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Tug of War over Own Development Bank
Last Updated: 2014-01-15 16:43 | Frontier Advisory
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By Claudia Broll

Pravin Gordhan'sense of relief was visible. "It'done", South Africa'finance minister proudly announced at the March summit of the world'leading emerging nations (BRICS) in Durban, South Africa. He was referring to establishing a joint development bank. This would be the first major joint initiative between Brazil, Russia, India, China and South Africa, and therefore a sign that these emerging countries are serious about evolving from a loose grouping into a distinct economic superpower.

Although, according to the South African hosts, the decision was celebrated as major progress, in fact government representatives agreed only on the lowest common denominator. "The implementation mechanism will have to be developed further", is how the Russian finance minister, Anton Siluanov, diplomatically summarized the situation. At present, hardly anybody expects the 'BRICS bank' to start work any time soon.

Independence from the West

Having their own development bank is not just a way for the leading emerging countries to demonstrate their increased self-confidence. For them, it is primarily about achieving greater independence from western industrialized nations. Starting with their own development bank to finance major infrastructure projects independently, this also extends to pooling currency reserves in order to provide mutual support in times of crisis along the same lines as the International Monetary Fund (IMF). Over the years, the World Bank and the IMF - two institutions founded after the Second World War at the Bretton Woods conference - have given more weight to emerging countries. However, there is criticism that newly industrialized nations have much too big a say in relation to their economic importance. For their part, though, these countries still consider themselves to be underrepresented. In their view, this is also reflected in the fact that the World Bank is traditionally headed by a US citizen, while the IMF is led by a European. Time and again, the complaint is heard that the World Bank and the IMF have dictated a political course to beneficiary countries by attaching conditions to loans and aid programs, such as the opening up of markets or privatizations.

The Need for a New Development Bank

BRIC (at that time not including South Africa) was originally a term coined by investment banker Jim O'Neill to describe the world'most rapidly growing countries. South Africa was not added until 2010. Today, 43% of the world'population lives in the BRICS countries. These nations generate around a quarter of global economic output and hold USD 4.400 billion as currency reserves. This economic power encourages efforts to forge closer political ties, too.

"A new development bank is clearly needed? said the economist and Nobel laureate in economics, Joseph Stiglitz. In emerging- market economies and low-income countries there is still a lot of catching up to do in terms of building infrastructure. 1.4 billion people still have no reliable electricity, 900 million lack access to clean water and 2.6 billion do not have adequate sanitation. At the same time, an estimated two billion people will move to cities from the rural areas in the next 25 years. "While the private sector can meet some of these needs, it can go only so far. The funding gap is beyond what existing international financial institutions can meet."

Unanswered Questions

First, however, there are multiple smaller hurdles to overcome. These five completely different countries, which have virtually no historic ties, still need to agree on some fundamental issues such as where the bank'headquarters will be located. At the World Economic Forum on Africa, the South African President Jacob Zuma urged for the bank to be based in South Africa, because the greatest need with regard to infrastructure projects will be on the African continent. China and India in turn are making a case for the headquarters to be seated in their countries. Thought has also apparently been given to creating a 'virtual' development bank with no fixed headquarters or basing the bank outside the BRICS economies somewhere like London, for instance. The latter would, of course, preclude the actual objective of achieving greater independence from the West.

Important questions such as the criteria for issuing loans and the bank'capital structure still remain. Originally there was talk of each member country contributing USD 50 billion. By the end of negotiations, the bank was to be set up with capital of USD 50 billion in total. This corresponds to USD 10 billion from each country, provided that their contributions are to be equal. The latter aspect is a political matter, primarily to prevent China from assuming a dominant position. At the same time, however, this means that capital resources always depend on the means of the smallest member, in this case South Africa. A contribution of USD 10 billion equates to 2.5% of South Africa'economic output and yet just 0.12% of China's.

As a consequence, the BRICS development bank would be significantly smaller than the World Bank and would only be able to obtain and provide capital on less favorable terms. "Ihis will be a bank that operates like a bank? said the President of the African Development Bank, Donald Kaberuka, in an attempt to moderate expectations. "You can't just throw money away. If there were opportunities in infrastructure, they must make sense."

For now, negotiations are continuing behind closed doors. At the September G20 summit in St. Petersburg, Russia, the bank was also a topic of discussion, however without specific results. There are other voices that advocate that the entire proposition be quietly forgotten to avoid further politically embarrassing debates.

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