Later this month, the leaders of five major emerging economies—some say they have already emerged— are likely to announce the establishment of a BRICS Bank. These countries are Brazil, Russia, India, China and South Africa. As the name suggests, the Bank will focus on investment needs in the BRICS countries, but might cover some other countries as well.
While the details are not widely known, the leaders are looking for a game-changing institution with a large capital base.
The establishment of a new bank implies that the multilateral development banks have not been able to adequately meet the investment needs of these countries. The BRICS countries want a new financing institution for several reasons.
First, the investment needs of these countries are massive. For example, in Asia and the Pacific alone, the annual financing needs for infrastructure are more than $700 billion. All the multilateral development banks (MDBs) taken together are able to finance less than 5 percent of these needs.
Second, the BRICS countries often find the processes and requirements of the MDBs too slow, cumbersome and restrictive. They are looking for a more responsive and agile institution to help them with their evolving needs.
Third, the BRICS countries feel that they lack adequate voice in the MDBs. With their growing political stature and economic strength, they rightfully want an institution in which they have the ability to influence the vision and direction.
The idea of a BRICS Bank addresses most of these concerns. It also helps in rebalancing global financial flows. These countries have large reserves and high saving rates, although these ironically coexist with huge investment needs. These savings and reserves are primarily invested in western countries. Using these resources domestically could improve the welfare of their people and strengthen the fundamental conditions for sustainable economic growth.
The establishment of a BRICS Bank opens up exciting opportunities for the MDBs. The MDBs could play a more catalytic role in these economies, with substantial financing coming from the BRICS Bank. There has been pressure on the MDBs to redefine and refocus their support to emerging economies. The new institution provides an opportunity for doing so. It would also free up the MDBs’ resources for investment in lower income countries. With their long experience and strong skill-base, the MDBs,could also help with project development, project administration, resource mobilization and syndication needs of the BRICS Bank.
However, let us also acknowledge that the establishment of a new institution is a wakeup call for the MDBs, including the Asian Development Bank. Our operations will need to become more responsive and inclusive. We should also acknowledge that, while we play an important role, we are not indispensable. We will need to become a bit more humble.
I hope the BRICS countries can amicably resolve the issues of location, governance structure and shareholding, which have been believed to be the cause of some contention among them.
The new institution is badly needed. It should have come sooner. Any delay will not help anyone.
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