The fourth BRICS summit, held New Delhi, India on March 21, 2012 saw its member states examine the possibility of setting up a “new development Bank”, which would work to mobilise “resources for infrastructure and sustainable development projects in BRICS and other emerging economies and developing countries”.
The proposed Development Bank would act as an alternative for its member states to the Western-dominated International Financial Institutions (IFIs) such as the World Bank (WB) and the International Monetary Fund (IMF). At the New Delhi conference, Brazil's President Dilma Rousseff criticised the developed world’s monetary policy for creating “unfair obstacles” for developing countries. Following subsequent negotiations, the new development bank is likely to be launched at the fifth BRICS summit, which will be held in Durban, South Africa, in March of next year.
The proposed bank is seen as an alternative to the IMF and could become a strong voice in the lobby for reforms of existing IFIs. The bank is expected to be a lending organisation to poor nations that would help them speed up their development and reduce poverty. It could also provide financial support to countries suffering from financial instability, a function that has, thus far, been largely reserved for the IMF. The proposed bank would also provide finance for joint BRICS projects.
The five nations plan to sign agreements that would help banks extend credit to other members in local currencies - a way of decreasing reliance on the US dollar. Using national currencies might provide greater macroeconomic flexibility and create national reserves.
Despite the encouraging progress of the project so far, the proposed bank is still in the early stages of development. A number of issues need to be resolved first. Fundamental questions remain over the location of its headquarters, with both India and South Africa hoping to host the bank. Furthermore, the bank’s mandate and structure need to be determined - particularly the question of whether non-member states will be allowed to use the bank.
Windsor Chan, who is the Deputy General Manager of the China Construction Bank's Johannesburg branch, was optimistic about the bank’s prospects:
“The project will go ahead if the countries put in the effort; with the uncertainties of the current market, particularly in the US and the EU, the BRICS countries will need to find [an] alternative growth path, both external and domestic.”
“The Development bank could in the future provide another finance choice for the non-Western countries without the political agenda hindering their economic development.”
Nicolas Véron, a senior fellow at Bruegel, a Brussels-based economic think-tank, was less convinced by the long-term prospects of the Development Bank. Véron said it was “unclear whether the BRICS bank was a real proposal, or a threat to the west. Effectively the reference of a new development bank followed a scathing statement against the management of the financial institutions. One may look at it as a way to ask for more balanced governance of the Bretton Woods’s bodies, or they [the BRICS] will create their own system outside the World Bank”.
South Africa’s Minister of International Relations and Cooperation Maite Nkoana-Mashabane, feels that South Africa has a responsibility to ensure the establishment of the BRICS Development Bank. Not only could the bank help the country finance its state-led infrastructure drive, it could potentially double the trade of South Africa with other BRICS members to $500 million by 2015.
After the US lost its AAA credit rating in August 2011, China was publicly critical of US economic policy. It openly suggested that the introduction of a “new, stable and secure global reserve currency” was needed. In March 2012, South Africa came out in support of China, endorsing the Chinese Renminbi as a new international trade and investment currency, in a bid to challenge the US dollar’s supremacy of trade and investment in emerging markets. South Africa has indicated its political support of China, and could potentially further increase the Renminbi’s access to the African market.
Chan acknowledges “the promotion of the Renminbi as the trade currency for a global approach including Africa”. However, he adds that “China’s trade and investment in Africa only represents less than 5% of the country’s global trade and investment; its focus in the short to medium term will remain in Asia and the other traditional markets. Its engagement with Africa tends to be on a long-term perspective and in this regard a sustainable growth is critical".
The five BRICS countries represent nearly 3 billion of the world’s population. It is an ever-expanding economy – responsible for 56% of the foreseen economic growth for 2012 according to the IMF. The creation of the development bank and the idea of developing another global currency will not only increase the BRICs countries’ influence, but it will also jeopardise the US reserve currency status. The BRICS are no longer adapting to the world economy but are taking an active role to shape it.
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