely accepted; the second a source of serious debate. 

In terms of politics, the BRICS Bank (technically called the "New Development Bank" (NDB) - surely the least exciting name ever given to a paradigm-shifting international organization) is clearly a very big deal. 

Rise of the rest

Founded during the most acrimonious period of relations between Russia and the West in the past 25 years, the NDB is a living, breathing rejection of the idea that Russia is "isolated." No matter how frequently the US state department's press office states otherwise, the simple fact is that Russia is not in any way isolated from the international community, and actually enjoys productive diplomatic and economic relations with the world's most populous and dynamic countries. As the foundation of the NDB underscores, relations between Russia and the other BRICS are on a positive trajectory, and seem likely to further strengthen. 

The political significance of the NDB then is twofold. First of all, it highlights a dramatic shift in Russia's grand strategy; from cautious integration with the West to full-scale rejection. 

It seems like a lifetime ago, but Russia's 2012 entry into the WTO was the culmination of a multi-decade effort to bring it into the institutions of the US-led international order. Russia's instrumental role in the creation of a bank specifically intended to operate outside of that order is an eloquent statement to how rapidly and cardinally Russia has shifted its focus. 

Outside Russia, the NDB further underscores the continuation of a long process of multi-polarization. The NDB is perhaps the single most concrete example of the "rise of the rest" and the concomitant breakdown in the West's privileged position in the international system. Economically the "developing world" now accounts for over 50% of global GDP, and it is starting to catch up in terms of its institutions. 

Mind the gap

Economically things are a quite a bit murkier. The World Bank has conservatively estimated the developing world's "infrastructure gap" at about $1 trillion a year. This is a gap that neither the World Bank nor the IMF have proven particularly adept at closing. 

Over the long-term the only way that this gap will ever be diminished is if developing countries themselves take more aggressive and coordinated action. The developed world is too focused on its own serious economic problems (including unsustainable pension systems and sclerotic labour markets) to be bothered with fostering infrastructure development in Sub-Saharan Africa, Southeast Asia, and other capital hungry regions of the world. The NDB could conceivably play a leading role in meeting this challenge. 

It will need serious resources in order to do so. Stephany Griffith-Jones, a professor at Columbia University, made some back of the envelope calculations about the potential role that the NDB could play. They are revealing. 

If one assumes a total capital endowment of $100bn (which matches what the BRICS themselves have been describing in their public statements) annual lending could reach $34bn in the next 20 years. When private contributions are taken into consideration - BRICS leaders have talked constantly about the importance of public-private partnerships - projects worth up to $100bn per year could be possible. If Griffith-Jones' estimates pan out, the NDB would, within a mere two decades, become a more significant international lender than the World Bank, though its total financial resources would still pale in comparison. 

The problem, however is that lending to the countries where infrastructure development is most urgently necessary is a very risky and uncertain proposition (if it was both easy and profitable, someone would already have done it). Writing at the Washington Post, Georgetown University professors Raj Desai and James Vreeland astutely noted that there are reasons for skepticism about the economic influence that the NDB can realistically wield. 

Cheques and balances

In order to lend on a scale comparable to either of the two most important International Financial Institutions (IFIs), the NDB will have to develop a rigorous and transparent process for scrutinizing loan applications. If the NDB's standards are too loose and permissive, then the quality of its loan portfolio will suffer accordingly, and it will require ongoing support from its founding members. 

Asking Chinese or Indian taxpayers to continually subsidize risky loans in Laos or Bangladesh is, to put it mildly, a politically dubious proposition. A development bank that needs ongoing support is one that will not last very long. 

On the other hand, if the NDB can't be too conservative If it's too scared to loan money to high-risk developing countries, then it will come to resemble the shambolic BancoSur, another developing-world-led IFI which - despite quite a lot of fanfare accompanying its 2009 launch - has yet to make a single actual loan. 

The NDB has serious political and financial support, but one should not underestimate the difficulty of the task it faces: it's very easy to say that the new bank's leaders should simply "find a middle ground" but exactly where this middle ground should lay is extremely contentious. And with the NDB, the emerging markets are setting out to find that middle ground on their own. 

The NDB is an example of extremely important and ongoing structural changes in the nature of the world economy, particularly the West's swift loss of economic prominence and the rapid rise of China. Politically, it is an important testament to the developing world's ambition to work together without western involvement. Economically, it has the potential to play a very significant role in driving growth and development, but it will need substantial coordination among its member states that will likely prove difficult due to their enormous political and economic differences. 

While opinions differ on precisely what kind of an impact the NDB will have, what is clear is this: the old system, in which the United States and its close European allies made all of the important decisions, is breaking down. Exactly what will replace it is not yet known, but we will see more and more organizations that look like the NDB, organizations of developing countries, run by developing countries, that help developing countries. 

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